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tv   Today in Washington  CSPAN  October 25, 2011 6:00am-8:59am EDT

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maybe 20% lower than that in general. >> thank you. we can start another round. every time the bell rings, you have to understand that is telling you precisely that there's nothing happening on the floor. it is only when it keeps ringing that we have to go vote.
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we are talking about soccer. just like terry romo, you are slammed to the ground. that is part of the deal. use lan the guy down so his head has to hit the ground. which is often hard. there are so many ways in football to see how are a revenge it or just a mean player who is famous for that and loves it and gets endorsement because of that, commercial endorsements. soccer is extremely brutal, exhausting, on a huge field
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where there is usually three or four goals scored and that is it. thinking about it myself, watched a lot of it because of that 1980 triumph. it is hitting the ball. or because i don't think -- you probably are slammed down to the ground or tripped up. a lot of tripping up, deliberately tricked into up. does that mean the head hits? i don't know but what are some of the ways it was ranked no. 3? what are some of the ways that concussions come about the other -- if it is heading the ball is it heading from any part of your head? >> concussions come about a lot of ways while playing soccer. heading the ball tends to be relatively safe if you use your
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forehead. concussions come when you hit with the top of your head most likely from a pound because it is moving at greater speed or when a ball gets shot and you happen to be in the way and on the side of your head is how concussions occur. for me the most common way sustaining a concussion is my head to the ground. as the type of player i was i would get my legs knocked out from under me and hit by head on the ground and when you watch soccer you watch where the ball is so that way might happen and you don't see that player go down and hit their head. that is why oftentimes those thoughts are bypassed because you are not aware because you following the ball where it is going. another area is going in complications' against the bully. the goal we will either get their heads kicked. i have seen players going up against the goalie getting needed head. there a lot of circumstances. >> like in hockey.
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>> right. >> so much work to be done by so many. i am a sports fan. you watch college and professional football and there is almost an instinct to look for the player who plays dirty and if he does you turn your wrath on roger goodell and the nfl for not having him ejected from the game. referees have that responsibility. they can push them back 15 yards. they should be ejected from the game. how do you influence? young men who play football are in it to win. they don't have long careers. if you are a running back or quarterback what is your career?
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>> running back has the shortest. >> that desperation to succeed, how do you get at that stuff? someone gives you electoral. all the athletes gather in a big locker room and someone gives a lecture on concussions. half the people aren't listening because they haven't had them. >> it is difficult especially in football from the defensive side of the game. violence is probably the biggest characteristic you need to be successful on defense. you need to be violent. so you are violent. that is part of a football game. as far as that sport is considered by feel like it is more of the understanding about brain injury and the recovery process as opposed to they are changing the game and getting
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rid of head to head contact in that aspect but more is the recovery when it happens because there will always be big hits in football. >> a lot of those -- >> a lot of them are legal but not just -- [talking over each other] >> it all clobbers the second or the first. >> blows to the body just as well as blows to the head as schmidt noted. >> if you get clobbered in the chest or something, that can concuss you? are am sorry i missed that. >> anytime you're head moved fast enough -- >> what will do that? what kind of hit will do that? a hit from the body or hit from a side? >> anything but transmits enough force to stop your movement. [talking over each other] >> gets hit in the chest and body hard enough and whips back. anything else can do it.
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>> perfect example of that is last year we heard about sean jackson's concussion between the atlanta falcons and philadelphia eagles. i don't recall whether there was a sign or penalty for that hit but if you watch that in slow motion and it is available you can go on the internet you can see there was no head to head contact between the cackling player and the sean jackson. he was sick in the all shoulder. his head was head violently forward and back as he went down. that is the mechanics you're talking about when you have these concussions where you don't have a blow to the head but the head is moving so rapidly that the brain didn't have time to catch up to itself and gets folded over and compressed. >> i am over my time. i think everyone. i have to go to a cybersecurity
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hearing. senator inskeep will take over the hearing. the ranking member -- >> could have been a tight end. >> please, chairman. i am up. i appreciate very much. thanks for holding a hearing and thank our panelists for sharing your thoughts with us. i want to follow up on the line of questioning that was started earlier but you are seeing participation at an all-time high in terms of young people across the country participating in sports in incredible numbers. sports related injuries and sometimes a lot of other injuries as well. what most people think about concussions people think about football. lots of other sports where we are seeing that but i am
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interested in knowing we got a lot of younger people participating in football for example, and i have a nephew who got a concussion and is out for a month and it was a hit where he went and hid his head on the ground but it seems with young people out there, more and more injuries occurring at an earlier and earlier age. my question is is that something we should be concerned about? are we starting young? are we starting kids too early where they're experiencing concussion that higher rates? what is your perspective in the rise in the number of concussions? and maybe your thoughts about are some of these kids developed enough and capable enough in the hits they are taking at that age and the injuries they are
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sustaining at an earlier and earlier age? >> i will start. concussions -- the issue with concussions -- we are seeing more of them and the numbers are up. really three main causes. the biggest one is awareness. that would explain the increased numbers that we see over the past five or six years. the second one with the kids being faster and stronger at an earlier age and playing more violently but also games have changed too. if you look at how football has evolve ahead of one of our backs coaches, lecturing me on how people -- now you see a lot more hitting and last tackle in. we think about the point in football and the defensive side is to stop the ball you do a
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better job hitting the ground rather than trying to launch your self in a violent it. for those reasons the numbers are up. as far as concussions in the younger ages there's always a sense for me that we have to keep track of the dose of hits that the kids are taking. it the younger age you want to be more careful and do we want to postpone when you can hit in hockey or when people can wear pads and play tackle football? that is a very good idea but it is more complicated than that because at some point kids have to learn how to be hit and how to avoid what the only come with practice. a pretty complicated question. >> i look at the advances in equipment. my dad played football in the 1930s. a senior in high school in 1937. they had leather helmets and he
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was 130 pounds and played linebacker and hitting a lot of young guys coming across. got knocked cold in one game and they treated everything with whiskey. what are played in the 1970s the helmets got better and the look at the athletes today and the equipment has improved a lot. the amount of padding and protective gear athletes are able to wear. we made great advancements but as you said these athletes are bigger, stronger, faster and the hits that are watch every sunday in the nfl, there is some real contact being made so you wonder if the type of equipment we have is adequate to that. i am interested in knowing with some other sports like soccer or rugby or water polo, who haven't traditionally required a great deal of safety gear, is there additional equipment available
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that could lessen injuries and concussions in those types of sports? would anyone care to answer that? >> i can address that in general. whatever you can do to reduce the severity of concussions or frequency york eliminate some concussions in one sport would be the same in another. you are talking the same brain response and same acceleration and if you can determine how that can be done by a mechanical standpoint or a physical standpoint you can figure out how to do it in other sports. the key is first finding those answers that would let you address it in a particular sport and extend those by reference to other sports if you can get to that point. >> anybody want to add to that? i see my time is expired.
