Monday, November 28, 2011

The Global Economic Crisis and the Challenge of Reforming Banking and Finance Practice

As world economic leaders convene at the 40th World Economic Forum in Davos, Switzerland (DAVOS 2010), polls have shown that fears are mounting among business leaders being increasingly fearful of over-regulation by Governments. How to get out of the global economic crisis is key on the agenda but the concern for business owners particularly owners of financial institutions is how the outcome of their deliberations can affect the competitiveness of their actual and potential investments.
The general trend of responses by Governments to the global financial crisis is a tightening of regulatory freedoms for industry operators. In Nigeria for instance, more regulation has resulted in the Central Bank of Nigeria placing a straight 10-year ceiling on the maximum number of years an individual can serve as a Chief Executive Officer of financial institutions. This is in addition to stricter financial reporting obligations, the introduction of the common year-end policy coupled with the adoption of International Financial Reporting Standards (IFRS), amongst others.
It is expected that the call for thorough banking reforms will be a key agenda at the DAVOS 2010 Forum. As world economic leaders and their Governments debate the thoroughness of the proposed banking reforms, attention should be paid to their implementation in a way and manner that does not lead to Government over-regulation.
Business owners in all sectors of an economy, particularly owners of financial institutions have a genuine fear of industry over-regulation. This is because over-regulation can drastically alter the balance of competition that is so central to service delivery and consequently corporate and industry recovery. The modus operandi of the financial regulator is critical to the restoration of industry confidence both from the client and industry investor points of view. With the introduction of sound policies and practices, the industry will in no time be back on the path of growth and stability.
What may be termed over-regulation of the financial industry is at best relative. This will depend on the peculiar circumstances of the financial industry in each nation. The level of operational sophistication of the regulator and the operator are key determinants. As fears of over-regulation have become a global issue, it is important to note that what may be termed over-regulation in one country may be regarded as under-regulation in another. The industry structure, established systems, level of sophistication, historical antecedents and industry peculiarities are key factors to consider whether a policy initiative by the financial regulator is deemed to be over-regulating.
The unprecedented failure of financial institutions in developed economies has given credence to the argument that financial self-regulation is itself not entirely effective in dealing with the sort of economic crisis the world faces today. There is absolutely no doubt that some form of stiffer Government regulation is required. However, Government regulation should strive to strike a balance between maintaining depositor confidence as well as maintaining investor confidence in the industry. This is because over-regulation poses a serious risk to investor confidence.
The present global economic crisis has highlighted some of the weaknesses inherent in the purely pro-capitalist system of economic management. The free market economic system while being effective in the allocation of some scarce resources cannot effectively cater for some basic human elements such as fear of the unknown, greed and ambition. Some of these elements are prime motivators for individuals who are saddled with the responsibility of taking economic decisions on behalf of their financial institutions and Governments.
The bottom-line is that Banking and Finance reforms regulation need to be comprehensively focused and specialized so that the financial regulator can closely and constantly monitor the performances of financial operators. With such an approach, individual institutions or groups whose performances deviate from the norm can be quickly and accurately corrected. To this end, proactive strategies of regulation can be developed to preempt likely undesirable tendencies while reactive strategies can be implemented to deal with actual deviations from the norm. In line with the above, firm Government regulation is likely to be the popular clarion call for a long time to come.