RSS FeedBy M. Isi Eromosele
The first line of defense against financial risks is the cumulative strength of major private global financial institutions. It is imperative that these financial institutions maintain strong capital positions and balance sheets. This would enable them to be in an excellent position to grasp and deal with risks that might emerge in the global financial sector.
Top-level decision makes at these financial institutions need to ensure that risk management policies are strictly implemented and that prudent but strong counterparty standards are not loosened due to competitive pressure. Particular attention should be given to liquidity risks and precautionary measures that need to be implemented to address potential liquidity shortages.
Governments can contribute to the mitigation of the above risks in quite a few ways. On a macroeconomic level, they need to maintain market confidence by implementing credible policy measures to facilitate orderly correction of global imbalances.
Such measures should include increasing national savings, especially in the United States, continued implementation of structural reforms that would promote robust growth in the Eurozone and Japan and allowance for additional currency flexibility in several Asian countries.
Global Central Banks should continue to raise policy rates to a neutral level. This would make it less forceful for financial intermediaries and investors to engage in carry trades and other various aspects of leveraging.
It is definitely in the global interest to make sure that there are no abrupt reversals of risk appetite among financial investors, which on previous occasions have proven to be destabilizing.
Gradually raising policy rates in a way that is well anticipated by global markets would buy cover against potentially volatile and destabilizing developments.
On a microeconomic level, regulators must be especially vigilant about the risk profile of financial intermediary institutions, particularly concentration risks and their vulnerability to sudden market shocks.
Investors should be publicly and openly reminded about the risks that confront them and the resulting consequences they face without any expectations of getting a bail out.
Risk Transfer
Given the growing relevance of the household sector in the assessment of global financial stability, governments and the financial services institutions need to improve the collection and dissemination of data about household balance sheets. The International Monetary Fund (IMF), World Bank and the Organization for Economic Cooperation and Development (OECD) can eminently support this effort.
Overall, the transfer of risk from the banking sector to non-banking sectors, including the household sectors, have apparently enhanced the resiliency and stability of the global financial system, essentially by widely dispersing financial risks, including throughout the household sector.
A further logical next step is for government and institutional financial policymakers to help households improve on their financial knowledge by giving them quality advice and products that would enable them to better manage their financial affairs.
Specially, global households need to understand the financial responsibility they need to shoulder and have access to unbiased information and advice about investment and savings options, as well as available products to manage their risks.
Raising the financial sophistication of global households requires long-term efforts, encouragement and coordinated activities. In addition to promoting financial education of households, governments should consider the use of tax and other regulatory incentives to encourage these households to save for retirements as well as to help improve their embrace of long-term investment practices.
Government and financial institutions can facilitate the development of appropriate financial products, designed to fulfill the needs of households to manage their risks, including longevity risks. Governments can issue long-term or inflation-indexed bonds and longevity bonds to help the financial sector better manage the risks involved in supplying some of the retail products, such as annuities.
M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance
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