Tokyo, Japan, October 13, 2012 — Opening statements of IIF Board Chairman Douglas Flint, IIF Vice Chairmen Rick Waugh and Roberto Setubal, IIF Board Member Urs Rohner, IIF Task Force on Risk Governance Chairman Koos Timmermans, and IIF Deputy Managing Director and Counsellor Hung Tran at the 2012 IIF Annual Membership Meeting.

Mr. Douglas Flint

Chairman of the IIF’s Board of Directors and Group Chairman HSBC Holdings plc

Thirty years ago the financial system, in the grip of a sovereign debt crisis – then, it was Latin America – created an organization, the IIF, to help co-ordinate the public/private response necessary to secure the stability of the global financial system. Thirty years later, we are in the midst of a very different debt crisis, this time focused in the developed world and most acutely in parts of the Eurozone. The IIF, born out of the first crisis, has come to maturity in the second. In the intervening years it has developed considerably.

The Institute has a number of different roles. It provides to more than 460 member institutions in-depth research and analysis on individual countries, the global economy, and global markets. It conducts detailed studies of the major issues concerning financial institutions, such as regulatory affairs and the principles of sound practices for firms. We represent our members on sovereign debt policy issues. But above all, the Institute acts as a respected and trusted voice of the international financial services’ community.

This aspect of our work – acting as an effective communicator between the private and public sectors – is more important today than ever before. Our influence today needs to be sharper than at any time in our previous history, illustrated by the leading role the Institute took in bringing together constructively private creditors and the government of Greece over that country’s debt restructuring, the biggest in history to date. The Institute’s responsibilities in serving the interests of all its members, in all major international debates, is more demanding than its founder members could ever have imagined.

Through its Board-level steering committees and expert working groups, the IIF formulates industry perspectives to inform the ongoing policy debates. It can make this contribution because of its strong relationships built over its existence with critical international entities, such as the Basel Committee, the Financial Stability Board, the International Organization of Securities Commissions, and the International Association of Insurance Supervisors.

In the turbulent times we are living through, in which the reputation of the financial services’ industry is under heavy criticism from many sides, access to these communication channels from a respected intermediary is ever more critical.

Since the onset of the latest financial crisis, in 2007, the Institute has played a vital role in the many dialogues around regulatory reforms. These reforms are essential to restore the stability of the international financial system, and to re-build necessary public confidence in the financial services’ industry. Stability cannot return without confidence; confidence cannot be restored without stability. How will we achieve long-lasting stability and confidence? That question – the Holy Grail eagerly sought by all of us – underlies the multitude of discussions, programs and proposals that are now being debated across the world’s major financial arenas.

In all of these debates, the IIF has a clear and welcomed voice. Our mission is to contribute to the development of reforms that promote financial stability, confidence in the financial system and economic growth and are deliverable at a proportionate cost. We support the thrust of Basel III, and have represented to the G20 our members’ views on the critical importance of ensuring consistent implementation of new regulations emerging from Basel III across all jurisdictions.

Where we speak up is when we are concerned that aspects of the implementation of Basel III – at a time when many mature economies are struggling, and when emerging economies show signs of slowing – could have the unintended consequence of constraining future economic growth, through adverse consequences for end-users. We seek to identify any ‘gold-plating’ of the basic reforms which could add another layer of regulation and complexity, which although well-intended by its proponents, could act as a further restraint on economic growth.

Our members currently face many challenges, including: the stresses within the Euro Area; the stubbornly constrained outlook for the global economy; implementing the major outstanding issues of financial regulation and risk management; and adjusting to the long-term fiscal strains faced by many of the world’s leading economies, struggling to find ways of meeting the promise of health and welfare support, as the population rapidly ages. All of these coalesce to create the most difficult macroeconomic environment since the 1930s.

The IIF has achieved much in the past year under the leadership of Charles Dallara, its long-standing Managing Director, who sadly cannot join us today. His personal commitment to working towards securing the voluntary agreement on behalf of private investors and creditors to restructure €206 billion of privately held Greek debt, the largest such restructuring in history, was critical to that outcome.

