THIS week I was in Tianjin attending the 18th International Conference of Banking
Supervisors, the annual gathering of the world’s top bank regulators to review the
progress of implementation of Basel III, the new rules that were established in the
aftermath of the Global Financial Crisis of 2007/2009.
What progress have we achieved in solving the worst crisis the world has suffered
since the Second World War? Can we prevent the next crisis?
The first thing we have to admit is some humility. The best and brightest of Western
minds did not see the last crisis coming, and none of us can predict when the next
crisis will happen. In fact, three events this year were not even on our radar screen
last year, but any one of them could change the course of history – Ukraine, IS and
Ebola. These are all butterfly events that can cause global chaos because we all live
in an increasingly crowded and interconnected world.
The second is to admit the flaws in our scientific paradigm that we use to think about
the world and to offer solutions. We got into trouble because we used models and
theories that the future will be based on historical data that we can project in a linear,
mechanical fashion. It reminds me of the pilot’s adage that those who fly by black
boxes die by the black box. If the radar cannot read the air turbulence ahead, we will
fly straight into the storm.
The scientific paradigm that we all use today is to take a total problem, break it down
into parts and then study each in depth, so we know more and more about less and
less. We forget that we all live within complex systems, with the parts totally
connected and interactive with each other in non-linear complex ways. Since we live
in systems within systems, because we are all in a highly crowded world, the
complexity is not only increasing, but becoming more unpredictable and
unmanageable by the day.
California systems thinker Fritjof Capra, who broke new ground with his book the Tao
of Physics (1975) and Web of Life (1996), has just written an undergraduate textbook
with Italian Professor of Biochemistry Pier Luigi Luisi called The Systems View of Life
(Cambridge University Press 2014). What they argue is that the current Newtonian
scientific worldview is mechanical and outdated.
What we need today is a world view that “evolution is no longer seen as a
competitive struggle for existence, but rather as a cooperative dance in which
creativity and the constant emergence of novelty are the driving forces.” Life is
actually not just a cooperative dance, but also a war dance, because the emergence
of Ukrainian conflict, IS terrorism and spread of Ebola are all about geography and
power.
What Capra and Luisi suggest is that we need a new science of qualities that forces
us to think in terms of relationships, patterns, and context, namely, “systems thinking”.
In other words, we all live in different systems that are dynamically changing,
interacting dynamically with other systems, so we must always seek to understand
the world in terms of relationships, patterns and context.
This brings us back to the question whether preventing the last crisis will prevent the
next one? The Basel Committee on Banking Supervision, the global standard setting
body on bank regulation, was expanded to include more emerging market members.
This week, it announced the inclusion of Malaysia, Indonesia and Chile as new
members. It has worked very diligently to identify the causes of the last crisis and to
fix them through a whole raft of new rules.
But if the past is not necessarily the best predictor of the future, then fixing past
problems is a necessary but not sufficient condition for preventing the next crisis.
Hence the need for some humility in what can be achieved by adding more and more
complex rules.
Understanding relationships, patterns and context is exactly ingrained in the Eastern
way of thinking. We live in complex human networks that are always dynamic and
changing, interacting not only with each other, but with mother nature. Ebola is a new
bug seeking to evolve, and spreading as human beings spread around the world. IS
is also a non-state actor that came out of the ashes of conflict in the Middle East, with
increasing global reach through the Internet. There is a pattern in these seemingly
random events. Life is not completely random.
Ukraine, Ebola and IS are not directly connected with banking, but they will have
huge impact on banks because they can disrupt real activities. Banks account for half
of the global financial assets and the war activities in Ukraine and IS are funded
through banks or underground banks. Ebola may take over US$1 billion to fight and
control. So while we are fixing banking through Basel III, the whole context in which
banks operate is changing, by technology giants such as ApplePay (through the
iPhone 6) and Alibaba.
The global financial crisis affected banks badly and was partly blamed on shadow
banks. But this current generation of policy makers keep on trying to find the key
under the lamp-post where there is light, rather than looking in the shadows, where
more and more regulation is driving real activities into. Perhaps the solution is to
improve the coverage of the light, but also to understand that more and more
specialized bank regulators cannot solve global problems on their own. We need to
cooperate together to solve global problems.
We live in a world of increasing polarization and contrasts. The world is slowing
down, but there is huge liquidity around with bubbly markets, but that is only for the
rich and powerful. The world is not short of credit. It is short of equity in both the
sense of more capital to cushion unknown risks for the 99 per cent and more fairness
in the system.
That is something outside the remit of bankers and bank regulators. So, I humbly
submit that Basel III will fix some of the problems of yesterday, but not the crisis of
tomorrow.
Tan Sri Andrew Sheng is a former financial regulator.
A version of this article appeared in The Star, 27 September 2014
|
|
