Speaking at a conference in Delhi sponsored by the Reserve Bank of India, Turner focused on the links between the international monetary system and domestic financial stability. [For the text of the speech and presentation please see below.] He argued that the most important actions to address problems revealed by past financial crises were:
- Primarily domestic action, in both surplus and deficit countries, to address the structural causes of large current account imbalances, which had played a significant role in the origins of the 2008 global crisis
- Macro-prudential policies to limit the role of short term debt capital flows in stimulating harmful credit and asset price booms, particularly in emerging markets
In comparison, Turner said that improvements in International Monetary Fund liquidity facilities or reforms to create alternative reserve assets to the United States dollar were less important.
Turner said that macro-prudential policies should include strong countercyclical capital requirements, and constraints on borrowers via maximum loan to value or loan to income limits. They should also include requirements that global banks with significant domestic credit exposures in any country operate there as subsidiaries not branches, combined with tight supervisory constraints on short term funding from abroad. Such policies would not limit useful long-term capital flows in either debt or equity form, nor constrain the ability of global banking groups to transfer technology and expertise. But they could usefully constrain the tendency for short-term debt capital to be provided in excessive bonanzas followed by sudden stops.
Ultimately, Turner rejected the idea that this would lead to a harmful fragmentation of global capital markets.
“Talk of such policies is often met by objections that this will lead to a dangerous ‘balkanisation’ of global capital markets, preventing the free flow of capital and stymieing its allocative efficiency benefits,” he said. “But since the evidence for the benefits of financial integration is at best elusive and ambiguous, some ‘balkanisation’ of short term international debt markets could be a good thing”
