05 December 1986 - 07 December 1986

Capitol Market Developments and Financial Stability

Chair: Sir Jeremy Morse KCMG

A joint conference with the Graduate School of Business of the University of Chicago

The last conference of the autumn season at Ditchley was on “Capital market developments and financial stability”. Sir Jeremy Morse, Chairman of Lloyds Bank, took the chair. The conference was planned in conjunction with the Graduate School of Business of the University of Chicago. Unusually for Ditchley, six substantial papers were written for and presented at the conference, and the proceedings were constructed round those papers. The whole conference was conducted in plenary sessions, a degree of environmental variety being obtained by holding some sessions in the lecture theatre while most were as usual in the library. Professor Robert Aliber of Chicago is making arrangements to have the papers, edited in the light of the conference, published as a book.

The participants in the conference were all specialists in finance, drawn partly from the ranks of senior practitioners in banking and financial services and partly from the ranks of academic experts on finance, banking and business, reinforced by some representatives of both tendencies from the World Bank, the International Monetary Fund and the OECD, plus a few journalists and members of parliament. The US and British participation was strong in numbers and authority. Germany and Canada were well represented, but there was only one Frenchman. There was also one Swede. At a total of four, Japanese participation was outstandingly strong, as was appropriate for the subject under discussion. The conference suffered from numerous late arrivals and early departures and a few last minute cancellations. Fortunately it was strong enough in both numbers and quality to absorb them.

The debate between practitioners and academics, between practice and theory, proved very fruitful, helped by the chairman's ability to deal on equal terms with both tendencies. The conference looked at the revolution in financial practice which has swept through the world in the past decade or so on the back of the revolution in international electronic communications and computer technology, producing a proliferation of new financial instruments and circumventing many of the regulatory controls and limitations imposed by national governments. The quantities of funds being moved through the major financial markets have increased phenomenally, following the oil price shocks of the 70's and world-wide inflation and responding to sharp and rapid fluctuations in interest and exchange rates. Other financial institutions now rival the banks in conducting many new forms of financial transaction, and the barriers between various forms of specialised financial dealing have fallen. Offshore markets have grown hugely to escape national regulation, especially in the US, and this has led to an easing of old regulations in national jurisdictions in order to attract business back again. New sorts of regulation are now being devised to deal with the new markets.

The conference considered the significance of the new financial order for both the industrialised and the developing countries and then examined the stability of the new order and its relative strengths and weaknesses.

There were some who argued that there was nothing revolutionary in the processes which had occurred even if the scene was now much more complicated. Banking and financial services had never stood still and had always taken advantage of new technology and devised new openings. The new instruments were invented to provide new ways of making profits in highly competitive markets and to lay off risks. Others argued that the changes had been revolutionary in the sense of changing the nature and quality of financial business, largely for the better. Much of the discussion took on a very technical note, but every now and then the technicalities were resolved into broad, almost simple issues of clear relevance to public policy-making. The report on the conference is being written by the director of research in the economics division of the Bank of England. It is best to leave exposition of the issues to him.

The broad conclusion of the conference seemed to be that professionalisation has grown in step with innovation in both old and new financial markets and that, as a result, risk can be measured with greater accuracy than before in spite of the more complex ramifications of the instruments and processes to be watched and followed. It is not so much a case of deregulation and liberalisation as of inventing and applying new methods to monitor a new phenomenon, a global market. This sits a little uneasily with old concepts of national sovereignty and national policy-making. This more political aspect of the subject was touched on only lightly. It seemed clear that the global financial market has imperatives which make old political arguments related to “capitalism” or “socialism” or “liberalism” look outdated. There ought to be further discussion of the significance of this for politics in the democracies. Another important question which was touched on only lightly was the compatibility between an open global financial market and open commercial trade. If governments could no longer hope to exercise effective control over financial flows, interest rates, exchange rates, etc., would they not turn to protectionism in trade to defend their economies? The more robust free market advocates appeared to take the familiar line that protectionism would produce impoverishment; but there was no significant discussion of the political pressures on governments and the capacity of democratic electorates to do damage to themselves in the name of pursuing good. The open, global financial market seems to be here to stay, but it is not yet clear how it will change familiar economic and political patterns in the world.

This Note reflects the Director’s personal impressions of the conference.  No participant is in any way committed to its content or expression.

Conference Chairman: Sir Jeremy Morse KCMG
Chairman, Lloyds Bank; Chairman, Lloyds Merchant Bank Holdings, City Communications Centre; Director, Legal & General Assurance Society Ltd, ICI pic; Deputy Chairman, Business in the Community; a Governor of the Ditchley Foundation.


