1.4k likes | 1.5k Views
Stay updated on the top 10 risk and compliance news stories and world events that shaped the week's agenda. Explore insights from industry leaders and experts. Discover the latest updates on network attacks, financial stability, and regulatory developments. Join IARCP to access valuable resources and stay ahead in the dynamic landscape of risk and compliance.
E N D
P age |1 InternationalAssociationofRiskandComplianceProfessionals(IARCP) 1200GStreetNWSuite800Washington,DC20005-6705USATel:202-449-9750www.risk-compliance-association.com Top10riskandcompliancemanagementrelatednewsstoriesandworldeventsthat(forbetterorforworse)shapedtheweek's agenda,andwhatisnext GeorgeLekatisPresidentoftheIARCP DearMember, “TheEuroislikeabumblebee” (…amemberofthebeegenusBombus,inthefamilyApidae). What?Whosaidthat? AccordingtoMrMarioDraghi,PresidentoftheEuropeanCentralBank,attheGlobalInvestmentConferenceinLondon: “Andthefirstthingthatcametomindwassomethingthatpeoplesaidmanyyearsagoandthenstoppedsayingit:Theeuroislikeabumblebee. Thisisamysteryofnaturebecauseitshouldn’tflybutinsteaditdoes. Sotheeurowasabumblebeethatflewverywellforseveralyears. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |2 Andnow–andIthinkpeopleask“howcome?”–probablytherewassomethingintheatmosphere,intheair,thatmadethebumblebeefly. Nowsomethingmusthavechangedintheair,andweknowwhatafterthefinancialcrisis. Thebumblebeewouldhavetograduatetoarealbee.Andthat’swhatit’sdoing. ThefirstmessageIwouldliketosend,isthattheeuroismuch,muchstronger,theeuroareaismuch,muchstrongerthanpeopleacknowledgetoday.” Ok.Ihavetolearnmoreaboutthebumblebee.IcouldaddittotheBaseliiiclass(somethinglike…fromtheMarketRiskunderBasel2totheBumblebeeMarketRiskunderBasel3…) Bumblebeesaresocialinsectsthatarecharacterisedbyblackandyellowbodyhairs,ofteninbands. Liketheirrelativesthehoneybees,bumblebeesfeedonnectarandgatherpollentofeedtheiryoung(beeshavenotdiscoveredbonusesyet). Readmore(aboutwhatMrMarioDraghisaid,notaboutbumblebees)atNumber10ofourlist. WelcometotheTop10list. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |3 NISTUpdatesGuidanceonNetworkAttacksandMalware Detectingandstoppingmaliciousattacksoncomputernetworksisacentralfocusofcomputersecuritythesedays. TheNationalInstituteofStandardsandTechnology(NIST)isaskingforcommentsontwoupdatedguidesonmaliciouscomputerattacks:oneon preventing,detecting,andrespondingtoattacksandoneonpreventing andmitigatingtheeffectsofmalware,apotenttoolinanattacker'sarsenal. GlennStevens:Theluckycountry AddressbyMrGlennStevens,GovernoroftheReserve BankofAustralia,toTheAnikaFoundationLuncheon,supportedbyAustralianBusinessEconomistsandMacquarieBank,Sydney. KiyohikoGNishimura:Inter-regionalfinancialcooperation–anotherlayeroffinancialcooperationtowardsfinancialstability RemarksbyMrKiyohikoGNishimura,DeputyGovernoroftheBankofJapan,atCEMLA’s60thAnniversaryCommemorativeConference“CentralBankCooperationattheBeginningofthe21stCentury”,MexicoCity. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |4 RegisterofInsuranceUndertakings Thecompilationofregisteredfinancialinstitutions publishedhereinisintendedtoprovideeasilyaccessibleinformationinaccordancetoArticle8ofEIOPARegulation. IsleofManFinancialSupervisionCommission Financesectorprofitsriseoverall,despitechallengingtimes TheFinancialSupervisionCommissionhaspublisheditsAnnualReportfor2011/12. DEPARTMENTOFLABOR OccupationalSafetyandHealthAdministration ProceduresfortheHandlingofRetaliationComplaintsUndertheEmployeeProtectionProvisionoftheSurfaceTransportationAssistanceActof1982(STAA),asAmended ACTION:Finalrule. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |5 ThethreatofillegalexportsfromtheFBI’sperspectiveRobertS.Mueller,III Director,FederalBureauofInvestigation U.S.DepartmentofCommerce,BureauofIndustryandSecurityAnnualUpdateConferenceonExportControlsandPolicy,Washington,D.C. DARPAMakes10MillionStridesintheRacetoContainahypotheticalPandemic FASBIssuesAccounting StandardsUpdatetoSimplifyTestingofIndefinite-LivedIntangible AssetsForImpairment TheFinancialAccountingStandardsBoard(FASB)hasissuedAccountingStandardsUpdateNo.2012-02,Intangibles—GoodwillandOther(Topic350):TestingIndefinite-LivedIntangibleAssetsforImpairment. MarioDraghi:VerbatimoftheremarksattheGlobalInvestment SpeechbyMrMarioDraghi,Presidentofthe EuropeanCentralBank,attheGlobalInvestmentConference,London InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |6 NUMBER1 NISTUpdatesGuidanceonNetworkAttacksandMalware Detectingandstoppingmaliciousattacksoncomputernetworksisacentralfocusofcomputersecuritythesedays. TheNationalInstituteofStandardsandTechnology(NIST)isaskingforcommentsontwoupdatedguidesonmaliciouscomputerattacks:oneon preventing,detecting,andrespondingtoattacksandoneonpreventing andmitigatingtheeffectsofmalware,apotenttoolinanattacker'sarsenal. Thepublicationsarebeingrevisedtoreflectthechangesinthreatsandincidents. Malware,alsoknownasmaliciouscode,isacommontoolthatattackersusetobreachcomputernetworkstoday,causingdamageanddisruption,andoftenrequiringextensiverecoveryefforts. "Malwarethreatsinthepasttendedtospreadquicklyandwereeasytodiscover,"explainsco-authorKarenScarfone,"buttoday'smalwarethreatsarestealthier,specificallydesignedtoquietly,slowlyspread,gatheringinformationoverextendedtimeframesandeventuallyleadingtolossofsensitivedataandotherproblems." TheupdatedGuidetoIntrusionDetectionandPreventionSystemsdescribessoftwarethathasbecomeanecessaryadditiontothesecurityinfrastructureofmanyorganizations. Intrusiondetectionandpreventionsystems(IDPSs)recordinformationaboutobservedsecurity-relatedevents,notifysecurityadministratorsoftheeventsthatshouldbeanalyzedfurtherandproducereportsforevaluation.ManyIDPSsrespondtoandtrytostopdetectedthreatsbyusingavarietyoftechniques. