Emily Vogl, Frank Vogl
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2009 Annual Meeting Statements by Dr. Josef Ackermann and Mr. William Rhodes
Istanbul, Turkey, October 3, 2009 — IIF Board Chairman Josef Ackermann and IIF First Vice Chairman William Rhodes discuss issues concerning global financial markets, as well as the outlook for the global economy and capital flows to emerging markets at the IIF 2009 Annual Meeting.
2009 IIF Spring Membership Meeting: Press Conference Statements
Dr. Josef Ackermann
Chairman of the IIF Board of Directors
Chairman of the Management Board and of the Group Executive Committee of Deutsche Bank AG.
Thank you Ergun for your welcoming remarks and good afternoon ladies and gentlemen. It is a pleasure to meet here in Istanbul. I wish to thank our good friends in the Turkish banking community for their support of the IIF over the years and for providing generous hospitality in hosting this Annual Membership Meeting. We are also honored that tonight our opening conference dinner speaker is Prime Minister Recep Tayyip Erdo?an.
At our opening session here yesterday afternoon we were delighted to learn from Deputy Prime Minister for the Economy Ali Babacan about the plans for developing Istanbul as a major regional financial center. Turkey has indeed made strides in recent years to become an appealing destination for global investors and an important partner to global businesses. I am confident that this progress will continue under the leadership of our friends in Turkey's government and in the private sector.
More broadly, we are now seeing signs of the beginning of global economic recovery, as well as improvement in the functioning of financial markets, but the situation remains fragile. We agree with the Group of 20 leaders who emphasized in Pittsburgh last week that "A sense of normalcy should not lead to complacency."
My colleague Bill Rhodes will discuss the economic situation in a few minutes, but I want to stress that while the recession appears to be largely behind us, we cannot be sanguine about the difficult challenges that lie ahead. We welcome the recognition at the Summit of the need for a more globally coordinated approach to the issue of imbalances. In recent years, for example, strong growth of liquidity helped to fuel investments into questionable assets and gave rise to serious risks. And we saw excessive current account imbalances, which also helped to set the stage for the crisis. We raised this key issue forcefully in our letter to the Summit leaders just before their meeting. To avoid the rebuilding of global imbalances as we emerge from the recession it is essential that there be a more coordinated approach to global policymaking that ensures that economic analysis is backed up by political will.
A prime requirement for securing durable growth of output and jobs is a more resilient and more efficient global financial system. And this is a critical time precisely because we are at the cusp of important decisions that will impact the structure and performance of this system for years to come.
We recognize that establishing a stable system is a shared responsibility of the public and the private sectors and that there will only be real success if far-reaching changes are made in our own operations. We understand the need for financial services firms to correct past mistakes. Confidence will only be restored when we demonstrate that we are making extensive internal reforms and adhering to them. And indeed we are. Benefiting from the recommendations on best practices outlined in the IIF's report in July 2008, firms across our industry are now pursuing reforms on an unprecedented scale. This is not a time of "business as usual" as is clear from just looking at a few examples in critical areas.
- I will start with risk management, which is the core business of banking. It is imperative that we are fully engaged on these issues and this must be a message that comes straight from the top of our firms. Today, wide-ranging risk management reforms are being seen in our industry, greater integration of all risk activities is being established, robust stress testing is being pursued and model assumptions have been modified taking the insights from the crisis into account; reliance on external ratings is reduced, while compensation policies, which in some institutions encouraged excessive risk, are being reformed.
- Governance reforms have significantly increased the authority being assigned in many firms to the Chief Risk Officer, while CEOs are ensuring that senior managers across firms assign greater priority to risk management as a core component of their responsibilities. We are also seeing greater focus in the Board on both the accountability of managements for firm performance as well as risk.
- Banks have also raised over $650 billion of new, market-based capital since late 2007. The quality of capital has been improved and leverage has been reduced.
- Let me also underscore changes in approaches to liquidity management - in some firms controls here were very weak, and indeed lack of sound liquidity management was a cause of the failure of a few institutions.
The IIF will publish in a few months a detailed report on how the industry is implementing reforms. The scale and scope of the changes that firms have made and continue to make needs to be well understood and factored into the deliberations that are moving ahead in the official sector on key measures. It is essential that the actions the industry is taking can work in synergy with the official sector so that external incentives reinforce the internal ones.
Now, in looking at proposed regulatory reforms permit me to start by making three general points and then I will touch upon a few specific issues.
First, reforms should be internationally consistent and globally coordinated. We understand the public pressures on politicians to act to stabilize domestic conditions after the large use of taxpayer funds to support financial institutions. Unfortunately, some of the measures taken have had adverse international effects resulting in a developing fragmentation of the global financial system. We have voiced concerns about this for some months now and we welcome the commitment made in Pittsburgh to "implement global standards consistently in a way that ensures a level playing field and avoids fragmentation of markets, protectionism, and regulatory arbitrage." Nevertheless, the challenge is not just to refrain from making these problems worse in the future, but also to roll back measures that have already contributed to fragmentation.
