Tuesday, September 16, 2008

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.

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