September 13, 2009
Financial crisis demonstrates banks need adequate capital, gov'ts need to get regulatory balance right
The financial crisis demonstrates banks need adequate capital and governments need to get regulatory balance right, said Richard Reid, London Chairman of the global famous accountancy firm KPMG.
He said in a recent interview with media that there are a number of lessons people could learn from the crisis and all these lessons are very important. Though emerging economies were hit less by the crisis, they could also learn a lot from it.
"Banks have to get adequate capital for their balance sheet and we have seen a lot of discussions about capital requirements on banks last weekend by G20," said Reid.
From his point of view, it is very important to set the level of capital requirements on banks.
One important lesson from the crisis was to reinforce the review of risk, he added, because western banks get involved with a lot of pretty complex transactions with complex instruments.
"It is very important actually for financial institutions, no different from any other company, to have risk committees that understand what is going on financial institutions and then report up to the board," he said.
In July, the British government published a report named "Walker Review" and the review raised a great number of suggestions on the reform of bank governance system and bonus structure. "What the Walker Review is doing is to reinforce the risk committees," said Reid.
As for financial regulation, he said "regulation and the regulators are obviously actually the key in the lessons learned. We all need regulators, but the key is to make sure that we have appropriate regulation."
"What we don't want to do is to stifle entrepreneurship within any organizations, but make sure to encourage people to use their brains to develop companies. Clearly we need an appropriate level of regulation so people and the regulators can understand what's going on."
Another lesson is around remuneration. Reid said the lesson was also quite important and the Walker Review suggested linking the remuneration to more long-term performance.
"Everyone, companies, markets, investors, the pension funds, they are looking companies for the longer term not just for results what can happen today or tomorrow, but what can happen in next three or five years, 10 years or 20 years."
When asked which lesson would be the most important, he said "I don't think any one thing is more important. It is complication. Regulation is clearly the key. Transparency within organizations in the activities they do is clearly the key."
"The more complex deal that are taken, the more important it is one understands what the deal is."
In terms of emerging markets, "I think the lesson they can learn is how important they are," said Reid, "in terms of Brics' economies, they are extraordinary important."
He took China for example and said "the growth of China is hugely important to the world's economy. It is incredibly important for everyone."
He said that the Chinese market is huge with 1.3 billion people and now a lot of the biggest banks in the world are Chinese banks.
At the same time, he said that it is also important for emerging market to learn lessons about regulation so that regulators apply appropriate control over financial institutions. From his point of view, emerging economies should also look at the results of banks on medium-term and longer-term basis.
In addition, Reid said that organizations like G20 discussed the importance of emerging markets and it is an "important sign." "So we can work together," he said.
"It is also very important we understand that there are imbalance in the world where in the west we have had for years and years a tendency to spend more and in the east they save more," he added.
"Clearly, if we get these move slightly in the opposite directions, from the world trade point of view, it will be very beneficial," he said.