On
October 12, the Institute of International Finance held a “CEO
masterclass about the future of finance”. The pretentious title
turned into a very interesting discussion about the state of the
universal banking industry and its outlook for tomorrow. Here are the
essentials:
Are
big and global universal banks necessary?
Jamie
Dimon says yes, simply because “clients need
the services”. As the financial system and its products are
complex and big corporates acting cross-border, banks simply mirror
this situation and become big and complex.
“Our
clients are quite happy with us.”
Jamie
Dimon (JP Morgan)
Do
universal banks respect ethics?
The
statements are somewhat mixed. The opinions range from downplaying
scandals to alarming the industry.
“We
have a series of issues and we are gonna deal with them. But that
doesn’t my bankers immoral.”
Jamie
Dimon (JP Morgan)
The
fundamental contract between financial services and society stands
bruised and perhaps broken” Anshu Jain (Deutsche Bank)
“Global
universal banks are at the heart of skepticism.”
Anshu
Jain (Deutsche Bank)
“We
[global banks] have to earn the license from civil society every day.
Just saying, shareholders are happy and clients are happy, will not
be enough.”
Piyush
Gupta (DBS)
“Ethics
is very profitable at the end of the day.”
Francisco
Gonzalez (BBVA)
Have
universal banks changed since the 2008/09 financial crisis?
Yes,
the regulatory changes have been substantial.
“BNP
Paribas, like any other bank, has more changed in the last five years
than in the last 150 years.”
Baudouin
Prot (BNP Paribas)
Are
universal banks dangerous?
No.
First, they have, since the financial crisis, increased significantly
the equity portion of their balance sheets. Second, proprietary
trading is usually not a significant portion of the banks’ balance
sheets.
“I
am not worried because leverage has gone down dramatically.”
Anshu
Jain (Deutsche Bank)
“The
whole system is fare safer.”
Jamie
Dimon (JP Morgan)
Is
credit intermediation in Europe gaining place?
This
is unclear. On the one hand, the speakers outline the growing
importance of capital markets in Europe.
“We
will absolutely need universal banks like BNP Paribas that bring
corporate clients for the first time to the bond markets.”
Baudouin
Prot (BNP Paribas)
“It’s
very important to reduce that dependence [of the European economy] on
banks.”
Anshu
Jain (Deutsche Bank)
“Whether
we like it or not, in Europe, we have to migrate to a system where
the banks’ balance sheets will be smaller, as a percentage of the
funds provided to the economy, and we need to have more market
mechanisms.”
Frédéric
Oudéa (Société Générale)
On
the other hand, Anshu Jain says that “European
confidence in [financial] markets is even lower than European
confidence in its big banks.” The consequence is that
“instead of capital market intermediation now
becoming a stronger force, it’s actually a weaker place.”
What
is most important when it comes to regulation of global universal
banks?
Most
important is that national regulators treat banks equally. This is
the famous level playing field.
“If
we want to have a level playing field we need the rules in terms of
capital and liquidity requirements but also for derivatives to be the
same [in Europe and the U.S.].”
(Anshu
Jain (Deutsche Bank).
Are
shadow banks bad?
It
will not surprise you that you won’t get a simple “yes” or “no”
answer here. On the one hand, the speakers want to cool down worries
about the shadow banking system.
“Just
because they [clients] go to the shadow banking system doesn’t mean
that it’s bad.”
Jamie
Dimon (JP Morgan)
On
the other hand, they face the reality that regulating the regular
banking system is, to some extent, useless, if the shadow banking
system remains unregulated.
“As you make banks safer, you cannot simultaneously remain suspicious and want to move activities away from them [to the shadow banking system].”
Anshu
Jain (Deutsche Bank)
“Risk
is a zero sum game. It has to sit somewhere.”
Anshu
Jain (Deutsche Bank)
Will
/ should the shadow banking sector be regulated?
Yes,
it will be regulated, simply because the regulator will follow the
risk. However, the lecturers believe that the regulators should be
more cautious as to the consequences of new regulation and regulate
financial products rather than the stakeholders creating and selling
them.
