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Luo Ning : Reforming the Financial Regulation System amidst the Financial Crisis-Promotion and Challenges

Apr 18-2013   



 

by Chen Ye

The ongoing global financial crisis has left many people struggling to survive, therefore giving them no time to think about the real cause of the crisis. It was originated in the United States, but how come it swept through the entire world within such a short space of time? As a rule, a full-scale reformation always comes on the heels of a major change to the financial system. Following the inauguration of the Obama Administration, the US Government introduced a series of new policies on financial regulation. So, what is the driving force behind Obama’s financial regulation reform? What challenges will he encounter? And what kind of new policies will they introduce next? At the invitation of BiMBA, Dr. Luo Ning, senior inspector at the Bank Supervision Department, Federal Reserve Bank of New York, gave MBA and EMBA students at BiMBA an inspiring lecture on financial regulation.

Graduated from Zhejiang University in 1981 with an MSC in statistical Physics, Luo was admitted to a doctorate course in Cornell University (USA) through China-US Physics Examination and Application (CUSPEA), a program sponsored by Professor Li Zhengdao to send Chinese students to study in the US. In 1988, he was awarded with a PhD in particle physics and became a teacher of Cornell University. Dr. Luo later changed his profession to financing and worked as, one after another, vice president and senior credit analyst of North America Bank Card Risk Management Department, National City Bank of New York, and overseas advisor and credit card columnist at Digital Fortune. He joined the Federal Reserve Bank of New York five years ago and is now acting as a senior inspector at the Bank Supervision Department. Luo is also a member of several prestigious international organizations, including New York Society of Security Analysts (NYSSA), the Global Investment Committee, Alternative Investment Committee, Professional Risk Managers' International Association (PRMIA), Global Association of Risk Professionals (GARP), and International Association of Financial Engineers (IAFE).

Thanks to his rich life experience and familiarity with the American financial system acquired over the years, Dr. Luo has a thorough and unique understanding about the ins and outs of the financial crisis. He started his lecture with a review of the crisis: Starting from August, 2005, the US suffered from a slowdown in economic growth—an initial sign of economic recession. In the following years, this economic “epidemic” infected national economies worldwide via the financial globalization network. But it was not until the closedown of Lehman Brothers on September 15, 2008, that the US financial crisis started to have a major impact on world economy. And before that, Europe and Asia just kept watching in the distance. During this process, countermeasures adopted by the Federal Reserve Board (FRB) mainly involved lowering interest rates and ease of credit—two traditional methods used by the US Government in the face of an economic downturn. Interest rates were once reduced to “virtually nil”.

The crisis has already happened. What is important now—apart from taking actions to fight against it—is to summarize and analyze the cause of the crisis, and therefore learn from our mistakes to better prepare ourselves for effective prevention of similar crises in the future. In this respect, Dr. Luo shared with us his insights regarding the following five issues:

Firstly, he maintained that the financial regulation system in the US is characterized by a fragmented regulatory structure. In other words, in the US, financial regulatory measures are introduced on an ad hoc basis and limited only to the areas directly affected by the problems. Such a “stopgap” or “piecemeal" approach renders the government incompetent in handling the overall development of the financial industry and inactive in strategic terms. Even worse, the gaps between different modules of decentralized financial regulation make it possible for people to take advantage of the loopholes in the legal system. Thus, in the long run, the fragmented regulatory structure will eventually lead to disorder or even a financial crisis.

Secondly, Dr. Luo believes that political pressure is the culprit for the explosive growth of sub-prime mortgage. The Democratic Party advocated the concept of “increasing minority home ownership”, and the Bush Administration also advertised the construction of “a ownership society”, which, combined with external market pressure, ultimately triggered the subprime crisis at Freddie Mac and Fannie Mae and dragged the world economy into the mire of economic recession. Luo added that, as a convincing disproof of the notion of “market knows the best”, the US subprime crisis merits a place in finance textbooks.

Thirdly, Dr. Luo’s lecture also touched upon the issue of asset bubble, an age-old issue which has been widely discussed ever since ancient times. Even today, how to solve asset bubble still remains a hot potato for socialists. The reason lies in the fact that financial supervisors share certain common interests with the financers, resulting in financial regulation being reduced to a mere formality, but of little practical significance; another important reason is that the existing inflation indicator CPI cannot accurately reflect asset bubble risks.

