John Hurley: Capital markets and financial integration in Europe
Opening remarks by Mr John Hurley, Governor of the Central Bank and Financial Services
Authority of Ireland, at the Ninth Conference of the ECB-CFS Research Network on Asset
Management, Private Equity Firms and International Capital Flows: Their Role for Financial
Integration and Efficiency, Dublin, 8-9 October 2007.
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Ladies and Gentlemen, good morning and you are all very welcome to this ninth conference
of the European Central Bank and the Centre for Financial Studies research network on
Capital Markets and Financial Integration in Europe. We are delighted in the Central Bank
and Financial Services Authority of Ireland to be hosting this event in Dublin and I would like
to particularly welcome those of you who are visiting us here for the first time. I would also
like congratulate the organisers on having the foresight to choose, as long ago as last year, a
topic for this conference which would prove so timely and interesting in the current
environment!
The conference programme is notable for both its diversity and its topicality. This is a
testament to the work of the ECB-CFS research network and represents a successful
collaboration on research in the area of financial market integration and international
linkages. The Centre for Financial Studies conducts and facilitates excellent independent and
internationally-oriented research on financial markets, financial intermediaries and monetary
economics, and the promotion of dialogue between academia and the financial community. It
is a natural partner to collaborate with the ECB in sponsoring this research network. The
ECB has, since its inception, maintained a focus on encouraging research which is directly
relevant to understanding the workings of the global economy. The ECB has a strong track
record of interacting with both academics and market participants in this regard.
In the five-and-a-half years since its inception, the ECB-CFS research network collaboration
has resulted in nine conferences, including today's. These have consistently been composed
of top-quality research, covering a myriad of topics in the area of the structure and integration
of financial systems in Europe and its international linkages. I was impressed to see that, as
far back as 2004, the network was exhibiting its talent for foresight, which I have already
mentioned, in investigating a number of issues on bank contagion in Europe, interbank
exposures, liquidity and systemic risk. And as far back at 2003, when the issue was still low
on the financial markets radar, the network was examining private equity issues. Also, and
more intriguingly, it looked at "heatwaves and meteor showers" - something we were in short
supply of here over the past summer.
Back to the present, I am delighted that the Central Bank and Financial Services Authority of
Ireland has been involved in the development, organisation and hosting of this latest
conference. I know that we have benefited significantly from collaborating with the ECB and
CFS in this field and I look forward to further developing these links in the future.
All three organisers certainly set themselves a significant task when they undertook to
"coordinate and stimulate top-level and policy-relevant research that significantly contributes to
our understanding of financial system structures and integration". From the programme for
this event, however, I can see that you have certainly provided plenty of material to stimulate
debate and consider policy implications on issues related to asset management, private
equity firms and international capital flows.
There has, of course, been a considerable amount of innovation recently in the private equity
and hedge funds industries, and in complex financial instruments and asset management
strategies generally. These innovations serve to more fully complete the financial markets
landscape, although when used imprudently can present extra risks, as evident in recent
market developments. This innovation has been led, to a significant degree, by market
participants and has presented a number of challenges for policymakers, especially
regarding the implications of risk transfer developments, valuation strategies and market
disclosure rules for financial stability and the efficacy of policy. There is much that central
bankers and academics can learn from market participants in these areas and a
collaboration such as this research network provides an excellent forum for a sharing of
ideas and an opportunity to contribute to these debates.
Turning to just a couple of the issues for discussion at this conference, the performance of,
and risk and disclosure practices in, the hedge fund industry were of course a major focus of
attention earlier this year, but have been pushed out of the headlines somewhat in recent
months. However, I am sure that they will return - albeit hopefully not in an environment of
disruptive market conditions. We can expect a renewed focus on the risks, which hedge
funds can pose for highly-exposed counterparties and for markets generally, and on the type
and extent of policy responses that can realistically be taken to help alleviate some of these
risks. Earlier in the year, market disclosure issues and questions about the adequacy of the
indirect model of regulation - where the focus was on the exposures of counterparties,
especially banks, to hedge fund risks - was a major focus of the debate about possible policy
responses. There are very differing views about both the effectiveness of further disclosure
measures and the moral hazard risks associated with increased disclosure. I very much
welcome the contribution which this conference is making to the debate, with both a full
session and of course the keynote address devoted to hedge fund issues, including the
disclosure issue.
With regard to private equity deals and leveraged buyouts, even though recent market
events appear to have halted the dramatic rise in deals, when normal market conditions are
restored one wouldn't prejudge a return to the previous high level of activity. A major concern
for central bankers and financial regulators in this area is whether the growth in these deals
has been accompanied by any significant increase in credit risk for entities, such as banks,
which are providing significant leverage to private equity deals and funds. While research,
published by the ECB, suggested that large banks' exposures in this area are manageable
relative to their capital buffers, there is also the issue of "warehousing risk", whereby the
movement of these risk exposures away from banks and into markets are contingent on
liquidity in credit risk transfer markets and on the effectiveness of risk syndication processes.
Clearly, the area of private equity is one where we need a greater degree of analysis to
inform our judgment about the financial stability issues arising, and I am very pleased to see
that you have quite a significant degree of empirical research being presented here on an
extensive range of issues in the private equity arena.
With so much interesting research to be presented and debated, I don't propose to take up
any more of your time this morning. To the organisers, I congratulate you on your efforts on
bringing this collaborative event together and I wish you every success with the conference. I
look forward to hearing the full conclusions of your deliberations, and especially to reflect on
the policy messages.
Many thanks for your attention.