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IIF Stresses Need to Restore Confidence as Key Global Challenge. Strengthened Policy Coordination is Seen as Vital

G-20 Decisions Should Rebalance Financial Regulation in Support of Economic Recovery

Capital Flows to Emerging Markets Are Forecast to Exceed an Annual One Trillion Dollars

Washington D.C., September 25, 2011 — The leadership of the Institute of International Finance today called on the Group of 20 Summit, which meets in Cannes in seven weeks time, to take strong and concrete decisions to restore confidence in the prospects for economic recovery and financial stability. The IIF stressed the need for intensified G-20 economic policy coordination that addresses the continued deleveraging of the private sector, while necessary public sector deleveraging takes place.

The IIF reaffirmed its commitments to the core elements of the Basel reforms, which together with other measures and improved industry practices, will increase future financial stability. However, it said that a number of key current regulatory reform proposals will severely damage economic recovery, while a failure to ensure the consistent timing and application of Basel agreements across all major jurisdictions will create massive distortions. The IIF called for bold decisions to rebalance financial regulatory reform by pursuing essential changes for stability, while also allowing credit growth to support economic recovery.

The IIF is the global association of major financial services firms with more than 450 member institutions. At a press conference today the leadership of the IIF’s Board of Directors highlighted key sovereign debt issues, financial regulatory reform decisions, as well as the outlook for emerging markets. In a new report, the IIF forecast that net private capital flows to emerging markets will continue at strong levels at over an annual one trillion dollars this year and in 2012.

Dr. Josef Ackermann, Chairman of the IIF’s Board of Directors and Chairman of the Management Board and the Group Executive Committee of Deutsche Bank AG, noting widespread concerns about Euro Area sovereign debt management stated, “The lack of an effective institutional framework to deal with this situation had led to incertitude, culminating in widespread market comment about the viability of the Euro as such. As European leaders have made abundantly clear, such speculation is entirely misplaced.”

He said, “The euro is an essential and stable pillar of the international monetary system and has brought stability and growth to its constituent members. Its central role in the global monetary system makes it all the more important that any doubt about the workability of its institutional foundations be removed. Therefore, it is crucial that all Euro Area governments now quickly follow through on the agreements reached in Brussels on July 21, which include approving the €440 billion European Financial Stability Facility and the broader scope of the EFSF’s mandate. It is equally important that member states approve the necessary measures agreed upon for subjecting economic policies to greater discipline.

Dr. Ackermann stated, “With regard to Greece, the private financial sector, led by the IIF, made agreements in Brussels and we are confident that private investors and creditors will participate strongly in the debt exchange offer and considerable progress has been made in building support. We are committed to working energetically to meet this goal. The combination of these actions and debt buy-back measures will reduce Greece’s debt-servicing burden, strengthen its financial prospects, and underpin debt sustainability.”

The IIF stated that the benefits of the current agreement for Greece will be substantial. The voluntary private sector involvement in Greece will provide an upfront reduction in the nominal stock of debt of €27 billion through debt discounts and debt buybacks, and cumulative cash flow savings of €300 billion over the period to 2020. At the core of the cash flow benefits will be €54 billion in interest savings from the voluntary PSI alone. Overall, combined with additional official support and on the assumption that Greece attains its fiscal and growth targets, the voluntary PSI will lower Greece’s net debt as a ratio to GDP from 155% in 2011 to 98% by 2020. Dr. Ackermann added, “It is not feasible to reopen the agreement and given the benefits to Greece we should focus now on its timely and resolute implementation.”

On the broader issues of G-20 coordination, IIF Vice Chairman Rick Waugh, President & CEO, Scotiabank, stressed that, “We do not underestimate the political difficulties, but now is the time when the governments of major economies need to work together in a spirit of genuine cooperation. This demands that the acceptance by the leaders that each country has to make sacrifices in the short run in order to pave the way for long run stability and growth. A failure on this front could further undermine economic recovery and risk the onset of protectionist, beggar-thy-neighbor policies.”

IIF Vice Chairman Roberto Setubal, President & CEO, Banco Itaú Unibanco Banco S/A, emphasized that emerging market economies are not decoupled from the global financial markets or from the economic developments beyond their borders and thus have a vital stake in a strengthened G-20 coordination approach.

He said, “Global policy coordination means that key emerging market economies need to be very active in seeing that consistent mutually supporting policies are formulated that promote growth and address global imbalances. The delineation that remains so popular between so-called mature economies and emerging market economies is becoming irrelevant. We all share very common problems and we all recognize the benefits of finding solutions that serve the best interests of the world economy as a whole.”

