Transcript Global Financial Crisis and Risk Management in Islamic Finance

GFC: Origin, An Alternative View
Mohamed Ariff
Renong Chair Prof, UPM
(Bond University, Australia)
UM: Dec., 15, 2010
Global Financial Crisis
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CONSENSUS IS
 I: April: 2007: Starts with Century Financial bankruptcy
 II: Five months of financial crisis in US, UK, Holland, Germany
 III: Sept 2008: Global Financial Crisis Eye of the storm
 IV: AFTER: Becomes Worldwide Recession (GDP down 1.1%)
WHAT IS THE ORIGIN OF CRISIS?
 A: POPULAR VIEW PROMOTED BY BANKS & GOVTS
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EVIDENCE SUGGESTS MORE COMPLEX ORIGIN
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Sub-prime loans 2001-4 > interest rate up from 1% to 5.35% 2004-6 >>
>property price -36% 2006-7 > Bank failure > Recession 60 nations
1994 on: Regulatory softening> credit explosion > leverage
 Some commentators call this humongous governance failure
1999-2007: >Risk management failed (Rating became voodoo science)
2001-2007: >Poor Investor Vigilance (bad monitoring of managers)
THIS EXPLORES HARD EVIDENCE ON ORIGIN
POPULAR VIEW OF Global Financial Crisis
A SIMPLISTIC VIEW
SUBPRIME
LOAN
2001-2004
Predatory
Lending
G
BANK
CRISIS
MAY-07
MAR-08
Collapse of
capital
RECE
SSION
DEC-08
DEC-09
Credit Crunch
3
THEORY ABOUT FINANCIAL CRISIS?
PATHOLOGY OF FINANCIAL CRISIS: MINSKY
1.CREDIT SPLURGE
5. CONTAGION
2. DISPLACEMENT
4. PANIC
3. REVULSION
THEORY OF FINANCIAL SYSTEM?
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THEORY OF ECONOMIC SYSTEM IS WELL DEVELOPED
 GENERAL EQUILIBRIUM MODEL
 HARROD-DOMAR EQUILIBRIUM ON FUNDS SUPPLY AND DEMAND FOR
INVESTMENT
 BEYOND THAT WE KNOW NOTHING
TWO AREAS OF UNKNOWNS
 1. HOW DOES THE FINANCIAL SYSTEM FUNCTION AND ACHIEVE
EQUILIBRIUM
 TO ANSWER THE QUESTION, WE NEED ALL PRICES TO BE EFFICEINT?
 TO ANSWERTHIS QUESTION, WE NEED A THEORY OF HOW THE
FINANCIAL SYSTEM FUNCTION.
 2. HOW DOES INSTABILITY IN FINANCIAL SYSTEM (FRAGILITY) MOVE
THROUGH THE ECONOMIC SYSTEM?
 WE HAVE NO THEORY. FULL STOP
RECENT DEVELOPMENTS
 ALLEN AND GALE 2007 AND COLOMIRIS 2007 RECENT ATTEMPTS TO BUILD A
THEORY OF FINANCIAL SECTOR EQUILIBRIUM
 THE EXISTING THEORY OF “FUNDAMENTAL SHOCKS” AS CAUSING CRISIS IS
TOO VAGUE AND DOES NOT HELP TO PREDICT CRISIS
 THE IDEA OF BUSINESS CYCLE ALSO DOES NOT HELP BECAUSE THE LEADING
AND LAGGING INDICATORS DO NOT HAVE HIGH DEGREE OF
PREDICTABILITY
THUS, WE DO NOT HAVE THEORETICAL TOOLS. BEST IS TO PUT OUT FIRE.
 ALMOST ONE CRISIS EVERY 10 YEAR … WE PUT OUT FIRE EACH TIME!
