The Fifth Brunel Banking Conference

By Professor E Philip Davis (Department of Economics and Finance)

12 Jul 2023

THE ROLE OF TRUST IN FINANCE AND APPROPRIATE POLICY FOR PERSISTENT INFLATION AND LATENT FINANCIAL STABILITY RISKS – SOME KEY TOPICS EMERGING AT THE FIFTH BRUNEL BANKING CONFERENCE

On 23rd June 2023, the Department of Economics and Finance held the Fifth Brunel Banking Conference, entitled "Financial stability, the macroprudential/ monetary policy nexus and bank behaviour". For the first time since 2019, the conference was held in person at Brunel (with scope for livestreaming) and the consensus was that this format is vastly more fruitful than purely online presentations. The conference was well attended by academics, practitioners, regulators in a collegial atmosphere.

The conference was organised by Professor E Philip Davis, Dr Dilly Karim and Dr Ka Kei Chan. With contributions from some of the world’s leading authorities on financial crises, bank behaviour, monetary, macroeconomic and regulatory policy, the conference provided a critical overview of current issues related to financial stability and inflation, the relation of macroprudential to monetary policy, and bank behaviour and performance as related to regulatory and sustainability requirements.

This high-level conference (along with its predecessors in 2018, 2019, 2021 and 2022) underlined the development of Brunel as a centre of research and teaching in banking economics, the latter being reflected in the introduction of the BSc in Banking and Finance to complement the long standing Banking and Finance MSc, both of which are proving highly popular with students. We also have instituted a Brunel Banking Research Group where we undertake research and policy work in fields such as macroprudential policy, bank competition and risk, and pension fund regulation.

The conference speakers (shown above) included senior officials from the major international financial organisations and central banks, Deniz Igan of the Bank for International Settlement, John Fell from the European Central Bank and Fatima Silva from the Banco de Portugal. The presenters also included an expert from the financial services industry, Kevin Gardiner of Rothschild and Co.; world-leading academics, that is Professor Claudia Girardone of the University of Essex, Professor Alistair Milne of Loughborough University and Dr Xian Gu of the University of Durham; and Professor Stephen Millard of the UK’s National Institute of Economic and Social Research; besides Brunel Professor of Banking and Finance E Philip Davis. Sessions were chaired by Davis, Karim, Chan and Dr Tomoe Moore.

The conference was organised under four headings; Macroprudential Policy (Millard, Davis and Fell), Bank performance and bank stability (Girardone and Silva), Financial structure and regulation (Gu and Milne) and Navigating financial turbulence (Igan and Gardiner). The conference presentations addressed a rich range of topics, including the following:

Further modelling of the impact and welfare effect of macroprudential policies, especially in combination with monetary policy (Millard)
Issues in the assessment of research results for policy purposes, including assessment of underlying biases (Fell)
Whether the banks’ net interest margin, which has come to prominence with the current monetary tightening, is affected by macroprudential as well as monetary policies (Davis)
The impact of remuneration schemes driven by environmental , social and governance factors on default risk for banks (Girardone)
The effect of capital headroom on the cost of funding for banks in their different liability markets (Silva)
The factors underlying the difference in interbank market structures and behaviour (Gu)
How regulation and legal considerations should deal with the growth of digital assets (Milne)
Features of the current conjuncture in historical perspective and the factors underlying key policy issues of inflation and financial stability risk (Igan)
Some considerations in respect of commonly held financial beliefs and concerns – including suggestions that some such concerns may be exaggerated (Gardiner)

A number of the papers, as well as the final overview session’s discussion raised further policy questions for bank regulators and central banks as well as fields for further investigation by researchers, such as

Trust appears to be core to many aspects of financial behaviour, regulation and structure. How can it be nurtured?
What is the impact of biased reporting of research for policy formulation?
While average effects of crises and of policy tightening may be moderate, how important is it to take account of distributional effects which may lead to extreme difficulties for some agents and institutions?
Is there a growing tendency to “trust” that the public sector can save any institution and group of individuals from undesirable outcomes? (The tendency to widen deposit insurance was cited as well as the furlough and other massive fiscal aid during COVID)
If so, is the consequence a growth in moral hazard that would enhance risk taking? Was the large volume of uninsured deposits with Silicon Valley Bank a symptom of trust that the authorities would react in this way?
Does wider use of crypto and other digital means in emerging markets result from a lack of trust in government, legal and regulatory structures? Should “permissionless” assets which are not linked to an institution or legal framework come under the regulatory umbrella at a global level?
Does trust among counterparts in policy areas such as central banking and regulation lead too often to “groupthink” entailing errors such as the holding of rates too low too long (or tightening too late) in the past decade?
Can a genuine disinflation occur with such low real interest rates compared to previous cycles?
Are we puzzled what to do with macroprudential policy in a period of inflation and slow growth because we are not sure what it is aimed to do? Should it be solely focused on ensuring resilience in such circumstances?
What further issues need to be addressed in the corporate governance of banks?
Has social media generated a new environment for bank runs or were panics always equally sudden?
And equally, do we exaggerate the price and volatility risks since the past shows they were often much worse?
Has commercial property been neglected by regulatory policy, especially at the macroprudential level and what are the current risks from this source, given the structural shift to working from home?
As mentioned, we found that holding the conference in person was a huge improvement in terms of comments and productive interaction. Notably, the final session where we sought to draw overarching themes was lively and constructive. Many of the presenters went away also with helpful comments and suggestions for improving their papers or for future research on their topics. The online delegates were nonetheless content also and many remained online for the whole day.

Links to the conference presentation materials are provided below – the reader is warmly encouraged to read them attentively!

Session 1: Macroprudential Policy

Stephen Millard (Deputy Director, National Institute of Economic and Social Research), “The Macroprudential Toolkit: Effectiveness and Interactions”

John Fell (Deputy Director General, Macroprudential Policy, European Central Bank) “A Meta-Regression Analysis of Monetary and Macroprudential Policies”

E Philip Davis and Dilly Karim (Professor and Senior Lecturer, Brunel University) “Macroprudential policy, monetary policy and the bank interest rate margin”

Session 2: Bank performance and bank stability

Claudia Girardone (Professor of Banking and Finance and Dean of Essex Business School, University of Essex) “Banks’ Sustainability-Linked Pay and Financial Stability”

Fatima Silva (Head of Macroeconomic Policy Division, Bank of Portugal) “The Solvency and Funding Cost Nexus - the Role of Market Stigma for Buffer Usability”

Session 3: Financial structure and regulation

Xian Gu (Associate Professor of Finance and Deputy Director of the Centre for Banking, Institutions, and Development (CBID), Durham University) “The Interbank Market Puzzle”

Alistair Milne (Professor of Finance, Loughborough University) “The Law and Regulation of Digital Assets”

Session 4: Navigating financial turbulence

Deniz Igan (Head of Macroeconomic Analysis, Bank for International Settlements) “Navigating the (dis)inflation journey: key risks on a turbulent path”

Kevin Gardiner (Global Investment Strategist and Managing Director, Rothschild), “Financial Instability; an Asset Allocator’s Perspective”