www.thenationonlineng.net/2011/index.php/business/18288-battle-against-global-recession.htmlBattle against global recession
By Taofeek Salako 04/09/2011 00:00:00
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•Angry mob protesting over economic recession in parts of Europe in mid 2009. SOURCE:
www.itimes.net With national and global economic outlook showing signs of gradual slide towards recession, regulatory authorities across the globe are working themselves into frenzy in order to forestall what analysts describe as a clear and present danger. Assistant Editor, Taofeek Salako, reports
AY we live in interesting times", so says a Chinese proverb. These are certainly interesting times for most economies across the globe as the fear of an imminent economic recession currently assails the world.
Growing concerns about the prospect of a relapse in the global economic recovery have continued to unwind the global financial markets.
The Managing Director of the International Monetary Fund (IMF), Christine Lagarde, spoke about the fears of many over a possible lull in the world economy in a recent broadcast in Washington, United States of America (USA) where she declared that the global economy was not only growing at an abysmally slow pace but shows signs of recession, which if not checkmated, could spell further doom for the economy still struggling to overcome the hangover of recession in the past few years.
Global financial outlook
Major indices of the global financial markets have reverted to the negative with most indices reeling in double-digit negative returns. Besides, nearly all forecasters have downgraded global economic growth forecasts for this year and subsequent period. Societe Generale (GLE) SA recently cut its forecasts for the USA and other economies, downshifting global growth forecast for 2011 and 2012 to 3.9 per cent each as against previous predictions of 4.2 per cent and 4.6 per cent respectively. Societe Generale also cut its growth forecast for USA this year from 2.0 per cent to 1.6 per cent while reducing growth outlook for 2012 from 3.0 per cent to 1.8 per cent. The Standard & Poor’s 500 Index has lost more than $1 trillion since August 5 downgrade of USA’s AAA rating by Standard and Poor’s. The European economies have been enmeshed in sovereign debt crises and the governments are yet to agree on the best possible ways for the resolution of the crises.
Societe Generale’s review, the latest in a string of gloomy reports, succinctly captured the general concerns that "damage has already been done to the world economy, and the US and Europe are now growing at close to stall-speed." Although the report noted that current scenarios might not lead to outright economic recession, many analysts said further reversals in advanced economies may serve as trigger for global economic recession.
National economy
Nigeria also remains in the throes of the global and national financial crises with government trying to wriggle out of interventions made to secure failing banks. The Nigerian stock market has particularly remained sluggish and weak with the average year to date return hovering above two-digit negative points.
Global Intervention
However, financial services authorities have adopted proactive measures to strengthen the global financial system and relating national systems in the quest to create what they described as the ‘new global financial system’. Under the auspices of the Financial Stability Board (FSB), the global authority saddled with working of the new global financial system, Finance Ministers and Central Bank Governors have been reassessing capital adequacy, clearing and settlement and transactional rules to block loopholes and build additional capacities to withstand shocks. FSB coordinates the work of national financial authorities and international standard setting bodies as well as develops and promotes the implementation of effective regulatory, supervisory and other financial sector policies in the interest of financial stability. FSB brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts, thus it provides a wider global forum for dissertation off ideas.
Already, the G20 Finance Ministers and Central Bank Governors have irrevocably committed themselves to the realisation of the reform of the financial sector with the general consensus and agreement on the full implementation of the Basel III new standards for banks within the agreed timelines. The agreement on the Basel 111 rules marked a significant upscale in the efforts to deal with bubble capital and ensure banks are adequately capitalised to withstand economic shocks. The Basel III rules set new global regulatory standards on bank capital adequacy and liquidity. Based on earlier recommendation of the FSB, the Basel 111 Framework is expected to take effect from the beginning of 2013 and will be progressively phased in by 2019. These transitional arrangements are to ensure that Basel III can be implemented in all countries without impeding the economic recovery, thus all countries are expected to take the necessary steps to adapt the Basel III agreements to their national laws and regulations in time for an effective implementation in 2013.
Chairman of the Basel Committee on Banking Supervision and President of the Netherlands Bank, Mr. Nout Wellink, described the Basel III Framework as "a landmark achievement that will help protect financial stability and promote sustainable economic growth."
According to him, the higher levels of capital, combined with a global liquidity framework, will significantly reduce the probability and severity of banking crises in the future.
The highpoints of Basel 111 Framework included higher and better-quality capital, better risk coverage, introduction of a leverage ratio as a backstop to the risk-based requirement, measures to promote the build up of capital that can be drawn down in periods of stress, and the introduction of two global liquidity standards.