Professor David Begg

Professor of Economics and Head of Department, Birkbeck College, University of London; Managing Editor, Economic Policy, HM Treasury Academic Panel
Sir Kenneth Berrill KCB
Chairman, Securities and Investment Board; Deputy Chairman, Robert Horne Group pic; Pro Chancellor, Open University; Member (Nominated), Governing Council, Lloyd’s.
Dr Brendan Brown
Director and Chief International Economist, County NatWest Capital Markets Ltd, London.
Mr John Browne MP
(Conservative), Winchester; Member, House of Commons Treasury Select Committee; Managing Director, Falcon Finance Management Ltd; Chairman, Conservative Smaller Business Committee
Mr John Flemming
Economic Adviser to the Governor, Bank of England
Professor Charles Goodhart
Norman Sosnaw Professor of Banking and Finance, Department of Economics, The London School of Economics and Political Science
Mr Anthony Harris
Assistant Editor, Financial Times.
The Rt Hon Terence Higgins MP
(Conservative), Worthing; Chairman, House of Commons Select Committee on Treasury and Civil Service; Director, Lex Service Group; Member, Public Accounts Committee, Executive Committee, 1922 Committee.
Sir Martin Jacomb
Deputy Chairman, Barclays Bank pic; Chairman, Barclays de Zoete Wedd; Deputy Chairman, Securities and Investment Board
Sir Geoffrey Littler KCB
Second Permanent Secretary (Overseas Finance), HM Treasury
Dr Oonagh McDonald MP
(Labour), Thurrock; Opposition Front Bench Spokesman on Treasury and Economic Affairs
The Hon Humphrey Maud CMG
Assistant Under-Secretary of State, Foreign and Commonwealth Office
Mr Peter Oppenheimer
Student of Christ Church, Oxford, and University Lecturer in Economics, Oxford University; Member, Council, Trade Policy Research Centre.
Mr Rupert Pennant-Rea
Editor, The Economist.
Mr Jonathan Perry
Director, and Member of Bank Management Committee, Morgan Grenfell & Co; Member, Executive Committee for ISRO (International Securities Regulatory Organisation) (and Member of the new council following the merger of ISRO and the Stock Exchange on 24 December).
Professor Richard Portes, Professor of Economics, Birkbeck College, University of London; Director, Centre for Economic Policy Research, London; Directeur d’Etudes Associé, Ecole des Hautes Etudes en Sciences Sociales, Paris; Research Associate, National Bureau of Economic Research, USA; Senior Editor and Co-Chairman, Economic Policy.

Dr Sylvia Ostry

Ambassador for Multilateral Trade Negotiations and the Prime Minister’s Personal Representative for the Economic Summit
Dr Grant L Reuber
President and Chief Operating Officer, and Director, Bank of Montreal; Director, Harris Bankcorp Inc, Sun Life Assurance Company of Canada; Chairman, C D Howe Institute; Member, Canadian Economic Policy Committee

Monsieur Paul Champsaur

Sous Directeur des Relations Extérieures, Direction de la Prévision, Ministère de l’Economie, des Finances et de la Privatisation, Paris

Dr Rolf Levedag

Managing Director, Deutsche Bank Capital Markets Ltd, London; Managing Director Designate, Schweizerischer Bankverein Deutschland AG, responsible for investment banking (from January 1987)
Dr Gunther Radtke, General Manager, Dresdner Bank AG, Dusseldorf, with special responsibility for syndicated loans, mergers and acquisitions
Herr Herbert Wolf
Chief Economist, Commerzbank AG, Frankfurt

Mr Michael P Dooley

Advisor, Research Department, International Monetary Fund, Washington, DC

Mr Yuichi Ezawa

Financial Minister, Embassy of Japan, London
Mr Koei Narusawa
Economic Advisor to the President, Bank of Tokyo, Tokyo
Mr Kazuo Nukazawa
Director, International Economic Affairs Department, Keidanren, Tokyo
Dr Shoichi Royama
Professor, Department of Economics, Osaka University

Dr Jeffrey Shafer

Counsellor, Department of Economics and Statistics, OECD, Paris

Mr Peter Engstr
Deputy Managing Director, Union Bank of Switzerland (Securities) Ltd, London

Professor Robert Z Aliber

Professor of International Economics and Finance, Graduate School of Business, University of Chicago
Mr J Thomas Chirurg Jr
Leading Partner, Protasis Holdings (investment company), Berkeley, California; Director, Protasis Holdings (SARL), Luxembourg; Lecturer, University of California
The Hon Charles A Cooper
Deputy Treasurer, EXXON Corporation (1976-85)
Mr E Gerald Corrigan, Chief Executive, Federal Reserve Bank of New York; President, Federal Reserve Bank of Minneapolis.
Professor Jack Guttentag
Professor of Finance and holder of Chair in Banking, the Wharton School, University of Pennsylvania
Professor Richard J Herring
Professor of Finance, and Director, The Wharton Program in International Banking and Finance, the Wharton School, University of Pennsylvania
Professor Richard M Levich
Chairman, International Business Department, Graduate School of Business Administration, New York University
Mr Stuart E Lucas
General Manager, European Office, Thorndike, Doran, Paine and Lewis/International (investment management), London
Mr William R Rhodes
Chairman, Restructuring Committee, Citibank NA,New York
Mr Richard S Simmons
Vice Chairman, Chemical Bank, New York

Mr Eugene H Rotberg

Vice President and Treasurer, The World Bank, Washington, DC