kpmg banking report 2009
TRANSCRIPT
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| rontiers in nance June 2009
rontiers in fnanceFINANCIAL SERVICES
or decision makers in nancial servicesJune 2009
The long roadto recoveryMaking it a reality
Major changes ahead
Making sense o regulation
Clarity and reality
The role o the auditorin nancial services
Jump start
Reviving the US nancial system
Confdence must return
An investment management perspective
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orewordrontiers in nance
June 2009
Brendan Nelson
Vice Chairman, KPMG in the UK
Global Chairman, Financial Services
The long road to recovery
The nancial services
sector like the global
economy as a whole
aces a long and
potentially bumpy road
to recovery. One o the
oundations or long term stability
should be regulatory reorm. While
regulation cannot eliminate all riskrom nancial markets, the old regime
was in need o some redevelopment.
Regulators in many jurisdictions are
struggling to ormulate new rameworks
which will prove robust and eective.
As yet, it is not clear that there is
agreement on basic principles.
Furthermore, solutions are likely
to dier between the banking,
investment management and insurance
sectors. I believe the audit proession
has much to contribute and hasty and
ill-considered action should be avoided.At the same time, the speed at which
new regulations may be brought in
means that rms do not have the luxury
o waiting until the dust has settled.
Some preparatory work has to start
now. In this issue we highlight this
rom a range o perspectives.
The US remains the engine o the
global economy, and so the success
o the Financial Stability Plan will be
crucial or us all. We look at some o
its key eatures and implications.
More generally, we recognize
recovery requires that trust in the
nancial services industry be rebuilt.
This is equally true in investment
management where there are
exciting opportunities ahead as
is the case in banking and insurance.
Also in this issue, we ocus on two
contrasting economies: Canada, where
the nancial services environment hasremained largely intact; and India, which
despite suering a battering rom the
crisis, is still on course or enviable
growth this year.
At KPMG, our member rms
work with leading nancial services
institutions across the world, providing
an opportunity to explore in detail how
companies are coping with these
turbulent times. A number o recent
KPMG surveys in investment
management, insurance and payments
also assist in oering valuable insights.On this journey to recovery, the
nancial services sector is going to
need all the insight and advice that is
available. I hope this issue o rontiers
in fnancegoes some way to meeting
that need.
Brendan Nelson
2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.
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Contents | rontiers in fnance June 2009
In this issue
For your inormation
yi 2
Topics
Major changes ahead: Making sense
o regulation 4
Perspectives on regulation in banking,
investment management and insurance 8
Clarity and reality: The role o the
auditor in fnancial services 2
Jump start Reviving the US fnancial
system: The Financial Stability Plan 4
Economic turmoil: The US commercial
real estate perspective 7
Confdence must return: An investment
management perspective 8
Renewing the promise: Time to mend
relationships in investment
management 2
Act now: The implications o
Basel II revisions 22
Quietly prospering: Canadian
fnancial services 24
A glimmer o hope 28
Show me the money: Insights into
global payments 30
Addressing the trust gap:
Renewing confdence in the fnancial
services industry 34
Separating value: Getting the most
rom your disposals 38
Changing or the better 42
Getting ahead UCITS IV: Putting thepotential into action 44
Order returns An economic overview 46
Series
Emerging markets: India: A brighter
uture? 48
Insights
Updates rom KPMG member frms,
thought leadership & contacts 52
12
Topics: Clarity and reality: The role
o the auditor in fnancial services
18
Topics: Confdence must return:
Investment management
24
Topics: Quietly prospering: Canadian
fnancial services
48
Series: Emerging markets:
India: A brighter uture?
2009 KPMG International. KPMG International is a Swiss cooperative. Member frms o the KPMG network o independent frms are afliated with KPMG International. KPMG International provides no client services.No member frm has any authority to obligate or bind KPMG International or any other member frm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member frm. All rights reserved.
