Financial Stability Reports:What Are They Good For?

This IMF working paper looks at the topic of financial stability reports:

Summary: The global financial crisis has renewed policymakers’ interest in improving the policy framework for financial stability, and an open question is to what extent and in what form should financial stability reports be part of it. We examine the recent experience with central banks’ financial stability reports, and find—despite some progress in recent years—that forward-looking perspective and analysis of financial interconnectedness are often lacking. We also find that higher-quality reports tend to be associated with more stable financial environments. However, there is only a weak empirical link between financial stability report publication per se and financial stability. This suggests room for improvement in terms of the quality of financial stability reports.


Irish Economics Association Conference 2012

Reminder – the deadline for submissions is next Wednesday January 18.  Details here.


Central Bank of Ireland Conference: The Irish SME lending market: Descriptions, Analysis and Prescriptions.

  • Friday 2nd March 2012, Radisson Blu Hotel, Golden Lane, Dublin 8, 9am-5.30pm.

The Central Bank of Ireland will host a conference on SME lending on March 2nd 2012. This conference will combine work by Central Bank of Ireland researchers on the Irish SME lending market with research from international experts in the area.

The conference will comprise four sessions as follows:

Session 1: The Irish SME segment in context – importance in the Irish economy, allocation across sectors, competition in lending, loan performance.

Session 2: Keynote Speech: Gregory Udell (Kelley School of Business, Indiana University)

Session 3: Credit Access – the role of relationship lending, securitization, foreign ownership.

Session 4: Loan performance and default modelling.

Confirmed presenters and papers:

Tara McIndoe Calder, Fergal McCann, Reamonn Lydon, Martina Lawless (Central Bank): The importance of SMEs in Irish economic activity

Stuart Fraser (Warwick Business School): SME access to finance: disentangling risk aversion from true credit risk.

Fergal McCann, Tara McIndoe-Calder (Central Bank): modelling borrower-level determinants of default in SME loans.

Sarah Holton, Martina Lawless, Fergal McCann (Central Bank of Ireland): SME credit access in the European crisis.

Thorsten Beck (University of Tilburg): The impact of foreign bank ownership on SME lending methods.

Santiago Carbó-Valverde (University of Granada): SME credit access: the role of securitization.

A full and precise program will be provided nearer to the event. Admission to the conference is free, but must be reserved by emailing patricia.kearney at with “SME conference” in the subject line.


Hildebrand quits as SNB chief

The FT report is here.


A code of ethics for professional economists

One of the most interesting things to come out of this year’s American Economic Association (AEA) meetings is the formal adoption of a code of conduct in relation to  potential conflicts of interest in the AEA’s publications. The idea of the code is to provide more information to readers of published work about the funding sources and other commitments authors of reports may have about their subject matter.

The code of conduct, reports Olaf Storbeck, contains the following points:

(1) Every submitted article should state the sources of financial support for the particular research it describes. If none, that fact should be stated.

(2) Each author of a submitted article should identify each interested party from whom he or she has received significant financial support, summing to at least $10,000 in the past three years, in the form of consultant fees, retainers, grants and the like. The disclosure requirement also includes in-kind support, such as providing access to data. If the support in question comes with a non-disclosure obligation, that fact should be stated, along with as much information as the obligation permits. If there are no such sources of funds, that fact should be stated explicitly.  An “interested” party is any individual, group, or organization that has a financial, ideological, or political stake related to the article.

(3) Each author should disclose any paid or unpaid positions as officer, director, or board member of relevant non-profit advocacy organizations or profit-making entities. A “relevant” organization is one whose policy positions, goals, or financial interests relate to the article.

(4) The disclosures required above apply to any close relative or partner of any author.

(5) Each author must disclose if another party had the right to review the paper prior to its circulation.

(6) For published articles, information on relevant potential conflicts of interest will be made available to the public.

