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What the crisis can teach us |
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Looking to the past to safeguard the future In his address to the Board of Governors, Lord Myners, Financial Services Secretary to the UK Treasury, emphasised that we must learn the lessons of the financial crisis. During the first day of the EBRD’s 18th Annual Meeting (15-16 May), three of the panel discussions that form part of the Business Forum – the Opening Panel on the liquidity crisis, the Economics Panel and the Capital Markets Forum – considered that very matter. What went wrong? Can we, in the future, insulate the economic system against the shocks it has experienced over the past two years? Foreign currency debt There was a general consensus amongst panellists at all three events that high levels of foreign currency debt have contributed to the severe effects that the global recession has had on certain of our countries of operations. While some, such as Russia and the Czech Republic have suffered relatively little from this, in others such as Hungary and Latvia, both households and businesses have been crippled by foreign currency loans. In the capital markets forum Júlia Király, Deputy Governor of the Central Bank of Hungary, pointed out that at an individual level these foreign currency mortgages and debts were perfectly rational: cheaper than domestic loans and less subject to volatility – or so it seemed at the time – and that nobody was behaving irresponsibly at a microeconomic level. As was reiterated throughout the sessions, few people foresaw the coming crisis and the safeguards against a recurrence of this problem in the future would have to be at a macroeconomic level. “Counter-cyclical” This idea cropped up repeatedly in all three morning panels on Friday. Few now seem to dissent from the idea that the entire financial system – both institutions and regulators – was too lax in controls, provisioning and risk management during the good times. This has left most banks with insufficient capital to continue operating in a much more hostile environment with far higher capital ratios. Several references were made to “dynamic provisioning” which has proved largely successful in Spain. Dynamic provisioning is simply a more exciting name for the homely adage of “saving up for a rainy day”. Adopted in Spain in 2000, it means building up provisions during periods of high growth to tide you over when growth either slows or stops. This maintains lending capacity in a downturn but prevents overheating in the credit market during the more prosperous times. Regulation A pervasive topic of discussion was regulation. Each of the three panels explored the question of whether the global financial system requires more regulation, more supervision or a change of direction. Some panellists argued for more regulation, notably Jacques Der Megreditchian, Head of Investment Banking and Global Markets at Troika Dialog, who advocates a new Glass-Steagall Act to separate investment banking from retail banking. On the other hand, Zdenek Tuma, Governor of the Czech National Bank, expressed the convictions of many when he stated in the Economics Panel that the need is not for more regulation but for more active supervision and enforcement of existing regulation. Interpretations of this need, however, varied between panellists. While many agreed that greater supervision was required, there were also several mentions of the need to either modify or abandon the Basel II agreement, which some now consider to be too “pro-cyclical”. Everything is connected to everything else Regardless of the huge variety of economies, trade conditions, industries, imports, exports, regulation and connection to the global market across the EBRD region, no country has escaped unscathed. What started as a crisis involving a single asset class in one economy – sub-prime mortgages in the United States – has widened and deepened to encompass the global business community. For good or ill, world trade is a reality, global recession is a reality, and so must the remedies for the current financial situation be. In the opening panel discussion on the liquidity crisis, this view was firmly underlined by Herbert Stepic, CEO of Raiffeisen International, an Austrian banking group which has extensive holdings in the banking sectors of central and eastern Europe. “I haven’t met a single banker from the strategic banks who has considered withdrawing funds or capital [from its subsidiaries abroad],” Mr Stepic affirmed. Fears that western governments would prevent aid packages from being used for the benefit of struggling foreign subsidiaries have so far proven unfounded. “Without the assistance of western European governments (and their fast action), the whole system would have been very much at risk,” he said. No single solution, no simple solution With the EBRD region encompassing such economic and political diversity, the panellists are united in the view that there cannot be one solution to all economic ills, nor can simple solutions prevail in a crisis of this level of complexity. According to Grigory Marchenko, Governor of the National Bank of Kazakhstan, a 25 per cent devaluation of the local currency in Kazakhstan is already having beneficial effects. “And I’ve never been out with a bodyguard,” joked Mr Marchenko. In Russia the stabilisation of commodity prices is easing difficulties. Manfred Schepers, EBRD Vice President, Finance, warned participants to beware of expecting results from simplistic solutions. “The international financial institutions and the International Monetary Fund cannot provide remedies. They are not remedies. They are simply plasters we put over the scabs. The question is what will be under the plaster when we take it off.” Is recovery coming? In the opening Liquidity Crisis Panel, moderator David Shirreff, Business Correspondent at the Economist, led with the difficult question of whether the “green shoots of recovery” are visible in the fact that the deterioration of banking assets seems to be declining. Responses to this clearly showed the different experiences of our countries of operations. Oleg Vyugin, Chairman of MDM Bank in Moscow responded: “We are seeing some light at the end of the tunnel, following the injection of liquidity and the other support measures. We are seeing a stabilisation of financial institutions.” Mr Stepic, on the other hand, was vehement that banks like his own which align with the real economy have not yet reached the bottom of the cycle. United we stand What became abundantly clear as the morning progressed was the commitment shown by all parties to learn the lessons of this period of turbulence and build a more robust and prudent system for the future. Opinions vary as to causes and symptoms, or viable remedies, but all are determined to find a cure for the financial crisis. Cooperation – between international financial institutions, nations, regulators, industry, economists, bankers and politicians – is the key to future recovery.
By Nikki Braterman, Internal Communications Manager
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