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Global Financial Industry Leaders Support Constructive Dialogue to Secure Financial Sector Stability and Economic Growth
IIF calls on Group of 20 Summit and International Regulatory Authorities to achieve a global consensus on core capital and liquidity elements of reform
Vienna, June 10, 2010 — Leaders of the global financial industry today underscored their commitment to a constructive dialogue with governments and regulatory authorities to create the conditions for financial sector stability and economic growth. They called on the heads of the governments that will be attending the Group of 20 Summit in Canada in late June, and the international regulatory authorities, to seek to reach a timely consensus on the key elements of proposed bank regulatory reforms.
Speaking at the Institute of International Finance's (IIF) Spring Membership Meeting in Vienna, Dr. Josef Ackermann, Chairman of the IIF's Board of Directors and Chairman of the Management Board and of the Group Executive Committee of Deutsche Bank AG, stated, "We are meeting at a crucial time for the global economy - a time both of uncertainty over the course of economic recovery, and one where major economic policy and financial regulatory reforms will be at the center of the G-20 Summit discussions."
Dr. Ackermann added, "The IIF's Board of Directors, which met this morning, welcomes the progress being made in formulating a package of core regulatory reform proposals and looks forward to the participants in the forthcoming G-20 Summit, and the international regulatory authorities, finalizing the reforms in a timely manner. As they do so, it will be important to consider carefully the content, the timing and the calibration of the reforms in order to achieve the right balance between stability and growth."
The IIF is the leading global association of financial institutions with over 400 members. Dr. Ackermann stressed at a press conference here that, "We appreciate that the international regulatory authorities have been willing to engage us in a constructive informal dialogue and we share with them the conviction that such a dialogue is essential to reach the key objectives of financial sector stability and economic recovery. We consider the direction of regulatory reform to be broadly right. Our efforts, including the reports we have recently published and our new report today on the cumulative economic impact of reform proposals, have the goal of helping to attain our shared objectives."
Mr. Stephen Green, Chairman of the IIF Steering Committee on Regulatory Capital and Group Chairman, HSBC plc., stated, "We are convinced that reforming the global regulatory framework is absolutely vital. The package of reforms which the Basel Committee is working on needs to be well considered, technically sound and proportionate. And it is also important that there be an implementation timetable which takes account of macroeconomic realities."
Mr. Green stated, "On capital issues, the proposed new, narrow definition of regulatory capital would have a significant impact on the amount of capital that firms would need. A review of the proposed regime of exclusions and deductions is necessary to achieve a result that is more proportionate to their risk and economic effect, while nevertheless ensuring that the overall quality of capital improves over time throughout the system. This is not a theoretical debate and there will be a real impact on real businesses."
Mr. Green added, "The industry strongly supports measures to strengthen liquidity management, in particular the need for robust liquidity buffers. However, the Basel Committee's very narrow definition of eligible liquid assets for liquidity buffers would distort the market for liquid agency and corporate paper and covered bonds, and cause undue concentrations in sovereign bonds. The longer-term net stable funding ratio would require banks to raise huge amounts of liquidity that are not in line with market realities. In its current form, the proposal brings into question the basic maturity transformation function of banking, and, especially when markets are tight it would have highly procyclical effects if banks have to sell assets or reduce lending."
Mr. William R. Rhodes, First Vice Chairman of the IIF's Board of Directors and Special Advisor, Citi, emphasized that, "Action on regulatory reforms needs to be viewed within the broader context of the efforts to move the global economy onto a sustainable recovery path. In these efforts, just as in meeting the challenge to formulate bank regulatory measures, it is imperative that there be policy coordination under G-20 leadership. As recent events show, the durability of the global recovery is still clearly at risk. High levels of unemployment are feeding pressures for trade and financial protectionism. And there is growing concern about fiscal deficits and public debt in mature economies."
Dr. Ackermann noted in highlighting the IIF's proposals to the G-20 that, "It is important to emphasize that we recognize the responsibility that banks had in contributing to the crisis. We must continue to strengthen our operations and avoid the deterioration in business practices that preceded the crisis. Unquestionably, there is a compelling logic for a more effective and efficient internationally coordinated system of regulation. As a matter of fact, a more stable system is in the banks' own best interests. Unlike in other sectors, we cannot remain indifferent if a competitor takes on too much risk and jeopardizes not only his own existence but also that of others."
