Transcript Slide 1

Building Financial Markets and
Institutions: The Place of Values,
Knowledge, Wisdom and Understanding
AG Garba
Presentation at IV Plenary of
Central Banking, Financial System Stability and
Growth Conference
May 04, 2009
1
OVERVIEW
1.Background
2.To Build, Reform or
Transform?
3.Game Changers
4.Building a Sound Financial
System
5.Conclusion? – Food For
Thought
2
Background (1): Conceptual Issues
1. Financial Market or System?
Financial Market:
a.
b.
c.
d.
Products?
Allocative or Rationing device? – efficiency, transaction
costs, optimal intermediation
Discovery or Creative Process? - adverse selections;
moral hazards; credit crunch; volatility; etc
Partial, General or Global View? – volatility; contagion;
global games and adaptations; strength of national
banking and financial systems; capital controls; reform
of global financial architecture; etc
Financial System:
a.
b.
c.
Real-Financial Nexus?
Safest and Fastest Growing/Sustainable Economic
Growth?
Same issues as c. above.
3
Economy-Finance Nexus
1.
2.
3.
4.
5.
6.
Links to national income account
Links to external accounts
Links to private sector account
Links to public sector account
Implications for Money Survey
Implication for Competitiveness
4
Some Indicators of Real-Financial Relations
8000000
Fig 1A: Net Foreign Assets and Gross Fix ed Capital
Formation, 1 981 -2007 (Million Naira)
Fig 1B: Gross Fixed Capital Formation and Domestic Credit,
1981-2007 (Million Naira)
6000000
5000000
7000000
4000000
6000000
3000000
5000000
2000000
4000000
1000000
3000000
0
2000000
-1000000
1000000
-2000000
0
-3000000
1985
1990
1995
2000
2005
Net Foreign Aassets
Gross Fixed Capital Formation (1990 Prices)
1985
1995
2000
2005
Net Domestic Credit
Credit to Government
Credit to Private Sector
Gross Fixed Capital Formation (1990 Prices)
Fig 1C: NFA and Domestic Credit, 1999-2007
(Million Naira)
8000000
1990
8000000
Fig 1D: NFA and Net Other Assets, 1 981-2007
(Million Naira)
6000000
6000000
4000000
4000000
2000000
2000000
0
0
-2000000
-2000000
-4000000
-4000000
-6000000
99
00
01
02
03
04
05
NFA
Net Domestic Credit
Credit to Government
06
07
1985
1990
NFA
1995
2000
2005
Other Assets
5
Background (2): Conceptual Issues
2. What Type of Players and Referees?
Players (Borrowers, Lenders, Intermediators)
a.
b.
c.
d.
Knowledge Problems: Information Asymmetries and
Computational Skills (Collaterized Securities and
Derivatives)
Typologies : (i) wealth seeking; esteem seeking and wisdom
and truth seeking (Plato) – extrinsic versus intrinsic
motivations and (ii) worldly or righteous
Moral Strengths and Deficiencies (susceptibility to being
corrupted and willingness to corrupt)
Implications for Markets; System and Institutions (Moral
Suasion vs. Incentives)
Referees (Regulators)
a.
b.
Knowledge Problems; Motivations; Moral
Strengths/Deficiencies (susceptibility to corruption)
Separation from Players; Guardians or Actors?
6
Liberalization, Bubbles and Bursts
•
•
Western referees (governments and regulatory agencies like the Fed, OCC
and FDIC) have a monumental challenge; striking a balance between
protecting the system against systemic volatility and allowing the market to
penalize speculators (gamblers) and risky investors.[1] No one knows what
the right balance is. It is clear however, that the trade-off is brought about
and tightened by deregulation, gambling and risky investments the same
forces driving global financial integration.
Historical evidence indicate that deregulation is known to be behind “just
about every banking crisis in recent times.” Much of banking history from
the Dutch Tulip bulbs (1637), South Sea Bubble (1720), Mississippi Bubble
(1720) to the bubbles of the 1990s has been one of successive speculative
bubbles. Recent speculative bubble “tend to be fuelled by an explosion of
credit, a wave of unwarranted optimism and a subsequent mispricing of
risk” and then, the burst (The Economist, October 28th 2000). In all
speculative bubbles, the player-referee relations looms very large.[2]
Although, not as direct as was the case in the South Sea Bubble and the
Mississippi Bubble, referees have been linked to the unwarranted optimism
and mispricing of risks that trigger speculative bubbles. (Garba and Garba,
2001).
7
Players: Asymmetries and
Contradictory Behaviors
• Firm behavior:
selective financial misrepresentation is the only strategy that can
ensure that its stock price will outperform the market as a whole
and thus provide it with the additional credit that drives financeled growth.