Much remains to be done, on a wide variety of fronts. We at the IIF are conscious that our contribution must be to support policymakers through providing an industry-wide perspective to the debate on necessary actions, so that our industry is best positioned to shoulder its traditional and vital role – the promotion of economic growth through sound long-term lending and investment and related risk management.

I want to take this opportunity to underscore that our industry is in the midst of unprecedented change – much driven by regulatory reform but also from a keen recognition that society’s expectations of us are much higher, both as to contribution and as to behavior. The process of restoring trust and confidence will not be simple, but nothing worth attaining ever is.

Mr. Urs Rohner

Member of the IIF Board of Directors

Chairman of the IIF Special Committee on Effective Regulation and Chairman of the Task Force on Specific Impacts of Regulatory Change on End-Users

Chairman of the Board of Directors, Credit Suisse Group AG

We are today releasing a new IIF report on ways in which regulatory change is impacting the end-users of financial services. The title of this report is: Specific Impacts of Regulatory Change on End-Users: Initial Report. The background to this is obvious. The magnitude and longevity of the economic effects of the global financial crisis that started in 2007 and 2008 have – quite rightly – induced a determination by regulatory authorities that everything must be done to ensure that this never happens again. At the very least, appropriate buffers and a range of other measures, to strengthen the resilience of the global financial framework, need to be constructed, in order to prevent a future difficulty from turning into a full-blown crisis. The IIF fully endorses this laudable aim.

In the effort to achieve lasting stability the financial services’ industry, under the umbrella of the Institute of International Finance, is playing and will continue to play a proactive role. Thus we support the general ambition to put in place regulatory reforms, even as we express our legitimate concerns – voiced by other international bodies, such as the IMF – about the impact on future economic growth of some aspects of the proposed reforms. Even the most optimistic assessment of the net cumulative impact of these reforms acknowledges that they will have deleterious macroeconomic consequences: the only disagreement concerns their precise magnitude. Our anxieties focus particularly on the timetables for implementation, the level of international coordination, and the impact on Small and Medium-sized Enterprises. However, up to now, there has only been limited analysis of the specific microeconomic impacts of these reforms on different classes of end-users of financial services.

The IIF Board felt that it was essential that this be addressed and asked me to lead work to investigate these impacts. The Initial Report is, as its title suggests, a first high-level attempt at this. It does not aim to provide a full and comprehensive analysis of all the impacts both positive and negative and the exact way in which they will change the economic landscape, but only to provide a first picture of some matters that warrant further attention. The Initial Report examines the possible and likely effects on five classes of end-users. They are: retail bank clients; SMEs; borrowers in emerging markets; large multi-national corporates; and investors.

Several worrying findings emerge from this initial work. They are:

1. Emerging market corporate bond spreads are notably above the levels of a year ago – the spreads in JP Morgan’s CEMBI index are currently at 387.03, up from 305.21 at the beginning of 2011 and compared to 147.71 at the beginning of 2007.
2. 57% of respondents to our survey said that the terms and conditions for loans and lines of credit had tightened. Even more – 64% – said the cost of financing had increased.
3. There is evidence of credit tightening to large corporates. 80% of survey respondents said that they expected financial regulatory changes to have a negative impact on their business activities and investment decisions.
4. Two-thirds of investors surveyed believe that the reform agenda does not strike the right balance between resilience in the financial sector and maintaining efficiency in the provision of financial services. Nearly 75% of respondents believe that regulatory uncertainty is contributing to current (low) bank valuations. Two-thirds of respondents believe that the regulatory agenda will lead to lower investor holdings of bank equity. More than 90% believe that it will lead to lower holdings of long-term bank debt.
5. The impact on retail clients. In the U.S., consumer credit growth has declined from 7.6% at the beginning of 2008 to 2.6% in June 2012. Similarly, in the U.K. and Euro Area, consumer credit growth has declined from 6.3% and 5.1% to 2.3% and -1.9% respectively.
6. Above all, the impact on SMEs is particularly worrying. Unlike large well-established end-users, who are able to substitute bank funding with other sources, SMEs are being placed at a disadvantage. According to the U.S. National Small Business Association (NSBA), 57% of SMEs in the U.S. have needed funds over the last four years but were unable to obtain them. In Germany, 24% of SMEs were reported to have been unsuccessful in their credit application, compared to 15% of SMEs in 2007.