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rontiers in nance June 2009 | For your inormation
yi...At your fnger tips
rontiers in fnanceonlineWith our audiencegrowing rapidly, we wantedto make rontiers in fnancemore accessible to you,our readers. The rontiersin fnanceteam is pleasedto bring you KPMGs rstonline magazine. Thisexciting new versionmeans you will be ableto read the latest editiono the magazine at the
click o a button! But not only will you be able to viewthe entire magazine, you will also be able to downloadindividual articles, share them with your colleagues, viewvideos and podcasts on various topics and keep up to
w section, rontiers
d regularly to addressnancial servicesgazine now ate.
here is no clear leader or levels ro
date with hot issues through our nesupplements. These will be updatespecic aspects o interest in the industry arena. Go to our online mawww.kpmg.com/rontiersinfnanc
Insights in Nigerian Banking
Tpreerred bank or SMEs(Small to Medium Enterprises).According to the 2009 edition o
KPMGs Nigerian Banking Industry
Customer Satisaction Survey, it is
evident that the SME market may
not be receiving the attention it
deserves rom banks in Nigeria.
This insightul report also
highlighted a progressive rate o
diminishing customer satisaction
m the larger corporate
respondents. Futhermore it goes
on to highlight opportunities or banks
in Nigeria to improve customer
satisaction and in turn, increase
customer retention and loyalty, a
hot topic we are seeing or nancial
services globally.
For more inormation go to
www.ng.kpmg.com
Focus on next practices,not best practices
Proessor C.K. Prahalad1,
one o the worlds most
infuential experts in corporate
strategy visited KPMG in Finlands
top executive seminar on strategy
in May in Helsinki. Prahalad revealed
that the key to creating value and
the uture growth o every business
depends on accessing a global
network o resources to co-create
unique experiences with customers,
one at a time.
He argued that the nature
o strategy has changed and the
management ocus has to be on
anticipating new business
opportunities and on creating
next practices, not best practices.
According to Prahalad, the
competitive arena is shiting rom a
product-centric view o value creation
to a personalized experience-centric
view o value creation and innovation.
Prahalad believes that competitive
advantage will depend on a rms
approach to business processes, that
can seamlessly connect customers
and resources and manage
simultaneously the needs or
eciency and fexibility. It will be a
race to provide a unique customer
experience at the lowest cost.
For more inormation contact:
KPMG in Finland www.kpmg.f/en
1. For urther reading: The New Age o Innovation Driving Co-Created Value through Global Networks,C.K. Prahalad, M.S. Krishnan, McGraw-Hill 2008.
2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.
2
http://www.kpmg.com/frontiersinfinancehttp://www.kpmg.com/frontiersinfinancehttp://www.kpmg.com/frontiersinfinancehttp://www.ng.kpmg.com/http://www.kpmg.fi/enhttp://www.kpmg.fi/enhttp://www.ng.kpmg.com/http://www.kpmg.com/frontiersinfinance -
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For your inormation | rontiers in nance June 2009
Global Financial Forum
Taking stock andlooking aheadIn New York recently,The Foreign PolicyAssociation, ChathamHouse, and BritishAmerican Business,supported by KPMGInternational, organizedthe Global FinancialForum.
World economic leaders
gathered to discuss the
state o nancial services
and what is needed to move
orward. Christine Lagarde, The
French Minister or the Economy,
Finance and Employment pointed
out that what is unprecedented today
is not so much the consensus on a
need or stimulus, but rather the
consensus on a need or nancial
services regulation.
Lord Turner, Chairman Financial
Services Authority (the UK regulator),
highlighted three areas o regulatory
reorm needed; a macro-prudential
approach, capital reorm and a
mechanism to reverse the unding
o long term obligations by short
term risk.
President o the European Central
Bank, Jean-Claude Trichet, noted
the over-arching need to restore
condence in nancial services.
Some o these key themes are
discussed later in this edition.
For more discussion on regulation,
see page 4.