(7) The AEA urges its members and other economists to apply the above principles in other publications: scholarly journals, op-ed pieces, newspaper and magazine columns, radio and television commentaries, as well as in testimony before federal and state legislative committees and other agencies.

Storkbeck did a follow up interview with one of the progenitors of the idea, Prof. Gerald Epstein, who seemed cautiously optimistic about the wording, while wisely holding judgement on the efficacy of the code until five years or so have elapsed. Interestingly, Epstein argues for the adoption of codes like this in other professional economic associations:.

Would you recommend economic associations abroad to adapt similar guidelines?

Yes. Absolutely. I think this would be a good starting point for other associations. If they do not have publications, then they could still recommend the broad guidelines as indicated in point 7 of the guidelines. In fact it would be good to start with point 7 and then if they have publications, then require that they apply to the organizations’ publications.

In Ireland we have the Irish Economic Association, and its publication, the Economic and Social Review. The annual meeting of the IEA is on 26/27 of April this year in Dublin. Does it make sense to consider these types of resolutions, and if so, what do commenters feel the wording should look like?


Capitalism in Crisis

The FT has launched a series of articles on this topic.  The first essay is by Larry Summers, who focuses on the challenge of Baumol’s cost disease

The nature of the transformation is highlighted by the 50 fold change in the relative price of a television set of a constant quality and a day in a hospital over the last generation.


Germany Resists Europe’s Pleas to Spend More

The NYT outlines the German view of austerity and growth here.


PSI: Greece

The FT reports on the likelihood of a bigger reduction in the value of the debt held by private-sector investors in this article, while Cypriot central bank governor Orphanides expands on the downside of PSI in this op-ed.


The Debt Crisis: Causes, Consequences, Controls

The 2011-2012 Henry Grattan Lecture Series will address the theme of The Debt Crisis: Causes, Consequences, Controls. Henry Grattan lectures aim to promote informed and non-partisan debate and to offer new ideas to decision-makers and opinion-formers on long-term social, political and economic challenges.

Speaker:              Prof Karel Williams, Manchester Business School

Talk Title:            Elites and Crisis: the Case of the Econocrats

Date:                     Thursday 19 January from 6.00 to 7.30pm

Venue:                 Thomas Davis Theatre, Arts Building, TCD

The financial crisis from 2008-11 demonstrates that econocrats (central bankers and regulators) cannot understand or control finance and markets. In this public lecture Karel Williams, Professor of Accounting and Political Economy at Manchester Business School, will argue that the debt debacle is also a crisis of our expert elites. The lecture will be chaired by Paul Sweeney, Economic Advisor at the Irish Congress of Trade Unions.

Lectures are open to the public and there is no charge to attend. However advanced registration is recommended. Reserve your place today.

For additional details visit the Policy Institute website.


NYT: The Fall of Ireland’s Mighty Quinn

The NYT reports on the Sean Quinn case here.


How Not To Fill An Important Job

The Secretary-General of the Department of Finance is probably the most important job in the Irish civil service. With Kevin Cardiff’s imminent departure, the job has been publicly advertised and a shortlist arrived at.

Given the negative ramifications of the past mistakes made by the Department, one might have hoped that all efforts would be made to ensure that a good field of candidates is obtained and that the recruitment process would be run in a professional manner.

How’s it working out? Well, yesterday’s Irish Times confirms a story that has been run before, namely that “No expenses were paid for candidates travelling to Dublin to be interviewed for the position.” The government may as well have put up a sign to say “those working outside Ireland are not welcome”.

In addition, we are now informed

THE GOVERNMENT’S choice of a successor to Kevin Cardiff as secretary general of the Department of Finance is now expected to come from within the public service.

With morale in the department extremely low as a result of the economic crisis and the controversy over Mr Cardiff’s departure, appointing an outsider is being viewed within the Government as a risky strategy.

Appointing an external candidate to “shake up” the department would serve only to further demoralise staff, according to one source familiar with the process.

