SWIFT has cited centralisation, common frameworks and emergency liquidity provision as part of basic criteria that the financial industry should embrace for stability in a geographically integrated market.
The paper, by professors Erik Jones and Geoffrey Underhill, examines lessons from the European crisis, and the experiences of market integration within the UK, the US and Canada.
They outline six main points, including: A common risk-free asset to be used as collateral for liquidity access and clearing, and for refuge in times of distress; a centralised system of sovereign debt management; centralised exchanges, clearing agents and depositories.
These three points relate to the technical substructure of the markets, underpinning confidence in the system.
The final three points relate to the challenges of stabilising the market, and to preventing instability in the first place. These are: A common framework for prudential oversight; emergency liquidity provision, including lender-of-last-resort facilities; and common procedures and orderly resolution mechanisms for financial institutions and public entities.
Jones, of the Johns Hopkins University SIAS and Nuffield College, said: “This list of institutional arrangements is not exhaustive but it does represent the greatest points of overlap between the national cases that we examine in the research.”
He added: “Based on the research, each criterion is a necessary ingredient of stability, and the synergetic combination of all six may be considered sufficient to provide stability.”
Geoffrey Underhill, of the University of Amsterdam and SAIS Europe, added: “What is true for Europe is true elsewhere as well.”
He said: “This research offers the opportunity to help those policymakers engage in a transparent debate about the institutional preconditions for stable financial market integration. It offers a checklist of best practices and a cautionary note about the costs of non-compliance.”
The guidelines are designed to concentrate the debate around financial stability on political economy of finance. This could bring the financial industry in to conversation, encouraging companies to share best practices and strengthen institutional design.
