Bara Presentatie 200409


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Bara Presentatie 200409

  1. 1. Financial Markets Advisory Bankers’ Association for Risk Managers Indonesia Risk Forum March 18, 2009 Jakarta What is ahead of us? Economic pressure or time to pick up?
  2. 2. Disclaimer Disclaimer This presentation was prepared by FMA Group exclusively for the benefit and internal use of its identified (potential) clients. This presentation is incomplete without reference to, and should be viewed solely in conjunction with, the verbal briefing provided by the FMA Group .The presentation is proprietary to the FMA Group and may not be disclosed to any third party or used for any other purpose without the prior written consent of the FMA Group. The information in this presentation reflects prevailing conditions and our views as of this date, which are accordingly subject to change. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us or which was otherwise reviewed by us. In addition, our analyses are not and do not purport to be appraisals of the assets, stock or business of our clients. Even when this presentation contains a kind of appraisal, it should be considered preliminary, suitable only for the purpose described herein and not be disclosed or otherwise used without the prior written consent of the FMA Group. The information in this presentation does not take into account the effects of a possible transaction or transactions involving an actual or potential change of control, which may have significant valuation and other effects.
  3. 3. Agenda <ul><li>Credit Crisis ; Causes </li></ul><ul><li>2. Capital & Accounting Standards Banks </li></ul><ul><li>3. Comparison 1929 / 2007 </li></ul><ul><li>4. The mechanism of thread </li></ul><ul><li>5. What lies ahead? </li></ul><ul><li>6 Measures for prevention </li></ul><ul><li>7. Crisis & Risk management </li></ul>
  4. 4. Credit Crisis 1 CAUSES
  5. 5. Credit Crunch – How could it happen? <ul><li>Change in regulatory environment financial Markets </li></ul><ul><ul><li>Less regulatory pressure as from 1980 onwards </li></ul></ul><ul><li>After IT (internet) collapse late nineties </li></ul><ul><ul><li>structural low interest rates </li></ul></ul><ul><li>Booming markets and economies after 2002 </li></ul><ul><li>Increase in risk apetite banks </li></ul><ul><li>More complex products on the market </li></ul><ul><li>Increased globalization and cross border activities </li></ul><ul><li>Result : </li></ul><ul><ul><li>Growing hidden economic bubbles </li></ul></ul><ul><ul><li>Incorrect risk pricing </li></ul></ul><ul><li>Early 2007 first signs </li></ul><ul><li>Financial Sector </li></ul><ul><li>Banking investments </li></ul><ul><li>Sub prime market(s) </li></ul>Historical Overview
  6. 6. Credit Crunch – Bubbles examples <ul><li>Real Estate markets (US, UK, Ireland, Spain) </li></ul><ul><li>Sub prime mortgages </li></ul><ul><li>Commodity markets </li></ul><ul><li>Markets for corporate bonds, High Yield </li></ul><ul><li>Stock markets in emerging markets </li></ul><ul><li>Iceland, Hungary, Baltic States etc. </li></ul><ul><li>UK soccer clubs </li></ul><ul><li>Early 2007 first signs </li></ul><ul><li>Financial Sector </li></ul><ul><li>Banking investments </li></ul><ul><li>Sub prime market(s) </li></ul>Historical Overview
  7. 7. Oil USD PER BARREL Bron: Bloomberg Historical Overview Bubble Correction
  8. 8. Credit Crunch – Causes <ul><li>Origination from the US </li></ul><ul><li>Mortgage lending to low income and vulnerable groups </li></ul><ul><li>Role of Rating Agencies re. Subprime investment products </li></ul><ul><li>Role of BoD of Banks & personal financial greed </li></ul><ul><li>Quality of the supervision on banks & financial institutions </li></ul><ul><li>Insufficient supervision and control by regulatory bodies </li></ul><ul><li>Insufficient cross border regulations and accounting standards (IFRS) </li></ul><ul><li>Slow reaction of US government at first signs of crisis in US </li></ul><ul><li>Lehman Brothers default </li></ul><ul><li>Early 2007 first signs </li></ul><ul><li>Financial Sector </li></ul><ul><li>Banking investments </li></ul><ul><li>Sub prime market(s) </li></ul>Historical Overview
