Role models required

Editor's letter

Chris Jeffery

The financial crisis is proving a painful experience for many participants in the financial markets. Now a slew of international bodies is trying to put matters right. To do so, they are opening up the exclusive international members' clubs to participants from outside Europe, Japan and the US.

The new Financial Stability Board - the Financial Stability Forum with more teeth - will include members from China, India, Indonesia and Korea, as well as a host of other countries. Meanwhile, the Basel Committee on Banking Supervision, the body responsible for setting international bank capital rules such as Basel II, has expanded its membership to include Australia, China, India and South Korea, as well as Brazil, Mexico and Russia.

Gaining a permanent seat at the international table is well overdue for many Asian nations. It is less clear, however, what practical benefit this will have. Asia's emerging giants have exerted increasing influence on important matters in the international arena for some time. The benefit of sitting at a table where much of the discussion is centred on the need for more regulation, when that's probably not what's needed in Asia, is open to question.

The rationale for adding more countries to the discussion on new bank capital standards is also far from clear. It has taken nearly a decade to introduce Basel II, provoking some pretty tense negotiations. In 2001, for example, Germany nearly derailed the process in a spat with the US on the treatment of capital charges for loans to small to medium-sized companies. Inevitably, a compromise was reached.

Including more countries at the negotiating table is unlikely to help matters, and to some extent it's missing the point. Asian jurisdictions need to develop their own sets of best practices, on their own terms, for their own markets. Importing compromised international solutions was always a flawed excercise of dubious benefit.

Bank executives, meanwhile, should reconsider looking to Basel II, or Basel III, for 'best practice' guidance. Inevitably such rules cater to some of the weakest links in the chain. Instead, financial institutions should look towards real economic capital benchmarks.

With so many leading western banks in trouble, it is easy to assume most of their economic capital risk management practices were fatally flawed. But inevitably some of these practices did work and - perhaps more importantly - were followed by senior management. Perhaps some risk managers in the region would be better served by ingraining a set of best practices relevant to their institutions rather than looking to international bodies to do it for them.

Christopher Jeffery.

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