• Behavior of Individual investor:
knowledge of selective financial misrepresentation heightens risk
aversion, provides incentives for investing in portfolios which
replicate the market and, as such, denies firms the credit that is
used to drive finance-led growth.
Watson, Matthew. "Whither Financialisation? The
Contradictory Microfoundations of Finance-Led Growth
Regimes"
8
Background (3): Conceptual Issues
3. The Financial Products
Capital, Bonds, Money, Commodities, Foreign
Exchange, Derivatives
Essence of Products:
a.
To Facilitate Investment and Growth; Consumption and
Living Standards and; Domestic and International Trade
b. To Transfer of Risks; Guarantee Security; etc.
c. To offer opportunities for channeling dangerous human
proclivities into money making: thereby saving society
from “cruelty, the reckless pursuit of personal power and
authority, and other forms of aggrandizement”
(Keynes:1937:374).
9
Background (4): Conceptual Issues
4. Institutions and Policy Regimes
Rules plus Enforcement
Banking, Capital Market, Pension Market and
Insurance
Universal Banking
Transaction Costs
Corruption and Money Laundering:
AML/CFT
Protection of Depositors and Investors
Deregulation and Liberalization
10
Background (5): Conceptual Issues
5. Environment
Economic Structure and Balances: national accounts,
public, private, external, money survey and savings-investment
Global Financial Architecture and Crisis: action-lag,
market-state failures and consequences
Industry Character and Current Challenges
1.
2.
3.
4.
5.
6.
Margin Lending Loses: >$10 Billion?/Effects on Banking
System and Inter Bank Lending, Interest Rates, Forex Trading
Stock Market Crash: from >14 trillion to <5 trillion; declining
asset prices and volatility/AP Case
Forex Market: Volatility; Excess Demand; Devaluation
Pension Funds: Is it secure? Is it productive?
Insurance: How Strong and How Effective?
External Imabalnces
11
II.
To Build, Reform or Transform?
(1a)
1. To Build:
a. On what foundation? FSS 2020?
Existing Institutions?
b. Who builds, For Whom and to What
Purpose (s)?
c. How to build and using what
resources?
d. What is the building Plan?
12
II. To Build, Reform or
Transform? (1b)
The Structure of the Nigerian Financial Services Industry Today
Insurance
General
Pension Funds
Management
Banking
Capital
Markets
Issuing
houses
Infrastructure
Providers
Specialized
FIs
Reformed
Stock
brokers
Reinsurance
Life
Development
banks
Banks –
Universal,
Community,
Microfinance
PMIs
Nigerian Insurance
Commission
Finance
Companies
Discount
Houses
Central Bank of Nigeria/ Nigeria Deposit
Insurance Corporation
Regulatory Influence
Payments: Interswitch, Valucard, ATMC,
NIBBS, CSCS,
Pension Fund
Administrators
Portfolio
Managers
Pension fund
custodians
Investment
Advisers
Trustees
National
Pension
Commission
Security &
Exchange
Commission
Universal Banking
Other providers: Securicor, Excel
Cash Services, Rating Agencies
13
II.
To Build, Reform or Transform? (1c)
Table 1A: FSS 2020: Vision, Mission and Context
1. Vision
 To be the safest and fastest growing
financial system amongst emerging
markets
2. Mission
3. Contextual
Issues in
Strategic
Design
o
o
o
o
“To drive rapid and sustainable
economic growth primarily in Nigeria
and Africa”
National Economic Aspirations
Global & Local Economic Trends
Industry Character & Dynamism
Source: C. C. Soludo (2007): “Nigeria’s Financial System Strategy 2020
Plan “Our Dream”, Presented at FSS 2020 International Conference,
Abuja, Nigeria, JUNE 18TH 2007
Table 1B: FSS 2020: Dimensions and Outcomes
Dimensions
Outcomes/End State
1. Vision Timeframe 2020
2. Geographic
Emerging Markets
Dimension
3. Scope of
Full bouquet of financial
Offerings
services
4. Growth Rate
Fastest Growing
5. Size of Economy Top 20
6. Role of Financial Driver & Catalyst
System
7. Sector Target
Full diversification of the
economy
8. Additional Focus Efficiency & Safety
Source: Same as Table 1A.
