OECD-ADBI 10th Roundtable on Capital Market Reform in Asia

This 10th edition of the Roundtable brought together more 100 representatives from government, the business and financial sectors, and academia, from Asia, the Americas, and Europe, to discuss and debate the causes of the global financial crisis, and the impact on and implications for capital market development in Asia.

The Roundtable was born ten years ago in the wake of the East Asian financial crisis. The idea at the time was that the mature OECD countries could help the East Asian economies in their post-crisis reform. On its tenth anniversary, the Roundtable met in the midst of another crisis, this time a crisis emanating from the developed world.

The international community -- G20, G8/G7, IMF, World Bank, OECD, Asian Development Bank and other regional development banks – is responding decisively to the crisis. For its part, ADBI is conducting a series of conferences related to major aspects of the impacts of the crisis. As a contribution to the global effort, the OECD has recently published its Strategic Response to the Financial and Economic Crisis.

The roundtable comprised six sessions:

1. global financial crisis: causes, impacts, policy responses, latest developments & trends;
2. impact of the global financial crisis on Asia & the Asia response;
3. implications of current market developments;
4. financial education;
5. regulatory efficiency and effectiveness; and
6. corporate governance.

The causes of the crisis were discussed at different levels. Underlying the crisis was optimism bred by a long period of high growth, and low real interest rates and volatility. Looking into the crisis in more detail, financial innovation and deregulation came together to create the toxic products that were at the root of the current crisis. Inadequate supervision of the financial sector was an important contributor to the creation of the housing price bubble, which eventually collapsed in mid-2006. Further, over recent years there was a relaxation of residential underwriting standards.

Hedge funds, private equity funds and innovative financial products have all featured as segments raising significant concerns regarding financial stability and needing increased surveillance and regulation. Most assessments of the origins of the current global financial crisis conclude that highly leveraged funds did not play a significant role, partly because their leverage was lower than often assumed. Instead, the main sources of instability were found in the highly regulated banking sector, where leverage was sometimes far higher. Therefore, most assessments focus on the need to increase surveillance of hedge funds and other lightly regulated entities, and to maintain dialogues with major hedge funds, although there are increased calls for regulation of systemically important hedge funds.

Concerns about innovative financial products, especially derivative products such as credit default swaps and asset-backed securities, center on the need for standards in the origination, distribution and trading of such products and their capital requirements. The problems are much greater with asset-backed securities, where markets remain frozen due to uncertainties about valuation and the implications of market-clearing prices for bank capital. The toxic effects of the combination of the originate-to-distribute banking model and the reliance on sophisticated but opaque financial instruments highlighted widespread failures in regulatory coverage, the Basel II capital adequacy standards, international regulatory cooperation, corporate governance, management incentives, risk management practices, accounting standards, and the behavior of regulators and credit rating agencies.

The global financial crisis has been affecting Asia mainly through indirect impacts. Direct effects have been small as emerging Asian banks have limited exposure to subprime losses though the region experienced greater volatility in financial markets, exchange rates and equity markets. The major impact of the crisis on Asia is through trade and export-driven investment. For over 30 years, Asia has been building up a supply chain to feed western consumption, particularly in the US and Europe. The declining consumer demand in these advanced economies has led to significant drop in Asian exports. There is also a risk of declines in migrants' remittance inflows to countries like the Philippines, India, Indonesia and Viet Nam. Tighter access to international liquidity has hit countries like Korea and Indonesia, while all countries have been affected by more limited access to trade credit.

Looking to both the short- and medium-term, East Asia will have to generate more home-grown growth. The region needs to undergo structural adjustment to a semi-permanent decline in US consumption by shifting away from an external (US and EU) demand-dependent economy towards a regional (Asian) demand-driven economy.

To date, national responses to the crisis have been faster than regional or global responses. In addition to contributing to the global effort, Asia needs to develop a stronger regional response through policies in the following areas: reviving economic growth and financial stability; rebalancing growth away from export dependence; and strengthening regional co-operation.

Read the full summary of proceedings.