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thank you. >> thank you, senator deb olin unferth. senator deb? >> just very quickly. it seems probably 99% of the injuries that are suffered are not due to current equipment failures. thune -- something was sustained. i don't know about the little leagues but this stuff that is being tested, most of that is working pretty well. there is such a difficult problem. i don't worry so much about the big hits that we see where somebody has to be helped off of the field because we all know something is wrong. i worry more about the injury
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where you tackle somebody as you tackle them, in the face and your able to get up. but again we are conditioned -- you guys are condition we are all condition to play through injuries and you stay out there. it really is -- the way i would like to close is very briefly. we have a lot of moms and dads and coaches watching this. very quickly, is there any message you can send to the parents, how you can be better prepared to deal with this if it does come up. >> from the athlete standpoint, increasing their ability to be honest with coaches and parents and athletic trainers and understanding for themselves when something doesn't feel right. lightheadedness or dizziness or
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any of the symptoms. if the symptoms are known and they start feeling those it needs to be required that they make that known. i have had ones that have been not severe hits. >> it is important not only to address your symptoms when you have them but even once you finish having a symptoms give yourself extra time because that can prevent you not having to head your career and give yourself some extra days of leeway you can prevent long-term injury. >> the recognition of the injury is a huge. i see athlete hide their injuries every day but people don't know there are concussed. they're not aware of it. what that means is it falls on responsibility of everybody else around. teammates or coaches or parents
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or whoever to look after them and when the kid says i am fine. i can go. you have to question that. are am starting to see teammates coming to me saying i think he is not right. check him out. once it has been recognized you have to report that to the medical staff or whoever and have that patient or athlete removed from participation and allow him to recover fully before they go back to play. it is recognition, reporting, removing and recovering. >> i would say i don't see this -- i would say that i don't see this problem going away with equipment. i think equipment will improve this issue but it won't solve this issue and we have to address the way sports are played. the style of play, the amount of hitting that we allow, not of
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contact we allow and that will make a tremendous difference down the road. i don't see even a perfect helmet is always going to be those acceleration and deceleration whiplashed forces that we can't control. >> i would echo the panel's comments. there are a number of interventions that need to be enforced and encouraged and depended on the circumstances one may be more important than another but you can't avoid any of them. to the extent you shouldn't just rely on better diagnosis and return to play criteria you can't rely on just having good equipment. you have to do all those things. you have to change the attitudes of parents and players about reporting those of the then take the stigma from this need to be oh or strong or invincible. one of the things i have seen that has been effective is changing behavior based on the
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data that has been collected at the collegiate level through helmet instrumentation. the ability to identify players who have more hits on the top of the crown of the helmet than other players and because there is an association with increased likelihood of concussion we see school -- university of north carolina specifically, identifying those players and going in and engaging in behavioral modification so they're taking that out of the game. you start at the beginning with youth players and teach those players that you don't hit with the top of your head. don't hit with your head out all. the helmet is there to protect you in case you get hit and can't avoid it. you change those things you make significant reduction in the number of concussions and severity and you certainly can reduce the chance of having these catastrophic consequences of returning to play too soon or having multiple concussions that are not properly treated. all of them are important and
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you can't ignore or treat one as more important than the other. >> i want to return to some of the misleading claims on equipment. i know there has been discussion of equipment and dr. ann mckee talked about anti concussion mouth guards. have you seen at such as this one for a mouth guard sold for use by kids 11 years and under and you can see the poster here in the background. this was purchased west month. the product packaging statement mouth guard reduces the risk of concussion and creates brain save the space. given your first hand knowledge, are you troubled by this type of
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marketing for used sports equipment. young athletes who had a concussion might be particularly susceptible to advertising claims for so-called anti concussion devices. >> there is no clear evidence that mouth guard or a chin guard reduces either the rate or severity of concussion so i would have great objection to this claim. the only thing i am aware mouth guards and shin guards do is reduce floral and facial and dental injuries. the nature of concussion is not improved by the use of a mouth guard. >> you were not able to see what i was holding up. just in case you see anything else you want to comment on. >> i agree on that. are don't know if brain safety has real means.
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that term -- that is a little alarming. >> there is a diagram. >> i see it. >> it shows a space that -- creates -- what is the term it uses? it creates brain save the space. >> from some of the work done with accelerometers and helmets of football players and what forces they end up having diagnosed as concussion those concussions occur over a wide range. there are 115 hits that don't do it. if you're taking amount of force that is 115 and reducing it to 110 or so because of a mouth guard it might reduce forces if the hit is coming this way but concussions are occurring on a
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spectrum of forces. >> mr. udall mentioned head bands in soccer. i want to ask you about this. you discussed potential harm from creating a false sense of security when companies falsely claimed that product prevent concussions. this is not just about helmets or football. here's another example. this is the protective head band sold soccer players and other athletes. here's an image taken from this company's website that says this can come between you and a head injury. does this talk about advertising for a protective head band trouble you? is there a danger that young athlete might put himself or herself at greater risk of injury if they believe this head band will come between them and a head injury? >> i believe there is a problem there. this advertising is more vague and mentions head injury but not concussion. you could make an argument that
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there is a mechanism to prevent some superficial laceration and bruising but for concussion i don't believe there is no data that supports it decreases the risk of concussion. i have seen in my own practice athletes who have become more aggressive and injured themselves and others because they have a head band on and they get involved in head to head hits more when they would not have done that. >> please go ahead. >> there is another risk. we have seen this with helmets and devices like head ands but a player who has sustained a concussion now sees this or the parent sees this as the answer. mike it has had a concussion. if i put this on everything is fine. not only a false sense of security from being protected from the first concussion but because i just had one and this
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gives an extra layer and it is incredibly dangerous. >> either of u.s. athletes experience any of this that we're talking about in terms of the head band being protective? >> i wore a head year after i got my second concussion as a preventative measure and all will say i did adjust my play whether i had my head gear on or off. and think of it critically whether it was actually doing anything. if i had my head gear on i would head the ball more aggressively or played differently because i fought for some reason i would be secure from getting another concussion and if i didn't have my head gear on unpaid -- played differently. >> i used a variety -- i would get a new helmet after a concussion and would alternate brand and style and try different things but the risk is
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still there. >> that is really common in college football or football in general. obviously the brand is not the right one for you. >> that is the equipment manager would say that or just try a different style and do better next time. >> let me return to the helmet testimonial claim on note repeated concussions. july 23rd, 2010, memorandum the head coaches and head athletic trainers and nfl commissioner roger goodell wrote, quote, it is important to remember that no helmet can prevent a concussion or reduce the risk of concussion to any specified degree. yet one nfl head athletic trainer made several product endorsements for the revolution
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football helmet. in a rendell video news release title rendell revolution you p.m. see media campaign highlights tim green of the chicago bears states, quote, we have had some players who have had ongoing problems with head injuries. we made the switch to the new project of head gear when it came out. these players have had no problems since then or now repeated concussions. do you expect you for high school football team to have no repeated concussions after switching from traditional helmets' design to read all revolution helmets? >> no i don't. >> pretty straight forward. >> this is beyond my level of expertise. >> mr. oliver, i want to ask about the maximum life span of football helmets.
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you talk about that a little bit in relation to prior questioning you. starting next year it will no longer recondition helmets that are 10 years or older. the executive director stated he would not want is some wearing a helmet that old. the technical director, dave halstead told the new york times, quote, would never let his kid wear a helmet more than 10 years old. ralph konrad, 70-year-old son max was wearing a 20-year-old football helmet when he suffered a brain injury bridge ralph wrote to me after this came out. how is it possible our son was issued a helmet three years older than he was?
