Oxford Martin School

On the evening of 6 March 2009, three Central Bank officials and a managing partner with Goldman Sachs took the stage at the Said Business School for an open forum on the future of financial regulation. During the day, they had been at the 21st Century School with a group of twenty Bank Governors, regulators, bankers and academics to understand and identify appropriate regulatory responses to the global economic crisis. The meeting took place under Chatham House rules and was co-hosted by Oxford's James Martin 21st Century School, Said Business School and the Global Economic Governance Programme.

The open forum began with an overview of the issues discussed at the 21^st Century School during the day. Prof Colin Mayer, Peter Moores Dean of the Said Business School, introduced what were identified as the primary causes of the economic crisis and the questions they raised:

• The most direct cause was the US housing market and sub-prime mortgages, which brings the question of what made the US so prone to failure and risk taking?
• Second, bank governance was inadequate, particularly with respect to board structure. What role did incentives and executive pay play in causing or amplifying the financial crisis?
• Third, regulation failed to provide sufficient monitoring of financial institutions at a micro level. Where could regulation more effectively target capital requirements, leverage ratios and off-balance sheet activity?
• Finally, macroeconomic policy failed to protect economies from collapse. Was monetary policy to blame, and should other macroeconomic policy tools be reintroduced?

Within the framework of these questions, four main areas of debate emerged. Prof. Ngaire Woods, Director of the Global Economic Governance Programme, identified these debates as the following:

• How can bank governance be reformed through global agreements and principles?
• Why did the world live in a complacent economic orthodoxy for so long?
• What should be the scope for regulating the transborder activity of global banks?
• How can global cooperation generate rules and institutions to supervise their implementation?

The audience at the Business School was composed of senior academics, students and community members, who asked hard questions of the panel.

Wasn't monetary policy as important as regulatory failure as a cause of the financial crisis? The panelists generally agreed that Central Banks should have done more than just maintain price stability - they could have cast suspicion on emerging bubbles and grown capital requirements during periods of fast growth. But they also noted that even if macroeconomic policy was too loose, it wasn't the only cause.

Other members of the audience asked about the role of incentive structures within banks - didn't the promise of large compensation packages induce risk-taking behaviour? Many of the panelists agreed with this remark. One noted that compensation has not historically been thought a risk factor, but it was one of the main causes of the financial crisis. It was proposed that international cooperation is needed on an accepted set of principles that have to do with governance, transparency and risk adjustment at banks. We don't necessarily need rules on compensation, it was remarked, but we do need shared principles that address the incentive structure of banks - and a global monitoring system that will avoid regulatory arbitrage.

One of the evening's themes was the prevalence of a rigid economic orthodoxy, which blinded many bankers and regulators to the risks inherent in the financial system. Judging by the wide-ranging discussion of the open forum, new ideas and alternative thinking are now being brought to light. The diversity of voices within the room and the open-mindedness of the panelists marked a distinct shift away from orthodoxy and towards more creative thinking about financial regulation.

A full summary report is available here.