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Speech of the President for the GCC Regional Conference on the “Global Financial

Market: The Road Ahead” on January 14-15, 2010 – The Diplomat Radisson Blu

Hotel, Kingdom of Bahrain

Good Evening

Hon’ble Chief Guest Mr. R Bandyopadhyay, Secretary, MCA, Government of India

And Guest of Honour:

Mr Abbas Al-Radhi, Chairman, Bahrain Accountants Association & President of the

Arab Federation of Accountants & Auditors,

Mr. Kamal Ahmed, COO, Bahrain Economic Development Board

Ms. Usha Narayanan, Executive Director, Securities & Exchange Board of India

and

Dignitaries from CBB & Bahrain Stock Exchange

And Professional Brethren,

I am indeed very happy to be here amidst all of you on the occasion of GCC

Regional Conference on the “Global Financial Market: The Road Ahead”. This

Conference has been a congregation of eminent dignitaries from leading Regulatory

bodies and institutions and renowned professionals from diversified industries from

all across the globe to start a dialogue and build a platform to deliberate on the

Future of the Financial Market amidst turbulent times.

Over the last year, the financial planet has gone through a major turmoil and it is

widely believed that the sharpest phase of the crisis is behind us. The stimulus

packages and macro-economic measures have seen green shoots. But are these green

shoots or yellow weeds? Is it time to relax or take measures to shape the future of

financial markets from here on?

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The global deleveraging that first hit the world economy in mid-2007 and that

accelerated in autumn 2008 could not have been possible without the rare

coincidence of a number of market failures and triggers, some reflecting

fundamental imbalances in the global economy and others specific to the functioning

of sophisticated financial markets. Chief among these “systemic” factors were the

full-fledged deregulation of financial markets and the increased sophistication of

speculation techniques and financial engineering. Other determinants were also at

play, particularly the systemic incoherence among the International trading,

financial and monetary systems, not to mention the failure to reform the global

financial architecture. Most recently, the emergence of new and powerful economic

factors, especially from the developing countries, without the accompanying reform

needed in the framework governing the world economy, accentuated that

incoherence.

A better understanding is required of how lack of proper financial regulation set the

scene for increasingly risky speculative operations in commodities and currency

markets and of how across-the board financial deregulation and liberalization have

contributed to global imbalances. In doing so, a clearer vision may emerge of how

these and other systemic shortcomings can only be remedied by vigorous reform.

While driving for Financial Inclusion and Equitable Growth, the discussion points

that may come to the mind of the financial Experts are:

• What will be the key determinants of sustainable growth of financial markets?

What role will market reforms play in ensuring future development of financial

markets on a global level?

• How can exchanges foster fund flows and liquidity significantly, given the need to

integrate with global economies?

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• How can banks accelerate the move towards financial inclusion and equitable

growth by increasing their presence in rural areas?

• More than 80% of global derivatives trading activity takes place off-exchange

(OTC). In this situation, how important is it to move OTC trades to regulated

markets and why?

• What role does technology, customized offerings and new asset classes play in the

financial market spectrum to attract further investments from global entities?

A year later, we are on the track of recovery fuelled by the harmonic pumping of

liquidity by the Federal Reserves across the nations and other corrective measures to

restore normalcy. Economic recovery and the resulting increased risk appetite is a

serious concern which worries the regulators of every nation.

Financial regulation: fighting today’s crisis today

The financial sector acts as the central nervous system of modern market economies.

Finance is intrinsic to successful economic development, but like most powerful

tools, it can also cause great damage. There are, however, several misconceptions

regarding modern financial regulation. The most fundamental of these is the

assumption that “markets know best” and that regulators should take a back seat

and not try to guess them. Governments and regulators can and should play an

active role in monitoring and controlling markets. They are able to do so because

they are privy to the same information available to market participants, but only

they are in a position to detect and avoid systemic risk by understanding better than

market participants the limits to and the dangers of “irrational exuberance”.

