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REDEFINING GLOBAL FINANCE INTERNATIONAL TRENDS & LOCAL CONSEQUENSES
Idar KreutzerManaging Director Finance Norway
BI Centre for Asset Pricing Research23.09.2014
“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 challenges1. 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 challenges2. 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 challenges3. 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
• 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
6
International trends1. ”The rise of the consumer”
• 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
7
International trends2. 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”
• 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 insurance8
International trends3. 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
30,000
31,000
32,000
33,000
34,000
35,000
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
‐07
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
0 %2 %4 %6 %8 %
10 %12 %14 %16 %18 %20 %
Med særnorsk Basel I‐gulv
Med Basel I‐gulv etterEUs regler
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
1.0 2.01.01.0
0
2
4
6
8
10
12
14
16
18
Tidligereminstekrav
1. juli 2013 1. juli 2014 1. juli 2015 1. juli 2016
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
• 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
13
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.
-10 %
-5 %
0 %
5 %
10 %
15 %
20 %
25 %
30 %
2010
M05
2010
M08
2010
M11
2011
M02
2011
M05
2011
M08
2011
M11
2012
M02
2012
M05
2012
M08
2012
M11
2013
M02
2013
M05
2013
M08
2013
M11
2014
M02
2014
M05
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
• Small and diversified
15
The Norwegian banking sector
0
100
200
300
400
500
600
700
Est
land
Latv
iaR
oman
iaTs
jekk
iaS
lova
kia
Bulg
aria
Lita
uen
Pol
enU
ngar
nFi
nlan
dS
love
nia
Bel
gia
Nor
geIta
liaH
ella
sG
jenn
omsn
ittFa
stla
nds-
Nor
geLu
xem
bour
gIrl
and
Portu
gal
Øst
errik
eTy
skla
ndFr
ankr
ike
Dan
mar
kSp
ania UK
Sve
rige
Ned
erla
ndK
ypro
sS
veits
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
‐100 %
‐50 %
0 %
50 %
100 %
150 %
200 %
250 %
300 %
‐100 % ‐50 % 0 % 50 % 100 % 150 % 200 %
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)
16
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
0
1
2
3
4
5
6
1990K1
1991K1
1992K1
1993K1
1994K1
1995K1
1996K1
1997K1
1998K1
1999K1
2000K1
2001K1
2002K1
2003K1
2004K1
2005K1
2006K1
2007K1
2008K1
2009K1
2010K1
2011K1
2012K1
2013K1
2014K1
Banks Banks and credit institutions
Interest rate margins. Banks and credit institutions. 1990Q1‐2014Q2Cost/income for Norwegian banks
Large Medium‐sized Small1H.2013 1H.2014
Percen
t
Source: The Norwegian FSA
• 137 banks operating in Norway• ”Finansportalen” makes it easy to compare prices.
18
Transparent
Example on search results: Mortgage loan of 2 Mill. NOK for 25 years. 80 % LTV
178 offers!
19
Responsible lending and higher solvency
0
1
2
3
4
5
6
7
8
9
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Percen
t
Business segment Retail market
• Losses on lending. 1987-2013 • Development in capital adequacy. Norwegian banks.
Percen
t
CET1
CET1 without the Basel‐1 floor (NO.version)Leverage ratio
• 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
20
Liable and trustworthy
21
Requirements for future businesses
Environmentally robust
Global
Customer‐driven
Knowledge‐based
REDEFINING GLOBAL FINANCE INTERNATIONAL TRENDS & LOCAL CONSEQUENSES
Idar KreutzerManaging Director Finance Norway
BI Centre for Asset Pricing Research23.09.2014
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