Learning From the Global Financial and Economic Crisis

HERE’S A FINAL TIP

Learning From the Global Financial and Economic Crisis

By Gov. Amando M. Tetangco, Jr.

When I’m asked what keeps me up at night, I say “on the contrary, I sleep soundly.”* Though I have to admit that during the critical weekend just before the European central banks came out with their concerted program, Bloomberg, CNBC, and CNN kept me awake. At that time, it was quite unreal that when you would retire, the equities were up, but when you wake up, they would be down.

Seriously, I sleep well knowing that the Philippine economy is in a better position to withstand any financial storms that come its way and that our policy framework at the Bangko Sentral ng Pilipinas (BSP), though not recession proof, contains the appropriate balance between the requisite discipline toward the price stability mandate and flexibility to respond to challenges.

On that note, I share with you three key lessons we all should take away from the current crisis:

Macroeconomic prudence. This entails building buffers during good times to provide resilience in bad times. The pursuit in the past of credible monetary and exchange rate policies, responsible fiscal management, and strengthened financial supervision and regulation has afforded the Philippines some cushion from the turmoil going on in the global economy.

Quick and decisive response. The difference between the current crisis and past financial crises was the urgency and swiftness with which governments and central banks responded with an extensive array of support measures to stabilize the financial system – liquidity provision, capital infusion, and enhancing deposit insurance. These have had some effect in terms of shoring up confidence.

Effective and timely communication and transparency. These are important to help shore up market confidence. This is manifested most profoundly in terms of better disclosure of bank exposures to troubled financial institutions, banks’ institutional arrangements for risk management, and information on the range of underlying assets of structured financial products. Timely communication to the public on recent developments, policy changes, and emerging risks to the outlook and their implications for the economy would also help reinforce credibility.

And my advice to financial players to cope with these challenging times:

Remember the basics. Understand your market and keep to standards. It is worth noting that the root cause of the crisis is the weakening of safeguards in carrying out a very basic lending institution responsibility – underwriting. Even with an expansionary monetary environment, the crisis could have been mitigated had lending institutions observed prudent underwriting standards and regulators undertaken appropriate or corrective oversight.

Make sense of every financial innovation in the market. What one does not understand, one should not dabble in. This may seem pretty rational but under benign market conditions, exuberance strips the market of any rationality.

Protect themselves from market downturns. Have sufficient capital in line with risk exposure, business strategy, and possible changes in the economic and market environment.

*This was excerpted from The Last Word from GlobalSource Philippines monthly report of GlobalSource, New York and Lazaro Bernardo Tiu & Associates, Inc., Philippines.

A central banker for 35 years, Amando M. Tetangco, Jr. has worked through the 1980s debt crisis, the 1990s central bank restructuring, and the Asian crisis. Now in his fourth year as BSP governor, he’s at the helm working through the global financial and economic crisis.