The article tells us that

The recruitment process, which includes the creation of a shortlist and up to two rounds of interviews, is being run by the Top Level Appointments Committee (TLAC). Five of the committee’s nine members, including chairwoman Maureen Lynott, are from the private sector.

At this point, a public statement from the TLAC that they are running a process with the sole aim of appointing the best-qualified person to the job would be welcome. A re-think on the policy of not paying for travel expenses would also be welcome.


Ireland Adopting the British Pound Sterling

One of my students (an undergraduate here at Maynooth) has a short blog post suggesting that Ireland should implement a policy over the next few years to drop the Euro and instead adopt the British pound sterling as its currency.  It is not my proposal so please do not blame me for it, but reading his short blog I cannot figure out where he is wrong. Where are the errors in his analysis?

There is the small problem of you-know-who’s silhouette on the currency.  Most Irish people actually seem to like her ok as far as I can tell, but some do not.  Perhaps we could make a deal where we can paste over a picture of James Joyce or Bono.


January 27th Conference on Irish Economy

Details of the fourth in the series of conferences on the Irish economy are below. Further details of talks will be posted here in advance.

Conference on Irish Economic Policy


January 27th

Clarion Hotel IFSC

On January 27th 2012, the Geary Institute will run an event on the future of Irish economy policy in Dublin. An era of unprecedented growth followed by a dramatic economic collapse is giving way to several years of sluggish growth. The main theme of the conference will be the development of more intelligent economic policy that enables substantial development even in the context of a tightened fiscal and monetary environment. The conference will take place over the course of the full day, with parallel sessions addressing employment, innovation, education and related themes. The conference aims to provide a forum for new ideas on the conduct of Irish economic policy, including the extent to which academic economics and related disciplines can make a bigger contribution to the conduct of economic policy in Ireland, and the extent to which policy can be designed more effectively.  The conference organisers are Liam Delaney, Colm Harmon and Stephen Kinsella. Please email to register attendance: There is no registration charge.

9.00 – 9.15

Registration and Opening




Chair: Minister Joan Burton

David Bell (Stirling)

P O’Connell/S McGuiness (ESRI)

Aedin Doris (Maynooth)

Chair: Stephen Kinsella (UL)

Ronan Lyons (Oxford)

Michelle Norris (UCD)

Rob Kitchin (NUIM)




Economics and Evaluation


Chair: Donal De Butleir

Robert Watt (D. PER)

Colm Harmon (UCD)

Third Speaker TBC

Chair: Kevin Denny (UCD)

Orla Doyle (UCD)

Alan Barrett/Irene Mosca (ESRI/TCD)

Brendan Walsh (UCD)




Fiscal Policy

Competition and Sectoral Policy

Chair: Dan O’Brien

Philip Lane (TCD)

John McHale (NUIG)

Seamus Coffey(UCC)

Chair: Cathal Guiomard

Richard Tol, (Sussex)

John Fingleton (Office of Fair Trading)

Doug Andrew (former London airport regulator)

3.30 – 4pm



Banking and Euro

Chair: Constantin Gurdgiev (TCD)

Brian Lucey (TCD)

Colm McCarthy (UCD)

Frank Barry (TCD)

Economic Performance Fiscal Policy

The Exchequer Balance

Yesterday’s release of the end-of-year Exchequer Statement provides the opportunity to update the quick look we gave to the mid-year figures.  The conclusions drawn in July are largely unchanged.  First the overall Exchequer Balance. 

At €24,917 million in 2011, this was the largest Exchequer deficit ever recorded.  The Press Statement released with the figures says that it’s not too bad though.

The Exchequer deficit in 2011 was €24.9 billion compared to a deficit of €18.7 billion in 2010. The €6.2 billion increase in the deficit is due to higher non-voted capital expenditure resulting primarily from banking related payments. The majority of these payments are once-off payments relating to the recapitalisation of the banks  and an exchequer deficit of €18.9 billion is forecast for 2012.

