In an environment of sustained uncertainty and volatility, financial institutions from Wall Street to community banks must continue to adapt their business models and work to restore public and investor confidence, according to a group of expert analysts comprising APCO Worldwide’s International Advisory Council and Global Political Strategies groups.
How are the latest developments affecting the customers of the financial sector, and what will be the impact on long-term investment and consumption?
Eduardo Aguirre: Three years ago, bank governance and administration, together with government regulators and independent auditors, failed miserably at their individual and collective responsibilities. We’re still crawling out of that deep hole, and loan charge-offs continue to be an important factor. The Dodd-Frank Act has begun making tremendous reforms to the system. The overarching objectives are to make the system stronger and more resilient, while also limiting the potential shock wave that any large bank failure would impose on the economy. The act has also forced our regulatory structure, with its multiple overlapping agencies, to review and rewrite the new supervisory rules. Those rules are still a work in progress, and until they're fully ready, disseminated and absorbed by the bankers and the regulators, we're still going to be flying with inconsistent navigational instruments – that is to say, cautiously and timidly.
The recent financial turbulence is still fresh in our memory, and the economic recovery is still moderate. Thus, many in our industry are still hesitant to open wide the credit spigot. And that, of course, puts some undue pressure on all bank users but most especially on medium and small businesses, because large businesses are able to finance their capital expenditures. I'm convinced the financial system has the resources to finance the growing economy. However, bankers are still struggling to work up the courage to bring what used to be routine proposals to skeptical credit committees, who in turn are subsequently castigated by the regulators and their bank examiners. The colliding pressure between the regulators and the bankers will likely continue for some time longer, and until there is less of an adversarial environment, the industry is just not ready to return to the proactive normalcy that it should have.
The biggest risk that I see right now is the fact that we're still skating on thin ice in the industrialized nations. I think the U.S. and European economies and others are still not on solid ground. And therefore it's important that we get some stability to continue gaining some ground under our feet. It wouldn't take much or too many small incidents to create a big incident. So I'd just like to see some stability for a little while, in a world that is so complex that you see a tsunami in Japan impacting automobile sales in Nashville, Tennessee. It's complex and we don’t have too much of a cushion.
The risks are and should be commensurate with the rewards. We need to analyze opportunities, whether they are in the United States or in emerging markets. Some are good. Some are not. Due diligence is important.
Eduardo Aguirre is former U.S. ambassador to Spain; former vice chairman and COO of Export-Import Bank of the United States; and former Bank of America president of international private banking.
###
What is the current state of the Eurozone debt crisis, and how is the future of the financial markets and financial services firms in the region taking shape in the aftermath of the global meltdown and re-regulation?
Georges Ugeux: The recent regulation coming out of Brussels provides a series of exceptions on insurance companies' equity, average securities and derivatives, which are extremely important for capital liquidity. But you have to understand that most European banks have a balance sheet that is a multiple of their GDP, which is not the case in the United States. And therefore, in the sort of war between the regulators and the banks, the banks play at a national level where they have the upper hand.
The biggest issue is offshore matched retention between the two. Greek banks own 140 percent of their equity in Greek sovereign debt. So in doing sovereign debts in value, they lose equity. So the total Greek holdings are 86 billion euros, which is very dangerous.
The European Central Bank has done something which is not a liquidity strategy but a credit strategy under the pressure of the European governments. There are no Greek banks at 56 billion euros, which is totally bearable compared to what has been said because it represents three percent of their equity.
I don’t believe that any solution will be possible unless there is a clean restructuring and the bulk of the debts have been rescheduled, which requires inevitably the agreement of the European Central Bank which plays a critical role in the solution. But for political, moral and social reasons, there is a need for private sector contribution. And they are absolutely frightened by the fact that Greece, with a triple C rating, is now the worst country in the world from a trading standpoint. There won't be a micro-solution in the sense that people are going to be told what to do in a more or less strict way. What it means is that the weakness of the European banks is now fully exposed. And there is a huge disagreement between the fiscally conservative countries led by Germany and the others. I believe there is the risk of a “European Summer,” much like the recent Arab Spring – for many of the same reasons and with the same ingredients.
