2017 Annual Membership Meeting Welcoming Remarks by Tim Adams

October 15, 2017

“Looking Back and Looking Ahead”

Good morning and welcome to this year’s Annual Membership Meeting. I want to begin by thanking all of our members. Your support, coupled with your insights, enables us to be a vocal advocate for your interests throughout the world. 

I also want to thank our sponsors, who have made it possible for us to develop such a comprehensive program. They include:

  • PWC, our lead sponsor;
  • Abu Dhabi Global Market;
  • Dubai International Financial Centre;
  • S&P Global;
  • UBS;
  • IBM;
  • Moody’s Investors Service;
  • Ayasdi;
  • Deutsche Börse Group;
  • Earthport;
  • Fitch Ratings;
  • Nex;
  • Parker Fitzgerald;
  • Thomson Reuters; and
  • Visa.

Over the course of the meeting, we will have more than 200 speakers and panelists, focusing on issues including global monetary policy, Chinese Internet finance, cybersecurity, risk management, AI, and Brexit.

I typically devote a large portion of my remarks to an overview of the regulatory environment. While I will get to that, I’d like to start by noting that 2017 marks both the 35th Anniversary of IIF, as well as the 200th anniversary of the publication of a book that provides the underpinnings for what many of us do on a daily basis, David Ricardo’s “On the Principles of Political Economy and Taxation.”

The book was influenced by Ricardo’s professional journey. He started his career working in financial markets, where he was very successful. At the age of 27, he read Adam Smith’s “The Wealth of Nations,” and he was so inspired by it that about a decade later left the markets and devoted himself to the study of economics.[1]

He published on a number of topics: the quantity theory of money, the law of diminishing returns, and the existence of economic “rents.” But he really distinguished himself with his work related to trade theory. It may seem like common sense today that countries benefit from getting products at lower cost elsewhere than manufacturing them domestically. But 200 years ago, that was a radical idea.

It has stood the test of time and become one of the most widely accepted pillars of modern macroeconomics. It’s also helped give rise to an enormous volume of trade – merchandise exports last year totaled nearly 15.5 trillion dollars.[2]  Global supply chains are also the logical outgrowth of Ricardo’s work and they’re woven into the fabric of today’s economy. Consider the example of one iconic company – Apple. Earlier this year, it disclosed that it uses 748 different suppliers,[3] which are found in economies spread throughout the world – there are 331 in China alone, followed in quantity by Japan, the United States, Taiwan, and Malaysia.[4] I hope Tim Cook has a picture of David Ricardo hanging in his office.

In the 200 years since the publication of Ricardo’s work, we’ve seen the application and promotion of trade, as well as numerous other major breakthroughs: industrialization made possible by rapid scientific and technological advances, strengthening of the rule of law, and the spread of financial intermediation and capital formation.

As important as Ricardo was, some of his ideas were undoubtedly influenced by European history. And to understand the power of financial intermediation and capital formation he certainly could have looked to Florence, Italy a few centuries earlier. It was there that the Medici family established a banking dynasty that helped to make the city a birthplace of the Renaissance.

Many of the city’s most beautiful buildings stand as tributes to the work carried out by bankers hundreds of years ago. If you ever need to be reminded of what banking can do for societies, or if you need to help persuade a policy maker, a few days in Florence will likely do the trick.

Ricardo’s ideas helped provide the philosophical underpinnings for the integration of the global economy, while technologies – from the steamship to the telegraph to the shipping container – facilitated that integration. The byproduct of that dynamic process has been a dramatic rise in living standards over the past two centuries, focused in the West. Consider the progress:

  • Global per-capita GDP has risen from around $1,200[5] to more than $16,000.[6]
  • The UK’s per-capita GDP has risen more than 10-fold, from around £2,400 to £30,000. 
  • U.S. per-capita GDP has increased from less than $1,300[7] to more than $57,000.[8]
  • Global life expectancy has increased from around 30 years to more than 71 years.[9]
  • The child mortality rate has fallen from over 40 percent to about 4 percent.[10]         
  • The global literacy rate has increased from less than 20 percent to more than 80%.[11]
  • The share of the population living in a democracy has increased from less than one percent to more than 50 percent.

