The Hindu Business Line : Illusory co-operation

Crises produce an illusion of co-operation, and sometimes, if all goes well, even co-operation itself. The recently concluded G-20 meeting is best viewed in this perspective.

Whatever else they do or don’t do, crises produce at least an illusion of co-operation, and sometimes, if all goes well, even co-operation itself. Leaders of the G-20 meeting in Washington last week made all the right noises, such as the need for greater transparency, regulation and international cooperation. The recognition of the need for greater transparency was a direct consequence of the fact that when the financial crisis was building up, no one had a clue as to what the whiz-kids of high finance were up to. Much of the fancy footwork was cloaked in thick legal contracts which no one, not even the lawyers, fully understood. The world has (once again) realised that if regulators go to sleep on the job or adopt a “boys will be boys” attitude of indulgence, disaster eventually overtakes the system.

When regulation and regulators had not come into being or when their powers were not as extensive as they are now, financial collapses could be attributed to poor judgement and “irrational exuberance”. But for the past two decades at least, that excuse has not been available — whence the need for greater regulation. Of the greatest importance, possibly, in this regard are the standards for accounting and auditing. In spite of efforts to standardise them, the US has sought to do pretty much what it wants. The standards should be such as to enable everyone to assess the balance sheets in a uniform way and to make comparisons in a way that apples and oranges, merely because they are fruits, are not treated in identical fashion. This will enable not only the avoidance of unknown risks but also allow banks to lend because they will be able to tell what’s really what on a balance sheet.

Better risk management protocols are another item on the agenda, and as India has shown, dynamic provisioning must form the centrepiece of such protocols. Fundamentalists may argue that this leads to excessive caution in lending but it could equally plausibly be argued that it is better to be safe than sorry. As for international cooperation, it will probably be the hardest to achieve because once the intensity of a crisis diminishes, other imperatives come into play which de-emphasise such cooperation. But even if it be assumed that it will indeed be possible to sustain such a thing, the issue of the mechanism will not be easy to resolve. Who wields how much power in the body charged with international oversight will determine its eventual fate. Finally, the issue regarding rating agencies: why the silence? They have got away scot free, which somehow does not seem right.

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