McKinsey’s Study on New York’s Competitiveness as a ... Competitiveness as a Financial Center and Its Implications for Korea CONFIDENTIAL August 25, 2008 CONFIDENTIAL AND PROPRIETARY

McKinsey’s Study on New York’s Competitiveness as a Financial Center and Its Implications for Korea

CONFIDENTIAL

August 25, 2008

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited.

1|McKinsey & Company

Introduction

▪ The U.S. financial services sector is a vital element of the U.S. economy, and in particular to New York– Third largest sector of U.S. economy (8% of GDP) and growing faster than top two,

manufacturing and real estate– Accounts for 1 in every 19 jobs nationally (1 in every 9 private sector jobs in NYC) and

creates a large number of indirect jobs– Fuels growth by optimizing capital allocation and improves efficiency through links to

the global economy

▪ Seeing grave implications to a decline in global financial services competitiveness for the U.S. economy, New York City Mayor Michael Bloomberg and U.S. Senator Charles Schumer launched a process to identify sources of global financial services competitiveness

▪ The Bloomberg-Schumer report outlined an ambitious national and local agenda to sustain New York’s and U.S.’ global financial services leadership

▪ Since the Report, the U.S. has been at the heart of the world’s financial crisis; however, real progress has been made

▪ Today, we would like to discuss with you– Insights from the Bloomberg/Schumer Report regarding global financial services

competitiveness– Implications for Korea


Today’s Discussion

Bloomberg-Schumer Report

18 months after the Report: Progress and Challenges

Implications for Korea

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Bloomberg-Schumer Report: Process and methodology

▪ Senior and committed support from government and business– Report launched by Mayor Bloomberg, Mayor of New York City and Senator Charles Schumer,

Senior U.S. Senator from New York State– CEO of most major financial institutions participated– Top US regulators consulted and involved

▪ Extensive primary research– Analyzed financial services revenue streams, choice of venue, drivers and outlook– Assessed global trends and ability to influence– Consulted subject matter experts on accounting, capital, legal and tax issues– Interviewed over 100 executives, surveyed (written) additional 30 CEOs, and launched on-line

survey with 275 executives responding

▪ Involvement of all stakeholders in identifying issues and recommendations– Consulted investors, labor and consumer groups as well as financial services industry leaders– Syndicated extensively with key stakeholders to ensure buy-in

▪ Actionable recommendations– Developed combination of near-term priorities and longer-term steps to improve competitiveness– Identified specific actions and owners


Europe was on track to surpass the U.S. in capital markets revenuesInvestment Banking and Sales & Trading Revenues, $ Billions, 2005

Source: McKinsey Corporate and Investment Banking Revenues Survey

$109

Sales & Trading

Investment Banking

U.S.

69

40

74

EU 15 + Switzerland

98

24

7

Asia

37

30


Europe had become the center for innovative and fast growing derivatives markets

Source: McKinsey Global Capital Markets Survey

2005 revenues, $ Billions, percent

8 98

100% = $26$26

Americas

JapanAPAC

Structured derivatives

25

Flow derivatives

32

6

Europe 6052


US leadership in IPOs was being challenged

Source: Dealogic; year-to-date data compiled as of 11/02/2006.

Number of IPOs values at over $1 billion

33

17

42

67

63

56

36

17

223932

10Asia

03

16

02

42

2001

57

Europe

2006 YTD

32

605

18

32

04

28100% = 61221

U.S.

17


US financial stock significantly larger than other regions, but growth rate was lowerInvestment Banking and Sales & Trading Revenues, $ Billions, 2005

Source: McKinsey Global Institute; Global Insight

$51

U.S.

8

30

U.K.

$38

Non-JapanAsia-Pacific

$13

Japan

$20Euro-zone

CAGR 2001-05Percent

6.5 8.4

6.8

15.5 7.5Eurozone


EU had higher growth potential than the US because of lower capital market penetrationCapital markets penetration(private debt and equity as % of GDP), 2004

0%

50%

100%

150%

200%

250%

300%

350%

2.70 3.20 3.70 4.20 4.70

Nominal GDPper capita

EU

Rest of world

MatureEmergingNascent markets

Market maturity (log nominal GDP per capita), 2004

India

Philippines

$10,000 $25,000

Indonesia

China

Colombia

Thailand

Brazil

Argentina

Russia

S. Africa

Malaysia

Chile

PolandMexico

Taiwan

S. Korea

Spain

Portugal

Israel

GreeceNew Zealand

Singapore

Italy

Australia

Canada Germany

Belgium

France

Finland

U.K.

Austria

Japan

Sweden

U.S.

Ireland

Denmark

Switzerland

Norway

LuxembourgNetherlands

EUROPE

U.S.