For many countries, the progress is, of course, a more recent phenomenon. And while the gains have been uneven, we shouldn’t overlook that they represent the greatest improvement in living standards in human history.

As I’ve noted previously, there are still significant challenges. In developing countries, hundreds of millions people live in extreme poverty and suffer from debilitating diseases.   Rewards from globalization and trade aren’t distributed evenly, and too many people feel like they’ve been left behind.   There’s no one remedy, but the progress of the past two centuries is a powerful reminder of what can be achieved when there is a healthy ferment of financial capital, free trade, and innovative thinking. And that lesson is worth remembering as we navigate today’s challenging policy climate. 

 

IIF Anniversary

I’d now like to turn to IIF’s own anniversary. This year marks our 35th year.   

IIF began in the aftermath of Latin America’s sovereign debt crisis. From our very first day, we have been champions of globalization and trade, as well as policies that will foster stable capital flows, global financial stability and sustainable economic growth.  

And many of you know the distinguished individuals who have been associated with the Institute:

  • Jacques de Larosiere, Bill McDonough, William Ogden “co-founders” of the IIF;
  • Andres de Lattre and Horst Schulmann, the first two Managing Directors of the IIF;
  • And, of course, Bill Rhodes and Charles Dallara.

Everyone associated with the Institute can take pride in what it has accomplished over the past 35 years.

  • We were providing in-depth research on emerging markets before anyone else and foreshadowed a number of crises throughout the 1990s.
  • We made the first industry contributions to the Basel Capital Standards in the 1980s.
  • We helped design the principles for sovereign debt restructurings and assisted with crisis mitigation and management.
  • We contributed global industry perspectives in the development of the global regulatory framework under which our members now operate.
  • We developed the first set of industry leading practices in governance and risk management to address the deficiencies highlighted by the 2008 financial crisis.
  • We were ahead of the curve in recognizing the challenges and opportunities technology would present to the industry, and in engaging policymakers on the impacts of technological change. 

The IIF has been at the forefront of major issues critical to the financial industry and the global financial system and will remain on the leading edge. We continue to focus more on the impact of big data, artificial intelligence and how emerging technologies will impact the way we do business.

 

Tenth Anniversary of the Financial Crisis

I’d now like to turn to the 10th anniversary of an event we all remember, and that’s the financial crisis.  

Yes, the big shocks came nine years ago, in the fall of 2008, but the stage was set in June 2007 when two hedge funds at Bear Stearns needed rescuing. And soon thereafter, there was the run on Northern Rock.

I don’t think we need a recitation of everything that followed, but it is useful to reflect on how far we have come as an industry since then. When Chairman Yellen spoke at the Fed’s Jackson Hole meeting six weeks ago, she didn’t mince words. The verbatim quote was, “Banks are safer.” She also said the financial system is “substantially safer.” And she pointed out that Tier 1 common equity capital at the largest banks has more than doubled since early 2009.[12]

That’s a meaningful achievement. I would add a few more:

  • In the United States, about 25 percent of the balance sheets at large banks is accounted for by high quality liquid assets – meaning cash, Treasury securities, and other government securities. That is about three times the level they were holding before the financial crisis.[13]
  • In June, the 34 largest U.S. banks passed the Fed’s supervisory stress test.[14]
  • Globally, banks have raised more than $3.7 trillion in total tier 1 capital since 2008, and GSIBs alone have raised more than $1 trillion;
  • Market discipline is being advanced by the creation and implementation of resolution regimes that call for shareholders and creditors to bear the burden of bank failures.
  • The requirement that banks meet total loss absorbing capacity – or TLAC – standards is, in the words of Mark Carney, “an essential element for ending too-big-to-fail for banks.”[15]
  • Introduction of the leverage ratio as a backstop capital measure and an overall reduction in bank leverage;
  • Other measures are bringing greater safety and stability, from the U.S. prohibition on proprietary trading to Britain’s mandate, taking effect in 2019, that large banks move their retail banking units into highly-capitalized subsidiaries.  
  • Smaller balance sheets and banks de-risking across the board.

