Keynote Speaker: Dr' Marcus Lee

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Keynote Speaker Dr. Marcus Lee

• Vice President, DAG Investment Bank LLC, New York
  
• Chairman, Risk Management Foreign Exchange
  Committee, DAG Asset Management LLC, New York
• Chairman, China Private Banking and Wealth
  Management Forum 2007, Shanghai
• Keynote Speaker APEC, ASEAN Summit
• Author How to Outsmart China - Sold in over 40
  Countries. Featured in Bloomberg and CNN
• Speak 4 languages and 5 Chinese dialects
• EMBA Visiting Professor of Finance, City
  University of New York.

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Worst has yet to come?
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Strategies and Mechanism to achieve Financial
Stability The 11th Asia-Europe Business Forum,
2008

• Dr. Marcus Lee
• Vice President China Chief Representative
• DAG Investment Bank (New York) LLC

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1. Financial Stability Outlook
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Financial stability outlook

• Risk of financial system have increased in 2008
• IMF 2009 projection 0 to negative
• Remain uncertain and depends on 3 factors
• 1) How conditions in the US market?
• 2) How banks respond to the challenge?
• 3) Worst case scenario?

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World Economy

• Suffer from High inflation
• Overly expansionary monetary policy in US
• -Negative real interest rate
• -Depreciating USD -run from USD
• -Reversal of Capital Flow and Currency Turmoil
• Low interest rate discourage saving, bond yields
  and cause investor to seek higher yields in
  speculative commodities and forex market.
• Hence, energy and food price exploded to levels
  of threatening social and economy.
• -41 of total international reserve (end of 2007)
• America can maintain a large trade deficit only
  if foreign banks continue to hold a large number
  of dollars in their reserve currency. US entire
  consumption economy is based on the willingness
  of foreigners to hold US debt. A new world order
  is required.

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China Economy

• Pressure of inflation.
• GDP Growth 9.7 (2008) 9.3 (2009)
• Window guidance and credit policy guidance were
  strengthened, limit lending to low efficiency
  enterprises
• Slowdown of US economy affect Chinas export.
• Industries affected - most rely on export in
  China Electronic appliances 65, Office
  appliance 50, Fur production 47, Furniture 46,
  Fashion apparel 44, rubber 26
• Financial Stability in Credit, stock market

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Medium Term outlook

• 1. Commodity and Food price remain high despite
  recent declines.
• 2. Risk of broad based second round effects in
  wage and price setting, especially in emerging
  economies

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Real Economy Impact

• Affect GDP growth
• Affect Employment
• From Financial Crisis to long term real economy
  crisis
• Affect spending power

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Existing Mechanism

• Short term
• 1) Domestic Policies
• 2) Private Sector New loans, credit lines
• 3) International Backup IMF Supplemental
  Reserve Facility, SDR but rigid condition
• Long term
• 1) Reform Programs
• 2) Enhancing Financial Governance
• 3) Social enhancement
• 5) Steps towards sustainable finance - GRI

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2. Enhancing the Surveillance Framework
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Macro-Surveillance Framework

• Lost of Confidence
• More Bank Bankruptcy expected.
• Derivative Markets (trade in future and options
  equity) now deal with over 47,000 different kinds
  of options.
• Enhancing Financial Governance not a luxury but
  basic requirement. Timely and clear financial
  reporting, Independent assessors along with
  strong judiciary.
• Early identification of emerging risk and threats
  
• Pre-emptive measures
• Framework and infrastructure development,
  capability enhancement, governance structure and
  communication.

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Vulnerability Indicator for Banking Sector

• 1) Selection of Risk indicators
• 2) Construction of vulnerability indicator
• 3) Assessment of future vulnerability and stress
  testing. Disclosure of off-balance sheet
  activities.

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Financial Stability Surveillance

• 1. Micro-prudential Micro level assessment of
• -risk areas and risk management practices
• -business strategy and governance issues
• -risk absorbing capacity
• 2. Macro-prudential Macro level assessment of
• -exogenous and endogenous risk and
  vulnerabilities
• -contagion effects, transmission channels and
  impact on financial institutions and systemic
  stability.
• -Supervisory role of IMF, Basle Capital Accord,
  BIS, FSF, Financial Sector Assessment Program (WB
  and Govt)

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Action to be taken

• 1. monitoring macro-financial linkages associated
  with developments and emerging trends in the
  external sector, domestic economy and financial
  markets, corporate and household, contagion
  implication to financial system.
• 2. monitoring and evaluating the development of
  sector specific issues within the financial
  sector and the potential implications for overall
  system wide stability.
• -Guarantee of bank deposit by Central bank

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3. Mechanism for Emergent Financial event
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Emergency financing mechanism

• Failure of IMF Supplementary Reserve Facility
  (SRF) borrow, invest, export, repay IMF may
  lack of resources, WB, ADB, ADB consessional loan
• Objective Ability of fund respond to crisis for
  member countries
• Focus on emergency procedure rather than a new
  financing mechanism suggested by last year
  Chairman Statement.
• Exceptional procedures Rapid approval of fund
  support
• supplementary resources

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Precautionary cooperation framework

• Moral hazard limited to truly exceptional
  circumstances
• Not be a guarantee against sovereign default.
• Importance of strengthened fund surveillance
• Members responsibility to come to the fund early
  with a strong and comprehensive economic program
  to limit cost of repair.

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Criterion to regional financial conducts

• Suggestion limit the use of emergency procedures
  to situation involving significant spillover or
  contagion effects

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Process of Implementation

• 1. short report to EB current economic situation
• 2. level and phasing of access, the likely Impact
  on the funds liquidity and possible need to
  activate borrowing arrangement, changes in
  timetable etc.
• 3. Briefing guidance for EB to direct action
• 4. consultation with other creditors if needed.
• 5. 48-72 hours consider. Once agreed execute
  within 5 working days.

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Conclusion

• Mounting inflation and financial disorder would
  inflict costly stagflation, contraction in trade
  and disorderly oil and food markets.
• Ultimately, global financial security is not
  about stability and wealth generation for their
  own sakes but creating a system of transactions
  that enhances the livelihoods of people and
  natural environment, both for now and future.

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Thank you

• Dr. Marcus Lee
• Vice President China Chief Representative
• DAG Investment Bank (New York) LLC Shanghai
  Office
• 500, North Chengdu Road, Junling Square, 37
  floor,
• Huangpu district, Shanghai 200003,
• The Peoples Republic of China
• Tel [phone]
• Fax [phone]
• Email drmarcus_at_yahoo.cn
• Website www.dagbank.com
•