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Lehman collapse one year on: China bankers tackle the big issues
September 24, 2009, Thursday
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AS this month marks the one-year anniversary of the collapse of American bank Lehman Brothers - the biggest bankruptcy in US history - debate continues to rage about what must be done to avoid repeating the crisis.
Regulators, bankers and academics gathered in Shanghai to weigh in on the debate at the third annual China Bankers Forum on September 5.
While questions remain, the consensus among the participants was clear: regulatory oversight and governance need a major overhaul. As one speaker put it: "It's very clear that you need a healthy banking system in order to have a healthy economy."
In dissecting the massive challenge that lies ahead, the forum's participants covered five broad themes:
1. Global coordination
The first step, asserted Shen Liantao, a banking veteran and chief adviser at the China Banking Regulatory Committee (CBRC), requires looking at today's outdated regulatory frameworks from a new perspective.
Shen did that by borrowing a term more often associated with the Internet - Metcalfe's Law. Ever since the rapid rise of the Web, technology experts have used Metcalfe's Law to explain how the cross-connections of an IT network grow as the number of computers and users increases.
"Today's finance industry is a network," he said, noting that the current crisis is proof of how banking has become "interactive, complicated and interconnected."
In a similar vein, John McCormick, chairman of Royal Bank of Scotland Group in the Asia Pacific, noted: "Every aspect of our financial industry is intrinsically interconnected."
2. New risk era
Amid all the new-fangled and sophisticated financial tools, "one thing that has not developed is market discipline," noted Frank Newman, chairman of the board and CEO of the Shenzhen Development Bank. "And we have evidence that the market is not wise at all, so we need regulators."
The global derivatives market today is worth US$596 trillion, 12 times that of the global GDP, and it accounts for more than half of the entire finance industry, according to Shen. But, he says, it has become "so complicated that no one really understands it."
3. Pay on display
The financial crisis has not been bad for everyone. In 1999, executive remuneration at the top 10 banks in the US was US$31 billion. By 2008, it had more than doubled to US$75 billion, noted Shen.
In contrast, that same year, shareholders of these banks received US$17.5 billion of dividends. In other words, management earned more than four times more their shareholders.
It's not just the size of the pay packages that warrant attention, but also how and whether they are adequately linked to individual and corporate performance.
As Phil Rivett, global financial services assurance leader of PricewaterhouseCoopers, puts it, remuneration systems are too focused on the short term.
4. Building confidence
So how can the financial-services sector regain public confidence? "By continuing to seek ways to improve corporate governance standards and practices is the obvious answer," said Vincent Cheng, chairman of HSBC Asia Pacific.
5. Addressing imbalances
Guo Shuqing, chairman of China Construction Bank, observed: "A free and competitive market and American idealism have integrated very well in the US," he said. "It is implied that the American dream, symbolized by owning one's own home and car, can be attained through hard work."
That means addressing imbalances. According to figures cited during the forum, total debt in the US has grown from US$2.1 trillion in 1974 to US$52.5 trillion in 2008. The financial sector is the biggest debtor, accounting for about 32.5 percent of the total, with households at 26.3 percent and the commercial sector at 21.2 percent.
"The United States will need to go through a lengthy adjustment of long-term imbalance with household de-leveraging and will have to change the imbalanced growth pattern of 'over lending, over consumption'," said Zhu Min, executive vice president of the Bank of China Group.
(Reproduced with permission from Knowledge@Wharton, http://knowledgeatwharton.com.cn. Trustees of the University of Pennsylvania. All rights reserved. Shanghai Daily condensed the article.)
Regulators, bankers and academics gathered in Shanghai to weigh in on the debate at the third annual China Bankers Forum on September 5.
While questions remain, the consensus among the participants was clear: regulatory oversight and governance need a major overhaul. As one speaker put it: "It's very clear that you need a healthy banking system in order to have a healthy economy."
In dissecting the massive challenge that lies ahead, the forum's participants covered five broad themes:
1. Global coordination
The first step, asserted Shen Liantao, a banking veteran and chief adviser at the China Banking Regulatory Committee (CBRC), requires looking at today's outdated regulatory frameworks from a new perspective.
Shen did that by borrowing a term more often associated with the Internet - Metcalfe's Law. Ever since the rapid rise of the Web, technology experts have used Metcalfe's Law to explain how the cross-connections of an IT network grow as the number of computers and users increases.
"Today's finance industry is a network," he said, noting that the current crisis is proof of how banking has become "interactive, complicated and interconnected."
In a similar vein, John McCormick, chairman of Royal Bank of Scotland Group in the Asia Pacific, noted: "Every aspect of our financial industry is intrinsically interconnected."
2. New risk era
Amid all the new-fangled and sophisticated financial tools, "one thing that has not developed is market discipline," noted Frank Newman, chairman of the board and CEO of the Shenzhen Development Bank. "And we have evidence that the market is not wise at all, so we need regulators."
The global derivatives market today is worth US$596 trillion, 12 times that of the global GDP, and it accounts for more than half of the entire finance industry, according to Shen. But, he says, it has become "so complicated that no one really understands it."
3. Pay on display
The financial crisis has not been bad for everyone. In 1999, executive remuneration at the top 10 banks in the US was US$31 billion. By 2008, it had more than doubled to US$75 billion, noted Shen.
In contrast, that same year, shareholders of these banks received US$17.5 billion of dividends. In other words, management earned more than four times more their shareholders.
It's not just the size of the pay packages that warrant attention, but also how and whether they are adequately linked to individual and corporate performance.
As Phil Rivett, global financial services assurance leader of PricewaterhouseCoopers, puts it, remuneration systems are too focused on the short term.
4. Building confidence
So how can the financial-services sector regain public confidence? "By continuing to seek ways to improve corporate governance standards and practices is the obvious answer," said Vincent Cheng, chairman of HSBC Asia Pacific.
5. Addressing imbalances
Guo Shuqing, chairman of China Construction Bank, observed: "A free and competitive market and American idealism have integrated very well in the US," he said. "It is implied that the American dream, symbolized by owning one's own home and car, can be attained through hard work."
That means addressing imbalances. According to figures cited during the forum, total debt in the US has grown from US$2.1 trillion in 1974 to US$52.5 trillion in 2008. The financial sector is the biggest debtor, accounting for about 32.5 percent of the total, with households at 26.3 percent and the commercial sector at 21.2 percent.
"The United States will need to go through a lengthy adjustment of long-term imbalance with household de-leveraging and will have to change the imbalanced growth pattern of 'over lending, over consumption'," said Zhu Min, executive vice president of the Bank of China Group.
(Reproduced with permission from Knowledge@Wharton, http://knowledgeatwharton.com.cn. Trustees of the University of Pennsylvania. All rights reserved. Shanghai Daily condensed the article.)
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