  9. 9. Capital & Accounting Standards 2
  10. 10. Credit Crunch – Capital & Accounting Standards Banks <ul><li>Basel I capital accord 1988 </li></ul><ul><ul><li>8% capital reserve for loans granted (Tier 1 ratio) </li></ul></ul><ul><ul><li>No risk weighting (Clients, products) </li></ul></ul><ul><li>Basel II capital accord 2007 </li></ul><ul><ul><li>8% capital reserve for loans granted (Tier 1 ratio) </li></ul></ul><ul><ul><li>Risk weighted </li></ul></ul><ul><ul><li>Low risk clients : 2,5% capital reserve </li></ul></ul><ul><ul><li>High risk clients : 16% capital reserve </li></ul></ul><ul><ul><li>More flexibility </li></ul></ul><ul><li>Basel I & II </li></ul><ul><li>Financial Sector </li></ul><ul><li>IFRS </li></ul>Historical Overview
  11. 11. Credit Crunch – Capital & Accounting Standards Banks <ul><li>IFRS </li></ul><ul><ul><li>Key : valuation assets against market value </li></ul></ul><ul><ul><li>Traditional standards : valuation against (historical) cost price </li></ul></ul><ul><li>Market valuation: </li></ul><ul><ul><li>High frequency (3 months) reporting </li></ul></ul><ul><ul><li>Volatility markets </li></ul></ul><ul><ul><li>Relation between stock value and real economic value </li></ul></ul><ul><li>Result </li></ul><ul><ul><li>Massive write offs on capital due to revaluation </li></ul></ul><ul><ul><li>Unrest in the (global) financial system </li></ul></ul><ul><ul><li>Profitability banks under pressure </li></ul></ul><ul><ul><li>Decreased lending volumes </li></ul></ul><ul><li>Basel I & II </li></ul><ul><li>Financial Sector </li></ul><ul><li>IFRS </li></ul>Historical Overview
  12. 12. Comparison 1929 / 2007 3
  13. 13. Credit Crunch – comparison <ul><li>Similarities </li></ul><ul><li>1929 2007 </li></ul><ul><ul><li>Bubbles burst Y Y </li></ul></ul><ul><ul><li>Massive loss of capital write offs Y Y </li></ul></ul><ul><ul><li>(Potential) defaults of Banks Y Y </li></ul></ul><ul><li>Compare with earlier crisis 1929 </li></ul><ul><li>The big depression </li></ul><ul><li>World wide effects </li></ul>1929 – NYSE crash
  14. 14. Credit Crunch – comparison <ul><li>Differences </li></ul>1929 – NYSE crash 1929 2007 Agriculture & Industry sector Service Industry & Government Most commodities & Stocks Real Estate & Mortgages Massive Bank defaults Massive support to keep banks alive Differences in monetary policies Assertive reaction & policies by national governments Balanced budget Budget differences allowed Protectionism International alignment
  15. 15. Credit Crunch – Result after 1929 crash 1929 – NYSE crash <ul><li>GDP : -30% </li></ul><ul><li>Unemploymency : 2% to 25% </li></ul><ul><li>Industrial production : -50% </li></ul><ul><li>Oil - en Coton price : -80% </li></ul><ul><li>Consumer price level : -25% </li></ul><ul><li>Real Estate price level : -30% </li></ul><ul><li>Stock prices : -80% </li></ul><ul><li>World Trade volume : -60% </li></ul>
  16. 16. Mechanism of Threat 4
  17. 17. Credit Crunch – The mechanism of thread Write Off Loans (Mortgages etc.) Weakening Bank Balance sheet Less Lending Lower economic growth More corporate defaults
  18. 18. Measures for Prevention 5
