• Marcus Agius • Walter B. Kielholz • Henry R. Kravis • Daniel S. Och
• H.E. Sheikh Hamad Al Sayari • Tony Tan Keng-Yam • Jean-Claude Trichet
Moderated by • Howard Davies
Friday 30 January
The future shape of the global financial system, as it emerges from the current efforts to turn the tide on the crisis, was the focus of this session. Banks, private equity, hedge funds and sovereign wealth funds came under particular scrutiny, as did the nature of new regulatory arrangements and international oversight.
Marcus Agius, Chairman of Barclays, United Kingdom, commenting on the role of governments in the banking sector, said the government of the United Kingdom had intervened for reasons of expediency rather than as a matter of policy. He understood the policy to be to return them to private ownership once stability has returned. Reducing banking to a regulated utility is not the way forward, he said.
Walter B. Kielholz, Chairman of the Board of Directors, Credit Suisse, Switzerland, said that Swiss banks will continue to focus on their client base and the kinds of products clients need. Each institution will be looking hard at the appropriate risk profile, depending on its particular client franchise. Regulators will want to ensure that individual depositors are protected, but he was against erecting firewalls between banks’ wholesale activities and retail sector depositors.
Henry R. Kravis, Founding Partner, Kohlberg Kravis Roberts and Co., USA, and Chair of the Governors Meeting for Investors 2009, said that private equity should not be written off. KKR is still able to put money to work. The focus is less on buying companies outright and more on minority stakes in companies that need capital. He believes they will be able to continue to secure long-term investment financing. But rather than getting it from banks, they will turn increasingly to new sources such as sovereign wealth funds and pension funds. In a deleveraging world, the emphasis is on paying the right purchase price, managing the companies well and creating value. He predicted that holding periods will likely go up from what has been a seven-year average. Regulation will impact the sector and, like others, he said the pendulum would probably swing too far before coming back. Overall, he was “modestly optimistic” about the outlook for private equity.
Daniel S. Och, Chairman and Chief Executive Officer, Och-Ziff Capital Management Group, USA, said that differentiation would increase significantly among hedge funds, a market that has had few barriers to entry. Those that have performed well, demonstrated transparency and maintained trust will continue to do well. Poor performers with overleveraged portfolios that had suspended redemptions would not.
H.E. Sheikh Hamad Al Sayari, Governor of the Saudi Arabian Monetary Agency, said the drop in oil prices since the middle of 2008 was putting US$ 1.2 billion a day into the pockets of US consumers. This represents a huge stimulus that he hoped would help offset negative growth. He welcomed the importance accorded to the G20. Representing 70% of the world’s wealth and population, it provides an important forum for deliberation about addressing systemic issues in the global economy.
Tony Tan Keng-Yam, Deputy Chairman and Executive Director, Government of Singapore Investment Corporation (GIC), Singapore, said there would likely be a shake-out in the financial system into two tiers: first, a core of tightly regulated, large commercial banks working with lower levels of leverage than in the past; second, a group of “quasi banks” (private equity, hedge funds, etc.) with a different regulatory structure from commercial banks and no access to the central banks. Investment banks would probably come somewhere in-between, he said. It was normal that governments had intervened to prop up confidence. Now the question was how they would extract themselves in a way that provides incentives to shareholders, who will be necessary for a strong banking sector in the future. He also warned of the dangers of over-regulation stifling creativity.
Jean-Claude Trichet, President, European Central Bank, Frankfurt, called for a long-term vision that would shape a more resilient system with strong governance. He stressed the need for greater transparency and the need to fight against “pro-cyclicality” by encouraging long-term thinking. As a counterpart to the new financial architecture, he called for convincing, reasonable macroeconomic policies with effective surveillance. On oversight, he called for greater accountability in the markets for derivatives. “We would have been well advised to look at this earlier,” he pointed out. At the global level, he said the international financial institutions have an important role to play, but he also emphasized the growing influence of the new informal groupings and bodies that enable consensus building.
In a discussion of “marking to market”, the moderator, Howard Davies, Director, London School of Economics and Political Science, United Kingdom, and Chair, Global Agenda Council on Financial Market Development, asked whether this practice had “taken the air out of the tires” of the financial system at a crucial juncture. It is useful to know what assets are worth, but not if measurement decreases their value. Several speakers agreed that marking to market could undermine a longer-time appreciation of asset values.
On the issue of compensation, participants spoke of the need to get incentives right. Kravis said that annual bonuses could have a perverse impact in providing a reward before a longer-term evaluation of effective performance was possible. All agreed that government regulators require adequate compensation in order to attract the right people.