2009 frontiers in taxRestructuring, consolidationand government intervention
The 2009 issue o rontiers in tax,our sister title, looks at the impactsand consequences o the nancialcrisis and identies some othe longer term tax risks andopportunities.
T
hrough the global network
o KPMG member rms,
our colleagues take a orward-
looking view o the tax consequences
o major developments in the industry
such as the drat UCITS IV directive.
This is a major development in the
establishment o a single market in
mutual unds within the EU which
has wide-reaching eects.
Our colleagues look into recent
reorms and tax changes in the
Chinese insurance market which
give rise to interesting opportunities
or oreign investors. In addition a
recent trend in South East Asia sees
authorities taking a stricter line on
oreign investors using treaty networks
or cross-boarder transactions.
Finally, this issue discusses
proposed changes to indirect tax
or nancial services that could have
some unoreseen consequences or
the industry.
For urther inormation visit
www.kpmg.com/tax
Governance, riskand reportingDrat EC Directive orAlternative InvestmentFund Managers
I
n late April the European
Commission published new
legislation or the regulation o
Alternative Investment Fund Managers.
This ollows global calls or reorm to
risks taken by nancial institutions,
which have been linked to the credit
crisis1. The proposals would require
the alternative und managers, not the
unds, to register and seek government
authorization which would include
elements o reporting, governance
and risk management standards2.
Tom Brown, partner KPMG in
the UK noted while we can welcome
the directive rom the perspective o
supporting the industrys own
agenda o building good practice,
and while the better run hedge
unds will likely nd little change
rom many o the measures being
introduced, the real challenge is one
o implementation. Politicians need
to ensure that the political agenda
doesnt end up destroying the
European hedge und industry by
imposing sweeping changes that
are unworkable or unnecessary.
1. Hedge und managers warn on EU plans, www.t.com,April 29, 2009.
2. Hedge und managers warn EU rules will cripple their industry,www.t.com, April 30, 2009.
2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.
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rontiers in nance June 2009 | Topics
Brendan Nelson
MajorchangesaheadMaking sense o regulation
In some respects, the likely shape o the nancialservices industry ater the crisis may remain unclear.But one thing seems certain: the nature, scope andpurpose o regulation will change substantially.Politicians, regulators and treasury ocials acrossthe developed world are setting out proposals ora more robust and eective regulatory regime toimprove protection against uture crashes.
The ailure o the authorities
Responsibility or the crisis may
reasonably be shared among a
number o interests. Central bankers
declined to assume responsibility or
the growth o unsustainable asset
bubbles; governments ailed to tighten
policy when public nances allowed
and regulation ailed in its key task o
maintaining stability and condence
in markets and the nancial system.
The dangers o systemic risk
were ignored, and the need or
macro-prudential oversight orgotten.
As a consequence banks, especially,
are now coming under huge pressure
rom regulators to signicantly
improve their capital and liquidity
positions and demonstrate sound
and prudent management. A major
drive or regulatory reorm is already
under way. 2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.
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Topics | rontiers in nance June 2009
2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.
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rontiers in nance June 2009 | Topics
Regulatory reorm
In the US, Treasury Secretary Tim
Geithner is calling or comprehensive
regulatory reorm: not modest repairs
at the margin, but new rules o the
game. The European Commissions de
Larosire report suggests the creationo a European Systemic Risk Council
to oversee a new system o regulation
and supervision. In the UK, the Turner
Review calls or higher minimum capital
requirements, counter-cyclical capital
buers and limits on gross leverage.
What is still unclear is how all o the
proposals currently being ormulated
and discussed can be integrated into an
eective global ramework which also
refects individual national priorities. The
dangers o conusion, incoherence and
promotion o regulatory arbitrage are real.At the G20 London Summit in April,
world leaders pledged action to build
a stronger, more globally consistent
supervisory and regulatory ramework
or the uture nancial sector:
Strengthened regulation and
supervision must promote
propriety, integrity and
transparency; guard against
risk across the nancial system;
dampen rather than ampliy the
nancial and economic cycle;reduce reliance on inappropriately
risky sources o nancing; and
discourage excessive risk-taking.
