OECD to help chart way forward out of financial crisis
Oct 1, 2008 - OECD will provide a forum for discussions to chart a way forward out of the current financial crisis, starting with a review of the main regulatory and market failures that have emerged in recent months, OECD Secretary-General Angel Gurría said.
 Speaking on the occasion of an annual report to the Parliamentary Assembly of the Council of Europe on the outlook for the world economy, Mr. Gurría emphasised OECD support for the U.S. systemic rescue plan now being discussed in Congress and warned that similar measures may need to be taken in Europe.
“We have already seen the first troubled European banks being rescued in the UK, Belgium, the Netherlands, and Germany,” he noted. “Considering the exposure of European financial institutions, we might have to start thinking of a systemic plan for Europe if things don’t improve on the other side of the Atlantic. The piecemeal approach may not work in Europe either.”
Major economies face several quarters of weak growth as a result of the worldwide slowdown and the current financial crisis, with G7 economies set to grow by a mere 1.4% in 2008, Mr. Gurría noted.
“We are facing the worst financial crisis since the Great Depression and its consequences are already spreading beyond the financial sphere, throughout the globe,” he said. “The financial system is a conveyor belt through which the economy works. And if the financial system is partially blocked or paralysed, as it is now, then the economy cannot work normally.”
Beyond emergency measures, he stressed the need to address the roots of the problem and reform the international financial system. “Bubbles and crises will still occur if the sources of underlying imbalances are not addressed directly. Understanding causality is thus a pre-condition for correct policy making.”
In addition to traditional factors that have led to past banking crises in the US and other countries – notably a boom period of large credit growth, a sustained rise in asset prices and explosive lending to non-creditworthy economic agents -- the current crisis had its roots in non-traditional features, he said. Among these he cited:
* The development of the originate-and-distribute model of transferring risk;
* A high appetite for yield that nurtured a growing demand for high-risk assets;
* Ex-ante ignorance and ex-post uncertainty on the risk features of mortgage-based securities, related derivatives and credit-default swaps;
* Inadequate corporate governance and management incentives in financial institutions;
* The role of regulators and rating agencies.
OECD is an appropriate forum to exchange views on how to learn from these flaws and propose new approaches to these challenges, Mr. Gurría said. “We need to start thinking about what longer run solutions might look like, and the OECD committees will play a strong role in this respect.”
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