World authority for strict monitoring of global finance?

  • Business
  • Wednesday, 25 Mar 2009

IT now appears that global finance cannot exist without global government.

The assumption that markets are able to adjust along rational and efficient lines has been debunked by the greatest financial crisis of at least half a century.

The Turner Review, a report on the global banking crisis by Britain’s Financial Services Authority chairman Lord Adair Turner, recommends enhanced regulation and supervision in major aspects of finance.

Tougher emphasis is to be placed on a maximum gross leverage ratio (total assets over capital), capital buffers (that has to be built up during good times under an economic cycle reserve), greater capital requirements against trading books, and remuneration policies that should eliminate undue risk-taking.

Understanding and analysis of risk takes centrestage in the report.

It is not enough to note risk at a certain point in time but to study it across all sectors and cycles to estimate its possible systemic effects.

Over in Asia, much as we would like to think that we are decoupled, the ramifications of some of these views will be felt.

As global citizens, we will probably have to come under some of the new conditions, such as being a part of the global government on finance.

The setting up of global bodies, an independent global authority, and a global code of conduct are among some of the ideas put forward.

A college of global supervisors is proposed that will study system-wide risks, work towards a unified point of view, and have the power to inform their decisions to senior managements of institutions.

The power of these global authorities is not to be underestimated.

It is recommended that they scrutinise the activities of unregulated institutions such as hedge funds and anything else that develops bank-like features.

Capital and liquidity requirements can be imposed on them, especially when the scale of their activities presents the threat of systemic failure.

Offshore centres and domiciles should be brought under the ambit of internationally agreed financial regulation.

Centralised monitoring and control of complex derivatives such as credit default swaps, the failure of which had resulted in the collapse of AIG, is to be part of the works.

The argument for increased supervision at a globalised level is based on the observation that individual irrationality can overpower collective rationality.

A more systematic approach to dealing with risks and cross border finance will, hopefully, weed out the bursts of irrational exuberance.

Under the Turner review, macro-prudential analysis covering sectoral and system-wide risks will be stepped up.

Besides business analysis, there should also be prudential analysis that includes study of sustainability models of large and complex banking groups.

The ‘casino’ in banking is retained in the report.

Contrary to calls for a separation between investment banking and ‘normal’ retail and commercial banking, the report acknowledges the need for hedging and risk management financial instruments required by large, complex entities.

However, it sees the need to restrict the role of commercial banks in risky proprietary trading activities.

Besides hedge funds, intensified supervision of liquidity and capital requirements for investment banks is recommended.

The records show that periods of economic slowdown resulting from banking crises last the longest.

It is high time for the global financial community to come together and resolutely face the issues looming before them.

Do we need another banking crisis to cascade before us that will galvanise us to act?

The Turner report may be an attempt to document some of the lessons learnt arising from the failure to react to early warning signs.

The best that the rest of the world can do is to come up with similar, if not better, proposals for concrete action.

They say history seldom repeats itself, but the world has much to learn from a crisis of such a catastrophic nature.

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