Trade & investment

ICC experts discuss the financial crisis and its implications

  • 19 December 2008

The ICC Corporate Economists Advisory Group and Commission on Financial Services and Insurance held a joint meeting on 25 November to discuss the current financial crisis and its implications.

The meeting brought together business experts who provided accounting, credit agency, industry and regulatory perspectives on how to restore confidence in global financial markets.

As financial turbulence reached unprecedented levels worldwide amid a global credit crunch, the ICC panelists addressed the implications of the financial crisis for financial regulation, corporate governance, accounting standards, remuneration, including the risk profile of hedge funds and the investment strategies of sovereign wealth funds.

The meeting was attended by 50 economic and financial experts from 19 countries, including Czech Republic, France, Germany, Netherlands, Norway, Russia, Saudi Arabia, South Africa, Thailand, Turkey, United Kingdom and the United States. Guy Sebban, ICC Secretary General, opened the meeting.

“This is a breakthrough event, a first of its kind, where ICC experts from different horizons are brought together to offer analysis and suggestions on the implications of the financial crisis”, said Mr Sebban. “What are the driving forces behind the breakdown in financial markets? What are the consequences for today and what lessons must be drawn for the future? These are key issues for ICC,” he added.

The experts agreed that short-term speculation dominated for many years. A downturn combined with a low level of trust in the system led to this major crisis. They agreed that the recovery would take time, with credit markets still frozen. Slowdowns in consumer spending, business investment and the job market would cause further economic hardship.

From an accountancy perspective, it was recognized that more transparency was needed. Nicolas Véron, Research Fellow at Bruegel, mentioned that the “regulatory framework (Basel 2) should be redesigned to become less procyclical. This can and should be done without changing the accounting standards, which provide transparency which is crucial for investors’ trust: removing transparency would cause market conditions to deteriorate.”

In a discussion on the role of rating agencies, Pierre Cailleteau, Moody’s Chief International Economist, explained that “more regulatory supervision is unlikely to be the magic solution for rating agencies in terms of “getting the rating right”. He indicated that rating agencies have certainly to improve their capacity to deal with complex financial interactions and convince investors that their practices are sound. “Even a well-thought out regulatory framework per se is not sufficient. It is more important that agencies build the right analytical tools and metrics and contribute to market transparency rather than comply with more complicated regulations,” he added.

Key economists then discussed the development of the crisis with an outlook on the months to come.  Adrian Blundell-Wignall, Deputy Director of Financial and Enterprise Affairs at OECD raised the following question: “ Now we have to ask: can the effectiveness of markets as an allocator of capital amongst competing ends be relied upon in the future, when the trade-off between risk and return is now so asymmetric and banks know they are too big to fail?” Many argued that Basel principles may need to be reviewed. “ Basel 1 and Basel 2 favour mortgages and off balance sheet expansion and encouraged investment bank cost of capital,” said Mr Blundell-Wignall .

Thorsten Weinelt, CFA Global Head of Research & Chief Strategist at Unicredit, discussed major weaknesses: poor underwriting standards; weaknesses in risk management practices; poor investor “due diligence”; incentive distortions for originators and investors; conflict of interest with rating agencies; and weaknesses in regulatory frameworks.

Also addressing the meeting were Guillermo de la Dehesa, Chairman of the Centre for Economic Policy and Research and  member of the Board of Banco Santander; Jacques Le Cacheux, Director of Research for  the French Economic Observatory (OFCE);  Nils Terje Furunes, Group Corporate Economist, DnB NOR Bank;; Joseph Quinlan, Managing Director and Chief Market Strategist, Bank of America; Herbert Oberhänsli, Head of Economics for Nestlé; Sureyya Serdengeçti, Director of TEPAV Economic Stability Institute and former Governor of the Central Bank of the Republic of Turkey; Gérard Worms, Vice-Chairman of Rothschild Europe and Chairman of REXECODE; and  James Zhan, Officer-in-Charge of the Division on Investment and Enterprise at UNCTAD.

All participants agreed that the crisis was in some ways predictable. There was excessive abundance of capital in the system with a business model much more focused on earnings and incentives. Experts were fearful that “as the memory of this current crisis fades, we will be straight back into a process that leads to the next one”.

The meeting included participation by videoconference and teleconference from Saudi Arabia and the US. Follow-up meetings are already being scheduled and global scenarios for financial markets are being developed for publication in the first half of 2009.