Governance & Development:

Views from G20 Countries

Session 4 Presentation

Reforming the Global Financial System-

Implications for long term investment finance

YOSHIHIRO WATANABE

September 17-19, 2012

India Habitat Centre, New Delhi

Governance and Development: View from G20 CountriesICRIER, September 19, 2013, p ,

Reforming the Global Financial System‐f fImplications for long term investment finance

Y hihi W bYoshihiro Watanabe

Managing Director 

Institute for International Monetary Affairs 1

Points of discussion

• Financial stability and growth

• Risk Index developed by IIMA

• Facilitating trade financeFacilitating trade finance

• Facilitating infrastructure finance

2

Some of topics to be explored for Asia Pacific Financial Forum‐ through APEC Finance Minister Process

‘Linkages and Structural Issues’Promote  understanding  of  the  interaction  of  policy  and  regulatory proposals on financial markets linkages andregulatory  proposals  on financial markets,  linkages and structures through capital flow and finance

‐ What are the likely impacts of contemporary (global and regional) macroeconomic developments on financial market 

ti it i th A i P ifi ?connectivity in the Asia‐Pacific?

How can the unintended consequences of international‐ How can the unintended consequences of international regulatory standards be limited and those standards calibrated to meet regional economic development/growth needs?

3

Developing financial regulation andDeveloping financial regulation and international capital flow

Ch ll iChallenges remain (Consistency)‐between stringent regulation on financial transaction, financial institutionbetween stringent regulation on financial transaction, financial institution and macro economic policy (insufficient impact study, risk weight of governmental bonds, curbing bank lending in spite of efforts on economic recovery)

‐international regulation and national implementation‐unregulated shadow banking

(Global grand design of regulation and macro‐prudential policy)(Global grand design of regulation and macro prudential policy)

(International capital flow and monetary policy of major economy)‐QE or QQE to pull international investor’s confidence in financial products ‐financial bubbles are growing due to gap between real economy and finance

(Regulatory efforts for stability may not necessarily lead economic growth)4

Risk Index based on volatility ‐stocks, bonds and currenciesstocks, bonds and currencies

Investor’s confidence gaugedInvestor s confidence gauged

‐confidence by real economic growth and monetary easingeasing

l b l d ti l k t l tilit b d‐global and national market volatility gap be compared

5

4.50 

Global Market Volatility Index  (Stock, Bond, Currency) Stock

3.50 

4.00 

2 50

3.00 

Currency Bonds

2.00 

2.50 

1.00 

1.50 

0.00 

0.50 

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

6

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Global Market Volatility  Index (Stock) Global Market Volatility  Index (Bond) Global Market Volatility  Index (Currency)

（Source）Datastreamデータより国際通貨研究所作成

Market volatility and eventsMarket volatility and eventsGlobal Market Volatility  Index

and Vix, Risk Premium of Corporate Bond (Baa‐Aaa)

80 00

90.00 

100.00 

8

9 

10 

Russia & Brazil crisisLTCM banktuptcy

Global financial crisis(Lehman shock)

Greece shock

Exit talk of US QE3

BOJ Kuroda's QE

60.00 

70.00 

80.00 

6 

7 

8 

Asian crisis9.11 terrorists'attacks Worldcom crisis

Bear Sterns shock

S&P down gradeUS treasury

Euro debtcrisis

40.00 

50.00 

4 

5 

Paribas shock

20.00 

30.00 

2 

3 

0.00 

10.00 

0 

1 

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

7

Global Market Volatility  Index Yield of Baa‐Aaa  (%) VIX (Right scale, %)（Source）Datastream

How to calculate the indexS tock m arket

H istoricalvolatility (H V) of stock price index in each country for the latest 20 business days

How to calculate the index

H istorical volatility (H V) of stock price index in each country for the latest 20 business days

G D P w eighted average of H V: each day figureG D P w eighted average of H V: average figure

from Jan 1994 to Jan 2013

W eighted average of15 countries bynom inal G D P from Jan.1994 to Jan.2013

B ond m arket

H istorical volatility (H V) of 10 year gov't bond yield in each country for the latest20 business days

G D P w eighted average of H V: each day figureG D P w eighted average of H V: average figure

f J 1994 t J 2013

add all three => G M VI

20 business days

W eighted average of15 countries bynom inalG D P from Jan.1994 to Jan.2013

Foreign exchange m arket Units: tim es

H istorical volatility (H V) of foreign exchange rate of each currency against U Sdollar for the latest 20 business days

If the each dayfigure becom es

nom inal G D P

G D P w eighted average of H V: each day figureG D P w eighted average of H V: average figure

f J 1994 J 2013

W eighted average of11 currencies bynom inalG D P

dollar for the latest 20 business daysthe sam e as theaverage of thewhole period, theindex becom es 1 +1 + 1 = 3

8

from Jan.1994 to Jan.2013nom inal G D P 1 + 1 = 3.

Purpose of the indexPurpose of the index• to measure risk appetites of global investors and to 

f kgauge tense of marketsW eight M arket Indicators

Stock price indexx 15 countries

10 year governm ent bond yieldD ata

N om inal G D P(in current U S dollar)

x 15 countries

Foreign exchange rate against U S$x 11 countries

D ata

x 15 countries

Frequency Yearly D aily

Start 1994.01 ~ today

＊Existing similar indicators are the Chicago Board Options Exchange Market Volatility Index (VIX) and the risk premium of US corporate 

y

9

y p p

bonds (Baa – Aaa).

