While The Market Can Stay Irrational Forever
The Financial Crisis Is Far From Over

Even though Hong Kong was able to avoid a melt down and attain a modest recovery after the 2008 globe financial crisis. However, with the recent credit crisis in Europe enshrouding the global financial market, we are in fact far from financial stability. We can see that apart from European countries like Greece, Ireland and Portugal, some larger European economy like Italy and Spain as well as the United States may also be in trouble. The worldwide inflation has contributed to the unrest in the Arab world and to the recent riots in England and Israel. Financial stability and managing financial risks is critical to the sustainable development of our economy and society.

From Tulip Mania To Saving And Loan Crisis

Mr Patrick Rozario, Partner, Risk Advisory Services of BDO was invited to share his insights on the present financial market trends in a professional seminar held on 18 October 2011. In the seminar, Patrick’s speech covered financial crisis, risks exposure of financial instruments liquidity and capital management - stress testing, risks and capital adequacy governance, risk management and internal controls in managing financial risks. Patrick Rozario has over 20 year experiences working for large international accounting firms and in the commercial sector. He has many years of experience working in the area of Risk Consulting, providing service for clients across different industries including manufacturing, telecommunication, government, insurance and banking in Hong Kong and China.

Quoting the famous English economist John Maynard Keynes - “The market can stay irrational longer than you can stay solvent”, Patrick stated that financial crisis is not something new. He said, “From the Dutch Tulip Mania to the recent Saving and Loan Crisis in the US, cyclical crises have had an impact on the global markets and liquidity over the past 370 years. As a matter of fact, the number of crises over time appears on the rise.”

Seeing that corporations’ capacity to borrow in the markets are reduced and cash-flow is jeopardized by low asset or product quality, effective liquidity strategies should be brought to the forefront. Liquidity Risks Management, according to Patrick, is of utmost importance as it is the best way to ensure that capital or funds are available when needed and that creditors’ demands for repayment do not outstrip a firm’s ability to repay its debts.

One Size Does Not Fit All

However, Liquidity Risks Management is also multi-faceted and we should bear in mind that one size does not fit all. Patrick said, “No two companies’ business models are the same. Even for companies operating in the same market can have different characteristics in terms of their financial position or risk management approach. The starting point for designing any liquidity solution must therefore be based on a thorough understanding of how a corporate operates, its cash-flow structure and its business goals.”

“There are no new lessons to be learnt. Trusted corporations, financial institutions and regulators need to adhere to and not stray from the basic principles of good corporate governance, risk management and its effect on internal controls.” Patrick said. As a concluding remark, Patrick highlighted that the 2008 financial crisis is not over yet. In the present post-financial crisis situation, the challenge is to set the ‘tone at the top’ for managing risks by truly understanding, measuring, controlling and minimizing risks in the changing environment through the governance and fine-tuning of risk models and their effect on internal controls.