GEG and BSG WP 2013 Why Half of the New Global Financial Regulation is Misconceived

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Full Title: Fixing the Funding Machine: Why Half of the New Global Financial Regulation is Misconceived

Author: Macer Gifford

GEG and BSG Working Paper 2013


Much of the regulatory response to the Global Financial Crisis has been aimed at curtailing the liquidity risk taken by banks. The objective has been to avoid theGDP hit of a repeat occurrence, whilst also minimising the risk to the public purse. But in getting stuck straight in to a solution, the mainstream debate has largely bypassed the question of just why the system built up to a cash flow crunch in the first place. This paper gives practitioner’s insight into why and how the banks stretched their balance sheets in the run-up to the crisis, delving into the murky area of system-wide “funding liquidity”. With this framing, it is possible to conclude that the new regulations could be having the opposite of the desired effect. They may have prolonged the GDP pain, which has now required central banks to step in with broader public support. Key to this line of reasoning is the existence of a Term Liquidity Premium, providing an incentive for banks to manufacture long term liquidity. The paper argues that the manufacturing process lowers the cost of term lending and stimulates GDP growth. Restricting it has the opposite effect, holding liquidity premiums at near-crisis levels in an unnecessary “phony war”, which increasingly necessitates central bank lending of first resort.

Author Bio

Macer Gifford is a Visiting Fellow in the Globalization and Finance Project, a joint project of GEG and the Blavatnik School of Government. He is currently on sabbatical from Standard Chartered Bank where he was most recently Group Head of ALM and Regional Markets, with responsibility for both Asset and Liability Management and for the geographic management of Financial Markets globally. In this capacity was intimately involved in the design of the British Government’s banking stabilisation package in response to the financial crisis. Macer’s twenty year career in Financial Markets has covered a wide variety of trading and management roles, from being a pioneer in developing the Non Deliverable Forwards market to running Global Markets Africa. Macer joined Standard Chartered in 1994 from Citibank, where he started his career as a spot foreign exchange trader.  He is a graduate of the London School of Economics and a Sloan Fellow of the London Business School. Macer’s interests include cooking: he has a Grand Diplôme de Cuisine et de Pâtisserie from the Cordon Bleu in Paris.