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why does the nazis standard not set a maximum number of years before a helmet should no longer be used? >> there are a number of reasons why we don't. the first reason is you have to tell me what helmet you are looking at. if it is a 10-year-old helmet that has never been used or been used two seasons should that helmet be replaced simply because it has reached a birthday of ten years? there is no data that suggests that helmet because it restage of ten years is more or less protective that helmets of a similar age. the other thing has to do with whether or not you're using a 10 year life for 12 your life because there has been a change in technology. if 10 years ago or 9 years ago there was a radical change in the technology of helmets so that older helmets don't provide the same measurable level of protection it would make sense to have that life span cut off. we have always relied on the manufacturers to specify if there is a safe life on their
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helmets. one reason we do that is we maintain our standards of design neutral. part of the process is not to impose on manufacturer an obligation to use a particular kind of material or shape of the shell or a particular design to allow innovation and progress in those areas. if a helmet company makes a helmet and they say this helmet is good for 15 years as long as it is regularly reconditioned and recertified they must have data to support that and it is their helmets and other design. what we do know from reconditioning testing data that if there reconditioned and padding is replaced and properly cared for when they are retested after being used in the field and reconditioned those tests numbers look very much like they did when the helmet was brand-new. no way for us as an association
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or organization that sets the standards to save from our test that a helmet that is now 8 years old or 10 years old scores essentially the same as it did when it was a new should be replaced. for schools to replace maybe a third or half of their helmets maybe they don't need to be replaced. the other question you have to ask yourself is right now there are revolution helmets approaching 8 years old. i am not endorsing any particular helmet but there has been a great cry to move from older style helmets to newer style helmets. if there is a helmet on the market that is 8 years old and a new technology helps with patti replaced and retest on an annual basis what is it that happens at 10 years that makes that helmet suddenly need to be thrown away if it was safe at 9 years or save at 8 years? we don't have data to suggest
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that. the decision with regard to tenure helmets was a policy decision that they were not going to do that for helmets over 10 years. some helmets are 15 to 20 years old. >> do they require the helmets to have a visible date of manufacture and of last reconditioning? >> we do. we require both of those things. >> do you know how many high school younger football players are wearing helmets that are ten years or more in age? >> we don't know specifically. what we know is for helmets that come in for reconditioning because we get that test data back at the end of each season and we know the sample. this is a ballpark figure but approximately 89% to 92% less than 10 years of age. it varies year-to-year but that is the best we have got.
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>> do those 10 years and older meet current helmet standards? >> they will if they have been for the proper program and then properly reconditioned. >> shifting the issue to supplement. both of our physicians realize there has been a lot of information on supplements and this has surprised me. there is a company selling supplements which claims they, quote, protect against concussions. it is called sports brain guard. what are your thoughts on these claims of supplements and concussions? are will send one of these down to you. it is a dietary supplement called brain guard. do you have any thoughts on that? >> what are the components?
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is that the d h a product? much like the other discussions we had there is no data that this type of thing will prevent concussions at all really. i just go back to a conversation earlier in the hearing about time and money that went into neural protective agent for things like stroke. decades and billions of dollars and we have not found anything for mechanism we much know more about. we now have a stroke works at the molecular level anyway and yet we don't have the answer. i don't see any data supporting the use of this nor would i wick expect we will find it. >> let me briefly say in closing first of all, thank you to the entire panel. your testimony has been very
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helpful. parents and families are wanting to hear more about this. the way you have engaged us has held the law. this issue of awareness, all of you talked about raising the awareness level and we need more education and need to start younger and those are important points. the second which you can see that i am passionate about is this whole idea about misleading claims when it comes to equipment. seems to me that there is so much work we need to do to educate people and people need to realize the old statement always used, buyer beware. you need to check out when you have one of these products whether it is supplements or mouth guard or head band you really need to look a little
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deeper than the advertising. let me thank you again. the hearing is adjourned. [inaudible conversations] [inaudible conversations] [inaudible conversations]
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[inaudible conversations] [inaudible conversations] [inaudible conversations]
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[inaudible conversations] >> in a few moments a forum on the effect of the global financial crisis and in two hours the founder of the celebrity news site t m brings that all media will combine the elements of television and the internet and traditional broadcasters need to step down. several live events to tell you about the day. house members will look at how the european debt crisis may affect the u.s. economy. you can see financial services committee meeting on c-span3 at 10:00 a.m. eastern. on c-span2 at 10:00 a.m. a house foreign affairs committee hearing on what led to the deployment of u.s. special operations forces to you gotta to advise forces battling the board's resistance army.
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house on services subcommittee hears about changes to the military retirement system. you can watch that 1:00 eastern on c-span2 and witnesses will include defense department personnel specialists. >> this headline proved false but do we's defeat by harry truman was iconic and continued impact political history. this week on the contenders follow the career of thomas dewey. a dominant force in state politics and influence in national politics in the election of dwight eisenhower and richard nixon. the contenders live from the roosevelt hotel in new york city at 8:00 p.m. eastern on c-span. >> next a forum on the influence of the global financial crisis with members of the american enterprise institute joint shadow financial regulatory committee. this is a less than two hours.
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[inaudible conversations] >> welcome. to the public symposium following the eighth joint summit meeting of the regulatory committee. the theme of our meeting is lessons from the past moving into the future. that is what we're focusing on in this symposium. there are six shadow financial regulatory committee. the oldest one is the u. s. that is 1986 followed by europe, let's see. where is it. in 1990s -- 1996 in japan. also in 1996.
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then we had -- here we go. u.s. in 1996. the twenty-fifth anniversary of the u.s. shadow meeting committee. european 1998 and japanese 1998 and latin america in 2000. asia 2004 and the latest one to join us is australia and new zealand in 2006. two years ago we had chilly and four years ago we met in copenhagen, denmark. this meeting had 36 members of 20 different countries attending. we started on saturday morning and finish a few minutes ago. sort of like that many imf, the purpose brings great people to get it to exchange ideas and see if we could develop strategies and programs that can be acceptable to all of the committee's. the agenda for today's meeting
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we will introduce the chairman of six committees and they will introduce their members who are sitting here. many members have business commitments. we have enough members here who could interact with you after the symposium. bob blake and the individual chairman will review briefly and try to hold them down to three five minute tour left the gist of the papers they wrote which is the impact of the financial crisis in the area, colleges taken or not taken lessons there from. we develop a policy statement after listening to all the papers and committees and have a great deal of discussion. we will present a policy statement. you probably have copies available. then we have two commentators and two senior people from the
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world bank and imf. luc laeven from the imf. if anyone stays in their times allegedly enough time for q&a with the audience. let me get started with introducing the chairman of the various shadow committees, lilana rojas-suarez. do you want to introduce your members for the latin american committee? >> joining me are asli demirguc-kunt, former secretary -- [inaudible] -- and are you
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there? thank you. and investment right now in panama. very important negotiator in the canal. pedro is a professor at the university of san paulo. >> thank you. is the mike on? >> my name is jeremy goh from singapore management university. eyecare the asian committee. among members of the committee, three over there. from the university in indonesia and next to her is maria correll
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batista, senior economic adviser at the asia bank. and jonathan batman from the faculty at the hong kong university of technology. >> thank you. we only have one person left from the japanese group with us, kimie harada is representative of the japanese. >> i am kimie harada from tokyo city. the members here until yesterday, all of them accept me this morning. i am going to talk about japanese tradition. >> next, harold banning of the shadow committee. >> we have several members who are still here.
