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Lessons learnt from the global financial crisis

11/20/2008

THE key lesson to be learned from this global crisis is not more or less regulation but better regulation and focusing on how to get better regulation.

That’s the position of Professor Avinash Pers-aud, Chairman Intell-igence Capital Ltd., in an address to the 35th Caribbean Association of Indigenous Banks Con-ference held at the Lloyd Erskine Sandiford Con-ference Centre.

In his address covering “Global Financial Regula-tions: Trends, Risk and Opportunities for the Caribbean” Persaud said three things that he has not thought fully about in this crisis were brought to his attention.

Firstly, is the important role of national taxpayers, which he said given the financial environment last year taxes would have not been raised and if they were, the response received would be to say that it is so last century. However, the Professor said, “so now we have learnt the fundamental importance of national taxpayers”.

Noting that this first point was not relevant for the current discussion, Prof. Persaud said it does say something about the world of offshore banking centres, very important for the Caribbean and it does say something about the ability to do cross border banking.

“Both these (offshore and cross border banking) will be heavily affected as a result of this crisis, the realisation is that national taxpayers count,” he added. The next key thing the Professor learnt was, before the crisis there was a worry about the shadow banking system. He said that what this crisis has thought us is that banks are central, and this crisis did not start in the shadow banking system.

“At the centre of this crisis were the banks, were the regulated entities, they may try to move things around in unregulated parts and offshore parts, but ultimately it was the regulated banks,” informed the Chairman. Adding, “we think of the phase, ‘originate, rate, and relocate’ and that business model of banking has many flaws to it”.

The Professor informed the gathering of bankers that the banks that got into the biggest difficult were those who did not relocate assets, but instead kept them on the balance sheet and these banks also believe the rating agencies.

The fundamentals of this second point was that banks are creators of liquidity and they are central. Moreover, he instructed, we can worry about the shadow system, but actually the principle concern should be the banks.

Thirdly, is funding liquidity. This crisis started off not as a crisis of poor asset quality sub-prime represent 1 per cent of total debut around the world and the sub-prime that have gotten into trouble represents a further fraction of that 1 per cent.

“Yet it has brought down the global financial system and yet more damage has been done than banks and other lending agencies to global capital,” said Prof. Persaud.

The UK banking system is half nationalised, the European banking system will be half nationalised, how did that happen you may ask, it was on the funding liquidity side responded the Chairman.

Banks bought assets but funding was the problem, their short term funding, highly leverage short term funding that was the problem. Noting that the quality of the asset was also important, he ask to image assets worth 100 cents and if the credit problems are taken into account may be they would be worth 70 or 80 cents, but the company traded these assets at 20 cents.

Why? No one has the liquidity to fund these assets, so funding liquidity is a key lesson. (DH)

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