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