“Too big to fail” is a phrase which helped to define a global financial crisis that some say still hasn’t ended and it is as pertinent now as it was in 2008.
Almost five years exactly have passed since Hank Paulson, then US Treasury Secretary, swapped the purchase of toxic assets for straight injections of capital to shore up the country's banks.
The ramifications from such a huge statement of intent continue to reverberate even now, not just within the global financial services industry but amongst the regulators that police it and the credit ratings agencies that are meant to provide an early warning system of the potential risks.
As such, Dominique de Villepin, former French prime minister and currently frontman for a pan-Asian credit ratings agency, told FinanceAsia in an interview that banks should never again be allowed to become so important.
“It’s worth asking if it would not be preferable, when a financial institution becomes so large that its failure would be a systemic risk, to break it up. It is too dangerous for the financial markets of the future to have institutions that are too big to fail,” he said.
De Villepin believes the region is too dependent on the US and, to hit home the argument, advocates a system whereby the dollar is not allowed to dominate “the whole financial system”.
“Relying on one currency alone is obviously quite precarious, particularly as the levels of debt in the US are entirely out of control,” he told FinanceAsia.
The current chairman of the international advisory board of Universal Credit Ratings Group suggests Asian countries that want to anchor their exchange rates should look instead to a basket of currencies rather than a dollar peg, and thereby mitigate against any future shocks in the US.
Were Hong Kong to adopt such a system, he says, the renminbi would make a natural component part of any currency basket; as would the dollar, the euro or the yen.
Not relying on a western-centric approach is at the heart of his efforts to push UCRG as a pan-Asian credit ratings agency, comprising as it does Dagong Global Credit Rating Agency -- which is China's biggest -- Russian group RusRating, and Egan-Jones Ratings of the US.
De Villepin insists a meaningful challenger to the world's three dominant US credit ratings firms is vital, especially as the kinds of financial instruments that brought the world financial system to its knees in 2008 are still an issue.
“What is important is advocating a new system, a dual-rating system, which might be a combination of a global rating and a local rating, which will take into account many more factors than the Big Three – Standard & Poor’s, Moody’s and Fitch – are doing right now.”
Maybe “too big to rate” will become the phrase that defines the next five years.
