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  • MERTENS Daniel (3)
  • WHITE Harrison (2)
  • FUHSE Jan (2)
  • VOLBERDING Peter (2)
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Katharina Pistor’s book The code of capital – how the law creates wealth and inequality (Pistor, K. (2019). The code of capital – How the law creates wealth and inequality. Princeton: Princeton University Press) is an original and insightful intervention in the quest to understand both the rising inequality of the last 40 years, as well as the inner dynamics of capitalism, a social formation that has ruled in western societies for about 200 years now. Pistor shares many of the convictions of the publications in the journal Accounting, Economics and Law, such as the dangers to democracy inherent in the corporate form (Robé, J. P. (2011). The legal structure of the firm. Accounting, Economics and Law, 1(1). https://doi.org/10.2202/2152-2820.1001; Strasser, K., & Blumberg, P. (2011). Legal form and economic substance of enterprise groups: Implications for legal policy. Accounting, Economics and Law, 1(1). https://doi.org/10.2202/2152-2820.1000), the fact that firms and corporate form need to be distinguished (Y. Biondi, A. Canziani, & T. Kirat (Eds), (2007). The firm as an entity: Implications for economics, accounting and law. New York and London: Routledge) and that shareholders do not own corporations, but just their shares, it is only appropriate to discuss and present it to the wider audience of the journal, pointing to its fundamental insights and potential for follow-up research. The title of the book and its set-up evoke both Luhmann’s system theory with its penchant for binary code as well as Marx’s capital (Marx, K. (1955[1867]). Das Kapital. Berlin: Dietz Verlag, Vol. 1). Combining the coding of social systems and their relentless dynamic in innovating and generating new forms by recursively referring to established elements (Luhmann, N. (1984). Soziale Systeme. Frankfurt am Main: Suhrkamp Verlag; Luhmann, N. (1995). Das Recht der Gesellschaft. Frankfurt am Main: Suhrkamp Verlag) with Marx’s focus on the structuring effects capital has on society is making this a very inspiring book, which at the same time evokes many follow-up questions.

This paper contributes to the debate on the adequate regulatory treatment of non-bank financial intermediation (NBFI). It proposes an avenue for regulators to keep regulatory arbitrage under control and preserve sufficient space for efficient financial innovation at the same time. We argue for a normative approach to supervision that can overcome the proverbial race between hare and hedgehog in financial regulation and demonstrate how such an approach can be implemented in practice. We first show that regulators should primarily analyse the allocation of tail risk inherent in NBFI. Our paper proposes to apply regulatory burdens equivalent to prudential banking regulation if the respective transactional structures become only viable through indirect or direct access to (ad hoc) public backstops. Second, we use insights from the scholarship on regulatory networks as communities of interpretation to demonstrate how regulators can retrieve the information on transactional innovations and their risk-allocating characteristics that they need to make the pivotal determination. We suggest in particular how supervisors should structure their relationships with semi-public gatekeepers such as lawyers, auditors and consultants to keep abreast of the risk-allocating features of evolving transactional structures. Finally, this paper uses the example of credit funds as non-bank entities economically engaged in credit intermediation to illustrate the merits of the proposed normative framework and to highlight that multipolar regulatory dialogues are needed to shed light on the specific risk-allocating characteristics of recent contractual innovations.

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After the great financial crisis of 2007–2009, central banks were handed a macroprudential mandate to contain systemic risks, a mandate seen as endangering their independence due to expected distributional conflicts. At the same time, depoliticization through scientific expertise was largely foreclosed, as systemic risk was a largely undefined concept. This paper focuses on how central banks dealt with this conundrum. It examines the scientific debate on systemic risk and macroprudential regulation post-crisis, focusing on the debate’s impact on final regulation. Employing author-topic-modeling on a unique dataset of 2397 published economic papers on the relevant topics, we detect the formation of a new alliance between central bankers and academic economists working jointly on developing systemic risk measures. Centered around a hinge of systemic risk contribution by individual banks, this new alliance expresses itself by incorporating the macroprudential concerns of practitioners into abstract market-based systemic risk measures. These measures develop incrementally, using and repurposing techniques from financial economics pre-crisis to legitimize and justify macroprudential interventions post-crisis. This alliance allows us to account for the incremental change witnessed post-crisis and point to its potential for long-term fundamental change.

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The European Investment Bank and national development banks provide a framework through which a European Recovery Fund could work quickly and effectively.

Publication date 2020-04 Collection Policy Paper : 252
MERTENS Daniel
RUBIO Eulalia
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Introduction: The debate over how Europe should organise solidarity and jointly respond to the COVID induced economic crisis is in full force, with various proposals either agreed or at debate such as the use of the European Stability Mechanism (ESM), the creation of new common debt instruments or the mobilisation of the upcoming Multi-Annual Financial Framework (MFF). So far, however, the prime responses to the economic shock have been located at the national level, not only being proof of the fact that most firefighting is done at the level of Europe’s nation-states but also displaying the inequalities of fiscal capacity that still loom large in the EU’s political economy. There have been various studies and reports comparing governments’ initial fiscal responses to the COVID-19 crisis1. While there are differences in the size and composition of fiscal packages, a common feature that emerges is the strong reliance on credit guarantees and other liquidity support measures. Less appreciated in current debates is the fact that these measures are often administered and distributed by a specific sort of para-fiscal actors: development banks, or national promotional institutions. Even at the European level, significant parts of the common response to the economic impact of the pandemic rest on the European Investment Bank (EIB). This policy brief highlights the key role these para-fiscal institutions play in Europe and reviews the similarities and differences in their responses by focusing on five large institutions (EIB, KfW, Bpifrance, CDP, ICO)2. It explains how these entities have worked as governments’ 'little helpers' in the European context of the past decade and points to key challenges that come with their role in terms of a coordinated and solidarity-based European effort.

