Sibos 2008 in Vienna — 15-19 September 2008
Vienna, Tuesday 16 September 2008 |
The beginning of the end of the American century?Is the erosion of confidence in the American model of financial market growth and regulatory oversight terminal?
David Eldon, chairman, Dubai International Financial Centre Authority The credit crunch was the trigger for much of the discussion in both the conference halls and the corridors of Sibos on Tuesday. With all eyes on developments in the US financial markets, several sessions considered the implications of the perceived shift both for US economic leadership and the emergence of new poles of global financial activity. A debate on shifting global economic power, led by Juan Senor, Business TV presenter, formerly CNBC and International Herald Tribune, set out to test the assumption that power was indeed shifting from west to east.
The Asia Pacific region has seen its share of global trade and GDP grow significantly over the past ten years, said Senor. At the same time, sovereign wealth funds have come to recent prominence with their USD 3 trillion of assets, particularly as rescuers of a number of major institutions hobbled by the credit crunch. “Is this the beginning of the end of the American century?” Senor asked. While recognising global shifts in economic metrics, most of the panel were sceptical about a wholesale demise of America’s global economic importance. Martin Blessing, Chairman of the Board of Managing Directors, Commerzbank, suggested that while we may be witnessing ‘the beginning of the end of the American Century’, “it will happen slowly.” US influence will wane over time, agreed David Eldon, Chairman, Dubai International Financial Centre Authority, “but there is some way to go.”
Nevertheless, the perception of at least a dispersal of global economic power has given rise to ambitions for a greater financial centre profile. Nor are the newer contenders necessarily modelling themselves on the US approach, pointing to the turmoil as something they’d like to avoid.
A session on the financial centres of 2013 placed side-by-side representatives of financial institutions and infrastructures in Japan, India, China, Russia and Dubai, each of whom argued convincingly that their market would realise significant future growth as a global financial pole.
| “US influence will wane over time, but there is some way to go.” David Eldon, chairman, Dubai International Financial Centre Authority |
To some extent, the rise of new financial centres, whether in Asia or elsewhere, does not necessarily herald a decline in importance of existing centres. “I don’t regard the success of financial centres as a zero-sum game,” Larry Hatheway, Chief Economist and Global Head of Asset Allocation, UBS Investment Bank told the afternoon session, citing the examples of New York and Chicago, which have successfully specialised in complementary areas.
To some a shift in economic power does not necessarily follow from changing trade and investment flows. “It is not simply where the money is,” suggested Ong Keng Yong, Director, Institute of Policy Studies, Singapore, “it is who decides what to do with it that must be considered.” For Konstantin Korishchenko, Deputy Chairman, Bank of Russia, meanwhile, it is not so much a question of the importance of America in the global economy as the role of the US dollar.
Decoupling of major markets from newer fast-growing economies is likewise exaggerated, panelists in the morning Big Issue debate agreed. In the short term, said Eldon, there will be import substitution and growth in intra-Asian trade, but not decoupling from the major markets, particularly the US. Yong, put the trends identified firmly in the broader context of globalisation. “There is a redistribution of economic activities, which has to be handled in an orderly manner,” he commented.
Centres of power
Rajnikant Patel, former Managing Director and CEO, Bombay Stock Exchange also cautioned against viewing the relative prominence of different financial centres in a binary manner. Envisaging a global financial services environment that would be both multi-location and increasingly integrated, Patel said a matrix model would be a more appropriate description.
Given the febrile financial climate of the past year and the long bull market that preceded it, observers may mistake enthusiasm for becoming a global fi nancial centre as opportunistic. They would be wrong. Plans to attract global financial flows in one guise or another are often the result of rational local imperatives. In Dubai, said Eldon, there was a recognition that its oil reserves were fi nite and that for a secure future, the economy would need to diversify. The move to successful entrepôt, then tourist destination and now financial centre is part of this long-term vision.
BRICs
The distinction identified by Korishchenko between economy and currency at the beginning of the day was revisited in a session on whether the rouble had the potential to become a global reserve currency. “Had someone come up to me ten years ago and said I would be moderating a session on whether the rouble could become a reserve currency, I would have told them to go and have their head checked,” said Illka Salonen, Deputy Chairman of the Board of Sberbank and moderator of Tuesday’s session, ‘Can the rouble become and global reserve currency?’
| “Trust in the US dollar is undermined more than is realised publicly.” Clemens Grafe, senior economist for Russia and the CIS, UBS |
Having a Russian stream at this year’s Sibos reflects the great strides the country has taken in the last 15 years, but the question posed to delegates was whether this is enough to increase central banks’ confidence in the rouble.