THREE KEY FACTORS AT WORK
1: REGULATORY FORGIVENESS

Removal of key regulations  increased credit risk
 1992-07: Huge Cash fLOW: China kept fuelling credit 6% of GDP
supporting shortfalls (China trade 62% to US/Mexico financed)
 1980s: Abolition of Statutory Reserves from about 3.5% to zero
 1999: Clinton Graham-Leach-Bliley Act softened Glass-Steagel
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2000-2004: Fraudulent mortgage loans; Repeal of Glass-Steagel Act
2004: SEC softened net capital rule for lenders
1998-2006: Growth of “parallel banking” outside prudential
supervision of the US Fed. & Bank of England
 SIV of banks provided off balance sheet loans $5,200 billion
1994-2005: Exotic financial products sold to unwary investors
WMD (WB) unleashed, poison pill Germany, UK, US, Iceland, etc
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Under this, savings banks permitted to buy in investment & securities firms
Bad ways (First half of 2010, Citigroup profit mainly from securities trading)
CDOs recovery rate was 5% to 35%; so dangerous. At height of crisis
NY banks bought back 25% of US$ 12 tril bit deep into bank capital
Consequences
2: POOR RISK ASSESSMENT
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RISK RATING BECOMES A VOODOO SCIENCE
 ONE SIGNIFICANT ACT WAS THE RESIGNATIONOF THE LADY
CEO OF S&P FOR FAILURE TO RATE CORRECTLY. BRAVE SOUL
 RATING AGENCIES HAVE ALWAYS HID HOW RATING IS DONE
 ASK ANY PROFESSOR TEACHING THIS SUBJECT. A BLACK BOX!
 CONFLICT OF INTEREST
 FEE INCOME FROM RATING IS SUBSTANITAL, AND THIS IS
PAID FOR BY INVESTMENT BANKS, now part of Savings banks
 PRIOR TO 1999, THE INVESTMENT BANKS WERE SEPARATED
FROM SAVINGS BANK
 FROM NOV 1999, NO LONGER, SO THE RISK OF INVESTMENT
BANK ISSUES OF RATED SECURTIES MUST HAVE MULTIPLIED
MANY FOLD. THERE IS EVIDENC OF COMPLICITY IN USA
 INQUIRY MADE BY SEC LED TO TIGHTENING, SO A TOTAL OF
US$ 2 TRILLION ASSETS DOWGRADES IN 2007:
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EVEN NOW THERE IS NO CONSENSUS ON HOW MUCH OF
THIS IS DUE TO RATING FAILURE
CONSEQUENCE: BANK-RATER-INVESTMENT-BANK NEXUS RISK
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THIS ADDED TO THE CRISIS BECOMING WORSE AT THE WRONG TIME
3: POOR INVESTOR VIGILENCE
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AGENCY PROBLEM HAS BEEN HIGHLIGHTED FOR 20 YEARS !!
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WORLDWIDE EVIDENCE SUGGEST PERKS APPROVED BY INVESTORS TO CEO
AS LEADING TO INVESTOR ASSETS BEING PUT TO RISK
POOR GOVERNANCE MADE AGENCY PROBLEM FESTER
 FINANCIAL FRAUD WAS PERPETRATED SO MANY TIMES
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LIST GOES ON: TIMID RESPONSE SELF-REGULATIONS !
 INVESTMENT FRAUDS: BOETSKY-MILKEN SAGA; LBO
SCANDAL; MADOFF; LIST GOES ON
 REGULATOR RESPONSES HAVE BEEN TOO GENTLE
 CEO BONUSES WERE BOOMING WHEN COMPANIES WERE
ACTUALLY LOSING MONEY !! (2006 bonus US$ 24 billion !)
 JAPAN WORKS WITH 1: 12 TIMES SALARY DIFFERENCE; UK
& US 1:50 TIMES
 EVEN A TINY SINGAPORE 1: 152 TIMES !!!
 STIGLITZ CALLS THIS A FRAUDULENT BEHAVIOUR
CONSEQUENCE, INVESTORS HELPED THE BANK-RATERINVESTMENT-BANK NEXUS TO PUT THEIR ASSETS AT HIGH RISK
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MAXWELL CORPRATION FRAUD IN 1984; ENRON & WORLDCOM IN
2001; PHARMALAT IN 2005; AUSTRALIA TOO HAD ITS BIG ONES
1: REGULATORY SOFTENING LEADS TO
VERY HIGH BANK CREDIT RISK
FWMD
REGUL
ATION
WEAK
BANK
CONS
OLIDA
TION
LOWER
INTER
EST
RATES
DEBT
DERIV
ATIVE
1992-2004
1999-2006
2000:2004
1998-06
Regulation
Monopoly
Failure of
Fed
Shift of risk to
weak hands
Deferred
Mortgage
Annuity
2002-2004
Predatory
Lending
11
LENDING RATES COLLAPSE THEN DOUBLES,
THEN TUMBLES
LIQUIDITY CRISIS
Greenspan Era of low real interest caused
low bank income
Real estate decline Jan 2006: sub-prime
Banks seek to reduce capital via CDD
(Read Fools Gold)
2010 AIG SOLD $35.5 bil
TRANCHE
AAA
LOAN
BOOK
AT
BANK
INCOME
STREAM
FACE
VALUE
AIG
INSUR
ES
TRANCHE
AA
TRANCHE
A
2007-08 BANKS BUY BACK 25%: BLEEDS CAPITAL
W
O
R
L
D
C
U
S
T
O
M
E
R
S
MARKET REACTIONS LEAD TO RECESSION
BASE i
JUMPS
JUN 2007
BANK
BAILOUTS
JUL 2007
CONSUM
PTIONS
DECLINE
RECESS
ION IN
ECONS
DEC QTR 08
DEC QTR 08 ON
CONSEQUENCES OF GFC
Massive liquidity crisis develops
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Purchasers of CDOs started to dump them in 2007
 This led to Wacovia bank failure 09:08, soon all major
banks short of capital facing losses from (1) sub-prime (2)
CDO
Insurance cost of these securities went from 2 cents to 22
cents per $100 cover (AIG bust because of this).