Table 1C: FSS 2020: Strategic Tripod
I. Strengthen 1. Develop competence and skills for financial
the
services industry
domestic
2. Leverage on the oil and gas sector to develop the
financial
non-oil sectors
market
3. Integrate the informal financial sector into the
formal financial sector
4. Improve access to finance
5. Build an integrated infrastructure for the
financial industry
II. Enhance
1. Creating a platform for seamless and robust link
integration
to international financial markets
with
2. Pursuing currency convertibility while
External
maintaining macroeconomic stability
Financial
3. Maintaining a healthy foreign reserves level
markets
4. Assisting in the progressive unification of trade
and commercial laws among ECOWAS and AU
countries
5. Creating an enabling environment for entry of
global financial services providers and export of
local financial services operators
III. Build an
Internatio
nal
financial
centre
1. Lekki Financial Corridor
2. Incentives to attract Foreign Players
o Building Human Capital
o World-class communication and technology
infrastructure in the Financial Services Sector
o Creating World-class legal and regulatory
framework and practices linked to
international jurisdiction
o Establishing a capital account liberalisation
and currency convertibility environment
o 100% foreign ownership
o Internationally competitive tax rate on
income and profits
Source: Same as Table 1A.
14
Indicators of External Imbalances
Table 2: Selected External Balances, 1999-2007 (Million US$)
Years
Trade
Invisibles Net FDI Current
Capital
1999
3521.9
-5054.9
19.2
-1533.0
3957.4
2000
9408.9
-5010.9
32.8
4398.0
-385.4
2001
4435.7
-6041.5
30.2
-1605.8
-690.5
2002
4137.2
-5535.5
67.8
-1398.3
-3614.2
2003
7789.7
-5498.6
100.9
2291.1
-6616.6
2004
19593.5
-6871.3
149.1
12722.2
-6848.0
2005
19517.9
-5215.7
195.9
14302.2
-20514.2
2006
11317.8
-10829.2
322.4
488.6
-12376.3
2007
22539.8
-28934.3
428.6
-6394.5
-2580.4
Average
11362.4
-8776.9
149.6
2585.6
-5518.7
Cummulative
102,261.6
-78,992.1
1346.4
23270.4
-49,668.3
Source Data: Central Bank of Nigeria (2007), Statistical Bulletin, Vol 18,
December 2007
15
II. To Build, Reform or
Transform? (2)
Definitions
•
To Reform: “To improve by alteration, correction of error, or
removal of defects; put into a better form or condition.”
•
Transform: ““marked change, as in appearance or character,
usually for the better.”
Questions
–
What is defective in players, regulators, markets/games,
institutions, foundation, purposes, vision?
16
III. Game Changers
1.
2.
3.
4.
Global Financial Crisis and ongoing Debates
About How to Fix it
Global Dis-connect Between Production and
Finance
Responses to Global Financial Crisis
Consequences of Global Shocks
1.
2.
3.
4.
5.
5.
6.
Capital flows: Capital Market
Banking System Exposures
Forex Market Volatilities
Derivatives and Insurance
Pension Fund
Deregulation and Consolidation
Policy Dilemma and Moral Hazard: trade-off
between systemic collapse and bailing out
inter-mediators.
17
IV. Towards Sound Financial
System (1): Foundation Principles
1. Rethink FSS 2020:
after a strategic evaluation of (i) Game Changers;
(ii) Ongoing Debates about Global Financial Crisis;
(iii) Nigeria’s Experiences and, (iv) aspirations of
the Nigerian people.
2. Focus:
a. Strengthening links between Finance and
Production
b. Making B, R and T of the Financial System as Subset of Economy wide B, R and T.
c. Separate Players from Referees
18
IV. Towards Sound Financial System (2):
Who, For Whom and to What Purpose
1. Who?
The President, National Assembly, Ministry of
Finance, CBN, NIDC, SEC, other stakeholders
2. For Whom
Individuals, Households, SMEs, Organized Private
Sectors, Inter-mediators
3. Purpose
Growth, Job Creation, Price Stability, External
Balance, Balanced Regional Development, Reduction
of Poverty and Inequalities, Higher Life Expectancy,
etc.
19
IV. Towards Sound Financial System
(3): How and What Resources
Consistent and Integrated National
Strategic Plan Framework
1. Clear Vision, Mission and Understanding of Global
and National Games
2.
3.
4.
5.
Transparent Process
Empowered Participation
Rule of Law, Due Process
Dependence on National Resources: Human,
Intellectual and Non-Human
6. Use of Needed and Useful International Resources
20
IV. Towards Sound Financial System
(4): Building A Plan
1. The Short Term Plan
a.
b.
c.
d.
e.
Inter-Bank Market and Margin Lending Crisis
Stock Market Crisis
FOREX Market
Global Financial Crisis
Information Asymmetries
2. Medium and Long Term Plan
a.
b.
c.
d.
e.
Performance driven Economic Management Plans that
works for a majority of Nigerians and Nigeria
Stronger National Banking and Financial systems
Building mechanisms for reducing contagion
Minimizing moral hazard situations; Volatility and
Speculative Bubbles
Reforming Global Financial Architecture including the
Industry of Development Finance
21
Capital Control Debate
1.
