OTTAWA, Jan. 20 /CNW Telbec/ - The financial sector is different-it is tied to every other segment of the economy and is critical to the functioning of a modern market system. Therefore, it must be treated differently, the Conference Board argues in a briefing that draws conclusions based on the financial crisis of 2008.
"The rapidly cascading sequence of events that followed the bankruptcy of Lehman Brothers in September 2008 reinforced the fact that the financial sector is a cornerstone for every other part of the economy. No other sector is so fundamental to economic activities; without it, capitalism would not be able to exist," said Louis Theriault, Director, International Trade and Investment Centre. "Paradoxically, the crisis revealed how business and consumer confidence are at the heart of the financial system. Without confidence, the system can crumble and the economy cannot function.
"The problems of Wall Street can quickly become those of Main Street if banks are unwilling or unable to lend to businesses and consumers. That is the situation we faced in the autumn of 2008, and central banks and governments needed to intervene in the financial system using the nation's balance sheets to restore confidence."
The near-collapse of the international financial system in the autumn of 2008 offers two specific lessons to prevent a recurrence. First, the financial system plays a special role in a market-based economy. Second, regulatory frameworks need a careful and indepth review, so that the global and national financial systems are operated responsibly to serve a wider interest. Canada was fortunate to avoid the worst of the financial crisis, and should take advantage of its credibility in international financial circles by demonstrating leadership in adopting changes.
The regulatory frameworks for the global and national financial systems need a careful and in-depth review and adjustment. Three areas emerge as priorities.
- Capital requirements - Capital requirements should be increased to
better represent the "real" risk underlying various securities, and
this should be accompanied by better due diligence to understand the
risks. Issuers of structured products should also maintain a larger
ongoing exposure to their own products.
- Transparency and accounting rules - Efforts to redesign regulation
should focus on rules that improve the transparency of the risks
being securitized. Also, new accounting rules should require hedge
funds to report risk positions on their balance sheets on a timely
- Incentive schemes - Compensation incentives in financial institutions
are largely driven by short-term returns that often are associated
with larger risk-taking. Therefore, financial incentives should be
changed so that they reward fund managers based more on their long-
term performance and less on their short-term returns.
This publication is part of the Conference Board's series Lessons from the Recession and Financial Crisis. The Conference Board's Forecasting and Analysis team has examined the developments of the past year and has drawn key lessons for the world and for Canada that deserve priority discussion among policy makers and business leaders.
SOURCE Conference Board of Canada
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