Dr. Luo then went on to talk about risk management from a microcosmic perspective. In his opinion, the management of many large industrial companies nowadays focuses only on capital operation without paying enough attention to the management of the companies themselves. And, in the case of many firms, corporate management is being performed by people who know little about the professions they are in. This is very risky in the long run. To effectively solve this problem, the long-term interests of the managers must be bound together with that of the companies. Besides, neither of the existing indicators for assessing the performance of a company, i.e. ratings and capital level, is capable of reflecting the real situation of the company. It is, therefore, unviable to judge the performance of a company based on these indicators.

The last part of Dr. Luo’s lecture was an analysis of the issue of overall risks. He observed that, these days, some companies were simply “too big to fail”. Sometimes, they could even coerce the government into accepting their requirements, which is a bad thing in the long run. However, we have failed to find a satisfactory solution to this problem so far. In addition, every large corporate, and even the supervisory bodies, should keep a detailed account of their income and expenses, so that whenever the corporate suffers from a financial loss, it will be able to estimate the likely size of the loss. Due to economic globalization, economic problems encountered by one country may cause problems in other countries as a result of the “contagion effect”. In this regard, the ongoing financial crisis can be considered as a symptom of overall risks. In addition, Dr. Luo also revealed for us the trend towards aggravation of overall risks owing to the establishment of “super cycles” and the world system.

Dr. Luo shared with the students some information concerning the measures to be taken by the US Government to solve the financial crisis:

The establishment of a regulation system which can stand the test of time;

Financial regulation should cover financial companies as well as the market place;

The function of consumer protection should be singled out and be fulfilled by a separate organization; and

The creation of instruments needed for crisis control.

At the end of the lecture, he analyzed the pros and cons of the rescue program launched by the US Government, and the students also asked questions about a wide variety of current issues, ranging from financial derivatives, government rescue efforts and the over-issue of currency by the US Government to the Chinese real estate industry and stock market, etc. The lecture ended in with lively discussions. In the end, president Li of the BiMBA Finance Club presented Dr. Luo with the poster of the lecture and invited him to visit BiMBA again in the future.

Luo Ning : Reforming the Financial Regulation System amidst the Financial Crisis-Promotion and Challenges

Apr 18-2013   



 

by Chen Ye

The ongoing global financial crisis has left many people struggling to survive, therefore giving them no time to think about the real cause of the crisis. It was originated in the United States, but how come it swept through the entire world within such a short space of time? As a rule, a full-scale reformation always comes on the heels of a major change to the financial system. Following the inauguration of the Obama Administration, the US Government introduced a series of new policies on financial regulation. So, what is the driving force behind Obama’s financial regulation reform? What challenges will he encounter? And what kind of new policies will they introduce next? At the invitation of BiMBA, Dr. Luo Ning, senior inspector at the Bank Supervision Department, Federal Reserve Bank of New York, gave MBA and EMBA students at BiMBA an inspiring lecture on financial regulation.

Graduated from Zhejiang University in 1981 with an MSC in statistical Physics, Luo was admitted to a doctorate course in Cornell University (USA) through China-US Physics Examination and Application (CUSPEA), a program sponsored by Professor Li Zhengdao to send Chinese students to study in the US. In 1988, he was awarded with a PhD in particle physics and became a teacher of Cornell University. Dr. Luo later changed his profession to financing and worked as, one after another, vice president and senior credit analyst of North America Bank Card Risk Management Department, National City Bank of New York, and overseas advisor and credit card columnist at Digital Fortune. He joined the Federal Reserve Bank of New York five years ago and is now acting as a senior inspector at the Bank Supervision Department. Luo is also a member of several prestigious international organizations, including New York Society of Security Analysts (NYSSA), the Global Investment Committee, Alternative Investment Committee, Professional Risk Managers' International Association (PRMIA), Global Association of Risk Professionals (GARP), and International Association of Financial Engineers (IAFE).

