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Future developments in Global Finance
and the implications for the industry
Paola Subacchi, Research Director, Chatham House
March 2009
The changing nature of the financial
sector – who will carry the risks?
• Financial services – growth in intermediaries
carrying very low balance sheet risk, low
threat to national economy and security
• But which institutions will take on balance
sheet risks? Which countries can afford this?
• Risk aversion has driven savings into secure
bank deposits and government bonds
• Investors and banks are afraid to lend
• Currently governments are taking on an ever
greater role as lenders of last resort
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Investment trends: exodus from risk creates global asset imbalance
High growth and
inflation
The US: “The Anglo
Saxon Model”
• US financial wealth was
$60-65trn, over 4x GDP
The EU: “Balanced
Portfolio”
• Total financial wealth
similar to US
•But household wealth
held in equities lower
Risk averse
JAPAN: Cash
• Wealth $30 trn
•Nearly 55% of
household wealth
in bank deposits
Low growth and inflation
• Under 15% of household
wealth in bank deposits, as
much as 50% in equities and
corporate bonds
Risk taking
Rising government role in finance:
• Total financial wealth used to be about $200
trillion, roughly a third each in cash/bank
deposits, bonds and equities
• Now total wealth about $160 trillion – equity
share down to about 20%
• Cash/bank deposits almost half total wealth
• Government has increased its presence – now
government bonds are about 20% of total
wealth plus it has a large role in the banking
sector and in guarantees for corporate debt
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Coordinated national actions seen so far:
• Monetary policy coordination – flushing
liquidity through the system and cutting
official rates to near zero
• Bank bail outs and guarantees for loans –
toxic asset “dump” to come?
• Fiscal stimulus packages – agreed at G20 in
November 2008, possibly more?
• “Unconventional monetary policy” – such
quantitative easing “QE” – notice slightly
differing ways of implementing this
• Extra resources for international agencies
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International action as global capital flows
have plunged – need to raise IMF funds
IMF
Increase in funds over last decade has been “lite”
Need to double fund now just to catch up with past trend
Add $200 billion
Allowing for crisis, need more than this
Add $400-500 billion
TYPICAL AID
Conditionality
IMF programs
“LITE” AID
Less supervision
RESERVES
Just in case
Policy aims: restarting growth and lending
while defining a more secure system
Central Banks
Low official rates
Supplying liquidity
“QE”
Government
Treasury Department or
Finance Ministry
Easy fiscal policy
Banking and
Securities Regulation
Modifying rules
Tougher supervision
AIMS
Secure the global and local financial system
Restart lending and economic growth
Improve long-term outlook and stability
Changes in the Global Governance System
IMF
World Bank
More money,
more powers
FATF Money
laundering
BIS
(Central Banks)
BASEL (Banking)
Less pro-cyclical rules
Modified “mark to market”
Governments
WTO
Trade
From G7-G8
to G20
Accounting and
Auditing
Financial
Stability Forum
More members
RATING AGENCIES
To be regulated
IAIS
(Insurance)
IOSCO
(Securities)
Implications:
• Stiff competition in financial services, drive
for efficiency and less risk-exposure
• Greater supervision and regulation
• More emphasis on professional qualifications
and licensing, reporting, oversight
• But will risk takers be encouraged to lend or feel punished by the new costs and rules?
• Too harsh implies governments will have to
continue shouldering the risks
• Too lax a regime and crises will recur
• But it cannot be left in uncertain limbo!
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Is a way forward emerging?
• Global impacts, global responsibilities;
although tension between national
prerogatives and cross-border regulation
• New focus on systemic risk – how much
liquidity in system as a whole?
• Move to G20 to gain legitimacy, improve
global cooperation and governance
• Strengthened institutions and powers?
• IMF, World Bank, MDB funds must continue to
rise to meet the scale of global challenge
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Questions for the future
• Will this be enough to regenerate
confidence and private sector lending?
• Who takes on corporate debt?
• What impact on the financial sector in the
longer run?
THANK YOU
www.chathamhouse.org.uk/internationaleconomics
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