G20 Final Communique, April 2009
They announced that regulation
and oversight would be extended
to all systemically important nancial
institutions, instruments and markets,
including hedge unds.
While the principles o the G20
declaration are to be applauded, a great
deal o detailed discussion and drating
will be needed to ensure that an
eective and unambiguous system
emerges. The criterion o systemic
importance, while intuitively clear, is
merely the most high-prole concept
over which erce debate is inevitable.
There is also a risk that the realprogress made over the last 20 years
towards harmonization o global
standards will be undermined or
thrown o course.
Capital adequacy
The G20 proposals or a counter-cyclical
capital adequacy regime are likely to
be among the least contentious in
principle, since they are consistent
with current thinking rom a number o
sources. But they are likely to result in
a more ormulaic regime, which couldconstrain scope or fexibility at the
same time as imposing more stringent
overall capital requirements. It remains
to be seen whether any new system
will be truly balanced, or will simply
be used to impose higher limits during
the good times. Nor is it clear that it
will be easy in practice to track the
economic cycle with sucient
precision. The rate and extent to which
capital requirements are tightened as
we emerge rom recession will be a
particularly sensitive decision.One o the more challenging
commitments o the G20 Communiqu
is that all G20 countries should
progressively adopt the Basel II
ramework. However, no timetable or
this has been agreed. One o the
obvious major stumbling blocks is that
the US has, to date, ailed to make any
commitment to Basel II at all. In
addition, it is not obvious that imposing
Basel II on all banks, whatever their size
and degree o cross-border exposure,
will turn out to be realistic.
A great deal of detaileddiscussion and drafting willbe needed to ensure that an
effective and unambiguoussystem emerges.
2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.
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| rontiers in nance June 2009
7
Topics
Hedge unds
Political considerations and public
anger are giving extra orce to demands
or tighter regulation. Although hedge
unds have had only a minor role in
causing the crisis, they are widely
criticized and misunderstood and
are going to be drawn more tightly
into the new regulatory ramework.Funds and their managers can expect
to be registered and subject to new
disclosure requirements. The adequacy
o risk management systems will likely
be probed. Institutions which have
hedge unds as their counter-parties
will likely need to develop mechanisms
to monitor the unds leverage and set
limits or single counter-party exposures.
Once again, though, the detail will be
critical. There is not yet even an agreed
denition o what is, or is not, a hedge
und, let alone which criteria wouldidentiy one as systemically signicant.
In the UK, Lord Turner notes that hedge
unds in general are not like banks; the
implication is that they should not be
regulated in the same way as banks.
The UKs Hedge Fund Standards Board,
while operating a voluntary ramework,
has established a sound oundation
which global regulators could protably
build on.
Remuneration
There is also widespread publicconcern and anger at the
remuneration o those bankers
perceived to have caused the crisis;
some extension o regulation to include
salaries and bonus arrangements is
politically inevitable. The argument
seems even more compelling in relation
to those institutions which have been
bailed out or taken into public ownership.
The argument that compensation
arrangements should properly refect
risk and, in particular, match the time
horizon o risks so that payments
should not be nalized over short
periods where risks are managed over
long periods is surely sound. Similarly,
recent high-prole controversies have
accentuated the need or non-executive
directors and shareholders to be more
ully involved in and appraised o
remuneration arrangements beore
irrevocable awards are made.However, it will be important
that decisions in this area are air,
reasonable and proportionate, and
do not succumb to bash the bankers
prejudice. The G20s proposal that
supervisors should, where necessary
intervene in compensation policies
(with responses including increased
capital requirements) could be seen
as a veiled threat. The Turner Review
concluded that remuneration structures
played a less important role in
contributing to the nancial crisis thaninadequate approaches to capital,
accounting and liquidity.
Overall
Nobody can argue that the current
systems o regulation are sustainable.