  19. 19. Credit Crunch – Measures for prevention - 1 - Improvements <ul><li>Aim for reduction of debts. </li></ul><ul><ul><li>Consumer finance </li></ul></ul><ul><ul><li>Corporate lending </li></ul></ul><ul><ul><li>Improve corporate capital position </li></ul></ul><ul><ul><li>Reduce (national) budget deficit and aim for budget surplus (1%) </li></ul></ul><ul><ul><li>Set up of national credit monitoring institutes </li></ul></ul><ul><li>Improve financial professionalism on all levels but specifically on BoD and Supervisory Board level for banks. </li></ul><ul><li>Improve supervision by Supervisory Boards. To be reflected in legislation i.s.o. codes of conduct. </li></ul><ul><li>Review reward & incentive schemes. Include long term targets and pay out after three to five years. </li></ul><ul><li>Debt reduction </li></ul><ul><li>Improve professionalism </li></ul><ul><li>Review supervision </li></ul><ul><li>Review reard & incentive schemes </li></ul>
  20. 20. Credit Crunch – Measures for prevention - 2 - Improvements <ul><li>Increase the capital requirements for banks (Tier 1) </li></ul><ul><li>Review Basel II capital accord </li></ul><ul><ul><li>Development Basel III ; Tier 1 Capital to 10 – 15 % </li></ul></ul><ul><li>Review international accounting standards IFRS </li></ul><ul><ul><li>Return to traditional accounting standards is an option </li></ul></ul><ul><li>Investigate possibilities for establishment of cross border supervisory & regulatory bodies for adequate supervision of the international financial sector. </li></ul><ul><li>Introduce legal frameworks in which rating agencies need to comply with quality and transparency requirements </li></ul><ul><li>Review capital requirements for banks </li></ul><ul><li>Accounting standards </li></ul><ul><li>Complience rating agencies </li></ul>
  21. 21. What lies ahead? 6
  22. 22. Credit Crunch – Trends in Banking - Past What’s new? <ul><li>Diversification: </li></ul><ul><li> </li></ul><ul><ul><li>businesses, </li></ul></ul><ul><ul><li>markets, </li></ul></ul><ul><ul><li>products </li></ul></ul><ul><li>Size : change from balance sheet to market cap </li></ul><ul><li>ROE : main driver (shareholders value) </li></ul>
  23. 23. Credit Crunch – Macro Economy : What lies ahead? G20 Meeting Nov. 2008 <ul><li>International alignment: </li></ul><ul><ul><li>Stimulate national economies with tax relief </li></ul></ul><ul><ul><li>Support free world trade. No new import taxes allowed for one year </li></ul></ul><ul><ul><li>Improved cross border supervision by regulators </li></ul></ul><ul><ul><li>Reward & Incentive packages will be limited </li></ul></ul><ul><ul><li>Better control on complex financial products </li></ul></ul><ul><ul><li>Increased influence & authority of the IMF and involvement in cross border supervision on the financial sector </li></ul></ul><ul><li>Follow up meeting scheduled : April 2009 </li></ul>
  24. 24. Credit Crunch – Crisis and Risk Management What lies ahead? Developments Real Economy. Producers’ confidence
  25. 25. Credit Crunch – Crisis and Risk Management What lies ahead? Developments Industrial Production (% yoy) USA -10,0 Japan -30,8 Eurozone -12,0 Netherlands -13,3 Brazil -15,5 Russia -15,9 India -2,0 China +5,7 PM: Taiwan -43,1
  26. 26. Credit Crunch – Crisis and Risk Management What lies ahead? Developments Money Market Interest rates
  27. 27. Crisis & Risk Management 7
  28. 28. Credit Crunch – Crisis and Risk Management What’s new? <ul><li>Risk Management is of all times </li></ul><ul><li>Key elements of Risk management: </li></ul><ul><ul><li>Corporate business strategy </li></ul></ul><ul><ul><li>Organization Model </li></ul></ul><ul><ul><li>Corporate Governance </li></ul></ul><ul><ul><li>Technology & MIS (measurement) </li></ul></ul><ul><ul><li>Expansion Risk management i.e. </li></ul></ul><ul><ul><ul><li>Credit Risk </li></ul></ul></ul><ul><ul><ul><li>Market Risk </li></ul></ul></ul><ul><ul><ul><li>Operational Risk </li></ul></ul></ul><ul><ul><li>Increased investment </li></ul></ul>
  29. 29. Credit Crunch – Crisis and Risk Management What’s new? <ul><li>Risk Management </li></ul><ul><ul><li>Corporate business strategy </li></ul></ul><ul><ul><li>Reverse diversification </li></ul></ul><ul><ul><li>Back to core banking business </li></ul></ul><ul><ul><li>Better alignment business and risk </li></ul></ul><ul><ul><li>Enhanced Capital Management </li></ul></ul><ul><ul><li>Separate distinct lines of business risk driven </li></ul></ul><ul><ul><li>(eg. Commercial banking , Consumer Banking and Investment Banking) </li></ul></ul><ul><ul><li>Client focus and segmentation </li></ul></ul>
