Financial Crisis:Financial Crisis:Is the World Safer than Before?Is the World Safer than Before?

Prof. Stephen Y. L. Cheung

Chairman

Core Group on Corporate Governance

PARNET

PECC

OverviewOverview

• Diagnosis of Crisis

• Early Warning Signals of Crisis

• Crisis Prevention

• Policy Implications

CrisisCrisis

• Large changes in asset prices or exchange rate– Financial institutions– Market participants

• Information arrives discontinuously

• Herding behaviour

• History keep repeating itself

Nature of CrisisNature of Crisis

• The nature is changing

• Capital-accounting crisis are replacing Current-accounting crisis

• Bank crisis

• Twin crisis

Are Crisis Predictable?Are Crisis Predictable?

• Traditional indicators– Current account deficits– Real overvaluation

• Non-traditional indicators– Non-performing loans– Foreign-currency debt (short-term)

Difficult to obtain undated information

Many Academic LiteratureMany Academic Literature

• Focusing on current-account deficits

• Nature of crisis are changing

• Unsatisfactory predictive power

• Early Warning Signal?

Crisis PreventionCrisis Prevention

1. Strengthen Surveillance

– Timely data are hard to obtain

– Who will do the job, IMF?

– Do we have the right people and resource?

Crisis PreventionCrisis Prevention

2. Enhance Transparency

• Different standards

• Lack of data; corporate exposures; off-balance-sheet exposures; forward market exposures; nonperformance loans.

Crisis PreventionCrisis Prevention

3. International Standards

• One standard, whose standard?

• Ignore local culture

• Hard to achieve in a short period of time

Crisis PreventionCrisis Prevention

4. Rationalize Capital-account Management

5. Moral Hazard

Policy ImplicationsPolicy Implications

• Liberalizing capital-account before reforming domestic financial markets is.

• Pros and cons on capital flows

• Short-term vs Long-term

• Difficult to step back

• Tax on the inflows – Chile

• Control on the outflows - ?

• Stock market intervention – Hong Kong

Cost-benefit analysis

Policy ImplicationsPolicy Implications

Regional CooperationRegional Cooperation

• Micro-issues– PARNET

– Institute of Director of East Asia (IDEA.net)

– A code of corporate governance

– Training for directors

– Business Sector Advisory Committee

• Macro-issues– Regional surveillance – ASEAN or APEC

– A single monetary unit?

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