They have very dramatically ailed to
prevent one o the worst nancial crises
in many decades. Financial services
institutions have to brace themselves
or a much more muscular and
interventionist regime in uture. But
what that regime ultimately looks likewill depend on a great deal o argument
and compromise, which is a process
only just beginning. Moreover it is
essential that it avoids giving the
impression that all risk can be
eliminated rom nancial markets.
For more inormation please contact:
Brendan Nelson
Vice Chairman, KPMG in the UK
Global Chairman, Financial Services
Tel: +44 20 7311 6157
e-Mail: [email protected]
Political considerationsand public anger are givingextra force to demands fortighter regulation.
2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.
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rontiers in nance June 2009 | Topics
regulation in banking,investment management
and insurance
Perspectives on:
David Sayer Dave Seymour Frank Ellenbrger
2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.
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Topics | rontiers in nance June 2009
From let to right:
David Sayer,
Dave Seymour and
Frank Ellenbrger.
Many authorities across the world are seeking to ormulate new regulatoryrameworks in the wake o the crash. But the nal shape o any new systemremains quite unclear; and it is unlikely to remain ree o political distortionand intererence. David Sayer, Global Sector Leader, Retail Banking,
Dave Seymour, Global Sector Leader, Investment Management (IM)and Frank Ellenbrger, Global Sector Leader, Insurance, met recentlyto compare and contrast their dierent perspectives.
David Sayer (Banking) Looking at
whats happening at the moment, it
seems to me important that this crisis
is seen to have been caused by the
banks. So the diagnosis is ocused on
bank ailures and the need to stop this
happening again, oten to the exclusion
o other potential causes o the crisisincluding: trade surpluses, scal
decits, regulatory policies and so on.
Dave Seymour (IM) I agree.
Just ollowing up on the political
dimension or a moment, there is a
great deal o debate over the extent
to which US executive and legislative
policies during the mid 1990s, such
as the modications made to regulate
and strengthen the CommunityReinvestment Act anti-redlining
procedures, as well as other legislative
actions, may have impacted the crisis.
Policy makers are now trying to x it,
but given the complexities, it is dicult
to know what, or how much to regulate.
Frank Ellenbrger (Insurance)
O course by contrast with the huge
stress and uncertainty in the economy
caused by the banks, insurance and
the insurance markets have continued
to operate normally, without any major
disruption. The same is true or
reinsurance markets. The impact othe crisis on insurers has mainly been
on the lie side, with the value o
investments tumbling. Those that have
been most aected deviated rom their
core operations into nancial products
developed without understanding the
risk that underpinned them. But the
business model o insurers and the
largely uncorrelated relationship
between insurance risk and market
risk have so ar been stabilizing actors;
hence insurance is much lower on
the political and risk radar. 2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.
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rontiers in nance June 2009 | Topics
There is always a political dimension tonancial markets. The world has discoverednot only how dangerous nancial marketscan be, but how valuable functioning
nancial markets are to economies.Dave Seymour
SayerIn the case o the banks,
though, there is huge pressure now
or taxpayers to provide guarantees
and bailouts. These include liquidity
support through guarantees and
protection o savers and borrowers,
asset purchases, orced recapitalization,
bad bank schemes and so on. But the
big questions that I think should still
be answered are to do with how to
reduce systemic risk in the banking
system. This involves a range o issues:the nature o nancial regulation;
strengthening regulators; reducing
the impact o ailure o nancial rms;
protecting and supporting customers;
improving competition.
SeymourAnd this raises the key issue
o whether we can recreate a duciary
society with a common ramework
and set o rules, or whether we are
inevitably aced with a much more rigid,
strict set o rules. Do we really need
more regulation?
EllenbrgerBeore any action is
taken, it should be well thought through
and balanced, taking into account the
macro-economic considerations.
Intervention should not create an
uneven playing eld between dierent
sectors o the nancial services
industry. Although banking has been
the crux o the crisis, a new ramework
or set o rules should look beyond this
sector; introducing a one-size-ts-all
response will only lead to uturecomplications. Each industry will
require separate revisions.