Excluding banking related payments the Exchequer deficit fell by €2¾ billion year-on-year.

Ah, “once-off” banking payments.  Next year’s “once-off” banking payments will be €1.3 billion to IL&P and possibly some further payments to the credit union sector.  So what €8.95 billion of “banking related payments” do we have to remove to turn a €6.2 billion deterioration in the Exchequer deficit into a €2.75 billion improvement?

UPDATE: I had guessed what was included in this calculation but the Department of Finance have posted a useful presentation providing the details.   This is from slide 4.

The issue is the inclusion of the Promissory Notes.  If we exclude this €3.1 billion payment along with all the other banking amounts then the Exchequer Deficit is lower this year. 

We didn’t make a payment on the Promissory Notes last year but we will make this €3.1 billion payment each year to 2023 and lower payments right up to 2031.  From next year there will be accrued interest added to the Promissory Notes that will increase the General Government Debt.  You cannot exclude something that is going to happen for the next two decades as a basis for saying the deficit is getting smaller.

We can strip out a lot of the banking complications by looking at the balance of the Exchequer current account.  This does include the €1.2 billion of income earned from providing the guarantee to the covered banks which is counted as current revenue.

The final outturn and annual pattern of current account deficit has been largely unchanged for each of the last three years.  Between 2007 and 2009 there was a €20 billion deterioration in the current balance.  In the two years since the achievement has been to keep the drop to €20 billion.  There has been no improvement in the current account deficit.

Looking the Exchequer interest payments gives some insight into how this has been achieved.

For a country that has to borrow to fund the deficits shown above it is pretty amazing that the interest expense in 2011 was lower than in 2010.  The explanation is that some of the interest costs were covered from an account other than the Exchequer Account.  Again, the press statement is helpful.

Taking into account the funds used from the Capital Services Redemption Account (CSRA) as well as Exchequer payments, total debt service expenditure was up €1.1 billion year-on-year in 2011, at close to €5.4 billion. This reflects the burden of servicing a higher stock of debt.

For 2011, the Budget target was a General Government Deficit of 9.4% of GDP.  The actual deficit will be around 10.0% of GDP.  This slippage (largely the result of lower than expected tax revenue) was not a significant issue as the deficit limit set by the European Commission was 10.6% of GDP. 

For 2012, the Budget target is a deficit of 8.6% of GDP.  The deficit limit set by the EC is also 8.6% of GDP.  If there is any slippage or lower than expected nominal growth we will not meet the deficit limit.


Frank Convery writes on this new initiative in this Irish Times article.

Banking Crisis Competition policy EMU European economy Monetary policy Political economy

Ireland’s Policy Stance on a Tobin Tax

The most recent Final Conference to Save the Euro ended in disarray when the UK refused to sign up to a proposed set of EU treaty changes. The UK’s veto was due to the inclusion of an EU-wide Tobin Tax on security transactions in the set of proposals. The justification for an international Tobin Tax is quite strong. Hypercompetitive securities markets with excessively-large trading volumes and hyper-fast price changes are a serious danger to global financial stability. A Tobin Tax would eliminate these dangerous trading excesses without impinging much on underlying market efficiency. On other hand, the UK government’s refusal to sign up to an EU-only Tobin Tax, imposed on the City of London while the US and Asian global financial centres remain outside the tax net, was an obvious and sensible policy decision for the UK.

After the proposed EU treaty changes were restricted to a coalition of the willing, the Irish government fretted that a Tobin Tax might particularly disadvantage the Irish financial services industry, given that the UK will be outside the tax net.

What should be Ireland’s policy stance toward an international Tobin Tax? Should Ireland do the right thing as a global citizen by supporting such a tax within the Eurozone, or should it protect its international financial services industry from UK (and non-EU) predation and therefore veto any such tax proposal? It would be much better for all concerned if the Tobin Tax could be imposed at a global rather than EU level.

