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Speech of the President for the GCC Regional Conference on the Global Financial
Market: The Road Ahead on January 14-15, 2010 The Diplomat Radisson Blu
Hotel, Kingdom of Bahrain

Good Evening
Honble Chief Guest Mr. R Bandyopadhyay, Secretary, MCA, Government of India
And Guest of Honour:
Mr Abbas Al-Radhi, Chairman, Bahrain Accountants Association & President of the
Arab Federation of Accountants & Auditors,
Mr. Kamal Ahmed, COO, Bahrain Economic Development Board
Ms. Usha Narayanan, Executive Director, Securities & Exchange Board of India
and
Dignitaries from CBB & Bahrain Stock Exchange
And Professional Brethren,

I am indeed very happy to be here amidst all of you on the occasion of GCC
Regional Conference on the Global Financial Market: The Road Ahead. This
Conference has been a congregation of eminent dignitaries from leading Regulatory
bodies and institutions and renowned professionals from diversified industries from
all across the globe to start a dialogue and build a platform to deliberate on the
Future of the Financial Market amidst turbulent times.

Over the last year, the financial planet has gone through a major turmoil and it is
widely believed that the sharpest phase of the crisis is behind us. The stimulus
packages and macro-economic measures have seen green shoots. But are these green
shoots or yellow weeds? Is it time to relax or take measures to shape the future of
financial markets from here on?



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The global deleveraging that first hit the world economy in mid-2007 and that
accelerated in autumn 2008 could not have been possible without the rare
coincidence of a number of market failures and triggers, some reflecting
fundamental imbalances in the global economy and others specific to the functioning
of sophisticated financial markets. Chief among these systemic factors were the
full-fledged deregulation of financial markets and the increased sophistication of
speculation techniques and financial engineering. Other determinants were also at
play, particularly the systemic incoherence among the International trading,
financial and monetary systems, not to mention the failure to reform the global
financial architecture. Most recently, the emergence of new and powerful economic
factors, especially from the developing countries, without the accompanying reform
needed in the framework governing the world economy, accentuated that
incoherence.

A better understanding is required of how lack of proper financial regulation set the
scene for increasingly risky speculative operations in commodities and currency
markets and of how across-the board financial deregulation and liberalization have
contributed to global imbalances. In doing so, a clearer vision may emerge of how
these and other systemic shortcomings can only be remedied by vigorous reform.

While driving for Financial Inclusion and Equitable Growth, the discussion points
that may come to the mind of the financial Experts are:
What will be the key determinants of sustainable growth of financial markets?
What role will market reforms play in ensuring future development of financial
markets on a global level?
How can exchanges foster fund flows and liquidity significantly, given the need to
integrate with global economies?
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How can banks accelerate the move towards financial inclusion and equitable
growth by increasing their presence in rural areas?
More than 80% of global derivatives trading activity takes place off-exchange
(OTC). In this situation, how important is it to move OTC trades to regulated
markets and why?
What role does technology, customized offerings and new asset classes play in the
financial market spectrum to attract further investments from global entities?

A year later, we are on the track of recovery fuelled by the harmonic pumping of
liquidity by the Federal Reserves across the nations and other corrective measures to
restore normalcy. Economic recovery and the resulting increased risk appetite is a
serious concern which worries the regulators of every nation.

Financial regulation: fighting todays crisis today
The financial sector acts as the central nervous system of modern market economies.
Finance is intrinsic to successful economic development, but like most powerful
tools, it can also cause great damage. There are, however, several misconceptions
regarding modern financial regulation. The most fundamental of these is the
assumption that markets know best and that regulators should take a back seat
and not try to guess them. Governments and regulators can and should play an
active role in monitoring and controlling markets. They are able to do so because
they are privy to the same information available to market participants, but only
they are in a position to detect and avoid systemic risk by understanding better than
market participants the limits to and the dangers of irrational exuberance.

