Society, economic policies and the financial sector

Dr. YV Reddy emerged as one of the star central bankers from the crisis.

He spoke at the 2012 Annual Per Jacobsson Lecture hosted by BIS. And as always terrific stuff from the much sought policymaker.

The future of finance, and in particular saving it from a popular backlash against the global financial crisis and related crisis-management policies, has rightly become a matter of great concern. There is broad agreement that finance has, as in the past, the potential to do good, which should be harnessed by all. However, it is essential to minimise its potential to do harm. In the commendable search for good finance, central bankers have not merely a stake but also have a legitimate role to play. From central banker’s point of view, there are several issues in this search for good finance for the future, but there are three inter-related issues that I want to comment on today: (a) how to ensure that the financial sector serves the society better; (b) how to integrate financial sector policies better with national economic policies; and (c) how to ensure that the financial industry functions as a means and not as an end in itself?

The speech covers a large ground.

This one on trust in finance is pretty good:

A society’s trust and confidence in finance, like in any other sector, is derived partly from formal laws, regulations and procedures, and partly on the manner in which they are implemented, through both formal and informal channels. Trust is, therefore, difficult to measure, but on the basis of surveys conducted and anecdotes reported in the media, there appears to be an erosion of trust in the financial sector as a whole, and banking in particular, in advanced economies. The perceptions of such an erosion of trust, however, differ.

He points to several cases where trust has eroded in finance recently. He says central banks may not have tools to build trust in finance but has huge stake in the trust process:

It is also possible to argue that erosion of trust, if any, may be temporary, as seen in the past when the financial sector faced crises. It is also possible that central bankers have no tools for managing society’s trust except by delivering their mandate through price stability and financial stability consistent with maintaining employment and growth. But it is undeniable that maintaining trust and confidence in finance is essential for the good of society at large.

My submission is that the mandate for maintaining financial stability, which often rests primarily on central banks, has two related dimensions, namely the avoidance of disruptions in the functioning of the financial system and (more positively) the promotion of trust and confidence in the system. If there is any wing of public policy authority that has a stake in building such trust, it is the central bank. Hence, the central bank should be watchful of developments related to trust in their jurisdictions and take a conscious decision whether to monitor and act, as necessary, to ensure continued trust and confidence in the financial sector.

He talks about regulatory capture, inclusive finance, global finance and governance, regulation, etc etc. As I said failry exhausting…

Leaving further analysis of the speech to the visitors..

 

 

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