I. Tapping the Brakes: Are Less Active Markets Also Safer Markets?
How much financial market activity do we really need? Is there a suboptimal level of activity? The financial sector plays an important role in transferring funds from savers to borrowers, allocating scarce resources, and managing risk. However, this sector now accounts for over 8 percent of gross domestic product (GDP), with much of its activity concentrated in secondary market activity. While secondary markets provide valuable liquidity and price discovery services, in many cases the social benefits are not so obvious. For example, what purpose is served by the creation of financial products that are so complex that their buyers do not understand an instrument, let alone how to price it, other than making money for its creators? As another example, is the race to place orders milliseconds ahead of competitors providing valuable liquidity or price discovery services to the ultimate borrowers or savers? Conversely, is government regulation a good way to make financial markets more efficient service providers? Wouldn't market incentives lead to greater efficiency over time whereas regulation might tend to freeze in place some inefficient level? This panel will address these and related questions.
II. Adding Fuel to the Engine: Will More Private Liquidity Yield a Safer, More Efficient Financial System?
Does the central bank still have a role as the lender of last resort? Maturity transformation has long been recognized as a core function of banking. Yet such maturity transformation also exposes banks to runs and insolvency as demonstrated in the recent financial crisis. In order to reduce the risk of such illiquidity in a future crisis, Basel III defines and sets minimum standards for two new liquidity ratios. Will these requirements significantly reduce the risk of future crises? Conversely, will these requirements impose significant costs on financial intermediation? Could the benefit of these ratios be obtained at far lower cost by central banks acting as active lenders of last resort? This panel will address these and related questions.
III. Greasing the Skids: Was Quantitative Easing Needed to Unstick Markets? Or Has It Sped Us toward the Next Crisis?
Large-scale asset purchases, also known as quantitative easing or QE, seek to help achieve the Federal Reserve's dual mandate of maximum employment and stable prices. QE takes duration out of the market in an attempt to flatten the yield curve and increase demand for risky assets, promoting both higher levels of investment and consumption. However, what some observers view as essential measures to stimulate a weak economy with short-term rates at the zero lower bound, others see as deliberately inflating new bubbles in financial markets. Is QE needed to support markets until more normal rates of growth resume, or is QE merely creating new bubbles that will ultimately burst with substantially adverse consequences, or are both true? What is likely to happen when QE ends and the Fed moves toward normalization of monetary policy? This panel will address these and related questions.
IV. Seeing Clearly: Will We View the Next Curve in the Road with More Information?
Is more information resulting in a better financial system? Bankers, other market participants, and policymakers were repeatedly surprised throughout the financial crisis by revelations about the amount of risk in the financial system as well as its distribution. Since the crisis, a number of initiatives have been undertaken to increase transparency within the system to both market participants and supervisors in the hope that it will result in less and better managed risk. This panel will address several questions related to the changing information environment. How has it changed and how will it likely change within the next few years? To what extent will these changes allow decision makers to make better choices to manage risks and minimize the adverse effects of financial crises? What more remains to be done?