The New Global Order in the Financial Market

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The most recent G20 (19 nations and EU) Summit meeting was held in Seoul on Nov 11 & 12 and was the 5th meeting of the G20 Heads of Government to discuss the global financial system and the world economy. The theme of the Summit was "G-20's Role as an important forum for international economic cooperation and the Post-Crisis World." Over the past 2 years, G-20 has evolved rapidly into effective crisis management steering group for the global economy and financial system. The effects of the recent economic and financial crisis of 2008/2009 had led economies around the world to hope for some decisive action for reforms and stability and to avert another crisis. This has resulted in Governments seeking agreement on international policy coordination on strengthening transparency, enhancing sound regulation, promoting integrity in financial markets, reforming Financing Institutions, safeguarding ongoing recovery, restoring fiscal and financial sustainability, balancing global growth and opening trade Policy. The US has been central to this global economic order whilst having to deal with a fragile economy, low growth, bulging deficits and near double digit unemployment. Its voice and recent action have not been taken seriously and supported back home by its Washington law makers, her trade surplus partners and certainly not China. During the Summit, it was inevitable that the stage would be set for the locking of horns between the US and China, the world's two biggest economies. Obama used this opportunity to raise the issue of China's undervalued currency, causing unsustainable trade imbalances and was expecting to gain support from the other advanced economies impacted but failed to do so as it was deflected by the recent US Federal Reserve's decision of a US$ 600bn stimulus into its economy. Criticism was abound on US's action to buy UST bonds which will drive down the yield and the interest rates across debt markets that are linked to UST rates. In effect the US is printing billions of Dollars thus weakening the Dollar and stimulating export growth. It risks pushing oil and commodity prices up with floods of money seeking higher yields in the emerging markets causing higher interest rates and robust growth in the respective countries. In turn, this pushes up currencies to levels higher than some of the Government's desire, leading to some countries resisting its currency appreciating which causes tensions between these countries and the US. This is the second quantitative easing in US since Nov 2008. China presented counter proposals calling on US to adopt responsible policies for a stable Dollar and also demanded global resistance to trade barriers that would trigger high commodity prices and volatile financial markets. The Summit was broad-based and disappointing as G20 leaders pledged and agreed on moving forward towards a more flexible market driven exchange rate mechanism to reflect economic realities and refrain from revaluation of currencies. G20 Finance Ministers were tasked by 30 June 2011 to draft non-binding "indicative" policy guidelines conducive to addressing excessive imbalances to be maintained at sustainable levels between the surplus and deficit nations. The G20 Summit was always an exercise in damage limitation and the advantages for vague statement plays for time to allow countries to move at their own pace. However, by failing to agree on numerical targets would cast doubt on the any credibility effort required for a framework for a Strong, Sustainable and Balanced Growth. Any action one can expect to see or hope for will be made known only by the middle of next year. In the meantime, global economic and currency tensions will still remain, with the weakened USD opening the floodgates, resulting the inflow of funds flowing into Asia and other emerging markets to seek higher yields. G20 said it was appropriate for countries to adopt capital controls. However, the hot flow of funds could trigger asset bubbles and inflationary pressures in these countries while the Euro zone, especially the advanced economies. continues to address their bad debts issues. US must aim to reduce its trade deficit and to improve its competitiveness in the industrial and technological sectors. Clouds of uncertainty hovers on the recovery path as it was in plain view with China's growing assertiveness through a variety of International forums such as the failed Copenhagen climate Summit last year as China has its own agenda. The World will be watching warily for events on the monetary front between an undervalued Chinese currency against a devalued USD. Any further intervention to devalue their currency from underlying market economics will induce other countries to follow suit to protect their own export growth as Brazil has indicated to do so. In the meantime, any trade sanctions that the US may impose will be fraught with political and economic risks. Trade barriers and currency wars will prolong the Global depression and although nations can defuse a standoff, the possibility of this currency war still remains. World leaders have missed on the pre-emptive chance to act together on a macroeconomic level. But this should not be overshadowed by their latest ambitious achievements of a package to reform the IMF and an agreement on Basel III that were attained in a short time frame (as noted below with some other Summit Agenda items)

G20 Seoul Summit Summary:

Framework for Strong, Sustainable, and Balanced Global Growth

Global solutions and coordinated policy to address uneven growth and widening imbalance. Resist protectionism. Global partnership to build the capacity to achieve and balance global growth by focusing on concrete measures in the Millennium Development Goals (MDGs) to make significant changes to enhance living standards in developing countries particularly through the development of infrastructure. Seoul recommended the need to establish a development framework to narrow the gap between the advanced and world's poorest nations. This was approved by the participating nations. It contains nine key pillars which will need action plan to target the shortcomings of some 170 nations. This includes the enhancing of food security coherence policy, agricultural productivity and a training strategy to improve employment skills development

Reforming the Mandate, Mission, and Governance of the IMF

At the G20 Pittsburg Summit, President Obama led and proposed the call to reform to include dynamic emerging-markets and the developing countries to be more represented in IMF and its Executive Board so that it is more representative of today's Global economy. This will enhance IMF's credibility and effectiveness to form a stronger institution in promoting and achieving Global financial stability and growth. The advanced European countries agreed to relinquish two of their eight seats to provide a greater voice to these countries. The reform also moves BRIC nations (Brazil, China, India and Russia) into IMF top 10 shareholders to account for the size of their economies. It includes the protection of the voting share of the poorest countries and also maintaining US veto over key IMF decisions.

