Strategies and Mechanism to achieve Financial Stability


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Strategies and Mechanism to achieve Financial Stability

  1. 1. Keynote Speaker: Dr. Marcus Lee <ul><li>Vice President, DAG Investment Bank LLC, New York </li></ul><ul><li>Chairman, Risk Management & Foreign Exchange Committee, DAG Asset Management LLC, New York </li></ul><ul><li>Chairman, China Private Banking and Wealth Management Forum 2007, Shanghai </li></ul><ul><li>Keynote Speaker: APEC, ASEAN Summit </li></ul><ul><li>Author: How to Outsmart China - Sold in over 40 Countries. Featured in Bloomberg and CNN </li></ul><ul><li>Speak 4 languages and 5 Chinese dialects </li></ul><ul><li>EMBA Visiting Professor of Finance, City University of New York. </li></ul>
  2. 2. Worst has yet to come?
  3. 3. 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
  4. 4. 1. Financial Stability Outlook
  5. 5. Financial stability outlook <ul><li>Risk of financial system have increased in 2008 </li></ul><ul><li>IMF 2009 projection: 0% to negative </li></ul><ul><li>Remain uncertain and depends on 3 factors : </li></ul><ul><li>1) How conditions in the US market? </li></ul><ul><li>2) How banks respond to the challenge? </li></ul><ul><li>3) Worst case scenario? </li></ul>
  6. 6. World Economy <ul><li>Suffer from High inflation </li></ul><ul><li>Overly expansionary monetary policy in US </li></ul><ul><li>-Negative real interest rate </li></ul><ul><li>-Depreciating USD -run from USD </li></ul><ul><li>-Reversal of Capital Flow and Currency Turmoil </li></ul><ul><li>Low interest rate discourage saving, bond yields and cause investor to seek higher yields in speculative commodities and forex market. </li></ul><ul><li>Hence, energy and food price exploded to levels of threatening social and economy. </li></ul><ul><li>-41% of total international reserve (end of 2007) </li></ul><ul><li>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 . </li></ul>
  7. 7. China Economy <ul><li>Pressure of inflation. </li></ul><ul><li>GDP Growth 9.7% (2008) 9.3% (2009) </li></ul><ul><li>“ Window guidance” and credit policy guidance were strengthened, limit lending to low efficiency enterprises </li></ul><ul><li>Slowdown of US economy affect China’s export. </li></ul><ul><li>Industries affected - most rely on export in China: Electronic appliances 65%, Office appliance 50%, Fur production 47%, Furniture 46%, Fashion & apparel 44%, rubber 26% </li></ul><ul><li>Financial Stability in Credit, stock market </li></ul>
  8. 8. Medium Term outlook <ul><li>1. Commodity and Food price remain high despite recent declines. </li></ul><ul><li>2. Risk of broad based second round effects in wage and price setting, especially in emerging economies </li></ul>
  9. 9. Real Economy Impact <ul><li>Affect GDP growth </li></ul><ul><li>Affect Employment </li></ul><ul><li>From Financial Crisis to long term real economy crisis </li></ul><ul><li>Affect spending power </li></ul>
  10. 10. Existing Mechanism <ul><li>Short term </li></ul><ul><li>1) Domestic Policies </li></ul><ul><li>2) Private Sector – New loans, credit lines </li></ul><ul><li>3) International Backup – IMF Supplemental Reserve Facility, SDR but rigid condition </li></ul><ul><li>Long term </li></ul><ul><li>1) Reform Programs </li></ul><ul><li>2) Enhancing Financial Governance </li></ul><ul><li>3) Social enhancement </li></ul><ul><li>5) Steps towards sustainable finance - GRI </li></ul>
  11. 11. 2. Enhancing the Surveillance Framework
  12. 12. Macro-Surveillance Framework <ul><li>Lost of Confidence </li></ul><ul><li>More Bank Bankruptcy expected. </li></ul><ul><li>Derivative Markets (trade in future and options equity) now deal with over 47,000 different kinds of options. </li></ul><ul><li>Enhancing Financial Governance – not a luxury but basic requirement. Timely and clear financial reporting, Independent assessors along with strong judiciary. </li></ul><ul><li>Early identification of emerging risk and threats </li></ul><ul><li>Pre-emptive measures </li></ul><ul><li>Framework and infrastructure development, capability enhancement, governance structure and communication. </li></ul>
