Despite signs that a recovery is well underway in a number of major economies, doubts remain as to whether the bonus culture, the propensity for investment banks to conjure up complex instruments for resale to the buyside “at the expense of the public good”, or the difference between what the emerging and developed markets view as essential tools in attracting investors into respective areas, would ever be seriously addressed if it meant ditching short-term gain.
Joseph Yam, chief executive officer of the Hong Kong Monetary Authority, said the “conflict” between the interests of financial intermediaries “in maximising profits” in the near term, and its supervision by regulators, was rarely discussed despite its reform being an economic necessity “and in the public interest”.
“It’s not talked about it, but this structural conflict was the making of the crisis. Finance brokers were rewarded handsomely for their efforts through large bonuses, but this has led to greater financial inefficiency and not, as intended, to a reduction in the cost of capital,” the regulator said at this year’s Sibos event in Hong Kong.
According to Mr Yam, the drive to financial innovation in the run-up to the crisis “was built on a serious erosion of credit standards”, especially the development of securitised investment products, which regulators largely failed to anticipate. He added: “Investors then lost money and borrowers suddenly found money hard to come by.”
In the future, risks need to be managed through a “simple and sensible approach” in the development of the financial system and this was especially true for emerging markets’ ambitions in attracting major players to their centres.
“For some emerging markets, it shouldn’t be about getting top brand (financial) names to set up shop there, because some financial instruments might be quite toxic, as we’ve seen. Often fear or greed fed by misinformation and manipulation takes hold to produce volatility beyond prudent measures,” Mr Yam added. “I’m concerned about the willingness of some jurisdictions in their attempt to attract household finance houses that they will promulgate rules which could be unsustainable or unsuitable to domestic circumstances.”
On regulation, Peter Sands, chief executive officer at Standard Chartered Bank, called on the banking industry in Asia and elsewhere not to rely on regulators “to restrain market exuberance”, otherwise another crisis would be inevitable, he said. “You need the market to apply some market restraint on its own.”
Mr Sands admitted some business models of banks “were not sustainable” any more.
