Banking & finance

Disruptive forces still at play as financial markets recover

  • 1 July 2009

The recovery of the world’s financial markets depends on the interaction between regulation, finance and the real economy. However, other major driving forces including social, cultural and political factors are playing an increasingly important role in shaping the process, a workshop on the future of world financial markets concluded.

In partnership with ICC Monaco, ICC hosted the joint meeting of its Financial Services and Insurance Commission and the ICC Corporate Economists Advisory Group on 17 June. The session, entitled “Rebuilding Financial Markets: the Way Forward.” brought together an international body of high-level representatives from financial institutions, corporations, and civil society.

The participants analyzed the devastating effects of the US sub-prime mortgage crisis, recognizing that the magnitude and extent of the crisis around the world poses new challenges for financial institutions and business as a whole.

“Good management on the part of regulators, governments and the private sector is essential to assure the most desirable outcome,” said Commission Chairman Victor Chu. “In the face of mounting uncertainties, inaction is not an option.”

The experts concluded that while international coordination is desirable, it is not always efficient in reducing barriers to market integration. Measures from various stakeholders have a material influence on the trajectory, prosperity and sustainability of the financial markets, but culture, social norms and the political systems of individual countries play ever larger roles in shaping the process.

“Crises do not occur randomly and they tend to follow a pattern, occurring at time of a financial boom,” said Thierry Senechal, Policy Manager, ICC Commission on Financial Services and Insurance. ”To understand the driving factors and areas of uncertainties behind the crisis ICC has developed a major scenario planning project.”

“As financial turbulence reached unprecedented levels worldwide amid the recent crisis, ICC is developing narratives about how the future might unfold in the next ten years,” Mr Senechal added.  “ICC scenarios do not attempt to be predictions. Rather, they are provocative and plausible accounts of how relevant external forces — such as future financial and technological developments, economic conditions, emerging markets, the regulatory environment and protectionist endeavors — might interact and evolve, providing financial markets with new challenges and opportunities.”

Under a scenario of a stable economic recovery, the seminar concluded that global financial markets should be more integrated and financial institutions less speculative by 2020. Emerging markets will also play an increasingly important role given that they generally enjoy higher growth than markets in industrialized countries. A stable domestic political environment and improved governance and regulation should be contributing to their economic and social development.

The seminar concluded that large scale government interventions have become justifiable , especially in times of crisis, and that they are effective in revitalizing demand and restoring credit and confidence. Well-designed stimulus packages, consistent with longer-term national targets, work well to support demand and create jobs, but because these measures unavoidably distort competition and trade they should be temporary and their application limited as much as possible, the seminar concluded.

“A trend towards greater regulation and supervision is one of the major legacies of the crisis, and it has become widely accepted that proper rules are essential in safeguarding well-functioning markets,” Mr Chu said. “Strengthening accountability and transparency, improving regulation, enhancing the integrity of the financial markets, reinforcing international cooperation and reforming international financial institutions have become the themes of our era.”

Developments in enhancing risk management and supervision over large systemically important financial institutions is critical, the seminar concluded, with the collapse of Lehman Brothers demonstrating the economic and social costs of allowing such institutions to go under.

The crisis has also led to improved corporate governance practices focusing on the balance between economic performance, sustainable development and social responsibility. As investors are willing to pay a premium for well-governed companies, companies will voluntarily improve their corporate governance practices to restore trust and enhance their intrinsic values.