 This led to AIG failure followed by more
Risk spread (Govt bond yield vs Corp AAA) increased
 USA doubled from 0.6% to 1.2%
 Euro zone also, six-fold increase from 0.1% to 0.6%
Full blown liquidity crisis 10-12 Oct, 08; zero liquidity!
 Failures, bailouts, mergers, etc.
 Real sector firms starved of working capital & investment
CONSEQUENCES-1
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BLOW UP OF CREDITS IN UK & US
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1. FRAUDULENT HOME FINANCE &INVENTION OF DEFERRED ANNUITY
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2. HOUSEHOLD DEBT SHOT UP:
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2003 TO 2007 THIS CONTRIBUTED US4 1.6 TRILLION IN VALUE, MOST CAME BACK TO BITE
6. INVESTOR VIGILANCE LOWERED
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OFF-BALANCE SHEET LOANS (NO SUPERVISION) INCREASED BY US$ 5.2 TRILLION
TOP 5 NY FINANCIAL INSTITUTIONS INCREASED LEVERAGE IN 1997 OF 65% TO 120% IN 2007
MANY NON-BANKS OPERATED IN LENDING OPERATIONS (BEARS STERN IS ONE)
5. CDO (THE FWMD IN CRISIS): FROM 1998-2007 GREW TO US$ 12 trl (70% GDP)
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PRIVATE DEBT OF 123% IN 1981 SHOT UP TO 300% OF GDP BY 2008 (US$ 51 TRILLION)
THIS IS AT LEAST BASED ON INVESTMENT RETURNS FROM LONG TERM INVESTMENTS
4. BANKING LEVERAGE GOES SKY HIGH
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US HOUSEHOLD DEBT IN 2004 WAS 130 % OF GDP (THAT IS US$ 22 TRILLION)
3. PRIVATE DEBT ALSO INCREASED
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THE FIRST FIRM TO GO BUST IS A FRAUDULENT HOME MORTGAGE FIRM “CENTURY
FINANCIAL” IN APRIL-2007 LATER MANY MORE SUCH FIRMS WENT BELLY UP
US MORTGAGE OF 50% GDP IN 1990s ROSE TO 75% IN 2008
HOUSEHOLD DEBT BECAME 130% OF DISPOSABLE INCOME
US HOUSING FORECLOSURE ACTIVITY ROSE 400% 2007-08 !! (OF THIS SUB-PRIME 25%)
WALL STREET CEOs COLLECTED US$ 24 BILLION AS “BONUS” IN 2006 (THERE ARE FIFTY
COUNTRIES IN THE WORLD WITH GDP LESS THAN THIS AMOUNT!)
THIS IS DUE TO GOVERNANCE FAILURE AND A CULTURE OF GREED IN CAPITAL MARKETS
THUS FINANCIAL SYSTEMS OF KEY COUNTRIES BROKEN
CONSEQUENCES-2
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WORLDWIDE HAVOC; CONSEQUENCES FROM TIME ZERO
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APR 07: NEW CENTURY FINANCE CLOSES DOWN
JUL 07: FIRST RESCUE OF BEARS STERN BY GOVT $26 BIL.
AUG 07: BNP PARIBAS GOES BUSRT AND SAVED
SEPT 07: NORTHN ROCK RESCUE; LEHMAN $86 TO $0.03; FTSE -505!
OCT 07: BCBS, CITIGROUP & MERRIL LYNCH FAIL (Share down 80%)
DEC 07: ACTIONS BY UK & US RAISE US$ 700 BILL
JAN 08: BIG FALLS (Dow 504) IN STOCK MARKETS (IN SEPT ALSO)
MAR 08: LEHMAN GOES DOWN & 10 MORE IN TROUBLE
APR 08: UK INSTITUTIONS STOP MORTGAGE LOANS !