Recent volatile markets of emerging countriesRecent volatile markets of emerging countries

Recent Volatile M arkets ofEm erging C ountriesRecent Volatile M arkets of Em erging C ountries

180

Stock Index

India 120

Foreign exchange rates

140

160

100

Indonesia

Korea

Russia

China 100

110

00

120

140

2012

/1＝

Brazil

90

100

2012

/1=1

Korea

80

100

70

80China

Russia

Indonesia

India

(S ) D

602012/01 2012/07 2013/01 2013/07

602012/01 2012/07 2013/01 2013/07

Brazil

10

(Source) D atastream

GMVI shows a particular strain in Indian marketsGMVI shows a particular strain in Indian marketsVolatility average betw een 2006.8 and 2013.8 of each forex, bond and stock m arket is 1. That of w hole three m arkets in each country is 3.

14.00 14.00

6.00

8.00

10.00

12.00

6.00

8.00

10.00

12.00

0.00

2.00

4.00

0.00

2.00

4.00

Russia Brazil

12 00

14.00

12 00

14.00

4 00

6.00

8.00

10.00

12.00

4 00

6.00

8.00

10.00

12.00

0.00

2.00

4.00

0.00

2.00

4.00

11

ChinaIndia

Current Account Balance and General Government Net Lending /Borrowing（％ of GDP） （2012）

20

25

Current account balance

General government net lending/borrowing

（％ of GDP） （2012）

10

15

General government net lending/borrowing

0

5

‐10

‐5

Argentina Brazil China India Indonesia Mexico Russia Saudi South TurkeyArgentina Brazil China India Indonesia Mexico Russia Saudi Arabia

South Africa

Turkey

（Source）IMF

12

40

A ti

Reserves／Import of Goods and Services（Months）

30

35ArgentinaBrazilChinaIndiaIndonesia

20

25IndonesiaMexicoRussian FederationSaudi ArabiaSouth Africa

10

15 Turkey

0

5

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

（Source）The World Bank

13

250

Argentina

External Short Debt／Reserves（％）

200

ArgentinaBrazilChinaIndiaIndonesia

150MexicoRussian FederationSouth AfricaTurkey

50

100

0

50

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20121998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

（Source）The World Bank

14

16Bank Capital toAssets Ratio（％）

12

14

16

8

10

12

4

6

8

0

2

4

Argentina Brazil China IndiaIndonesia Mexico Russian Federation Saudi ArabiaSouth Africa Turkey

0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

（Source）The World Bank

15

35

40

Argentina Brazil

Bank Nonperforming Loans to Total Gross Loans（％）

25

30China India

Indonesia Mexico

Russian Federation Saudi Arabia

15

20

Russian Federation Saudi Arabia

South Africa Turkey

5

10

0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

（Source）The World Bank

16

（Source）The World Bank

f l b l hFor financial stability and growthN th i it d t l t bilit b t l thNow the priority needs not only on stability but also growth

‐ the banking sector’s capital and liquidity requirementsthe banking sector s capital and liquidity  requirements, as well as identifying and managing the sources of systemic risk

Financial regulation, financial inclusion and financial markets infrastructure developmentRegional development should be accounted carefully

17

Features of Asian Banks

• Assets: dominant lending portfolio to low trading assets• Liability: funded highly by domestic deposits• Liability: funded highly by domestic deposits• Non performing assets: improved from 2005 to 2012• Lending to private sector/GDP : more than 100% except India• Lending to private sector/GDP : more than 100% except India, 

Indonesia, Philippines at 2012

• Lending growth: Indonesia and India increased lending over 4Lending growth: Indonesia and India increased lending over 4 times from 2006 to 2012

• Local currency lending to deposit: Thailand and Vietnam over y g p100%, Korea 93.7%

• Regulation on large borrower, lending to deposit,  reserve to deposit, interest rate and lending rate

• BIS regulation is not best fitted to Asian banks 18

Points of business recommendation

Collateral management‐ which will be a critical condition to address new liquidity constraints to finance the economy (the collateral chain such as central infrastructures, ,securities services)

Financial Transaction Tax ‐that is expected to have multi‐layer negative consequences and uncertain benefits

19

Avoiding adverse effects

Trade financing (SMEs), and infrastructure financing

‐European authorities have taken a number of positive steps to address some of the potentiallypositive steps to address some of the potentially adverse impacts of Basel III, through amendments to CRD 4 ( Capital Requirements Directives)( p q )which recognize the real risk levels and positiveeconomic impacts of revised regulatory 

i f d fi drequirements for trade finance and corporate hedging (for example, credit valuation adjustment‐CVA)CVA)

20

Facilitating trade finance

T i thTo ensure economic growth European legislators adopt reforms

‐Capitalwaiving the one year maturity floorIntroducing trade finance risk curve byAsset Value Correlation and Probability of Defaulty‐Liquidity     equal outflow rates for trade finance contingentsq g‐LeverageCredit Conversion Factor of 20%

21

Facilitating infrastructure finance

‐External commercial borrowing limitation

‐Make brown field project a leverage to induce investment into green field projectsinvestment into green field projects

privatization, securitization, transfer of concession  rightright

‐ Proper risk allocation among investors and host

government

22