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Strategies and Mechanism to achieve Financial Stability

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  • 1. 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.
  • 2. Worst has yet to come?
  • 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. 1. Financial Stability Outlook
  • 5. 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?
  • 6. 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 .
  • 7. 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
  • 8. 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
  • 9. Real Economy Impact
    • Affect GDP growth
    • Affect Employment
    • From Financial Crisis to long term real economy crisis
    • Affect spending power
  • 10. 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
  • 11. 2. Enhancing the Surveillance Framework
  • 12. 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.
  • 13. 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 .
  • 14. 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)
  • 15. 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
  • 16. 3. Mechanism for Emergent Financial event
  • 17. 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
  • 18. 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.
  • 19. Criterion to regional financial conducts
    • Suggestion: limit the use of emergency procedures to situation involving significant spillover or contagion effects
  • 20. 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 .
  • 21. 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.
  • 22. Thank you
    • Dr. Marcus Lee
    • Vice President & China Chief Representative
    • DAG Investment Bank (New York) LLC Shanghai Office
    • 500, North Chengdu Road, Junling Square, 37 floor,
    • Huangpu district, Shanghai 200003,
    • The People’s Republic of China
    • Tel: (8621) 6103-4852
    • Fax: (8621) 6103-4800
    • Email: [email_address]
    • Website: www.dagbank.com