“I
think the regulators are coming. They are going to follow the risk
[towards the shadow banking sector]. But it’s gonna take some
time.”
Nicolas
S. Rohatyn (The Rohatyn Group)
“We
want to solve the problems of the last crisis and we don’t
understand the problems we are creating [by doing so].”
Alan
D. Schwartz (Guggenheim Partners)
“You
have to think much harder about how to regulate the products and
who’s got skin in the game.”
Alan
D. Schwartz (Guggenheim Partners)
Can
we make banking / financial products simple?
In
principle no as banking is, by definition complex. However, the
speakers seem to strive for simplicity even though it seems to be out
of reach.
“As
Albert Einstein said: ‘You should make it [the financial system] as
simple as possible, but no simpler.’)”
Jamie
Dimon (JP Morgan)
“There
is this trend towards the desire for simpler instruments in a world
in which you understand less.”
Nicolas
S. Rohatyn (The Rohatyn Group)
“People
are gonna look for simpler instruments.”
Nicolas
S. Rohatyn (The Rohatyn Group)
Will
financial hubs play a vital role in the future?
Yes.
The reason is that they allow efficient clearing of transactions. As
you might expect, fiscal or (lack of) transparency considerations
don’t play a role here.
“Flows
need and tend to congregate in places where efficient clearing
mechanisms and efficient aggregation mechanisms are.”
Piyush
Gupta (DBS)
“I
take it for given that financial centers have to develop based on
technology and competitiveness but not on lack of transparency and
things like that.”
Frédéric
Oudéa (Société Générale)
Is
the location of its headquarters still important
for a global universal bank?
Yes,
because “there is always a link between a
country [the home country of the bank] and a bank.” – Frédéric
Oudéa (Société Générale)
“It’s,
by nature, very important to be strong in our home market.”
Frédéric
Oudéa (Société Générale)
How
can global universal banks create a competitive advantage?
Generally,
it’s by allocating capital properly.
“With
the regulatory framework today, you cannot afford to mis-allocate
capital.”
Frédéric
Oudéa (Société Générale)
How
profitable can be big global banks?
New
regulation for banks makes it more and more difficult for banks to
remain profitable.
“It
is very difficult to be reasonably profitable in this new world.”
Frédéric
Oudéa (Société Générale)
“There
is probably a prize that will be paid [by big banks] for size.”
Frédéric
Oudéa (Société Générale)
This
is especially true in retail banking.
“It
will be increasingly hard to find global players in retail banking
[…] because the economics don’t work and the regulations make it
very complex.”
Piyush
Gupta (DBS)
“If
you are too small in a country, it’s not easy to compete [in the
retail banking market].”
Frédéric
Oudéa (Société Générale)
Where
will the industry head to in the coming years?
Corporate
and commercial banks will become more and more global, whereas retail
banks will become more regionally focused.
“In
the foreseeable future, you will see global corporate and commercial
banks and you will see more regionally and entrenched consumer
commercial banks.”
Piyush
Gupta (DBS)
Technology
is expected to further shake up the industry.
“Technology
is a game changer.”
Piyush
Gupta (DBS)
“I
think people overlook or underestimate the importance of technology.”
Francisco
Gonzalez (BBVA)
“People
are thinking in the short term. But in the medium or long term, there
is a big threat to the banking system, and this is technology.
Technology will give a completely different experience to our
customers.”
Francisco
Gonzalez (BBVA)
Dis-intermediation
and expected consolidation in Europe and the opening up of the
Chinese and Indian banking sector complete the current expectations
for universal banks.
“In
Europe, you will see consolidation [in the banking industry over the
next five years].”
Frédéric
Oudéa (Société Générale)
“The
barrier to entry CIB [corporate & investment banking] will be
huge. To be profitable in CIB with all the [regulatory requirements]
will request size.”
Frédéric
Oudéa (Société Générale)
“It’s
a question of time that the [Chinese] regulators will understand that
having an old-fashioned, non-efficient financial system holds up the
economy growing.”
Francisco
Gonzalez (BBVA)
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