SayerIn the banking sector, some
trends are clear. The quantity o capital
required will be high, and counter-
cyclical requirements will be imposed
to make banks hold more capital in
the good times (unlike the Basel II
ramework, which is pro-cyclical).
But it is yet unclear how this is going
to work in practice, and in dierent
economies. The other problem withimposing counter-cyclicality is that
cyclicality will always be there.
Someone has got to turn the lights
out just as everyone else is enjoying
the party. And thats really dicult.
Looking back, its hard to see how
macro-prudential regulation would
have been accepted in say 2005 or
1987 when the last booms were
getting going.
EllenbrgerIt will be interesting to see
how the banks adapt to the anticipated
counter-cyclical requirements requiring
them to signicantly shore-up their
capital holding. Intrinsically insurers
have always had to calculate their capital
adequacy because o their exposures
to risk when underwriting. But with the
2012 EU-wide implementation deadline
o Solvency II, Europes insurers will
have to undamentally review their
capital requirements and riskmanagement standards. Whether other
key global insurance markets look to
replicate this ramework locally remains
to be seen, and undoubtedly regulators
will be heavily involved.
SeymourAnd that makes it even
more dicult to see how greater
regulation can eectively be extended
to investment management. The G20
couldnt agree on regulating hedge
unds. The European countries are
pushing or regulation, while the US islooking or registration. The European
Commissions drat directive on the
issue is itsel proving highly contentious
among member states. Investment
unds are products, not companies,
and this makes providing saeguards
or investors a dierent matter than in
the banking sector. There is as yet no
clear idea o how to tie investment
unds into the systemic risk argument,
especially in view o the easy fow
o unds into and out o dierent
economies and jurisdictions. 2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.
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| rontiers in nance June 2009Topics
Although banking hasbeen the crux of the crisis,a new framework or set ofrules should look beyond
this sector.Frank Ellenbrger
EllenbrgerNevertheless, the
systemic risks resulting rom an overtly
complicated banking system with an
inadequately developed regulatory
ramework have been one o the
causes o the current crisis, and these
need to be addressed. The precondition
or creating an anti-cyclical regulatory
environment is to obtain transparency
and a holistic view o the global nancial
system, without leaving large parts
unregulated.
Sayer The debate over whether or
not a global regulator is necessary,
or possible, will inevitably go on. But
however global the ramework, its a
act that global institutions come home
to die. In the end, ailing banks are the
responsibility o their home regulators.
In my view, the global role should be
about ensuring consistency between
national rameworks and limiting the
scope or regulatory arbitrage.
Regulation itsel needs to remain local.In Europe, though, there is a particular
problem caused by the single market.
Since the single market requires ree
and open movement o capital, the case
or a single European regulator may be
stronger. Its not going to be politically
easy to achieve, but the potential
accession o Iceland to EU membership
may be a trigger.
EllenbrgerInternational groups
may benet rom diversication eects
but also be exposed to accumulation
or contagion risks. Those need to
be mirrored by supervision on a
cross-border basis.
SeymourAny regulatory reorm must
look to prevent the next crisis, not the
last one.
SayerIts also important that regulationavoids the moral hazard problem, and
avoids giving investors and customers
the impression that all risk has been
removed rom nancial markets.
SeymourI guess one thing that we
have certainly learned is that there is
always a political dimension to nancial
markets. The world has discovered not
only how dangerous nancial markets
can be, but how valuable unctioning
nancial markets are to economies.
SayerIts going to take time to work
out solutions in the banking sector.
What has happened by way o
emergency action was what needed to
happen, but the rest, a new approach
to regulation, will take time. And thats
a good thing. We need to take the time
to get this right.