Much of the recent appetite for investment in the rouble has been driven by the private sector – rather than the central banks – where the trend has been to diversify away from the dollar and euro. Panelists agreed that this is a good indicator of the future. “We see talk of diversifi cation into other currencies,
mainly from emerging markets,” said Clemens Grafe, Senior Economist for Russia and the CIS at UBS. “Trust in the US dollar is undermined more than is realised publicly. The private sector is driven by high returns and their behaviour now could be indicative of how central banks act in the future.”
Alexander Potemkin, President of Russian Cearing House MICEX, noted that unlike the early nineties, post the collapse of the Soviet Union, when Russia had similar ambitions for the rouble, its government has now shown a responsibility to take on “the burden” of using the rouble as a reserve.
“The new Russian president has expressed the country’s readiness for the rouble to become a reserve currency, and this is important,” he said. However, Potemkin also stressed that the rouble needs to become a prominent reserve currency in the CIS countries first, before going global.
Fellow panelist Richard Hainsworth, General Director of RusRating, part of the GlobalRating Group, an independent ratings agency serving the Russian market, felt political issues could stand in the way of this. “The CIS countries want to establish their independence,” he said. “As a result, they will be very cautious about their reliance on the rouble, as they may see this as a way in which Russia could assert its dominance over them.”
Martin Blessing, chairman, board of managing directors, Commerzbank
Lázaro Campos, CEO, SWIFT, who spoke at the end of the session, agreed that a change in the Russian mindset was required to attract increased foreign investment, but was optimistic of the country’s future. “Not only is the economic power shifting from west to east, but by 2020, there won’t be two or three fi nancial centres dominating, there could be a dozen and one of them will be Moscow.”
Brazil’s capital markets were also the subject of attention in an afternoon session. While many are aware of Brazil’s recent sustained economic growth, fewer are familiar with the revolution in the country’s fi nancial markets infrastructure that has supported its rapid transformation from infl ation-ridden laggard to regional superpower.
Moderator Monica Singer, CEO of Strate, a provider of clearing, settlement and depository services to South Africa’s financial markets, offered an opening salvo of statistics to demonstrate Brazil’s growing economic strength. But perhaps the most potent statement on the country’s financial standing was the assertion that 70% of demand for the 60 IPOs launched in Brazil last year came from foreign investors. This, said Maria Helena Santana, Chair of the Comissao de Valores Mobiliarios (CVM), Brazil’s securities and exchange commission, showed a high degree of international confidence in the country’s regulatory framework and the depth of its financial markets. “Brazilian firms can now access foreign capital more cheaply at home than in the US. And other Latin American companies are also benefiting by offering Brazilian Depository Receipts,” she said.
Adoption of best practices and close cooperation between market participants, infrastructures and regulators had helped to attract foreign investors, said Amarilis Sardenberg, Chief Clearing House, Depository and Risk Management Officer, BM&F Bovespa, which operates Brazil’s equities, mercantile and futures exchanges. But many more challenges lay ahead. BM&F Bovespa is exploring the possibility of a single clearing and settlement platform for all its markets, as well as a common collateralisation system.
Pedro Guerra, Citi’s Securities Services Manager for Brazil, rejected suggestions that a single exchange risked monopoly. “If Brazil aspires to be a big financial centre, it needs strong institutions. Our competition might be other BRICs today, but in the long term we can be a major international financial centre,” he said.
Back to the big picture
The vision of a globally dispersed group of financial centres reflecting shifting economic flows was shared by panelists in several sessions, though differences were evident in assessments of the time period over which that landscape would take shape and the criteria that these centres would need to fulfil to qualify.
Hatheway of UBS provided a template of the yardsticks by which a global financial centre could be judged, at least from an investor perspective. He identified six overarching factors: the rule of law; availability of information; an organised disclosure framework; critical mass; openness to trade; proximity to government centres and soft factors such as language and culture.
| “The ‘comprehensive’ failure of banks and regulators to understand the interaction of risks that led to the current financial crisis should lead the financial industry to look outside itself for solutions.” Till Guldimann, vice chairman, Sungard |
How far will these emulate models from existing major markets? Distinctions and nuances are likely. Attitudes to transparency and exchange rate management are, for example, likely to be affected by the travails of the US economy, if comments from Sibos are anything to go by.
Korishchenko of the Russian Central Bank stressed that he saw transparency as a desirable goal, but not an ‘absolute’. “Adoption of accounting standards can lead to paralysis for companies in bad times,” he notes. At the same time, he suggested, an excess of information in a market is not necessarily a good thing. “Too much predictability on the part of central banks has in my view been a contributory factor in the current crisis,” he argued.