MAY 08: UBS & BARCLAY RAISE CAPITAL
JUL 08: FREDDIE AND FANNIE MAY RESCUE BY US
=>SEP 08: WORLDWIDE NO MONEY TO LEND. ZERO US$
OCT 08: DOW FALLS 8%; Ireland 2, UK 3, Aust 11 guarantee bank deposit
NOV 08: CHINA SPENDS US$586 STIMULUS (US$ 3.7 TRILLN)
DEC 08: REAL SECTORS WORLDWIDE IN DECLINE, RECESSION
CONSEQUENCE BECAME ONCE-IN-LIFETIME EVENTS
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27-03-2010 REPORT: 50 WALL ST BANKS POSSIBLY GUILTY OF FRAUD !!
CONSEQUENCES-3
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THREE DIMENSIONS OF CONSEQUENCES
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I: MAJOR NATIONS AFFECTED
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I: CONTAGION TO 60 NATIONS: the worst hit 11 countries lost US$ 712 bill GDP
II: MAJOR DIMENSIONS OF RISK (cash rates doubled or more 03:2008 to 11:2008)
III: CORPORATE FAILURES due to no cash for short-term financing
BELGIUM; GREECE; ICELAND; LATVIA; RUSSIA; UKRAINE;
60 NATIONS DECLINES IN GROWTH (US$ ???? BILLION) IN 2008 ALSO IN 2009
II: MAJOR DIMENSIONS CHANGE
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SUB-PRIME LOANS DUE TO LOW INTEREST RATEMAJOR CAUSE
WORLDWIDE HOUSING PRICE DECLINES LEAD TO LOSSES
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BIDDING UP OF COMMODITY PRICES BY CHINA FOR ITS SELF INTEREST
AUTOMOTIVE INDUSTRY CRISIS LEADS TO HUGE UNEMPLOYMENT
III: CORPORATIONS BUSTED
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US REPORTS IN APRIL 2010 SUGGEST 12 MILLION HOMES BELOW FVALUE OF MORTGAGE !!
NEW CENTURY FINANCIAL; AMERICAN FREEDOM MORTGAGE;
CHARTER COMMUNICATIONS; LEHMAN BROTHERS; LINEN ‘N THINGS
NETBANK; SENTINEL MGT GROUP; YAMATO LIFE; BANCO PRIVADO
PORTUGUES; ALLCO AUTOMOBILE; TWEETER; CHRYSLER; GM
IN ADDITION, THERE ARE UNRECORDED CASES
FINANCIAL CRISIS TO RECESSION
BASE i
JUMPS
BANK
BAILOUTS
CONSU
MPTN
DOWN
RECESS
ION IN
60
ECONS
JUN 2007
JUL 2007
DEC QTR 08
DEC QTR 08 ON
After the financial meltdown, economic crisis
COST OF GFC
US$ 712 billion GDP loss by 11 of 60 economies
% quarterly Δ GDP
6
3.3
4
2
1.4
4.2
3.7
2
2
0.8
0
-2
-4
2007 2007 2007 2007 2008
-0.4 2009 2009
-0.5 2008 2008 2008 2009 2009
-2.8
-3.6
-6
-6.4
-8
GDP Loss in US$ bil in 2008
0
-50
US, JAPAN, CHINA, UK,
CANADA .. BEAR THE
BRUNT OF CRISIS
-100
-150
-200
-250
-300
2. COST TO LONG TERM INVESTORS
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Share markets in US and Euro zone recovered 1999-2003 twin crises (IT & 9/11).
 The market correction for these two events were very large
Stock market started to decline from Sep 2007, 3 months after the liquidity crisis
became embedded.
 Dow Jones =100 in 1990 went up to 350 in Aug 2007, to 220 in 2008
 EUROSOXX=100 in 1990 went to 325 in Aug 2007, down to 170 in 2008
 ASX = 100 in 1990 went to 340 in Aug 2007, down to 170 in 2008
The values of banking stocks were severely eroded
 Example Citicorp fell from $46 years back down to $4 to $1.60 in June 09
 The same happened across in Europe: UBS shares at $87 down to $4:60
 Bank stock price recovery happened when GAAP for recognition of profit was
changed in April, 2009 !!! (another regulation bending to please banks)
 NPL from under 3% to 6.7%; loan delinquency 35% up 2007 vs 2008
All asset prices marked down in 4Qtr 2008 and in 2009
 The real losers are the superannuation funds & private investors. Estimated
loss in super as at end 2009 is about 20% of some US$15 trillion ($3 trillion).