The full impact of reforms on end-users has though yet to materialize, as many reforms – such as those on liquidity, or derivatives – have yet to be finalized or implemented. The evidence is that uncertainty has led to banks temporarily absorbing costs, and delaying decisions on their future business strategies. Once the reforms are cast in stone, it seems certain that the additional costs resulting from them will be passed on to end-users, to the detriment of economic growth generally. As a result, there is urgent need for much more analysis of these impacts on end-users. The IIF will conduct its own further research, but it recommends that the official sector also conducts studies into this area. Such work is vital: only through this will those responsible for regulatory reform gain the necessary deeper understanding of the impacts on end-users, and how these impacts might best be mitigated by more careful phasing-in and more effective calibration.

Mr. Rick Waugh

Vice Chairman of the IIF Board of Directors and Chairman of the IIF Committee on Governance and Industry Practices

President and Chief Executive Officer, Scotiabank

As you all know, during the past four years the IIF has been undertaking important work on sound industry practices in the areas of risk governance and risk management. This work dates back to 2008 when the Institute released the Final Report of the Committee on Markets Best Practices: Principles of Conduct and Best Practice Recommendations, or CMBP for brevity.

The CMBP Report identified a number of weaknesses in governance and risk management practices, drew lessons from these weaknesses, and developed industry practices to help address them. Later on, the IIF established the Steering Committee on Implementation or SCI, which was in charge of promoting and assisting IIF members on the effective implementation of such recommendations. Last year the SCI took on a permanent form, becoming the Committee on Governance and Industry Practices. Its mandate is to improve best practices for the financial services’ industry and monitor progress through an independent survey by the IIF and Ernst & Young. Progress is being made but much needs to be done, in particular more on risk management – embedding a risk culture in day-to-day decision-making.

Today, we are issuing the latest investigation into this highly topical matter. Called the Report on Governance for Strengthened Risk Management, it carries forward the earlier work, by analyzing the main challenges that financial firms are facing when implementing strengthened practices, and providing practical, real life examples of how different firms have successfully overcome those challenges and implemented improved practices.

I want to reiterate what I have said at previous IIF Annual Members’ Meetings. There has been in the last few years a tremendous amount of activity in financial sector reform since the storm first broke. Most major banks operating internationally have undertaken substantial improvements in risk management and risk governance over the past four years, but no-one in our industry is complacent. Recent cases of failures in risk management and adequate governance are good reminders that a lot of work still remains to be done. While everyone recognizes that risk management and risk governance have to be top priorities, emphasis should be put on embedding recommended sound practices inside financial firms.

Ultimately this is a matter of judgment, however. We can make all the technical systems’ improvements in the world; but without having the proper governance and risk culture, getting the right balance between risk and reward, those improvements may still fail to prevent excessive, unbalanced risk-taking. Getting the balance right between being too cautious (thus hindering profitability and economic growth) and too ready to shoulder unjustifiable risks (thus endangering the system) is an art as much as a science.

What it calls for is experienced industry leadership, effective supervision and robust industry practices. Good risk management does not mean being entirely risk-averse; that way lies stagnation. I am confident that eventually, thanks to work being done in this area by the IIF, and collaboration with policymakers, we will get the balance right, ensuring better growth and prosperity for all.