Sometime in the future, May 6th 2010 might rank with August 9th 2007 as a “warning date” for a subsequent financial market disaster. Recall that starting on August 9th 2007, quant-trading hedge funds experienced an extremely turbulent, credit-market-related meltdown. Although the quant-trading markets calmed down after about two weeks, many analysts now recognize this as an early warning signal of the subsequent global credit crisis. In an interesting parallel, on May 6th 2010, high-frequency trading systems generated a “flash crash” of US equity markets, causing a 9% fall and 9% rise of the US stock market within a 20 minute period. Some individual stock prices went bananas; completed trades at crazy prices during this short “flash crash” period were annulled that evening by the NYSE board. Since the markets righted themselves within a day or two, many analysts have forgotten about this incident. But could this “flash crash” be an early warning sign of a subsequent “permo-crash”? High frequency trading (HFT), using entirely computerized systems to trade at hyper-second frequency, now constitutes 70% of US equity and equity-related (equity baskets, futures, options) trading volume, and 30% in the UK. If HFT generates a flash-crash at the end of the trading day, rather than mid-day as on May 6th, and something else goes wrong at the same time, it could lead to an enormous disaster.

Tobin originally proposed his tax for the foreign exchange market, which was the first financial market to have hyper-competitive trading costs. He saw that most of the trading volume in forex markets provided very little economic value. A small tax would have a big influence on trading volume, rendering purely speculative and potentially destabilizing trading strategies unprofitable, while having little or no impact on the real economic value of these markets. Tobin called it “throwing sand in the wheels” of securities market trading. Nowadays, Tobin’s “sand in the wheels” metaphor is widely misunderstood. Tobin was a World War Two naval officer and throwing sand in the wheels was an accepted way to improve machine performance in his day. For mid-twentieth century machinery a little sand in the wheels would slow down the mechanism (think of something like a navy ship’s water pumps) and make for more reliable performance with less chance of overheating. With modern precision engineering the notion of “sand in the wheels” as a repair method seems ridiculous, so commentators assume Tobin is advocating sabotage of securities markets. That was not what he meant – “sand in the wheels” is an old-fashioned procedure to slow down machinery so that performance improves, not a means of sabotage. Oddly, the tax is designed to generate minimum revenue – it relies on the elasticity of trading volume to net costs, and tries to drive out destabilizing short-term trading strategies while collecting minimal tax revenue.

Now, after decades of hard-fought liberalization, US and UK equity markets have the same hyper-competitive trading costs as forex markets. HFT has hijacked this and feeds off this market cost improvement (and by earning net profits from “normal” market traders) with trading systems that add little real efficiency improvement for markets. Eliminating their net profits with a small tax would do little harm, and make markets safer. The very bright computer scientists who run these HFT firms could go back to socially useful activities like designing better software.

There is another interesting parallel to the global credit crisis. US housing regulators worked for thirty years to increase access to owner-occupied housing for lower and middle income households and this was a big success. Then, they took that policy too far, and the policy was hijacked by self-interested actors in the US property lending and securities trading sectors. There was too much of a good thing in terms of the too-low-credit-quality US residential property lending market. The same applies now with securities market trading costs and trading access. Regulators have succeeded in driving out bad securities trading practices and greatly lowering trading costs, but this process has gone too far. It has been hijacked by HFT. I call this the Too Much of a Good Thing (TMGT) theory of regulatory capture.

During the credit bubble, Ireland enthusiastically joined the dumb-down contest to impose the minimal possible regulation on the financial services sector. Perhaps now Irish policy leaders could make amends by joining the push for a Tobin Tax.

How would a Tobin tax impact the competitive draw of Dublin for its brand of “off shore” financial services? Perhaps it would be the death knell for the Irish stock exchange since all trading volume might migrate to London. Ireland policymakers should encourage a global solution, bringing the US and UK in particular into the plan. Asian markets (which are not yet competitive for HFT) might be willing to cooperate as well, since there is no great cost for them.