Thanks to his rich life experience and familiarity with the American financial system acquired over the years, Dr. Luo has a thorough and unique understanding about the ins and outs of the financial crisis. He started his lecture with a review of the crisis: Starting from August, 2005, the US suffered from a slowdown in economic growth—an initial sign of economic recession. In the following years, this economic “epidemic” infected national economies worldwide via the financial globalization network. But it was not until the closedown of Lehman Brothers on September 15, 2008, that the US financial crisis started to have a major impact on world economy. And before that, Europe and Asia just kept watching in the distance. During this process, countermeasures adopted by the Federal Reserve Board (FRB) mainly involved lowering interest rates and ease of credit—two traditional methods used by the US Government in the face of an economic downturn. Interest rates were once reduced to “virtually nil”.

The crisis has already happened. What is important now—apart from taking actions to fight against it—is to summarize and analyze the cause of the crisis, and therefore learn from our mistakes to better prepare ourselves for effective prevention of similar crises in the future. In this respect, Dr. Luo shared with us his insights regarding the following five issues:

Firstly, he maintained that the financial regulation system in the US is characterized by a fragmented regulatory structure. In other words, in the US, financial regulatory measures are introduced on an ad hoc basis and limited only to the areas directly affected by the problems. Such a “stopgap” or “piecemeal" approach renders the government incompetent in handling the overall development of the financial industry and inactive in strategic terms. Even worse, the gaps between different modules of decentralized financial regulation make it possible for people to take advantage of the loopholes in the legal system. Thus, in the long run, the fragmented regulatory structure will eventually lead to disorder or even a financial crisis.

Secondly, Dr. Luo believes that political pressure is the culprit for the explosive growth of sub-prime mortgage. The Democratic Party advocated the concept of “increasing minority home ownership”, and the Bush Administration also advertised the construction of “a ownership society”, which, combined with external market pressure, ultimately triggered the subprime crisis at Freddie Mac and Fannie Mae and dragged the world economy into the mire of economic recession. Luo added that, as a convincing disproof of the notion of “market knows the best”, the US subprime crisis merits a place in finance textbooks.

Thirdly, Dr. Luo’s lecture also touched upon the issue of asset bubble, an age-old issue which has been widely discussed ever since ancient times. Even today, how to solve asset bubble still remains a hot potato for socialists. The reason lies in the fact that financial supervisors share certain common interests with the financers, resulting in financial regulation being reduced to a mere formality, but of little practical significance; another important reason is that the existing inflation indicator CPI cannot accurately reflect asset bubble risks.

Dr. Luo then went on to talk about risk management from a microcosmic perspective. In his opinion, the management of many large industrial companies nowadays focuses only on capital operation without paying enough attention to the management of the companies themselves. And, in the case of many firms, corporate management is being performed by people who know little about the professions they are in. This is very risky in the long run. To effectively solve this problem, the long-term interests of the managers must be bound together with that of the companies. Besides, neither of the existing indicators for assessing the performance of a company, i.e. ratings and capital level, is capable of reflecting the real situation of the company. It is, therefore, unviable to judge the performance of a company based on these indicators.

The last part of Dr. Luo’s lecture was an analysis of the issue of overall risks. He observed that, these days, some companies were simply “too big to fail”. Sometimes, they could even coerce the government into accepting their requirements, which is a bad thing in the long run. However, we have failed to find a satisfactory solution to this problem so far. In addition, every large corporate, and even the supervisory bodies, should keep a detailed account of their income and expenses, so that whenever the corporate suffers from a financial loss, it will be able to estimate the likely size of the loss. Due to economic globalization, economic problems encountered by one country may cause problems in other countries as a result of the “contagion effect”. In this regard, the ongoing financial crisis can be considered as a symptom of overall risks. In addition, Dr. Luo also revealed for us the trend towards aggravation of overall risks owing to the establishment of “super cycles” and the world system.

Dr. Luo shared with the students some information concerning the measures to be taken by the US Government to solve the financial crisis:

The establishment of a regulation system which can stand the test of time;

Financial regulation should cover financial companies as well as the market place;

The function of consumer protection should be singled out and be fulfilled by a separate organization; and

The creation of instruments needed for crisis control.

At the end of the lecture, he analyzed the pros and cons of the rescue program launched by the US Government, and the students also asked questions about a wide variety of current issues, ranging from financial derivatives, government rescue efforts and the over-issue of currency by the US Government to the Chinese real estate industry and stock market, etc. The lecture ended in with lively discussions. In the end, president Li of the BiMBA Finance Club presented Dr. Luo with the poster of the lecture and invited him to visit BiMBA again in the future.