  30. 30. Credit Crunch – Crisis and Risk Management What’s new? <ul><li>Risk Management </li></ul><ul><ul><li>Organization Model </li></ul></ul><ul><ul><ul><li>Independent lines of business </li></ul></ul></ul><ul><ul><ul><li>Product and / or Client Driven approach </li></ul></ul></ul><ul><ul><ul><li>Centralized Decentralized Risk management? </li></ul></ul></ul>
  31. 31. Credit Crunch – Crisis and Risk Management What’s new? <ul><li>Risk Management </li></ul><ul><ul><li>Corporate Governance </li></ul></ul><ul><ul><ul><li>Chief Risk Officer on (executive) board level with veto right </li></ul></ul></ul><ul><ul><ul><li>Line Management will be responsible for (operational) Risk management </li></ul></ul></ul><ul><ul><ul><li>Enhance risk based business control by creating business and risk partnership </li></ul></ul></ul><ul><ul><ul><li>Imbedding operational risk driven criteria in business decisions </li></ul></ul></ul>
  32. 32. Credit Crunch – Crisis and Risk Management What’s new? <ul><li>Risk Management </li></ul><ul><ul><li>Technology & MIS </li></ul></ul><ul><ul><ul><li>Measurement of Risks </li></ul></ul></ul><ul><ul><ul><li>Rating models </li></ul></ul></ul><ul><ul><ul><li>Data Integrity </li></ul></ul></ul><ul><ul><ul><li>Processes and controls </li></ul></ul></ul><ul><ul><ul><li>E-business developments </li></ul></ul></ul><ul><ul><ul><li>Dedicated (IT) resources for Risk MIS </li></ul></ul></ul>
  33. 33. Credit Crunch – Crisis and Risk Management What’s new? <ul><li>Risk Management </li></ul><ul><ul><li>External </li></ul></ul><ul><ul><ul><li>Flood of regulatory changes to be expected </li></ul></ul></ul><ul><ul><ul><li>Cross border alignment of supervisory bodies </li></ul></ul></ul><ul><ul><ul><li>Remuneration trends & policies </li></ul></ul></ul><ul><ul><ul><li>Increased authority re. capital requirements for cross border banks for supra national bodies like IMF </li></ul></ul></ul><ul><ul><ul><li>Increased Professionalism for Risk Professionals by international and/or local recognized certification programs </li></ul></ul></ul>
  34. 34. What is ahead of Us? Economic pressure or time to pick up? <ul><li>Conclusion </li></ul><ul><li>Economic recession inevitable. </li></ul><ul><li>National governments and supra national organizations very actively involved in monitoring and action taking like emergency loans to development countries, bail out programs for banks etc. </li></ul><ul><li>Interest rates expected to continue to be under pressure </li></ul><ul><li>Real recovery only possible after thorough clean up of the banks’ balance sheets (with the help of governments) </li></ul><ul><li>Risk management </li></ul><ul><ul><li>Increased level of regulations and legislation </li></ul></ul><ul><ul><li>New controls, accounting standards </li></ul></ul><ul><ul><li>Review traditional (Risk) Governance models </li></ul></ul><ul><li>High costs anticipated for the financial sector to follow and comply </li></ul>
  35. 35. What is ahead of Us? Economic pressure or time to pick up? <ul><li>However: </li></ul><ul><li>Unprecedented stimulus packages to support economies around the world </li></ul><ul><li>Now time for investment in innovation and sustainable developments to be ready for the time when it picks up again. </li></ul><ul><li>Now time for more education and training to enhance professionalism at all levels </li></ul><ul><li>Signs of slight recovery already noted (China; ECB speech) </li></ul><ul><li>Pick up expected Q4 2009in US followed by Europe in 2010 </li></ul><ul><li>Asia Less growth (China, India) </li></ul>
  36. 36. Questions?