anselmo l s teng : conference on human resources issues ( closing remarks ) closing remarks by mr anselmo l s teng, chairman of the monetary authority of macao, at the 12th conference of central banks of portuguese speaking territories on human resources, macao, 16 september 2009. * * * dear delegates, ladies and gentlemen, in the past two days, we have listened to a series of professional and indepth deliberations on the big topic of human resources. the knowledge imparted to us will no doubt provide food for further thought and subsequent practical implementation. i am here today not to repeat what have been said, but to present to you my observations on human resources issues related to the recent financial tsunami. what caused the financial crisis which triggered a recession not seen since 1930? the postmortem report will tell you a number of reasons, such as excess liquidity, savings glut, carry trade etc. i would however share with you some of the causes which are related to human resources, the main theme of this conference. the most popular motto on the wall street before the financial tsunami was “ greed is great ”. remunerations of originators, traders and top level executives were based on profit of current period. such a policy increased appetite on the part of employees to take unwarranted risks on behalf of the institutions they were working for. it is never too late to mend. after all, we all learn from mistakes. it is therefore imperative in human resources management to devise a fair compensation scheme for financial institutions. it is my personal conviction that compensation for risk taking should be based on the following principles : 1 ) an executive compensation scheme should adequately reflect the performance of the executive in the medium and long term. therefore, executives and traders should not be compensated based on current year revenue but the average income of a financial institution in a defined period. 2 ) executives and traders who are compensated on deals done basis should never get their shares immediately after the completion of the transaction. there should be a vesting period to make sure that the profits are not illusory. 3 ) compensation schemes based on deals done should be symmetrical. that is to say, when failures ensue, penalty should be imposed. this is to avoid the one way traffic of paying out enormous rewards once the transaction has been completed while the responsible staff would come out unscathed when the deal turns sour later. to avoid another financial tsunami,

. while these funds aim to avoid reductions in net asset values, this objective may not be attainable if rates in the market are negative for a considerable period of time, prompting large outflows and closures and reducing liquidity in a key segment of the financial system. for insurance and pension funds, a low - for - long interest rate environment poses challenges, which may even be exacerbated if rates enter into negative territory. they may find themselves unable to meet fixed long - term obligations. life insurance companies will also be less able to meet guaranteed returns. iii. excessive risk - taking : increased financial stability risks, stemming from search for yield and higher leverage. keeping interest rates at negative levels for a long time increases borrowing attractiveness in key sectors of the economy and the risk of bubbles. this can not only lead to an inefficient allocation of capital, but leave certain investors with more risk than they appreciate, as investors in search of higher yields necessarily turn to excessive risky assets. iv. disincentive for government debt reduction : with interest rates at negative levels, governments are under no pressure to reduce their debt. negative rates actually encourage them to borrow more. and if government borrowing becomes a sort of free lunch, there is a clear disincentive for fiscal discipline. ultra - low interest rates flatter the debt service ratio, painting a misleading picture of debt sustainability. for instance, persistent negative rates may potentially act as an “ anaesthetic ” to governments of eurozone countries, especially in the europeriphery, meaning that they will proceed only slowly with fiscal and structural reforms, given the fiscal space that they gain from lower debt servicing costs.. v. operational risks : the issuance of interest - bearing securities at negative yields may face design challenges. areas that are commonly mentioned as sources of concern are interestbearing securities, particularly floating - rate notes ( renegotiating, collecting interest, use as collateral ) in the context of negative interest rates. more generally, if negative rates were to bis central bankers ’ speeches prevail for long, they may entail the need to redesign debt securities, certain operations of financial institutions, the recalculation of payment of interest among financial agents, and other operational innovations, the costs of which may offset negative rate benefits. for instance, most option - pricing models either do not work or do not work well with negative interest rates, particularly entailing risks for the compatibility of trading systems and