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |7 TheguidancedescribesthecharacteristicsofIDPStechnologiesand providesrecommendationsfordesigning,implementing,configuring,securing,monitoringandmaintainingthem. ThepublicationdiscussesfourtypesofIDPStechnologies: network-based,wireless,networkbehavioranalysisandhost-based. "IDPSforwirelessisanimportanttypeforallorganizationstohavebecauseofthegrowthofmobiledevicesandemployees'desiretousetheirownwirelessdeviceforwork,"saysScarfone. Whilemanyagenciesandcompaniesaregoingmobile,itisstillcriticaltoprotectdesktopsandlaptops. TheGuidetoMalwareIncidentPreventionandHandlingforDesktopsandLaptopsisasupplementtoanotherdraftdocument,ComputerSecurityIncidentHandlingGuide(SP800-61). Itgivesbackgroundinformationonthemajorcategoriesofmalwarethatafflictdesktopandlaptopcomputersandprovidespracticalguidanceon howtopreventmalwareincidentsandonwhattodowhenasystemisinfected. TherevisedversionofSP800-61isexpectedtobepublishedlaterthis summer. Recommendedmeasuresincludedevelopingpreventionplansbasedontheattacksthataremostlikelytobeusednowandinthenearfuture,usingdefensivearchitecturemethodstoreducetheimpactofmalwareincidents,andincludingmalwareincidentpreventioninemployeeawarenessandtrainingprograms. TheGuidetoIntrusionDetectionandPreventionSystems(SpecialPublication800-94,Rev.1)canbefoundat:http://csrc.nist.gov/publications/drafts/800-94-rev1/draft_sp800-94-rev1.pdf TheGuidetoMalwareIncidentPreventionandHandlingforDesktopsandLaptops(SpecialPublications800-83,Rev.1)canbefoundat:http://csrc.nist.gov/publications/drafts/800-83-rev1/draft_sp800-83-rev1.pdf InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |8 Note Intrusiondetectionistheprocessofmonitoringtheeventsoccurringinacomputersystemornetworkandanalyzingthemforsignsofpossibleincidents,whichareviolationsorimminentthreatsofviolationofcomputersecuritypolicies,acceptableusepolicies,orstandardsecuritypractices. Incidentshavemanycauses,suchasmalware(e.g.,worms,viruses),attackersgainingunauthorizedaccesstosystemsfromtheInternet,andauthorizedusersofsystemswhomisusetheirprivilegesorattempttogainadditionalprivilegesforwhichtheyarenotauthorized. Althoughmanyincidentsaremaliciousinnature,manyothersarenot;for example,apersonmightmistypetheaddressofacomputerandaccidentallyattempttoconnecttoadifferentsystemwithoutauthorization. Anintrusiondetectionsystem(IDS)issoftwarethatautomatestheintrusiondetectionprocess. Anintrusionpreventionsystem(IPS)issoftwarethathasallthecapabilitiesofanintrusiondetectionsystemandcanalsoattempttostop possibleincidents. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |9 InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |10 Note: InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |11 AboutNIST-NationalInstituteofStandardsandTechnology Foundedin1901andnowpartoftheU.S.DepartmentofCommerce,NISTisoneofthenation'soldestphysicalsciencelaboratories. CongressestablishedtheagencytoremoveamajorhandicaptoU.S.industrialcompetitivenessatthetime—asecond-ratemeasurement infrastructurethatlaggedbehindthecapabilitiesofEngland,Germany,andothereconomicrivals. Today,NISTmeasurementssupportthesmallestoftechnologies—nanoscaledevicessotinythattensofthousandscanfitontheendofa singlehumanhair—tothelargestandmostcomplexofhuman-madecreations,fromearthquake-resistantskyscraperstowide-bodyjetlinerstoglobalcommunicationnetworks. NUMBER2 InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |12 GlennStevens:Theluckycountry AddressbyMrGlennStevens,GovernoroftheReserveBankofAustralia,toTheAnikaFoundationLuncheon,supportedbyAustralianBusinessEconomistsandMacquarieBank,Sydney. ThankyouforcomingtodaytosupporttheAnikaFoundation. BeforeIproceedIwantalsotothankMacquarieBankfortheirsupport,onceagain,inprovidingtoday’svenueandsustenance,andtheAustralianBusinessEconomistsfortheircontinuingorganisationalsupportfortheseannualfunctions. ItisslowlybecomingbetterrecognisedthattheAustralianeconomy’srelativeperformance,againstaveryturbulentinternationalbackground,hasbeenremarkablygood. ManyforeignvisitorstoAustraliacommentonthisrelativesuccessandIhavenoticedanincreaseinthenumberofforeigncompaniesinterestedininvestinginAustraliaasaresult,notwithstandingourdomestictendencytowardsthe“glasshalfempty”view. Butsomeobservers–admittedlynotthemajority–stillharbourconcernsaboutthefoundationsofrecenteconomicperformanceandquestionthebasisforconfidenceaboutthefuture. Thereareseveralthemestothesedoubts,butthecommonelementisthatrecentrelativesuccessowesacertainamounttothingsthatwillnotcontinue–toluck–andthatourluckmaybeabouttoturn. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |13 RapidgrowthinChinesedemandforresources,forexample,hasbeenofgreatbenefittodate,butwhatiftheChineseeconomysuffersaseriousdownturn? Anotherpotentialconcernisdwellingprices. Australiasawalargerunupindwellingpricesandhouseholdborrowinguntilafewyearsago. Someothercountriesthatsawthissubsequentlysufferedpainfulcorrectionsanddeeprecessions,associatedwithverystressedbankingsystems. CanAustraliaescapethesameoutcome? AfurtherthemeisthefocusonthefundingpositionofAustralianfinancialinstitutions,insofarastheyraisesignificantamountsofmoney offshore. Couldthisbeaweakness,intheeventthatmarketsentimentturns? Actually,thisisanotherversionoftheoldconcernaboutthecurrentaccountdeficit:whatwillhappenifmarketssuddenlydonotwanttofundourdeficit? IthaslongbeenavisceralfearamongAustralianofficialsandeconomiststhatglobalinvestorswillsuddenlytakeadimviewofus. ThesamesortsofconcernsoforganisationssuchastheInternationalMonetaryFundandtheratingsagenciesseemtoliebehindaperpetualquestionmarkaboutAustraliaanditsfinancialinstitutions. Itisunlikelywewilleverbeabletochangedefinitivelytheviewsofallthesceptics. And–letusbeclear–weshouldwelcomethesceptics.Perhapssomeoftheirconcernsarevalid. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |14 • TheReserveBankgivesalotofthoughttotheseissues;wecertainlydonotdismissthem. • Weshouldalwaysbewaryoftheconventionalwisdombeingtooeasilyaccepted. • Weshouldnever,ever,assumethat“itcouldn’thappenhere”. • ItisinthatveinthatIwishtoposeasetofquestionsthatarethrownup bythesescepticalviews.Inparticular: • Howmuchoftherecentrelativelygoodperformancewasduetoluck? • Towhatextentdidweimproveourluckbysensiblepolicies,acrossarangeofeconomicandfinancialfronts? • Aretheresignsofanyofthethingsgoingwrongthatpeopletypicallyworryabout? • Andifthereare,orweretobe,suchsigns,couldwedoanythingaboutit? • Tobegin,Ishallre-statesomekeymetrics. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |15 InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |16 Thesechartsreallyrequirenoexposition(Graph1,2and3). Themessageisclear.Itisfairtoconcludethat,giventhecircumstancesinternationally,theAustralianeconomyhasexhibitedmorethanacceptableperformanceoverrecentyears. Thisconclusionwouldstandwhethercomparisonsweremadeeitheragainstmostothercountries,oragainstourownhistoricalexperience. WhywasitthatAustraliadidnothaveadeepdownturnin2009whensomanyothercountriesdid? Andwhywasitthatwehavereturnedtoreasonablegrowth,whenothershavestruggledtodoso? Thisquestionhasbeenansweredonnumerousoccasions.Thereareseveralelements. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |17 First,theAustralianbankingsystemwentintothecrisisinreasonableshape. Tobesure,thereweresomepoorlendingdecisionsduringtheprecedingperiodofeasycreditandtherewas,inhindsight,toomuchrelianceonwholesalefunding. Butamongmajorinstitutions,creditqualityissueshaveturnedouttobemanageable. Assetqualitywasnotasgoodamongsomeoftheregionalbanks,andevenlesssoamongsomeforeignbanksoperatinginAustralia,buttheproblemshavenotbeeninsurmountable. Someobserversmightcounterthatthebanksreceivedassistancewithwholesalefundraisingintheformofthegovernmentguarantee. Butthebankspaidforthat,anditwasanappropriateresponseatatimeofmassivemarketdislocationwhenalltheirpeerswerereceivinglikeassistance–andmuchmore. Moreoverthebankshaveneitherhad,norneeded,accesstothisforsometimenowandthestockofguaranteedliabilitiesoutstandinghasfallenbyabouthalffromitspeaklevel,asissuesmatureorarerepurchased Soourbankingsystem,whilenotentirelyfreefromblemishes,wasnonethelessinprettygoodshapeoverall. Bankswereabletoraisecapitalprivatelyinthedepthsofthecrisis.Thelowestrateofreturnamonganyofthemajorbanksoverayearduringthe crisisperiodwasabout10percent. TheAustralianGovernmenthasnotneededtotakeanownershipstakeinafinancialinstitution. Second,Australiahadscopeformacroeconomicpolicystimulus,whichwasusedpromptlyanddecisively. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |18 Interestrateswereloweredaggressively,fromahighstartingpoint,loweringdebtservicingburdensatarapidrate. Thefiscalstimuluswasoneofthelargerones,asapercentageofGDP,amongthevariouscountrieswithwhichwecanmakecomparisons. Theevidencesuggeststhatthesemacroeconomicmeasureswereeffectiveinsustaininggrowth. Thirdly,therapidreturntogrowthoftheChineseeconomysawdemandforenergyandresourcesstrengthenagainafterabriefdownturninlate2008andthefirstcoupleofmonthsof2009. ThisreversedthefallinAustralia’stermsoftrade,andinfactpushedthemtonewhighs,whichledtoaresumptionofthehistoricinvestmentbuild-upthathadalreadybegun. ItbenefitedthewholeofAsia,whichstagedaverypronouncedV-shapedrecoveryonthebackbothoftheChinesemeasuresandthingsother countriesdidthemselves. Afourthelementthatmanypeopleaddisthattheexchangeratefellsharply,whichwasanexpansionaryimpetusfortheeconomy. Butofcoursetheexchangeratewasrespondingendogenouslytothevariousshocksandpolicyresponses,andhassincereversedthefall.Itwasdoingwhatitwassupposedtodo. Perhapstherealpointisthattherightexchangeratesystemwasimplementednearly30yearsago,andthatitwasallowedtowork. SoAustraliahadthesethingsgoingforit. Wasthisalljustluck? Wecouldnotdenythatourgeography–thoughtformuchofourhistorytobeahandicapbecauseofthedistancefromEuropeanandAmericanmarkets–combinedwithournaturalresourceendowmenthasprovideda InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |19 basisforthecountrytoridetheboominAsianresourcedemand.Wedid notcreatethat,thoughwestillhavetomusterthecapabilitytotakesustainedadvantageofit. Butawell-managedandwell-supervisedbankingsystemisnotan accident. YearsofcarefulworkbothbybanksandAPRAwentintothatoutcome.Norwastheabilitytorespondforcefully,butcredibly,with macroeconomicpolicyjustluck. Youdon’tsuddenlyacquirethecredibilityneededtoeasemonetarypolicyaggressivelywhiletheexchangerateisheadingdownrapidly.Authoritiesinlotsofcountrieswouldnotfeeltheycoulddothat. Atanearlierpointintimeweprobablywouldnothavefeltwecouldhavedoneiteither. Thecredibilityneededtodoitcomesfromhavinginvestedina well-structuredframework,andhavingbuiltatrackrecordofsuccessincontaininginflation,overalongperiod. Thefloatingexchangerateisanintegralpartofthatframework.Likewise,youcan’thaveamajorfiscaleasingandexpectittobeeffective ifthereareconcernsaboutlong-runpublicdebtdynamics,asrecent debateelsewhereintheworldshows. Youneedtohaverunadisciplinedbudgetoveralongperiodbeforehand,sothattheamountofdebtyouhavetoissueinacrisisdoesnotraisequestionsaboutsustainability. Inboththemonetaryandfiscalareas,ofcourse,havingusedthescopewehadsoaggressively,itwasalsonecessary,asIarguedin2009,tore-invest inbuildingfurtherscope,byreturningsettingstonormaloncetheemergencyhadpassed. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |20 So,yes,Australiahashaditsshareofluck.Buttoexplaintheoutcomes,weneedalsotoappealtofactorsthatdidn’tjusthappenbyaccident. Ofcourse,thatdoesn’tmeanwestillcouldn’thaveproblems. Evenifsuccesstodatehasn’tbeenduetoluckalone,perhapsourluckcouldturnsobadthatalloureffortsatgoodpolicymakingcouldbe overwhelmed. Letusthentakealookatsomeofthepotentialpressurepointsthatpeoplesometimesworryabout. ThefirstistheChineseeconomy. OneofthedataseriespeoplepayalotofattentiontoistheChineseversionoftheso-called“PurchasingManagers’Index”. Theusualcommentarysurroundingsuchindexesinvariablyreferstothe“50”levelasthethresholdbetweengrowthandcontractioninthesectoroftheeconomybeingexamined. ButwhathavethesePMIsactuallybeensayingabouttheChineseeconomy? Properlycalibrated,asinthischart,theysuggestthatgrowthinChina’sindustrialproductionhasbeenrunningatabout5percentagepointsbelowaverage,whichmeansitisjustunder10percent(Graph4). Butitisalongwayfromacontraction. WedidactuallyseeChineseIPcontractforseveralmonthsin2008;wearenotseeingthatatpresent. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |21 TheconclusionIdrawisthattheChineseeconomyhasindeedslowedoverthepastyearorso. Itwasintendedthataslowingoccur. Buttherecentdatasuggestthat,sofar,thisisanormalcyclicalslowing,notasuddenslumpofthekindthatoccurredinlate2008. ThedataarequiteconsistentwithChinesegrowthinindustrialoutputofsomethinglike10percent,andGDPgrowthinthe7to8percentrange. Tobesure,thatisasignificantmoderationfromthegrowthinGDPof10percentormorethatwehaveoftenseeninChinainthepastfivetosevenyears. ButnotevenChinacangrowthatfastindefinitelyandtherewereclearlyproblemsbuildingfromthatearlierbreakneckpaceofgrowth. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |22 Inflationrose,therewasoverheatinginpropertymarketsandnodoubtagooddealofpoorlending. Itisfarbetter,infact,thatthemoderationoccur,ifthatincreasesthesustainabilityoffutureexpansion. Moreover,theChineseauthoritieshavebeentakingwell-calibratedstepsinthedirectionofeasingmacroeconomicpolicies,astheirobjectivesforinflationlooklikebeingachievedandasthelikelihoodofslowerglobalgrowthaffectingChinahasincreased. Pricesforkeycommoditiesarelowerthantheirpeaks,butareactuallystillhigh. Sofar,then,the“Chinastory”seemstoberoughlyoncourse. ItiscertainlytruethatwewillfeeltheeffectsoftheChinesebusinesscyclemoreinthefuturethanwehavebeenaccustomedtointhepast. Thatpresentssomechallengesofeconomicanalysisandmanagement.Butevenso,itmaybebettertobeexposedtoaChineseeconomywitha highaverage,evenifvariable,growthrate,than,say,toaEuropewitha verylowaveragegrowthratethatisapparentlyalsostillrathervariable. NextIturntodwellingprices. Aseveryoneknows,dwellingpricesroseagreatdealoverthedecadeormorefrom1995,andnotjustinAustralia. Thisoccurredglobally. Thefactthatitwasawidespreadphenomenonisahintthatweshouldbewaryofexplanationsthataresolelydomesticintheirfocus. Itsuggeststhattheglobaldwellingpricedynamichadalottodowithfinancialfactors–andthereislittledoubtthatfinanceforhousingbecamemorereadilyavailable. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |23 Invariouscountriespriceshavesubsequentlyfallen. IntheUnitedStates,forexample,pricesaredownbyabout30percentfromtheirpeak,thoughtheylookliketheyhavenowreachedbottom. IntheUnitedKingdomthefallwassmaller–atabout15–20percent.InAustralia,thedeclinesincethepeakhasbeenabout5to10percent, dependingontheregion. Thereareofcourseprominentexamplesofparticularlocalitiesorevenindividualdwellingswherepricefallshavebeenmuchlarger. Scaledtomeasuresofincome,Australiandwellingpricesonanationalbasishaveinfactdeclinedandarenowaboutwheretheywerein2002(Graph5). Thatis,housinghasbecomemore“affordable”. Fourorfiveyearsagowesupposedlyhadahousingaffordability“crisis”.Nowitseemsthattheproblemsomepeoplefearisthatofhousing becomingevenmoreaffordable. Aredwellingpricesovervalued? It’sveryhardtobedefinitiveonthatquestion. Therearetwoaspectstotheclaimthattheymightbe. Thefirstisthatpricesrelativetoincomearehigherthantheywere15or20yearsago. Ifthisratioissomehowmean-reverting,theneitherincomesmustrisealotorpricesmustfall. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |24 Itcouldbethatthisanalysisiscorrect,buttheproblemisthatthereisnoparticularbasistothinkthatthepricetoincomeratio20yearsagowas“correct”. Therearereasonsthatmightbeadvancedforwhytheratiomightbe expectedtobehighernowthanthen–thatthemeanhasshifted–thoughagainthereislittlesciencetoanyquantificationforsuchashift. Inanyevent,argumentsthatappealtohistoricalaveragesforsuchratioslosepotencythelongertheratiostayshigh. InAustralia’scasetheratioofpricestoincomeonanationalbasishasbeenapparentlyatahighermeanlevel–about4to4½–foraboutadecadenow. Thesecondsupportfortheclaimthatdwellingpricesareovervaluedistheobservationthattheyseemhighincomparisonwithothercountries. Inseekingtomakesuchcomparisons,though,thereareseriousmethodologicalchallenges. Thekeydifficultyisinsourcingcomparabledataonthelevelofpricesacrosscountries.Suchdataare,atbest,prettysketchy. Withthatcaveatveryclearlyinmind,considerthefollowingtwocharts.SimplycomparingAustraliaandtheUnitedStates,itishardtoavoidthe impressionthatgravitywillinevitablyexertitsinfluenceonAustralian dwellingprices. Butifweputthesetwolinesonachartwithanumberofothercountrieswithwhichwemightwanttomakecomparisons,thepictureismuchlessclear(Graph6) Totheextentthatwecanmakeanymeaningfulstatementsabout internationalrelativities,themainconclusionwouldbethatAustraliandwellingprices,relativetoincome,areinthepackofcomparablecountries.Inthiscomparison,theUnitedStatesseemstheoutlier. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |25 InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |26 NoneofthiscanbetakentosaydefinitivelythatAustraliandwellingpricesare“appropriate”,orthatthereisnopossibilitytheywillfall. Itisaverydangerousideatothinkthatdwellingpricescannotfall. Theycan,andtheyhave. Thepointissimplythathistoricalorinternationalcomparisons,totheextenttheycanbemade,donotconstitutedefinitiveevidenceofanimminentslump. Attheveryleast,thecomplexityofmakingthesecomparisonssuggestsweoughttolookatsomeothermetricsinthinkingaboutthehousingmarket. Onewouldbetheperformanceoftheassociatedmortgages.Here,themainstoryisthatnotmuchhaschanged. Arrearsremainlowandifanythinghavebeenedgingdownoverthepastyear.Thatinturnisnotaltogethersurprisinggiventhatdebtservicingburdenshavedeclined(Graph7). InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |27 Asaresultoflowerhousepricesandthereforelowerloansizes,somewhatlowerinterestratesandagooddealofincomegrowth,therepaymentonanewloanonamedian-pricedhouseasashareofaverageincomeisnowatitslowestforadecade(exceptforthe“emergency”interestrateperiodin2009). Itistruethatalowunemploymentrateisakeyfactorhelpinghere,butitisalsotruethattheproportionofhouseholdsthatareaheadontheirmortgagepaymentsisalsohigh–withsomeevidencepointingtooverhalf–whichwouldprovideabufferofsomemonthsforthosehouseholdsintheeventaperiodoflowerincomewasexperienced. Ifwelookatapplicationsforpossessionsofdwellings,theyhavebeen runningatabout0.15percentofdwellingsonanannualisedbasis. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |28 SuchapplicationshaveactuallydeclinedsincetheirpeakinbothNSWandVictoria,thoughtheyhaverisenoverthepastcoupleofyearsinWAandQueensland. IntheUnitedStatesthemostcomparablefigureforrepossessions–“foreclosuresstarted”–peakedatover2percentofdwellings. Theconclusion?Weshouldneversayacrashcouldn’thappenhere,andtheReserveBankcontinuestomonitorpropertymarketsandtheperformanceofmortgagesquiteclosely,aswehaveformanyyears. Butithastobesaidthatthehousingmarketbubble,ifthat’swhatitis,seemstobetakingquitealongtimetopop–ifthat’swhatitisgoingtodo. Theingredientswewouldlookforassignallinganimminentcrashseem,ifanything,lessinevidencenowthanfiveyearsago. Whatthenaboutfundingvulnerabilities? Thepre-crisisperiodsawtoomuch“borrowingshorttolendlong”,andtoomuchrelianceontheassumedavailabilityofmarketfunding. Bankseverywherehavebeenadjustingawayfromthatmodeloverrecentyears,Australianbanksamongthem. Theshareofoffshorefundinghasfallen,anditsmaturityhasbeenlengthened(Graph8). InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |29 Theflipsideofthisisofcoursetheriseindomesticdepositfunding,whichhasoccasionedsuchcompetitivebehaviourinthemarketfordeposits. Interestinglyenough,whilewehavebeentoldovertheyearshowAustralianbanksweredoingthecountryafavourbyarrangingthefundingofthecurrentaccount,theyhavestoppeddoingthisoverthepastyearwithout,apparently,anydramaticeffects. Asmeasuredinthecapitalaccountstatistics,therehasbeenanetoutflowofprivatedebtfundingoverthepasttwoyears,offsetroughlybyincreasedinflowofforeigncapitalintogovernmentobligations(Graph9). Thishasoccurredwithanetdeclineingovernmentdebtyieldsandanetriseintheexchangerate. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |30 Thecurrentaccountdeficithas,inotherwords,beeneasily“funded”withouttheassistanceofbanksborrowingabroad–infact,whiletheyhavebeennetre-payersoffundsborrowedearlier. Areasonableconclusionisthatthedegreeofvulnerabilitytoaglobalpanicofanygivenmagnitudeappearstohavediminished,ratherthangrown,overthepastfewyears. Ithasn’tcompletelydisappeared,anditwouldnotbesensibletoexpectitwould,unlesswewerepursuingapolicyoffinancialautarky.ButthereislittlereasontoassumethatAustralianinstitutionsaresomehowunusuallyexposedtotheseriskscomparedwithmostoftheircounterpartsoverseas. Intheend,ofcourse,anybank’sabilitytomaintaintheconfidenceofitscreditorsismainlyaboutitsassetquality. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |31 Thatbringsusbacktolendingstandards,themacroeconomicenvironment,andsoon. Onewouldthinkthat,overall,thingslookrelativelygoodinAustralia,comparedtotheworld’stroublespots. Thinkforjustamomentabouttheholdingsofgovernmentdebtonthebooksofbanksinanynumberofothercountries,andaboutthestateofpublicfinancesofmanyofthosecountries. TheargumentsIhavepresentedamounttosayingthatsomenecessaryadjustmentshavebeenoccurringgraduallyandreasonablysmoothly.China’sgrowthhadtomoderate. Ithasslowed,butithasn’tcollapsed.HousingvaluesandleverageinAustraliacouldn’tkeeprising.Theyhaven’t. Dwellingpriceshavealreadydeclined,relativetoincome,anditisinfactnotobviousthattheyareparticularlyhighcomparedwithmostcountries. Housing“affordability”hasimprovedsignificantly;over99percentofbank-heldmortgagesarebeingservicedfully. Bankshavereducedtheirneedforthesortoffundingthatmightbedifficulttoobtaininacrisissituation. Thecurrentaccountdeficitisbeingfundedbyacombinationofdirectequityinvestment,andflowsintohigh-qualityAustralian dollar-denominatedassets,thelatteratcoststhathavebeenfalling. Infact,theCommonwealthofAustralia,anditsconstituentStates,areatpresentabletoborrowataboutthelowestratessinceFederation. Marketsdonot,then,seemtobesignallingseriousconcernsaboutAustralia’ssolvencyorsustainability. Butmarketscanbewrongsometimes. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |32 Theycansometimesbetoooptimistic(andothertimestoopessimistic).Soeventhoughwedon’tfaceimmediateproblems,weshouldask:whatifsomethingwentwrong? BelowIconsiderafewpossibilities. IfthethingthatgoeswrongisamajorfinancialeventemanatingfromEurope,themostdamagingpotentialtransmissionchannelwouldbeiftherewereacompleteretreatfromrisk,capitalmarketclosureand fundingshortfallsforfinancialinstitutions. Letmeemphasise,importantly,thatthisisnotoccurringatpresentandifitdidoccuritwouldbeaproblemforagreatmanycountries,notjustAustralia. Butinthatevent,theAustraliandollarmightdecline,perhaps significantly. Wemightfindthat,inanextremecase,theReserveBank–alongwithothercentralbanks–wouldneedtostepinwithdomesticcurrencyliquidity,inlieuofmarketfunding. Thevulnerabilitytothispossibilityislessthanitwasfouryearsago;ourcapacitytorespondisundiminishedand,ifnotactuallyunlimited,isnotsubjecttoanylimitthatseemslikelytobind. Analternativeversionofthisscenario,ifitinvolvedthesortofeurobreak-upaboutwhichsomepeoplespeculate,couldbeaflowoffundsintoAustralianassets. Inthatcaseourproblemmightbenotbeingabletoabsorbthatcapital.Butthenthebankswouldbeunlikelytohaveseriousfundingproblems. IfthethingthatgoeswrongisaseriousslumpinChina’seconomy,theAustraliandollarwouldprobablyfall,whichwouldprovideexpansionaryimpetustotheAustralianeconomy. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |33 Butmoreimportantly,wecouldexpecttheChineseauthoritiestorespondwithstimulatorypolicymeasures. EvenifoneisconcernedabouttheextentofproblemsthatmaylurkbeneaththesurfaceinChina–sayinthefinancialsector–itisnotclearwhyweshouldassumethatthecapacityoftheChineseauthoritiestorespondtothemisseriouslyimpaired. Andinthefinalanalysis,aseriousdeteriorationininternationaleconomicconditionswouldstillseeAustraliawithscopetousemacroeconomicpolicy,ifneeded,aslongasinflationdidnotbecomeaconcern,whichwouldbeunlikelyinthescenarioinquestion. IfdwellingpricesinAustraliadidslump,thentherewouldbeobviousquestionsabouthowthatdynamiccouldplayout. Insuchcircumstancespeopletypicallyworryabouttwoconsequences. Thefirstisalongperiodofveryweakconstructionactivity,usuallybecauseanexcessofstockresultingfrompreviousover-constructionneedstobeworkedoff. Butwehavealreadyhadafairlyprotractedperiodofweakresidentialconstruction;it’shardtobelieveitwillgetmuchweaker,actually,atanationallevel. Thesecondpotentialconcernisthebalancesheetsoflenders.ThisscenarioisamongthoseroutinelyenvisagedbyAPRA’sstresstestsoverrecentyears. Theresultsofsuchexercisesalwaysshowthatevenwithsubstantialfallsindwellingprices,muchhigherunemploymentandassociatedhigherlevelsofdefaults,keyfinancialinstitutionsremainwellandtrulysolvent. Ofcourse,itcanbearguedthatthefullextentofreal-lifestressescannotbeanticipatedinsuchexercises. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |34 That’sareasonablepoint.Butweactuallyhadareallifestresseventin2008and2009.Thefinancialsystemshowsafewbruisesfromthatperiod,butitsfundamentalstabilitywasmaintained Conclusion MostAustraliansIencounterwhoreturnfromoverseasremarkhowgooditistobelivingandworkinghere. Weareindeed“lucky”insomanyways,relativeeconomicstabilitybeingonlyoneofthem. Butwhatmattersmoreiswhatwedowithwhatwehave.Noteverygoodaspectaboutrecentperformanceisdowntoluck. Bythesametokentherearethingswecandotoimproveourprospects–or,ifyouwill,tomakeabitofourownfutureluck. Someoftheadjustmentswehavebeenseeing,asawkwardastheymightseem,areactuallystrengtheningresiliencetopossiblefutureshocks. Higher–morenormal–ratesofhouseholdsaving,amoresoberattitudetowardsdebt,are-orientationofbanks’funding,andaperiodofdwellingpricesnotmovingmuch,comeintothiscategory. Theyearsaheadwillnodoubtchallengeusinvariousways,includinginwayswecannotpredict. Butwhat’snewaboutthat? Evenifthepessimiststurnouttoberightononeormorecounts,itdoesn’tfollowthatwewouldbeunabletocope. Actingsensibly,withalong-termfocus,hasasgoodachanceaseverofseeingusthroughwhatevercomesourway. Mostofall,andtoreturntothewholepointoftoday’sevent,wehavemuchtolivefor. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |35 WewanttodoeverythingwecantoensurethenextgenerationcansharethepositiveoutlookthatmostAustralianshave(almost)alwayshad. ThatiswhytheAnikaFoundation’sworkissoimportant,andwhyyourpresenceheretodayissovaluable. Thankyouagainforyoursupport. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |36 NUMBER3 KiyohikoGNishimura:Inter-regionalfinancialcooperation–anotherlayeroffinancialcooperationtowardsfinancialstability RemarksbyMrKiyohikoGNishimura,DeputyGovernoroftheBankofJapan,atCEMLA’s60th AnniversaryCommemorativeConference“CentralBankCooperationattheBeginningofthe21stCentury”,MexicoCity. 1.Introduction Firstofall,Iamgratefultotheorganizersforinvitingmetothe60th AnniversaryCommemorativeConferenceofCEMLA,asymboloffinancialcooperationbetweencentralbanksinLatinAmerica. Iamespeciallythrilled,becausethisistheidealopportunitytodiscussinternationalmonetarystabilityandcentralbankcooperationfromtheintegratedperspectivethatspansLatinAmericaandAsia. LatinAmericaandAsiaareamongthemostdevelopedregionsinterms offinancialcooperation. Today,Iwouldliketotaketheconceptoffinancialcooperationonestepfurtherbyconsideringthetopicofinter-regionalfinancialcooperation. Althoughthethemeoffinancialcooperationattheglobal,intra-regional,andbilaterallevelhasbeendiscussedatavarietyofinternationalforumssuchasG20,Ibelieveinter-regionalfinancialcooperation,especiallybetweenLatinAmericaandAsia,representsanotherimportantlayerbetweentheglobalandtheintra-regionalorbilaterallevels. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |37 2.LatinAmericaandAsiainthe21stCentury:fromlowtohighcorrelation LetmebeginbygivingabriefsummaryofthelinkagebetweenLatinAmericaandAsiawithrespecttorealeconomicandfinancialactivities,focusingparticularlyontheperiodsince2000. Bothregionshaveexperiencedseverallarge-scalefinancialcrisessincethe1980s,namelytheMexicanDebtCrisisin1982,followedbythe so-calledTequilaCrisisin1994,theAsianFinancialCrisisin1997accompaniedbytheRussianCrisis,andtheArgentineCrisisin2000. However,roughlyspeaking,thisperiodinourhistoryalsohighlightsthefactthat,untilthecollapseofLehmanBrothersin2008,wehadneverfacedalarge-scalefinancialcrisissimultaneously. Infact,thecross-countrycorrelationofrealGDPgrowthbetweenLatinAmericaandAsiashowsrelativelysmallcoefficientsintheearly2000s(Slide1). InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |38 