These accomplishments are to a great extent thanks to an internationally-agreed regulatory framework developed during the last 8 years. There is however the risk of increasing regulatory fragmentation if individual jurisdictions pursue policies that myopically restrict the operations of global firms, trap capital and liquidity and restrict the efficient functioning of cross-border firms. These trends must be resisted for a truly global financial system and its customers to thrive.

And here let me make a final comment about international standard setters, including the FSB, the Basel Committee, IOSCO and the IAIS. These bodies have played an extremely important role in developing a globally consistent regulatory framework. A globally harmonized framework is critical from an economic perspective, supporting capital flows, enabling competition and efficiencies, and in promoting stability. It is for this reason that it is important for these global standard setters to refocus on their core mandate and to continue their comprehensive analysis of the impacts of regulation as the basis for urgently needed fine tuning and recalibration.

Ultimately, the challenge ahead is to maintain the proper balance between ensuring that financial firms are stable and that they can undertake the activities that unleash growth and opportunity for consumers and companies throughout the world.  

 

Five Years as CEO

The final anniversary I’d like to mention is my own. This February will mark five years since I started at IIF. I was fortunate to step into an organization with a first-rate staff, and I’ve worked with them to build on the considerable achievements of my predecessors.

We’ve continued to be actively engaged in the global regulatory process, especially on Basel issues. And we are reengineering ourselves to evolve in line with how the financial industry is evolving – focusing on issues such as fintech, regtech, cybersecurity, data policy, and artificial intelligence.

We’ve also worked to develop a more diversified member base – including more asset managers and insurers. And we've expanded our global footprint through new regional offices in London, Dubai, Singapore, and Beijing.

Finally, at a time when so much communication is delivered in 140 characters or less, we’re striving to produce research that is both shorter and sharper. And if even that is too long for you, you can always find us on Twitter.

Here’s a quick rundown on some of what we’ve accomplished over the last five years:

  • Submitted more than 200 regulatory comment letters and reports;
  • Held more than 500 events worldwide;
  • Published more than 1,300 pieces of economic research;
  • Generated more than 5,000 news articles and TV and radio interviews;
  • And our staff has flown millions of miles to engage with members and policymakers worldwide

 

Conclusion

While I devoted most of remarks to looking backward, I’d like to close by looking ahead.

Individuals and institutions throughout the world are faced with a high degree of uncertainty about the future. This uncertainty includes public policy, to be sure, as we await developments on U.S. tax reform, the U.S. trade agenda, the U.K.’s Brexit negotiations. But we also face geopolitical challenges as tensions with North Korea and East Asia remain elevated and relations within the Middle East continue to be strained.  

But the uncertainty also touches on even more fundamental questions:

Is the modest rate of growth experienced by so many advanced economies going to become a semi-permanent feature of the economic landscape? Especially against the backdrop of “termites in the woodwork” such as:

  • An aging population
  • High government debt and pension liabilities
  • Weak productivity growth
  • Slowing business dynamism and entrepreneurship
  • Increased income and wealth inequality

 Will Emerging Markets also suffer from several termites of their own, such as:

  • A slowing or declining working-age population
  • Premature deindustrialization and shift towards services-based economy
  • High corporate and household debt burden
  • Weak productivity growth
  • Pressure on the export and manufacturing led growth model, amid weak global trade and capital flows, low oil and commodity prices, Chinese rebalancing and increased anti-globalization sentiment in advanced economies

Are automation and artificial intelligence going to be a net plus for job creation or a net negative?

Is our personal data ever going to safe from cyber breaches?

There are no easy answers to these questions, but they’re some of the pre-eminent issues of today and ones that we all need to grapple with.

And while I’m confident that countries throughout the world can return to a period of higher growth, that growth is certainly not pre-ordained. It depends on a number of different factors, not the least of which is enlightened leadership from senior people throughout the public and the private sectors. In other words, from many of the people attending this gathering.

