Regulating Systemic Risk

The failure to spot emerging systemic risk and prevent the current global financial crisis warrants a reexamination of the approach taken so far to crisis prevention. The paper argues that financial crises can be prevented, as they build up over time due to policy mistakes and eventually erupt in "slow motion." While one cannot predict the precise timing of crises, one can avert them by identifying and dealing with sources of instability. For this purpose, policymakers need to strengthen top-down macroprudential supervision, complemented by bottom-up microprudential supervision. The paper explores such a strategy and the institutional setting required to implement it at the national level. Given that the recent regulatory reforms that have been undertaken to address systemic risks are inadequate to prevent and combat future crises, the paper argues that national measures to promote financial stability are crucial and that the Westphalian principles governing international financial oversight should be rejected. The paper proposes that while an effective national systemic regulator should be established, strong international cooperation is indispensable for financial stability.global financial crisis; systemic risk; macroprudential supervision; systemic stability regulation; regulating systemic risk

Regulating Systemic Risk

The failure to spot emerging systemic risk and prevent the current global financial crisis warrants a reexamination of the approach taken so far to crisis prevention. The paper argues that financial crises can be prevented, as they build up over time due to policy mistakes and eventually erupt in slow motion. While one cannot predict the precise timing of crises, one can avert them by identifying and dealing with sources of instability. For this purpose, policymakers need to strengthen top-down macroprudential supervision, complemented by bottom-up microprudential supervision. The paper explores such a strategy and the institutional setting required to implement it at the national level. Given that the recent regulatory reforms that have been undertaken to address systemic risks are inadequate to prevent and combat future crises, the paper argues that national measures to promote financial stability are crucial and that the Westphalian principles governing international financial oversight should be rejected. The paper proposes that while an effective national systemic regulator should be established, strong international cooperation is indispensable for financial stability.systemic risk, global financial crisis, macroprudential supervision, microprudential supervision, regulatory reform

Developing regional financial markets – the case of East Asia

"The paper explores the extent and benefits of financial integration in East Asia. It presents evidence that the extent of financial integration in East Asia is less extensive than the aggregate data suggests. The paper then addresses why some countries are integrated more than others and discusses the obstacles to regional financial integration. The paper points out that East Asia’s growth strategy has shaped bank centric financial systems. An important thesis presented in the paper is that reliance on bank-based intermediation has hindered financial integration. The prospects for regional financial integration would be improved greatly if governments would step back from the tradition of massive government involvement and allow market forces to play a greater role. The paper finally explores what can be done to improve the process of regional financial integration. A simple first step will be to harmonise the regulatory framework for non bank financial institutions." (author's abstract

The East Asia crisis and corporate finances : the untold micro story

Explanations of the causes of the Asian crisis have focused on macroeconomic factors leading to the crisis. This paper offers a complementary corporate distress perspective linking the crisis to corporate finances. Key ratios for companies in various countries are presented in the paper. The global benchmarking imposes a consistent cross-border analysis of financial risk and performance, and sheds light on the crisis. The study provides a statistical review of the financial practices and performance of corporates in Asia: Hong Kong, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand benchmarked against financials of corporates in other countries: Latin America, and industrialized countries: France, Germany, Japan and USA. A thematic point that comes across in all the results of the corporate financial analysis is unsustainable rapid (and probably excessive) investment in fixed assets financed by excessive borrowing in some Asian countries- e.g., Indonesia, Korea and Thailand. The East Asian investment-spending spree resulted in poor profitability, reflected in low, and declining return on equity, and return on capital employed. It leads to the conclusion that at the core of the corporate crisis were financial excesses that violated prudent financial practices, and eventually lead to the inevitable financial distress we are witnessing. Therefore, the empirical findings presented in the paper lend credence to the view advanced by Krugman that crony capitalism was at the core of the crisis. Crony capitalism was manifested in supportive bad policies-e.g., implicit government guarantees, and poor banking supervision- that lead to poor credit allocation decisions in the banking dominated financial system. Preliminary findings suggest as well vast differences in Economic Value Added between countries- developing and developed alike. The conclusions from an economic value added approach indicate that in an era of increasing capital mobility, corporates are not adhering to global standards in creating shareholder value. The analysis leads to policy conclusions.Banks&Banking Reform,Payment Systems&Infrastructure,Economic Theory&Research,International Terrorism&Counterterrorism,Environmental Economics&Policies,Financial Intermediation,Economic Theory&Research,Banks&Banking Reform,International Terrorism&Counterterrorism,Environmental Economics&Policies

Corporate financial restructuring in Asia: implications for financial stability

Corporate financial fragility preceding the Asian financial crisis heightened vulnerabilities. Many countries in the region undertook significant corporate financial restructuring after the crisis, with some countries bouncing back much faster than others. These sounder corporate financial practices bode well for financial stability.

Corporate Restructuring : Lessons from Experience

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What Is the Impact of the Global Financial Crisis on the Banking System in East Asia?

The paper analyzes the risks in the banking systems in East Asia using the standard supervisory framework, which assesses capital adequacy, asset quality, management, earnings, and liquidity (CAMEL), and finds that banking systems in the region are sound, but that the short-term outlook is negative. Second, it reviews the measures introduced in Asian countries to support their banking systems. The main bank support measures—direct capital support, removal and guarantees of bad assets, direct liquidity support, and guarantees for banks' existing or newly issued obligations—might be necessary to ensure stability, but they need to be handled carefully to prevent long-term distortions. It remains to be seen whether Asian policymakers will manage skillfully the lifting of bank support measures. Third, the paper conducts stress tests of the banking systems. The stress tests indicate that the largest banking systems in East Asia have a total of almost US$1.2 trillion in Tier 1 capital and a possible shortfall of US$758 billion. Fourth, it assesses the implications for liquidity of the increase in international banking flows and finds that the banking system in the Republic of Korea appears vulnerable to a reversal of capital flows. Fifth, the paper explores the implications of the crisis for credit formation, assessing whether nonbank financial institutions in the region have the capacity to provide sufficient liquidity. The author concludes that they do not. The paper ends with a brief assessment of the impact of the crisis on the corporate sector, concluding that the effects of the crisis are likely to be significant but manageable.east asian bank capital; global financial crisis; government bank support policies