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we have a professor of finance at the great university in frankfurt, germany. then we have mr. cushions the from the university of paris too. the back we have gerard professor christina brown from
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monarch university. >> thank you. let's go very briefly five minute the left telling you the gist of their papers. we will do this in the order of the establishment of the committee. the first committee and the oldest one is the u.s. but not necessarily the most important but charlie will be presenting it. come up to the podium. >> thank you. i will briefly summarize the end of our paper which presents 11 key lessons learned from the crisis and from the policy response to the crisis. first one of the main drivers of the crisis was government housing subsidies, southern the for risk particularly in the mortgage market which included had mandates on fannie and
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freddie's behavior but other government policies that encourage lax underwriting especially over time and increased leveraging in the mortgage market. almost nothing has been done. perhaps nothing has been done to address this problem and prevent it from happening again. second problem was easy monetary policy keeping interest rates far below their equilibrium levels for four years in a row from 2002-2005 which resulted in underpricing of risks, asset price inflation for risky assets including housing and fuel unreasonable expectations that helped to inflate the housing bubble. the fed has not accepted responsibility for these mistakes nor has it outlined how it will prevent itself through some sort of rule or practice that could prevent it from doing it again. we learned regulatory and
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supervisory frameworks are deeply flawed. two of the most obvious and important weaknesses our failure to measure risk in the financial system in regulated banks in particular on an accurate basis in advance and the second very important problem is failure to recognize losses when they start to accumulate despite the fact they are apparent in the market and anyone who doesn't have a political or other motivation for hiding them. nothing in the regulatory reforms have addressed these two key problems as a measurement of risk and recognition of loss despite thousands of pages of dodd-frank. bank risk-management was another area that failed. corporate governance in banks and some banks were deeply flawed. risk-management failed to recognize and constrained valued destroying risktaking that heart
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and stockholders and contributed very much to the financial crisis. some of the interventions the government undertook were well designed especially those with structure that made themselves liquidating and temporary. others were not so well designed and we are still seeing the federal reserve with $1 trillion worth of mortgage-backed security in its balance sheet based on reactive and not well designed programs which have ongoing implications for problems with independence. we found out there are weaknesses in resolution of failed financial institutions both domestically, weaknesses having to do with ability to resolve investment banks and bank holding companies but also internationally having to do with what to do when troubled financial institutions present
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problems across borders that require international coordination of resolution policy. these remain largely unaddressed. we have reinforced perceptions that were preexisting about too big to fail doctrine. the doctrine that so large institutions are too big to fail despite some reforms in the dodd-frank legislation, many people believe the dodd-frank legislation institutionalizes too big to fail without preventing or going forward. there are also more technical problems relating to the primary dealer system and the way the federal reserve implement monetary policy which exposed the fed system to and unnecessary concentration of problems having to do with a small number of primary dealers and we point to the e c b at the better approach for a broader
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based system of counterparties engaging in monetary policy. those are the highlights. >> thank you. one difficulty with the chairman of the u.s. committee is i forgot to introduce members of the u.s. committee that are anxiously -- if i could recognize them. marsha bloom of the university of pennsylvania and boston college, ken damp of the law school. anybody else i should recognize? barb will be here to talk in a moment. of the punk and foundation. who did i forget? peter wallace and --wallison of the american enterprise institute. anybody else in my cousin -- my own committee i haven't recognized? second person to speak is harold benink who will tell us what the europeans said.
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five minutes. >> good morning, ladies and gentlemen. pleasure to see so many of you here. talking about the health care situation you can imagine in the past few days we ask the shatter european committee -- having a difficult time because we know the whole world is looking at europe and saying get your act in order and do something about it. as you will notice later on during this session, statement we are going to issue as shadow committees to large extent dealing with problems in europe. as you know europe is unique in the sense it has a large and important diversity and also institutional complexity in terms of the collection of 27
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countries which is the type of internal marketing in which there is freedom for flow of goods versus capital and services. out of 27 countries we have 17 countries having a single currency, euro. it also means we have ten non euro zone countries and countries likes with the month which is closely linked to the european union but still not a member of vote switzerland becoming stronger through the u.s. -- [laughter] -- and charlie is going to jump -- european shadow committee. we are nicely mixing up and creating a type of cultural diversity on the regulatory committee. in terms of the crisis when it started in 2007, the first year
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as you will recall there were some banks in the united kingdom -- quite a few german banks hit because substantially in u.s. portfolios. the reaction in europe in other parts of the world after september of 2008 when lehman brothers failed and the reaction we have seen in europe was basically a type of bailout in terms of the government providing capital injection into the banking system. some called nationalized, loan guarantees were provided in the portfolio for state mortgages and also all types of bank
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guarantee liabilities. basically large banks started the issue and most of the government guaranteed. in europe in late 2008 and important committee started work -- one of the former managing directors of the international monetary fund produced a report of increasing and strengthening european supervision in a situation that from january of this year some institutions were created most importantly european systemic risks for the type of observatory of systemic risk of monetary and systemic risk in the euro zone but also supervisory agencies. they are new in the sense they were created but they are the successors of former types of
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corporations in europe. i am talking about banking authority and european security and mark authority and european authority of occupational pension funds. these supervisory agencies been strengthening of european supervision of corp. between european supervisors but supervision is exercised as a shadow committee reviewing this is not likely to be a stable situation with supervision of the large european banking and financial service. in terms of other legislation europe has been active implementing basel iii with the proposed directive -- basic following the work of basel iii.
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you will have seen the united kingdom there is an independent banking commission who are basically arguing large banks actively involved in commercial investment banking -- a way of limiting the amount of risk at stake for the taxpayers. what is quite urgent in europe made this clear, that we need to develop much more stringent resolution and solvency procedures because we have seen it -- in particular belgium and the netherlands, very hard to support things if you talk about the european banks. finally a few words about the european crisis. we have been preparing for this
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meeting. we going to more detail into that. i started this presentation with complexity of europe which is a difficult process which is happening. you are all aware of the big plan being discussed with great depth is unsustainable and needs to be restructured. there is a point of recapitalization of european banks to law losses. this weekend there was an important meeting of ministers of finance and government leaders, some which is floating around on a billion -- i understand the imf--so that is interesting to see and the main thing which is under discussion is how to increase firepower of european financial stability and the rescue fund and the point is the type of puzzle european
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leaders -- how can you present -- restructuring creek debt. how can you prevent the contagion from spreading? if those countries have a real problem in the euro zone that point is we are working on this and talking about potential bank, rescue fund with european countries, with additional money and it is a difficult puzzle to resolve. if we need much larger rescue fund in one way or another -- and then something hopefully the european leaders will be sorting out before next wednesday. i understand plans are being discussed -- and some interesting ideas about it. thank you very much.
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>> thank you. .. >> that started when it of bubble in 1990. so that is japanese not only financial, but also when institutions were fortunate since financial supervision was
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already imploding at that time. for example, fsa, financial services agency, forced major banks took it out of nonperforming loans in mid-2000. as shown in the graph, number of loans. it declined in 2000. in the mid-2000s. the decision was of course be late because the bubble burst in 1990. however, in terms of the global financial worked. that means japanese banks didn't have any uptick for risky investment such as subprime.
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so the direct impact on the japanese institutions were limited. the obvious reason is, as shown here, the japanese banks didn't have much exposure to toxic assets and financial institution maintain stability so far. it was stable so far. however, the real economy suffered a lot. here gdp growth led in some. as an example, it suffered more than united states. so, why did the japanese economy suffer so much? why the financial system was largely armed?
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-- largely harmed? the most important was export to countries that was directly hit by the financial crisis. so it looks, the country to remain financially stable, however the bill is not correct. the other two major problems so far seems responsive to the global decision, created another problem. one is a well-known problem. one is financial stimulus make fiscal situation unsustainable. and japanese banks hold huge amount of government bonds.