At the heart of the last financial crisis stood the shadow banking system, a mesh of financial activities and entities that grew outside of bank balance sheets but with the support of the banking sector. These activities were not regulated or supervised like banks, and they were characterized by high maturity mismatches and leverage. Two prime elements were Money Market Mutual Funds and Asset-Backed Commercial Papers, which jointly performed bank-like functions. This paper sheds light on the fate of these entities post-crisis and the regulatory dynamics at play as policymakers shifted their focus from constraining their activities to drafting a European regulatory infrastructure that delivers both stability and growth. Based on expert interviews and document analysis, we show how European policymakers opened up to private experts during this shift to learn about the technical complexity of Money Market Mutual Funds and Asset-Backed Commercial Papers, but in the end were restricted in their efforts to craft such regulation due to competing national factions and the legislative time pressure at the European level. We argue that the process was heavily influenced by, first, nationally held visions about the future role of financial markets that came to the fore at pivotal moments during the negotiations, and, second, the specific European institutional set-up and its electoral cycle.

in The Routledge International Handbook of Financialization Edited by MADER Philip, MERTENS Daniel, VAN DER ZWAN Natascha Publication date 2020-02
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Post-crisis, macro-prudential ideas have challenged the epistemic authority of private risk management technologies, declaring them to be pro-cyclical contributors to systemic risk. This discursive challenge has been most critical of the shadow banking system, where private risk management instruments are central. This challenge, however, has not been translated into regulatory tools which reflect these convictions. This paper studies this process of discursive challenge to (failed) regulatory intervention for the case of the repo-market, the heart of the current shadow banking system. It traces regulatory efforts on the global and EU level from regulatory statements to (lack of) action, documenting both the persistent articulation of macro-prudential ideas challenging private risk-management systems and timid to no regulatory intervention. It links this hiatus to international coordination problems, the need for macro-prudential action to span regulatory communities, involving banking and financial market authorities and disagreements between micro- and macro-prudentially oriented regulators. The lack of evidence and the difficulty to generate it are identified as major impediments for regulatory consensus, further aggravated by ambiguities about the goals of anti-cyclical regulation. Beyond governance problems and the persistent appeal of private risk-management systems, the paper thus points to difficulties operationalizing macro-prudential ideas as a major explanatory factor.

in Finance, Growth and Inequality: Post-Keynesian Perspectives Edited by ROCHON Louis-Philippe, MONVOISIN Virginie Publication date 2019-09
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In Chapter twelve, Max Nagel and Matthias Thiemann argue that unconventional and highly accommodative monetary policies, deployed by central banks after the financial crisis of 2007, reduced pressures on the economy and on financial markets. However, integrated monetary and financial systems transmit loose monetary and financing conditions across the globe, evoking volatile international capital flows and the unsustainable build-up of foreign-denominated debt. The authors trace the discussions in the international expert debate regarding these negative spillover effects, analyzing speeches and texts by the Federal Reserve, the International Monetary Fund and the Bank for International Settlements. International debates among policymakers and experts could neither agree on the size of these negative spillovers nor how to counter them via adjustments of global monetary governance and monetary policy frameworks. However, they have found that insights from international macro-finance in particular have caused the IMF and the BIS to acknowledge the need to account for the effect of monetary policy on (international) financial stability. They conclude that post-Keynesians could make a substantial contribution to this debate as routes towards reform of global monetary governance and monetary policy frameworks open up.

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In 2013, the Governor of the Bank of England heralded that the Bank of England is ‘open for business’: ready to buy and sell every asset it can value, thereby adjusting the role of the Bank of England to the demands of market-based finance. This article examines this re-articulation of the role of central banks in financial markets, situating it in the context of the recently enacted Basel III regulatory reforms. By placing a regulatory price on private liquidity provision, Basel III hampers broker-dealers’ market-making capacity and the liquidity of assets used as collateral in repo-transactions. The BoE aims to counter these fragilities of market-based finance, providing a potential backstop for market prices. Endorsing entrepreneurial principles, a hallmark of neoliberal reason, this hybrid mode of external and internal intervention establishes a new balance in the relationship between central banks and private market actors. Our paper complements analyses which showed that such liquidity-providing interventions of central banks are of institutional necessity by highlighting how regulators and central bankers engage with this task. We show that the ‘cultivation of market liquidity’ is driven by the intention to transform shadow-banking into a value for society, therefore accepting to engage in an admittedly risky investment.

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Prof. Matthias Thiemann discusses post-financial-crisis regulations in Europe and the U.S. He will introduce the shadow banking industry, explain the danger of “regulatory competition,” and provide some clarity for the future of the European Union. Prof. Thiemann visited us at Princeton from Sciences Po, also known as the Paris Institute of Political Studies. He is both a political economist and a sociologist, and he primarily researches on post-crisis regulatory changes in the U.S. and Europe and the regulators’ attempts to control risk taking behaviors in the financial industry. Prof. Thiemann gave a lecture at Princeton titled “The Regulation of Finance in Europe after the Euro Crisis,” which will be presented in this episode as well. Prof. Thiemann’s book "The Growth of Shadow Banking: A Comparative Institutional Analysis" was just released in May, 2018.

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