By Angela Dorizas
This week marks the first anniversary of the collapse of US investment bank Lehman Brothers, which sent shockwaves around the world and brought the global financial system to its knees.
Griffith Business School Professor of Finance, Michael Drew, said the collapse of Lehman Brothers demonstrated “multiple failures” in the current global financial system, including deceptive and fraudulent practices.
Professor Drew said a mix of low interest rates, lax lending standards and a number of innovative financial products, including credit default swaps and collateralised debt obligations (CDOs), lead to the rise of new and largely misunderstood risks to global finances.
“In the fast moving world of the global financial crisis, the debate is now shifting to perhaps the most challengeing question – how are we going to stop this from occurring again?”
That question was high on the agenda at a recent symposium hosted by Griffith University’s Business School.
More than 100 delegates from super funds, banks and the Queensland public service gathered in Brisbane last week to discuss the role of innovation in the global financial crisis.
“The conversation centred on the role of financial innovation in the crisis and how financial innovation will either assist us or harm us in [the future] in solving a number of topical issues, including retirement savings and the emissions trading scheme,” Professor Drew said.
In his presentation, From Sublime to Subprime: adventures in financial innovation, Professor Drew explored the regulatory challenge of finding an appropriate balance between the competing demands of consumer protection and financial innovation.
“That really is front of mind for regulators around the world at the moment – trying to make sure we can find an appropriate path that allows innovation and risk taking to occur in a way that doesn’t jeopardise the very fabric of the economic financial system,” Professor Drew said.
“That’s a very fine line to walk.”
He said bold initiatives announced by the Australian Securities and Investment Commission (ASIC) and Australian Prudential Regulation Authority (APRA) signalled that further regulation was in the pipeline.
“They all seem to suggest that we are living in a world of greater regulation,” Professor Drew said.
“Probably the key issue is the question around the independence of the advice, the independence of the risk management strategies and the advice around those strategies.
“There was a great deal of conversation about superannuation funds in particular; the need for independent investment specialists on investment committees; the fact that investment matters are now becoming so complicated that it might be beyond the realms of a traditional trustee board to handle those issues; and that it is timely for an independent representation on a separate investment committee and an independent chair of that investment committee.”
There was also some discussion about the need for all levels of government to have the appropriate skills for investing in innovative and complex financial products, such as CDOs and credit default swaps.
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