Towards the banking union

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Maximilian Harrell
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1 Towards the banking union Opportunities and challenges for Statistics Session 4: Communicating Statistics Huw Pill Goldman Sachs Seventh ECB Statistics conference October

2 Objectives of banking union Create a more robust, more resilient and more efficient European banking system Contain risks at both micro-prudential and macroprudential levels Support greater integration of the European financial sector Create a level playing field across participating countries of high quality in terms of rules, regulations and supervision 2

Support greater integration of the European financial sector Create a level playing field

3 Role of communication / statistics Helps to stabilise expectations and improve legitimacy and efficacy of policy actions Transparency Clarity Accountability Effectiveness 3

4 Role of communication / statistics Transparency Clarity Accountability Effectiveness and the greatest of these is effectiveness 4

5 Effectiveness Effectiveness can only be assessed against the objective of the policy framework but objectives of banking union are difficult to define in a quantitative manner. Financial stability = absence of financial instability Financial instability: you know it when you see it 5

6 An approximate answer to the right problem is worth a good deal more than an exact answer to an approximate problem. John Tukey Professor of Statistics Princeton University 6

7 Heat map for indicator of financial instability / macro-prudential risk in the Euro area Derived from regime switching model of risk of multiple bank defaults derived from CDS prices Risk Measure Housing Market Credit Market Money Market Stock Market Source: Goldman Sachs Global Investment Research 7

prices Risk Measure Housing Market Credit Market Money Market Stock Market 2003 2004 2005

8 Role of communication / statistics Transparency Clarity Accountability Effectiveness but there are potential trade-offs amongst these different communication objectives 8

9 Trade-off # 1 Transparency vs. Clarity Internal analysis and discussion of available data leading to policy decisions Transparency reflects whether external presentation corresponds to internal analysis Presentation of analysis and policy decisions to external audience (e.g. market participants) Internal analysis is inevitably complex and needs to embrace various points of view and debate among them Clarity of message entails that complexity of internal analysis is simplified, which may compromise transparency 9

presentation corresponds to internal analysis Presentation of analysis and policy decisions to external audience (e.g.

10 All models are wrong... but some models are useful. George E. P. Box Professor University of Wisconsin Empirical model-building and response surfaces Wiley 10

11 Trade-off # 2 Transparency / honesty vs. Effectiveness In a market environment, there is a danger of feedback effects and thus instability and / or selffulfilling prophecies emerging Monetary policy: Convertibility risk and the behaviour of sovereign and banking markets in ; Dragging anchor of longer-term inflation expectations deviating from price stability objective 11

instability and / or selffulfilling prophecies emerging Monetary policy: Convertibility risk

12 Trade-off # 2 Transparency / honesty vs. Effectiveness In a market environment, there is a danger of feedback effects and thus instability and / or selffulfilling prophecies emerging Banking union / prudential policies: Bank run on individual institution Systemic implications of price misalignments / liquidity hoarding, etc. 12

thus instability and / or selffulfilling prophecies emerging Banking union /

13 Managing feedback effects Market response Market and bank data Analysis and modelling of data by staff Policy decisions and actions Impact on banks subject to policy actions 13

14 Ensuring a convergent path Do the correct thing in a timely and pre-emptive manner Say what you do Predictability helps markets interpret information and anticipate policy action, doing the heavy lifting on behalf of policy makers and do what you say Credibility is crucial, since this induces stabilising market responses 14

anticipate policy action, doing the heavy lifting on behalf of policy makers and

15 Ensuring a convergent path Design and presentation of statistics (and communication more generally) needs to be fully embedded in the overall policy framework Sceptical of an independent communication channel for monetary or prudential policies Better seen as crucial to the design of and as an amplifier for correct policies 15

framework Sceptical of an independent communication channel for monetary or

16 I keep saying that the sexiest job in the next ten years will be that of statistician. And I m not kidding. Hal Varian Google chief economist The New York Times, 5 August

Time Matters: Capital Markets. Peter Diamond November 9 2011

Time Matters: Capital Markets. Peter Diamond November 9 2011 Time Matters: Capital Markets Peter Diamond November 9 2011 Bank Regulation Old Monetary policy Inflation, unemployment Safety and soundness of banks Microprudential regulation Deposit insurance Consumer