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there are some estimations that 100 basis points decrease in government bonds, in the interest-rate, lowe's could be 4.7 trillion yen could be part of its capital. so the fiscal expansion may have contributed to prevent the economy from going into a deeper recession, but fiscal situation was already serious before the financial crisis. the second problem, going back to the previous slide, the financial regulation hurt banks to consume losses for
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classifying loans as nonperforming. so first can we learn from the japanese experience, one is here, japanese banks as financial regulators do not want to repeat the nonperforming loan programs. so one lesson is michael prudential policy is important. -- micro prudential policy is important. the core deposits for financial loans is not good either. three, foam stability point, fiscal expansion might create another financial crisis in the future. so summarizing all of this, the
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economy is relying on export, suffered a lot from the financial, from the decision abroad. thank you for your attention. >> thank you, kimie. our next speaker is from -- lilana rojas-suarez. >> good morning. thank you for your attention. well, as most of you know latin america is perceived as the region during the former financial crisis. there was no banking crisis, no major loss of confidence from depositors. but that didn't mean that the region was not affected. it was heavily affected by the shock. when, after lehman and it was a dry up in liquidity, finance collapse, local banking credit, the rate of growth of local taking credit in many number of, any number of countries again even negative.
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and recession was felt in most of the countries. however, the difference is that it was short-lived. the region recovered very quickly. by 2010, early 2010, it was facing the same problem that it was facing before the crisis, and the problem was that large capital inflows that were appreciating in the currency. by the way, we're kind of in same situation now, when possibility of new crisis may hit the region. and we argue that there were basically three reasons for this outcome. perhaps most important reason is latin american countries, policymaker, were standing at the beginning of the crisis. so in michigan conditions matter. it mattered for the crisis in
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the past and it will matter for whatever shock is going to come. there was much improved micro performance and a better financial regulatory framework. the second is not only policymaker estimate in better fujian, but their response by policymakers, and for the first time in many, many years and they were able to implement secondary monetary policies. central banks were not able to implement and i tell you what in the second. and the third factor is sheer luck. it just happened that after the crisis the fed reduced the rate easing financing conditions for countries like latin america, as well as commodity prices for commodities that latin american export. so there was a combination of those three factors. to us, the most important
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lessons is the central banks learned what in economics is called -- the fact that you can -- open capital account, had independent monetary policy. in the past latin america have tried hardly to go is important and it always fail. latin america has to correct, has many of course, but two very important for dealing with crisis. the first one is the most financially open region among developing countries in the world. okay? it capital flows come and go, and some restrictions a some capital controls in brazil but they are little. most of the rest of the countries, of the latin countries don't have the many restrictions. so very financially open. and the second one, cannot issue
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hard currency. i would like to stress this one very much because this is what makes difference between american market and develop, advance economy. nothing else make a difference. the fact is at the end of the day, when you need liquidity you need internationally traded liquidity and that is called these days u.s. dollars. okay, so when you're in this situation and you're a central bank facing those two things, you finally recognize it, then you know which have to do. you can not choose a fully flexible changed system. you want a flexibility. you don't want to be trapped, but you cannot have full flexibility to because you have -- you cannot issue hard currency. so that's why this country did. that serve them well because at the time of the crisis they were able to extend not only to banks but to some corporations, i cannot go into detail, but
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corporations meeting hard currency to actually make good on some positions they had taken with international banks. that's what they did. in addition to that they also learned that good fiscal management matters. i mean, latin america is very well known for all kinds of debt crisis. i mean, look at the history of debt crisis in the world and latin america check, check, check. right? so they learn. no more debt. no more debt. very little debt. and most countries have very small ratio of debt to gdp, but most importantly they must -- using their bank in banks economy, basically -- low interest debt. so being in that position implied that when the crisis
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hit, there was not large amounts of money that had to be rolled over. and less for your. okay? who has to come into the market in the next few months over and over again. that's not the case in latin america. i don't have time for more, but let me just finalized with the question, what is latin america prepared now for the next crisis. a little bit less than in 2007. why? because some countries that have expanded fiscal policy, correctly so, have not yet backed out completely. so, on the monetary standard, wonderful job, and that's a lesson for the united states. [laughter] i mean, we are full of lessons, okay? but on the fiscal stand, some countries still have work to do and they better hurry up otherwise the crisis might not
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hit them as well as they were in 2008. thank you. >> next speaker is jeremy go from the asian committee. >> thank you, george. good morning ladies and gentlemen. clicker, yes. we report on what happened in 2000 a crisis and how it impacted the asian economy. and what message we can learn from it. let me see how this works. okay. it's important to understand what happened, the precrisis condition, and then what are steps taken by policymaker to handle this, this very trying economic and financial crisis back them. now, asian economies extremely diverse.
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you have stages of financial development and also in the market. but by and large they're also a lot of similarities going before the crisis hit in 2008. large asian countries are relatively sound, economically speaking. and good financial fundamentals. there was a crisis that hit in the late 1990s, and people learned. and what really help at that point in time was low inflation rate and robust growth rate, and very key issue here is low debt to gdp ratio. of around 60%. and going into the crisis, the crisis hit, the chart will show a lot of the stock market is at a historical high. so all in all, the asian economy at the point in time was in pretty good shape. just before the crisis hit. and another factor i guess that
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is unique in that region is financial institutions are very conservative. so we know what happened in 2007, all the cdos and whatnot, so i don't need to go through all of this, and building and bankruptcy and spread and liquidity dried up and everything. but look at the start and say a lot of the markets, stock market is really at historical high for many countries. just before the crisis hit, and the same in the real sector. i also noticed the recovery, it recovered in no time. slightly less than a years time we're back to pre-crisis levels for a lot of the economies in asia. and if you look at the real sector, economic growth after the crisis, was, you know, phenomenal.
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monetary policy and fiscal policy adopted by government in the region make very sharp cut in interest rate, reduction of requirement, deposit insurance act of the lehman hit, some of the war is that they will be runs, you know, a lot of measures are put in place to restore confidence in the system. and also one very important issue is the build up of a lot of this reserve allowed the economy to intervene in foreign market. to calm the system. and also fiscal policy, fiscal stimulus, and huge fiscal stimulus of five-8% of gdp. and other measures, basically increase confidence in the market, including things like imposing short sale restriction and u.s. dollar facility and suspended market, accounting rules. because some argue that, but
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those things, measures were taken by some of the countries in the region. so what happened post-crisis group? we see a very sharp recovery. and singapore registered 14% growth rate, china more than 10% and also with this hot region you get hot money. very strong capital inflows to the region. can't really separate out hot money and the fbi but it created a new set of problems. housing, places like china, hong kong and my country of singapore and is also inflation there he and currency appreciation and the fact that some export in countries like thailand or to one of the issue i guess it's the thai government had to deal with at a point in time was ever increasing -- make export very
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expensive. so kept control. so one of the big glass lessons to be learned -- last lessons to be learned from the crisis, the agent economy or asian market kind of left out, left not because of conservative banking practices. and also the fact that exotic financial products are not very popular among investors over there. the and also financial institutions are regulated, and regulators over there are looking over the financial institutions. and one of the most important things that we share with latin america economies is provide cushion. so one thing we learned is prudent use of stimulus. it's very hard to calibrate we know, but overuse of stimulus of what would happen, like real
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estate bubble. we have real estate bubble in singapore, and china and hong kong. and deflationary pressure and currency depreciation. one of the things that was adopted in a lot of asian market, countered the bubbles is basically use of policies to kind of, you know, to handle some of this, this spiraling up housing prices. i can tell you a star in singapore happened, every time you get a housing market that spirals out of control, if you own a government subsidized property you can't buy another private property, that basically killed the speculators in the market. and also a lot of, 80%, you can load up to 80%. when we do handle the problem,
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we cut it to 60%. so really, it's unfortunate but overall i think it does help to stem some of the bubble thing. i think some of the important lessons we learned. thank you. >> and last speaker is kevin davis. >> thank you very much, george. welcome. i think there's no correlation between the speaking order from the oldest shadow committee member is passionate what happened in australia? by north american and european standards, not much. but it was pretty uncomfortable for quite a while. quite a bit of financial market disruption and we had a significant client of equity markets, roughly 50% drop. the banking system maintained profitability of a slight drop of in profitability for those very substantial failures
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outside of the potential regular sector and also a lot of investor losses from various structured product or in terms of economy, a very moderate and back to australia only one quarter a just marginally negative income and growth. new zealand slightly more but in general not a lot of effect. why was that? we were in the right place at the right time for both countries have been increasingly tied into asia and in particular china and that helped strengthen the economic situation. also resources helpful on the economic front. in terms of the financial sector australia and new zealand banks basically a one in the same because there are four major banks in australia that are also the major banks in new zealand. were not exposed to toxic assets. i would do not exposed? one major reason was they were very busy borrowing themselves in international capital markets to fund our large current capital deficit and using those funds in pretty profitable lending, largely for housing. so in a sense there was no incentive to get out there and
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cannibalize their system by trying to build up vehicles until one. i think also in australia and new zealand, particularly in australia very strong prudential supervision. reflecting the flag in early 2000 the regulator had a very bad experience with the failure of a major insurance company. i think it's also the case that we had relatively conservative banking, not as much emphasis on treating and position taking. also i think reflecting the flak that bankers memories are a bit longer than we thought they were. we have some very bad experiences in the early 1990s and i think the memories of that tongue over somewhat. in terms of influencing bank behavior. i think it's also important, very important at the time of christ it was very substantive government actions imposition of guarantees or provision of guarantees of bank deposits.