Stock price decline by 35% in 2008
COST TO LONG TERM INVESTORS: 3 CASES
(-37% USA; -17% EUROPE; -21% AUSTRALIA)
400
350
300
250
US SHARES
200
EUROPE SHARES
AUSTRALIA SHARES
150
100
50
0
1990
2007
ASX LOST A$ 360 BIL (NZ$400 bil)
2009
Massive Monetary intervention
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Bernanke’s short experiment to control inflation stopped
 Instead M1 and M2 jumped as central banks went on
pouring money
M1 in USA increased by 16% over 2 years (!!!) when g = 0
 Euro region actually curtailed M1 growth
M2 increased by double the rate of previous years.
 Euro region also increased but very small
The combined effect of these pouring of money increased
the capital base of banks, and prevented runs
 While for 20 years banks reduced capital requirement,
now governments poured taxpayer money to prop capital
 Serious moral hazard problem unseen before in DE
By December, 2008, liquidity crisis within banks stopped.
3. MACROECONOMIC IMBALANCES WIDEN
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Total world trade US$ 7,600 billion or 13% of world GDP down
Total trade decline since GFC will take 4 years from 2010 to
recover to the level of pre-GFC
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Fiscal balance of many countries were severely eroded:
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Deleveraging worldwide: fear sovereign loan defaults (Greece 120% GDP)
The impacts on trade balance:
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UK admitted in 2010 it will take 4 years to balance budget
USA estimates a longer time to balance budget
Japan (like Greece) has the worst scene: a 10% deficit in budget
Sovereign loans now a burden to economies
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2008: the total decline in world trade is US$ 900 billion !!
After 3 years of decline, world trade just beginning to go up in 2010 !
Severe for developing countries: some double digit falls (see charts)
Moderate slowdowns in trade balance in developed countries: single digit
There are other consequences: unemployment; deleveraging; etc.
WORLD TRADE SUFFERED BADLY
As a result …
Growth rate (%)
60.00
50.00
Hong Kong
40.00
Japan
30.00
Singapore
20.00
China
10.00
Malaysia
0.00
-10.00
Hong Kong
-20.00
Malaysia
India
USA
-30.00
Year
US$ value of budget deficits 2009/2010
(Average deficit 12% GDP)
$5,000
$4,500
$4,000
$3,500
$3,000
GDP (bil)
$2,500
Deficit(bil)
$2,000
$1,500
$1,000
$490
$500
$333
$195
$45
$7
$0
JAPAN
UNITED
KINGDOM
SPAIN
GREECE
ICELAND
WHY DID BANKS DO WHAT THEY DID?
BANKS ARE PROFIT SEEKING FIRMS !
THEORY & PRACTICE:
SEARCH FOR LOWER REGULATORY
CAPITAL & HIGHER PROFITS
WHAT HAPPENS UNDER MONEY MULTIPLIER
THEORY IS NORMAL !
35
Money Multiplier Theory: Is there a lesson?
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1989-2002: Low banking Income low profits
 Banks seek to conserve capital by new inventions
 Lobby: SR removal; invents CDD; invents deferred annuity
mortgages to entice subprime mortgage customers
1980s: As SR is removed, banks lend more with same capital
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1998-06: CDD is issued, banks reduce capital base
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For every $100 capital, loans go up substantially to seek more profits
CDD originated by two former employees of Milken fame (1980s) who
joined JP Morgan. Designed “Bistro” deals. Freed capital on $9 bil loans
Mortgage-backed derivates balloons ( $12 tril in US) and $??? Europe
If half the loan book can be collateralized and sold, the capital base of $8
for every $100 loan goes down to $4.80, so more loans can be made
2007: Liquidity crisis: defaulting sub-prime mortgage erode capital
Jun 2007 on: Liquidity crisis to bailouts, then property price
36
decline accelerate, leading to recession
Money Multiplier Theory
No SR + LIQ
Money
Multiplier
With SR + LIQ
$6.4
1.0
0.8
0.5
0.3
RR = SR + LIQ
0.1
Reserve
Ratios
Same Capital Required are increased
loan
With CDOs
Loan Book
SR
abolished
Δ SR +CDO {
SR required
Δ lending
{
Change in
loan
1.0
0.8
0.5
0.3
0.1
$ 100 x ROE (20%) = π = $20 Profits
Reserve
Ratios
Collateral Debt Obligation Reduces
Capital Requirement
Loan Book
CDO
1/2 of loan
100
$100
$8 capital
Capital
$45.20 x ROE (20%) = $9.40 = π
$4.80
capital
Capital
Loan and
capital
LESSONS
ORIGIN 1: bank’s search for profits
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THIS IS WHAT BANKS ARE SUPPOSED TO DO &
REGULATORS NEED TO CURTAIL THIS TO SAFETY
Financial intermediaries licensed to operate with a very thin
layer of capital (8%; and 1.6% (20% of 8%) for Derivatives)
 Historically over 250 years regulatory capital has declined
to a very low level. 2.5% equity; 1.5% loan book today!
