COP’s Hearing: “Learning from the Past--Lessons from the Banking Crisis of the 20th Century”

A lot can be learnt from past banking crisis and their solutions.

US’s Congressional Oversight Panel has lined up few experts for testimonies about banking crisis and their solutions.
Experts' views on past banking crisis and lesson learnt

The testimonies by these experts are compiled in the website above.

We can learn a lot about banking crisis listed below, solutions used then and insights gain:
1. Great Depression in 1930s;
2. Savings and Loan collapse in the 1980s: the solution then was Resolution Trust Corporation (RTC);
3. Banking Crisis in Japan in early 1990s;
4. Banking Crisis in Sweden in early 1990s (This solution is what they called "Nordic Capitalism – the future of capitalism"). Refer to my previous related post.

What will US (and the world) use as a solution to current financial crisis ?


My other related posts on:
Europe investment, financial crisis, US investment.

Geitner's Treasury Outlines Framework for Regulatory Reform

Geitner of US Treasury has come out with a framework for regulatory reform.
It can be read from link below:
Geitner’s Treasury Outlines Framework For Regulatory Reform

Summary: (refer to the website for actual texts and details)
4 components of regulatory reform
1. Addressing Systemic Risk
2. Protecting Consumers and Investors
3. Eliminating Gaps in Our Regulatory Structure
4. Fostering International Coordination

Primary focus: systemic risk

For 1. Addressing Systemic Risk, it is applied on the following:
1. Systemically Important Firms and Critical Payment and Settlement Systems
2. Standards on Capital and Risk Management for Systemically Important Firms
3. Registration of All Hedge Fund Advisers With AUM (asset under management) Above a Moderate Threshold
4. Oversight, Protections and Disclosure for the OTC Derivatives Market
5. Money Market Funds

How will these be done ? Which regulators will do what ?

Some of the other related main regulators in US:
Securities and Exchange Commission (SEC)
Federal Reserve
Commodity Futures Trading Commission (CFTC)

How will these regulators divide their turfs ?

More on Reform on Monetary System

Zhou Xiaochuan, Governor of The People’s Bank of China has more speeches related to international reserve currency:
On saving ratio
Changing Pro-cyclicality for Financial and Economic Stability

His speech text of "Reform the International Monetary System" was released on 23 Mar, "On saving ratio" on 23 Mar, "Changing Pro-cyclicality for Financial and Economic Stability" on 26 Mar. We can see his urgency to get the messages across before the G20 Summit :-)

In this Reuter’s article, it was said that "Russia said it would put forward a proposal for the creation of a new reserve currency issued by international financial institutions at the Group of 20 meeting in April." and "Moscow said it has the support of other emerging market countries, including Brazil, South Korea and South Africa for its proposal. ".

In a FT’s article, it was said that "EU leader condemns US ‘road to hell’".

US and UK are against to the proposal of new international reserve currency.

It left to be seen what will happen on the coming G20 Summit.

Zhou Xiaochuan of The People’s Bank of China proposed “Reform to International Monetary System”

Zhou Xiaochuan of The People’s Bank of China has proposed a reform to international monetary system in his speech "Reform to International Monetary System" (published in both Chinese and English).

Read his text of speech for details.

A lot about international reserve currency can be learnt from his view.

A summary: (I try to figure it out)
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(Previous) International reserve currency : Silver Standard, the Gold Standard, the Gold Exchange Standard and the Bretton Woods system

Theoretical characteristics of an international reserve currency:
1. Anchored to a stable benchmark and issued according to a clear set of rules, therefore to ensure orderly supply
2. Its supply should be flexible enough to allow timely adjustment according to the changing demand
3. Adjustments should be disconnected from economic conditions and sovereign interests of any single country

Why existing system doesn’t work:
Triffin Dilemma, i.e., the issuing countries of reserve currencies cannot maintain the value of the reserve currencies while providing liquidity to the world, still exists.

Desirable goal :
create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run

Solution:
super-sovereign reserve currency, proposed to use SDR.

Not a new idea:
1940s, Keynes: "Bancor", based on value of 30 representative commodities
1969, IMF: SDR

Proposed SDR valuation:
basket of currencies, expanded to include currencies of all major economies, GDP included as weight.

Steps
1. short run, the international community, needs to recognize and face up to the risks resulting from the existing system, conduct regular monitoring and assessment and issue timely early warnings.

2. Give SDR a greater role; push forward a SDR allocation; approved Fourth Amendment to the Articles of Agreement and relevant resolution on SDR allocation proposed in 1997; broaden scope of using SDR; Set up a settlement system; promote the use of the SDR; Create financial assets denominated in the SDR; improve the valuation and allocation of the SDR

(This may be the difficult part) :
Entrusting part of the member countries' reserve to the centralized management of the IMF and IMF as international "supervisor" on the macroeconomic policies of its member countries.

Suggestion for IMF to promote greater role of SDR :
set up an open-ended SDR-denominated fund based on the market practice, allowing subscription and redemption in the existing reserve currencies by various investors as desired.
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Many countries are really frustrated with status of USD, especially those that bought lots of USD-denominated debts.

But questions remain:
1. Can IMF really handle this big role of handling all member countries' reserve and be the international "supervisor" on the macroeconomic policies ?
2. Will countries of the world let IMF handle it ?



Note:
You may wish to check out my other posts on US investment and economic analysis.