Source: McKinsey analysis; UN Population Division


Competing foreign exchanges were internationalizing faster than the US

* Mainland Chinese IPOs considered “foreign” for Hong Kong purposesSource: Dealogic; year-to-date data compiled as of 11/02/2006.

0

10

20

30

40

50

60

70

80

90

100

London Stock Exchange

U.S. exchanges

20042002 2003

IPOs by foreign companiesPercent of total IPO value

Singapore

Hong Kong*

2006 YTD2005


Talent, legal and regulatory factors are most important factors determining competitiveness

Senior executive rating CEO ranking

n/a

ImportanceHigh

Medium

Low

4.0

4.1

4.3

4.6

4.7

4.8

4.9

4.9

5.1

5.1

5.2

5.3

5.4

5.4

5.6

5.6

5.8

5.9

Effective and efficient national security

High quality transportation infrastructure

High quality of life (arts, culture, education, etc.)

Reasonable commercial real estate costs

Openness of market to foreign companies

Attractive regulatory environment

Government and regulators are responsive to business needs

Reasonable compensation levels to attract quality professional workers

Deep and liquid markets

Availability and affordability of technical and administrative personnel

Favorable corporate tax regime

Workday overlaps with foreign markets

Openness of immigration policy for students and skilled workers

Fair and predictable legal environment

Low all-in cost to raise capital

Low health care costs

Close geographic proximity to other markets customers and suppliers

Availability of professional Workers

* High importance factors were rated between 5.5-6.0 on a 7-point scale; medium between 5.0-5.4; low were less than 5.0Source: McKinsey Financial Services Senior Executive Survey


Financial services leaders perceived New York as weakening

▪New York was still winning the war for talent, but London had superior momentum– Cost and quality of life favored New York– U.S. Immigration restrictions presented a challenge– Clustering of talent (e.g., hedge funds) had accelerated in London– Center for innovation was shifting to London

▪U.S. legal environment was seen as expensive and unpredictable– U.S. had high propensity toward legal action – Severity of U.S. system was a concern– Multi-tiered, highly complex U.S. legal system was perceived as unpredictable

▪Recent U.S. regulatory trends were damaging competitiveness– U.S. system perceived as complex, costly and lacking uniformity of enforcement– Regulatory system was overly reliant on rules and a system that had not adapted as the

capital markets had grown and changed– Other regulatory and legislative actions were hurting competitiveness (e.g., Sarbanes-

Oxley, implementation of Basel II and GAAP accounting)


0.30.2

0.20.10.100

-0.2-0.2

-0.3-0.3

-0.5-0.6

-0.6-0.6-0.7-0.7

-1.1

Among high importance factors, New York excelled in talent but underperformed in legal and regulatoryPerformance gap, rating scale

Importance*High

Medium

Low

Government and Regulators are Responsive to Business Needs

Fair and Predictable Legal Environment

Attractive Regulatory Environment

Reasonable Compensation Levels to Attract Quality Professional Workers

Close Geographic Proximity to Other Markets Customers and Suppliers

Reasonable Commercial Real Estate Costs

Favorable Corporate Tax Regime

Openness of Immigration Policy for Students and Skilled Workers

Workday Overlaps with Foreign Markets Suppliers

Openness of Market to Foreign Companies

Low Health Care Costs

Deep and Liquid Markets

High Quality Transportation Infrastructure

Availability of Professional Workers

High Quality of Life (Arts, Culture, Education, etc.)

Low All-In Cost to Raise Capital

Effective and Efficient National Security

Availability and Affordability of Technical and Administrative Personnel

* High importance factors were rated between 5.5-6.0 on a 7-point scale; medium between 5.0-5.4; low were less than 5.0Source: McKinsey Financial Services Senior Executive Survey


London was seen as a dramatically better legal environment,especially as it relates to propensity toward legal actionRanking by response, percent

Source: McKinsey Financial Services Senior Executive Survey

Which legal environment is more business-friendly?

US/New York City is much betterUS/New York City is somewhat better

About the same

UK/London is somewhat better

UK/London is much better

Propensitytoward legalaction

Predictability oflegal outcome

Fairness oflegal process

20

38

25

125

38

38

8

133

43

31

12

113


The U.S. regulatory regime is complex and fragmented

Primary/secondaryfunctionalregulator

Nationalbank

Statebank

Federalsavingsbank

Insurancecompany

Securitiesbroker/dealer

Otherfinancialcompanies

Consolidatedregulator Financial Holding Co.

