The title of my speech today is enabling banks to support the economy in the New Normal.

Transcription

1 Handelsblatt Enabling banks to support the economy in the New Normal 3 September 2015 Samir Assaf, Chief Executive, HSBC Holdings plc Good morning ladies and gentlemen. The title of my speech today is enabling banks to support the economy in the New Normal. This is where our key themes of international trends, growth markets and regulation converge. Years after the financial crisis, it is easy to forget that we continue to live in extraordinary times. We have become used to zero interest rates and quantitative easing conditions that, in historical terms, are highly abnormal. And we have started to take for granted the fact that low growth in developed markets can be compensated for by high growth in the emerging world. In the future we will need to adapt to new circumstances. Recently we have seen what these new conditions might look like. China is clearly at the top of everyone s mind, for obvious reasons. In 2013 China accounted for only 12 per cent of nominal global GDP, but was still responsible for half of all global growth. A slowdown in China has profound implications for the world. Recent events in China have coincided with speculation about US interest rates. The Fed is clearly committed to raising rates at some point soon. And this has weighed heavily on global markets, and sparked further concerns for the health of emerging economies. This new economic context poses serious questions about the ability of other economies to achieve sustainable growth. The banking industry has a vital role to play in that process. 1

2 Since the financial crisis, banks have been heavily regulated, with good reason. But it is critical that regulation continues to help, not hinder, the ability of banks to support the economy. So, as we finalise new regulation that will further increase capital buffers, I want to think about what all of this means for the global economy. [Normalisation of China] Let me start with China. In recent years China has done more than any other country to support global growth. If Chinese infrastructure investment had not surged, commodity prices would not have recovered as quickly. Emerging nations would have been short of export revenues and some would have been faced with a balance of payments crisis. If the renminbi had not been allowed to appreciate, currencies in much of the rest of the world would not have depreciated, monetary conditions would have been tighter, and deflationary pressures more intense. But having helped the world manage its imbalances, China is now addressing its own. China has been on a long road towards economic liberalisation, which has enabled it to release control to the market in a steady and measured way. That was never going to be an easy process, as we have seen with the recent stock market selloff and the depreciation of the RMB. As China continues to open up its financial system, there will inevitably be more fluctuations to come. This is normal in a market-oriented economy. 2

3 And whilst China continues to invest heavily both domestically and overseas, growth will inevitably slow as the economy matures. Despite all of this, I believe that fears of a sharp slowdown in China are being overstated. The primary aim of the PBOC s actions was to liberalise the RMB exchange rate mechanism, not to prop up growth. Exports are disappointing, but this is mainly due to weak global demand. The Shanghai stock exchange may have fallen significantly, but the equity market does not yet play a major role in the Chinese economy. Economic data may not be strong in some sectors, but the property market is still supportive and infrastructure investment is set to accelerate rapidly. And services, incomes and domestic consumption all remain resilient. With an interest rate of 4.6%, China still has room to boost domestic demand, and plenty of options on the fiscal side to support growth. The data suggests that China will stage a modest recovery in the coming quarters, with full-year growth of 7.1 per cent. But we should also remember that even 5 per cent growth this year would add more to world output than 14 per cent growth did in Nonetheless, what happens in China will have a major global impact. [Normalisation of US interest rates] 3

4 The global economy will also be influenced by the normalisation of interest rates in the US. The end of quantitative easing last year and the expectation of rate rises later this year have caused investors to consider what the impact will be on growth. One clear consequence is a rise in the dollar, which impacts many emerging markets that are net dollar-debtors. The shape of the US yield curve could also expose emerging markets to a possible rise in term rates due to the growing popularity of Asian bonds amongst foreign investors. A further potential consequence is that US rate increases trigger a sudden and substantial rebalancing of international portfolios. The accompanying market volatility and spikes in market rates would damage financial stability globally. As the economic cycle returns to normal, the Fed will need policy ammunition to boost the economy in the event of a downturn. In the decades before the financial crisis, the Fed was able to slash rates during economic downswings, regardless of the starting point. Starting from a rock-bottom base now would deprive the Fed of its most effective conventional weapon at the very outset. It is therefore not a case of if the interest rate rises, but when, and how the global economy adapts. So, the normalisation of the Chinese economy and the normalisation of US interest rates are the two major trends that will impact the global economy. 4

5 The most obvious impact of both of these changes will be lower global growth, less cheap money and reduced liquidity. This new economic context coincides with the finalisation of much of the regulation of the banking industry emanating from the aftermath of the global financial crisis. I now want to turn to the impact of that regulation on banks ability to support global growth. [Regulation and the role of banks] Let me repeat what I said earlier: the banking industry has been regulated heavily and with good reason. The financial system suffered a near-fatal collapse for which the banking industry bears considerable responsibility. It is right that we should have taken steps to make the financial system safer and to restore confidence and financial stability. There is no appetite to return to the high risk, high leverage, low supervision environment in which the banking industry operated before The Basel 3 framework has meant more and better capital, liquidity requirements, a review of traded risk measures, more transparency and greater accountability. The leverage ratio, which at one stage was thought of solely as a backstop, is now a biting constraint, particularly on low-risk inventories and activities. The Dodd-Frank Act in the US and the European Market Infrastructure Regulation in Europe have implemented the G20 objectives on derivatives. Their differences are not material enough to prevent mutual recognition of their equivalence. 5