Enhancing Global Financial safety nets

The IMF Governance made significant reforms to its lending facilities to include the establishment of the Precautionary Credit Line and the enhancement to its Flexible Credit Line, both of which are new measures to help the prevention of crisis spreading against external shocks by allowing strongly-performing countries to insure themselves during future crisis. Leaders and some citizens disagree on any proposal to 'lenders of last resort' as they believe this would articulate moral hazards. However, it is essential to strengthen the global financial safety net by doubling the size of the Fund to bring the IMF quotas to be like a 'lender of last resort' and act as a mechanism to mobilize the IMF financing for special drawing rights (SDR) and for any temporary swap arrangements. The reform should look to include the need to integrate better its surveillance and financing role.

Strengthening Global Financial Regulatory framework

The Financial Stability Board (FSB) has been tasked to develop capital and liquidity standards for systemically important financial institutions (SIFI) to prevent excessive risk taking and was asked to suggest appropriate resolution tools for effective supervision of the SIFIs to mitigate potential systemic failures, moral hazards, 'too big to fail' and to ensure its commitment to the World Bank Financial Sector Assessment Program.

Global Financial Inclusion Action Plan and Flexible SME Finance Framework

Expand opportunities to poor households, small and medium enterprise to access global financial services Harmonized framework for EU for national restructuring and improved control in Europe to be established as of 1 Jan 2011to ensure stability of the financial markets.

Exchange Rate Policy

The discussion from a nominal exchange rate to the rebalancing of current account issue was discussed. G20 leaders pledged to work together to avoid "competitive" devaluations of currencies and draw up guidelines by 30 June 2011 to address measures on trade imbalances

Doha Development Round

These are the principal documents agreed by WTO member Governments at important stages in the trade negotiations. Commitment to promptly bring to a successful completion of Doha development mandate and that representatives must intensify and expand in 2011 for the outcome to be reached and commit to seek ratification where necessary to resist protectionist measures. Landmark free trade accord (FTA) sought by the US with South Korea was not achieve in Seoul. Trade and investment liberalisation has been a key economic foreign trade policy. President Obama stressed shared values on democracy and tolerance with Indonesia and India, implying that Asia would do better to embrace this model rather than China's version of capitalism. As the CEO of Credit Suisse, we need to continue to maintain our strong position as one of the best capitalised global banks with a Basel II Tier 1 ratio of 16.7%. We include our dividend accruals in our Tier 1 ratio in line with the historic payout. Under the new tighter Swiss Banking regulation for a proposed first capital surcharge on 'too big to fail" banks, Credit Suisse is required to meet its capital holdings to almost double the minimum capital adequacy by at least 19% of assets, weighted according to risk. Credit Suisse has achieved this including a counter-cyclical capital buffer, using a conservative organic growth for a common equity ratio to at least 10% by 2019 as compared to the 7% required under Basel III for other banks. In line with Basle requirements, we use incremental default risk adjustments to include credit risks held in our trading books. We continue to make disciplined investments in a global platform and have reduced our proprietary business and refocused our business strategy to a more flow based model in the emerging markets which should generate higher revenues and also mitigate some impact from any incremental default risk relating to credit inventories. On our derivative business that has uncollateralized exposures, these will either mature or be hedged over the next few years. We also concentrate on fixed income, underwriting and advisory business which is yielding high returns and achieving good solid performance reflecting our improving competitive position. We will keep abreast of developments on an ongoing basis and will move quickly to take advantage of business opportunities if considered prudent and in keeping with our strategy. Likewise, we will closely monitor currency exposures and will take appropriate action to maximise gains and to minimise potential losses. We continue to operate on a high standard of corporate governance, including liquidity management, accounting, audit and lending practices. We also ensure that proper supervision and expertise is applied by our managers and staff and to equip the organization with appropriate Risk Measurement tools to capture trade, operational and counterparty risks, in addition to the capture of securitisation and warehousing on and off balance sheet. We have compensation and profit sharing schemes that are based on performance measured and risk adjusted over the business cycle rather than short term risk taking. Other than external credit ratings, we also use in house measurements ratings. We need to increase the direct trading via centralised exchanges as this will quality for a zero risk weight for counterparty risk exposure and avoid the build up of excess leverage which can lead to deleveraging 'credit crunch' in a crisis situation. We must continue to ensure the capture of effective information with regard to open, unmatched positions and currency exposure and it remains highly prudent that we continue to adjust our business strategy and prepare ourselves ahead of current and future market uncertainties to avoid adverse contagion risks.
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