The reason why there is no French-German consensus is because fundamentally it's seen that in the three weak areas, the French banks are the most exposed. And so the main concern of the French government is protecting the French banks.
There is a huge difference between the debt crisis and a currency crisis. The euro is not extinct. The euro continues to exist. It's an issue of managing the debt of the euro, which is essentially different.
Georges Ugeux is former president of the European Investment Fund; former head of the international group of the NYSE; and chairman and CEO of Galileo Global Advisors.
###
What is the key opportunity to improving the current global financial landscape, and what is the greatest risk?
Mike Oxley: The key opportunity is growing investor confidence. A recent poll claimed that more than 80 percent of individual investors don’t trust the capital markets. They think that Wall Street rules are rigged against them. That is an enormous indictment of our system. We saw that happen after Enron and WorldCom. We continue to move forward, but at the end of the day, investors have to be confident that the decision to participate in the capital markets is a wise one, and that it’s a fairly regulated market, and that risk is based on the right information. That’s really the challenge that we have before us.
The biggest risk is the debt ceiling issue in the United States – we’re the largest economy in the world. Everything's denominated in dollars, so the decisions that are made in the United States will have tremendous reverberations throughout the world. All the eyes right now are on Washington to try to solve this problem.
I think a total failure of the Senate to pass a budget the last three years is irresponsible, and in the case of the Republicans, the debt ceiling issue gives them leverage to try to get our fiscal house in order. So this is a huge deal and it's going to be, I think, historic. And my experience is that the Congress only acts when there is a crisis. I'm worried, though, that in this case, the reaction may be far more negative, particularly internationally—and once you go down that slippery slope, it's difficult to get back up and that's my big concern.
Michael G. Oxley is former U.S. congressman; former chairman of the U.S. House Financial Services Committee; key author of Sarbanes-Oxley Act.
###
What effect has the global financial crisis had on emerging markets – and on Asian markets specifically?
David Hall: Emerging markets have come through the current crisis quite well. International banks that operate in emerging markets generally have a common view that local banks have become ever more efficient and ever more competitive, especially in the commercial banking area, which is in the old-fashioned business of taking deposits and making loans. But this particular crisis does represent an inflection point for emerging-market banks, particularly for Asian banks and Chinese banks because now they're obviously among the biggest in the world.
One of the great changes is that, until the recent past, emerging markets looked to western banks, institutions and regulators for expertise and guidance. And now their confidence in that expert edge has been somewhat damaged by the events of the crisis. They now feel themselves much more confident, rightly or wrongly. What this means is that in terms of international cooperation, they will be looking at wider cooperation but very much from their own point of view. Whether they want to go down the same regulatory route as the United States is open to question.
For China, it’s obviously a vast economy and a challenging one to manage. However, the Chinese government has done a very good job over a period of time. But clearly what they are struggling with at the moment are inflationary pressures.
Looking further around – Singapore in particular has been booming. They've been building casinos and the economy there is particularly strong. It's moving as well in Latin America. Obviously places like Brazil have had very strong inflationary pressures and pricing pressures on the currency, again, I think, probably fed in part by U.S. dollar weakness.
Some commentators have suggested that China may be the next Japan, with a stagnating economy. China shares with Japan a high savings rate and a highly protected economy. However, China obviously is coming off a much lower GDP per capita base than Japan, so one must expect considerable and continuing opportunities for capital and infrastructure investment to drive the economy.
On the other hand, there has been significant misallocation of investment in China: airports built where nobody wants to fly; towns built where nobody wants to live, for example. There are also concerns about the level of municipal debt. All that said, the overall growth trajectory and China's ability to generate valuable investment would seem to distinguish them from Japan's sort of stagnation.