Lessons for developing countries
Developing countries are paying a steep economic price for a crisis that originated at
the centre of the worlds financial system. They need to consider how they can
protect themselves from external financial shocks. Moreover, most developing
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countries are rightly trying to build deeper and more (functionally) efficient financial
systems, and this crisis should be seized as an opportunity to expose the hidden
risks of financial development and how more sophisticated financial systems require
more, and not less, regulation.

Primarily I would like to segregate my suggestions for developing nation into two
folds:
1. Financial development requires more and better regulation
Developing countries tend to have financial systems that are less functionally
efficient than those of the advanced economies. Given the importance of finance for
investment in fixed capital and growth, several developing countries adopted
ambitious structural reform programs aimed at modernizing and improving their
own financial systems. However, there are serious doubts as to whether these pro-
market policies were successful in their aim of increasing the social efficiency of their
financial sectors.
2. There is no one-size-fits-all financial system
Developing countries face a difficult trade-off regarding the design and regulation of
their financial systems. On the one hand, access to finance is necessary for economic
development. On the other hand, as seen above, a more sophisticated financial sector
is also likely to lead to an increase in total risk. If the second effect dominates the
first, financial development may lead to an increase of systemic risk. Until recently it
was believed that good financial regulation could be a solution to this trade-off and
most countries could build financial systems that are both sophisticated and stable.
The current crisis suggests that this objective may not be within the reach of most
developing countries, at least in the near future. In choosing where to position
themselves in the continuum between financial sophistication and stability,
developing countries should recognize that there is no model that is right for all
countries or at all times. Each country needs to find the model, which is most
appropriate for its current level of development, needs, and institutional capacity.

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Regulators around the world must be chastened by what has befallen global finance,
but equally determined to draw the lessons and be up to the reform tasks that lay
ahead. A Herculean effort will be called for not only as penance for what has already
occurred but as proof that the system can be fixed and can deliver the
functional/social efficiency expected of it. Therefore, the most important task is to
ensure that financial efficiency is defined as the sectors ability to stimulate long run
economic growth. Transaction costs, the number of available instruments, or the
overall size of the financial system are only relevant if they contribute to increasing
social welfare, they should not be objectives per se.

It is necessary to develop a macro-prudential regulatory system based on
countercyclical capital provisioning and to develop institutions for the supervision
of all the different financial markets that are focusing systemic risk and nothing else.

ROLE OF ACCOUNTANTS IN TACKLING FINANCIAL CRISIS
Within the context of both domestic and international challenges, the accounting
profession therefore plays an important complementary role towards building a
credible, reputable and internationally competitive economy, irrespective of the
capacities in which they perform. This includes not only in your capacity as auditors,
but also as advisors, consultants, directors or even as members of the corporate
sector. The higher the quality and integrity maintained by the profession, the
stronger and more resilient will our markets be.
Our best tool to combat the damage is a well functioning financial system. Policy
makers need to put finance back on its feet within days and not weeks, so that
financial and non-financial firms can better navigate the difficulties of the coming
year. As indicated by various G-20 recommendations also, we need to take steps in
various directions:

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Monitoring Financial Stability- One key area of regulation:
Conserve cash and control costs.
Diversify the sources of capital and establish new credit lines.
Secure receivables and supply chains.
Seek out strategic assets.
Consider a new capital mix.

WHAT I S THE SOLUTI ON:
1. Aiming at building strong international institutions:
2. Creating transparent markets:
3. Promoting ethical values

Through such conference we should provide a platform for interaction between the
practitioners, academicians, regulators and a general investor to come together and
share knowledge and experiences that can help the world to come out of the global
economic crisis.

Last but not the least I would like to congratulate the entire managing team of the
Bahrain Chapter of ICAI for keeping the Chapter so much vibrant and for organizing
various programmes of professional interest. All these efforts are laudable and I am
sure that in times to come, the Bahrain Chapter would continue to play its due role
in furthering the Mission of Indian Chartered Accountancy profession which
positions itself as the Valued Trustees of World Class Financial Competencies, Good
Governance and Competitiveness.
Thank you all.