Wellink advised against misconceiving the Basel 111 and other global efforts as relevant only to the developed economies.
"Some view Basel III as a solution to a problem they did not cause and which did not affect them. It is true that the crisis had its roots in the United States, and through the imprudent use of complex securitisations by large, complex banks its devastating effects spread to other industrialised countries", Wellink said, adding: "The current debate over the use of contingent capital or the treatment of systemically important financial institutions ("SIFIs") might further reinforce the impression that Basel III only targets specific markets or banks. But this is only part of the story. If one looks beyond the ruinous fall-out from the crisis, a careful analysis reveals a series of fundamental shortcomings, any of which could affect all jurisdictions and banking systems."
According to him, some of the failures that characterised this crisis and which Basel III addresses include poor liquidity risk management and insufficient liquidity buffers, despite a global glut of liquidity; too much leverage in the banking system, combined with weak credit underwriting; bank capital that was of inadequate levels and of insufficient quality and serious shortcomings in corporate governance, risk management and market transparency.
The G20 November 2011 Summit would also consider ongoing policy work on systemically important financial institutions as scheduled in the FSB work programme for 2011 as well as implementation in an internationally consistent and non-discriminatory way of the FSB’s recommendations on OTC derivatives and on reducing reliance on credit rating agencies’ ratings. .
Also in another move that implies fundamental changes in the Over-the-Counter (OTC) market for derivatives, the Committee on Payment and Settlement Systems (CPSS) and the technical committee of the International Organisation of Securities Commissions (IOSCO) late August released for comment a report on the OTC derivatives data that should be collected, stored and disseminated by trade repositories (TRs). The report was sequel to recommendation by the Financial Stability Board (FSB) that the CPSS and IOSCO should consult with the authorities and the OTC Derivatives Regulators Forum in developing minimum data reporting requirements and standardised formats and the methodology and mechanism for data aggregation on a global basis.
Earlier, CPSS and IOSCO principles had issued new and more demanding international standards for payment, clearing and settlement systems. The new standards (called "principles") are designed to ensure that the essential infrastructure supporting global financial markets is even more robust and thus even better placed to withstand financial shocks than at present.
The new standards, are designed to apply to all systemically important payment systems, central securities depositories, securities settlement systems, central counterparties and trade repositories, collectively known as "financial market infrastructures" or "FMIs". These FMIs collectively record, clear and settle transactions in financial markets. When fully adopted, the new principles will replace the three existing sets of CPSS and CPSS-IOSCO standards, the Core principles for systemically important payment systems (2001); the Recommendations for securities settlement systems (2001); and the Recommendations for central counterparties (2004). According to CPSS and IOSCO, a single set of principles will provide greater consistency in the oversight and regulation of FMIs worldwide. "Robust and efficient FMIs help to ensure that markets continue to function effectively even in times of crisis. They are an essential prerequisite for financial stability," President and Chief Executive Officer of the Federal Reserve Bank of New York and CPSS Chairman, William Dudley underscored the importance of the new standards.
Compared with the current standards, the new principles introduce more demanding requirements in many important areas including the financial resources and risk management procedures an FMI uses to cope with the default of participants; the mitigation of operational risk; and the links and other interdependencies between FMIs through which operational and financial risks can spread.
Chairman of the Netherlands AFM and IOSCO’s Technical Committee, Hans Hoogervorst, noted that FMIs have generally performed well but there were need to incorporate lessons learnt from the recent crisis and from the years of more normal operation in new standards
"With these new principles, we believe we have produced a blueprint for the safety and stability of global financial infrastructure that will stand the test of time," Hoogervorst said.
National intervention
Already, Nigeria, which chairs the African Middle East Regional Committee (AMERC) of IOSCO, has reaffirmed its commitments to domesticating changes in international securities and transaction laws. Nigeria is a Signatory A to the IOSCO Memorandum, the premium category of membership for the global securities regulatory body.
Compliance with best practices
Head of Media, Securities and Exchange Commission (SEC), Mr. Lanre Oloyi, said Nigerian securities market regulator would stand by its international commitments and obligations.
According to him, given the leadership roles of Nigeria in the comity of securities regulators, Nigeria would make earnest moves to domesticate new global requirements while cooperating with the other jurisdictions to ensure the stability of the global market.
The global financial system is undoubtedly undergoing a rebirth but the definition of the global system would be determined by the willingness of national authorities to domesticate international standards and cooperate on enforcement of standards. The increasing internationalisation of the Nigerian economy comes with the obligation to synchronise Nigerian financial rules and regulations with the global standards. These prerequisites for internationalisation may mean more hurdles for Nigerian banks, capital market operators and other institutions.