This research material discusses the scenario prevailing in the Global economy and provides a glimpse on the effects of the global financial crisis and the significant measures taken under the theme of 'God's Global Governance'
Individual regulatory systems need to be revamped in order to better monitor threats to the whole financial system. As agreed upon by the G-20 leaders, leverage should be more strictly controlled in financial firms. The revamp of risk management and accounting systems means the introduction of a "leverage ratio" that would systematically measure the degree to which financial market players have borrowed beyond their ability.
Banks should be required to increase their capital ratios in good times in order to create a cushion for future downturns. Authorities should also introduce or enforce minimum margin requirements on derivatives and other securities contracts. The so-called "value at risk" method of estimating the capital requirements of banks is also likely to be tossed out or revised.
Hedge funds that are "systemically important" should be subjected to greater regulation and oversight, as will all key financial instruments, markets and instruments. Compensation schemes to be developed taking into consideration sustainability. Improved valuation methods should prevail and greater regulation on credit rating agencies.
The Financial Stability Board was constituted by G20 which will provide guidance and expertise in the regulatory overhaul effort. Bankers' pay will be aligned with institutional performance to ensure that government-backed banks do not continue to dole out large bonuses. Regulators should be able to restructure pay so that the compensation of its highest earning staff can be reviewed annually.
A strengthened Financial Stability Board (FSB) will contribute to the development of policies and monitoring practices around the world.
Since the crisis, consumer protection has attained significant importance. Hence, we will move from de-regulation to re-regulation and thereby improve risk, governance and reporting requirements for the benefit of the customer. The G20 and other global organizations are working on various measures to protect the consumer, such as common principles of consumer protection, improving disclosure requirements, and stronger oversight regimes for credit rating agencies.
The U.S. Dodd-Frank Act established a new framework for regulatory and supervisory oversight of the over-the-counter (OTC) derivatives market, which is estimated at more than $600 trillion. According to Dodd-Frank, the Commodity Futures Trading Commission and the Securities and Exchange Commission must share regulatory and supervisory authority for OTC derivatives. The New Basel 3 rule increases the liquidity and capital adequacy requirements of banks. The Volcker Rule was enacted under Dodd-Frank Act to restrict proprietary trading.
Regulatory realignment is the solution for financial stability. Basel 3 focused on increasing the quality and consistency of capital, increasing counterparty credit risk charges, increasing the quantity and quality of liquid assets and funding profile of banks, and developing the guidelines for systemically important banks. The bank's Tier 1 capital is mostly made up of ordinary shares termed "Common Equity Tier 1". Non-common Equity Tier 1 capital is subject to strict conditions and must be capable of supporting a bank on an ongoing basis. Significant changes are also made to Tier 2 capital.
The Tier 1 capital ratio must be increased from the current 4% of risk weighted assets to 6%. The Common Equity Tier 1 ratio must also increase from 2% to 4.5%.The counterparty credit risk charges are increased by ensuring that derivatives, repos and securities financing activities that are not cleared with a central counterparty are subject to (i) much higher capital requirements for counterparty credit risk and (ii) more robust margining, collateral and disclosure requirements.
In 2013, Basel 3 had come up with revisions in liquidity coverage ratio. Banks would have to meet only 60% of the Liquidity coverage ratio obligations by 2015, and the full rule would be phased in annually through 2019. The longer time-table for applying would ensure costs are spread gradually. It will also kick-start the mortgage backed securities market.
The Global regulatory reforms and the transformation in global financial architecture after the crisis impacted Universal Banking Groups. Universal Banks have abandoned business and locations, through forced disposals or severe cost –cutting. They are also revisiting their strategies in business lines such as equity derivatives and fixed income. Some of them focused on asset management while others exited or rebalanced the equity business. In a world of lower leverage the old investment models don’t work anymore.
Global Goverance has called for a coordinated effort to stop international tax evasion, urging governments to systematically share bank data and also to measure the tax havens. Money lying in tax havens needs to be measured, managed and controlled. Every government needs to be transparent. The automatic exchange of tax data, an approach which United States has adopted will represent a major change from the current procedures. The Foreign Account Tax Compliance Act, (FATCA) has given impetus for this new approach. Tax Havens may become less attractive Business Models.
The current realignment of the global architecture will support the achievement of one of the eight "UN Millennium development goals" to further develop an open, rule-based, predictable, non-discriminatory trading and financial system, which includes a commitment to good governance, development and poverty reduction- both nationally and internationally.
Economies need to integrate the principles of sustainable development into their policies and programs and reverse the loss of environmental resources. This will also enable such economies to achieve the UN Millennium development goal of "ensuring environmental sustainability." Countries such as Qatar have also made environmental development one of the pillars of its national vision. The financial sector can also participate by taking steps to manage climate change and mitigate global warming. The financial sector can contribute in the areas of carbon trading and green banking.
Systematically important banks have also been under focus as part of the Global regulatory reforms. Unwinding global financial institutions will be challenging. Preventing collapse of small banks are equally important. The cost of regulation should be worth to ensure sustainability in the financial system. There should be agreement on measures for cross- border resolution. With global regulatory reforms underway, the European Crisis began to unfold in 2010. The Euro crisis has also given new lessons to God's Global Governance. The United Nations should be empowered to decide on the countries rating as a part of global governance.
It was my privilege to meet H.E.Ban Ki Moon in February 2010 for a wide-ranging discussion on global governance. If we take stock of the failures of the regular metrics, we see that accountants have failed and regulations have failed. The only solution I found is to empower the UN as an unbiased entity. It should control the rating agencies. We should empower the United Nations and provide the sufficient support for a measurement mechanism, one which is fair and equitable. The necessary infrastructure and funding should be created to have global governance. As such, I expressed my thoughts during my Interview on CNBC In February 2010.