Rebalancing Financial Regulation

Mr. Waugh emphasized that significant improvements have been made in banks in recent years that need to be recognized. The IIF noted that such improvements relate to Tier I capital that has greatly increased, the quality of capital, in risk management, governance, disclosure, winding down of SIVs, recovery plans and living wills.

Dr. Ackermann said that the IIF believes that the Basel III core agreements that were announced one year ago, including gradually phased-in increases in capital requirements, represent a real contribution to future financial stability. The IIF supports those agreements, which should serve as an internationally consistent standard. However, he noted that a range of actions that are now being taken that go beyond Basel III requirements, accelerate the agreed timetable, and create an unlevel international playing field, threaten economic recovery and job creation.

He stressed, “It is essential that the Basel agreements involving global and regional banks be applied in all major jurisdictions at the same time. Right now, all the indications show that this is not the case. There is no parallel application in terms of timing and the definition of capital between the major jurisdictions. It already seems almost certain, for example, that Basel 2.5 and Basel III will be implemented on different timescales in major countries. This will lead to massive distortions.”

The IIF’s Board Chairman told a press conference at the IIF’s Annual Membership Meeting that there needs to be a rebalancing in approaches to regulation that safeguard systemic stability, but which ensure that measures do not undermine economic recovery today. He noted that substantial deleveraging across the industry has already contributed to reduced credit growth and that a new IIF study shows that the combined impact of all regulatory reforms could see GDP in the mature economies over three percent lower by 2015, which implies foregoing the creation of around 7.5 million jobs.

Accordingly, Dr. Ackermann said it is crucial that the G-20, the Financial Stability Board, the Basel Committee and the European authorities, as appropriate, should now take the following actions:

  • Implement the new Basel III capital requirements – both in terms of higher quality and quantity – as agreed last year with the phased-in timetable and with consistent interpretation and application in all jurisdictions.
  • Resist pressures to introduce transaction taxes. They would be a costly mistake, burdening consumers and businesses and weakening financial services firms. And, in the absence of global application, which would be a very bad idea, they would precipitate arbitrage on a massive scale.
  • Reconsider the application and the timing of the proposed Basel capital surcharges on banks that are judged to be globally systemic. The proposals might not only add to moral hazard and increase risk, but right now the critical concern is that they can be particularly damaging given the fragility of financial markets and the serious concerns about the economic outlook. The IIF believes that there are more effective ways for dealing with the issue of systemically important firms, including substantial supervision and establishing an effective cross-border resolution regime.
  • Review and revise key liquidity proposals. Some of the proposed measures are impractical and will not serve the interest of a sounder system, and are potentially damaging to economic growth – forcing banks to boost their holdings of sovereign assets is unwise at this stage. On the Liquidity Coverage Ratio, the industry is prepared to work with the Basel Committee to forge pragmatic and consistent international liquidity standards. A full re-assessment of the proposed Net Stable Funding Ratio should be pursued.

Mr. Waugh added that securing progress on cross-border resolution is essential. He said, “The Financial Stability Board has made important progress in this area, but more needs to be done with a real sense of urgency. Forceful impetus from the G-20 will be very helpful in advancing the goal of building a fair, credible and internationally coherent approach to resolution. This is vital if we are to end moral hazard once and for all and, at the same time, make sure that all firms and all investors are treated fairly.”

Emerging Markets’ Challenges

In its new report on net private capital flows to emerging markets the IIF forecast that GDP for 2011 will rise by an average of only 1.4% for the mature industrial economies, while it will rise by 6.3% for the emerging markets, and the respective 2012 forecasts are 1.8% and 6.0%. It said net private capital flows now exceeds one trillion US dollars – the total in 2010 was $ 1,009 billion, this year it is expected to be slightly higher at $1,053 billion and rise to $1,084 billion in 2012.

Mr. Setubal noted the sluggish growth in the mature economies will probably place some downward pressure on commodity prices that combined with sharp market volatility, including large short-term capital flows searching for yield, will impact the emerging markets significantly and this will continue to be the case. He emphasized, “It is important to differentiate among the emerging market economies. Some of them will be impacted more than others by current global events. Many are focused on the consequences of a slowdown in mature market growth and their decisions, therefore, to put monetary tightening on hold is timely. But, given inflationary pressures in some countries, the key for policymakers is to get the balance right. A number of countries need to press ahead with fiscal consolidation and almost all still have a large and important agenda of structural reforms.”

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