▪ Federal Reserve or Office of Thrift Supervision

▪ SEC

Foreign branch Foreign branch Limited foreign branch

▪ OCC▪ Host country

regulator

▪ Federal Reserve

▪ Host country regulator

▪ OTS▪ Host country

regulator

Litigation Federal state

▪ 50 State insurance commissioners plus DC and PR

▪ NASD▪ SEC▪ CFTC▪ State securities

regulators

▪ Federal Reserve

▪ State licensing(if needed)

▪ U.S. Treasury for some products

▪ OCC ▪ FDIC

▪ State bank commissioner

▪ FDIC and/or▪ Federal

Reserve

▪ OTS▪ FDIC

ILLUSTRATIVE


UK was preferred across many regulatory dimensions but most so for cost and simplicity of regulationsRanking by response, percent

Source: McKinsey Financial Services Senior Executive Survey

Which regulatory environment is more business-friendly?

US is much better

US is somewhat better

About the same

UK is somewhat better

UK is much better

Rules inspireinvestorconfidence

Clarity of rules

Fairnessof rules

Uniformityof regulatoryenforcement

Simplicity ofregulatorysystemstructure

Cost ofongoingcompliance

45

23

2

26

4

31

35

19

132

33

34

14

16

3

42

32

12

131

45

32

8

132

43

31

7

14

5


Bloomberg-Schumer Report outlined a national and local agenda to increase NY’s and U.S.’ financial services competitiveness

Critically important near-term issues▪Provide clearer guidance on SOX implementation▪ Implement securities litigation reform▪Develop a shared financial sector vision and guiding principles to set

strategic direction led by President’s Working Group

Initiatives to enhance U.S. competitiveness▪Ease restriction on skilled non-U.S. professional workers▪Recognize IFRS now without reconciliation and promote faster

convergence of international standards▪Protect U.S. competitiveness under implementation of Basel II

Important long-term initiatives▪Create independent, bipartisan National Commission on Financial

Markets Competitiveness▪Modernize financial charters

Public-private NYC venture focused exclusively on financial services

1

2

3

4






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3


U.S. at the center of financial services crisis

Source: McKinsey Global Capital Markets Revenue Pool

20

25

19

24

3026

38

46

45

53

6216

281

Western Europe

201009

305287

North America

Lat.Am., CEEMEA

115

87

12

104

60

11

91

22

1014

96

96

122

126

51

120

373

321

248

Non-Japan Asia

06

Japan

0807

11

15

2005

253

186

252

Projected revenue from 2006 – 10, Long Chill ScenarioGlobal, U.S.$ Billions

33 10

35 7

-28 20

-111

-14 1

1

CAGR*

2005-07 2007-10

7


Response to current market crisis will impact economies, consumers and financial services competitiveness

Likely to remain challenged in near-term

Early signs of returning

Appears to be already returning

2008 annualized*

Other CDOs

2005 2006

CDOs of ABS

2,659

Home equity

520

2,925

Credit cardAutosStudent loansCMBSCLOsOther ABSOther RMBS

-$2.4 Trillion2,296

230

437 27447203

2,106

253

299

Global structured product issuances$ Billions

Source: Dealogic; SIFMA; 2008 annualized based on monthly or quarterly data through June 2008


Real progress has been made but challenges remain

▪ Clearer leadership on competitiveness and common regulatory agenda– U.S. Treasury Department convened a blue ribbon panel on financial

competitiveness in the months after Bloomberg-Schumer and issued a Blueprint for a Stronger Regulatory Structure earlier this year

– The Treasury and the Federal Reserve have emerged with a de facto “right to lead”with Treasury leading coordination across regulators through the President’s Working Group and the Fed, in effect, the lead regulator

▪ Convergence of global governance and regulatory practices– SEC recognized international accounting standards (IFRS) – Federal banking agencies have agreed to harmonize implementation of Basel II

▪ Regulators working with private sector leadership to address market crises, e.g.,– New York Federal Reserve leading industry initiative around derivatives

infrastructure– President’s Working Group recognized Securities Industry and Financial Markets

Association, American Securitization Forum and European Securitization Forum’s joint effort supported by McKinsey to develop industry-led recommendations to restore confidence in market practices






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Questions for Korea

▪ How to build the equivalent leadership for building the financial services sector and alignment of all players?

▪ How to define a clear vision and roadmap for actions to be completed?

▪What are areas where Korea can win?

▪ How to focus the government system on delivery?

▪ How to leverage the leadership of the industry?

▪What methods exist to bring in expertise from outside Korea?

▪What is the “political case” for a strong Korean financial sector? Job creation? GDP?

▪ How to continue to make the country attractive for international talent? Companies?

Documents

McKinsey’s Study on New York’s Competitiveness as a ... Competitiveness as a Financial Center and Its Implications for Korea CONFIDENTIAL August 25, 2008 CONFIDENTIAL AND PROPRIETARY