Mr. Koos Timmermans

Chairman of the IIF Task Force on Risk Governance

Vice-Chairman of the Management Board Banking, ING Group

The IIF’s Report on Governance for Strengthened Risk Management is the product of several months of work of a group of experts from within the IIF membership. Our task was not to produce another set of recommendations in the areas of risk management and governance. Rather, our mission was to build upon the existing sets of recommendations by both the industry and the public sector, and analyze the types of challenges that firms face once they embark on the process of applying such recommendations to their own organizations.

Once the challenges are identified, the next step is necessarily to assess how to overcome them and make progress with robust implementation of sound practices. While there is universal agreement in our industry concerning the need to build a strong risk culture, the importance of developing a robust risk appetite framework, of raising the profile of the Chief Risk Officer, and of generally increasing senior management, Board and Board Risk Committee’s roles in risk matters, firms have different approaches as to how to implement these challenges in practice.

Many financial institutions continue to face challenges in implementing risk governance practices for strengthened risk management. Thus the purpose of this new report is to assemble a series of experiences of individual businesses as practical examples that illustrate specific ways in which governance and risk management challenges can be addressed. While these examples are not necessarily applicable to all other institutions, firms may well find useful lessons to be drawn from the example of others. One central message throughout the report is this: there are challenges when attempting to revamp the overall risk framework of an organization, but they can be effectively overcome.

What emerges from this report is that, just as risk has many gradations, so too does risk-response. A blanket, universal attempt to mandate the risk governance roles and responsibilities of the Board, its Risk Committees and the Chief Risk Officer, may not yield the sought-after improvements to risk management. ‘One-size-fits-all’ requirements that do not take into account a financial institution’s corporate governance structure and business model, are less likely to provide meaningful improvements in risk governance than a more flexible model, one that is proportionate to the nature, scale and complexity of an individual institution.

Our report focuses on the areas that we believe are the cornerstone of sound governance for risk management. As a central tenet, this Report suggests that financial institutions should develop and maintain a risk culture that aligns behavior and compensation policies with their own attitude to risk taking and risk management. The most important conclusion is that the idea that ‘risk is everyone’s business’ needs to be ingrained in the day-to-day operations of the institution. One key vehicle to achieve this is to develop a robust risk appetite framework that effectively cascades down through the organization, informing how business units operate and make decisions. In essence, our report underscores that the foundation of strong risk governance is based on the premise that ownership of risk resides with the business.

Of course, the cornerstone of creating a strong internal risk culture in any financial institution is the achievement of the proper ‘tone at the top’ of the business. In this respect, the Board and various Board Risk Committees have a leadership duty, one that permeates the institution, inspiring and encouraging a heightened sensitivity to risk at all levels. The full Board naturally bears ultimate responsibility and accountability for risk oversight and risk governance. Similarly, it is vital that the Chief Risk officer have sufficient stature, seniority and independence to influence decision-making. Close cooperation between the Chief Risk Officer, the Chief Executive, and the Chief Financial Officer – particularly during strategic and business planning processes – is essential.

We trust the findings and examples of practice contained in this report are helpful to IIF members and the wider industry in their efforts to strengthen their governance and risk practices and to promote a more stable and resilient financial system.

Mr. Hung Tran

Deputy Managing Director and Counselor of the Institute of International Finance

Tomorrow, the Joint Committee on Strengthening the Framework for Sovereign Debt Crisis Prevention and Resolution will finalize its Report and present it to the Group of Trustees for the Principles. The Joint Committee was set up in March 2012 under the auspices of the Co-Chairs of the Group of Trustees, to assess and draw lessons from the Euro Area debt crisis and the historic voluntary debt exchange for Greece. It was also established to make recommendations on appropriate enhancements to the guidance for the implementation of the guidelines to put into practice the Principles for Stable Capital Flows and Fair Debt Restructuring.

The Principles were instrumental in facilitating the successful conclusion of the unprecedented voluntary Greek debt exchange in March-April 2012. In a nutshell, the Principles are the voluntary code of conduct between sovereign debtors and their private creditors, developed in the early 2000s and endorsed by the G20 Finance Ministers in their November 2004 meeting in Berlin. The Principles emphasize crisis prevention through data and policy transparency and, in the case of debt restructuring, good faith negotiations and fair treatment of all creditors. Without the adherence to the voluntary, market-based approach espoused by the Principles, I very much doubt that if the high creditor participation in the Greek debt exchange could have been achieved.

