KARACHI, Sept 24: The recent turmoil in global financial markets is a wake-up call for leading financial market centers to reassess their legal and regulatory framework, said Dr Shamshad Akhtar, Governor, State Bank of Pakistan, on Monday.

Delivering her keynote address on “Reflections on global economic and financial developments” at the 57th annual general meeting of the Institute of Bankers Pakistan (IBP) in Karachi, Dr Akhtar said there was now a broad consensus that this financial turmoil stemmed from a liquidity crunch and has sharpened financial vulnerabilities globally.

She said given the intensity of financial market turmoil, there have been concerns regarding its implications for inducing economic slowdown, particularly in US markets where housing slowdown is estimated to have already chopped off close to half or quarter of US GDP growth.

The SBP governor said the Federal Reserve took extraordinary steps to reduce its key discount rate by 50 basis points.

Although markets responded to this positively with stock markets indexes registering growth, the easing of interest rates will boost world economy with a laggard effect, she added.

Dr Akhtar said financial globalisation, marked by growing cross-border flows and strengthening of financial inter-linkages, has been on the rise.

“This has been supported by a wave of financial and capital account liberalisation worldwide, accompanied by financial engineering and innovation in the area of structured finance,” she added.

Dr Akhtar opined that the central bankers have played a crucial role in maintenance of macroeconomic stability through effective monetary tightening, while nurturing healthy domestic financial markets that along with enhanced global monitoring and vigilance helped keep global financial markets fairly robust and stable.

Notwithstanding, concerns have been echoed regarding global economic and financial vulnerabilities, she said and added these concerns stemmed partly from continuous widening of global economic imbalances now for almost five years whereby burgeoning US external current account deficit has also raised several questions.

The SBP governor said in order to promote global economic stability and an orderly unwinding of these imbalances, the International Monetary Fund has now launched a Multilateral Surveillance Mechanism while strengthening bilateral surveillance process with special focus on exchange rate surveillance.

While concluding her speech, Dr Akhtar outlined some of the lessons to be learnt from this recent financial turmoil.

She said there are clear limits of excessive leveraging and excessive off balance sheet transactions come to eventually haunt the financial institutions which have to either take over or assume losses of special vehicles or to provide for requisite liquidity support.

While spreading of risks cross borders help in diffusion of risks, it has serious implications for global financial markets which have wider consequences across developed and developing countries, said Dr. Akhtar.

The governor said evidence suggests that rating methodology for corporate credit is fundamentally different from that used for structured finance and yet ratings are placed on same scale.

The sub-prime debacle (in USA) has served as a catalyst for a general reassessment and re-pricing of risk across financial markets. This should augur well for future of structured finance products, she concluded.