REDEFINING GLOBAL FINANCE INTERNATIONAL TRENDS & LOCAL CONSEQUENSES

Idar Kreutzer

Managing Director Finance Norway

BI Centre for Asset Pricing Research

23.09.2014

“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 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

6

• 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

International trends

1. ”The rise of the consumer”

7

• 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

International trends

2. 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”

8

• 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

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

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

2014-0730,000

31,000

32,000

33,000

34,000

35,000 Reduction of close to 4000 bn. euro

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

Med særnorsk Basel I-gulv

Med Basel I-gulv etter EUs regler

0 %

2 %

4 %

6 %

8 %

10 %

12 %

14 %

16 %

18 %

20 %

Tidligere minstekrav

1. juli 2013 1. juli 2014 1. juli 2015 1. juli 20160

2

4

6

8

10

12

14

16

18

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

1 211

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

13

• 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

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.

2010

M05

2010

M07

2010

M09

2010

M11

2011

M01

2011

M03

2011

M05

2011

M07

2011

M09

2011

M11

2012

M01

2012

M03

2012

M05

2012

M07

2012

M09

2012

M11

2013

M01

2013

M03

2013

M05

2013

M07

2013

M09

2013

M11

2014

M01

2014

M03

2014

M05

2014

M07

-10 %

-5 %

0 %

5 %

10 %

15 %

20 %

25 %

30 %

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

15

• Small and diversified

The Norwegian banking sector

Estlan

d

Roman

ia

Slova

kia

Lita

uen

Ungar

n

Slove

nia

Norge

Hella

s

Fastl

ands

-Nor

ge

Irlan

d

Østerri

ke

Fran

krike

Spani

a

Sverig

e

Kypro

s0

100

200

300

400

500

600

700

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

16

-100 % -50 % 0 % 50 % 100 % 150 % 200 %

-100 %

-50 %

0 %

50 %

100 %

150 %

200 %

250 %

300 %

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)

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

1990

K119

90K4

1991

K319

92K2

1993

K119

93K4

1994

K319

95K2

1996

K119

96K4

1997

K319

98K2

1999

K119

99K4

2000

K320

01K2

2002

K120

02K4

2003

K320

04K2

2005

K120

05K4

2006

K320

07K2

2008

K120

08K4

2009

K320

10K2

2011

K120

11K4

2012

K320

13K2

2014

K1

0

1

2

3

4

5

6

Banks Banks and credit institutions

Interest rate margins. Banks and credit institutions. 1990Q1-2014Q2Cost/income for Norwegian banks

Large Medium-sized Small 1H.2013 1H.2014

Perc

ent

Source: The Norwegian FSA

18

• 137 banks operating in Norway• ”Finansportalen” makes it easy to compare prices.

Transparent

Example on search results: Mortgage loan of 2 Mill. NOK for 25 years. 80 % LTV

178 offers!

19

Responsible lending and higher solvency

19871989

19911993

19951997

19992001

20032005

20072009

20112013

0

1

2

3

4

5

6

7

8

9

Business segment Retail market

Perc

ent

• Losses on lending. 1987-2013 • Development in capital adequacy. Norwegian banks.

Perc

ent

CET1

CET1 without the Basel-1 floor (NO.version)Leverage ratio

20

• 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

Liable and trustworthy

21

Requirements for future businesses

Environmentally robust

Global

Customer-driven

Knowledge-based

REDEFINING GLOBAL FINANCE INTERNATIONAL TRENDS & LOCAL CONSEQUENSES

Idar Kreutzer

Managing Director Finance Norway

BI Centre for Asset Pricing Research

23.09.2014