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Globalisation and Finance at the Crossroads
Adrian Blundell-Wignall · Paul Atkinson
Caroline Roulet
Globalisation and
Finance at the
Crossroads
The Financial Crisis, Regulatory
Reform and the Future of Banking
Adrian Blundell-Wignall Caroline Roulet
University of Sydney and OECD Organisation for Economic Co-operation
(consultant advisor to the Secretary and Development
General, and former Director of Paris, France
the Financial and Enterprise Affairs
Directorate)
Paris, France
Paul Atkinson
NHA Economics, Ltd.
Paris, France
ISBN 978-3-319-72675-5 ISBN 978-3-319-72676-2 (eBook)
https://doi.org/10.1007/978-3-319-72676-2
Library of Congress Control Number: 2018938337
© The Editor(s) (if applicable) and The Author(s) 2018, corrected publication 2018
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For Lucy Mushita, Mubeccel Gevher, Iftekhar Hasan and those few key
people who supported us by letting the evidence be heard in the face of all
that regulatory capture working against it.
The views in this book and any errors herein are those of the authors alone.
The opinions expressed and the arguments employed do not purport
to reflect those of the OECD, the OECD Secretary General, or any
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vii
Foreword
Policy makers, international organisations, central banks and Treasury
departments were caught off guard during the financial crisis of 2007–
2008. This was mainly due to a poor understanding of the connectiv-
ity between major trends in the global economy, such as deregulation,
leverage, financial innovation and the rise of savings outside of OECD
countries. The crisis was a manifestation of the inconsistency between
these global trends. And this journey is not over.
This book Globalisation and Finance at the Crossroads—by former and
current OECD officials—aims to provide the reader a with good under-
standing of what happened during the crisis, what is currently happen-
ing, as well as some of the tools that current and future practitioners
will need to analyse and understand financial risk going forward.
Groupthink amongst policy makers and regulatory pushback from
banks are blocking sensible financial regulation. In some jurisdictions,
banks are still dealing with the aftermath of the crisis, while in others
banks’ profits are back to pre-crisis levels even as they continue pushing
back on regulations. While the Basel Committee has done good work
on capital and leverage reforms, not so much has been done to change
ix
x Foreword
the business models of large systemic banks, which the authors have
shown in research spanning a decade to be much more important. It is
hard to judge when the right balance will be achieved, but it is safe to
say we are not there yet and more work needs to be done.
In this respect, the regulatory landscape best suited to the global
collective interest in the future is a central concern for the OECD. In
general, progress towards a world that operates on a level playing field
and based on a set of common principles has been very slow. One has
to agree with the authors that without consistency, new forms of risks
will always emerge; worryingly, today we see plenty of inconsistencies
between financial jurisdictions in OECD countries and between dif-
ferent policy approaches in advanced and in emerging countries. In
addition, in certain developing countries debt is building up quickly,
including that associated with infrastructure investment in Belt-and-
Road-related countries; and there are also echoes of the 2008 financial
crisis in some emerging countries in the extent to which large off-bal-
ance sheet exposures of banks have been building up. The authors argue
that the connections between globalisation and finance have reached a
crossroads where the pressures for policy changes are building up anew.
But how do we know which issues matter most and what policies are
best suited to deal with them? The world is not in any state to withstand
another crisis, given the extremes to which monetary and fiscal support
were pushed in major economies since 2008. This book aims to provide
students, historians, researchers and policy makers with some necessary
tools and a way of thinking about problems in globalisation and finance
based on real-world experience, in both the policy world and private
sector finance. One of the main strengths of this book is that the pro-
posals being put forward are based on empirical support.
The knowledge being shared within these pages is invaluable. I
am happy to say this based on my own experience with some of the
authors at the OECD, where the case for an imminent crisis was pre-
sented internally and in published forms in the two years prior to the
‘Lehman moment’ in late 2008. This view was based both on knowl-
edge of, and bottom-up research on, banks’ activities. Since 2012, the
Foreword xi
OECD has incorporated some of this thinking into its overall work on
New Approaches to Economic Challenges (NAEC). I would encourage
others interested in reform to benefit from the breadth of the insights in
this book.
Paris, France Angel Gurría
April 2018 OECD Secretary General
Contents
1 Globalisation Sets the Background to the Crisis 1
2 Financial Innovation and Basel II 41
3 The Watershed Year of 2004: Origins and Causes
of the Crisis 87
4 Business Models of Banks and Global Contagion 115
5 Managing the Crisis, Exit and Requirements of Reform 137
6 The Determinants of the Riskiness of Banks 157
7 Why Bank Separation Must Complement the Leverage
Ratio 175
8 Assessing the Finalised Basel III Banking Regulation
Regime 201
xiii
