Tectonic shifts in international power

Guest blogger, Guillermo Kopp, executive director and global research fellow, TowerGroup, says the banking industry has yet to wake up to the challenges of globalisation.

Is the global financial services industry plummeting in a tailspin dive? Or will a stubbornly resilient global economy survive the ripple effects of the financial crunch? The start of Sibos 2008 coincided with the casualties of Merrill Lynch, Lehman Brothers and Washington Mutual.

As international markets become increasingly interconnected, financial risks — especially shortfalls in liquidity — must be managed systemically and globally. The intrinsic vibrancy in European markets and emerging regions has challenged the role of the United States as a dominant financial centre.

A forum eliciting discussion by industry leaders from Europe, the Gulf, Singapore, India, and Russia moderated by Juan Senor pondered whether the end of the US dominance has begun, and what level of influence a whopping $3 trillion in sovereign wealth funds will have on the balance of power.

Globalisation has been picking up speed. The world's economies and financial systems are increasingly interconnected. But the growth in international economies and their interdependent roles has still to dawn on many players in mainstream markets.

Rather than expanding a domestic business model abroad or aggregating a collection of disparate local product and services offerings, internationally minded financial services institutions (FSIs) need to adopt a genuinely multi-directional global approach.

Too much leverage, concentrated risk, optimistic valuations of distressed assets, and over reliance on opaque hedge fund investments have rocked the stability of many FSIs. With due consideration to avoid stifling innovation, regulators must orchestrate a disciplined and consistent framework of sound principles and practical rules across the financial services industry.

For example, the Financial Stability Forum has been championing risk management and reporting standards that will extend to hedge funds. A broader challenge is to minimise the lag by local jurisdictions and the reluctance by some FSIs to implement global guidelines.

The US financial woes have raised doubts about global leadership, control, and manageability. Adequate transparency with timely disclosure of a vital set of common risk and liquidity indicators by all participants will be key to finding a balance between multiple and increasingly interdependent financial centres.

Data management not on the agenda

There may be a few bank or vendor exhibition booths missing this year at Sibos in Vienna thanks to the credit crunch and good old-fashioned consolidation. However, one noticeable absence is data management vendor, Asset Control.

Phil Lynch, CEO of Asset Control is attending the Sibos conference, but this year they decided not to have a booth at Sibos as they felt that when it came to the conference programming, there was not enough attention being paid to data management.

Arguably, he is right, there are no real conference sessions on data management per se, which is surprising given that poor data governance and data quality were at the heart of the subprime crisis.

Lynch alluded to the fact there seemed to be a lot of focus on payments at Sibos this year, which he said was important. Neverthless, managing counterparties and instrument risk is also important,he said. "There is a strong undercurrent of risk and data management, but it is not a distinct track at Sibos," said Lynch.

There is certainly plenty of work to be done when it comes to data quality and governance given that a lot of data is stored in disparate systems or on spreadsheets, where it is unclear who owns the data and what changes if any have been made to it.

Lynch says transparency of data is also important in terms of the inter-relationships between data, data sources and determining who owns the data. "Firms cannot outsource that work," says Lynch. "They need to do that themselves and form a unique view as opposed to a market view."