The National Center for Financial Research (NCFR) at Peking University hosted the first lecture of "Distinguished Lecture Series” on May 22 at Guanghua School of management. The distinguished Chair Professor Darrell Duffie from Stanford Business School gave a talk titled " Prospects for Financial Stability and Market Efficiency ". Professor Jin Li, Director of NCFR and Associate Dean of Guanghua School of management, delivered a welcome speech followed by Mr. Wang, Chairman of Zhongzhi Group.

In his speech, Professor Duffie initially pointed out that the government policy change has impact on market structure, financial stability and market efficiency. The first part of his speech elaborated on the bank and security market, and the relationship between them. In developed markets, such as the United States, a large part of the credit is from the Securities Exchange Company, while in China, more are through banks carrying out loans. Professor Duffie predicted that China needs to put out more efforts to stimulate liquidity in securities companies to maintain its high speed growth, and that would result in relatively low capital cost.

Prof. Duffie observed the rapid growth of China's government bond market, as well as the non- government bond market. He called on better regulations on bond market and its liquidity. China's offshore bond market also grows fast, although the scale is still moderate, but promises a great potential of capital resource for both China's local government and Company.

Professor Duffie went on to mention the impact of financial reform on monetary policy and the secondary market liquidity. He illustrated the effects of financial reform on the developed markets. For example, the U. S. financial market currently struggles for lacking of liquidity. What is the source of this symptom and how to improve the market liquidity are the heated discussion topics among American interested parties.

Then, the three main architectures of the secondary market were discussed: traditional dealers OTC market; the securities and derivative products that can be directly traded between the buyer and the seller which is very active in China’s market; and the channel through agency intermediary. Professor Duffie pointed out that the liquidity of China's derivative market is increasing, together with the growing trading volume of Shanghai and Shenzhen 300 index. Both signal a good and very dynamic derivative market in China.

The third main point of Prof. Duffie’s speech was bout the clearing of the central counterparty (CCP), the topic that gains general popularity. Professor Duffie claimed that CCP has to be stable to adjust market and control financial stability. Before the 2008 financial crisis, this market was very vague, people were not clear about the main counterparty risk and how to manage the risk. The new mission of G20 that not so many people know about is to have centralized clearing for all standard swap contracts. This way could greatly improve counterparty risk control and provide greater transparency to regulators, for them to better understand transactions.

Professor Duffie emphasized the low possibility for CCP to rise up problems. Especially for large, supervised CCP，the risk of bankruptcy is small. However, emergency measures are needed. So far, no such plans have been introduced. Furthermore, Professor Duffie explained in details the CCP default management waterfall model and gave out examples of response patterns under CCP fund insufficient situation.

Professor Duffie concluded his talk with a summary of possible negative effects of financial policies on the global financial markets, including CCP mechanism that cannot solve all the problems but is better to have than none. In addition, the emerging multilateral electronic trading platform hasn’t reached the full sufficiency of capital liquidity. Moreover, since the compliance cost is very high, the price to improve financial stability is high as well. Banks should not be solely relied on as shock absorber, but all market participants should collectively take this responsibility.  

The positive effects of the financial policy should be shown as the financial regulatory authority using this opportunity to coordinate market, increase financial stability, especially for large banks and heavy risk impact key banks, and improve their transparency. In particular, Professor Duffie agreed with his Stanford colleague on the idea of bank's capital adequacy ratio being too low and must be raised. There are also some risk mitigation practices, and easier to achieve through non-banking institutions. Through these policies, the competition among financial intermediaries has increased. The market traditionally monopolized by big banks or dealers now see some small market participants. The central bank’s new monetary policy has played a role on the growth and stability of the market. Finally, the transparency of the market has been improved by financial policies.

In the subsequent Q & A session, Professor Duffie answered questions from participated scholars and students regarding Internet banking in China, Chinese government supervisory role in the financial sector and detailed operating procedure of CCP model. Prof. Duffie showed great interests in financial phenomena and problems in Chinese context and expressed his willingness to further his observation and in-depth research.

About “Distinguished Lecture Series”

“Distinguished Lecture Series” hosted by Guanghua School of Management, organized by the National Center for Financial Research at Peking University (NCFR) and solely sponsored by Zhongzhi Enterprise Group, regularly invites distinguished financial scholars in China and abroad, to share their insights and interpretations of hot issues in global and China financial market.  

About Dr. Darrel Duffie

Darrell Duffie is the Dean Witter Distinguished Professor of Finance at Stanford University's Graduate School of Business. He is a member of the Financial Advisory Roundtable of the Federal Reserve Bank of New York, a Fellow and member of the Council of the Econometric Society, a Research Fellow of the National Bureau of Economic Research, a Fellow of the American Academy of Arts and Sciences,  and a member of the board of directors of Moodys Corporation since 2008. Duffie was the 2009 president of the American Finance Association. In 2013-2014, Duffie chaired the Market Participants Group, charged by the Financial Stability Board with recommending reforms to Libor, Euribor, and other interest-rate benchmarks. Duffie’s recent books include How Big Banks Fail (Princeton University Press, 2010), Measuring Corporate Default Risk (Oxford University Press, 2011), and Dark Markets (Princeton University Press, 2012).

About NCFR

The National Center for Financial Research (NCFR), a new research institute and high-end think tank, has been recently established by Peking University, thanks to the generous donation of Zhongzhi Group. As an open research platform with global perspectives, the Center aims to apply world-class academic research to financial practices in China, to achieve its goals of addressing major financial issues facing the country and society, building a solid analytical foundation for financial reform, offering policy analysis for financial policy-making and regulation, and supplying creative ideas and technology for the construction and development of the Chinese financial market.