David Hall is former head of group communications for HSBC in Asia.
a global affairs media network
Global Finance on the Edge: Four Expert Views
September 28, 2011
In an environment of sustained uncertainty and volatility, financial institutions from Wall Street to community banks must continue to adapt their business models and work to restore public and investor confidence, according to a group of expert analysts comprising APCO Worldwide’s International Advisory Council and Global Political Strategies groups.
How are the latest developments affecting the customers of the financial sector, and what will be the impact on long-term investment and consumption?
Eduardo Aguirre: Three years ago, bank governance and administration, together with government regulators and independent auditors, failed miserably at their individual and collective responsibilities. We’re still crawling out of that deep hole, and loan charge-offs continue to be an important factor. The Dodd-Frank Act has begun making tremendous reforms to the system. The overarching objectives are to make the system stronger and more resilient, while also limiting the potential shock wave that any large bank failure would impose on the economy. The act has also forced our regulatory structure, with its multiple overlapping agencies, to review and rewrite the new supervisory rules. Those rules are still a work in progress, and until they're fully ready, disseminated and absorbed by the bankers and the regulators, we're still going to be flying with inconsistent navigational instruments – that is to say, cautiously and timidly.
The recent financial turbulence is still fresh in our memory, and the economic recovery is still moderate. Thus, many in our industry are still hesitant to open wide the credit spigot. And that, of course, puts some undue pressure on all bank users but most especially on medium and small businesses, because large businesses are able to finance their capital expenditures. I'm convinced the financial system has the resources to finance the growing economy. However, bankers are still struggling to work up the courage to bring what used to be routine proposals to skeptical credit committees, who in turn are subsequently castigated by the regulators and their bank examiners. The colliding pressure between the regulators and the bankers will likely continue for some time longer, and until there is less of an adversarial environment, the industry is just not ready to return to the proactive normalcy that it should have.
The biggest risk that I see right now is the fact that we're still skating on thin ice in the industrialized nations. I think the U.S. and European economies and others are still not on solid ground. And therefore it's important that we get some stability to continue gaining some ground under our feet. It wouldn't take much or too many small incidents to create a big incident. So I'd just like to see some stability for a little while, in a world that is so complex that you see a tsunami in Japan impacting automobile sales in Nashville, Tennessee. It's complex and we don’t have too much of a cushion.
The risks are and should be commensurate with the rewards. We need to analyze opportunities, whether they are in the United States or in emerging markets. Some are good. Some are not. Due diligence is important.
Eduardo Aguirre is former U.S. ambassador to Spain; former vice chairman and COO of Export-Import Bank of the United States; and former Bank of America president of international private banking.
###
What is the current state of the Eurozone debt crisis, and how is the future of the financial markets and financial services firms in the region taking shape in the aftermath of the global meltdown and re-regulation?
Georges Ugeux: The recent regulation coming out of Brussels provides a series of exceptions on insurance companies' equity, average securities and derivatives, which are extremely important for capital liquidity. But you have to understand that most European banks have a balance sheet that is a multiple of their GDP, which is not the case in the United States. And therefore, in the sort of war between the regulators and the banks, the banks play at a national level where they have the upper hand.
The biggest issue is offshore matched retention between the two. Greek banks own 140 percent of their equity in Greek sovereign debt. So in doing sovereign debts in value, they lose equity. So the total Greek holdings are 86 billion euros, which is very dangerous.
The European Central Bank has done something which is not a liquidity strategy but a credit strategy under the pressure of the European governments. There are no Greek banks at 56 billion euros, which is totally bearable compared to what has been said because it represents three percent of their equity.
I don’t believe that any solution will be possible unless there is a clean restructuring and the bulk of the debts have been rescheduled, which requires inevitably the agreement of the European Central Bank which plays a critical role in the solution. But for political, moral and social reasons, there is a need for private sector contribution. And they are absolutely frightened by the fact that Greece, with a triple C rating, is now the worst country in the world from a trading standpoint. There won't be a micro-solution in the sense that people are going to be told what to do in a more or less strict way. What it means is that the weakness of the European banks is now fully exposed. And there is a huge disagreement between the fiscally conservative countries led by Germany and the others. I believe there is the risk of a “European Summer,” much like the recent Arab Spring – for many of the same reasons and with the same ingredients.
