redefining global finance redefining global finance international trends & local consequenses...
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REDEFINING GLOBAL FINANCE INTERNATIONAL TRENDS & LOCAL CONSEQUENSES
Idar Kreutzer
Managing Director Finance Norway
BI Centre for Asset Pricing Research
23.09.2014
“No industry has a comparable talent for privatizing gains and socializing losses.”Martin Wolf, Financial Times, 2008
Loss of confidence in the Financial Industry
2
Global challenges
1. The financial vs. the real economy
“The stock market exists to provide companies with equity capital and to give savers a stake in economic growth. Over time that simple truth has been forgotten.”
“The existing system has become far more complicated than it needs to be to discharge its functions – and dangerously unstable”
John Kay (professor at LSE, columnist at Financial Times)
3
Global challenges
2. Protecting the tax payer
Substantial direct and indirect economic costs from the financial crisis:
• Direct: Bailing out banks by public money (i.e. tax payers money), stock market downturn
• Indirect: Loss of GDP, unemployment, declines in consumer wealth
Ordinary people was left with the bill
4
Global challenges
3. Globalisation vs. multipolarization
The current international order based on US hegemony is shifting to a multi-polar system led by several pillars including the European Union (EU), Russia, China, and the US
5
6
• Technological progress has opened up for new possibilities
• New technology in the financial industry is targeted directly at consumers
• Increased focus on consumer protection and consumer interests
International trends
1. ”The rise of the consumer”
7
• Technological development is also enabling various types of companies to enter the banking industry
• More than one-third of the market share in the U.S. could be up for grabs in the future due to digital innovations
• New “banks:”– Starbucks– Google
International trends
2. New entrants
“…full-service banks, as a group, could lose about 35 percent of their market share by 2020. Who gains this market share? Digitally oriented disruptors that are far more agile and innovative”
8
• CRD IV: Capital requirements– Liquidity, higher capital adequacy,
funding structure
• BRRD: Crisis management– Bail-in, resolution fund
• Banking union: – Singe supervision, single
resolution, single rulebook
• Structural reform– No proprietary trading for the
biggest banks?
• Solvency II: Capital requirements and insurance
International trends
3. New regulations
9
Capital requirements do have economic consequenses
Norges Bank Watch 2014 on capital requirements:
“...a sizeable body of international research (…) suggests significant effects on the cost and availability of credit”
10
Deleveraging
2012-01
2012-03
2012-05
2012-07
2012-09
2012-11
2013-01
2013-03
2013-05
2013-07
2013-09
2013-11
2014-01
2014-03
2014-05
2014-0730,000
31,000
32,000
33,000
34,000
35,000 Reduction of close to 4000 bn. euro
Source: Financial Times 11.10.13
Total aggregated assets for all banks inthe eurozone. Bn. euro
Source: ECB
• Uncertainty regarding the economic development and consequences from new requirements
• More emphasis on economic growth in the EU• Continuously observing and evaluating
Progress with caution
Economic growth Premature implementation of new requirements
11
Different rules when calculating RWA
12
NO. risk weights: mortgage: 20 percent, businesses: 55 percentSE. risk weights: mortgage: 7 percent, businesses: 40 percentSource: A large Norwegian bank
Med særnorsk Basel I-gulv
Med Basel I-gulv etter EUs regler
0 %
2 %
4 %
6 %
8 %
10 %
12 %
14 %
16 %
18 %
20 %
Tidligere minstekrav
1. juli 2013 1. juli 2014 1. juli 2015 1. juli 20160
2
4
6
8
10
12
14
16
18
3.4 4.5 4.5 4.5 4.5
4.6 3.5 3.5 3.5 3.5
2.5 2.5 2.5 2.5
2.0 3.0 3.0 3.0
1 211
Norwegian capital requirements. Percent
Large increase in capital requirements
Min. CET1 capital requirement, AT1 capital and tier 2 capital, Capital conservation buffer, Systemic risk buffer, Buffer for SIFIs, Counter-cyclical capital buffer.Source: Ministry of Finance
Prev. min requirement
With the Norwegian version of the Basel 1 floor
With the EU version of the Basel 1 floor
13
• Banks are the main source of lending for businesses• New regulation decrease banks’ willingness to lend out• Large corporations with access to the bonds market vs. SMEs
Effect on lending and the housing market
Source: Statistics Norway, Boligprodusentenes Forening, Prognosesenteret
New homes. Change in sales and housing starts each month. Twelve-month change.
