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September 30, 2013 11:54 pm
From Mr Frank Vogl.
Sir, Gillian Tett cogently highlights six elements in her article “Insane financial system lives on post-Lehman” (Insight, September 13) – permit me to add a seventh: the connectivity conundrum.
Official authorities greatly underestimated the immediate impact on global financial markets of allowing Lehman Brothers to collapse. The reaction across markets highlighted the intense degree of connectivity between all manner of participants in the financial system. There remains today a lack of clarity as to how best to map the multiple connections across the financial system’s landscape; build early warning approaches that can counter vulnerabilities; and find means of regulatory intervention to ensure that the failure of one institution does not – as Lehman’s collapse did – trigger a chain reaction that unleashes financial market chaos.
These shortcomings by regulatory authorities have made matters worse over the past five years. Almost certainly, the degree of connectivity across the financial system has increased as new technologies continue to accelerate the tempo of market actions and reactions. Fears of systemic risks have led official authorities to be ultra cautious: for example, US officials have admitted to concerns that some institutions may be “too big to fail”. The argument is that the criminal prosecution of a major bank, for example for international money laundering, could trigger sudden dangerous reactions across the financial system.
Responses to the connectivity issue by regulatory authorities have been piecemeal. There have been initiatives led by the Financial Stability Board to impose special requirements on “systemically important financial institutions”. This ignores the fact that smaller institutions in today’s highly connected world can do enormous damage (Lehman and Northern Rock, for example, would have been too small to be on the systemically important financial institution list). Inadequate progress has been made on developing resolution systems and seeking to end the “too big to fail” phenomenon. For example, the European Union’s current efforts amount at best to a rough sketch for implementation many years hence. For example, major banks have not fully agreed to publishing and regularly updating fully transparent “living wills”.
The response to the connectivity conundrum needs to start with increased co-ordination among the multitude of financial regulatory authorities. They need to work together in ways that acknowledge that the financial system today – including financial speculators and institutions engaging in financial crime – does not recognise national borders. The FSB and the International Monetary Fund should be far more assertive leaders.
There is also a need to bring the Financial Action Task Force, or a new multilateral institution with some teeth, fully into the frame so that it is better understood that risks to the financial system come not only from inefficient financial institutions, but also from those who use corrupt practices and money laundering to boost their profits.
Frank Vogl, Washington, DC, US
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