Lessons for developing countries

Developing countries are paying a steep economic price for a crisis that originated at

the centre of the world’s financial system. They need to consider how they can

protect themselves from external financial shocks. Moreover, most developing

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countries are rightly trying to build deeper and more (functionally) efficient financial

systems, and this crisis should be seized as an opportunity to expose the hidden

risks of financial development and how more sophisticated financial systems require

more, and not less, regulation.

Primarily I would like to segregate my suggestions for developing nation into two

folds:

1. Financial development requires more and better regulation

Developing countries tend to have financial systems that are less functionally

efficient than those of the advanced economies. Given the importance of finance for

investment in fixed capital and growth, several developing countries adopted

ambitious structural reform programs aimed at modernizing and improving their

own financial systems. However, there are serious doubts as to whether these pro-

market policies were successful in their aim of increasing the social efficiency of their

financial sectors.

2. There is no one-size-fits-all financial system

Developing countries face a difficult trade-off regarding the design and regulation of

their financial systems. On the one hand, access to finance is necessary for economic

development. On the other hand, as seen above, a more sophisticated financial sector

is also likely to lead to an increase in total risk. If the second effect dominates the

first, financial development may lead to an increase of systemic risk. Until recently it

was believed that good financial regulation could be a solution to this trade-off and

most countries could build financial systems that are both sophisticated and stable.

The current crisis suggests that this objective may not be within the reach of most

developing countries, at least in the near future. In choosing where to position

themselves in the continuum between financial sophistication and stability,

developing countries should recognize that there is no model that is right for all

countries or at all times. Each country needs to find the model, which is most

appropriate for its current level of development, needs, and institutional capacity.

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Regulators around the world must be chastened by what has befallen global finance,

but equally determined to draw the lessons and be up to the reform tasks that lay

ahead. A Herculean effort will be called for not only as penance for what has already

occurred but as proof that the system can be fixed and can deliver the

functional/social efficiency expected of it. Therefore, the most important task is to

ensure that financial efficiency is defined as the sector’s ability to stimulate long run

economic growth. Transaction costs, the number of available instruments, or the

overall size of the financial system are only relevant if they contribute to increasing

social welfare, they should not be objectives per se.

It is necessary to develop a macro-prudential regulatory system based on

countercyclical capital provisioning and to develop institutions for the supervision

of all the different financial markets that are focusing systemic risk and nothing else.

ROLE OF ACCOUNTANTS IN TACKLING FINANCIAL CRISIS

Within the context of both domestic and international challenges, the accounting

profession therefore plays an important complementary role towards building a

credible, reputable and internationally competitive economy, irrespective of the

capacities in which they perform. This includes not only in your capacity as auditors,

but also as advisors, consultants, directors or even as members of the corporate

sector. The higher the quality and integrity maintained by the profession, the

stronger and more resilient will our markets be.

Our best tool to combat the damage is a well functioning financial system. Policy

makers need to put finance back on its feet within days and not weeks, so that

financial and non-financial firms can better navigate the difficulties of the coming

year. As indicated by various G-20 recommendations also, we need to take steps in

various directions:

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Monitoring Financial Stability- One key area of regulation:

Conserve cash and control costs.

Diversify the sources of capital and establish new credit lines.

Secure receivables and supply chains.

Seek out strategic assets.

Consider a new capital mix.

WHAT IS THE SOLUTION:

1. Aiming at building strong international institutions:

2. Creating transparent markets:

3. Promoting ethical values

Through such conference we should provide a platform for interaction between the

practitioners, academicians, regulators and a general investor to come together and

share knowledge and experiences that can help the world to come out of the global

economic crisis.

Last but not the least I would like to congratulate the entire managing team of the

Bahrain Chapter of ICAI for keeping the Chapter so much vibrant and for organizing

various programmes of professional interest. All these efforts are laudable and I am

sure that in times to come, the Bahrain Chapter would continue to play its due role

in furthering the Mission of Indian Chartered Accountancy profession which

positions itself as the Valued Trustees of World Class Financial Competencies, Good

Governance and Competitiveness.

Thank you all.