Safeguarding Financial Stability

One time is not custom! This review is about international finance since it is a fundamental question as well as for business enterprises than for our contemporary democracies. Therefore, understanding and criticizing finance, in its relations to the way firms are governed, is an unavoidable part of a society and business program of research.

Garry Schinasi, after having spent nearly ten years engaging in international capital market surveillance for the IFM (that edited the author's text), decided to write the book about financial stability issues he never founded in practical, academical or commercial literature. Its hope in publishing his study is that practitioners who safeguard financial stability “will be encouraged to develop useful, policy‐oriented framework for achieving and maintaining national and international financial stability” (p. xii) that is fundamental for our societies.

After a first chapter that is an introduction, the text is divided in three parts. The first one “Foundations” contains three chapters that provide a logical foundation for thinking about financial stability issues. Chapter 2 lays out the essence of modern finance: the temporary transfer of liquidity and payments services of money in return for a promise to return a greater amount of money to its original owners. The element of human trust in financial relationships and contracts is the source of both efficiency gains but fragility. In principal, the fundamental operation can be defined and measured in terms of the manner in which finance does or not enhance efficiency and effectiveness of real economic processes. In reality, precise measurement is “extremely difficult if not impossible” (p. 19). Chapter 3 applies some of the concepts from economic public sector to finance in order to identify sources of markets imperfections in finance that justifies private‐collective and public policy involvement. Chapter 4 clarifies what is meant by efficiency and stability in the context of finance and distinguishes between volatility, fragility and instability. Part II “Toward a framework for financial stability” develops a broad policy‐oriented framework for assessing safeguarding financial stability and for taking face problems when they arise. Chapter 5 proposes a working definition of financial stability in terms of economic and measurable processes. It also identifies several practical implications of the definition of financial‐stability work. Based on the previous definition, the Chapter 6 develops a generic framework for financial‐stability monitoring, assessment and policy. This chapter also identifies remaining statistical and measurement challenges. The Chapter 7 explicates the role of central banks in ensuring financial stability. The part III “ The benefits and challenges of modern finance” identifies and analyses ongoing challenges to financial efficiency and stability posed by recent structural changes in national and international global finance. Chapter 8 discusses about the stability implications of the globalization of finance and, correlatively, risk. Chapter 9 examines the potential for instability due to the growing reliance on over‐the‐counter derivatives instruments and markets. Chapter 10 analyses the increase reliance on efficiency – enhancing risk transfer mechanisms on the angle of financial instability. Chapter 11 is about the possible role of insurance and reassurance companies in financial and markets activities. Chapter 12 proposes what should be done in order to secure financial stability. Schinasi considers that “reforms are desirable and should aimed by striking better balance between relying on market discipline and relaying on official or private‐collective action” (p. 20). Therefore, he lists seven areas where reforms are most needed.

This book is easily readable even for non specialist. It proposes a pertinent, original, well documented and moderate approach of the international finance. At the end of this book, the reader cannot completely invalidate the two following hypothesis: in spite of all the Nobel prices, no one understands what really appends within financial markets; in spite of all “good practices,” those markets are far to be under control. The finance navigates on large seas sometimes turbulent, on a fragile boat, with a divided crew, without compass and without sure and well settled carts. Even Conrad could not imagine this!