strategies and mechanism to achieve financial stability
TRANSCRIPT
Keynote Speaker: Dr. Marcus Lee
Vice President, DAG Investment Bank LLC, New York
Chairman, Risk Management & Foreign Exchange Committee, DAG Asset Management LLC, New York
Chairman, China Private Banking and Wealth Management Forum 2007, Shanghai
Keynote Speaker: APEC, ASEAN Summit
Author: How to Outsmart China - Sold in over 40 Countries. Featured in Bloomberg and CNN
Speak 4 languages and 5 Chinese dialects
EMBA Visiting Professor of Finance, City University of New York.
Worst has yet to come?
Strategies and Mechanism to achieve Financial Stability
The 11th Asia-Europe Business Forum, 2008
Dr. Marcus Lee
Vice President & China Chief Representative
DAG Investment Bank (New York) LLC
1. Financial Stability Outlook
Financial stability outlook
Risk of financial system have increased in 2008 IMF 2009 projection: 0% to negative Remain uncertain and depends on 3 factors:
1) How conditions in the US market? 2) How banks respond to the challenge? 3) Worst case scenario?
World Economy
Suffer from High inflation Overly expansionary monetary policy in US -Negative real interest rate -Depreciating USD -run from USD -Reversal of Capital Flow and Currency Turmoil
Low interest rate discourage saving, bond yields and cause investor to seek higher yields in speculative commodities and forex market.
Hence, energy and food price exploded to levels of threatening social and economy.
-41% of total international reserve (end of 2007) America can maintain a large trade deficit only if foreign banks continue to
hold a large number of dollars in their reserve currency. US entire consumption economy is based on the willingness of foreigners to hold US debt. A new world order is required.
China Economy
Pressure of inflation. GDP Growth 9.7% (2008) 9.3% (2009)
“Window guidance” and credit policy guidance were strengthened, limit lending to low efficiency enterprises
Slowdown of US economy affect China’s export.
Industries affected - most rely on export in China: Electronic appliances 65%, Office appliance 50%, Fur production 47%, Furniture 46%, Fashion & apparel 44%, rubber 26%
Financial Stability in Credit, stock market
Medium Term outlook
1. Commodity and Food price remain high despite recent declines.
2. Risk of broad based second round effects in wage and price setting, especially in emerging economies
Real Economy Impact
Affect GDP growth Affect Employment
From Financial Crisis to long term real economy crisis
Affect spending power
Existing Mechanism
Short term 1) Domestic Policies 2) Private Sector – New loans, credit lines 3) International Backup – IMF Supplemental Reserve
Facility, SDR but rigid condition
Long term 1) Reform Programs 2) Enhancing Financial Governance 3) Social enhancement 5) Steps towards sustainable finance - GRI
2. Enhancing the Surveillance Framework
Macro-Surveillance Framework
Lost of Confidence
More Bank Bankruptcy expected.
Derivative Markets (trade in future and options equity) now deal with over 47,000 different kinds of options.
Enhancing Financial Governance – not a luxury but basic requirement. Timely and clear financial reporting, Independent assessors along with strong judiciary.
Early identification of emerging risk and threats
Pre-emptive measures
Framework and infrastructure development, capability enhancement, governance structure and communication.
Vulnerability Indicator for Banking Sector
1) Selection of Risk indicators
2) Construction of vulnerability indicator
3) Assessment of future vulnerability and stress testing. Disclosure of off-balance sheet activities.
Financial Stability Surveillance
1. Micro-prudential: Micro level assessment of: -risk areas and risk management practices -business strategy and governance issues -risk absorbing capacity
2. Macro-prudential: Macro level assessment of: -exogenous and endogenous risk and vulnerabilities -contagion effects, transmission channels and impact on
financial institutions and systemic stability. -Supervisory role of IMF, Basle Capital Accord, BIS, FSF,
Financial Sector Assessment Program (WB and Govt)
Action to be taken
1. monitoring macro-financial linkages associated with developments and emerging trends in the external sector, domestic economy and financial markets, corporate and household, contagion implication to financial system.
2. monitoring and evaluating the development of sector specific issues within the financial sector and the potential implications for overall system wide stability.
-Guarantee of bank deposit by Central bank
3. Mechanism for Emergent Financial event
Emergency financing mechanism
Failure of IMF Supplementary Reserve Facility (SRF) – “borrow, invest, export, repay” IMF may lack of resources, WB, ADB, ADB consessional loan
Objective: Ability of fund respond to crisis for member countries
Focus on emergency procedure rather than a new financing mechanism suggested by last year Chairman Statement.
Exceptional procedures: Rapid approval of fund support
supplementary resources
Precautionary cooperation framework
Moral hazard – limited to truly exceptional circumstances
Not be a guarantee against sovereign default.
Importance of strengthened fund surveillance
Members responsibility to come to the fund early with a strong and comprehensive economic program to limit cost of repair.
Criterion to regional financial conducts
Suggestion: limit the use of emergency procedures to situation involving significant spillover or contagion effects
Process of Implementation
1. short report to EB current economic situation
2. level and phasing of access, the likely Impact on the fund’s liquidity and possible need to activate borrowing arrangement, changes in timetable etc.
3. Briefing: guidance for EB to direct action
4. consultation with other creditors if needed.
5. 48-72 hours consider. Once agreed: execute within 5 working days.
Conclusion
Mounting inflation and financial disorder would inflict costly stagflation, contraction in trade and disorderly oil and food markets.
Ultimately, global financial security is not about stability and wealth generation for their own sakes but creating a system of transactions that enhances the livelihoods of people and natural environment, both for now and future.
Thank you
Dr. Marcus LeeVice President & China Chief Representative
DAG Investment Bank (New York) LLC Shanghai Office500, North Chengdu Road, Junling Square, 37 floor, Huangpu district, Shanghai 200003, The People’s Republic of ChinaTel: (8621) 6103-4852Fax: (8621) 6103-4800 Email: [email protected] Website: www.dagbank.com