Emily Vogl, Frank Vogl
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Banks Commit to Take All Necessary Actions to Contribute to Stability, say IIF Leaders
New Report Notes Significant Slowing in Net Private Capital Flows to Emerging Markets from Exceptional 2007 Record Level
Washington D.C., October 12, 2008 — Given today's difficult conditions leaders of the global financial industry underscored that, "We accept the responsibility to take whatever actions are needed to contribute to stability now and in the future. This commitment reflects the unanimous view of the IIF's Board of Directors," stated Dr. Josef Ackermann, Chairman of the Board of Directors of the Institute of International Finance, Chairman of the Management Board and of the Group Executive Committee of Deutsche Bank AG.
The IIF is the leading global association of financial services firms with more than 390 member institutions. Its Board of Directors met here this week-end and Dr. Ackermann told a press conference, "Rebuilding confidence is essential. This requires both official concerted international actions and resolute efforts by financial firms themselves."
Dr. Ackermann said that many firms have disposed of troubled assets, taken substantial write-downs and obtained new capital. Importantly, companies are taking vigorous actions to strengthen their operations. He noted, "The leaders of the financial industry recognize the weaknesses in our industry and the concerns that exist. Integrity and transparency must be the guideposts for our business and influence all aspects of the ways banks operate."
Leaders of the IIF's Board of Directors, speaking at the Institute's annual membership meeting, stressed that when there is an extraordinary confluence of developments that so substantially damages market stability and the prospects for prosperity, then determined official actions are essential. "Systemic crises need systemic responses. To avoid arbitrage between national government approaches there has to be internationally coordinated, consistent approaches that produce a level playing field," said Dr. Ackermann.
IIF First Vice Chairman, Mr. William Rhodes, Chairman, President and Chief Executive Officer, Citibank and Citicorp Holdings Inc. and Senior Vice Chairman, Citi, added with regard to emerging markets that, "Many of these countries have instituted key reforms and pursued prudent macro-economic policies that have made them much more resilient than in the past and we believe that many of them are positioned to weather the storms." He said that policies now in a number of countries will need reinforcement and that, "Actions at the national level can and should be strongly supported, where appropriate, by the International Monetary Fund, which should establish a contingency funding facility for this purpose. The IMF should, as well, facilitate the expansion of currency swap arrangements with central banks, which are now available to mature economies, to include emerging markets."
The IIF also published a report today on capital flows to emerging markets, which showed that these have been resilient this year, despite the strains in global credit markets. The IIF estimates that net private flows to emerging markets in 2007 reached an extraordinary record volume of almost $900 billion. After a strong start, flows this year are seen as moderating significantly to about $620 billion, and the IIF forecast that the 2009 total will be about $560 billion reflecting a likely substantial slowing of the global economy.
The major reason for the slowing of capital flows to emerging markets is an anticipated substantial reduction in commercial banking flows. After reaching $400 billion in 2007, the IIF estimates net commercial bank flows will amount to $245 billion in 2008 and total around $135 billion next year.
Dr. Ackermann stated that, "Quite recently we saw early signs of a revival of market stability and then, with the unexpected failure of Lehman Brothers, we saw a precipitous unraveling. We recognize the moral hazard concerns that influence decisions on specific cases, and we understand that at times it is appropriate that firms exit the markets. But, in this case the consequences were dramatic and they highlighted how interconnected the global financial system has become and how serious it is when a major investment firm fails. Indeed, we have all seen how intense market pressures on a number of firms could not be resolved on a case-by-case basis, but called for a response on an internationally coordinated scale that fully appreciated the systemic problems."
He added that, "The structural strains that we are seeing in this first major global crisis of the highly inter-connected global financial system need to be comprehensively analyzed and approaches should be developed to overcome the weaknesses and strengthen the structure. The IIF's Board of Directors has decided that work in this area will be an important priority for the Institute."
In addition, the Institute, as an integral part of its efforts to minimize the risk of a recurrence of financial crisis, stated that it will be launching a Market Monitoring Group with a view to detecting at an early stage the emergence of points of vulnerabilities.
Regulation and Fair Value Accounting
The Chairman of the IIF's Board of Directors noted that against the backdrop of the market turmoil, there are mounting calls for more regulation. He said, "Gaps and weaknesses are apparent in a number of regulatory areas, such as U.S. mortgage lending, and we agree that some new modalities for supervision of large, complex international institutions may be needed. I want to stress, however, that the focus needs to be on increasing the efficiency of supervision and enhancing international coordination and consistency. In this regard we believe consideration should be given to establishing a global regulatory coordinating body."
