The Risk Telescope — Playing for Time
This morning’s news from Brussels might lead readers initially to believe that yet another issue of The Risk Telescope would be devoted to the deteriorating economic situation in Europe. Instead, the telescope turns its lens to another important meeting that occurred yesterday in Europe and whose decisions have been lost amid the noise of the news cycle. Welcome to the technocratic world of the FSB, where regulatory policy, economic policy, and central banking policy are made.
Yesterday’s FSB statement presents a grab-bag of initiatives familiar to regulatory policy advocates. It promises that six different reports representing the details of their agreement will be issued in the unspecified future, presumably before the early November G20 summit. It recycles decisions already articulated by the FSB and the Basel Committee this year, signals a drop in momentum regarding a few issues, adds a few issues to the regulatory priority agenda, and quietly drops a few other issues. The loss in momentum reflects growing cross-border tensions among sovereigns grappling with increasingly negative and challenging economic policy environments. Those sovereigns are also finding it seductive to consider the possibilities for their own regulatory arbitrage strategies under the polite label of “competitiveness” considerations. Section I of this issue of The Risk Telescope assesses yesterday’s outcomes through this analytical lens.
Section II of this publication addresses a related, potentially more important implication from yesterday’s meeting in Zurich and related work products from the international official sector. Even if cross-border (not global) political cohesion existed within the G20 regarding regulatory policy, the slow down on shadow banking issues would be occurring. The slow down does not necessarily reflect only political discord regarding the role that trading markets should play in funding banks. It also reflects a much deeper debate underway among policymakers regarding the role of central banks and the contours of monetary policy first identified in the 10 December 2010 issue of The Risk Telescope and the January editions analyzing the Basel Committee’s macroprudential buffer.
Today’s edition assesses how delay in the FSB’s shadow banking agenda suits the needs of economic policy makers. Those who manage collateral policies and design modeling frameworks to price interest rate and exchange rate risk must pay close attention to this technical, serious debate now. The debate within the global economic policy community suggests that financial stability considerations and the functions of the shadow banking sector may become serious contributors to the design of monetary policy in the near future.
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