Surviving the Storm: Preparing for Recovery

Predicting the End of Recession

Dennis Turner, chief economist at HSBC, gave an overview of the UK economy. He described the coincidence of the credit crunch and the economy as two express trains on collision course. He pointed out that the consumer spending that has boosted the economy in place of investment and export during the boom years is “the wrong sort of growth” – but is now necessary to pull the country out of recession. Inevitably though, there will be a large consumer spending deficit in 2009, Turner said. Despite this, he predicted that the economy would see an end to economic decline by the end of 2009, with a tentative recovery in 2010. “I see a light at the end of the tunnel – though some say it is the light of the approaching express train. In my view, we should hope for the first and prepare for the second.”

Roy Leighton, chairman of the Financial Services Skills Council, injected a note of optimism, noting areas where banking is still flourishing, including general insurance, foreign exchange and on-exchange derivatives. There are “buckets of liquidity” in Islamic banking, he said, while the weakness of sterling was a “massive shot in the arm” for British manufacturing. But John McFall, chairman of the Treasury Select Committee, rebutted suggestions of a recovery in the short-term. “I don’t subscribe to the ‘green shoots’ theory at all,” he said, pointing out that US banks are still approaching the Federal Reserve for capital. “There is still a long way to go,” he added. He urged national banks to cooperate with each other in the absence of a strong regulatory lead by the EU. McFall also called for more scrutiny of credit rating agencies, pointing out that Northern Rock enjoyed a top rating until its collapse.

Overhauling the Risk Function

Picking up the recurring theme preventing organisational failure was Hector Sants, chief executive of the Financial Services Authority (FSA). He called for risk managers to be brought in at board level to act as a check against the type of ‘cavalier attitudes’ that have been present in financial services. “We can no longer rely on the judgment of senior managers,” he said. He said that as part of a programme of general regulatory reform, the FSA would address the level of remuneration and support available from the regulator to non-executive directors to introduce “a different calibre of non-executive directors with sector knowledge as well as business and interpersonal skills. It will also bring in a new training and competence programme for FSA enforcement representatives.

The role of the risk manager was also addressed in a roundtable led by Andrew Hilton, director of the Centre for the Study of Financial Innovation. The discussion examined how the risk function will have to change in the wake of the credit crunch, and whether the fault of the failures lay with flawed risk analysis models or the way firmed acted on the information thrown up by the checks and controls that were put in place. John Tattersall, a partner at PricewaterhouseCoopers said a fall into the trap of “silo thinking” was largely responsible, as well as the lack of risk managers with enough of an overview of banks’ processes. “The models and algorithms still work, but not the assumption on which they were based,” he said.

On the technology side, the outlook for multilateral trading facilities was examined by Bourse Consult’s Lyndon Jones, who warned that the whole of the OTC market is likely to be regulated in the wake of the failure of collateralised debt obligations. “Credit default swaps and OTC derivatives shouldn’t be punished by heavy regulation… but the regulator has the attitude that something must be done,” he said.

The Financial Times’ John Plender and Bronwen Maddox, chief foreign commentator at The Times debated “Is the financial sector irretrievably broken?” Plender said the outlook for the sector is currently mixed, adding: “I don’t believe that the G20 addresses the policy agenda in any meaningful way.” He said identifying systemically important banks is key to preventing a repeat of the current crisis. Maddox said that the situation had already improved, adding that she believed the markets had already bottomed out, although the UK economy still has a long way to go. “It is not as apocalyptic as it seemed before,” she added. However, she sounded a note of caution on the situation in central and Eastern Europe, where she believes the bottom of the market is still unknown. “Some of these countries are wondering about their place in Europe now,” she added.

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