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provision of liquidity facilities and also very strong fiscal expansions, facilitated by the fact that both governments have been running superfluous for quite a long time and the positions reversed on. what were the consequences? i think one of the important consequences is the pride of the financial crisis both australia and new zealand were marred by the fact that they would only g3 questions without deposit insurance or without explicit deposit insurance. having introduced guarantees becomes a bit difficult to sustain that situation. australia has moved to explicit guarantee system. new zealand is attempting to go back to basically what i would call the deposit at risk model where if a bank fails, they and the deposit are at risk of losses. whether that is feasible i think, i think personally is unlikely because one of the consequences of that experience is that we all thought to be detailed was the case. we now know that too big to fail is the case in australia and new
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zealand. what's also happening is i think reflecting the international agenda, even though the australian banks sailed through the crisis recently well, with having to imposition of tougher banking regulation, also it's important that reflecting the figures that occurred outside of the banking sector in terms of the retailing and borrowers and the failures in the day, there is much greater focus on consumer protection. and a shift in the onus of responsibly away from consumers for taking responsibility for assessing whether it meets the needs to the providers of those products. that banks and other institutions having more responsibility for assessing the nature of the suitability of that product. what are the lessons? perhaps as yet untested hypotheses, one, the regulatory structure to both countries have very simple regulatory structures and i think particularly in australia we had
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a specialist dedicated prudential supervisor. only one task and that was prudential supervision. a lot of the gaps that might have existed in regulation have disappeared over the years as we're taking responsibility away from state governments and allocated it federally. secondly, i think a lot of the risk in the economy was passed on to end users rather than being held within the financial sector. in particular, most of the bank lending is very will interest rate lending, and to the extent there were increases in bank funding costs they were passed on to borrowers. likewise, the equity impacted primarily on individuals through their investments, through the pension fund investments into defined contribution and that set more of the risk onto end-users and we're seeing a reflection of that in the fact that there is a significant increase in savings for individuals following those losses in the financial crisis.
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a third possible lesson or at least a hypothesis, maybe there are benefits in having a concentrated banking system made up of large banking. those benefits might come despite the fact there is concerns about adequate competition arising from that type of model. but maybe some of the risk, systemic risk is internalized within the banks and can manage it better. maybe there's also, it's easy to supervise practice small number of large banks. i think finally the last thing i would point to is again one of the benefits of the two systems was a clear division between the potentially regulated sector and the unregulated sector. when people made losses in the unregulated sector there was less opportunity for them to claim for compensation from governments because that's outside the prudential regulator. >> thank you. we would then listen to these reports, and sat down and noticed the last three reports all said it was good luck.
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we did want to issue a statement that said all it takes is locked. [laughter] but we need to spend a little more time so we debated and the statement we came up with will be presented by bob. >> thank you, george. so when this conference was planned about a year ago, the main idea behind it is that the shadows from the different parts of the world would get together and we would share lessons with each other, with a few that at some distant time we could draw on these lessons and apply them so that maybe next time we would do better. well, the distant time arrived a lot more quickly than i think we anticipated a year ago, and so we met actually at a quite convenient time where the world is facing a potential crisis in europe. and so our statement concentrates on europe to provide a framework for judging
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the plans that may emerge out of the discussions that are not -- that are now going on in brussels and perhaps after that and a lot of a lot of immediate commentary that will surely follow all of this. i should say just personally, and i think a lot of people will share this view, i think we all have great sympathy with the finance ministers and the elected leaders in brussels who are now wrestling with these problems. and they are huge, and they will all, all the options will entail a very significant and painful costs. and we had the benefit of course we are not elected leaders, and we are economies, lawyers who can provide are expertise in providing a framework but we don't have to face the voters. and the people that are meeting there now are underage huge pressure, and as i said, we have
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sympathy. just lastly before get to the introduction, i don't know how i ended up doing this, but i am the designated summarizer, but we have a lot of other experts in the realm so that when we get to the q&a i have a feeling that a lot of people will want to voice their views and i want to express appreciation for everyone who contributed to this statement. so, first point. it's really at the end of our statement, and that is that the world has a huge stake in the outcome of this crisis. this is not well recognized. i think a lot of immediate and different parts of the world. i'm just going to tick off a few. if europe goes down in some fashion, there could be capital flight from emerging markets around the world. and, in fact, at that point let us suggest the imf immediately needs to think about bolstering its resources to provide liquidity to emerging markets in case they get hit by the fallout. second, there could be significant credit contraction and latin america in particular
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to follow lilana's comments, it was pointed out that a sizable fraction of the banking system in latin america is from european banks. and if they are in trouble there's a great risk that money will be transferred from latin america back to europe to bolster those banks. with that money gone and you've got credit contraction in europe. number three, lilana talked about last time there was a contraction in trade credit. it could happen all over again. and add to that the fact that if europe goes south, the contraction in real economic activity in europe will lead to a decline in export from all the countries that nasa and goods and services to your. and that includes the united states, asia, japan, china, and all commodity exporters. so everybody gets hit. fourth, equity investors have a big stake in europe so they get hit directly if european markets go down, and if markets go down they can trigger an avalanche,
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declined and other equity markets around the world. fifth, united states money market fund, about 40% of their assets are invested in short-term liabilities of european banks. so needless to say, if european banks are in trouble, we will talk about that in a minute, that our money market fund investors get it. and, finally, there's the unknown or the unknown unknowns. and that is, we don't know the extent of counterparty exposure to europe. we don't know who gets hit. so for example, in 2008, aid had to be rescued, largely because the regulators fears of counterparty risk. we don't know enough about the counterparties are in europe and how concentrated the art and whether there could be another aag or aid's. so if that doesn't scare you enough as to why this matters, it should and so here is what we suggest. at the beginning it's important
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understand there are three separate in a related problems in europe. number one, there are sovereign debts that are unsustainable. number two, there are banks that are facing insolvency or severe under capitalization. and number three, and this is not widely recognized, that is what's called differential competitiveness within the eurozone. so you have some countries like greece and other southern countries whose currencies are overvalued and so their export machine is significantly compromised. conversely of other countries whose currencies may be undervalued. let's say in the north. and so you have this differential that needs to somehow get ironed out. and so that leads to the next major point that we make, though whatever is done there must be a long run credible plan for resolving these three problems. because without addressing these
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three fundamental problems, the market will not have any confidence what comes out wednesday or maybe the following week and we will just lurch from crisis to crisis. and so that leaves us to greece. i will very briefly talk about greece but basically the bulk of the statement is to say that we've got to do more than just fixed rates. but when it comes to greece, the elements are clear. as harold said, the debt needs to be restructured in orderly fashion, the losses need to be allocated between the creditors and the government, and the rest of europe must be protected from the fallout in case bad things happen increase in the fence fashion in a sense there's a fence around the rest of your. as a broader agenda, the wiki european banks have got to be honestly assessed, and the capital adequacy has to be assured. now, that can be accomplished by closing some inefficient banks,
