Home » Opinion » China Knowledge
Lesson from financial crisis: Serve people, not bankers and banks
June 27, 2013, Thursday
|
Print Edition
Print Edition
WHAT lessons can be drawn from the global financial crisis nearly five years after the fall of Lehman Brothers? That was the topic debated by a panel of top financial executives from Asia at the recent Wharton Global Forum in Tokyo. The discussion, led by Wharton finance professor Franklin Allen, explored potential lessons, as well as the potential risks, still lurking in the global financial system.
As a private equity (PE) practitioner "working in the trenches," Richard Folsom, representative partner for Advantage Partners, said the first lesson he would point to is the fact that companies have managed to emerge ? even from a once-in-a century financial crisis ? with profitability intact.
The second lesson: When sound underwriting and due diligence are neglected, financial crises ensue. "The lesson is that informed investors or underwriters can make money in any market, including recessionary environments, and will have much smaller loss ratios in times of crisis," Folsom said.
From the point of view of a consultant working mostly with banks, McKinsey director Keiko Honda said one lingering question is why Japanese banks managed to survive the crisis in relatively good shape.
The Japanese banks have fared well because they did a good job of managing nonperforming loans and because they had already undergone a major consolidation following the bursting of Japan's bubble and the Asian financial crisis in the late 1990s, Honda noted. As they consolidated, "Japanese banks did extensive cost cutting."
According to Jon Kindred, president and CEO of Morgan Stanley Japan Holdings, the crisis impressed "significant lessons" on financial institutions, policymakers and regulators. The most fundamental is an obvious, but apparently overlooked, truth: "Large financial institutions exist to serve their clients," Kindred said, rather than just to suit themselves. Industries and regulators need to also fully come to grips with today's complex levels of interconnectedness.
The deepening complexity and global nature of the financial world has made products and systems more difficult to understand, Kindred added. By the time the financial crisis hit, derivatives had become opaque, unclear and hard for regulators to analyze. Since derivatives have become a critical tool for financing, the market is now being made more transparent.
Signs of adjustment
At the same time, there is a growing recognition of the risks and relationships between leverage and liquidity. Leverage had gotten "way too big," Kindred said, as banks' balance sheets ballooned in size. "High leverage and low liquidity of assets is a dangerous brew," he noted. Much of the debt was confined to financial institutions that have now been reprimanded, reminding them that their purpose is to serve the real economy, not just to move money around.
Such issues ultimately hinge on the culture and ethics of the financial institutions and the bodies that regulate them. "Overall governance structures need to be changed, and that clearly has been happening," Kindred said, pointing to the higher capital requirements required under Basel III.
Masanori Mochida, president of Goldman Sachs Japan, was less rosy in assessing the lessons drawn from the crisis, despite a more acute awareness now of the need for better risk management. "As a bubble continues to grow, people tend to become more and more confident and believe, ?This time is different.' We've seen this again and again."
What came as a big surprise was the recognition that even firms with low leverage and huge scale can be exposed to huge risks. Goldman Sachs' conservative approach to risk management involved keeping cash on hand to ensure its capital was adequate even in a "stress environment," Mochida noted.
Like Mochida, Weijian Shan, CEO and chairman of PE firm PAG Asia, was skeptical about the financial industry's propensity for learning from crises. After all, many of the lessons being learned this time around were driven home in Asia during the regional financial crisis of the late 1990s, he stated. "Western banks don't know any better than their Eastern counterparts," even though the Asian banks largely derived their own lessons from the West and the International Monetary Fund as they cleaned up their balance sheets and began imposing stronger risk management regimes following the Asian crisis.
At the same time, though, there seems to be a growing disconnect between financial markets and the real economy, Allen stated. "Financial markets have been booming, but in the real economy, growth trends are very tepid in most of the world," he said. "Are we going through another session of boom and bubble in the stock market, and is it likely to burst?"
A growing disconnect
In Japan, Folsom noted, the key to restoring growth in the real economy will be structural reforms, or the so-called "third arrow" of Prime Minister Shinzo Abe's economic plans.
Kindred said his discussions with Japanese leadership suggest that they have a strong will to push ahead with reforms, and are well aware that if they don't, any market gains will be reversed.
The Asian financial crisis drove home the crucial nature of structural reforms, noted Shan. That fiasco resulted mainly from structural deficiencies and problems in the economy.
The massive quantitative easing prevailing at the time suggests that governments are not adequately addressing the risks of a future financial crisis, noted Kindred, who views sovereign risks as a "massive boil-over" likely to explode. "At some point, it has to be addressed on the political level. There have to be structural reforms so that the debt can come down."
Adapted from China Knowledge@Wharton,http://www.knowledgeatwharton.com.cn. To read the original, please visit: http://www.knowledgeatwharton.com.cn/index.cfm?fa=article&articleid=3285
As a private equity (PE) practitioner "working in the trenches," Richard Folsom, representative partner for Advantage Partners, said the first lesson he would point to is the fact that companies have managed to emerge ? even from a once-in-a century financial crisis ? with profitability intact.
