Governments must recognise results from structured economic indicators to ensure the best chances of financial stability, according to an expert at Aston Business School.
Dr Johan Rewilak, a lecturer in Finance at Aston, said that since the global financial crisis in 2008 real incomes have fallen, cuts to public services have been dramatic and interest rates have hit record lows.
He said: “A decade on – and a weak and inconsistent recovery later –what lessons have we learnt, if any? More importantly, why are we still witnessing housing bubbles and rapid expansions in consumer credit across the world?”
Dr Rewilak was speaking at the latest Fresh Perspectives breakfast seminar at Aston Business School on Thursday 22 March, entitled ‘Financial stability: causes, effects and everything else in between’.
He presented evidence on the importance of maintaining financial stability – and how financial instability depresses the economy even in the absence of a full-blown crisis.
And he explained how macro-prudential indicators in the CAMELS rating system established by the International Monetary Fund provided important insights into complex economic challenges. These included:
• Shock absorbency (capitalisation)
• Unproductive investment (asset quality)
• Ineffective allocation of resources (managerial efficiency)
• Movement of savings to investment (earnings)
• Disruption in financial intermediation (liquidity), and
• Managing risk (sensitivity to risk).
Dr Rewilak said: “Financial instability indicators are seen to peak prior to financial crisis, but they also show how more financially stable economies can withstand surges of credit inflows that have jeopardised economies in the past.
“We now have a better understanding of what financial stability is and that adequate precautions are taking place, such as the Basel Accords and multilateral regulations trying to clean up the banking system. These include limiting bankers’ bonuses and ring fencing retail from investment banks. Ironically, similar legislation was passed after the Great Depression with the Glass-Steagall Act, but hopefully policymakers will not succumb to pressure to repeal these stability enhancing laws in future.
“The issue now is about the new financial instruments that are created daily in search for profit, and the regulators staying on top of them, which can be a dangerous game of cat and mouse.”
Referring to continued low interest rates, Dr Rewilak said that he is quite “hawkish” and would like to see them increase, preventing any “bubbles” like house prices from growing further, but acknowledges this may be highly unlikely as it would seriously harm economic growth.
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