2016 Latin America-U.S. Symposium on Building the Financial System of the 21st Century

Session 1 Capital Markets Development: Pension Fund Systems and Opportunities for Investment Funds

Pillars of Latin American Pension Systems Intergenerational solidarity – pay-as-you-go or subsidized Can include other welfare benefits Individual accounts (Chile, other Andean) Employer-based Public, SOE, or private Variations across countries

Pension System Sustainability Actuarial Longer lifespans, falling birth rates Informal economy How to include informal workers Movement in and out of formal sector Sufficiency of pensions Contribution rates Low wages

Pension Investment What assets? Driven by regulation, varies by country Expansion of asset classes: foreign, infrastructure, private equity, etc Room for hedging, especially forex Who manages? Professional managers Subcontracting a portion of funds Danger of politicized investment committees Capabilities and costs Risk management Costs may increase

Pension Governance How is accountability ensured? Professional management Regulation and government oversight How to ensure autonomy of regulators? Coordinating regulators Oversight boards – but membership can create problems Risks and returns Who chooses strategies and assets in funded plans? Who bears the risk? Are citizens prepared to accept consequences of risk? Infrastructure raises new risks and assessment challenge

Economic Effects Dangers of fiscalization of pensions Capital accumulation Funded vs PAYG (Pay as you go) Way to fund needed infrastructure investments Matches liability structure more closely Risk of political interference Capital market development Funded plans can invigorate capital markets Buy and hold strategies may cause secondary markets to lag Concentration can retard market development May increase management fees But scale is important for capabilities, compliance

Political Sustainability Citizens’ expectations exceed earned benefits Low wage base, insufficient years of contribution, investment returns Societal expectations of living standards Minimum solidarity pensions are at poverty level Windows of opportunity for change Economic challenges only increasing Harder in periods of low return Need to act before population structure ages

Session 2 Impact of G-20 Financial Regulation on Latin American Markets

Rationale driven by global crisis in developed world G-20 Agenda Main pillars Capital, liquidity, leverage Resolution framework Assessing risk Rationale driven by global crisis in developed world Prevent excess risks Eliminate Too Big to Fail (TBTF) Prevent taxpayer bailouts But perhaps fighting the last (developed country) war?

Global Effects Effects on banks and banking Broader effects Safer but more conservative Less global Increased costs of compliance Less competition Fewer loans, especially to SMEs Broader effects Shifting activity—and risk—to shadow banking & fintech Reduced credit provision Innovation more likely in less regulated sectors Do benefits outweigh costs?

Effects on Latin America Does G-20 agenda fit Latin America’s needs? US/EU model is one-size-fits-all Latin American supervision shielded region from global crisis Mexico, Brazil, Chile learned from their own crises in 1990s Latin America an early and enthusiastic adopter of new rules But have banks’ practices really changed? Increased compliance costs Crowds some SMEs and startups out of bank lending Some international banks withdrawing from region Derisking Costs outweigh benefits, especially in retail

What Regulations Does Latin America Really Need? Transparency and disclosure Audits Corporate governance Managing conflicts with controlling shareholders (especially SOEs) Corporate versus individual responsibility for violations Auditor liability Risk management Assessment and provisioning Preventing the next crisis Shadow banking and fintech

Potential Pitfalls Contagion Recent political developments US has weakened ability to respond to future crises Especially lender of last resort Lack of coordination could lead to ringfencing by regulators Recent political developments EU/Japan concerns re Basel III Trump administration Dodd-Frank—repeal or tweak? More constraints on Fed? Protectionism Impact on international cooperation, including FSB

UPCOMING EVENTS Europe-U.S. Symposium Frankfurt, Germany March 29-31, 2016 China – U.S. Symposium Armonk, NY May 18-20, 2017 To receive an invitation to other PIFS Symposia, or to recommend your colleagues for participation, please contact: James Shipton jshipton@law.harvard.edu, 617-496-7731