1 December 2010
“A Globalized World - Post Crisis: financial regulation and convergence in the European and US models.”
I concluded my previous talk at CIAR, just prior to the financial crisis in 2007, by a quotation from an American musical “The Man of La Mancha” from Dale Wasserman (played in NY in 2002)
"Who knows where madness lies. Perhaps to be too practical is madness, too much sanity may be madness, madness of all is to see life as it is and not as it should be, as the world will be the better for this, that one man covered with scars still strive to reach the unreachable stars."
Yes those stars belong to the concrete world and are challenging each of us individually and collectively, starting from here at Cornell specially today as at the end of 2010 we are all facing the tremendous challenge of a new world structurally changed by 4 independent factors:
- By the explosive development of the BRIC countries, long announced but not expected so soon & so strong,
- By the globalization that, through technology, has made the world not “flat” but reachable in its profound diversity
- By the demographic imbalance between the young generation and the older one, in the western world and also in China
- and finally, quite obviously, by this current, historical financial crisis that came from unregulated market forces based on the dream of politicians, supervisors, and the financial industry itself. A dream that, although contrary to common sense, financial technologies, combined with competition, would eliminate the traditional series of economical cycles;
Yes we are living an extraordinary acceleration of world structures and functioning. Lets speak first about the fundamentals of this crisis,
then about globalization vs territorial issues
illustrated by the European challenges,
and finally about our common US-EU responsibilities.
1 -First- An historical crisis
This crisis has had 2 dimensions: first the exercise of responsibility at the individual, institutional, governmental levels created a crisis of individual and collective ethics. The nightmare of the combined effect of technologies and competition replaced the common sense responsibilities and captured public authorities, regulators and even financial surveillance.
The second dimension has been the gap between the globalization of markets forces, finance and economies and the national frameworks of rules: internationalization is lagging behind globalization. This asymmetry is a major source of risk and dysfunction in the economy. A healthy competition should not be based on competition between rules and regulatory frameworks. It needs transparent and level playing fields and to avoid such practices as Lehman arbitraging US-UK accounting rules on derivatives instruments to hide capital ratio constraints in the US at the consolidated level.
We can understand the anger of citizens after the tremendous financial failure and accumulation of human errors from the regulatory circle to the financial industry including the buy side and distribution of financial instruments including subprime credits. But this anger should not drive political authorities to overreact and blur the real lessons to be learned. This is where profound academic work is still needed to highlight and understand better, not just the causes of this crisis but why the decisional process at the regulatory and financial institutions level was frozen and failed…, all the while facing a risky bubble obvious since 2005.
It is clear that in this global world, finance plays a key role and is instrumental in accompanying the expansion and growth of the global economy. Globalization by financial means, is leveraging global resources and creating value for the world. At the same time, it is generating huge complexities for the real economy-- meaning industries. Finance has a challenging mission to cover those risks, but not through opaque and complex instruments, as was the case before the crisis. Instead, through simple and transparent instruments…That is our challenge today. It will require a lot of research, it will require academic work, and it will require innovation!
But convergent global rules means global governance. How is this feasible? What are the consequences on this world of regions under construction?
2- The answer is from globalization to a sound convergent internationalization process.
One lesson this crisis has demonstrated is that a world structured just by nations competing is sub-optimal and dangerous. The existing regulatory mechanisms and institutions: the GATT, IMF, the World Bank or the financial stability committee, are not sufficient.
The world of regions has been an important structural step to rebalance the world and address asymmetry between globality and internationalization, market forces vs international politics. This world however is evolving quickly. In fact, in less than 30 years, it has evolved from a US driven unilateral structure towards a multi-polar world at first centered on the US imperium hub, but now moving gradually towards spokes of peer regions centered around a global governance hub. This hub is led by the G20 and the Financial stability board, the FSB, and is anchored on 3 pillars: the IMF, the Basle committee for prudential rules, and IOSCO for financial and markets rules.
From our European experience we know that this evolution will not be easy as each region will have to give up part of its power to the center. But wishful thinking and intentions will not be enough to progress and this is probably the reason why France’s President Sarkozy has been so instrumental in the creation of the G20 … In order to arbitrate between this new balance of powers, the world will need not just negotiating powers but leaders that will be able to share a vision driven by what could be a common understanding of global general interest…our unreachable stars that we have to fight for, that we have to strive for!
3-Our European case, is an illustration of one “region” under construction.
In this post crisis world of regions, Europe faces a specific challenge. We have no other choice than to integrate and leverage what is today the number one economy by GDP standards . Individually, France, England, Germany and the other member states are not powerful enough to be around the global table individually. Triggered by the US after the world war II, for more than 50 years, we Europeans have been chasing an historical dream started with Charlemagne in the 9th century.. We, Europe, are not just a region. .. We are much more than that, although not yet or, perhaps never, a federation. Therefore, we must invent a new type of multi-state governance. Something new built up from a very pragmatic bottom-up approach that has been punctuated by crises as you can read in today’s papers through Greece, Portugal, Ireland, …But the nature of these sovereign debt crises is not very different from America’s 46 States in deficit today. The only difference is governance…and again, we Europeans have no other choice than to find solutions. We did it last summer for Greece, it will be done for Ireland & Portugal. The Euro is clearly an asset. Its governance is being progressively adapted to the needs via subtle compromises between national and European power.
