For economic stability:

Avoiding disproportionate responses vital

RAMANI KANGARAARACHCHI

In the modern world of interdependent economies, economic and financial stability is considered to be of critical importance. Instability in one market can often spread to other markets and result in wholly disproportionate responses, economic and otherwise, a consultant to the European Union Professor Barry Rider said.

He was addressing the banking community in Sri Lanka on Accountabilities and Responsibilities in the Modern Banking World at the Central Bank Auditorium yesterday.

He said that the causes of the collapse and global financial crisis that countries face are many and complex, in many people's minds, and a significant issue was the rampant greed which infected the increasingly de-regulated markets over the last decade.

Prof. Barry said it is too early to know whether the widely held view that in many cases what occurred particularly in the management of credit within the banking sector went beyond negligence into culpable recklessness.

He pointed out that there are many factors that promote instability in the financial sector, over the last decade.

It has been recognized that one issue of importance, is financial crime. Very little work has been done by economist or anyone else in this area. There is a strong perception, perhaps built on experience, that serious financial scandals do promote a sense of unease.

The effects of scandals are disproportionate, and the actual scandal would not normally affect the solvency and creditworthiness of the sector, let alone the whole market.

He said what a scandal may do, is however expose weaknesses in the system which may be assumed, rightly or wrongly to be widespread.

It is also the case that panic itself results in actions that might destabilise the markets and particular institutions that would otherwise be well able to ride out the storms, Prof. Barry said.