1. The Prudential Supervision under Financial Liberalization Presented by Yawen Cheng Auditor Banking Bureau Financial Supervisory Commission

2. Agenda Part I. The impressing intern in UBS IB, Zurich Briefing of the learning experience in LSE Part II. The Effect of Capital Liberalization on Financial Supervision

3. Key Features of UBS UBS is the world largest wealth manager, a top tier investment banking and securities firm, and a key global asset manager UBS is a Swiss public company listed on the SWX Swiss Stock Exchange, the New York Stock Exchange (NYSE) and the Tokyo Stock Exchange (TSE). One of the Top 5 FX traders worldwide

4. UBS Ratings Fitch, London Moody’s, New York Standard and Poor’s, New York Long-term Rating AA+Aa2AA+ Short-term Rating F1+P-1A-1+

5. Business Structure of UBS

6. Put it in a easier way …… Wealth Management Asset Management Individuals, Institutions Investment Bank Market

7. Key to success People The faithful commitment form talented employees The encouraging challenge for career planning Operation Centralized operation, e.g. FX, Equity, FI Improved Efficiency via E-commerce, E-tools

8. Business Business leader – one of the largest FX traders The concept of “Service” Risk Management Dynamic ceiling Powerful on line / off line control

9. Active Supporting Departments HR Innovative Marketing – a matching image Good interaction with Regulators Regular meeting between UBS and EBK

10. Briefing of LSE courses Academic Leader Taught course for MSc in Accounting & Finance Emphasis on self-inspired study

11. Part II. The Prudential Supervision under Financial Liberalization

12. Historical Review Historical Review Several cases of financial liberalization are assessed to play a meaningful role in crises UK ERM, 1992 Mexico, 1994 Thailand, 1998 Indonesia, 1997 South Korea, 1997

13. Controversy over the Effects of Financial Liberalization Benefits Deliver efficient allocation of resources Provide opportunities for portfolio diversification, risk sharing and intertemporal trade Promote the dynamic efficiency of financial sectors by increasing competition

14. Potential Risk Market Imperfection Information Asymmetry -- Adverse selection -- Moral hazard -- Herding behavior Domestic Distortion -- Industry protection -- Government guarantees against possible failure of domestic banks encourage excessive capital inflows

15. Are Restrictions on Capital Movement any better? Shelter financial intermediaries from international competition Weaken the market discipline felt by policymakers Vest additional power with bureaucrats who may be less capable than market at delivering resources allocation

16. Under what conditions financial liberalization, particular capital account liberalization will be beneficial rather than harmful?

17. Correcting Policies – eliminate or reduce protection on industry Sound framework for information disclosure and transparency Prudential supervision on financial institutions Macroeconomic policy to resist the buildup of serious financial imbalance

18. Financial Liberalization and Crises It is not the financial liberalization at the root of problem but the inadequacy of prudential supervision and regulation whose consequences are magnified by liberalization Sudden capital outflow precipitate a crisis in countries which are engaged in heavy short-term debt

19. Possible causes for crises Inconsistent Policies Trilemma – with open capital market, the government is typically deprived of the ability to target exchange rate and run monetary policy effectively at the same time.

20. Second Generation Model Self-fulfilling & Expectation Market is sophisticated to expect an inevitable shift in policy and launch attack + policymaker alter policy Debt and Currency crisis Sudden withdraw because of loss confidence in the credit of country Country with short-term debt more vulnerable Imperfect informed investors’ herding behavior

21. Banking Crises Triggered by Currency Crises The loss of confidence in currency will drive depositors to withdraw and convert their assets into foreign denominated assets, weakening the bank’s liquidity Stemming from Moral Hazard Explicit and implicit guarantee

22. Case Study Thailand Inconsistent Policies +Self-fulfilling

23. Growth rate for major expenditure Exchange Rate

24. ERM Crisis, 1992 UK Self-fulfilling + External shock

26. China The major reason for China to keep exchange rate stable throughout Asia crises is China only partly open capital account

27. Asia Economies and Emerging markets: Net Capital Flows

28. FDI to China

29. Trend of Capital Flows 2005 A wave of privatization and cross-border M&As drew a substantial foreign direct investment The broad surge of private capital flows continue – net capital inflows from official and private sources increase from $418 billion 2004 to $472 billion 2005

30. Challenge ahead Encourage more economies to access the developing international capital flows Avoid sudden capital flows reversal by redressing global imbalance Ensure that development finance is managed judiciously to meet the goals of recipient countries while promoting greater engagement with global financial markets Source:Global Development Finance 2006, Volume 1, World Bank

31. Challenge for Financial Supervision Actively join the international organizations / events Intensive Cooperate with Authorities Encourage integration internally and internationally

32. Thank you