1 euro investment returns 300-400 euro to the exchequer

Peter Cox advocates greater public investment in the heritage sector in this Irish Times article.  There may well be a strong case for extra investment in this sector. Still,  it would be good to see the rigorous analysis behind this remarkable rate of return.  It would also be good to see the cited Quantum Research study that finds that

grants made over the last 10 years have contributed at least two-fold and possibly four-fold to the exchequer in income tax, VAT, employment and buying local and Irish goods

Fiscal Policy

Authorities refused to publish house price warnings in 2004

Anthony Murphy, now at the Dallas Fed, is a renowned Irish econometrician with a strong research interest in housing markets. Back in 2004 he was commissioned by the National Competitiveness Council to study the competitiveness implications of the housing boom.

The first paragraph of his report read: “Ireland’s booming housing market has attracted and continues to attract a considerable amount of attention, both domestically and internationally. Irish house prices are extremely high by historic and international standards, both in absolute terms and relative to incomes. The strength and duration of the house price boom is unique. Many other countries and regions have experienced large house prices booms. However, at least in the 1980’s and early 1990’s, most of these booms have ended in a house price bust.”

The report, which is here, was obviously written in very judicious language but was highly critical of the fiscal contribution to the boom. (His demolition in Section 3.5 of many of the research papers written on the boom is also well worth reading). The NCC declined to publish it. Though I have a good deal of respect for Forfás and the NCC in general, I am forced to ask: how much attention might it have received, and might it have made any difference, if it had been published?


Happy 2012?

Charles Wyplosz writes on what can be done in 2012 to fix the eurozone crisis in this vox article.


Richard Tol leaves the ESRI

And he’s not gone quietly. Richard is leaving to take up a position at the University of Sussex, and I wish him well. Moving country when one has young kids is no joke. One doesn’t do these things lightly. Richard has made some important points in relation to Irish public policy on Twitter, in relation to the ESRI and the Irish economy in the Irish Times, and a bit of both today on the News at One (link is to .mp3, about 3:40 in). These are worth highlighting for three reasons.

1. Richard has criticized the independence of the ESRI with respect to its funding sources and the conclusions of its research, especially in areas away from their sometimes trenchant criticism of the Department of Finance. This is a serious matter which deserves some comment by the ESRI in my opinion.

2. Richard now joins 6 or 7 senior academic economists, including world leaders in their fields like Profs Kevin O’Rourke and Liam Delaney, leaving Ireland for more or less the same reason–they see a decade of austerity ahead for Ireland, they feel Irish academia has less to offer them as a result, and because they are research active and employable elsewhere, they are going. This is a problem for Irish academic economics going forward.

3. Most importantly, I think, Richard is a dissenter in many areas of Irish public policy and public life. He has his opinions which, while we don’t have to agree with them all (I certainly don’t), should be respected and given an airing. The fact that he didn’t find a home to adequately voice these opinions is a shame, and something I think we are poorer for as a result.


Regulatory Reform and Economic Performance

The Memorandum of Understanding between the Irish government and the troika of EU, ECB and IMF was agreed in December 2010. It contained commitments to policy changes designed to improve competitiveness through acting on professional service costs, the structure of the energy sector and similar matters. Several commentators on this site have been arguing recently that the new government is delivering austerity without reform. Here’s an interesting recent article from the Economic Journal and an earlier version on open access if you cannot get into the ucd online library.

Guglielmo Barone and Federico Cingano conclude that OECD countries which have gone furthest in tackling anti-competitive practices have enjoyed enhanced performance in industry sectors which are consumers of the products and services of the formerly rent-absorbing firms and professions.

Their conclusions are supportive of the MoU reform agenda, and of the recommendations in the report of the State Assets Review Group on vertical separation (unbundling) in the energy sector.

Happy New Year to you and yours.