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WEALTH MANAGEMENT


“Contrary to popular belief, currency and banking crises usually do not appear out of the blue”


leading indicators were appreciation of the real exchange rate (relative to trend), a banking crisis, a decline in stock prices, a fall in exports, a high ratio of broad money to international reserves and a recession. Current-account indicators were the best of the pack for the annual indicators. So if we know the common grains of most financial


crises, why can’t we be smart and devise something that can stop a crisis before it hits? Unfortunately, these common grains have not led to common solutions to prevent a crisis, for several reasons. Despite the warning signals, the authorities believe that “this time is different” and are reluctant to act. There can be strong political disincentives domestically for politicians who take unpopular measures that slow economic growth. There is even a collective reluctance at the time of writing for the G-20 to address the inherent problems with the international monetary system and global imbalances, both of which are the likely kernels for the next financial crisis.


Focusing policy In the light of the past three years, many will argue that preventing financial crises has to be the real focus of policymakers going forward. But where should prevention be focused? Over the past 20 years, many emerging market economies have been told by the advanced economies and the supranational institutions that if only they improved their standards of policy- making – including adopting fiscal rules and inflation targeting frameworks, better debt management and the avoidance of dangerous debt structures – then they would avoid financial crises. How the world has changed. There have been various suggestions mooted to address the problems in the banking sector in


54 FAMILY OFFICE: ASIA TOMORROW


recent year. These have included reforming Wall Street compensation; improving the regulatory capital and liquidity requirements on banks; significantly increasing collateral requirements for globally traded financial products; and separating capital market banking from standard commercial banking. Those who favor more direct and indirect market discipline to prevent future banking crises (as opposed to regulatory intervention) have suggested that the following three instruments would be useful. First, impose more transparency, that is, force bank managers to disclose publicly various types of information that can be used by market participants for a better assessment of banks’ management. Second, change the liability structure of banks, for example, force bank managers to issue periodically subordinated debt. Third, use market information to improve the efficiency of supervision. To prevent an exchange rate crisis, policymakers


should opt for floating exchange rates and avoid a monetary union in the absence of an optimum currency area (the forthcoming EMU break-up will be a testament to this).


On a final note, it should be remembered that


financial crises over the past 60 years have continued to occur despite vigorous attempts to strengthen the international financial architecture and when our understanding about nominal variables, financial markets and banking structures has made enormous strides. Preventing future financial crises requires more than technical adjustments; it requires changing human nature, which is far harder.


Michael J. Oliver This article first appeared in FamilyOfficeGlobal magazine, issue 3.


15%


THE NUMBER OF CRISES OCCURRING OVER THE PAST 40 YEARS WITH ONE THIRD OR FEWER OF THE INDICATORS FLASHING A DANGER SIGNAL.


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