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by re-capitalizing the banks either from private or public sources or a combination, or by government guarantees. but somehow the adequacy and the safety and soundness of the banking system has to be assured. second, there needs to be ample, substantial funds available to support liquidity and to support the bank we capitalization efforts to the extent they are mounted. the money spent have been provided ideas have, the european stability fun, and the ecb, the central bank, are not enough. there needs to be a lot more indicated. the fund should be available in either without preconditions or only two qualifying countries to enact these sufficient reforms. now let's get to the really tough nut. to differential competitiveness we have talked about. what we did in a statement is outlined three alternatives, all
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right, if you can't be wished away. and it's going to have to be a political decision about what the leaders decide to do, but none of these are painless. so option number one is what we call the passive option, and it's just to allow essentially the countries that are in deep trouble to experience a continued conflation, essentially a decline in their wages so that eventually they become competitive. that could take a very long time. that could be accompanied by lots of high unemployment and political unrest in which we now see in the streets increase and you could see in the streets of other countries. the second option is that some countries could leave the eurozone. now, in theory that should solve their competitiveness problem because their currencies would decline and they could become competitive. but that could entail that probably would entail very significant short-term disruption, that could damage
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the e.u. experiment entirely. and a third option is to allow higher inflation for the eurozone, and in particular for the north. so that in effect you get wage appreciation in the north, you get wage declines in the south that are accompanied by deep structural reforms so that we don't have to do this over and over again and exchange rates become so long in the future. but the key here, and a third option, is the eurozone would have to allow for several years the possibility that the actuality of more inflation to fix this competitiveness problem. and the final point we make has to do with banking regulation. if an unrecognized fact that the basel framework contributed to this crisis. the basel system without going into the nuts and bolts essentially risk weights different assets.
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they assigned a zero risk way to all the sovereign debts of all the eurozone countries. any country that has an investment grade. , investment grade rating. and what that has meant is that the banks have gorged themselves on european debt, and now they are stuck. it's given them no incentives to discriminate between the countries that are sound and not sent but it's given them no incentive to do so provide their government holdings. and so the basel system is direct contributors to this mess. and what we end up recommending is that the whole basel system needs to be rethought. in particular, there are zero risk weights has got to be given a. we suggest that better standards be developed, and among them a leverage ratio, a simple leverage ratio, as you all know, you audit the inflation we begin and a leverage ratio is simply the ratio of august capital to total assets. we talk about liquidity standards and perhaps other
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standards, but the framework that we have now has got to be fixed. all this has to be done urgently because time is of the essence. >> thank you, bob. we feel it is important that we get some feedback from people outside the field. we're very fortunate to have with us today to senior people from the world bank and imf. and our first speaker will be asli demirguc-kunt. asli? >> thank you very much. at the honor to be here. i'm a fan of all your statements, so it's a pleasure. i need to say that all of these views are my own, and mine only,
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and if anything, the bank would probably vehemently disagree with them. [applause] okay, so i went through all the papers. my task was to read the papers and comment on them, much less so the statement which i just heard. but i think what i'm going to say today is going to have implications for that one as well. so, just to comment on actually the one that i read most carefully because the first one i received is the u.s. paper. well, basically i very much agree with what's in there. i agree with the analysis that the macro policy and the global imbalances made it more likely to the crisis, but essentially beyond the line reason were all the incentive distortions that were introduced into the system. now, i also am going to say that i very much also agreed with the
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lessons that are drawn in that paper. and perhaps most important lesson is summarized on page 61, where the authors sort of underline again that credible reforms must really sort of address the incentives, incentives of the banks, regulators, the politicians. so that all the problems that we see that may look like technical problems are actually incentive problems. so the solutions need to address these. now, here though i'm going to say the question is how, how to do this credibly, how to do this effectively, which has been difficult so far. so in that respect i wanted to sort of give you three thoughts that are based on my own research and also my experiences
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with developing countries in the world bank. so if i were to sort of just mentioned them briefly, one has to do with the transparency and simplicity. the other one again will underline the importance of sort of clawing back subsidies for the large and interconnected, too big to fail. and the third is actually trying to reorient the whole regulatory process to sort of, to focus on incentives rather than auditing core principles, auditing incentives. so let me just go through each one of them. okay, so this is very consistent with what you just mentioned actually at the end of your statement. while we know that the crisis really challenge the basel framework in very important ways, and it's continuing to challenge it, so there are flaws
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in external rating, accuracy, internal risk models were question. there's always problems with risk weights, lack of disclosure and transparency. so in one of my recent papers, actually we thought we could learn something about the usefulness and redesign of the capital regulation by looking at what happened during the crisis. so we try to sort of look at quarterly stock returns over the 2006 and 2009 period over 12 countries come and we use this 2007 shock as an unexpected negative shock to see how market participants really perceive different capital definitions, and how sort of banks ability to withstand stress was based on how much capital they have. so obviously we knew that sort of all banks did poorly in terms
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of their stockmarket value, but some did better than others. so the question was whether better performing banks also were better capitalized, in which matter of passionate which measure of capital was better. so this is relevant for discussion here, because what we find is indeed during the crisis, stockmarket investors placed high value of better capitalized banks, but the simple capital asset ratio, the leverage ratio was more relevant than any other complicated racial that basel had come up with. especially for large banks. so the prudent measure of risk exposure was much more informative than the writ measure you by the regular. there was also evidence that higher quality tier one capital, tangible liquidity were more about that for stock markets
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investors. so what does this mean for the statement here? it's actually sort of, remind me of your earlier statements what you mentioned how it's very difficult for economic capital to be calculated, but the capital regulation itself need not be complicated. and, indeed, the fact that basel regulation still emphasize risk adjusted capital is a problem because this leads to arbitron, unintended consequences as we are saying time and time again, so it's much better to use simple coming easy to enforce and monitor ratios such as the leverage ratio, complemented with signals on the market itself, which you said before, cds spreads. so i thought that in this statement, i could see this in the paper but i thought in this statement you need to emphasize again the transparency and the simplicity, and because complexity itself distorts the
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incentive that makes banks, investors arbitrage which the markets did, so i sort of did i think figure it out that you're going to say that an event. that's good. now, the second point that i want to emphasize is this whole issue about the too big to fail, and how important it is i think to fix the exit mechanism if we are ever going to hope to have effective regulation position. now, there's not, i mean, i think everybody agrees about this, but the solutions very to the extent people believe they will work. so i just want to leave you with my thoughts and here again based on some of the research i've done. so, i believe obviously that introducing -- which are crude
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and which are likely to backfire is the way to go. again, the whole idea needs to be sort of clawing back the incentives to become large and interconnected. and here, i want to again emphasize three areas. one is higher additional capital requirements, and these could be structured in different ways, to make it more costly for these institutions to become large. the second issue is to have greater crisis preparedness in general. so outside of the crisis, to be able to think through what to do about these institutions in case there's a crisis almond through a living will, so that when the time comes to do something there is at least a moment there which are thought to even if you do not think, you don't necessarily follow it very closely. the very fact you have taken the
