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Global Issues

Chartered Accountants NAMA Forum International Perspectives Leo F. Goodstadt, TCD & University of Hong Kong, October 2011. Global Issues. Bank crises start with illegal/improper bank lending practices tolerated by regulators.

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Global Issues

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  1. Chartered Accountants NAMA ForumInternational PerspectivesLeo F. Goodstadt, TCD & University of Hong Kong, October 2011

  2. Global Issues • Bank crises start with illegal/improper bank lending practices tolerated by regulators. • These lead to asset bubbles (mainly property), which politicians are usually reluctant to halt. • This phenomenon is universal, as China shows. • Yet it is avoidable, as Hong Kong demonstrates. • Post-crisis recovery depends on rebuilding public confidence, as Ireland has learnt.

  3. China to the Rescue? • PRC foreign exchange reserves have been world’s largest since 2006: 2009: US$2.9 tn; 2007: US$1.5 tn . • The general expectation is for RMB to become more attractive than the US dollar (and Euro). But President Hu has warned: ‘It takes a long time for a country's currency to be widely accepted in the world…making the RMB into an international currency will be a fairly long process’. (NCNA 17/1/11)

  4. PRC Banks under Pressure • 2010: AgBank’s IPO was world’s largest, thanks to US$117 bn bailout in 2008. NB: US Fed 2008 exposure to AIG: US$112 bn • 2009: ‘The correlation between [bank] efficiency and profitability [was] close to zero’.(IMF) • 2005: Many PRC bank branches were too incompetent to transact more than ‘one or two loan businesses per year’. (PBOC) • 1997-98 : 40%+ of bank loans were NPL. ‘Many banks were technically insolvent’. (PBOC)

  5. China’s Policy Dilemmas • 2008-09: US$586 bn economic stimulus package largely funded by bank loans to local governments. Result was immediate ‘systemic risks’ to the financial system (BoC) • These borrowings are vulnerable to property market collapses. BUT the government has to control inflationary pressures, house prices in particular.

  6. China’s Credit Risks • 2009: local government borrowings rose 70%, equal to 20% GDP • 2010: ‘questionable’ loans to local governments were 4 % of GDP. NB: Cost to US and UK of bank rescues was around 1% of GDP. • 2011: government ‘reclassified’ USD438 bn of local government loans to ease strain on bank reserves. (CD 15/08/11)

  7. China’s Reform Agenda Threat to financial stability recognised in 2010: • Banks criticised for ‘unscrupulous and unhealthy’ conduct; illegal borrowings to be repaid. • In future, ‘supervisory authorities must... resist any relaxation of supervisory and regulatory standards’. • ‘Supervisory practices should be invasive and interactive’.

  8. Hong Kong Fills the PRC Gap • The convenience of a First World IFC, with New York/London market standards and professional services • The historical base for Mainland financial firms to develop their international activities in a totally capitalist economy • Advanced regulatory and corporate culture compels Mainland firms here to comply with world best practice

  9. HK Financial Model • Pre-1986: HK banking most unstable in British empire. • 1998-03: Property falls 70%. M’gage defaults below 2.5%. No bank crises. • 2007-09: among world’s most stable banking systems, thanks to ‘more hands-on supervision’ (IMF 2008, 2010) .

  10. Hands-on Regulation Hong Kong imposes direct constraints on banks’ mortgage business to ensure loans are affordable: • 1991: mortgage loan-to-value ratio for mortgages set at 70% • 1994-98: property exposure ceiling of 40% on a bank’s total Hong Kong loans • 2011: loan-to-value ratio for mortgages further reduced to halt incipient bubble

  11. IFC Rankings: Hong Kong 71 of the world’s 100 largest banks 1st for IPOs (equity raised) 7th by market cap (2nd in Asia) 7th in forex trading 4th FDI inflows (2nd in Asia) 1st FDI outflows to China (1979-10) 1993-10: 595 Mainland IPOs (US$384 bn)

  12. IFC Rankings: Ireland • Half of the world’s 50 largest banks • ‘Largest exchange for funds listing in the world… a leader in the global market for alternative investments’ • ‘2nd in Europe for money market funds’ • ‘1st for cross-border life insurance in Europe’ (‘Fin Services Sector Profile’ Enterprise Ireland)

  13. Rebuilding Ireland’s Reputation • Primary causes of Ireland’s bank crisis: • Ministers’ complacency • Regulators’ incompetence • Bankers’ mismanagement • Professionals’ misconduct • Regulatory standards now being repaired (eg, Central Bank’s role in Greek rescue exercise) • But court cases, lawsuits and political process will create a scandal pipeline for years.

  14. Ireland-HK: Way Forward • Market confidence building: exploiting HK as the base to build Mainland businesses. • Reputational restoration: collaboration with HKMA to develop new regulatory systems for high growth with maximum stability. • Mobilisation of IFSC stakeholder support: to fund improved self-regulation and finance a HK office (matching 2009 Jersey Finance initiative).

  15. Ireland-HK Partnerships • EU base for tax/professional services. • Potential purchaser of NAMA assets. BUT only if Dublin is prepared to do business on ‘Hong Kong’ terms: • Avoidance of ‘informal’ business practices • Well-presented analysis of investment projects • US/UK standards of professional performance and corporate governance • Due diligence in seeking suitable foreign partners

  16. US Market Resilience • In 2009, New York securities industry profits were US$61 bn, highest ever. • In 2008-09, FRBNY invested US$45 bn in Citigroup, from which a profit of US$12bn+ has already been made. • In 2008-09, $700 bn spent on TARP [Troubled Asset Relief Programme] lifeline. Repaid by end-2010

  17. For full data and sources, see: • Reluctant Regulators: How the West Created and China Survived the Global Financial Crisis (2011) • Profits, Politics and Panics: Hong Kong's Banks and the Making of a Miracle Economy, 1935-1985(2007) • Uneasy Partners: The Conflict between Public Interest and Private Profit in Hong Kong (2nd edition 2009; Chinese edition 2011)

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