2012 Financial Markets Conference
Policy Session Descriptions

A set of urgent financial policy issues, such as sovereign risk and over-the-counter derivatives, has relegated a host of other major policy issues to the level of mere "details" that can be more thoroughly addressed later. Yet the ultimate resolution of these details may be profoundly influenced by decisions being made now. This conference will consider four such details: the future role of the government in mortgage finance, the role of regulated intermediaries in providing maturity transformation, the potential for the new regulations to create a new shadow banking system, and the creation of "systemically responsible" money market funds.

Policy session 1- Shadow Financial System
"Will the Devil Hide in the New Shadow Banking System?"
Many financial reform measures consist of binding regulations, which will increase costs to many financial institutions. Such higher costs often create incentives for regulated and unregulated firms to innovate around the regulation.  This session examines answers to what banking activities will be more profitable outside of the banking sector. In other words, what are the new reg arbs? With these activities identified, the panel will discuss where outside the banking sector these activities will be carried out, who will perform them, and ultimately, the social costs associated with these new shadow banking activities.

Policy session 2- Maturity Transformation
"Is Maturity Transformation the Devil's Work?"
The international regulatory responses to the recent financial crisis have included efforts to reduce the risk of "runs" on important institutions. On the one hand, financial institutions are encouraged to lengthen the term of their funding relative to the maturity of their assets and increase their holdings of liquid assets. That alone seems to imply a reduction in maturity transformation. On the other hand, a major supplier of funding—U.S. money market mutual funds—faces new requirements to reduce the maturity of those assets, which seems to imply a further reduction in liquidity transformation. Would maturity transformation be reduced by these initiatives and, if so, what are the repercussions for financial intermediation and ultimately economic growth? How much maturity transformation is too much and are we risking having not enough?

Policy session 3- Mortgage Finance
"The Devil's in the Tail: Home Mortgage Finance and the U.S. Treasury"
The current U.S. home mortgage system is not sustainable. It is heavily dependent on the housing government-sponsored enterprises, which in turn are completely reliant on support from the U.S. Treasury. This panel will explore the options for reforming mortgage finance, with an emphasis on the feasibility and desirability of competing policy alternatives that seek to address extreme, surprise events (or "tail" events.) Recent options include policies designed to reduce Treasury's exposure to losses due to tail events and compensate Treasury for bearing any remaining risks to policies that seek to eliminate Treasury's risk exposure.

Policy session 4– Money Market Mutual Funds
"Money Market Funds: Past Devils? Reformed into Future Angels?"
The onset of the climax of the financial crisis of 2007–2008 was announced by the run on the money market fund Reserve Primary Fund after Lehman Brothers filed for bankruptcy. Suggested changes to money market funds include ones as dramatic as requiring these mutual funds to have capital and revoking their ability to maintain a stable net asset value. Panelists will discuss the desirability of various changes suggested, and the difficulties of accomplishing them.