Reforms of Financial System Are Necessary

By Philippe Thiebaud

French Ambassador to Korea

The world is going through unprecedented financial turmoil of an intensity rarely seen. No country is spared, even those with the most remarkable economic performances.

No one can predict the consequences of this crisis on the economy, but a global economic slowdown is expected in 2009.

The measures taken in concert the past few weeks by governments, central banks and regulators are starting to bear fruit.

The spectre of the disintegration of the financial system has been avoided, though the situation remains volatile. A worldwide proactive and coordinated approach by government institutions is the key to tackling this crisis.

For now, finding answers to the crisis is the most urgent task, but it is just as important to learn from what has just happened. It is clear that events of the past few weeks are not simply a mere accident in the markets.

There's evidence of deep dysfunction within the international financial system. Ambitious reforms are critical.

First, market transparency must be increased. This means regulation must be reinforced when it is lacking or found to be insufficient, for example, regarding rating agencies, hedge funds or unregulated markets.

All the actors in the financial system must be held accountable in order to discourage taking unnecessary risks.

For example, France proposes that institutions securing credit in order to grant loans should keep part of their assets. Such a rule would have limited the effects of the U.S. subprime mortgage turmoil.

It is also indispensable to eliminate inciting very short-term profits, which generate speculative behavior. The traders' compensation system is one of the sources of the problems we are facing today.

Market monitoring and regulation must also be reviewed, so that risks can be better anticipated. Coordination between different national institutions must improve further.

We have proposed to set up a network center which will share, on a continuous basis, information between supervisors, regulators and normalization agencies in the world.

It also important that the norms applicable to the financial sector are studied collectively from the perspective of financial risk. Such should be the case for ``mark to market" accounting rules, whose pro-cyclical nature must be well monitored.

Finally, the International Monetary Fund (IMF) must be allowed to take on new responsibilities so that it can monitor high finance as it does the economy.

This means new tools are needed to adapt to the needs of all countries. At the same time, the IMF's political legitimacy must naturally be reinforced, and it is important that emerging and developing countries have a stronger voice within this institution.

These reforms are urgent. Due to market globalization, their implementation must come from a concerted effort at the international level.

For this reason, France, which currently holds the EU presidency, has proposed several summits at the heads of state level, between major industrialized countries, to enable concrete and quick decisions.

The first summit took place in New York on Nov. 15, with 20 major economic powers participating, including the Republic of Korea. This high level meeting was held to give the necessary impetus to the reform movement.

To succeed, this process needs everyone's commitment, in particular from Asian countries. President Lee Myung-bak's support of the reforms of the international financial system is, for us, a key element in the success of the summit in New York, and of those that will follow.