The financial crisis is likely to lead to changes in the structure of the US financial system, said Joseph Yam, chief executive of the Hong Kong Monetary Authority (HKMA), noting that the US "black box" that lures funds globally has turned out to be defective.

Yam also added that there are valuable lessons to be learnt from the US economic woes, that may have important implications for other jurisdictions.

The HKMA chief used "black box" to describe the US financial market in his weekly column "Viewpoint", and said the box is the origin of the wide-spreading financial crisis.

Global investors are lured to put their funds into the US black box for a "return", on the other side, fund raisers take what they need to finance their activities from the box by paying a "price".

In a largely free-market environment, Yam said, the box operation is what promised to be a highly efficient means of producing the lowest spread between the return for the investors and the price for the fund raisers.

However, the operation, he said, "turns out to have benefited the operators of the box at first, with the spread then widening, inducing the crisis in the end".

The financial system is supposed to match the risk appetite of investors with the risk profiles of fund raisers, but the defective US black box operation has proven to be unstable and therefore unsustainable.

"There seems to be a need to go back to basics," Yam said, "simpler ways of bringing investors and fund-raisers together may be more cost-effective in the long run."

What are simpler ways or basics? To make the box a lot more transparent and all parties are responsible for ensuring that the box works as intended, Yam explained.

When the US sneezes the world catches cold, and local financial institutions have taken successive hits on their holdings of structured financial products from the developed markets.

Yam said the severity of the economic woes is clearly demonstrated by the extent to which the US authorities have been willing to intervene, to ease financial market tension and to rescue systemically important financial institutions, or support the housing market.

The public may feel difficult to appreciate the significance of the crisis, as people may not be affected other than those suffered from the large downward adjustment in stock prices.

(HK Edition 09/05/2008 page2)