The second lesson: When sound underwriting and due diligence are neglected, financial crises ensue. "The lesson is that informed investors or underwriters can make money in any market, including recessionary environments, and will have much smaller loss ratios in times of crisis," Folsom said.
From the point of view of a consultant working mostly with banks, McKinsey director Keiko Honda said one lingering question is why Japanese banks managed to survive the crisis in relatively good shape.
The Japanese banks have fared well because they did a good job of managing nonperforming loans and because they had already undergone a major consolidation following the bursting of Japan's bubble and the Asian financial crisis in the late 1990s, Honda noted. As they consolidated, "Japanese banks did extensive cost cutting."
According to Jon Kindred, president and CEO of Morgan Stanley Japan Holdings, the crisis impressed "significant lessons" on financial institutions, policymakers and regulators. The most fundamental is an obvious, but apparently overlooked, truth: "Large financial institutions exist to serve their clients," Kindred said, rather than just to suit themselves. Industries and regulators need to also fully come to grips with today's complex levels of interconnectedness.
The deepening complexity and global nature of the financial world has made products and systems more difficult to understand, Kindred added. By the time the financial crisis hit, derivatives had become opaque, unclear and hard for regulators to analyze. Since derivatives have become a critical tool for financing, the market is now being made more transparent.
Signs of adjustment
At the same time, there is a growing recognition of the risks and relationships between leverage and liquidity. Leverage had gotten "way too big," Kindred said, as banks' balance sheets ballooned in size. "High leverage and low liquidity of assets is a dangerous brew," he noted. Much of the debt was confined to financial institutions that have now been reprimanded, reminding them that their purpose is to serve the real economy, not just to move money around.
Such issues ultimately hinge on the culture and ethics of the financial institutions and the bodies that regulate them. "Overall governance structures need to be changed, and that clearly has been happening," Kindred said, pointing to the higher capital requirements required under Basel III.
Masanori Mochida, president of Goldman Sachs Japan, was less rosy in assessing the lessons drawn from the crisis, despite a more acute awareness now of the need for better risk management. "As a bubble continues to grow, people tend to become more and more confident and believe, ?This time is different.' We've seen this again and again."
What came as a big surprise was the recognition that even firms with low leverage and huge scale can be exposed to huge risks. Goldman Sachs' conservative approach to risk management involved keeping cash on hand to ensure its capital was adequate even in a "stress environment," Mochida noted.
Like Mochida, Weijian Shan, CEO and chairman of PE firm PAG Asia, was skeptical about the financial industry's propensity for learning from crises. After all, many of the lessons being learned this time around were driven home in Asia during the regional financial crisis of the late 1990s, he stated. "Western banks don't know any better than their Eastern counterparts," even though the Asian banks largely derived their own lessons from the West and the International Monetary Fund as they cleaned up their balance sheets and began imposing stronger risk management regimes following the Asian crisis.
At the same time, though, there seems to be a growing disconnect between financial markets and the real economy, Allen stated. "Financial markets have been booming, but in the real economy, growth trends are very tepid in most of the world," he said. "Are we going through another session of boom and bubble in the stock market, and is it likely to burst?"
A growing disconnect
In Japan, Folsom noted, the key to restoring growth in the real economy will be structural reforms, or the so-called "third arrow" of Prime Minister Shinzo Abe's economic plans.
Kindred said his discussions with Japanese leadership suggest that they have a strong will to push ahead with reforms, and are well aware that if they don't, any market gains will be reversed.
The Asian financial crisis drove home the crucial nature of structural reforms, noted Shan. That fiasco resulted mainly from structural deficiencies and problems in the economy.
The massive quantitative easing prevailing at the time suggests that governments are not adequately addressing the risks of a future financial crisis, noted Kindred, who views sovereign risks as a "massive boil-over" likely to explode. "At some point, it has to be addressed on the political level. There have to be structural reforms so that the debt can come down."
Adapted from China Knowledge@Wharton,http://www.knowledgeatwharton.com.cn. To read the original, please visit: http://www.knowledgeatwharton.com.cn/index.cfm?fa=article&articleid=3285
- About Us
- |
- Terms of Use
- |
-
RSS - |
- Privacy Policy
- |
- Contact Us
- |
- Shanghai Call Center: 962288
- |
- Tip-off hotline: 52920043
- 沪ICP证：沪ICP备05050403号-1
- |
- 互联网新闻信息服务许可证：31120180004
- |
- 网络视听许可证：0909346
- |
- 广播电视节目制作许可证：沪字第354号
- |
- 增值电信业务经营许可证：沪B2-20120012
Copyright © 1999- Shanghai Daily. All rights reserved.Preferably viewed with Internet Explorer 8 or newer browsers.