Patel agreed: “You need to be transparent, but not naked,” he asserted. Regulators need to understand and be attuned to local sensitivities and then develop transparency requirements in the light of those, said Patel.
Nor did transparency prevent the current US financial crisis. “The crisis did not result from a lack of transparency, said Blessing. “Greed was simply bigger than fear.” Korishchenko also warned against the adoption of double standards. If, as Alan Greenspan suggested, hedge funds should not be too heavily regulated, why should other asset managers face more onerous rules, he asked.
Similarly, the enthusiasm for freely floating exchange rates is not universal. “Are managed exchange rates a necessary evil,” asked Senor. “They are a tool to growth,” replied Patel. Yong voiced a similar sentiment. “Our priority is growth,” he said. Anything that will help will be considered.
No one size fits all
There is a growing acceptance that there is room for individual approaches. These are not one-size-fits-all decisions. “Each country must feel its own way,” said Blessing, while Eldon pointed out that Hong Kong has had a very successful managed exchange rate since 1983. That said, as markets liberalise and other currencies strengthen, will the US dollar lose its global position? No one on Tuesday was holding their breath. So long as oil is priced in dollars, speakers observed, the dollar will remain dominant and, as Eldon commented, “oil will not priced in anything else for some time.”
When asked by Senor what they saw as the likely top financial centres in 2020, none of the morning’s panelists predicted a radical shake up. “There will be no tectonic changes,” said Korishchenko. “London, New York, Europe and BRICs will be the main financial centres. Patel predicted that two or three Asian centres would feature among the top ten, while Yong and Eldon predicted that at least one would be in Latin America. Only Blessing was firm. “London, New York and Shanghai will be the financial centres of the future,” he said.
Inflationary pressure
One common recognition, despite diversity of views in other respects, was a widespread lack of comfort with current levels of inflation in many markets. “The discussion on inflation was very interesting – especially the view that countries would be going into double- digit inflation,” said Gail M. Makenete, Director of Financial Markets, Central Bank of Lesotho, after listening to the morning’s Big Issue debate. “So was the discussion on the new markets that are going to be the markets of the future. I suppose African markets don’t play a dominant global role, so they’re unlikely to feature highly, but it would have been nice to hear something about South Africa and more about the Middle East.”
For Ifeyinwa Nwobodo, Assistant General Manager for Correspondent Banking, Zenith Bank in Nigeria, “Everyone knows what’s happening in China and India, but other markets will emerge. Look at Nigeria, for instance: it’s a market that can’t be neglected.”
Beyond the financial sector
“The ‘comprehensive’ failure of banks and regulators to understand the interaction of risks that led to the current financial crisis should lead the financial industry to look outside itself for solutions,” according to Till Guldimann, Vice Chairman, Sungard.
| “London, New York and Shanghai will be the financial centres of the future.” Martin Blessing, chairman, board of managing directors, Commerzbank |
“There’s no point refining our existing risk models,” said Guldimann, formerly chairman of J.P.Morgan’s market risk committee and founder of RiskMetrics. Although the financial markets – both regulators and banks – had become very adept at understanding the risks pertaining to individual institutions, he said, they had lost sight of the increasing levels of complexity and interaction between different types of risk. “We were looking at the nodes, when the problem was the network,” said Guldimann.
Having appeared stable, the financial sector had been brought to its knees by the equivalent of the beat of a butterfly’s wings, he said. “My recommendation would be to convene a think-tank of people from outside the finance industry that have experience of understanding unstable systems, perhaps biology, cancer research, aerodynamics or weather,” he said.
Nevertheless, both Guldimann and John Gaine, President Emeritus and Special Counsel, International Affairs at the Managed Funds Association, believe that the US financial markets would emerge much stronger from the current financial crisis. “US policymakers recognised the need for comprehensive restructuring of financial services regulation in the US and around the world some months ago,” said Gaine. “The US Treasury Department’s blueprint for financial services reform preceded current issues, which will only serve to accelerate the process.”
Gaine said he derived confidence from the fact that both current and future US administrations were committed to reform. “Never in US history will there have been such a comprehensive look at the structure of the finance industry,” he said.
One thing is for certain. In a multi-polar financial centre landscape, national regulators will need to work together more closely to contain and mitigate future shocks to the system.
“But at the end of the day, I expect investors to be better served by this process, and the world’s capital market structures will be more secure. That might sound like wishful thinking, but I really believe it,” said Gaine.
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