Horst Kohler (2001), “New Challenges for Exchange Rate Policy”, Kobe, January
13, 2001
Pre-conditions for capital account liberalization include: (i) sound
domestic financial systems; (ii) adequate supervision and prudential
regulation; (iii) good risk management capacities in banks and
businesses; (iv) greater transparency and (v) market discipline
2.
Stanley Fisher, “Lessons from a crisis”, (The Economist, October
3rd, 2000).
“The IMF’s position has long been that capital-account liberalization
should proceed in an orderly way: countries should lift controls on
outflows only gradually as the balance of payments strengthens;
liberalization of inflows should start at the long end and move to the
short end only as banking and financial systems are strengthened.”
22
IV.
Towards Sound Financial System (5): Other
Matters
1. Attitudinal change
o
2. Building institutions
o
o
o
o
3. Improving macroeconomic
fundamentals
o
o
o
o
o
4. Reducing the growth of
external debt
o
o
Corruption; Fatalism, Inferiority complex;
Official helplessness; Strategic Thinking,
Decision Making and Actions
Governance:
(1) Rule of Law
(2) Freedom of Information
(3) Protection of Investors and Depositors
(4) Separation of Players from Referees to
avoid conflicts of interests
Sound domestic financial systems
Effective supervision and prudential
regulation
Good risk management capacities in banks
and businesses
Greater transparency
Market discipline
Establishing synergies between real and
financial sectors
Human Capacity Building and Job Creation
and
Real Per Capita GNP Growth, Growth in
Investment; Productivity; Savings; Balance
of Payment Imbalances; Fiscal Imbalances;
Monetary Accommodation;
Low inflation
While Paris Club and London Club Debts
have been settled, Multilateral Debt is
rising
23
V. Conclusion (1) ?
a. The Players and the Referees are humans,
governed by values and, knowledge problems
b. Values and knowledge and, wisdom and
understanding (or, lack of) shape the choices
and the actions of players and referees
c. Ultimately therefore, success or failures in
building, reforming or transforming
Financial Market or System would depend
strongly on the (1) motive forces driving
players and referees and, (2) on the
knowledge, wisdom, understanding and
righteousness brought to bear in the B, R or
T.
24
Food For Thought (1)
•
•
•
•
•
•
•
Luke 6:49 But he that heareth, and doeth not, is like a man that, without a
foundation, built a house on the earth, against which the stream beat
vehemently, and immediately it fell, and the ruin of that house was great.
Psalm 15:5 He that putteth not out his money to usury, nor taketh reward
against the innocent. He that doeth these things shall never be moved.
Psalm 49:6-7 They that trust in their wealth, and boast themselves in the
multitude of their riches; None of them can by any means redeem his
brother, nor give to God a ransom for him:
Psalm 49:10 For he seeth that wise men die, likewise the fool and the
brutish person perish, and leave their wealth to others.
Luke 16:13 No servant can serve two masters: for either he will hate the
one, and love the other; or else he will hold to the one, and despise the
other. Ye cannot serve God and mammon.
Mathew 6:19 Lay not up for yourselves treasures upon earth, where moth
and rust doth corrupt, and where thieves break through and steal:
Mat 7:17 Even so every good tree bringeth forth good fruit; but a corrupt
tree bringeth forth evil fruit.
25
Food For Thought (2)
•
•
•
•
•
•
•
•
Proverbs 13:11 Wealth gotten by vanity shall be diminished: but he that gathereth
by labor shall increase.
Ecclesiastes 5:10 He that loveth silver shall not be satisfied with silver; nor he that
loveth abundance with increase: this is also vanity.
Isaiah 9:20 And he shall snatch on the right hand, and be hungry; and he shall eat
on the left hand, and they shall not be satisfied: they shall eat every man the flesh of
his own arm:
Mathew 13:22 He also that received seed among the thorns is he that heareth the
word; and the care of this world, and the deceitfulness of riches choke the word, and
he becometh unfruitful.
Mark 10:23 And Jesus looked around, and saith to his disciples, How hardly shall
they that have riches enter into the kingdom of God!
1Timothy 6:17-19 Charge them that are rich in this world, that they be not highminded, nor trust in uncertain riches, but in the living God, who giveth us richly all
things to enjoy; That they do good, that they be rich in good works, ready to
distribute, willing to communicate; Laying up in store for themselves a good
foundation against the time to come, that they may lay hold on eternal life.
James 5:2 Your riches are corrupted, and your garments are moth-eaten.
Psalm 55:22 Cast thy burden upon the LORD, and he will sustain thee: he will
never suffer the righteous to be moved.
26