Keynote Speaker: Dr. Marcus Lee

Vice President, DAG Investment Bank LLC, New York

Chairman, Risk Management & Foreign Exchange Committee, DAG Asset Management LLC, New York

Chairman, China Private Banking and Wealth Management Forum 2007, Shanghai

Keynote Speaker: APEC, ASEAN Summit

Author: How to Outsmart China - Sold in over 40 Countries. Featured in Bloomberg and CNN

Speak 4 languages and 5 Chinese dialects

EMBA Visiting Professor of Finance, City University of New York.

Worst has yet to come?

Strategies and Mechanism to achieve Financial Stability

The 11th Asia-Europe Business Forum, 2008

Dr. Marcus Lee

Vice President & China Chief Representative

DAG Investment Bank (New York) LLC

1. Financial Stability Outlook

Financial stability outlook

Risk of financial system have increased in 2008 IMF 2009 projection: 0% to negative Remain uncertain and depends on 3 factors:

1) How conditions in the US market? 2) How banks respond to the challenge? 3) Worst case scenario?

World Economy

Suffer from High inflation Overly expansionary monetary policy in US -Negative real interest rate -Depreciating USD -run from USD -Reversal of Capital Flow and Currency Turmoil

Low interest rate discourage saving, bond yields and cause investor to seek higher yields in speculative commodities and forex market.

Hence, energy and food price exploded to levels of threatening social and economy.

-41% of total international reserve (end of 2007) America can maintain a large trade deficit only if foreign banks continue to

hold a large number of dollars in their reserve currency. US entire consumption economy is based on the willingness of foreigners to hold US debt. A new world order is required.

China Economy

Pressure of inflation. GDP Growth 9.7% (2008) 9.3% (2009)

“Window guidance” and credit policy guidance were strengthened, limit lending to low efficiency enterprises

Slowdown of US economy affect China’s export.

Industries affected - most rely on export in China: Electronic appliances 65%, Office appliance 50%, Fur production 47%, Furniture 46%, Fashion & apparel 44%, rubber 26%

Financial Stability in Credit, stock market

Medium Term outlook

1. Commodity and Food price remain high despite recent declines.

2. Risk of broad based second round effects in wage and price setting, especially in emerging economies

Real Economy Impact

Affect GDP growth Affect Employment

From Financial Crisis to long term real economy crisis

Affect spending power

Existing Mechanism

Short term 1) Domestic Policies 2) Private Sector – New loans, credit lines 3) International Backup – IMF Supplemental Reserve

Facility, SDR but rigid condition

Long term 1) Reform Programs 2) Enhancing Financial Governance 3) Social enhancement 5) Steps towards sustainable finance - GRI

2. Enhancing the Surveillance Framework

Macro-Surveillance Framework

Lost of Confidence

More Bank Bankruptcy expected.

Derivative Markets (trade in future and options equity) now deal with over 47,000 different kinds of options.

Enhancing Financial Governance – not a luxury but basic requirement. Timely and clear financial reporting, Independent assessors along with strong judiciary.

Early identification of emerging risk and threats

Pre-emptive measures

Framework and infrastructure development, capability enhancement, governance structure and communication.

Vulnerability Indicator for Banking Sector

1) Selection of Risk indicators

2) Construction of vulnerability indicator

3) Assessment of future vulnerability and stress testing. Disclosure of off-balance sheet activities.

Financial Stability Surveillance

1. Micro-prudential: Micro level assessment of: -risk areas and risk management practices -business strategy and governance issues -risk absorbing capacity

2. Macro-prudential: Macro level assessment of: -exogenous and endogenous risk and vulnerabilities -contagion effects, transmission channels and impact on

financial institutions and systemic stability. -Supervisory role of IMF, Basle Capital Accord, BIS, FSF,

Financial Sector Assessment Program (WB and Govt)

Action to be taken

1. monitoring macro-financial linkages associated with developments and emerging trends in the external sector, domestic economy and financial markets, corporate and household, contagion implication to financial system.

2. monitoring and evaluating the development of sector specific issues within the financial sector and the potential implications for overall system wide stability.

-Guarantee of bank deposit by Central bank

3. Mechanism for Emergent Financial event

Emergency financing mechanism

Failure of IMF Supplementary Reserve Facility (SRF) – “borrow, invest, export, repay” IMF may lack of resources, WB, ADB, ADB consessional loan

Objective: Ability of fund respond to crisis for member countries

Focus on emergency procedure rather than a new financing mechanism suggested by last year Chairman Statement.

Exceptional procedures: Rapid approval of fund support

supplementary resources

Precautionary cooperation framework

Moral hazard – limited to truly exceptional circumstances

Not be a guarantee against sovereign default.

Importance of strengthened fund surveillance

Members responsibility to come to the fund early with a strong and comprehensive economic program to limit cost of repair.

Criterion to regional financial conducts

Suggestion: limit the use of emergency procedures to situation involving significant spillover or contagion effects

Process of Implementation

1. short report to EB current economic situation

2. level and phasing of access, the likely Impact on the fund’s liquidity and possible need to activate borrowing arrangement, changes in timetable etc.

3. Briefing: guidance for EB to direct action

4. consultation with other creditors if needed.

5. 48-72 hours consider. Once agreed: execute within 5 working days.

Conclusion

Mounting inflation and financial disorder would inflict costly stagflation, contraction in trade and disorderly oil and food markets.

Ultimately, global financial security is not about stability and wealth generation for their own sakes but creating a system of transactions that enhances the livelihoods of people and natural environment, both for now and future.

Thank you

Dr. Marcus LeeVice President & China Chief Representative

DAG Investment Bank (New York) LLC Shanghai Office500, North Chengdu Road, Junling Square, 37 floor, Huangpu district, Shanghai 200003, The People’s Republic of ChinaTel: (8621) 6103-4852Fax: (8621) 6103-4800 Email: drmarcus@yahoo.cn Website: www.dagbank.com