– the paramountcy of financial system stability in a global context
Last week I did a thorough analysis of three major commercial banks and some of the implications on the domestic financial sector. Extending on that, today’s piece seeks to present financial stability in a broader spectrum, so as to gain an in-depth understanding of the dynamics of the global financial system and financial markets.
The 2007-2009 financial crisis seemingly emanated from the U.S economy; it was highly complex in nature and caused severe financial and economic damage to the global economy. The causes of the global financial crisis constitute a great degree of complexity, and it is by far the most debatable topic on global agendas relating to global financial sector management. It appears that such crisis evolved into a cycle of the global financial system.
The aftermath of the crisis saw the global economy exhausting its efforts to recover from the shocks caused and to avert another crisis. The resultant effect thus far is there has been a plethora of financial and economic reforms with emphasis on improving and strengthening the regulatory framework. Emerging from this is the escalated debate on the need for global financial governance.
Against this backdrop, the creation of a world financial authority with the principal aim of regulating the global financial system has been strongly advocated for by many economists (Weber & Staiger, 2014). To achieve this, Weber posited countries need to give up some amount of sovereignty so that the organisation can effectively design international regulation (Weber & Staiger, 2014).
In this regard, such an institution was created by the Group of Twenty countries in response to the Global Financial Crisis, the Financial Stability Board (FSB). Evidentiary of the effectiveness of the Financial Stability Board with regards to its primary mandate of coordinating relevant international institutions and policy makers of key member countries: The FSB has made significant improvements with regards the execution of its functionalities from the onset of its creation in 2009 up until 2013. From 2015 onwards, it was faced with greater challenges with regards to its objectives, and therefore was deemed weak and inconsistent or insufficiently effective.
Substantiating this, citing Jones et al (2010), the FSB at that time was widely critiqued in his paper on Authority and Governance. In this report, the workings of the FSB were described as cosmetic and based on the same rule that led to the debacle of the financial system. It was also argued that emerging economies should seek to gain greater participation in the governance of IFIs. Such an approach would seek to bring about change in the paradigm to regain the original spirit of the Bretton Woods. In this spirit, reference is made to the building of an international financial system supporting a balanced development of trade, production and employment.
Comparing the workings of the FSB from then to this day, it was seen that tremendous work has been undertaken and improvements have been made in which most of the challenges and weaknesses were addressed. It can be safely said that the FSB has evolved into a much stronger institution encompassing a broader membership agenda, deeper and broader scope of analysis, and peer review. A broader spectrum of work in these regards is being developed and pursued by the FSB, albeit there remains challenges and weaknesses to overcome. These of course are expected, as the global economy and financial system is rapidly growing with complexities.
Recommendations
Emerging economies are becoming more financially integrated globally. This development allows for greater access to capital, but also exposure to the risk of financial shocks. With this in mind, emerging economies’ policy makers need to consider improving the legal and institutional frameworks accordingly, and thus ensuring resiliency of these economies amidst a more volatile external environment (IMF, 2016). In the light of this, the following recommendations are made:
* Emerging market economies should continue to bolster the rights of outside investors, particularly minority shareholders;
* Bringing disclosure requirements fully in line with international best practices and promoting greater board independence are likely to yield benefits;
* Emerging market economies should continue to reform their regulatory, legal and institutional frameworks to foster effectiveness and enforceability of corporate governance regimes.
Finally, the following recommendations arose out of the findings of the most recent Global Financial Stability Report: IMF (2016).
* In the assessment of macro-financial conditions, policymakers may need to progressively consider economic and policy developments on emerging market economies. This suggests also the need to pay attention to financial spillbacks from emerging economies stemming from the policy actions of advanced economies. Underscoring this development is also the criticality of enhanced international macroeconomic and macroprudential policy cooperation.
*The need for more comprehensive and granular data on capital flows and their intermediation by banks, large institutional investors and investment funds to better assess risks and vulnerabilities, and identify potential shock triggers and spillover channels.
*Governments should promote specific forms of financial deepening; for example, developing a local investor base (GFSR April 2014, Chapter 2) cited by IMF (2016. This is suggested against the fact that evidence have shown that financial deepening can attenuate financial spillovers of external shocks.
*As China’s role in the global financial system grows, transparency of its policy goals, clear and timely communication of its policies, and strategies consistent with achieving them will be increasingly important to avoid volatile market reactions with wider reverberations.
*Enhancing financial surveillance of cross border financial flows intermediated by asset managers should be a priority.
*Lastly, it will be important for authorities to deploy appropriate macroprudential measures targeted at bank and market based financing to limit excessive increases in corporate leverages that could threaten financial stability (GFSR October 2015, Chapter 3) cited by IMF (2016).