March April May June
Sales Housing starts
Jan. Feb.
2010
M05
2010
M07
2010
M09
2010
M11
2011
M01
2011
M03
2011
M05
2011
M07
2011
M09
2011
M11
2012
M01
2012
M03
2012
M05
2012
M07
2012
M09
2012
M11
2013
M01
2013
M03
2013
M05
2013
M07
2013
M09
2013
M11
2014
M01
2014
M03
2014
M05
2014
M07
-10 %
-5 %
0 %
5 %
10 %
15 %
20 %
25 %
30 %
Banks and credit institutions Bonds and certificate debt
Credit to non-financial corporations. Twelve-month change. 2010M05-2014M07
• Norway has to focus on knowledge intensive and sustainable industries
• The financial industry in Norway can make important contributions to the Norwegian economy– Knowledge intensive and productive industry – Capital abundance nation provides the basis for a
broader investment environment – Can provide capital for infrastructure
• Should develop a concrete and forward-looking industrial policy for the Norwegian Financial industry
We need a comprehensive industrial policy for the Financial industry
14
15
• Small and diversified
The Norwegian banking sector
Estlan
d
Roman
ia
Slova
kia
Lita
uen
Ungar
n
Slove
nia
Norge
Hella
s
Fastl
ands
-Nor
ge
Irlan
d
Østerri
ke
Fran
krike
Spani
a
Sverig
e
Kypro
s0
100
200
300
400
500
600
700
Banking group. Assets as a percentage of GDP. 2012
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000 Assets in Norwegian parent banks and average*. Mill.
NOK. 2013
Source: The Norwegian Bank’s Guarantee Fund, Nordea*DNB and Nordea are excluded from the figure but included in the averageAs of 12/31/13 – Total assets in DNB were 1.826 bn. NOK, Nordea 523 bn. NOK
Source: The Riksbank, The Norwegian FSA, Statistics Norway
16
-100 % -50 % 0 % 50 % 100 % 150 % 200 %
-100 %
-50 %
0 %
50 %
100 %
150 %
200 %
250 %
300 %
The Norwegian Financial industry- High growth in productivity and unutilized potential
Growth in productivity and employment for industries in Mainland-Norway, 1990–2010 (measured as deviation from average for all industries)
Employment growth
Productivity growth
Information and communication
Finance and insurance
Retail sector etc.
Source: Victor Norman (NHH - Norwegian School of Economics)
• Cost/income is declining • Decreased interest rate margins
Increased efficiency benefits the customers
Source: Statistics Norway
17
1990
K119
90K4
1991
K319
92K2
1993
K119
93K4
1994
K319
95K2
1996
K119
96K4
1997
K319
98K2
1999
K119
99K4
2000
K320
01K2
2002
K120
02K4
2003
K320
04K2
2005
K120
05K4
2006
K320
07K2
2008
K120
08K4
2009
K320
10K2
2011
K120
11K4
2012
K320
13K2
2014
K1
0
1
2
3
4
5
6
Banks Banks and credit institutions
Interest rate margins. Banks and credit institutions. 1990Q1-2014Q2Cost/income for Norwegian banks
Large Medium-sized Small 1H.2013 1H.2014
Perc
ent
Source: The Norwegian FSA
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• 137 banks operating in Norway• ”Finansportalen” makes it easy to compare prices.
Transparent
Example on search results: Mortgage loan of 2 Mill. NOK for 25 years. 80 % LTV
178 offers!
19
Responsible lending and higher solvency
19871989
19911993
19951997
19992001
20032005
20072009
20112013
0
1
2
3
4
5
6
7
8
9
Business segment Retail market
Perc
ent
• Losses on lending. 1987-2013 • Development in capital adequacy. Norwegian banks.
Perc
ent
CET1
CET1 without the Basel-1 floor (NO.version)Leverage ratio
20
• AFR – A nationwide authorization scheme for financial advisers in Norway
• Competence, credibility, reputation, customer experience, confidence in the financial industry
• Currently 6 603 authorized advisers
Liable and trustworthy
21
Requirements for future businesses
Environmentally robust
Global
Customer-driven
Knowledge-based
REDEFINING GLOBAL FINANCE INTERNATIONAL TRENDS & LOCAL CONSEQUENSES
Idar Kreutzer
Managing Director Finance Norway
BI Centre for Asset Pricing Research
23.09.2014