The global financial crisis has exposed serious government and market failures and questioned some of the basic tenets of prevailing economic thought. The post-crisis monetary and regulatory response has been significant in many areas. Yet many fundamental questions persist, and new ones have arisen. The latter include the new post-crisis mandate and role of central banks, the effectiveness of the new global regulatory framework, and the possibilities and systemic risks associated with new financing models emerging, to name a few.
Much of the post-crisis intervention has been driven by advanced country considerations. This is true even though emerging economies have had a stronger voice in crisis management and post-crisis regulatory discussions than ever before. The G20 process has proved a reasonably workable platform for global discussions, first circumventing and then leveraging the traditional global IFIs. Emerging market G20 presidencies have put their concerns more confidently on the policy table. China’s current G20 Presidency is further elevating emerging economy issues on the global agenda. Yet the redesign of the global financial architecture, particularly when viewed from the perspective of emerging economies, is far from balanced or complete.
At the same time financial sectors, also in emerging economies, have undergone major transformations in non-banking segments, including the “shadow banking sector”, and the digital-technological product revolution is now also impacting on some emerging economies. These developments challenge old banking models, even traditional “utility banking”, with tremendous opportunities particularly for emerging economies, but also significant risks in the absence of appropriate regulation.
The transformation of global financial architecture in the wake of the crisis has to engage more profoundly with the perspectives of emerging economies, drawing on top-notch research and knowledge including in emerging economies themselves. The Rethinking Global Financeinitiative, joint between the LSE Institute of Global Affairs and the Institute of New Economic Thinking, aims to strengthen the research capacity and policy voice of key emerging economies. Only on this basis can a truly global and inclusive financial architecture be developed.
This initiative aspires to:
- contribute to research and policy discussions on a number of global issues in the monetary, regulatory and financial sector development areas, selected in close collaboration across key emerging economies; and
- support emerging economies’ efforts to better understand, and ultimately develop, an evidence-based set of recommendations for policy makers. This initiative will inform and complement G20 and other official sector efforts as well as various processes set up by the private sector.
Initial inventories and discussions have identified a number of issues for research and policy thinking:
- International spillovers of national monetary policies. Monetary policies remain nation-based with little international coordination despite their potentially major cross-border spillovers in today’s globalized world. Representatives of emerging economies have voiced concerns over the impact of monetary policy in advanced economies; recent experience also points to such spillovers from major emerging economies. A much better understanding of these externalities could help inform policy responses; facilitate monitoring and eventual policy coordination; and avoid escalating competitive interventions.
- Central bank mandate, governance and overall policy mix post-crisis. There are important lessons to be drawn for emerging market policy makers regarding central bank mandate, targets (including exchange rate volatility issues), governance/independence, and relationship with the fiscal authority including the financing of fiscal deficits. The ongoing debate on the impact of unconventional monetary policy, including on job creation, and the ramifications of the current policy mix of heavy (over) reliance on monetary policy can be informed by emerging market-based research and perspectives.
- Monetary transmission mechanisms in emerging markets. The global financial crisis has brought out important differences in monetary and credit transmission between advanced and emerging economies, but also across emerging economies. Research is needed to better understand these differences and their implications and the critical importance of appropriate domestic policies.
- Optimal quantity and quality of leveraging / debt: How much and what kind of financial deepening is needed sustain growth? This work will include drawing lessons from the global financial crisis on the extent of financial deepening and access to finance.
- Transformational impact of the digital revolution on financial markets. Could thetechnological developments such as peer-to-peer banking, crowdfunding and big data allow emerging economies to “leap-frog” traditional banking systems? What would be the implications of these developments for financial access and macroeconomic stability?
- Global financial regulations in local context. Work will focus on assessing (i) if there is excessive or appropriate regulation of today’s financial markets. This inquiry will cover also remaining issues of “unintended consequences” such as liquidity and capital requirements in the emerging market context; and (ii) new regulatory proposals that can benefit from research involving emerging markets.
- State-owned financial institutions. What are the appropriate mandates and role of these institutions in financial sector development? What is the empirical evidence on the impact of directed lending? Under what conditions can state-owned institutions enable, rather than crowd out, the private sector?
- cutting-edge independent research papers that combine global expertise with local knowledge and skills
- significant input into global debates as well as into informing and shaping the new financial architecture
- strengthened capacity of local research to support senior policy makers in emerging economies
- cross-fertilizing research events involving lead researchers from emerging economies and global experts
- new research networks.
This Initiative led by LSE IGA and INET, involving the LSE Financial Markets Group and the Brevan Howard Centre for Financial Analysis at Imperial. It is chaired by Lord Adair Turner, Chairman of INET and former head of the UK’s FSA and chair of the Financial Stability Board Standing Committee for Regulatory Cooperation. A similar constellation – a senior policymaker and a research group – will be created in each of the large emerging economies: India, China, and Russia, and discussions are under way with other countries. We are also linking up on specific events and projects with other organisations, such as the Reinventing Bretton Woods Committee (RBWC) and the World Economic Forum Global Agenda Council on the Global Financial System, both with links to the G20 process. Throughout the Initiative we will seek to combine the work on global challenges of financial development and financial stability with efforts to better understand the specific local contexts in which these challenges manifest themselves and confront national policies.
- January 27, 2016, Mumbai: Global launch of the initiative in India, chaired by Raghuram Rajan, Governor of the Reserve Bank of India.
- February 25, 2016, Shanghai: Launch in China.
- End-June, 2016, St. Petersburg: Launch in Russia (planned).
- Set of brainstorming and policy events in London by the LSE IGA Macro group in the period March – June 2016.
- May 5/6 2016: LSE IGA-RBWC event focusing on one of the key themes of the Chinese G20 Presidency on the international financial architecture.