Global financial markets are in a state of flux. Since the global financial crisis many international agencies and national authorities have envisaged changes to the regulatory rules and supervisory architectures for banking and other financial institutions. The focus is now on systemic risk and macro-prudential policies both at the national and the international levels. These changes imply challenges and opportunities, in particular to less developed countries that managed to avoid most of the negative effects of the crisis. Many of these countries have started reforms or deepened those already undertaken. More recently, a wave of innovation to finance, with new entrants, products and business models, imply new opportunities and risks to national financial systems. Research and applied analysis using assumptions and asking questions that are of particular relevance for less developed countries are necessary to inform a successful reform process.
Many less developed countries have managed to navigate the aftermath of the global financial crisis without much harm. This is likely to be due at least in part to the fact that financial stability concerns are as old as financial systems and several of these jurisdictions have already reacted and undertaken reforms to past crises. This provides a first rationale for seriously considering the analysis of financial regulation and financial stability from the perspective of these countries: the recent experience in less developed countries may help to inform the reform process in more developed countries. However, less developed countries are not immune to new episodes of financial instability. New international financing conditions and domestic macroeconomic realities may impose huge challenges to policymaking in these countries. This provides a second rationale: it is worth analyzing the links between international conditions, macroeconomic policies and financial stability. Moreover, the international policy and academic agenda is dominated by the problems in developed markets; so that reform proposals and “best” practices may be biased towards managing risks that are not necessarily the relevant ones for less developed countries. This provides a third rationale for promoting the analysis of financial regulation and financial stability with a less developed countries’ viewpoint.
Research questions may include: in this new global environment, which is the optimal supervisory architecture to preserve financial stability in less developed countries? Which are the best practices that should be followed by these countries in order to implement an efficient supervisory architecture? Nowadays financial interconnectedness implies that capital flows almost freely; so that even the structure and ownership composition of small and less developed countries’ financial systems may be determined by global decisions by investment groups. Which are the challenges for these small countries and what kind of regulatory response may be implemented? During the last decade several countries in the South implemented deep reforms to the regulation, supervision and safety nets of their financial systems. Which are the prudential policies that have shown to be effective? Should the experience in the South help to inform the reform process in the North? Should Basel III be adopted or adapted by less developed countries? Which is the social cost-benefit impact of heightened bank capital and liquidity requirements? Which are the financial developments that should be promoted? Which are the challenges imposed to insurance, capital and pension markets? Which are the implications for the sustainability of pension systems? Which are the reforms that should be implemented in order to preserve the stability of financial markets including banking, insurance, capital markets and pension systems? Which are the links and implications between financial stability and macroeconomic policies?
Details of the research program: The group will bring together academics and policy makers from a wide range of backgrounds to discuss cutting-edge ideas in a series of workshops organized around specific themes. The interaction between policy makers and academics will be of vital importance to develop new knowledge in order to be better equipped to face financial stability challenges.
Broader impact: The research group is expected to push forward a high-level research agenda in financial stability aiming to better serve the needs of central banks and regulators in less developed countries.