The IIF was invited to play a role by the Eurogroup Working Group, in view of its leading role in the development and implementation of the Principles, and those senior officials from the Euro Area and European institutions should be thanked for having the vision to recognize that private sector involvement from the start was critical to success. The Board of the Institute deserves recognition, for endorsing the readiness of IIF Members to act collectively in this matter, and for establishing a Private Creditor Investor Committee for Greece and a Steering Committee, consisting of senior figures from around 30 large private investors in Greek government bonds. This move was critical in reassuring the Eurogroup and the IMF about covering Greece’s funding needs, that there would not be an immediate default. Above all, this experience truly changed the map for debt restructuring, by clearly demonstrating that a voluntary, market-based approach is more effective and appropriate than a unilateral, top-down approach. Dialogue is better than diktat – in debt negotiations as well as other fields. The Greek experience has markedly influenced how the whole Euro Area debt crisis is managed. The voluntary Greek debt exchange has demonstrated and underscored the validity and usefulness of resolving even the most difficult sovereign debt problems, in a manner consistent with the cooperative, market-based guidelines of the Principles, with major benefits for all parties involved.

Mr. Roberto Setubal

Co-Chairman of the IIF Emerging Markets Advisory Council

President and Chief Executive Officer, Itaú Unibanco SA

Vice-Chairman Itaú Unibanco Holding SA

The return to long-term growth trends in the mature economies remains problematic, and will continue to be so, as long as uncertainty overshadows the future development of the Euro Area. By contrast, growth in emerging markets remains solid, even though many of them are understandably experiencing the knock-on effects of the Euro Area’s problems. Policymakers in some Emerging Markets have moved fast. In the case of Brazil, for example, a notable slowdown earlier this year met with a considered response and we now believe that Brazil will have greater economic stability heading into 2013.

As Co-Chair of the IIF Emerging Markets Advisory Council, which comprises the Heads of 41 Emerging Market private sector financial institutions, I wish to convey the concerns of the Council about the continued weakness of the mature market economies. This has hampered the ability of Emerging Markets to contribute more positively to global recovery, as they did in 2009. This is reflected in reduced capital and trade flows.

According to the latest projections by the IMF, Emerging Markets as a whole are likely to see their GDP grow by 4.1% more than the advanced economies in 2013. Nor is this discrepancy solely a reflection of the impact of the recent financial crisis in the developed economies. According to some estimates, emerging markets’ GDP has, over the past two decades, grown by an average 5.1% a year – nearly 3% more than advanced economies.

There are, of course, significant regional and country differences, and these are highlighted in the new issues of two key IIF reports, the Capital Flows to Emerging Market Economies, and the Emerging Market Bank Lending Survey. For those of you who may be unfamiliar with the Capital Flows report, it uses a unique dataset – created by the IIF economics’ staff – to track capital flows for 30 key emerging markets. This is an invaluable monitor of one crucial aspect of the global economy. The new edition of this report estimates that total net private inflows in 2012 will be some $1,026 billion, rising to $1,100 billion in 2013. By comparison, in 2011 net private inflows were $1,030 billion. This year, more than 47% of that capital inflow will be directed towards Emerging Asia. One response by policymakers in the more advanced economies to the very sluggish recovery in their markets has been a renewal of expansionary monetary policy, which is likely, in our view, to support capital flows into emerging markets.

The IIF is also issuing today the latest Emerging Markets Bank Lending Conditions Survey. This reveals that overall bank lending conditions in emerging markets continued were stable in Q3 of 2012. If we are looking for glimmers of optimism – and we all are – then perhaps we can take heart from the fact the tightening in funding conditions witnessed in 2011 has moderated in most regions since the start of the year, and have eased for the first time since Q4 2010.