ตีพิมพ์ในหนังสือพิมพ์ The Nation Oct 22, 2010
The Financial Stability Board (FSB - the body that monitors financial institutions risks) is going to propose many new financial regulations to the G20 meeting in Korea. But will they address all the concerns of emerging markets? My answer is - no. What are they?
First, what to do when a global institution fails! The Institute of International Finance, the Washington based body that represents large international banks, calls for G20 to set up an international framework for cross-border resolution. It suggests that the host and the home regulators should have joint proceedings and shared power to sort out assets and liabilities across the world.
Suppose that global institution has a significant business in an emerging market, but suppose it represents only a small part of the whole, will that emerging market be invited?
During the last crisis, when American International Group (AIG) showed signs of trouble, we in Thailand were worried. AIG had a leading share of retail life insurance in Thailand. If it should go under and take as long to liquidate as Lehman Bros., it would create big disruptions. My Finance Minister asked me to see whether Thailand’s portion of the business could be easily carved out and bought by local investors. It could not, because the Thai operation was part of a global network.
Some countries require foreign institutions to operate only in the form of locally incorporated subsidiaries. In this model, the local operation could be saved quickly by simply negotiating for sale of the subsidiary. I hope G20 will come up with a good solution, otherwise more and more emerging markets will be driven to this model.
Second, how to encourage banks to move the trading of derivatives onto exchanges! Currently a lot of derivatives are traded between banks in the over-the-counter markets. This creates interconnectedness between banks which can be pulled down en mass when one is closed down. All countries are now urged to instead have derivative transactions traded on exchanges with central clearing in order to reduce systemic risk. But in most emerging markets, private banks have no incentive to do so. What additional tools can be available to the regulators?
The answer may be in the calculation of BIS capital ratios, where banks have to attach risk weights to various classes of assets. It should help if the rules are amended to require a higher risk weight for outstanding balances with other banks for trades done over-the-counter, against a lower weight for trades done on exchanges.
Third, how to better regulate hedge funds! This issue was raised since 1997 but has been ignored until this crisis. By definition, emerging markets often have temporary imbalances; such as in their currency values in the case of Thailand, or in their international bond yields in the case of Greece. They need time in order to work out these imbalances. But hedge funds will rob the emerging markets of this precious time.
The answer may also be in the BIS capital ratios. The banks that lend to or have trading balances with hedge funds should be required to attach higher risk weights to these exposures to reflect the high leverage of these hedge funds. A normal risk weight is 100% for current loans and 150% for non performing loans. Exposures to hedge funds should carry risk weights even higher than 150% to reflect their high risks.
Finally, how to have a better restructuring mechanism for emerging market foreign debts! Thailand entered the IMF program in 1997, but it was not a good experience. We certainly don’t want it again. Emerging markets need an alternative to the IMF program.
Back in 1997, if Thailand decided not to enter the IMF program, what else could we have done? At that time, the Bank of Thailand sold forward against Thai Baht to hedge funds most of its reserves which was US$ 20 billion or so. I would have closed down the offshore market for Thai Baht to squeeze out the hedge funds and gain back the reserves. But it would have to be closed down completely without a timeframe, like Malaysia did. And then I would have announced a temporary moratorium on foreign debts.
Would this have been better than going to the IMF? There are pluses and minuses. On the plus side, we would have had the reserves back. We could have followed our own plan for financial institution restricting. And it would not have affected Thailand’s ability to return to the international market because, as it turned out, we paid back all banks’ foreign debts in full within two years after the crisis anyway. On the minus side, there would have been no outside force to push for reform.
But here is the problem. When a private company needs temporary protection from its creditors, there is Chapter 11. Why don’t we have something similar for sovereign debts? I think we need a framework that can allow sovereign debts to be temporarily frozen, re-scheduled, even with a haircut, and then for the countries to later be able to come back to the market in an orderly fashion.
Who should think about these issues if not the G20 and the FSB?