We need new measures that develop a level playing field in global finance; new measures that recognize the advantages to the real economy of globally integrated institutions; indeed, measures by the official sector that strengthen the international system as a whole.
Second, reforms must be balanced, and the trade-offs involving possibly lower global growth and less job creation need to be carefully considered. We are seeing multiple official proposals on capital, leverage, underwriting, liquidity and compensation, which are designed to secure the system's soundness and stability. This goal is very important, but so too is the need to ensure that regulated financial institutions are able to innovate and to provide the credit flows necessary for economic growth across the world. Regulatory measures need to be weighed in substantive dialogue with the industry to enable banks to play their vital role in the economy. I believe there is a very real risk that as central banks and governments strive to avoid premature shifts away from supportive monetary and fiscal policies, that regulatory reforms come into force that could undermine global recovery and job creation.
Reforms have to be carefully calibrated and getting this right requires a detailed examination of the cumulative impact of all the proposed measures. It is important to underscore that innovation and prudent risk management need to coexist in firms. We need the scope and opportunity to innovate - such as providing hedging against currency and other risks - so as to best serve our customers and enable them to use finance more efficiently and productively.
Third, there have been suggestions that banks prefer to take advantage of a "too big to fail" world that supports excessive risk-taking. We do not. It is clearly untenable that taxpayers should bear the burden of banking failure. The solution is not, however, to label institutions as "systemically relevant" on the basis of size alone -” or as some may view it, as just "too big." One of the lessons of the crisis is that systemic failure in an age of highly interconnected international finance can be triggered by many different types of firms and market dynamics.
Firms can incorporate resolution plans in their contingency planning, as the G-20 suggested. But we believe it is critical to build more resilient markets resistant to the failure of one or more of their participants and-”most importantly-”to develop an orderly cross-border resolution system to help address the "too big to fail" issue. No firm or country can do this on its own in today's globally integrated system. This is very complicated and challenging, but it is essential and it is an area where a close dialogue between the industry and the official sector is essential.
Now, permit me to turn to a few specific issues starting with capital requirements where discussions are at a critical stage on various aspects of reform. We agree with the G-20, and indeed we have said this before, capital levels need to be bolstered compared to what they were previously. We have also said, however, that this needs to be achieved on the basis of a risk-based approach and should be phased-in very carefully. These considerations are important. Premature changes and retreat to more simplistic measures will prove ineffective in the long run and lead to the emergence of more problems.
Now, let me turn to accounting, where the crisis underscored the need for clarity and for convergence towards a single set of high quality standards. We welcome the G-20's forceful statement in support of this objective. However, recent developments suggest that the international standard setters are moving on a divergent, rather than a convergent, path and there was no recognition of this by the G-20 in Pittsburgh. It is urgent that the obstacles be set aside and that a consistent way forward is secured. An important issue, for example, relates to the use of fair value and here convergence is essential. Fair value has been and remains an important element in capital markets, but we have significant concerns about recent suggestions to broaden its use in traditional banking activities. This approach could have serious unintended consequences.
Ladies and gentlemen, sound risk management requires prudent compensation policies. As we stressed in our IIF report more than a year ago, these policies need to be based on performance and should not induce excessive risk-taking. We have taken a strong stand within the industry on underscoring the importance of aligning the payout of compensation incentives with the timing of full and final realization of related risk-adjusted profit. For example, we have been outspoken against such practices as multi-year bonus guarantees.
The industry welcomes the principles that the Financial Stability Board has formulated and the G-20 has endorsed. We stand ready to work actively with the FSB and national authorities as they advance supervisory guidelines based on this principles-based approach. It is crucial, however, to ensure that these guidelines are applied across major jurisdictions and all segments of the marketplace, in order to create a level playing field for the industry.
In addition, we believe that as firms consider the implementation of compensation policies in coming months it would be useful for all of us to recognize that the significant recent rise in profitability at many firms is due in large part to exceptional support from governments and central banks.
In closing I want to underscore that the positions that we have presented to you today are based on the fundamental point that financial services are central to the functioning of the real economy and that the more we can build a strong global financial system, so the more our industry will be able to contribute to economic recovery, job creation and to sustained growth.
So, let me reiterate four essential messages:
First, we must follow through on our responsibilities to strengthen industry standards - this is happening. Second, we live in a global financial system, yet reform proposals appear to be pulling us toward a fragmented world of finance - it is essential to reinforce the global marketplace. Third, as regulatory reforms are considered so the right balance has to be found to ensure that innovation is not stifled and that credit growth is not so constrained that it undermines economic growth.
