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THE head of the International Monetary Fund (IMF), Dominique Strauss-Kahn, has called for a new economic paradigm for the world. The IMF has warned that another financial crisis is a matter of when and not if, and has called for better preparation for the crisis.
Strauss-Kahn said there was a need to understand the complex linkages between the financial system and the broader economy, and also the linkages between countries themselves. International platforms such as the recent World Economic Forum continued to call for coordinated measures to manage the global economic recovery.
"Most important of all, countries need to work together to build a more successful and more stable global economy," Strauss-Kahn said. He suggested the first step was to address the safety and soundness of the financial sector.
The financial economic crisis was one of the main reasons behind the economic recession in the US, which later spread to other parts of the world.
A call had been made for "robust regulatory oversight". Steps had been taken on this front, including Basel 3 proposals, which among other things sought to improve the liquidity of banks.
Rules were only as good as their implementation, Strauss Kahn noted, calling for financial sector supervision that was "not afraid of saying no to powerful interests".
When the next crisis strikes, "we cannot expect taxpayers to once again foot the bill. This is why the financial sector must shoulder a substantial yet fair share of the costs that risk-taking imposes on the economy," Strauss-Kahn said. He added the IMF had proposed a tax on financial activities.
Where Strauss-Kahn is right is in saying it all has to start with the financial sector. Basel 3 requirements drew ire from banks, which complained that the new regulations would impede economic growth. In terms of the proposals, banks have to – as is currently the case – keep capital against their assets, but the amounts have been increased dramatically.
The new regime for banks encompasses a leverage ratio; two new capital buffers – a conservation buffer and a countercyclical buffer; new and significant capital charges for non-cleared derivates and other financial market transactions; and significant revisions to the rules on the types of instrument that count as bank capital.
The capital requirement for common equity, which includes ordinary shares, rises from 2% of assets to 4.5%; in addition, there will be a 2.5% conservation buffer bringing the total to 7%.
This is a significant increase, but the new regulations will be phased in over a long period of time and won't be fully implemented until the start of 2019.
That's a long phase-in period; what happens if disaster strikes in the meantime?
At present the focus seems to be on bankers' bonuses. US regulators have proposed that executives at the country’s largest financial institutions defer half of their bonuses for at least three years.
After three years, the bonus should not be paid all at once. Executives could receive no more than one-third of the deferred amount in one year. The bonus rule – required by the Dodd-Frank law – came in response to complaints that institutitions were paying for short-term profit gains, without thinking about long-term implications for companies and markets.
The yuan conundrum
The trouble with attacking bonuses is that banks will find a way around it. They will, as many have done, increase the basic salaries of their employees.
The key to avoiding another financial crisis in future lies in regulation. Regulators in the past had a laissez-faire approach to banks. That must change, and not just where bonuses are concerned.
After all, before 2007 regulators never picked up on the ticking time bomb that was the subprime mortgage lending crisis. It's a very bad sign indeed that they weren't clever enough to realise that making loans to individuals without income, assets or jobs would eventually backfire.
What has been missing from the aftermath of the crisis is a clean-out of regulatory bodies, and the replacement of regulators with new people who possess inside banking knowledge. Salaries of regulators should be high enough to draw people with talent.
As far as a new paradigm for the global economy is concerned, this usually means a strengthening in the Chinese yuan. But for the currency to strengthen sufficiently to make US manufacturers competitive the Chinese would have to severely curb their dollar buying.
This would also curb their investment in US treasuries. The US government might find itself paying higher interest rates, and interest rates on mortgage bonds would also rise, as these are linked to US treasuries. In the case of the Chinese yuan, it's a question of being careful what you wish for.
Strauss-Kahn's wish for a world in which everyone works together is probably a pipe dream. More scary is his prediction that there will be another financial crisis.
- Fin24
Strauss-Kahn said there was a need to understand the complex linkages between the financial system and the broader economy, and also the linkages between countries themselves. International platforms such as the recent World Economic Forum continued to call for coordinated measures to manage the global economic recovery.
"Most important of all, countries need to work together to build a more successful and more stable global economy," Strauss-Kahn said. He suggested the first step was to address the safety and soundness of the financial sector.
The financial economic crisis was one of the main reasons behind the economic recession in the US, which later spread to other parts of the world.
A call had been made for "robust regulatory oversight". Steps had been taken on this front, including Basel 3 proposals, which among other things sought to improve the liquidity of banks.
Rules were only as good as their implementation, Strauss Kahn noted, calling for financial sector supervision that was "not afraid of saying no to powerful interests".
When the next crisis strikes, "we cannot expect taxpayers to once again foot the bill. This is why the financial sector must shoulder a substantial yet fair share of the costs that risk-taking imposes on the economy," Strauss-Kahn said. He added the IMF had proposed a tax on financial activities.
Where Strauss-Kahn is right is in saying it all has to start with the financial sector. Basel 3 requirements drew ire from banks, which complained that the new regulations would impede economic growth. In terms of the proposals, banks have to – as is currently the case – keep capital against their assets, but the amounts have been increased dramatically.
The new regime for banks encompasses a leverage ratio; two new capital buffers – a conservation buffer and a countercyclical buffer; new and significant capital charges for non-cleared derivates and other financial market transactions; and significant revisions to the rules on the types of instrument that count as bank capital.
The capital requirement for common equity, which includes ordinary shares, rises from 2% of assets to 4.5%; in addition, there will be a 2.5% conservation buffer bringing the total to 7%.
This is a significant increase, but the new regulations will be phased in over a long period of time and won't be fully implemented until the start of 2019.
That's a long phase-in period; what happens if disaster strikes in the meantime?
At present the focus seems to be on bankers' bonuses. US regulators have proposed that executives at the country’s largest financial institutions defer half of their bonuses for at least three years.
After three years, the bonus should not be paid all at once. Executives could receive no more than one-third of the deferred amount in one year. The bonus rule – required by the Dodd-Frank law – came in response to complaints that institutitions were paying for short-term profit gains, without thinking about long-term implications for companies and markets.
The yuan conundrum
The trouble with attacking bonuses is that banks will find a way around it. They will, as many have done, increase the basic salaries of their employees.
The key to avoiding another financial crisis in future lies in regulation. Regulators in the past had a laissez-faire approach to banks. That must change, and not just where bonuses are concerned.
After all, before 2007 regulators never picked up on the ticking time bomb that was the subprime mortgage lending crisis. It's a very bad sign indeed that they weren't clever enough to realise that making loans to individuals without income, assets or jobs would eventually backfire.
What has been missing from the aftermath of the crisis is a clean-out of regulatory bodies, and the replacement of regulators with new people who possess inside banking knowledge. Salaries of regulators should be high enough to draw people with talent.
As far as a new paradigm for the global economy is concerned, this usually means a strengthening in the Chinese yuan. But for the currency to strengthen sufficiently to make US manufacturers competitive the Chinese would have to severely curb their dollar buying.
This would also curb their investment in US treasuries. The US government might find itself paying higher interest rates, and interest rates on mortgage bonds would also rise, as these are linked to US treasuries. In the case of the Chinese yuan, it's a question of being careful what you wish for.
Strauss-Kahn's wish for a world in which everyone works together is probably a pipe dream. More scary is his prediction that there will be another financial crisis.
- Fin24