So if we accomplish nothing else during the next few days, I hope everyone can leave here with a renewed understanding of not only what’s at stake . . . but also what can be achieved if we work together to support the policies, practices, and ways of thinking that will give rise to more opportunity, as well as more optimism about the future.   

My colleagues and I look forward to working with you on these issues and many others.

Thank you for listening and thank you for being here.

 

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The Hill: Gutting the Dodd-Frank financial reform law won't help the budget

July 27, 2017

This post first ran in the Opinion section of The Hill on July 27, 2017.

Since the passage of the landmark Dodd-Frank Act in 2010, several leading members of Congress have been gunning to repeal or substantially alter the financial reform law, but have been unable to do so for lack of sufficient support, particularly in reaching the 60-vote threshold in the Senate.

Now, a new opportunity arises via a much different route: the annual budget and reconciliation process, where “germane” policy changes can be achieved with just a simple majority. If it sounds a bit peculiar to change banking law through the budget process, it is, especially given that the expected budget “savings” from such changes are illusionary.

More specifically, Title II of Dodd-Frank created an orderly liquidation authority that was designed as a complementary backstop to the U.S. bankruptcy code in the event that a systemically important U.S. financial institution is in severe financial distress and needs to be wound down. The orderly liquidation authority allows the Federal Deposit Insurance Corporation (FDIC) to fire management, wipe out shareholders, and haircut bondholders before selling off the pieces.

To facilitate this winding down, the orderly liquidation authority allows the FDIC to draw funds from Treasury on a temporary, emergency basis. These funds will be fully repaid by proceeds from selling parts of the business and, if necessary, by assessing a fee on the financial industry to pay back any remaining costs.

Here’s where the illusion of budget savings comes into play. The Congressional Budget Office assumes that, over the next 10-year budgetwindow, bank failures will occur, requiring the FDIC to draw funds from the Treasury. The resulting repayment from the resolved or disposed institution, and the mandatory supplemental payment by the industry, wouldn’t occur until years eleven and beyond.

Given these arbitrary budget scoring assumptions, the orderly liquidation authority appears to generate approximately $14 billion in budget outflows. But in fact, the orderly liquidation authority does not entail any net budget cost to the U.S. Treasury or the American taxpayer if viewed over a slightly longer time horizon. The billions in assumed budget savings is an illusion based simply and superficially on the arbitrary timing of Treasury outflows and inflows within the 10-year budget window.

The orderly liquidation authority is designed and mandated by law to function as a budget neutral tool that protects taxpayers and safeguards our financial system in a time of crisis. Eliminating the authority will generate zero real savings for taxpayers.

More importantly, eliminating the authority would put the financial system and our economy at greater risk by removing a critical backstop to responsibly managing the dismantling of a systemically important financial institution. We would return to the same position we were in 2008 — lacking a complete set of tools to navigate a financial crisis.

Banks are now much better capitalized, less leveraged and more liquid. Living wills have made bankruptcy a more viable option, and Congress has made progress on a new chapter in the bankruptcy code for large financial institutions. Yet, there may be some cases where the government would need all resolution tools, including the orderly liquidation authority, to respond to crisis situations and avoid damage to the economy and job losses.

Ending the orderly liquidation authority would also threaten the cross-border flows of capital critical to spurring investment and supporting business opportunities globally. Regulators in the U.K., Europe and the G-20 generally have already modeled their resolution powers on the U.S. approach, ensuring that if a globally interconnected firm is at risk of failure, regulators around the world can coordinate using the same toolkit to resolve a firm without significant disruption to the financial system.

If the U.S. were to end the orderly liquidation authority, foreign authorities would likely impose much more draconian ring-fencing and supervision requirements on U.S. banks that would likely further dampen their ability to lend, depriving the economy of far more credit than the provision’s hypothetical $14 billion price tag.

After eight years of reform, the financial system is safer, sounder, and more robust than it ever has been. The administration and Congress are rightfully shifting their focus to ensuring that the rules and regulations in place balance safety and soundness with economic growth and job creation. Eliminating the orderly liquidation authority to take advantage of fictional “savings” is the wrong idea.