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crisis and are the keys to reform. Not so, the OECD warns as the G20
takes steps in such areas. Compromises on action to deal with
symptoms, such as bonuses, rather than action on real causes could
even end up doing more harm than good, the OECD said in a report and
remarks to AFP. The Organisation for Economic Cooperation and
Development says that progress on new rules to strengthen the capital
base of finance companies and related regulations does go in the
right direction. But, in the words of the author of the report,
Adrian Blundell-Wignall, much of the focus in other areas, such as on
bonuses, tackles " symptoms instead of causes" and "puts the cart
before the horse." Instead the focus should be on matters which are
scarcely being discussed. Among these issues are: - Preventing the
spread of failure, or " contagion", by erecting "firewalls" within
financial companies; - Requiring the company risk manager to be on
the main board with freedom to speak out without fear of the chief
executive. This would ensure that boards were fully informed, and
would focus more on the interests of shareholders rather than on
their own incentive pay; - Ensuring that directors of financial
companies are competent and understand their business, instead of
meeting a requirement merely to have no criminal convictions as is
the practice now; - And reforming national tax regimes in leading
countries. This is because onshore tax incentives encourage the legal
use of offshore entities and complex instruments to take best
advantage of onshore tax allowances. The Organisation for Economic
Cooperation and Development is a policy forum for the 30 leading
industrialised economies, and participated in the G20 talks on
reform of the global system. The report said: "A widely held myth
about the current crisis is that it has occurred in a regulatory
vacuum." Although deregulation had been a factor, the crisis broke
"within an overall framework of complex rules" and supervision.
Regulatory arrangements should be updated and streamlined, the report
argued. On bank bonuses, Blundell-Wignall said: " Excessive bonuses
come out of excessive profits from excessive risk-taking. "If you
just cap bonuses without dealing with excessive risk, the problem is
not solved. If you get the corporate rules, structures and
governance right, you will deal with the bonuses. "Governments have
no place sitting in the boardrooms setting wages." The report argued
that if boardrooms came under increased pressure to work for
shareholders, the budgets for bonuses would be contained. A pivotal
step would be to free the chief risk officer from fear of sanction by
the chief executive. "If the chief executive loses direct control of
high risk activities because of firewalls, and if the risk officer
has to be a director reporting to the chairman and board, the balance
of power and risk-taking changes. This is the key," Blundell-Wignall
said. He said another central issue was the spread of damage when a
financial entity in a group failed. "The concept of contagion of risk
is about the structure of companies, but it isn't being addressed,"
he warned. Blundell-Wignall, who is deputy director of finance and
enterprise affairs at the OECD, told AFP that the causes of the
crisis lay with policymakers in many fields and in many countries.
"At the root of all this is public policy," he said. " On the macro
economic side, the global problem lies at the door of misaligned
exchange rates. "This is not a US or European policy matter. They
have no control of this. It is mainly driven from Asia, the Midddle
East and parts of Latin America where they have pegged their
currencies to the dollar." The report "Reform and exit strategies"
implies that the main causes of the global crisis were borrowing by
governments and unduly low interest rates by central banks. Official
distortion of exchange rates then prevented markets from absorbing
the global trade and savings imbalances which resulted. In the West,
a social bias towards "easy money policies" led to "excess liquidity,
asset bubbles and leverage."
