1. International Financial Crisis - quo vadis
International Financial Crisis - quo vadis? MIGUEL SANTOS NEVES Associate Professor University Autónoma Lisboa Director Network of Strategic and International Studies
International Conference
Euro-Asia Cooperation or Competition
Reflections and Global Perspectives
Berlin Free University
10 October 2015

2. Structure Financial crisis 2008-2009 : root causes and dynamics
Implications of poor financial governance
Response to financial crisis : G-20 global initiatives and major powers;
China new activism and redistribution of financial power.
Solutions to minimise risks
Conclusions

3. 1. Financial Crisis : root causes and dynamics
(i) Excessive liberalization and deregulation
Elimination of controls of capital movements in the 90s: fuelled short term speculative capitals
(ii) Regulation failure to address systemic risk
Regulatory capture
Conglomerates and “too big to fail” syndrome
Fragmentation (banking, insurance, financial markets) inadequate for holistic/cross-pillar approach
Shadow banking
(iii) Inadequate global financial governance – Bretton Woods crisis and IMF crisis: lack of preventive approach; “one size fits all”; lack of instrumental perspective – financial system is not an end in itself
Cheap money, very low interest rates : FED set interest rate at 1% in 2001 to overcome negative impact of 9/11
Greed and unethical behaviour
Impact of new technologies: increase in the volume and speed of financial transactions

4. 2. Implications of poor financial governance
High level of speculation, hot money – the “Casino economy” and rapid transmission of shocks
High level systemic risk in the financial system increases the vulnerability and propensity to financial crises
Formation of Conglomerates, market hyperpower and restriction of market competition, generates increasing inequality.
Financial system centrality at the expense of the real economy and long term investment
Erosion of the fiscal base of States, weakening their capacity related to the off-shore phenomenon - BEPS process ; higher ineqality
Higher global security risks : global terrorism expansion and financing; growth of TOC and money laundering.
Lack of preventive approach and contingency planning

5. 3. G-20 and post-2009 attempts to improve governance
New institutional framework – soft law process: IFIs vs. G-20
(ii) G-20 Global Plan of Recovery and Reform Washington-London-Pittsburgh; Financial Stability Board (FSB)
(iii) Successes and Failures
Successes:
- Basel III capital requirements for banks tightened
- More responsibility of the financial system : fund resolution of systematically relevant banks
- More coordination on fighting money laundering : revision of FATF rules -

6. - Regulation of derivative markets
Failures
- Regulation of derivative markets
- Regulation of hedge funds
- Accounting convergence
- Control over shadow banking, which has expanded as a
strategy to circumvent regulation
- IMF reform blocked – 2010 package
- No progress on effective “behavioral supervision” of banks
- Off-shores extinction/regulation
- Little advances of FSB on early warning mechanisms,
contingency planning and preventive action.
- credit shortage for investment and growth, for SMEs

7. 4. China activism and redistribution of financial power
(i) China’s response to financial crisis and strengthening of Beijing’s global position – non-revisionism
(ii) Recent new activism challenges the global financial framework: the significance of AIIB and NDB creation in 2015.
Supplant (not supplement) IFIs as alternative to the deadlock in global financial governance reform
Assert its leadership of the BRICs and G-77.
Challenge and undermine US and Japan regional finance dominance and soft power, namely ADB.
Enhance China’s regional soft power: finance and consolidate new pheriphery diplomacy strategy, “One belt, one road”
(iii) Increase in the level of complexity of financial reforms and obstacles to coalitions, conflicting views among great powers as G-20 initial consensus is breaking.

8. 5. Solutions to minimize risks
Allow banks to fail without taking economies down with them (international deposit insurance fund)
Holistic regulation combining different pillars thus addressing conglomerate logic and informal shadow banking challenges
Break down large financial conglomerates to counteract concentration and “too big to fail”
Tackle off-shores and large conglomerates tax evasion- implementing BEPS.
Tax financial transactions
New institutions to fight “concentration of wealth and trickle down” paradigm : support community micro-credit schemes ; restore and promote regional banks by enforcing competition rules.

9. Conclusions
Major reforms to improve global financial governance have not been implemented and systemic risk remains high and preventive approach very weak
Initial political consensus in G-20 is breaking down and China’s new initiatives are a strong sign
3. Euro crisis is partly a result of this lack of progress and the resistance of powerful financial conglomerates, with high human, political and social costs for adjustment countries like Portugal and Greece.

10. 4. There is both divergence and convergence between Europe and Asia on global financial governance
Heterogeneity of Asia and of Europe: 3 poles US-Japan; China; EU
Convergence EU and China in balancing US excessive financial power and US dollar dominated system; conglomerate approach; China has invested in troubled EU countries compensating for lack of capital
Divergence
Global IFIs reform and redistribution of voting rights: over-representation of EU vs. under-representation of China
Trade unbalances and liberalization of financial services - reciprocity problem
Financial system as a means (China) or an end in itself (EU)