MAS: Global Safety Net Lacking

MAS: Global Safety Net Lacking

Although the global financial system is highly inter-connected, there is still a lack of a global financial safety net for the financial system, said Ravi Menon to finews.asia.

Liquidity lines, in the form of swap lines where countries can have quick access to dollar liquidity to meets temporary shortages in one's own market, is lacking in the world, said Ravi Menon, managing director of the Monetary Authority of Singapore, or MAS,  who was speaking exclusively to finews.asia.

This is despite the interconnectedness of global financial markets and the dominance of the dollar as a funding currency in many emerging economies.

Safety Nets As Solutions?

«Of course, bilateral swaps do help – they're all meant to help, but we don't have global safety net. We have regional safety nets but a global safety net is not in place,» Menon added, who was speaking at the sidelines of Bloomberg's New Economy Forum in Singapore on Tuesday and Wednesday.

Co-ordination of policies between country central banks are unlikely to happen under normal circumstances, because each country's central banks are accountable to their own legislature and citizens, said Janet Yellen, the former Chairwoman of the Fed who was also speaking at the forum: Managing the Next Financial Shock.

Extremely Important

«The federal reserve swap lines were extremely important (for) countries with sound policies, but suffer the dollar shortage. But the Federal Reserve (Fed) has not been charged by congress to be the backup supplier of dollar (on a regular basis), to economies around the world. This needs to be available short of a crisis... I think IMF is the logical body,» said Yellen.

Due to individual mandates, Menon believes that it could take some time for the world's central banks to come together for a co-ordinated global safety net.

Never Destroyed

«It's not co-ordination, but when you share very candidly what your policies are, what your considerations are, what your constraints are, and you listen to one another, that makes you more sensitive to one another's issues. I think that is helpful,» said MAS' Managing Director, referring to central banks.

Using the analogy that energy is never destroyed but transformed into other forms, Menon drew the parallel with financial risks: Risks in financial systems have not disappeared, but just moved into different places even since the global financial crisis. To understand where future risks lie, one has to follow where debts have gone.

Risks Shifted

The first trend he has noticed is the shift in debt from advanced economies to emerging market economies. 

«Because of the very loose liquidity conditions globally because of expansionary monetary policies in the west, leverage is built up in the emerging economies. Leverage has shifted, so risks have shifted,» Menon said during the panel.

From Banks to Non-Banks

Besides the shift of risks to emerging economies, the second area of risk to the financial system is the extension of credit having shifted from banks to non-banks. Because of tighter bank regulations, lending has been done more responsibly at the banks. However, this is not the case for non-banking entities which face different degrees of regulation, Menon said.

«You take the U.S. for instance, more than half the mortgage lending today is done by non-banks. Pre-crisis, it was just about nine percent, this is a huge shift. We got to ask ourselves, how good are these underwriting standards, who are funding these, if these loans go bad, what are the repercussions to the financial system.  Even in China, P2P lending lies outside the banking sector,» he added.

Another Dimension of Risk

The third area of risk is the level of indebtedness that has shifted from financial sector to non-financial sectors, said Menon. «There has been a lot more corporate bond issuances since the crisis. Leverage in the non-bank non financial sector has gone up across advanced and emerging economies, and emerging economies add to that risk. And a good part of that corporate borrowing is in dollar denomiation, that adds another dimension of risk,» Menon explained.

«We have seen growing risks in non financial corporate lending over the last several years...we have seen deteriorating underwriting standards, (but) unless it is a threat to the bank itself, to its own safety and soundness, the authorities (and) banking regulators in the U.S., to regulate this debt is very limited,» acknowledged Yellen.