Risk South Africa: more transparency needed to end crisis

Government programmes aimed at ending the global financial crisis require greater transparency to shore up investor confidence, said Robert McAdie, global head of credit strategy at Barclays Capital.

Speaking at the Risk South Africa conference in Cape Town yesterday, McAdie said events such as the bankruptcy of Lehman Brothers had proven the interdependence of the global financial system. This, along with a transferral of credit risk from the private to the public sector, meant governments and public institutions with different objectives would have to co-operate to stem the fallout.

As a result, cross-border politics would be critical to addressing the downturn, he added - something that didn't bode well for the financial industry.

The liability side of bank balance sheets had been propped up by programmes implemented by public authorities, such as the Federal Deposit Insurance Corporation's Temporary Liquidity Guarantee Program and Federal Reserve's Commercial Paper Funding Facility, among others. But the asset side of balance sheets, comprising illiquid assets in a dislocated market, continued to pose a problem, he said.

In response, McAdie called for 'bad bank' or ring-fencing plans, similar to the UK Treasury's Asset Protection Scheme and others around the world. Critically, these plans should aim to prevent the bleeding of bank's core capital ratios, remove price dislocation, assist an orderly de-leveraging, remove the threat of nationalisation, and free bank balance sheets for further lending.

If executed in a transparent manner, they would also restore investor confidence. But McAdie said transparency, in particular, was still lacking.

Despite a pessimistic view of recent global events, he suggested public authorities still had the power to limit the effects of the crisis if this last condition was met. "All I can say is that we have fallen hard and fast. The depth and breadth of this recession remains an open question."