New era of financial globalization

The 40th World Economic Forum in Davos focused on US President Barack Obama’s actions aimed at curbing the freedom of banks’ activities. It will be recalled that this caused, in the long run, the stocks of big US and European banks to drop. For this reason, many bankers warned about the likely negative consequences of strict world financial system regulation as a way to ride out the crisis. EU representatives at the forum said in turn that they were not planning to follow the US suit.

Which of the two positions is more farsighted in the light of a likely second wave of the world economic crisis? And what do Ukrainian bankers think about the so-called Obama Plan and the prospects of this strategy in the world? The Day put these and other questions to Roman SHPEK, a participant in the Davos forum, Ukraine’s minister of economics in 1993–95, and vice-president of Alfa-Bank (Ukraine), which was a partner organizer of Ukraine’s participation in the forum.

“The US president’s proposals do have a core of good sense. The idea is to try to avoid a conflict of destructive motivations for big banking groups, when these banks, on the one hand, attract deposits from individuals under governmental guarantees of minimal security in case of a default and, on the other, conduct risk operations, such as profit-oriented trade in securities under the guarantee of their own accounts. As these banks are too big, they are aware that the government will not allow them to ‘collapse,’ and this awareness motivates them to opt for a considerable risk in their investment activities – they thus risk the money of depositors and then the money of all taxpayers. Obama’s idea is to separate credit and investment business in big bank groups.

“Incidentally, this is not a new idea for the US: after the Great Depression of 1933, financial institutions were for the first time forbidden to combine credit and investment business. But then, after these tough restrictions, US banks began to lose out in competition against their European counterparts which did not have these kinds of restrictions and managed to combine all their profit-oriented activities owing to the globalization of business and trade and the intertwinement of financial services. So European banks began to oust US banks from the market and even absorb them. Those restrictions were canceled in 1999 under the pressure from Wall Street, and since then financial giants have been quickly ‘buffing up their muscles.’ Some say that this actually caused the great riskiness of banking operations, which resulted in a world crisis, while others believe that it is not only about banks – one should also take into account the non-banking sector, governmental policies, accounting standards, and the activity of rating agencies.

“To sum it up, I will say that a more proactive and comprehensive bank regulation is inevitable. Whether this regulation will be worldwide or nationwide is the subject of the ongoing debate in many places of the world, including Davos. Europe is not exactly rushing to implement US initiatives. Instead, it suggests a broader approach to this issue, putting emphasis on using banking standards as an instrument to avert a systemic risk. In his turn, the IMF chief Dominique Strauss-Kahn expressed concern over the likelihood of contradictions, inconsistencies, and incompatibilities, which may emerge if every country addresses the bank regulation problem on the basis of its own national situation, and urged the world public to make a global decision to be enshrined in a multilateral agreement.

“I also think one should take into account that 2010 is the year of parliamentary elections in the US and Europe, so politically-motivated initiatives catalyzed by disgruntled society will be hardly effective and can even do harm. Therefore, I would like to say again that global coordination is critical, because governments work locally, while the banking business operates globally. And the point is not in the magnitude but in the intertwinement of financial services. One should not fight against magnitude. One should aim all efforts at establishing effective financial regulation to offset destructive motivations and a conflict of interests.”

Do the abovementioned dilemmas matter for the Ukrainian banking system? What are the main risks for it today? In what way do you think they should be resolved?

“Naturally, the world crisis has also affected Ukraine. As a result, we have several nationalized banks. I would like to point out the role of the bankrupt institutions’ management. Undoubtedly, one must increase the liability of managers and shareholders for ill-considered and risky activities – this will be a preventive device for the future. In the current conditions, we are sending extremely dangerous messages to the future managers of banking institutions: ‘You may manage the bank as you please. All you have to do is rise steeply. In any case, you will be bailed out and go scot-free.’ I think we must speak frankly with society and, what is more, explain to it the true causes of the obtained consequences, instead of shifting all the blame to the global crisis.

“With regard to combining the investment and credit businesses, the Ukrainian banking system has not yet felt the acuteness of this problem because it is still in its infancy. Although we do have representatives of international players, they cannot conduct this kind of risky operations on the Ukrainian market. This results from an underdeveloped Ukrainian stock market and inadequate mutual intertwining and mutual penetration of financial instruments and services. What Ukraine should do first is to address and solve the problem of crediting faults in the context of currency-related risks. Naturally, Ukraine should learn international experience in the future and borrow the best, time-tested things.”

How can the likely change (towards stricter regulation) of banking policies in the countries in which the parent structures of many Ukrainian banks are located affect the situation in Ukraine?

“I do not think we should expect any major changes, as far as international players in Ukraine are concerned. This will only result in a greater stability of banks as financial intermediaries that help utilize financial resources more effectively. Besides, banking services will be safer for their users.”

How dangerous can the second wave of the world crisis be to the Ukrainian banking system? How can we forestall its main risks?

“Regarding the second wave, there is no overall consensus that it is inevitable. There are different viewpoints. First of all, these expectations are psychologically-grounded. Concerning the Ukrainian banks, I think they only became stronger during the first wave of the crisis and will endure the likely second wave far more easily. The main risk for Ukrainian banks today is not a hypothetical recurrence of the global crisis but the domestic crisis which poses a greater threat. Ukraine is still waiting for reforms. This country is under-reformed and needs to be modernized in all respects. The main economic sectors have lost their competitive power on the global market. So, to forestall this risk, which is more important for the banking sector, we need a quick transition to reform. This in turn depends on the political maturity of recognizing the results of the ongoing elections without any lengthy disputes and clarifications, as well as on an early formation of the government and implementation of a wide range of reforms.”

What conclusions did you draw from the Davos forum? In what direction do you think the world economy will be moving in the near future, judging by the forum participants’ sentiments?

“The 40th World Economic Forum, which was held this year, raised a wide range of questions – from the global economic crisis, the systemic financial risk, stock market regulation, and global warming to the problems of vaccination, education, and the ever-increasing role of virtual social communication in our life. The conclusive opinion of the forum participants about prospects for the world economy is based on the understanding that the peak of the crisis has already been passed, but one should not relax and just wait for a new economic boom. It won’t come. All we have to do now is learn the lessons of this period, find its root causes, and minimize the risks of a relapse. This is why there is a lively worldwide debate going on about stricter bank regulation and, what is more, the methods of carrying it out.”