Istanbul, Turkey, October 3, 2009 — "It is crucial that the official and the private financial communities embark on a new phase of systematic dialogue on global financial regulation at senior and technical levels to build a resilient and stable financial system," said Dr. Josef Ackermann, Chairman of the Board of Directors of the Institute of International Finance (IIF), Chairman of the Management Board and of the Group Executive Committee of Deutsche Bank AG.

Speaking on behalf of the IIF's membership, Dr. Ackermann stressed that, "Official regulatory 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 proposals that 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, regulatory reforms come into force that could undermine global recovery and job creation."

The IIF is the leading global association of financial services firms with more than 375 member institutions headquartered in over 70 countries. At the opening press conference of the IIF's Annual Membership Meeting here the Institute's Chairman noted, "We are at the cusp of important decisions that will impact the structure and performance of the financial system for years to come. Far-reaching reforms in the operations of financial services firms together with essential, but carefully calibrated, official actions on capital requirements, liquidity management, compensation and other key issues, are now absolutely essential to secure durable global growth and financial market stability."

Dr. Ackermann underscored that, "We fully understand the need for financial services firms to correct the mistakes that were made in the past. Confidence will only be restored when we demonstrate that we are making extensive internal reforms and adhering to them. And indeed we are. This is not a time of "business as usual." Substantial reforms are now being made by firms in such areas as risk management, governance, liquidity management, and compensation and these need to be widely recognized."

IIF First Vice Chairman, Mr. William Rhodes, Senior Vice Chairman, Citigroup, and Senior Vice Chairman, Citibank, stated that there is gathering evidence of global economic recovery and that new IIF forecasts show that capital flows to emerging markets are also rebounding, after a very difficult period. Emphasizing that global economic recovery is fragile, he stressed that, "It is important that the G-20 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."

The IIF forecast global GDP growth of 3.1 percent next year after a contraction of 2.5 percent this year. It also projected a rise in overall capital flows to emerging markets of about $672 billion in 2010, after plunging to around $349 billion this year from $649 billion in 2008 and the record level of $1,252 billion in 2007.

IIF Managing Director Charles Dallara stated, "Our new report shows that banking flows have been severely curtailed, but that financial institutions have more recently begun to maintain and rebuild exposures to borrowers in emerging economies somewhat. As new regulations requiring banks to hold levels of capital are introduced, however, accompanied by other regulatory changes, it is possible that banks will retrench somewhat from emerging market lending, especially to borrowers and economies that are perceived to be at the weaker end of the spectrum. Access to external financing for many smaller and lower-rated companies remains severely curtailed."

Fragmentation, Protectionism and Imbalances

Dr. Ackermann stated that the IIF's Board of Directors today reviewed the recent decisions taken by the G-20 at Pittsburgh. He said, "Regulatory reforms should be internationally consistent and globally coordinated. We understand the pressures on political leaders 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."

Mr. Rhodes stated at the press conference that, "Protectionism must be avoided, the Doha Round needs to be concluded, and trade finance support for poorer countries should be continued." He noted that a further key concern relates to official actions to reduce the risks to economic stability of excessive current account imbalances, which could revive as economic growth proceeds. He said, "To ensure that the political authority and will is generated to tackle the difficult problems of securing a more balanced global economy we believe it is now appropriate for the G20 to establish a Senior Task Force, fully supported by the IMF."

Key Regulatory Issues

The IIF's Chairman noted that, "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. However, this needs to be achieved on the basis of a risk-based approach and should be phased-in very carefully. Premature changes and retreat to more simplistic measures will prove ineffective in the long run and lead to the emergence of more problems."

"Yet another key area is accounting," said Dr. Ackermann. "The crisis underscored the need for clarity and for convergence towards a single set of high quality standards and 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 at present. It is urgent that the obstacles be set aside and that a consistent way forward is secured."

The IIF Chairman added that, "An important accounting 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."

Mr. Rhodes noted, "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."

Dr. Ackermann emphasized that, "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."

He said 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," said Dr. Ackermann.

Global Recovery and Capital Flows

In discussing challenges facing the global economy, Mr. Rhodes stressed that, "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. 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."

Today's new IIF report said beneath the surface of a steady overall improvement in capital flows to emerging economies there are some concerns. In addition to the issue of recovery in banking flows, the Institute said the potential of speculative flows pose policy challenges to a number of emerging economies. There could well be significant financial flow implications resulting from emerging economies being at the leading edge of a recovery from a downturn that was not of their own making. Prospects of higher growth (and interest rates) in emerging markets are liable to attract sizeable amounts of speculative capital to many (but not all) of these economies, adding to policy management challenges.

The new report noted that emerging economies as a whole are substantial net capital exporters. For those emerging countries already holding extensive claims in mature economies (especially on the United States), the attractiveness of adding to these exposures is fast fading. An alternative, that is likely to become more prominent in coming quarters, will be increased investment-”both debt and equity - in other emerging economies. In this context, China is likely to play an increasingly important role as an overseas investor.