Fourth, it is crucial that the official and the private financial communities embark on a new phase of systematic dialogue at senior and technical levels to promote what are, after all, our shared goals of building a resilient and stable financial system that creates prosperity and wealth once again.
Thank you and now let me hand over to Bill Rhodes.
Mr. William Rhodes
First Vice Chairman of the IIF Board of Directors
Senior Vice Chairman, Citigroup, and Senior Vice Chairman, Citibank
Good afternoon. First, let me echo Joe's words of welcome to you and to our Turkish colleagues in the financial services industry and in the government who have been steadfast friends of the IIF over many years.
Economic recovery is now becoming more visible and the IIF forecasts global GDP growth of 3.1 percent next year after a contraction of 2.5 percent this year. The recovery is being led by emerging economies, notably those in Asia. And it these economies that are leading a rebound in net private capital flows. The Institute forecasts a rise in overall flows to about $672 billion in 2010, after plunging to around $349 billion this year.
One year ago we called for an overall increase in the resources available to the international financial institutions including the rapid introduction at the IMF of a flexible, pragmatic credit facility to assist emerging market countries that were being hit by the crisis and that had been pursuing sound economic policies. A number of us pushed hard for this vital initiative, including writing articles and making the case through the IIF, which ultimately brought a positive response just before the G-20 Summit in London last April. As you can see in the new IIF report official flows of capital to emerging markets have been playing an important role this year, notably in Emerging Europe.
Let me draw your attention in particular to the trends in commercial bank flows, which reached a record of over $430 billion in 2007, then dived in 2008 to $103 billion. Now, the IIF is projecting that 2009 total will be negative by $83 billion, with very modest recovery in 2010 to $49 billion. These trends reflect the crisis in financial markets, the deleveraging and the caution by financial services firms. The impact on emerging markets is considerable and the revival in banking flows is important.
And here I want to emphasize a point that Joe has just made: we need to be highly mindful of the risks to securing the restoration of healthy banking flows, indeed the risks to economic recovery itself that could result from an overly burdensome accumulation of regulatory requirements on lenders.
The economic recovery is largely the result of massive, sustained fiscal policy stimulus and the effective liquidity programs pursued by central banks. These were essential as the crisis unleashed bitter shockwaves, pushing financial markets to the brink, causing a collapse in output, boosting unemployment and unleashing protectionist trade pressures. Considering these challenges is a central focus of the IIF's and of the official meetings here in Istanbul.
There are valid questions about the durability of this recovery. In the United States in 2010, for example, the fiscal stimulus will wind down, inventory replenishment will have been completed and a range of industry problems seem set to persist, such as those in the commercial real estate sector. These questions make it all the more important - and complicated to be sure - for key governments, working together, to strike the right balance between keeping supportive policies in place and exiting from extraordinary measures. In this regard we welcome the decision by the G-20 in Pittsburgh to create a "Framework for Strong, Sustainable and Balanced Growth."
It is essential that timely coordinated strategies for curbing fiscal deficits and monetary expansion are now developed and articulated. Prolonged and excessive liquidity growth could fuel bubbles that create new crises; while procrastination in addressing rising budget deficits will increase anxieties about inflation and undermine market confidence. I believe that under the umbrella of the new "Framework" the G-20 leaders should evolve joint growth plans, which can build confidence, secure decision-taking at the key levels of finance ministers and trade ministers and central bank governors, while maximizing the skills and authority of the IMF, the World Bank and the WTO.
G-20 leadership is vital on a broad front, from rolling back the fragmentation that Joe just spoke about, to translating the commitments made in Pittsburgh on securing an open international system of trade and investment into action. Protectionism must be avoided, the Doha Round needs to be concluded, and trade finance support for poorer countries should be continued.
Let me just add to what Joe has noted on the issue of reducing the risks to economic stability of excessive current account imbalances. The revival of economic and financial imbalances cannot be discounted. Such imbalances would create new vulnerability for the global economy. The G-20 in Pittsburgh recognized the importance of this issue, but in recent days there has been skepticism voiced about the prospects for really making progress. It is appropriate to repeat a proposal that we made before the Summit where we suggested that the G20 establish a Senior Task Force, fully supported by the IMF, which should have the political authority to tackle the difficult problems of securing a more balanced global economy. It is important to ensure that the political will is generated that can yield essential decisions.
Finally, permit me to underscore Joe's comments on international regulatory and accounting standards, both of which are necessary to ensure a level playing field globally. We believe that to move forward on the accounting front the Financial Stability Board should pursue active leadership and governance roles. This is not only required to secure a renewed commitment to convergence, but also to ensure consistency between accounting standards and regulatory policies.
Emily Vogl, Frank Vogl