Emily Vogl, Frank Vogl
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2011 Annual Membership Meeting Press Conference Opening Statements
Washington D.C., September 25, 2011 — Opening statements of IIF Board Chairman Josef Ackermann, and IIF Vice Chairmen Rick Waugh and Roberto Setúbal at the IIF 2011 Annual Membership Meeting.
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.
Good morning everyone and welcome!
You have all been immersed over the last three days in intense briefings from many leaders on today’s global economic challenges: I therefore presume you are well informed, so rather than take you on a tour of all present concerns let us focus on three major and closely related issues.
First, we are confronting a global not a regional set of challenges. Each of the major mature economies – the U.S., the E.U. and Japan – face major economic policy difficulties that have tested, and will continue to test, governments. The slow growth of these economies and the volatility in financial markets will create added pressures on policy-makers in the emerging markets. My colleague Roberto Setubal will comment on this point in a moment.
Actions to promote stability and growth therefore, and that is my second point, need to be globally consistent and engage leaders from all of the key major economies.
The Group of 20 Summit in November in Cannes must take strong and concrete decisions to restore confidence in the prospects for economic recovery and financial stability and must ensure that measures taken are consistent across the G20.
One source of uncertainty in the global economy is tension within the Euro Area triggered by problems with sovereign debt management in some Euro member states. The lack of an effective institutional framework to deal with such a 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. 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 crucially important that all Euro Area governments now quickly follow through on the agreements reached in Brussels on July 21, which include approving the Euro 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.
In this context, the Government of Greece must know what it needs to do and we shall hear more on its resolve at our lunch today when the Greek Minister of Finance speaks to us. Led by the IIF the private financial sector made commitments in Brussels to support Greece 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 additional debt buy-back measures that we anticipate will reduce Greece’s debt-servicing burden and so strengthen its financial prospects.
We believe that 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. Indeed, it is not feasible to reopen the agreement and, given the benefits to Greece, we should focus now on its timely and resolute implementation.
Thirdly, in light of these economic challenges, it has become even more obvious that the ongoing reform of global financial regulation needs to carefully balance stability and economic growth. The IIF has consistently voiced support for the core elements of Basel reforms, which together with other measures and improved industry practices, will increase future financial stability. The IIF supports the Basel III core agreements that were determined one year ago, which should serve as an internationally consistent standard.
However, actions that are now being seen and are being proposed that go beyond Basel III requirements, accelerate the agreed timetable, and create an unlevel international playing field, threaten economic recovery and job creation.
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 3 will be implemented on different timescales in major countries. This will lead to massive distortions. The G-20 should call on the Financial Stability Board and the Basel Committee to act to discourage measures that can have such damaging consequences for the cohesiveness of regulation.
Ladies and gentlemen, financial services firms across the globe are retrenching to an unprecedented extent. Many are adopting a mode of operation which is exceptionally risk averse. In a number of cases firms have been shedding assets. These actions partly reflect market constraints and the weakness of the recovery. But, they also reflect the piling-on in one jurisdiction after another of new regulatory measures and, equally important, uncertainties about future regulatory requirements.
The deleveraging in the financial sector that we have seen has contributed to real declines in the volume of credit extended to businesses and households in the EU and the US over the last years. This has undermined economic recovery. It serves as a warning of what lies ahead if there is no regulatory rebalancing. A recent 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.
Let me highlight three concerns: First key aspects of liquidity proposals are impractical and could have a damaging impact on economic activity. For example, they contain incentives for holding sovereign debt which look increasingly inappropriate. With regard to the Liquidity Coverage Ratio, we believe the best way ahead is for the Basel Committee to work with the industry as a matter of priority to forge pragmatic and consistent international liquidity standards. We see still more difficult issues with the proposed Net Stable Funding Ratio and believe that its repercussions need to be re-assessed before this regime is fully implemented.
Secondly, we believe that the proposed Basel capital surcharges on banks that are judged to be globally systemic should be reconsidered with regard to their application and timing. 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 condition of the world economy. 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.
Thirdly, transaction taxes 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.
Ladies and Gentlemen, financial stability and economic recovery require credit growth and the ability of the financial services industry to provide adequate finance to governments and to enterprises. This ability is in danger of being severely hampered. Our hopes now rest on the G-20 to step forward and act decisively to ensure that it will be fully restored.
Mr. Rick Waugh
Vice Chairman of the IIF’s Board of Directors and President & CEO, Scotiabank.
Thank you Mr. Chairman and good morning to all of you. I would like to make three points:
First, policy makers need to recognize the significant improvements that have been made in the financial sector since 2007. As we discuss this issue it is useful to recall that four years ago at the IIF’s annual meeting the Board of Directors launched a major review that resulted in a landmark report on industry best practices, particularly on risk management. I co-chaired the study and the in-depth follow-up work that the IIF has pursued over the last three years and many were taken up by the FSB. We have been surveying our members on implementation. Our banks have made significant progress on capital, liquidity, risk management, and improving the quality of their assets.
Second, we recognize in the industry that we need to keep making progress in these areas. On Saturday afternoon here we held an extraordinary meeting of the senior executives from major banks from across the world to exchange views and deepen understandings on the key issues related to risk management.
Third, let me highlight one of the most difficult and most important areas of regulatory reform – the issue of resolution and how best to address what is commonly seen as the problem of too big to fail. The Financial Stability Board has been making 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. Thank you.
Mr. Roberto Setubal
IIF Vice Chairman, President & CEO, Banco Itaú Unibanco Banco S/A and Vice Chairman of the Board Itaú Unibanco Holding S/A. IIF Vice Chairman, President of Banco Itaú in Brazil.
Ladies and gentlemen, the emerging market economies continue to support world’s growth. The IIF is now forecasting that GDP for 2011 will rise by an average of only 1.4% for the so-called mature industrial economies, while it will rise by 6% for the emerging markets.
The strengths of the emerging markets are highlighted by the scale of net private capital inflows. The annual volume now exceeds one trillion US dollars. Very significantly, direct investment, which contributes to strengthening the economic base and creating employment, represents somewhat more than 40% of these total flows.
The emerging market economies are not, however, decoupled from the global financial markets or from the economic developments beyond their borders. The sluggish growth in the mature economies will probably place some downward pressure on commodity prices that combined with sharp volatility in the markets, including large short-term capital flows searching for yield, impact the emerging markets significantly and this will continue to be the case.
“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.”
What is common to all, I believe, is that it is clearer today than ever that the prospects of the mature economies and the emerging market economies are getting more and more closely bound together – that demands increasing efforts to ensure that international economic policy coordination involves the key emerging market governments.
This point has been clearly underlined in recent days. The meeting here of senior officials from several major emerging market economies illustrated the serious responsibility now felt in our nations to contribute to the search for global economic policy solutions.
On Friday, the IIF’s Emerging Market Advisory Council, which was established by the IIF’s Board of Directors and involves the senior executives of about 40 major banks, met with senior government officials and regulators. Our discussions involved many key topics related to the global economy and the international financial system. The private sector financial leaders in EMAC underscore the importance of the governments of emerging markets today contributing fully to a strengthened global economic coordination process under the G-20.
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 that counter all forms of protectionism. It also means that emerging market authorities should implement the Basel III standard and support the objective of securing a global level playing field for finance. In conclusion let me say that 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. Thank you.
Emily Vogl, Frank Vogl