March 2009 Future developments in Global Finance and the implications for the industry Paola Subacchi, Research Director, Chatham House

The changing nature of the financial sector – who will carry the risks? Financial services – growth in intermediaries carrying very low balance sheet risk, low threat to national economy and security But which institutions will take on balance sheet risks? Which countries can afford this? Risk aversion has driven savings into secure bank deposits and government bonds Investors and banks are afraid to lend Currently governments are taking on an ever greater role as lenders of last resort 2

Risk averse High growth and inflation Low growth and inflation Investment trends: exodus from risk creates global asset imbalance Risk taking The US: “The Anglo Saxon Model” US financial wealth was $60-65trn, over 4x GDP Under 15% of household wealth in bank deposits, as much as 50% in equities and corporate bonds JAPAN: Cash Wealth $30 trn Nearly 55% of household wealth in bank deposits The EU: “Balanced Portfolio” Total financial wealth similar to US But household wealth held in equities lower

Rising government role in finance: Total financial wealth used to be about $200 trillion, roughly a third each in cash/bank deposits, bonds and equities Now total wealth about $160 trillion – equity share down to about 20% Cash/bank deposits almost half total wealth Government has increased its presence – now government bonds are about 20% of total wealth plus it has a large role in the banking sector and in guarantees for corporate debt 4

Coordinated national actions seen so far: Monetary policy coordination – flushing liquidity through the system and cutting official rates to near zero Bank bail outs and guarantees for loans – toxic asset “dump” to come? Fiscal stimulus packages – agreed at G20 in November 2008, possibly more? “Unconventional monetary policy” – such quantitative easing “QE” – notice slightly differing ways of implementing this Extra resources for international agencies 5

International action as global capital flows have plunged – need to raise IMF funds RESERVES Just in case IMF Increase in funds over last decade has been “lite” Need to double fund now just to catch up with past trend Add $200 billion Allowing for crisis, need more than this Add $ billion TYPICAL AID Conditionality IMF programs “LITE” AID Less supervision

Policy aims: restarting growth and lending while defining a more secure system AIMS Secure the global and local financial system Restart lending and economic growth Improve long-term outlook and stability Central Banks Low official rates Supplying liquidity “QE” Government Treasury Department or Finance Ministry Easy fiscal policy Banking and Securities Regulation Modifying rules Tougher supervision

Changes in the Global Governance System Governments From G7-G8 to G20 FATF Money laundering IMF World Bank More money, more powers Financial Stability Forum More members WTO Trade Accounting and Auditing BIS (Central Banks) BASEL (Banking) Less pro-cyclical rules Modified “mark to market” IOSCO (Securities) IAIS (Insurance) RATING AGENCIES To be regulated

Implications: Stiff competition in financial services, drive for efficiency and less risk-exposure Greater supervision and regulation More emphasis on professional qualifications and licensing, reporting, oversight But will risk takers be encouraged to lend - or feel punished by the new costs and rules? Too harsh implies governments will have to continue shouldering the risks Too lax a regime and crises will recur But it cannot be left in uncertain limbo! 9

Is a way forward emerging? Global impacts, global responsibilities; although tension between national prerogatives and cross-border regulation New focus on systemic risk – how much liquidity in system as a whole? Move to G20 to gain legitimacy, improve global cooperation and governance Strengthened institutions and powers? IMF, World Bank, MDB funds must continue to rise to meet the scale of global challenge 10

Questions for the future Will this be enough to regenerate confidence and private sector lending? Who takes on corporate debt? What impact on the financial sector in the longer run?

12 THANK YOU