‘Global crisis requires macroeconomic, regulatory solutions’

Doha Bank Group CEO Dr R Seetharaman spoke on the current global economic crisis at a function organised by the European University in Barcelona, Spain recently.

He said the current crisis was not just financial, but also social in nature.

As a result of financial innovation, new business models of banks emerged, which changed the underlying economics of banking as new financial instruments enabled credit risk to be shifted away from the originators of loans.

However, securitisation also changed the nature of risks and, in particular, transformed credit risk into liquidity risk, then into a funding risk, and ultimately into a solvency risk, Seetharaman said.

He highlighted the key reasons for the crisis and the areas which require attention from regulatory and macroeconomic policy levels.

Seetharaman said: “Financial regulators were not equipped to see the risk concentrations and flawed incentives behind the financial innovation boom. Neither market discipline nor regulation were able to contain the risks resulting from rapid innovation and increased leverage, which had been building for years.

“Policymakers failed to sufficiently take into account growing macroeconomic imbalances that contributed to the build-up of systemic risks in the financial system and in housing markets. Financial supervisors were preoccupied with the formal banking sector, not with the risks building in the shadow financial system.

“The key areas, which required attention from the regulatory level, are scope of regulation, market discipline, information gaps and systemic liquidity provision. The key areas which required attention at the macroeconomic policy level are response of monetary policy to systemic risks, strong fiscal policies, and regulation of international capital flows and alignment of fiscal and monetary policies. Today’s euro crisis is a clear case of conflict between monetary and fiscal policies.”

On the current trends in financial markets, Seetharaman said: “Japan has come with the easing measures recently which involved enhanced purchases of long-term Japanese government bonds. This move sent the dollar close to the ¥100 line. Last week the IMF said it was lowering its outlook for world economic growth this year to 3.3%, down from its forecast in January of 3.5%. It expects US economic growth of 1.9% this year, down from its January estimate of 2.1%. It expects that the combined economy of the 17 euro countries will shrink 0.3% in 2013. Sluggish global economic recovery, increasing energy production in the US and a slightly slower growth in China has put pressure on oil prices recently. Gold prices have fallen on reports Cyprus could sell a significant volume of gold. Gold and industrial metals fell hard after China reported that economic growth slowed unexpectedly in the first three months of the year.“

Seetharaman highlighted the regulatory reforms in response to the crisis. He said “In response to the crisis, the global regulatory reforms had been actively reviewed under the leadership of G20 countries in co-ordination with financial stability Board (FSB), International Monetary Fund (IMF) and Bank for International settlements (BIS).The Dodd–Frank Wall Street Reform and Consumer Protection Act in US implemented the regulatory reforms in response to the crisis. The Volcker’s Rule was enacted under this regulation to restrict proprietary trading.

The SEC (Securities and Exchange Commission) also proposed tougher disclosure rules for hedge fund and private equity firms. The FSB, IMF and BIS are working on macro-prudential policy frameworks, including tools to mitigate the impact of excessive capital flows, Seetharaman said.