Just out of the first plenary session which focused upon how regulatory reform and its likely impact upon the future structure of the industry.
The session was chaired by Martin Wolf, Chief Economics Editor of the Financial Times, and comprised four panellists:
Om Prakash Bhatt, Chairman, IBA & Chairman, State Bank of India
Charles Goodhart of the London School of Economics
Stephen Hester, Group Chief Executive, The Royal Bank of Scotland
Hans van der Noordaa, CEO Banking Benelux, ING
Charles began with an opening review that included several notable comments, such as:
“Being tough with bank taxation has become a political virility symbol”;
“The securitisation market is moribund. Can it be revived or replaced? If not, then do we return to lending purely related to deposits and will deposits grow fast enough to keep economies in growth?” and
“Each regulator wants to run their own stable of CCPs, so how can we create a global market for clearing if we don’t have interoperability?”
This set the backdrop for the panel discussion, with Stephen Hester kicking things off by saying that we should recognise: “that we have just gone through the greatest crisis of modern globalisation, not a banking crisis.”
This is the line that Alan Greenspan takes, as in it’s the fault of global imbalances rather than issues created by the banks.
Stephen continues to a second insight “that the world has seen that crisis but not reacted by turning in on itself, but recognising instead that globalisation is still the model that creates the greatest wealth for the greatest group of people, so it must be continued. This means the financial system has to maintain its place as the oil in the globalisation process and for information exchange.”
He concluded with the view that “regulation will be essential, but not constructed so as to make it impossible to allow the financial system to continue to fuel growth.”
Hans from ING had a slightly different view of the world: “we are concerned about fragmentation. In the USA, Basel II and Solvency II are not implemented, and I think we may move to a very nationalistic response to the implementation of regulations in Europe. It should not be a rat race for regulators to implement these rules.”
The issue he cites is that there is a lot of regulatory issues at large, such as the gaping holes in OTC derivatives and related developments. This is going to be an issue to be addressed.
Om Prakash had a different view of the world however, in that he felt that “sometimes, in India, we wonder if we are living in a different world. We have growth at 8.8% and a healthy and positive economy, so we hear these issues and wonder what is happening.”
In other words, we’re doing fine. If you have issues, then you need to solve them ‘cos I’m alright Jack.
Om Prakash also underlined how risk averse their banks have been: “most of the banks are financed by retail deposits. 80% is deposits and the rest is finance and reserves. So you talk about a return to deposit-based securitisation, and we are there … the credit deposit ratio in India is 74% and the amount of investment in government securities, promoted by regulatory fiat or dictate, is 24%.”
What this goes to show is that India’s government is highly regulating the industry and keeping foreign competition away from them.
Charles Goodhart then interjected, saying that he found “it surprising that Stephen Hester says this is not a banking crisis, as it is obviously a financial crisis. Equally, it seems that a lot of people think it just came out of the blue, but it didn’t. It had been bubbling away for years, as banks were becoming more and more undercapitalised and the banking system as a whole became over-extended. I agree that globalisation is good, but it has to be managed or divergent nationalistic interest will tear it apart.”
In particular, he was “concerned that the deficit countries are always bound to change their behaviours because the markets will enforce that. The challenge is to get the surplus countries to meet their obligations, if a global market is to continue.”
He also commented on Om Prakash’s views by saying that: “we will see fragmentation of the industry for the foreseeable future. This is because governments are moving back to national interests and focus. China and India, for example, have been relatively closed economies in terms of allowing foreign bank entry, and that is going to continue to be a challenge … having large cohorts of foreign banks operating in your country is questionable.”
Om Prakash was still bullish and, if anything, sees growth the other way.
“A few years ago, our international business was just seven percent of our balance sheet. Now it’s 15% and growing at 30% per annum with the aim to make this 20-25% in the future. This is because we need to support businesses locally within India and internationally as they grow and develop.”
In order to respond to this, they are creating an international business group, with the aim to make that “a separate bank with offices around the world. It will be like a bank within a bank, with its own technology, HR, branches and more. The question then is what changes evolve as we get to grips with this.”
The conversation continued for a while, with Hans making a really interesting insight: “the banking industry has not been seen as an example of customer centricity in the past … with social media, we underestimate what the public can do. They have all the tools there to bring you to your knees if they want to. This means banks must be clearer in their strategies in choosing the customers they want to serve and the customer they don’t.”
Anyways, you can read the rest in the SIBOS daily news and other updates, but a good start to the week I thought.