Int'l co-op prerequisite for global financial system reform

by Chen Wenxian

DAVOS, Switzerland, Feb. 1 (Chinese media) -- International

cooperation, not protectionism, is the precondition for global financial system

reform, world leaders and financial experts told this year's World Economic

Forum Annual Meeting, held here from Jan. 28 to Feb. 1.

FIGHT AGAINST FINANCIAL

PROTECTIONISM

During the five-day forum, participants sent a strong

message to combat financial protectionism. British Prime Minister Gordon Brown

warned that financial protectionism is a greater danger than trade protectionism

in the current world economic scenario.

Cooperation between major powers and global financial

institutions is vital to ensure a continued flow of credit to developing and

smaller countries, which are likely to be the biggest victims of the recession,

he added.

There is an implicit protectionism in what is

happening now, said Brown, referring to the moves of several countries to

restrict government funding for bolstering endangered banks to national

financial institutions and barring overseas operations from benefiting.

This is leading to the withdrawal of capital from

these institutions' foreign operations. "If this continues, what you will see is

a form of financial protectionism and financial isolationism," he said.

Developing countries, likely to suffer most in the

global crisis due to their still weak domestic financial sector, have already

seen a dramatic loss of capital, Brown added.

Meanwhile, German Chancellor Angela Merkel said the

global financial crisis may lead to the formation of a UN Economic Council, like

the UN Security Council, based on a global economic charter.

REFORM INTERNATIONAL FINANCIAL

INSTITUTIONS

Participants at the forum agreed that one of the

important steps for reforming the global financial system would be to rebuild

International financial institutions such as the International Monetary Fund and

World Bank.

According to Brown, new forms of international

institutions are vital to tackle future problems.

The IMF should take a greater role in heading off

crises and preventing them rather than dealing with the after-effects, while the

World Bank should tailor its operations to better deal with environmental

issues, he suggested.

However, it is not easy to strengthen international

financial cooperation and reform the global financial system.

Stephen Roach, chairman of Morgan Stanley Asia, told

Chinese media that a multilateral financial entity needs teeth.

"The problem is that there is no enforcement

mechanism, no penalties for bad behavior. Nobody wants to relinquish national

authority."

In an era of globalization, only international

financial cooperation and financial supervision can help establish a new and

effective global financial system, which has been agreed upon by both advanced

and emerging economies.

Last November's G20 Financial Summit in Washington

hammered out a blueprint for the new global financial system. The London G20

Financial Summit in April is expected to work out details for realizing that

goal.

REFORM FINANCIAL RULES

Current financial rules must be "fundamentally

revised" as they had deepened the global financial crisis, financial experts at

the Davos forum said.

Rules such as capital adequacy regulations and fair

value accounting were "well intentioned," but had proved to be inadequate, said

Stephen Green, chairman of the HSBC Group.

"Fair value accounting has added considerable

volatility to results, only part of which is economic, and the capital adequacy

regime has hobbled many banks with spiraling capital requirements just when

customers need them to be flexible with lending," he said.

These rules encourage banks to build up their capital

instead of lending money to their customers, which is against the efforts taken

by the governments.

So far, the U.S. and British governments have taken a

series of fiscal and monetary policies to push banks to restore lending. Central

banks in these countries have launched "quantitative easing" with an aim to

increase money supply in the market.

The financial system must also be less leveraged, the

experts said.

Improved risk management skills are required and

there must be an end to the "go for broke" incentive systems, both for traders

and for corporate chiefs, they said, adding that there should be limits on

"wild" derivatives with better and safer capital requirements.

According to them, banks in the future should clarify

their business and be put under strict supervision.

Alessandro Profumo, chief executive officer of

Italy's UniCredit Group, believes that banks in the future would specialize

either in commercial activities such as deposit-taking and lending or in

investment activities such as operating proprietary trading desks and

underwriting derivatives, not both.