The reason why there is no French-German consensus is because fundamentally it's seen that in the three weak areas, the French banks are the most exposed. And so the main concern of the French government is protecting the French banks.
There is a huge difference between the debt crisis and a currency crisis. The euro is not extinct. The euro continues to exist. It's an issue of managing the debt of the euro, which is essentially different.
Georges Ugeux is former president of the European Investment Fund; former head of the international group of the NYSE; and chairman and CEO of Galileo Global Advisors.
###
What is the key opportunity to improving the current global financial landscape, and what is the greatest risk?
Mike Oxley: The key opportunity is growing investor confidence. A recent poll claimed that more than 80 percent of individual investors don’t trust the capital markets. They think that Wall Street rules are rigged against them. That is an enormous indictment of our system. We saw that happen after Enron and WorldCom. We continue to move forward, but at the end of the day, investors have to be confident that the decision to participate in the capital markets is a wise one, and that it’s a fairly regulated market, and that risk is based on the right information. That’s really the challenge that we have before us.
The biggest risk is the debt ceiling issue in the United States – we’re the largest economy in the world. Everything's denominated in dollars, so the decisions that are made in the United States will have tremendous reverberations throughout the world. All the eyes right now are on Washington to try to solve this problem.
I think a total failure of the Senate to pass a budget the last three years is irresponsible, and in the case of the Republicans, the debt ceiling issue gives them leverage to try to get our fiscal house in order. So this is a huge deal and it's going to be, I think, historic. And my experience is that the Congress only acts when there is a crisis. I'm worried, though, that in this case, the reaction may be far more negative, particularly internationally—and once you go down that slippery slope, it's difficult to get back up and that's my big concern.
Michael G. Oxley is former U.S. congressman; former chairman of the U.S. House Financial Services Committee; key author of Sarbanes-Oxley Act.
###
What effect has the global financial crisis had on emerging markets – and on Asian markets specifically?
David Hall: Emerging markets have come through the current crisis quite well. International banks that operate in emerging markets generally have a common view that local banks have become ever more efficient and ever more competitive, especially in the commercial banking area, which is in the old-fashioned business of taking deposits and making loans. But this particular crisis does represent an inflection point for emerging-market banks, particularly for Asian banks and Chinese banks because now they're obviously among the biggest in the world.
One of the great changes is that, until the recent past, emerging markets looked to western banks, institutions and regulators for expertise and guidance. And now their confidence in that expert edge has been somewhat damaged by the events of the crisis. They now feel themselves much more confident, rightly or wrongly. What this means is that in terms of international cooperation, they will be looking at wider cooperation but very much from their own point of view. Whether they want to go down the same regulatory route as the United States is open to question.
For China, it’s obviously a vast economy and a challenging one to manage. However, the Chinese government has done a very good job over a period of time. But clearly what they are struggling with at the moment are inflationary pressures.
Looking further around – Singapore in particular has been booming. They've been building casinos and the economy there is particularly strong. It's moving as well in Latin America. Obviously places like Brazil have had very strong inflationary pressures and pricing pressures on the currency, again, I think, probably fed in part by U.S. dollar weakness.
Some commentators have suggested that China may be the next Japan, with a stagnating economy. China shares with Japan a high savings rate and a highly protected economy. However, China obviously is coming off a much lower GDP per capita base than Japan, so one must expect considerable and continuing opportunities for capital and infrastructure investment to drive the economy.
On the other hand, there has been significant misallocation of investment in China: airports built where nobody wants to fly; towns built where nobody wants to live, for example. There are also concerns about the level of municipal debt. All that said, the overall growth trajectory and China's ability to generate valuable investment would seem to distinguish them from Japan's sort of stagnation.
David Hall is former head of group communications for HSBC in Asia.