Our European strategy over all has 2 priorities , internal harmonization and global compatibility:
- the first priority is to accelerate the construction of our internal market facilitated by a sound financial industry built on trust and on harmonized rules. We must be as efficient in our market organization from London to Warsaw as the US is from New York to San Francisco. That is our utmost priority.
- The second is global compatibility. It means that in Europe we have to build up operational financial conditions for a domestic area of 500 million citizens with harmonized legal frameworks that we call “directives” while simultaneously assuring that this framework is built up on principles that are compatible with global standards.
Today’s financial crisis has accelerated some decisions driven by common sense but temporarily blocked by short term categorical interests. Now the backbone is strengthening and begins to be in place. Europe is progressively perceived from abroad as a coherent virtual financial center articulated through a network of territorial financial centers, London, Paris , Frankfurt, Madrid, Milan etc. .These financial centers are not just in competition but are leveraging our diversities and bringing the financial services close to its users, meaning the issuers, SMEntreprises, and investors.
This back bone is in the process of structuring itself around clear functions :
- an EU governance driven by the European Commission and the Parliament
- a common financial rule book derived from an impressive set of directives about the organization of the market (MIFID), prudential rules in banking and insurance ( CRD3 & Solvency2), market abuses and transparency…
- a common framework of European regulators and surveillance bodies articulated from the European to the local level in such a way to ensure the implementation of common rules through European binding powers and the efficiency of local expertise and prudential hands on experience avoiding bureaucratic central bodies. This new regulatory governance will start in January 2011,
- a coherent framework of market infrastructures : payment systems, central depositories for securities, Central Clearing Platforms CCP, for the cash market and progressively for the derivative market. In this domain we are still fragmented as the European strategy had counted on market forces to consolidate this eco system, but it failed. A new set of legal instruments are now under discussion between the European Commission and the financial industry to define common principles for the organization and the consolidation process of those needed market infrastructures based on common securities law ( SLD) and that way to reach the actual level of efficiency that exists in the US.
4- The US and the EU: our common responsibilities
In front of the rest of the world the US & the EU share a huge responsibility in the way finance is sustainable and how it will fulfill its function in financing the real economy, for 2 reasons : firstly because of our combined US and EU market share, more than 75% of the world financial markets and secondly because this crisis started in the US and propagated mainly in Europe through the incredible interconnectivity of the financial industry . Based on the G20 road map, it is then necessary for both parties to address in similar ways the lessons of the crisis, either through the Dodd Franck Act or through the sets of ad hoc European directives or regulation.
In this dialogue we must integrate a major fact: our economies are not financed through the same model: in the US, the market is financing the economy by around 75 % while it is exactly the reverse in Europe, where the banks have the leading role.
Despite our different contexts, The US and the EU must address common issues through compatible and convergent solutions :
- how to rebalance the regulated market vs the non regulated market ( cash vs OTC?);
- how to define the right level of transparency in pricing mechanisms;
- how to disclose risk structures or concentration, a hedge fund issue, in order to enhance the surveillance mechanism;
- how to define the right level of stability ( 100% stability meaning death !) and how to cover the remaining risk at the best collective social cost between the cost of capital vs the cost of surveillance;
- and finally how to define common accounting principles and address the difficult issue of short termism related to too much mark to market value as the definition of fair value.
Based on those answers our both platform will reach an optimum level of compatibility and then will be able to discuss to go a step further based on mutual recognition.
On all those issues intense discussions are held between the European Commission and the US regulatory bodies. France, through Paris Europlace the French financial center, is very active in its contributions articulated to facilitate this difficult problematic. It tries to identify the best criteria to reach some kind of compromises triggered by a common understanding of the general interest.
But in the end, the key will not be just institutional reforms and technical negotiations. It will be about values & ethics as the crisis has been a crisis of values.
And so, here we are back to Cornell and this prestigious CIAR gala dinner. Friendship is very important but most importantly is the values that you will learn and practice through your professors, your research and your social activities. CIAR is a small world, a world in which you can understand and address what we have in common and can articulate the way through convergence enriched by our diversities.
To conclude,
let me quote from a major Opera of Paul Hindemith 1938:” Matthias the Painter” (An opera about a famous 16th century painter Matthias Grunewald ) and leave you with his words:
“Dare to wish for what willpower alone cannot achieve. Rise above the capacity of man.”
(Oser vouloir ce que la volonté seule ne peut obtenir par les contraintes. S'élever au dessus des facultés de l'homme."
EF de Lencquesaing à l’Université de Cornell
Aucun commentaire:
Enregistrer un commentaire