6 Recovery and Resolution regimes have also been developed, while proprietary trading bans and ring fencing promote greater financial stability. We understand, by and large, what the impact of these measures is on bank balance sheets and capital buffers. Capital requirements have increased by a factor of ten. In the United Kingdom, major banks trading assets have fallen by almost a third, interbank claims by two-thirds, and liquid assets have increased four-fold. But there is also a great deal about the impact of existing regulation that we simply do not know. We know that regulation may have reduced market-making capacities for banks and consequently liquidity in secondary capital markets, but we do not know how much. The FSB has warned of an illusion of liquidity in a number of financial markets. Last week a report prepared by PWC for the IIF and the Global Financial Markets Association which I chair concluded that current and future market liquidity is a subject of considerable concern for market participants. We must also be mindful that the next crisis could be caused by the unintended consequences of the regulation designed to address the last crisis. For example, what will be the impact of the growth of CCPs? And there are questions about the ability of the financial system to finance the economy, particularly in Europe. The European and indeed the Asian financing model is very different to the financing model in the United States. 6

7 In the US, around 70 per cent of the economy is financed by capital markets and 30 per cent by banks. In Europe and in Asia, it is broadly the other way around. In Europe especially, we have created a system of regulation based on reducing the reliance on bank financing, but not yet put in place the conditions to reduce the fragmentation of capital markets that will increase the financing options for all participants. Forcing greater reliance on capital markets might be straightforward for large corporates, but what about SMEs? So there is work to do to put the conditions in place to reduce reliance on bank lending before the conditions which should have enabled the transition are withdrawn. [Regulation still to come] There is still further regulation to come. For example, the Fundamental Review of the Trading Book; TLAC; calibration of the Leverage Ratio; and Standardised Risk Models. As we know, the Basel Committee appears to be determined to finalise a number of these reforms by the end of the year. But rushing towards a conclusion does not appear to be consistent with the aim of reaching the best outcome to support global growth. We need further discussion about the detail of all of these proposals. Many of these will require banks to hold more capital, but we do not know how much. Nor do we know the cumulative impact of these measures and existing rules whose effects are still largely to be seen. 7

8 Until now, impact assessments have only been done for each individual measure. We need a coherent approach and cumulative impact assessments to properly understand the effects of, and interactions between, regulatory measures on market liquidity, long-term financing and financing for SMEs. If we want banks to have a financing role, we need to understand its impact before embarking on new initiatives that will exacerbate problems that we know exist, but cannot yet quantify. We also need to consider carefully how these measures interact. Are there overlaps? Are we setting the right incentives for what banks should hold on their balance sheets? Do they take into account national models which are often central to how economies operate? If those same layers of regulation impede banks from fulfilling the role that we want them to play in the economy, then we have to make sure that we understand the extent of that before we move forward. Calibration is key. And caution must be the watchword for all participants in the process as we embark on a new and increasingly uncertain phase of the global economic cycle. [Capital Markets Union] While we must be cautious in adding greater layers of regulation, from a European perspective there are other measures that we need to accelerate, in particular Capital Markets Union. Capital Markets Union can be the catalyst to build asset classes that are attractive to investors, and encourage greater participation in Capital Markets across Europe. 8

9 Some in Europe s more developed countries question the need for Capital Markets Union - and it is true that some countries want for funding more than others. But if we are to achieve sustainable growth across Europe then all of its members must pursue the mutual benefit of building deep and efficient capital markets that all of Europe s businesses are able to access. If there is any one lesson from the Eurozone crisis, it is that European economic stability depends on the economic health of all of its members, not just its biggest. We have to provide the means for all of Europe s countries to prosper. So securitisation is essential. There is already widespread agreement that the securitisation market needs to be restarted and focussed on high quality, simple, transparent and standardised products. Amongst the key issues will be: the definition of simple, transparent securitisation; ensuring the new proposals work with the generic Basel proposals so centralised loan obligations and commercial mortgage-backed securities face capital requirements that are relative to risk; and working towards greater global harmonisation. Financing SMEs is an increasingly pressing issue. Banks clearly retain a role here, but other means of financing such as equity financing need to be made available. We must also overcome a lack of standardised data and documentation for SMEs. On infrastructure, the Juncker Plan will play a key role in creating a pipeline of investable projects. 9

10 This will help investors to plan ahead and increase their exposure to infrastructure assets, but we need to make faster progress. Finally, if we are to meet global climate change commitments, we need to speed up access to sustainable finance. This new asset class is a major opportunity for the investment banking sector and we should be doing all we can to develop this market. [Conclusion] So, in conclusion, the global economy is entering a new phase. Liquidity will be tighter, despite the very welcome policies implemented by the ECB and Bank of Japan. China s economy and US interest rates are both normalising. As a result of the work done since the financial crisis, the banking industry is now well regulated and supervised, with strong capital and liquidity buffers in place. We are in a good position to support global growth. It is critical that we do not put that at risk now by rushing to close the regulatory programme. We need to pause, take stock of what we have done and, most importantly, ensure we find the right calibration for the remaining measures to be submitted to and agreed by the G20 in November. That is the only real urgency and it will ensure the banking industry will have the capacity to deploy more liquidity and capital to support the global economy in a safe and sustainable way. 10

11 Thank you. [ENDS 2,286 words = 21 minutes] 11