Interest rates declined since 1986 to paltry levels; about 1%
 Real interest rates became zero (1994) negative (2002)
 Urgent for banks to start searching for lowering the
capital requirements as profitability falls normal
Three key regulations helped to save/reduce capital
 Zero statutory reserve in 1980s
 Collateralized debt derivatives (CDO)FWMD
 Insurance reduce risk capital (2cents per $100 up 22cents)
ORIGIN 2: UNTESTED INVENTIONS
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Mortgage markets provided higher returns to banks.
But with near or below zero real interest, banks needed to
devise ways to induce more borrowing: liquidity explosion !
 As real rate dipped to zero, banks invented deferred
mortgage annuity to attract sub-prime borrowers to this
market (10 million zero-credit customers) *
Bernanke ups interest rate in 2005
 Interest rate from 1% to 5.35%, so sub-primers defaulted
 Liquidity crisis started in June 2007, got worse in Oct 08
CDO instruments reduced capital requirements
 From 2006 mortgages went bad to worse; 6%- 20% down
 CDOs (investors) and insurance (AIG) went bad*
 Defaults went up 400% within 2 years in 2007-2008
Property prices fell by 33% by end 2008 in the US
ORIGIN 3: FLOW-THROUGH TO ECONOMY
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1998: 2 former employees of junk-bond era employed in JP
Morgan developed the CDO, collateralized debt derivative
(bistro deals), to save capital for JP Morgan spreads
 CDO on $9.7 bil loans of top 150 firms saved capital for JP
Morgan bank. So others copied it from 2004 to 2007.
Break loans into tranches of differing quality (see chart) and
sell them to willing investors seeking high returns (Iceland)
 J. P. developed this into a $19 bil market by 2000; … $12 tril
1999: London emulated this new invention as well as give
approval to financial institutions to hold this new derivative
 The market for this amounted to US$12,000 billion by 2007
 Saved the banks 20% of 8% of capital required (as
explained) so banks could lend more to customers
Liquidity went up very high and risk multiplied !!!
Lessons learned
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1. Profit seeking financial institutions
 Inbuilt incentives to
 Reduce regulatory capital …. Intrinsically risky to financial system
 Regulator’s willingness to remove rules which came as lobby to
White House consistent with profit-seeking banks
2. When real interest rate is negative or close to zero, incentives starts to
build to seek profits with less or same capital base liquidity buildup
3. DE had too long a period of low interest rate with low inflation and
modest GDP growth (Clinton-Greenspan era)
 Long period of sustained growth led to relaxed vigilance
 Banking lobby played a key role … so politicians were behind it
4. Asia: with 1997-8 & 1999-02 crises, Asia kept careful watch on credit risk,
justified from past experience, no regulatory softening
5. With developed world real demand declining, DE and Asian economies
will suffer job losses and recessions well into the future.
Latest Reforms
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1. Rating Agencies
 2007 SEC tightened some sets of rules, still considered as inadequate
2. Accounting Rules
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3. Banking Act in August, 2010
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Europe and China opposed to some fundamental reforms
Capital provision being opposed to
5. Basel III
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Revision to capital adequacy standards
Compensation packages conditioned on outcomes
Too-big-to-fail banks to be required to have buffer capital; etc.
4. G20 Reform package broadly agreed
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Defer marked-to-market rule, still considered wrong, and requires revisions
Risk-weighted capital from 2.5% raised to 7%
Liquidity ratio upped;
Buffer capital of 2.5% to be compulsory to draw on at times of crisis
6. Derivative Trades to be brought to Exchanges, increased disclosures
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No action yet; lot of opposition despitethis being the origin of crisis
Work in progress: Not to be cited
Thank You
THREE KEY FACTORS AT WORK