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http://www.ft.com/cms/s/7e2e6dc6-ac1...0779e2340.html
By Mohamed El-Erian
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First, the information content of market indicators that serve as traditional inputs for policymaking and market positioning has significantly distorted. This is true for staples such as the shape of yield curves and market measures of volatility and risk spreads.
Second, several countries must improve their policy tools to navigate their new circumstances. In emerging economies the traditional focus on liability management needs to be complemented by more sophisticated asset management capabilities.
Third, while financial innovations have enhanced risk management tools, a rise in risk efficiency does not entail a decline in risk. Rather, emboldened by new opportunities to tranche and securitise risk, many investors have moved up the risk curve. This shift is placing pressure on the infrastructure that supports settlement and operational risk management.
Fourth, regulatory efforts aimed at maintaining financial stability also need to be more sensitive to changes in the technical components of liquidity.
Finally, as recognition grows that international financial institutions are becoming less relevant, some difficult decisions face their shareholders if they wish to keep them effective and credible. At the minimum, they must agree on better representation and governance, a more sustainable income model and a sharper focus.
These five issues are an illustration of the complexities that face us in a world where seemingly competing themes are in fact consistent components of a bigger phenomenon. They speak to how today's vibrant economies and markets are looking to exploit opportunities afforded by significant structural changes. They also show how risks are evolving with these opportunities. It is time for policy debates to reflect these realities.
...
First, the information content of market indicators that serve as traditional inputs for policymaking and market positioning has significantly distorted. This is true for staples such as the shape of yield curves and market measures of volatility and risk spreads.
Second, several countries must improve their policy tools to navigate their new circumstances. In emerging economies the traditional focus on liability management needs to be complemented by more sophisticated asset management capabilities.
Third, while financial innovations have enhanced risk management tools, a rise in risk efficiency does not entail a decline in risk. Rather, emboldened by new opportunities to tranche and securitise risk, many investors have moved up the risk curve. This shift is placing pressure on the infrastructure that supports settlement and operational risk management.
Fourth, regulatory efforts aimed at maintaining financial stability also need to be more sensitive to changes in the technical components of liquidity.
Finally, as recognition grows that international financial institutions are becoming less relevant, some difficult decisions face their shareholders if they wish to keep them effective and credible. At the minimum, they must agree on better representation and governance, a more sustainable income model and a sharper focus.
These five issues are an illustration of the complexities that face us in a world where seemingly competing themes are in fact consistent components of a bigger phenomenon. They speak to how today's vibrant economies and markets are looking to exploit opportunities afforded by significant structural changes. They also show how risks are evolving with these opportunities. It is time for policy debates to reflect these realities.