Financial Sector Reform: Revealing and Appealing
Mr. David G. Eldon
Chairman
The Hongkong and Shanghai Banking Corporation Limited
Distinguished Guests, Ladies and Gentlemen: good afternoon.
As we discuss today how to build a better banking system and which reforms are most appealing. I suggest we be mindful of the words of Sophia Loren.
According to the Italian actress, sex appeal is fifty per cent what you've got and fifty per cent what people think you've got.
When it comes to the global financial system, we are all very familiar with what 'we've got'.
We have technology that makes it possible to shift billions of dollars into and out of markets with the flick of a key. We have massive fund movements, with the turnover in foreign exchange alone at more than 2 trillion dollars per day. We have at our fingertips more information on more markets and more companies than ever before. We have an ever-expanding mix of players, ranging from banks - both commercial and central - to mutual funds to hedge funds to institutional investors and day-traders. And all have different interests, different strategies and different mindsets. We have fickle investors that run with the herd, worrying less about fundamentals and more about picking the next market of the moment. We have a wide range of political systems and ideologies at work and countries that are at significantly different stages of economic development. And we have no one single regulator.
In short, we have a complicated and unpredictable financial system.
As for the second part of Sophia's equation: what do people think we've got?
Some pundits think we still have a lot of work to do. There has been a steady stream of books, academic papers and editorials calling for everything from a new global financial architecture to major renovations to just minor repairs.
Some investors think enough has been done. This year net private capital flows to emerging market economies will total more than 190 billion US dollars, up from around 150 billion in 1998 but below the peak of 328 billion in 1996. Latin American and Asia are forecast to see the largest increases in flows.
Some banks think they have learned from past mistakes. In hindsight, the combination of continued high growth over several years, a benign credit environment and increased competition resulted in a gradual relaxation of credit standards in the region. The Asian crisis reinforced the need for all banks to focus less on the expectation of government support and more on creditworthiness.
Likewise, incidents such as the near-collapse of Long - Term Capital Management prompted banks to review and enhance risk their management practices. However, it appears that some may also have short memories. As the Bank for International Settlements have noted "there are some indications that competitive and business pressures are starting to re-assert themselves and may be influencing credit standards imposed by banks in their dealings" with hedge funds.
Some economies think they have made significant progress in becoming more transparent and a recent report from the Institute of International Finance confirms as much. Several emerging market economies are now providing markets with more frequent and timely information, with countries such as Thailand amongst those that offer the most comprehensive financial data. And other economies, such as Hong Kong, Malaysia and the Philippines, are credited with making "considerable progress" in meeting higher standards.
That said, the report also notes that "in spite of a significant continuing improvement in overall standards of data provision, serious shortcomings remain in certain area."
Given this backdrop, how can we build a better banking system? Or in other words, what do we still need?
Most agree that further reforms are required, and there are some encouraging signs the reform process is continuing despite the recent rebounds in numbers and in sentiment.
In Asia, for example, regulations are being strengthened, disclosure standards are being improved, many troubled companies have been restructured or closed and foreign banks are being a allowed in, bringing with them new technology and new expertise. Another positive sign is the increasing number of asset management companies that have been established to purchase non-performing loans from ailing domestic banks.
Just as an aside, I should point out that I am also encouraged by what I am not seeing in Asia. There does not appear to be an overall migration towards protectionism or countries only addressing domestic interests at the expense of international expectations.
In regions such as Asia we also need to develop more diverse sources of financing or what Mr. Greenspan has called a 'spare tire'. Again we are seeing evidence of this happening in many parts of Asia as companies are using shares and bonds as sources of financing, reducing their dependency on bank loans and making themselves less vulnerable to currency savings.
Given issues such as transparency, accounting standards, bankruptcy laws and foreign ownership are familiar and frequently discussed topics, let me conclude by briefly focusing on a vital, but less talked about aspect of reform.
To build a banking system that can withstand the challenges brought on by a global economy, we need to ensure the building blocks of the system - namely the banks - can withstand the challenges of today's new economic order.
Gone are the days when banks only competed with other banks. Now non-traditional competitors such as utilities, supermarkets and dot-coms are providing financial services and attempting to woo customers away from banks in some markets. And banks can expect to see even more head-on competition with companies who employ the most sophisticated marketing and selling techniques and who are not saddled with the cost base of a traditional bank.
To be competitive, banks will need to offer multiple products and be capable of delivering their services at the same time prices as monoline specialists who target profitable sectors of the market. To be successful, banks will also have to organise themselves around the customer. For organisations such as mine, this means providing for different needs of different customers in different locations.
It means our customers in Canada are able to buy and sell stocks on the Internet. It means our customers in the UK can sit in the comfort of their own homes with a remote control and apply for loans or mortgages and more through our interactive television banking service. It means our customers in Hong Kong can check account balances, transfer funds between accounts and trade securities on their mobile phones. And it means our customers on the Web will soon be able to carry out business transactions throughout our e-commerce joint venture with Cheung Kong and Hutchison Whampoa.
Competition is forcing all banks - big and small, domestic and foreign - to change the way they do business. The indirect benefit of such change is that banks will be better positioned to withstand the pressures of the global economy. As for the general debate about the state of the global financial system, I believe we must focus on pragmatic actions rather than global prescriptions.
In the immortal world of Sophia Loren: "nothing makes a woman more beautiful than the belief that she is beautiful."
In the not-so-immortal world of a banker from Asia: nothing will make our financial system more stable than the belief it must continue to change.