Bankers’ Dilemmas: The Global Economy, Basel III and Banking for the Good of Society

Bringing together more than 200 transaction bankers to discuss how they can better work together may sound a bit like herding cats, but the two-day BAFT-IFSA global annual conference, held in London on 23-24 January, was fruitful – mainly due to the frankness and participation of attendees. The backdrop of the current economic situation, specifically Standard and Poor’s (S&P) downgrading of France and eight other eurozone countries, brought home the fact that the pressure is on – even in the safe, stable and almost hidden world of transaction banking.

Jeremy Wilson, chairman, BAFT-IFSA board of directors and co-chair Europe Council, whose day job is vice chairman, Barclays Corporate, summed up the two days: “The transaction banking industry, similar to other industries, is under pressure in this economic climate – but it is still an attractive business. The issues that we are grappling with are how can we continue to work well in the new regulatory environment and how the industry can convey our knowledge to help regulators understand the critical complexities – many tested over centuries – of our business and help them to regulate it effectively?”

It was apparent that those in the room considered themselves to be the ‘good guys’ of banking, due to the facilitating role transaction banking plays in the global economy. More than one speaker reminded the audience that global trade has lifted billions out of poverty, effectively making the modern world ‘go round’. Many called this banking sector a “force of cohesion”.

In a world sceptical of bankers, transaction banking is truly the acceptable face of the industry. But this sector is still painfully aware of the need to promote trust and engage with the customer. One speaker said that the new question being asked is whether or not the bank will be around. The idea of ‘too big to fail’ needs be changed to ‘too good to fail’, according to one panellist.

Looking to the future, the idea of one global bank that could be everything to everyone was under scrutiny. A few speakers put forward the hypothesis that the next generation of banks won’t be in every country in the future. To survive these stressful times, banks need to concentrate on competitive advantage, and partnership banking; in this sense correspondent banking and diverse collaboration is the wave of the future – not bigger banks.

The main aim of the conference, operating under the Chatham House Rule, revolved around education, networking and specific take-aways to be better able to run the business. The two days tackled such pressing issues as the continuing global economic turbulence and incoming regulatory changes, including the dampening effect that Basel III may have on global trade flows. Risk was also top of mind for attendees.

Global Economy – Continuing Turbulence

The situation in the eurozone was one of the main threads of the conference. It is crystal clear that the world cannot afford another banking crisis. However, one cannot wish away the situation that we are in – and it is obvious that the East is doing much better than the West in this current crisis. Asia has not decoupled from the West, but is better insulated. It has diversified growth, through resilient domestic demand and south-to-south trade flows. In addition, it has room for manoeuvre in terms of economic and fiscal policymaking.

Refreshingly, the panel discussion examining the global economy tried to take a positive view of the turbulent situation. One panellist looked to the European periphery with hope, as these countries are not in a slump but only a recession. The core, such as Germany, is in a “pause” and is expected to grow again by the end of year. According to an expert, the US may surprise the rest of the world with results on the high side in 2013. This is because US consumer spend held up despite weakness in consumer confidence, business and the markets. In addition, industrial production is still growing, although modest, which means a double dip recession is not predicted.

Growth in Latin America and Africa remains strong. The former will benefit from high commodity prices and increasing domestic demand, which is expected to grow over the next two years. However, the expert expects that 2012 will see an economic slowdown. Africa will also see domestic opportunities, particularly in the consumer market.

The attendees queried panellists about the biggest risks. “A hard landing in China” was one answer put forward. Some postulated that serious inflation could be a problem down the road in Europe. Other panellists identified challenges around food and commodity prices, while Middle Eastern schisms in Iraq and Syria may reverberate around the whole region. The biggest concern raised was the possibility of another synchronous downturn, which would be “devastating”.

Basel III and Trade Finance

What keeps transaction bankers awake at night? New, incoming regulations seem to continually top the worry list, maybe because not all the details have been worked out by the regulators and the flavour of the regulation depends on the region. In addition, there is a lack of consideration/appreciation/forgiveness on the side of regulators in terms of cost to be borne by the industry.

Although this situation can be challenging, it also opens up an opportunity for a trade body such as BAFT-IFSA to give feedback to the regulatory bodies as to how the proposed regulations will affect their business. This opportunity has been seized with both hands, particularly with regards to the impact Basel III regulations will have on trade finance, which sits alongside payments as the heart of transaction banking. In 2011 BAFT-IFSA gathered data from across the industry to illustrate the low-risk nature of trade finance products and the unintended impact of the increase in capital requirements. Ongoing proactive industry engagement by the likes of BAFT-IFSA, International Chamber of Commerce (ICC), British Bankers’ Association (BBA), World Trade Organisation (WTO) and the World Bank has resulted in the Basel Committee on Banking Supervision adopting two technical changes to the Basel regulatory capital adequacy framework related to the treatment of trade finance that will help promote trade with low income countries in October 2011.

Another area of interest for industry co-operation that was raised at the conference is around intraday liquidity. Large swings are reasonable but one panellist suggested that there is a need to drill down into data to analyse what is going on – or some costs will be associated with overdrawing.

Banking in the Service of Society

With participants at the World Economic Forum, meeting in Davos the same week, questioning the viability of capitalism, the BAFT-IFSA attendees highlighted the positive aspects of financing world trade including wealth creation, job creation and lifting millions around the world out of poverty. In addition, many banks are committed to social investment and charity work.

But there was also a significant amount of ‘soul searching’ at this conference. Many panellists and participants talked about the need to reconnect financial business with the moral fibre of society. As Bob Diamond, Barclays’ chief executive officer (CEO), has argued in an opinion piece in the Guardian, banks need to become better citizens. They need to engage with shareholders and really assess risk and reward.

An interesting point raised on the first day of the conference was the inherent contradiction in the way many banks operate on a global level yet die locally. Global banks are tied to and affected by sovereign ratings, yet their business spans the world. It comes back to the ‘too big to fail’ argument, where some banks are too large for the national tax payer. One idea put forward was the need create a global authority with global taxes and a global winding up regime.

Conclusion

The transaction bankers sitting in the room expressed the fundamental strength of this single pillar of banking and felt they were among friends with a common purpose. But they are well aware of the massive change waiting in the wings to revolutionise their business model.

Interestingly, one of the most popular sessions explored the world of mobile banking and social media. Although the two case studies focused mainly on the retail banking sector, the opportunities for innovation opens up a new paradigm in banking and soon this will spill over into the corporate banking space.

Social media engages users and encourages collaboration in a way the banking industry has never seen before. Organisations such as BAFT-IFSA will need to be at the forefront of this encouraging trend.

Kathleen Gowin, interim chief executive officer (CEO) and president, BAFT-IFSA, encourages interested readers to join BAFT-IFSA to add their voices and keep the momentum going.

56 views

Related reading