balancing regulatory responses to financial crisis and ... · this report is solely for the use of...

CONFIDENTIAL

New York, November 17, 2008

This report is solely for the use of client personnel. No part of it may be circulated,quoted, or reproduced for distribution outside the client organization without priorwritten approval from McKinsey & Company. This material was used by McKinsey& Company during an oral presentation; it is not a complete record of the discussion.

Balancing Regulatory Responses toFinancial Crisis and MarketCompetitiveness

Presentation to the Institute of International Bankers

Charles Roxburgh

McKinsey & Company | 1

This document is solely for the use of attendees at the IIBconference on November 17th.

No part of it may be circulated, quoted, or reproduced fordistribution without prior written approval from McKinsey &Company.

This material was used by McKinsey & Company during anoral presentation; it is not a complete record of thediscussion.

Not all the slides are included in this file. Please contactCharles Roxburgh if you would like further information

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� Just 18 months ago, policy consensus wasdeveloping on financial marketcompetitiveness reforms

� Now, the financial crisis is radically affectingindustry economics as well as the pace andscope of regulatory reforms

� Reforms that produce good regulation andregulatory structures must balance the crisisresponse without damaging the long-termmarket competitiveness to serve customersand support economic growth

Three points


In 2007, several reports spurred consensus on need for reform

Source: McKinsey


There was growing pessimism about New York City vs. London as afinancial center . . .

Do you believe this city will become more or less attractive over the next 3 years?

More attractive

About the same

Less attractive

New York City

44

15

41

London

38

8

54

Ranking by responsePercent

Source: McKinsey Financial Services CEO Survey

McKinsey & Company | 5Source: McKinsey Financial Services CEO Survey

. . . And regulation was seen as a major contributor to New York’s loss ofcompetitiveness

Which regulatory environment is more business-friendly?

U.S. is much better

U.S. is somewhat better

About the same

U.K. is somewhat better

U.K. is much better

Rules InspireInvestorConfidence

Clarityof Rules

Fairnessof Rules

Uniformityof RegulatoryEnforcement

Simplicity ofRegulatorySystem

Cost ofOngoingCompliance

45

23

2

26

4

31

35

19

132

42

32

12

131

45

32

8

132

43

31

7

14

5

Ranking by responsePercent

33

34

14

16

3



� Now, the financial crisis is radicallyaffecting industry economics as well as thepace and scope of regulatory reforms


Three points


There is still a long road ahead . . .

IMF estimates of potential financial sector write-downs on U.S. financial assets$ Billions

Reported write-downsby end September$ Billions

725-820Banks

160-250Insurance

125-250Pensions/savings

100-135GSE’s government

115-225Other

1,405Total

80

100

Other

760

Insurers

Global banks

100% =

580

Source: IMF October 2008




� Reforms that produce good regulation andregulatory structures must balance thecrisis response without damaging the long-term market competitiveness to servecustomers and support economic growth

Three points


Developing consensus points from 2007 now under attack because ofglobal financial crisis

• “Principles-based regulation has been discredited”

• “London had a relatively worse crisis than New York”

• “Litigation is on the rise – with good reason”

• “Basel II is flawed – lucky that the U.S. has been slow to implement”

• “Immigration reform is irrelevant given surplus of talent”

• “Massive Government intervention demands re-regulation and tighter rules”


Despite turmoil, key points from earlier consensus are still valid and willre-surface when crisis ebbs

• Customers benefit from competitive markets able to support sustainedeconomic growth and development

• Principles of good regulation and prudential supervision are still validand essential to build new international financial architecture

• Case for consistent global standards are more important than ever –G20 process going forward will be critical to future success and globalmarket development

• Better international cooperation and coordination are critical, especiallyin joint development of early warning surveillance systems, domesticallyand globally

• Open markets for talent and capital flows are still valid given globaleconomic realities, especially in face of global recession

• Case for institutional reform in U.S., Europe and other markets isstronger than before


All regulatory models are now under intense review

Examples G-30 Comments

Source: Group of Thirty, The Structure of Financial Supervision: Approaches and Challenges in a Global Marketplace(Washington, D.C., 2008)

Institutional • “Suboptimal given the evolution of themarkets”

• China, Hong Kong,Mexico

Functional • “Somewhat suboptimal structure “• France, Spain, Italy,Brazil

Integrated • “Viewed as flexible and streamlined . . .[but] may create the risk of a singlepoint of regulatory failure”

• United Kingdom,Canada, Germany,Switzerland, Japan,Singapore, Qatar

Twin Peaks • “Designed to garner many of thebenefits and efficiencies of theIntegrated Approach, while addressingthe inherent conflicts”

• Australia,Netherlands

Exception • “Current structure is quite complex andhad come under increased scrutiny”

• United States


What more is needed?

• From governments, continued process of reform atnational and global level

• From the private sector, bolder actions to get ownhouses in order to mitigate risk of over-regulation


What more is needed from governments – architecture design features

• A few simple principles – a “compass”

• Clear, cost effective rules based on those principles

• Better cooperation and coordination across all financial services segments,domestically and globally

• Prudential supervision to ensure earlier identification, correction of problemsthat could lead to later systemic risks

• Clearer responsibility for continuous surveillance and early warning systems

• Greater accountability for regulatory behavior and outcomes, regardless offinal regulatory architecture (number/type of regulators matters, but . . . )

• Greater transparency in regulatory policies and processes, with privatesector input

• Uniform treatment for products and providers to protect consumers


What more is needed from the private sector – seven priorities

• Convincing demonstration that competitive and open markets can work, witheffective regulation and prudential supervision

• A new science of risk management, with more human controls & commonsense application and better early warning systems, coupled with betterapplication of the existing science

• Better use of market-based self regulation before government intervention(pricing signals for debt, money markets, deposit rates; rapid asset growth)

• Aggressive industry actions to improve basic practices (e.g., underwriting,securitization, governance)

• Structural industry cost rationalization to reduce over-reliance on riskrevenues

• Rapid moves to de-risk OTC markets

• Principles-based reform of executive compensation (e.g., Institute ofInternational Finance (IIF) Committee on Market Best Practices)





Three points

CONFIDENTIAL

New York, November 17, 2008

This report is solely for the use of client personnel. No part of it may be circulated,quoted, or reproduced for distribution outside the client organization without priorwritten approval from McKinsey & Company. This material was used by McKinsey& Company during an oral presentation; it is not a complete record of the discussion.

Balancing Regulatory Responses toFinancial Crisis and MarketCompetitiveness

Presentation to the Institute of International Bankers

[email protected]

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