Thereasoncouldbethattheregionsaregeographicallydistant,andthusrelativelylessinfluencedbyeachother,particularlyintermsoftrade activity. However,thisrelationshiphadalreadybeguntochangeduringtheeraoftheso-calledGreatModeration,andhaschangeddramaticallysincetheLehmanshockandtherecentEuropeansovereigndebtcrisis. Infact,theabove-mentionedcross-countrycorrelationshowsasignificantincreasesince2008inthecorrelationcoefficientsofallmajorAsianeconomies,followingagradualincreaseinChinaandJapanafewyearsearlier. Althoughgeographicaldistancehasnotchanged,ourmutualdependencyintradehasdramaticallyincreasedsincethemid-2000s,drivenlargelybyChina,andowingtosignificantimprovementsintransportationtechnologyandadeclineinvarioustrade-relatedcosts(Slide2). InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |39 Thelinkageoftrade,andthuseconomicandfinancialactivities,betweenLatinAmericaandAsiaisexpectedtobestrengthenedfurtherinthefuture. Tradevolumeisdeterminedbythesizeofpopulationandthedegreeofcomplementarinessofgoodsandservices,iftransactioncostsaresufficientlysmall. ThecombinedpopulationsofLatinAmericaandAsiaareforecasttoremainatmorethan60percentoftheglobalpopulation.Asincomelevelsincrease,thetworegionscombinedareexpectedtobecomeoneofthelargestconsumermarketsintheworld(Slide3). Moreover,thetworegionshaveawell-balancedsupply-and-demandrelationship,rangingfromagriculturalgoodsandrawmaterialstocapitalgoods. ThisimpliesthatfuturetradeactivityinacombinedLatinAmericaandAsiacanbeself-sustainedwithouthavingtorelysubstantiallyon InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |40 advancedcountries. Asmutuallinkageofeconomyisenhancedthroughtrade,eventuallysoisfinanciallinkagebetweenthetworegions,includinganincreaseinforeignexchangetransactionsforthepurposeofrealdemandandhedging,aswellasanincreaseinstockpricecorrelationreflectingactivecross-bordercorporatetransactions. Thisheightenedinter-dependencyofeconomyandfinancialmarketsimpliesthatafinancialcrisisinoneregionhasadirectimpactontheother. Moreover,astheimportanceofacombinedLatinAmericaandAsiaincreases,sotoodoesthechancethattheyhappentobecometheepicenterofaglobalfinancialcrisis. Inthisregard,policymakersofthetworegionsaremutuallyresponsibleforthestabilityoftheglobaleconomyandfinancialmarket. Tofulfillsuchresponsibility,financialcooperationshouldnotbeconfinedtooneregion. LatinAmericaandAsiahavemanyissuesincommon.Addressingcapitalflowsisonesuchissue. Avarietyofregulationsandmacroprudentialmeasureshasalreadybeenintroduced,andhasbeentoacertainextenteffectiveineachofthejurisdictionsorregions. However,morestructuralissuesassociatedwithfinancialstabilityshould bediscussed,notonlyattheintra-regionallevel,butalsoatthe inter-regionallevelbetweenLatinAmericaandAsia. Thesestructuralissuesincludethedevelopmentofliquidanddeep capitalmarkets,andimprovementsinfinancialinfrastructure,includingderegulationandharmonizationofregulations. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |41 Moreover,fromalonger-termperspective,issuesrelatedtopopulationaging,andcorrespondingarrangementsofsocialsecurityandtaxsystems,alsoneedtobeconsideredcomprehensivelywithan inter-regionalviewinmind. 3.Asianexperienceonfinancialcooperation LetmenowturntotheAsianexperienceonfinancialcooperation,anticipatingsimilardiscussionoftheLatinAmericanexperiencelaterfromotherparticipants. (VulnerabilitiesinAsia) AlthoughoveralleconomicandfinancialstabilityhasbeenimprovedremarkablyinAsiasincetheAsianFinancialCrisis,therearestillvulnerabilitiesintheregion. First,thereremainsthedouble-mismatchofcurrencyandmaturityinthebankingsector. SuchvulnerabilitiesmaterializedinsomeAsianeconomieswhenU.S.dollarliquiditydriedupafterthecollapseofLehmanBrothers. WehaveseensimilarimpactsrecentlywiththedeleveragingbyEuropean banks. Second,inAsia,includingJapantosomeextent,thefinancialintermediationfunctionhasstillbeenservedlargelybyindirectfinancing,mostlythroughbanks. Giventhisfinancingstructure,alargenegativeshockhittingfinancialinstitutionsmakesitdifficultfornon-financialcorporationstogainsmoothaccesstodebtfinancingfromtheseinstitutions,almostregardlessoftheirfinancialsoundness. Third,thereisstilltheissueofscantinvestmentopportunitiesinAsianlocalcurrencies. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |42 AbundantsavingsinAsiahavenotbeeninvestedsufficientlywithintheregion,andhavethuseventuallybeeninvestedoutsidetheregion,suchasinbondsintheUnitedStatesanddevelopedEurope. Toputitinadifferentperspective,theAsianfinancialsectorremainshighlydependentonbanks,indicatingtheunderdevelopmentofregionalbondandothercapitalmarkets. Owingtosuchanunbalancedmarketstructure,Asianeconomiesareexposedtotheriskthatdomesticassetpricesbecomevolatilebecauseofrapidglobalcapitalflows,resultinginasharpincreaseinthevolatilityof foreignexchangerates. Also,theimmaturelocalderivativesmarketmakesappropriate risk-takingtransactionsdifficult,asrisk-hedginginstrumentsarelimited(Slide4). Moreover,owingtotheirless-developedsecuritizationmarkets,Asianeconomiesdonotsufficientlyenjoythemeritsofthesecuritization InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |43 schemesthatattractavarietyofinvestorsdependingontheirrisk-takingcapacities(Slide5). (Authorities’effortstoaddressvulnerabilities) HowhavetheAsianauthoritiesrespondedtothesevulnerabilities?Iwouldliketoexplaintheireffortsinthreeaspects. Todeveloplocalcurrency-denominatedbondmarkets. Thefirstisaprojectaimedatdevelopingliquidbondmarketstoprovideabridgebetweenabundantlocalsavingsandlocalinvestments:theABFofEMEAP,andtheABMIofASEAN+3. TheExecutives’MeetingofEastAsia-PacificCentralBanks(EMEAP)establishedtheAsianBondFund(ABF)investmenttrustin2003,and becametheinitialbuyersbyinvestinginsovereignandquasi-sovereignbondsintheeightmemberjurisdictions. Whenitwaslaunched,theFundwaslimitedtoinvestmentonlyinU.S. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |44 dollar-denominatedbonds. However,since2005,theFundhasbeguntoincludethosedenominatedinthelocalcurrenciesoftheeightmembers. Inaddition,EMEAPlaunchedanexchange-tradedfund(ETF)calledthePanAsianIndexFund(PAIF). ThePAIFwasfirstlistedontheHongKongStockExchangein2005,andlatercross-listedontheTokyoStockExchangein2009. AspartoftheASEAN+3process,theauthoritieshavelaunchedtheAsian BondMarketsInitiative(ABMI),aimedatpromotingbondmarkets. ThemostnotablerecentachievementistheestablishmentinNovember2010ofatrustfundintheADBcalledtheCreditGuaranteeandInvestmentFacility(CGIF). TheCGIFplanstostartitscreditguaranteeoperationsforlocalcurrency-denominatedcorporatebondsissuedintheASEAN+3jurisdictionsinthethirdquarterof2012attheearliest. AttheFinanceMinisters’andCentralBankGovernors’MeetinginMaythisyear,anothernewroadmapfortheABMIwasproposedandendorsedtofurtherpromoteresilientcapitalmarketsintheregion,forexample,byimprovingtheregionalcreditratingsystem,developingsmallandmedium-sizedenterprises’financeandsecuritizationmarkets,andraisingtheleveloffinancialeducation. Toestablishandenhanceacurrencyswapnetwork ThesecondresponsebyAsianauthoritiestotheregion’svulnerabilitiesisaprojecttoestablishanddevelopamutualframeworkofU.S.dollarliquidityprovision,calledtheChiangMaiInitiative(CMI). Aimedatimprovingtheregion’sresilienceagainstexternalshocks,theCMIstartedbuildingabilateralcurrencyswapnetworkintheregion,whichinvolvesacontingentclaimonforeigncurrencyreservesheldby InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |45 eachASEAN+3authority. TheCMIhassinceenhanceditseffectivenessbyincreasingitssizeandthenumberofparticipants. Infact,inMarch2010,theauthoritiesevolvedtheCMIframeworkfromitsoriginalbilateralswaparrangementstothemultilateralChiangMaiInitiativeMultilateralization(CMIM),whichisacollective decision-makingframeworksignedbyallmemberjurisdictionsina singlecontract. Toensuretheeffectiveimplementationofcrisispreventionandactual U.S.dollarliquiditysupport,itisessentialfortheauthoritiestomonitorcloselytheregionaleconomyandfinancialmarkets,andexchangeviews ontheirrespectivemacroeconomicpolicies. TheASEAN+3authoritiesthusestablishedtheirownbutindependentsurveillanceunit,calledtheASEAN+3MacroeconomicResearchOffice(AMRO),inSingaporeinApril2011. Recenteffortstoenhancefinancialstability Inadditiontotheabove-mentionedtwoprojects,momentumisbuildingamongAsiancentralbankstomakecross-bordercollateralarrangements(CBCAs),aimedatfurtherenhancingfinancialstabilityintheregion. CBCAsarearrangementswherebyacentralbankprovideslocalcurrencyliquiditybyacceptingforeigncurrencyassets,suchassovereignbondsinforeigncountries,aseligiblecollateral. Sucharrangementsalreadyexistinsomeadvancedcountries. CBCAsarethoughttobeaneffectiveframeworkparticularlyintimesofshort-termmoneymarketstress. Foreignfinancialinstitutions’branchesandsubsidiariesoftenlackstablelocalfundingsources,suchasretaildeposits. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |46 However,underaCBCA,theycanstillcontinuetoprovidecredittotheircustomers,whoareinmostcasesbranchesandsubsidiariesof non-financialcorporationsdomiciledintheirhomecountries. Infact,aCBCAwasestablishedinNovemberlastyearbetweentheBankofJapanandtheBankofThailand,astherearemanyJapanese non-financialcorporationsoperatinginThailand. Atalmostthesametime,aCBCAwasannouncedbetweenBankNegaraMalaysiaandtheMonetaryAuthorityofSingapore,andearlythisyearbetweenBankNegaraMalaysiaandtheBankofThailand. Meanwhile,EMEAPhasformedanactiongroupandmadeaCBCAreferencetemplatefortheirfutureexpansionintheregion.Sofar,theyarebilateralnegotiationsbetweentwojurisdictions,dependingontheirnecessity. Moreover,JapanandChinaaremakingeffortstoenhancemutualcooperationtowardsthedevelopmentoffinancialmarketsinthetwolargestAsianeconomies. Owingtocooperationbetweentheauthoritiesandprivatemarketparticipants,manytangibleoutcomeshavealreadybeenachieved,includingthepurchaseofChinesegovernmentbondsbytheJapan’sForeignExchangeFundSpecialAccountandthestartofdirectexchangebetweenJapaneseyenandChineserenminbiontheTokyoandShanghaimarkets. 4.Towardsinter-regionalfinancialcooperation Aseconomicandfinanciallinkagesdeepen,Ibelievethatthe above-mentionedeffortsandissuesaddressedinAsiacanbesharedmoreorlesswithLatinAmerica.Bothregionsalsohavecommonstructural problems. Ibelievethatitisfruitfulforregionsbearingsimilarproblemstoresolvethemcollaboratively. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |47 First,letmeraisetheissueofdemographicchangeandeconomicpotential. Slides6,7,8,and9showtheratioofworking-agepopulationtotherest,thatis,howmanypeopleofworkingagehavetoprovideforonedependentperson,forJapan,theUnitedStates,Asia,andLatinAmerica,respectively. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |48 InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |49 LowfertilityratesandpopulationaginghavebeenthemaincauseofprolongedloweconomicgrowthinJapansince1990. ThisisalsolikelytobecomeabigissueevenforKoreaandChinainthenot-so-distantfuture. SomeLatinAmericancountriesmayalsohavesimilarconcerns,althoughthedegreevariesacrossjurisdictions. Havingthisfuturevisionwellinmind,wehavetobepreparedevennowtoimplementthenecessarysocialreforms,includingtherestructuringofsocialsecuritysystems,taxreforms,andrevisionofemploymentsystems. Second,letusconsiderthedevelopmentofassetpricesandcreditexpansion. InSlides10,11,12,and13,thedevelopmentofpropertypricesandloansinrealtermsisaddedtothechartoftheworking-agepopulationratio(inversedependencyratio)inthepreviousSlides6,7,8,and9,respectively. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com
P age |50 InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com