REDEFINING GLOBAL FINANCE REDEFINING GLOBAL FINANCE INTERNATIONAL TRENDS & LOCAL CONSEQUENSES Idar Kreutzer Managing Director Finance Norway BI Centre for Asset Pricing Research

“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 challenges 1. 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 challenges 2. 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 challenges 3. 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 trends 1. ”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 trends 2. New entrants “…full-service banks, as a group, could lose about 35 percent of their market share by 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 insurance 8 International trends 3. 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 Reduction of close to 4000 bn. euro Source: Financial Times Total aggregated assets for all banks in the 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 growthPremature implementation of new requirements 11

Different rules when calculating RWA 12 NO. risk weights: mortgage: 20 percent, businesses: 55 percent SE. risk weights: mortgage: 7 percent, businesses: 40 percent Source: A large Norwegian bank 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. MarchAprilMay June SalesHousing starts Jan.Feb. Credit to non-financial corporations. Twelve-month change. 2010M M07

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 Source: The Norwegian Bank’s Guarantee Fund, Nordea *DNB and Nordea are excluded from the figure but included in the average As of 12/31/13 – Total assets in DNB were bn. NOK, Nordea 523 bn. NOK Source: The Riksbank, The Norwegian FSA, Statistics Norway

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 Interest rate margins. Banks and credit institutions. 1990Q1-2014Q2Cost/income for Norwegian banks LargeMedium-sizedSmall 1H H.2014 Percent 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 Losses on lending Development in capital adequacy. Norwegian banks. Percent 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 authorized advisers 20 Liable and trustworthy

21 Requirements for future businesses Environmentally robust Global Customer-driven Knowledge-based

REDEFINING GLOBAL FINANCE REDEFINING GLOBAL FINANCE INTERNATIONAL TRENDS & LOCAL CONSEQUENSES Idar Kreutzer Managing Director Finance Norway BI Centre for Asset Pricing Research