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Eye of the storm
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14 September 2009
As Hong Kong braced itself for a tropical storm on Monday, the macro-economic outlook offered to Sibos delegates promised some distinctly heavy weather.
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Ronnie Chan, CEO, Hang Lung Properties |
Despite rebounding stock markets and unprecedented levels of government intervention, the world’s financial and economic infrastructures remain under a cloud of uncertainty.
This was the consensus forecast delivered at Monday’s Big Issue debate 1, ‘Sibos one year on – leading through uncertainty’. Ronnie Chan, CEO of Hang Lung Properties, rejected the view of Peter Sands, his counterpart at Standard Chartered Bank, that the financial system is now sufficiently healthy to leave intensive care. “We haven’t even seen the doctor yet,” said Chan. “Many of the issues have not even been addressed.”
“I know of no other industry with more conflicts of interest than investment banking.”
Ronnie Chan, CEO, Hang Lung Properties |
Chan’s prescription was for a return to a simpler and smaller banking system which separates investment from commercial banking, Glass-Steagall-style, and which asks investment bankers to accept the risks as well as the rewards of their innovation by reverting to partnership structures. “Investment banking is a necessary activity, but boxing it in with commercial banking will create more problems than solutions,” he said. “I know of no other industry with as many conflicts of interest than investment banking. Moreover, the reward system is asymmetric: if the company does well, it’s mine, if it loses money, it’s the investors’. That’s a good deal!”
William White, OECD |
In his welcome address prior to the debate, Joseph Yam, CEO of the Hong Kong Monetary Authority, highlighted the difficulties of ensuring that financial innovation works for the public interest rather than against it. “The primary purpose of any financial system is intermediation that supports the needs of the wide economy. Financial systems should not have a life of their own,” he said.
William White, Chair of the Economic Development Review Committee at the Organisation for Economic Co-operation and Development, agreed with Chan that the question of whether today’s global banks are too big has not been discussed sufficiently by policymakers. If they were too big to fail, before the collapse of Lehman Brothers, now they were even bigger and even more complex. Government intervention, he suggested, raised two significant risks. “Banks that are supported by governments could turn into zombie banks that do not supply the services the economy needs to recover,” he said. “The other risk is that, having seen how far governments will go keep the big guys going, they will become even more cavalier in the future than they were in the past.”
Living will
While not joining Chan in calling for a division of investment and commercial banking, White found merit in UK Financial Services Authority chairman Lord Turner’s proposal of a ‘living will’ that would force banks to reduce their complexity if their affairs could not be unwound over the course of a weekend in the event of bankruptcy.
“Financial systems should not have a life of their own.”
Joseph Yam, CEO of the Hong Kong Monetary Authority |
Standard Chartered’s CEO Peter Sands found fault with the proposed regulatory remedies, despite acknowledging the industry’s continued ailments. He dismissed any Glass- Steagall-lite legislation as an “utter distraction” on the grounds that “narrow” banks such as Northern Rock, Washington Mutual, Lehman Brothers and Bear Stearns were among the biggest casualties of the crisis. “We should move to regulating activities regardless of the institutions they are in,” he said. Sands also warned that the living will risked removing the uncertainty that helped impose market discipline on banks, but admitted the concept had merit as a means of reducing complexity.
On both the financial and macro-economic fronts, panellists worried that policy-makers were in danger of administering the same medicine as in previous crises, thereby treating the symptoms and not the underlying cause. White said it was wrong to focus purely on financial innovations such as structured investment vehicles and collateralised debt obligations. “It’s more comforting for the central banks to point the finger at what’s new, but it’s more important to look at what’s the same as previous crises,” he noted. White admitted that policy-makers were learning from history in some respects and welcomed the growing support for countercyclical capital provisioning to counteract periods of excessive enthusiasm.
“We should move to regulating activities regardless of the institutions they are in.”
Peter Sands, CEO, Standard Chartered |
White also suggested that the underlying structural problems of the global economy were being ignored in favour of a repeat dose of easy credit. “Yes there are some green shoots, but what’s being used to fertilise them?” he asked. “We’ve had at least 20 years of excessive monetary and credit expansion. We’ve had the same response to every crisis in that period: lower interest rates.” The policy-makers’ insistence on continuing to follow a similar approach today is delaying a much-needed restructuring of excess capacity across a number of industry sectors. “Half the world is geared up to provide goods and services to people who can no longer afford to buy,” he said, citing the US and UK governments’ ‘cash for clunkers’ schemes to restart demand for cars.
If anyone was hoping for the world’s fastest growing large economy to ride to the rescue single-handed, Chan had some sobering news. “For those that missed the translation of premier Wen Jiabao’s words [in the debate’s opening video package], he said: ‘We can manage our own affairs, but not the world’s,”. Chan predicted that Asia would become more like western economies over time as its people increased consumer spending. But the change would not happen overnight. “You don’t change 3,000 years of frugality being a virtue in three months,” he said.
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Watch video highlights of the Big Issue Debate 1 