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opportunity to think through this outside of a crisis situation, sort of makes it much easier to providing, provide the impression that something can be done besides the knee-jerk reaction at bailing out these institutions. and, finally, i think this is probably the most controversial point and the most counterintuitive, given that we have heard during the crisis, even though countries which did not have come introduced, and those that did have it increased the coverage, what i would argue seize stay out for the largest banks. now, why am i cink's? well, we know that deposit insurance is not there for sort of systemic crises. the government step in whenever that happens but it's only there for bailing out individual financial institutions. now, what do we have? we have these large financial
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institutions which we are trying to claw back the subsidies, and just having subsidies for those that don't make sense in my mind. now, the subsidies, the coverage is actually for small financial institutions in order to make them competitive, and no to make them viable. now, to the extent we believe these institutions are important for mom and pop operations and communities, and i'm not saying i agree with that, but if you agree with that, there is a reason for having explicit deposit insurance for the small banks. however, on the large side, i see no reason to have explicit deposit on top of the too big to fail subsidies that we are trying to claw back. so the whole idea for a depositor when trying to decide to put their money is going to be, the choice is going to be between and in charge small bank versus at least a bank that does
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not have explicit deposit interest but presumably only implicit when pics of this would go a little weight in clawing back the subsidies. so at least i would like to put that on the table, which nobody seems to be talking about. okay, so finally, and now i think we all agree that incentives are important. but i think we are falling a little short in discussing how to reorient the whole approach of regulation toward sort of one that focuses on incentives. so for example, the current approach of basel really emphasizes assessment of compliance with various sort of regulations, different sort of versions of basel. and i know being part of the
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bank, huge resources are spent actually in an effort to emulate these principles in developing countries. and we have these sort of financial sector assessment programs, again, spent huge amounts of resources ensuring compliance with these types of regulations and have participated in the sort of programs, and having fun some of them i know the whole process that is basically captured by the negotiation of the exercise of figure out whether one regulation is here and the other one isn't. now unfortunately though, ironically again studies, and these studies are conducted myself and colleagues from the fund, looking at the impacts of compliance with these bank financial strengths find really know robust correlation.
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there is really nothing that sort seems to suggest that all the exercises are helping in making the financial system around the world more robust. if anything, there is only some evidence that the principle that captures the quality of transparency information which makes sense to all of us in this room i think, is the one that is most highly correlated with outcomes. now so, we should be done? this is my last slide, basically again i with a couple of my coworkers with the bank are trying to propose incentive deposits to identify the perverse incentives, become a core part of the financial architecture. so they need for a macroprudential authority is already acknowledged by the international community, but most of the approaches and the
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tools that are given to the macroprudential authority is really prudential i don't. what we are proposing is that the focus of this macroprudential regulation should become incentives as a means of identifying and correcting systemic risk. similarly i think this whole program, which all of us are spinning so much of our time and energy on, should move away from compliance with principals to an assessment of incentive problems throughout individual countries. thank you. [applause] >> thank you, asli. next commentator is from the imf. welcome. >> thank you for the opportunity to come on. i'm afraid i want to jump to all the individual papers, there is
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detail there that is very important if you think about making policy in some of those parts of the world. and so i will touch on some of the overarching themes that i think are important, that were present in some of the papers but not in all of them. and we will add some more in the questions at the and hopefully for a secret meeting or something like that. i should also stress that these are my own views and not those of the imf and i've not coordinated with asli, although i will echo some of her views. okay, so first of all, getting better incentives where asli ended brings me immediately to think about how to reinforce the markets. with a large, large literature on fat, and all would like it of course work better. so what do i think, what do i mean by market discipline?
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market, stock market and bond market ability to not only monitor but actually control, not just thank the financial institutions at large. we have very mixed evidence in the academic literature on the effectiveness of this, and in part because the government has policies in place that make it very difficult for the markets to discipline banks. above all, we have insurance because the shareholder discipline is not something you would expect too much of because shareholders like managed the banks always want to take excessive risks, excessive grain more than what would be passionate that it was the share of the -- the role of the shareholder. that's not something to complain about, it's just the way it functions. if you want to look at a dental, what is it doing.
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maybe small deposit, we have especially in the more developed financial systems, would play such an active role, but if we always come in with guarantees and other bail out during crisis, then you make this sort of discipline you'd. and i think that's where there's a number of challenges. and trying to get these debt holders to discipline banks. an important element, asli mentioned, i think it's quite troubling that information the banks is so imprecise, especially in times of crisis when you want to be more precise. so let's just say if the u.s. would happen, account information contained in u.s. bank holding companies going into the crisis, you actually already sort of the market started to notice some trouble, the city the sort of our regulatory measures of capitals, so market by of banks equity
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have plummeted and there were large differences between market value of banks capital. and actually register capital didn't move all that much. if you look at the system as a whole. let's just say u.s. and europe. and, of course, asset markets on one hand, but stock of fire sales, the discrepancies which is so large and it was clear stress on the financial system that easy regular capital moving, it sort of race and questions there. and then knowing from the past and the s&l crisis in the u.s., but also the japanese experience that was summarized today, regulators often resort to forbearance at these times. that's just depicted in this graph were, it plummeted around
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oh wait. this is for the median u.s. bank holding company, and has obviously not recover. so typically between one and two. this plummet for him being banks below one, and about two or three bank holding companies who were severely, if you go by this measure. but the markets are below and. and the regular capital, if anything, slightly increased. the pictures are even more stark for the euro zone countries. so how do you go about improving market discipline, and ultimate something i would like the record to discipline, if you don't have market discipline and regulatory forbearance. so obviously, just echoing that we need to emulate the safety nets. we are now looking forward, and
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not backtrack. reduce accounting discretion which again was intensified because we let go of markets. really, we have particular i think severe problem. on the one hand, we want to rely on the market, but at the same time banks have become so large and interconnected. you see this financial cycles. so as good times banks or building at risk. and how do we deal with that? we have dubbed this new term macroprudential. there's a need for this. not calling for more regulation, just calling for better regulation. but the key here is why are we coming up with this macroprudential regulation? is because the market cannot deal with certain respect on market failure. we don't always recognize those but market discipline is no defense against macroprudential
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risk. they come from economic cycle. the market cannot effectively deal with economic risked so macroprudential is needed. what is a? it's not individual banks but the banking system as a whole. and really why it's already known for quite some time, and justifies why you need have macroprudential because you have market mckillip that cannot deal with aggregate risk. what we need to think about is financial stability. so if you think what have regulars done, focused on individual banks. this is what they're asked to do, and they go by that kind of paradigm. they really need to focus much more on the liver risk. that requires a whole different way of thinking about it, and new framework.


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