The conflict between the private short-term interest of the financial intermediaries in maximizing profits and the public interest of effective financial intermediation was an important contributing factor to the making of the financial crises, Hong Kong's weathered monetary chief Joseph Yam said Monday.
Speaking at the SIBOS, or SWIFT International Banking Operations Seminar, which runs from Sept. 14 to Sept. 18 in Hong Kong, Yam said there was an internal contradiction in the claim that the handsome rewards the financial intermediaries received for their innovations were justified by greater financial efficiency.
The greater efficiency was shown in the higher rate of return for those with surplus money and a lower cost for those in need of money, according to the claim.
But, "greater profits for financial institutions and larger bonuses for those employed in them mean, to me at least, a widening, rather than a narrowing, of the intermediation spread; in other words, lower financial efficiency," Yam said.
The observed narrowing of the intermediation spread comes at the expense of, or presages, a future, possibly sharp widening that often occurs in the context of a financial crisis, Yam told the big shots at the conference.
"Indeed, we have just had a case of co-occurrence of highly remunerated financial innovation and a temporary narrowing of the intermediation spread that was built upon, among other things, a serious erosion of credit standards," he said.
The outgoing central bank chief said he had no answer, "other than always to be alert to it and be ready, as protectors of the public interest."
Yam also defended the intervention of Hong Kong authorities in the financial crisis back in 1998, saying that the market in reality is often not perfect.
"Fear or greed, fed by information or misinformation, stoked by manipulative or predatory behavior by a few, often takes hold, to such an extent as to produce volatility well beyond prudent risk management parameters, threatening a complete meltdown of the financial system or other forms of systemic breakdown," he said.
Intervention, which can often be controversial, is called for when it is necessary to put things right so that the financial system can continue to function, he insisted.
"The purists wave the free-market banner and condemn any market intervention, pointing out the moral hazard involved, the cost and the unfairness of intervention. Often the process of arriving at a consensus takes time and meanwhile the problem worsens and the effectiveness of the actions to be taken is eroded.
"I believe therefore that those responsible for the maintenance of monetary and financial stability should have the necessary emergency powers to do what is required independently and promptly," he said.
"Very simply therefore there is a case for the authorities to get involved, as a developer or a service provider, when a private sector solution that is in the public interest is not available.
"The public interest is not just in the enhancement of financial efficiency but also in the limitation of contagion and the more effective achievement of financial stability," Yam said.
Source:Xinhua
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