ECLA suggests learning lessons from financial crisis

Special Report:Global Financial Crisis

SANTIAGO, March 17 (Chinese media) -- The Economic Commission for Latin America and the Caribbean (ECLA) suggested on Tuesday the governments in the region to learn lessons from the financial crisis in the U.S. to prevent turbulences in their economies.

In an analysis entitled "The Sub-prime Crisis in U.S. and the Financial Regulation and Supervision: Lectures for Latin America and the Caribbean," the ECLA said that among the causes of the crisis is the change on the financial system functioning model, where the banks gave the credits but transferred the risk.

Other factor was the inadequate incentive structure for those who operated the financial system with an asymmetric distribution of the risks.

According to ECLA, for any cause the results were, since September 2008, there were strong drops on the assets and it started the worse systemic financial crisis in many years.

The global crisis will impact the emerging economies, therefore in Latin American countries it will be felt with more strength in the first six months of 2009, ECLA said.

The evolution of the crisis showed that the financial markets have serious failures of self-regulation, which explained by the expectations' roles in its functioning, a high presence of asymmetries and information failures, moral risk, interest conflict and failures on its governability.

For those reasons those markets are susceptible to unsustainable balances "obsessions and panics" that can become into a systemic crisis.

Once taking into account the social effects that produce the financial crisis, the public policy is key, through regulations and supervision and direct investments in the markets and institutions if needed.

The lessons for the region to prevent the financial crisis are on internal regulatory aspects and are gathered in four areas: to have a macro-prudential focus to complement the current regulatory focus; and to design mechanisms translated into a reduction of the pro-cycling of the financial systems

Other lessons include widening the traditional ambit of regulation and supervision of all the institutions with systemic risks, and the relations between the grading and risk agencies, the external auditory companies and the financial institutions.

ECLA said that the financial systems in the region are different to those of the more developed countries. However, the lessons from the current discussion will be also valid to improve the definition of the regulatory frames and good conduction of the public policy in the region.