IIF Managing Director Charles Dallara pointed out at the press conference that, "We also need to emphasize with regard to banks in emerging markets that, while they too view regulatory reforms as necessary, there are concerns that their implementation should not produce any unintended consequences in countries where robust requirements are already in place and where banking systems have generally performed well during the recent global crisis. In many countries regulatory standards already well exceed the minimum global requirements and if not adjusted the current proposals would damage growth and development in emerging markets."
Mr. Peter Sands, Group Chief Executive of Standard Chartered Plc. and Chairman of the IIF's Special Committee on Effective Regulation (SCER), noted that the IIF has published a series of reports that have brought together the global financial industry's perspectives on the major issues of financial regulatory reform. He said, "Very recently, we addressed the issue of systemic risk and systemically important banks. We also published a report on the crucial issue of cross-border resolution. In this report we stressed our belief that no bank should be "too big to fail", and we made it clear that in the event of bank failures that resolution approaches should be in place that should not leave the taxpayer out-of-pocket. We stressed the need for the establishment of a coherent international framework for cross-border resolution. Support for this from the G-20 will be invaluable."
Mr. Sands noted that the IIF's report today on the net cumulative impact on economic growth and employment of currently planned bank regulatory proposals is based mainly on the Basel Committee's proposals on capital and liquidity requirements that were announced last December. He said, "This work is breaking new ground in integrating financial markets and banking systems into macroeconomic models. We have deliberately described this report as an interim report: first because we plan to extend its scope to other countries; second because we want to be able to receive feedback and suggestions on methodology; and, finally, we are conscious that the set of regulatory proposals that are likely to be agreed, as well as the timing of implementation, may change from the original December Basel proposals. By necessity we took a snapshot and as the picture changes so we want to reflect this in the analysis of the economic implications."
The IIF study compares a projected economic growth scenario without the introduction of new bank regulatory reforms with one that sees reforms coming into effect with the capital and liquidity calibration as currently projected. Mr. Sands said, "The analysis suggests that rapid implementation of the Basel Committee proposals would have a significant negative impact on economic growth and job creation. Specifically, in the core G-3 (the United States, the Euro area & Japan), the analysis indicates that GDP by 2015 would be 3% lower than it would otherwise be, which implies under reasonable assumptions, that some 9.7 million fewer jobs would be created over this five year period than would otherwise be the case. Let me be clear, this does not mean we are talking about 9.7 million job losses. We are talking about headwinds that would result in slower economic growth and thus slower new job creation. However, to the extent that the regulatory reform proposals are modified or the timing of their implementation is changed, and this does appear to be happening, the economic impact will also change."
Mr. Sands stated at the press conference that, "The point of this report is not to argue against regulatory reform. To the contrary, as we have made clear today and in our previous reports, we support much of what is being proposed by the Basel Committee and the FSB. But there is a price for making the banking system safer and more stable, and that price will inevitably be borne by the real economy. The challenge is to strike the right balance, to get the maximum benefit for the minimum negative impact. It is in pursuit of this objective, and in the spirit of constructive dialogue, that we have already shared our methodology and conclusions with many policy-makers and have today published this interim report."
IIF Deputy Managing Director and Chief Economist Philip Suttle, who is the lead author of the new report, said the impact is not the same in each part of the world, given differences in each banking system and in the roles banks play in the broader economy. The analysis suggests that for the Euro Area a weaker recovery with real GDP some 4.3% less than otherwise might be the case and with new job creation, therefore, being potentially some 4.6 million lower over the 2011-2015 period than otherwise might be the case. The respective projections for GDP and for employment on this basis for the United States would respectively be 2.6% and 4.6 million. For Japan the projected numbers on this same scenario would be 1.9% and around 0.5 million jobs to 2015. Emerging markets could also see an impact on their own growth if new requirements were implemented on banks in their countries, as well as from the consequences of slower growth in the mature economies."
Dr. Ackermann noted, "There are many issues on the reform agenda today. For example, it is essential that we have substantial convergence of accounting rules ahead of, or simultaneous with, bank regulatory reform."
"In the coming months," Dr. Ackermann noted, "we will seek to deepen the dialogue with the official sector. We are convinced that the right package of reforms, introduced on a realistic timescale will bring real benefits to the global economy and we are committed to working together with policy makers to achieve this."
Emily Vogl, Frank Vogl