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Back to basics

By Andrew Sheng (chinadaily.com.cn)
Updated: 2008-11-17 10:23

Note that even in countries with super-regulators, you cannot avoid tri-partite coordination between the super-regulator, the central bank and the ministry of finance. Hence, the fundamental problem of financial stability is that appropriate government policy must be coordinated and enforced in order to achieve stability.

This cannot be the function of financial regulators alone. If this is complicated at the national level, this is even worse at the global level.

Financial regulators need to think strategically on how to regulate effectively over the whole economic cycle. The current Basle type approach has assumed peace-time conditions as normal, whereas financial regulators need to deal with and prepare for crisis conditions as bubbles emerge.

Anti-cyclical mentality needs to be built into the work process, including the necessary budgetary resources. As Churchill used to say, in peace prepare for war, and in war, prepare for peace.

Finally, we cannot allow theory and wishful thinking to advance way ahead of practice and reality. The Europeans did not expect that the US subprime crisis would hit them so badly, until they realized that it was their less-sophisticated parts of the banking system that had purchased large amounts of toxic products and that some of them had become over-dependent on external and wholesale financing.

For example, it was the weaker regional German banks and British building societies that had to be rescued from their follies. Clearly, even though there was massive restructuring of European financial oversight and regulation, the sectors that were local and not subject to clear oversight became the most vulnerable to external shocks.

In many emerging markets, the reality on the ground is that commercial banks are still struggling with their basic function of serving retail customers and credit to enterprises, let alone moving to wholesale banking.

Emerging market regulators, central banks and ministries of finance are still focused on their daily domestic turf battles rather than understanding that the global game of finance is changing. Global interconnectivity is reality, but mindsets and social and financial institutions are still local.

The reality is therefore that it will take time to change mindsets and institutional structures to fit the new world of financial interconnectivity.

To be continued...

The author is chief advisor at the China Banking Regulatory Commission and former chairman of the Hong Kong Securities and Futures Commission.

 

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