IMF's Caruana calls for financial integration and sound risk management
Jaime Caruana, director of monetary and capital markets at the International Monetary Fund, says these are the ingredients of more strategic opportunities for banks in his keynote speech at The Asian Banker Summit this year.
Jaime Caruana, former chairman Of The Basel Committee on Banking Supervision, former governor Of The Bank Of Spain and currently director, Monetary & Capital Markets Department, International Monetary Fund, delivering the keynote speech at The Asian Banker Summit 2007.
“Integration, properly managed, brings tangible benefits.” This was the message Jaime Caruana, director of monetary and capital markets at the International Monetary Fund, stressed during his keynote speech at the close of The Asian Banker Summit, held from March 25 - 28 in Jakarta, Indonesia. Portraying Asia against the backdrop of increasingly sophisticated risk management practices, heightened complexity in the financial markets and stronger interaction between the real and the financial economy, he forecasts greater integration between the financial sector and the real economy leading to deeper regulatory integration and cooperation.
Citing Spain as an example of a "country that has benefited enormously from integration”, the native Spaniard shares, “We thought that integration was the proper answer to rapid globalisation. We embraced the idea that further integration was not the problem but the solution, and this idea was able to catalyse changes and reforms in the right direction."
Though Europe might seem far removed from the region, he points out, “Asia’s financial integration with the world is well advanced” and as a result, advocates that Asia enhance its financial integration. “While changes in macroeconomic policies are key in addressing this issue, improved intermediation of savings in the region by building stronger financial systems and increasing integration will play an important role as well,” he adds, claiming that the long list of benefits include growth, financial stability, and more strategic opportunities for banks. “In Europe, the European Central Bank estimates that the integration of the bond and equity markets alone has contributed over 1 percent of GDP,” he illustrated, “or approximately €100 billion, over a ten year period.”
“While trade openness, as measured by the ratio of goods and services trade to GDP, has increased in nearly all countries in Asia and, on average, is higher than in most other regions of the world, regional financial integration has been more sluggish,” he says, especially when compared with its more advanced financial integration with the world. Asia’s high savings rate of 30 percent of average GDP, is a sharp contrast against the world average of 20 percent. Ironically, the savings flow to the west, then back to Asia in the form of loans, a point Cesar Enrique Aguinaldo Virata, former president of the Bankers' Association of the Philippines (and co-winner of The Asian Banker Lifetime Achievement Award) had also made earlier, during the awards ceremony on Sunday night.
Caruana is optimistic, though, that the pace will pick up since Asian banks, especially stronger ones, will benefit from the trend despite new challenges emerging as a result. “Firstly, integration will lead to greater competition and therefore pressure to improve efficiency, secondly, strong and well-managed banks will have greater opportunities for growth, and as a consequence risk management will become an increasingly strategic element to improve the competitive advantage of banks and thirdly, greater integration will bring new risks that banks will need to learn to manage properly,” he notes.
“In such a setting, with increased financial integration, state-of-the-art risk management can become an important competitive advantage for banks,” he continues. While Caruana, no longer in a role on the Basel Committee, was reluctant to discuss the Basel II accord that he presided over, he did note that Basel II gave banks an opportunity to revamp their risk management systems, an advantage that is only now being realised in some of the more advanced institutions and will be important to a future scenario of increasing financial integration. But challenges still remain, namely the need to integrate qualitative risk, better telecommunications, and enhanced government systems. Hence, “sound risk management, governance and disclosure practices are a crucial contribution of financial institutions to maintaining the confidence and integrity of capital and financial markets,” he shares, bringing up one of the issues mooted during The Risk Management and Governance Conference.
Further, more reforms are needed in areas such as institutional investors, corporate governance, and financial reporting, especially corporate governance, he adds. “Shortcomings in the governance of banks not only lowers returns to shareholders, but can also destabilise the financial system,” he cautions. Hence, “improved risk management systems in large international banks will need to be based on an integrated view of risks, as well as be tuned to country-specific circumstances and structures.” His view was earlier echoed by chairman of The Risk Management and Governance Conference, Sir Brian Pitman, senior advisor to Morgan Stanley and former Chairman of Lloyds TSB, who emphasised the extreme importance of top management’s role in this area.
Financial regulators too, should not rest on their laurels. “Supervisors recognise that they have to go beyond a compliance or ‘checklist’ based approach in supervision to one that requires a thorough understanding of an institution’s activities and its risks,” he shares, but in a world of increasing integration, this is insufficient. “Risk-based supervision and the capacity to understand and effectively supervise risks more generally should be the focus of supervisors going forward,” he notes, adding that as the financial industry embraces more financial giants and deeper cross-border linkage, Asian regulators should also practise more consolidated supervision, cross-border cooperation and convergent approaches.
A good round of applause from delegates after the keynote speech session.
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