“Should We Shut The Stable Door Before The Horse Bolts Again?”,Answers NIESR.

Posted: June 9, 2010 in Uncategorized
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Director of Macroeconomic Research and Forecasting of  National Institute of Economic and Social Research ,Professor Ray Barrel  has  announced his recent research on optimal bank regulation and  the causes of financial crises at Westminster Economic Forum at  NIESR in Westminster today.

Professor Ray Barrel(on the right) and the chairman Dr Sushil Wadhwani (on the left )at Westminster Economic Forum at NIESR.

Barrel  has  explained the costs and  benefits of bank regulation in the forum chaired by Dr Sushil Wadhwani .While benefits of regulations  equal the cost of crises ,costs of regulation cause firms to pay higher  fee of capital and consumers to pay higher borrowing fee according to the research.

Question of “Do regulatory factor affect crisis probabilities?”  was answered with the  role of  capital and liquidity in OECD crisis model  which was first found by Barrel, Davis, Karim and Liadze in 2010 .Bad lending indicators house price bubbles and sustained deficits ,split between on balance and off balance sheet(OBS) ,faster growth of  OBS activity increase crisis probabilities, explained Barrel.

The research shows that a five point in capital and liquidity would reduce crisis probability from 1 in 19 years to 1 in 100 years. Provision against housing bubbles and current account are found wise but second best  while acting against the growth of OBS activity  was and is crucial to  decrease crisis probabilities.

Evaluation of crises between 1981 and 2007 proves that not all crisis are followed by a recession and not all recessions follow crises ,however crisis recession are longer  (5.9 years) and deeper(-1.8%)  and one in four crises  affect output per person hour permanently.

Barrel has   also explained the costs of tighter capital and liquidity in the long run and how markets work and the bankers’ approach  as well as the impact of changes in Headrooom.

According to the research markets work but slowly.1% point increase in regulatory capital reduces unweighted lending by 1 to 1.5 percent and 1.6 to 2.0 percent risk weighted  thus corporate loans drop more. Liquidity  costs rising in proportion to size from 150 basis points to 500 basis points.5 points on liquidity and capital would reduce lending by 10 percent .

Barrel’s last and maybe the most important point was to act together to change the global saving and investment balance which would reduce real long term interest rates and halve the effects.

In the end of the forum Barrel answered the questions of the participants.


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