The IIF welcomed the recent statements by the IASB, FASB and the SEC with regard to fair value accounting of assets in illiquid markets, and the announcing of an immediate review of differences between IFRS and U.S. GAAP in respect of how assets can be transferred from one category to another. Dr. Ackermann said, "The IIF has been calling for a review of key aspects of fair value accounting by the standard setters and the authorities for many months. Back in April, we called for dialogue on this front and we highlighted the problems when we released the Interim report of our Committee on Market Best Practices at that time. We believe it is essential that there now be an immediate high-level dialogue among stakeholders to consider the issues of fair value accounting in the global arena."
Mr. Rhodes pointed out that there has been significant strengthening in recent years of private sector financial services firms headquartered in emerging markets. Nevertheless, he said that, "Private financial firms in emerging markets need to take full note of the weaknesses that the turmoil has exposed in European and American institutions and move forward to benchmark their own operations against the best practices recommendations that are contained in the recently published report by the IIF Committee on Market Best Practices (CMBP)."
He noted that, "For a time there was a lot of talk about "decoupling,' which I always thought was a myth, and indeed it has become increasingly apparent that all economies are more interdependent than ever. He said that he has warned for some time of serious looming difficulties in the global economy, starting at the IMF and World Bank annual meetings in Singapore two years ago. "This is the most serious crisis in my 50 years in banking. Neither the debt crisis of the 1980s, nor the Asian crisis of the 1990s, saw such an erosion of market confidence as we are now experiencing. Leadership, policy coordination, confidence building - these are crucial today," said Mr. Rhodes.
The IIF stated that amid the current turmoil any assessment of net inflows in 2009 is a delicate balancing act, combining the dramatic effect of what seems to be another sudden stop in emerging market inflows as the starting point, with a realistic assessment of the recovery in flows that might be expected as the year progresses. It noted that the record volume of flows in 2007 reflected in part very strong "carry trade" flows and there has been a sharp unwinding of carry trades since July. On banking flows, the IIF said that its forecasts assume that global inter-bank markets will normalize in the months ahead, and that Western European banks persist with a business strategy with a focus on developing new markets in Emerging Europe.
Today's IIF report said that net debt inflows from non-bank private sector sources have moderated recently in large part due to a sharp unwinding of carry trades that had earlier pushed capital flows to higher-yielding emerging markets. Meanwhile, many portfolio investors and pension fund asset allocators do remain committed to raising the share of emerging market fixed income securities -” especially local market assets. Taking all these factors together, the IIF projected net non-bank private debt flows to rebound modestly in 2009 to $164 billion, from $155 billion in 2008, and after a total of $201 billion last year.
In addition to a slowing of banking flows, the IIF said that the overall prospective decline in capital flow volumes is due to net equity portfolio flow declines. They peaked at $57 billion in 2005, but turned negative in 2007. This largely reflected significant rises in foreign investment by investors based in the emerging markets. The IIF sees these flows being negative $69 billion this year and negative $19.5 billion in 2009, after a negative $5.8 billion in 2007.
The IIF said that while banking-related flows are the possible weak link in capital flows to emerging markets, there are a number of important supports that are likely to become even more relevant at times of stress. Today's report noted the relative stability of foreign direct investment. According to its latest estimates, the IIF said FDI flows to its sample of 30 countries, which reached $302 billion last year, will total $287.6 billion this year and $282.3 billion in 2009.
The IIF's forecasts for capital flows reflect in large measure its perspectives on the outlook for growth for the global economy. The report today noted that the global economy has slowed significantly with the decline most concentrated in the mature economies. It said that the U.S. economy appears to have moved into recession and the IIF expects this phase of outright contraction to last through the early months of 2009, but then recover through the balance of the year. With weak economic performance in the Euro area, the U.K. and Japan, and some slowing of growth in emerging markets, the IIF forecast that global growth, which was 3.7% last year and is forecast to be 2.3% this year, will be about 1.6% in 2009 - the weakest performance since 2001.
Major emerging markets included in the IIF's report on capital flows are the following:
Emily Vogl, Frank Vogl