Global financial system in danger of fragmentation

Peter Sands, group CEO of Standard Chartered, says the world’s financial system is in danger of fragmentation due to new regulations that have not been properly thought through.
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Standard Chartered CEO Peter Sands captured at a G20 business summit in Seoul (AFP)</div>
<div style="text-align: left;"> Standard Chartered CEO Peter Sands captured at a G20 business summit in Seoul (AFP)</div>

The danger of creeping protectionism and a fragmentation of the global financial system are being heightened by regulators who are looking in the rear-view mirror, argues Peter Sands, CEO of Standard Chartered, in an exclusive interview with FinanceAsia.

“There are strands of the individual regulatory change agenda that are leading to a degree of fragmentation in the global financial system, which is an unintended consequence of authorities in different jurisdictions doing things to try and protect the resilience and stability of their individual financial systems,” said Sands. “There is a cost to that and it is a cost that is more significant to emerging countries than to the West.”

The key issue is that all the new regulations are made in countries and at an international level where voices from Asia are not being heard. “The voice and influence of Asia in all these international fora that are reshaping the architecture of the global financial system is still not what it should be,” he said. “If you look at the priorities for the regulatory change agenda, they are all about avoiding another Lehman or RBS. They are not about what is the kind of regulatory architecture that the emerging world needs. Those things tend to get swept up in retrospect with people looking to make a few amendments afterwards. They are not front and centre of the agenda.”

One particular area of concern — not just for Standard Chartered but for all banks and companies in Asia — is the way that the new Basel III regulations are treating the capital requirements for banks involved in trade finance. Asian companies rely on the provision of trade finance to a much greater degree in their working capital than their Western counterparts. But the rules that govern how much capital banks need to set aside for trade finance activity are being decided in the West. And despite some changes to the proposed rules last October, they are still onerous and likely to negatively impact banks’ ability to lend against ultra-safe trade deals.

“[The Basel committee] made some concessions, but those that they made last October address a fraction of the gap between the regulatory cost of doing trade finance under Basel III and the true economic cost of doing it,” Sands said. “They only address a small part of it. You still have a situation where the regulatory cost of trade finance is considerably greater than the true underlying economic cost.”

Overall, the issue is that Asian voices are not properly represented, either in existing bodies such as the IMF or in the new forums that have been established, such as the G20 or the Financial Stability Board (FSB). And even when they do take part, decisions have already been made that then need to be changed in retrospect. In this way, Asia is following decisions made elsewhere, rather than pushing its own agenda from the start.

“The agenda, I am sorry to say, is a very backward looking agenda: not having another repeat of 2008/2009. I would like to see the emerging world and particularly Asian voices having more say as to how all this gets reshaped. That voice is growing but it is catching up with the realities of the world economy.”

A full transcript of this interview will be published in the April edition of FinanceAsia, as part of a cover story on Standard Chartered, its strategy, risk and competition.

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