  13. 13. Vulnerability Indicator for Banking Sector <ul><li>1) Selection of Risk indicators </li></ul><ul><li>2) Construction of vulnerability indicator </li></ul><ul><li>3) Assessment of future vulnerability and stress testing. Disclosure of off-balance sheet activities . </li></ul>
  14. 14. Financial Stability Surveillance <ul><li>1. Micro-prudential : Micro level assessment of: </li></ul><ul><li>-risk areas and risk management practices </li></ul><ul><li>-business strategy and governance issues </li></ul><ul><li>-risk absorbing capacity </li></ul><ul><li>2. Macro-prudential : Macro level assessment of: </li></ul><ul><li>-exogenous and endogenous risk and vulnerabilities </li></ul><ul><li>-contagion effects, transmission channels and impact on financial institutions and systemic stability. </li></ul><ul><li>-Supervisory role of IMF, Basle Capital Accord, BIS, FSF, Financial Sector Assessment Program (WB and Govt) </li></ul>
  15. 15. Action to be taken <ul><li>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. </li></ul><ul><li>2. monitoring and evaluating the development of sector specific issues within the financial sector and the potential implications for overall system wide stability. </li></ul><ul><li>-Guarantee of bank deposit by Central bank </li></ul>
  16. 16. 3. Mechanism for Emergent Financial event
  17. 17. Emergency financing mechanism <ul><li>Failure of IMF Supplementary Reserve Facility (SRF) – “borrow, invest, export, repay” IMF may lack of resources, WB, ADB, ADB consessional loan </li></ul><ul><li>Objective: Ability of fund respond to crisis for member countries </li></ul><ul><li>Focus on emergency procedure rather than a new financing mechanism suggested by last year Chairman Statement. </li></ul><ul><li>Exceptional procedures: Rapid approval of fund support </li></ul><ul><li>supplementary resources </li></ul>
  18. 18. Precautionary cooperation framework <ul><li>Moral hazard – limited to truly exceptional circumstances </li></ul><ul><li>Not be a guarantee against sovereign default. </li></ul><ul><li>Importance of strengthened fund surveillance </li></ul><ul><li>Members responsibility to come to the fund early with a strong and comprehensive economic program to limit cost of repair. </li></ul>
  19. 19. Criterion to regional financial conducts <ul><li>Suggestion: limit the use of emergency procedures to situation involving significant spillover or contagion effects </li></ul>
  20. 20. Process of Implementation <ul><li>1. short report to EB current economic situation </li></ul><ul><li>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. </li></ul><ul><li>3. Briefing: guidance for EB to direct action </li></ul><ul><li>4. consultation with other creditors if needed. </li></ul><ul><li>5. 48-72 hours consider. Once agreed: execute within 5 working days . </li></ul>
  21. 21. Conclusion <ul><li>Mounting inflation and financial disorder would inflict costly stagflation , contraction in trade and disorderly oil and food markets. </li></ul><ul><li>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. </li></ul>
  22. 22. Thank you <ul><li>Dr. Marcus Lee </li></ul><ul><li>Vice President & China Chief Representative </li></ul><ul><li>DAG Investment Bank (New York) LLC Shanghai Office </li></ul><ul><li>500, North Chengdu Road, Junling Square, 37 floor, </li></ul><ul><li>Huangpu district, Shanghai 200003, </li></ul><ul><li>The People’s Republic of China </li></ul><ul><li>Tel: (8621) 6103-4852 </li></ul><ul><li>Fax: (8621) 6103-4800 </li></ul><ul><li>Email: [email_address] </li></ul><ul><li>Website: </li></ul>