In my view, the global roleshould be about ensuringconsistency betweennational frameworks andlimiting the scope forregulatory arbitrage.David Sayer
For more inormation please contact:
David Sayer
Partner
Global Sector Leader, Retail Banking
KPMG in the UK
Tel: +44 20 7311 5404
e-Mail: [email protected]
Wm. David SeymourPartner
Global Sector Leader,
Investment Management
KPMG in the US
Tel: +1 212 872 5988
e-Mail: [email protected]
Frank Ellenbrger
Partner
Global Sector Leader, Insurance
KPMG in Germany
Tel: +49 89 9282 1867
e-Mail: [email protected]
2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.
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Brendan Nelson Scott Marcello
Brendan NelsonandScott Marcelloexplore the possible need to expand theuture role o the auditor in nancial services.
The role o the auditor in fnancial services:Is reorm desirable?
Clarityand reality
Financial Reporting today
is clearly complex and oten
not well understood. Why
is this the case? One key
reason is that we oten lose
sight o what should be
the overriding objectives. Too oten, we
succumb to treatments and positions
that we believe to be conceptually pure
or technically superior but that are
potentially less than relevant and all
too oten not understandable.
In the extreme, what good isserved i each and every accounting
pronouncement is perectly consistent,
globally harmonized, and aligned with
well developed conceptual
underpinnings, i users nd that
inormation wholly irrelevant and
incomprehensible? Adding to this, the
objectives or underlying concepts used
to develop accounting standards are not
really agreed; this is particularly true
when you consider issues rom a global
perspective. This was evident in the
recent debate in the US regarding air
value accounting or investments.
Some people strongly support the use
o air value, others hate it. Probably a
majority believe it is a valid principle,
but have signicant concerns about
when it should be viewed as the most
relevant attribute or measurement in
nancial statements. Vast amounts o
energy have been invested in this issue
but conusion remains.
Another issue is, rankly, who reads
all o this inormation anyway? Annual
reports today have grown to hundredso pages, including inormation o
widely varying importance and
relevance. How many people read and
really understand all o this inormation?
Is it more than a handul o people?
And how many is that when you
exclude the auditors, certain members
o management and certain regulators?
The role and involvement o the
auditor with respect to inormation also
may oten be poorly understood. Most
people recognize the technical content
an auditor provides: their opinion on the
air presentation o a companys
nancial statements and, in some
cases, the internal controls relevant
or nancial reporting. But there is a
vast amount o inormation included
in companies lings that is not
subject to audit work. Users o nancial
statements may be quite surprised to
learn that many pieces o inormation
that they view as being very signicant
to their analysis are not covered by the
audit liquidity or example.
So how can the auditing proessioncontribute to improving the global
paradigms or regulation and nancial
reporting? Accountants, when you think
about it, can help in leading the debate.
When it comes to accounting rules and
nancial statement reporting, they can
help keep the real goals in sight and
in proper perspective. Apart rom the
regulators, accountants are one o
the ew groups uniquely qualied to
understand complex nancial institutions
and provide genuine insight about their
business, their operations and their 2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.
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Topics | rontiers in nance June 2009
Apart from the regulators, accountants are one of thefew groups uniquely qualied to understand complexnancial institutions and provide genuine insight abouttheir business, their operations and their reportedinformation. They can bring a varied and globalperspective, and professionalism and objectivityto important and challenging debates.
reported inormation. They can bringa varied and global perspective, and
proessionalism and objectivity to
important and challenging debates.
Progressing that thought, together,
management, regulators and auditors
have to move toward providing insight
and important perspective rather than
expanses o accurate, but possibly
less relevant inormation:
more relevant and important
inormation has to be prioritized
and unimportant, obvious, or
redundant inormation has tobe eliminated rom the equation
second guessing should be
minimized while still respecting
the need to protect stakeholders
it needs to be recognized that the
role o nancial reporting is to
provide relevant and reasonably
reliable inormation, not to predict
the uture with certainty
and its important to recognize
the judgment and intellectual capital
that can be added by management,
regulators and auditors
On this last point, a critical question
is whether this intellectual capital will
fow reely and to its ull extent i it is
hampered by the potential or signicant
legal liabilities. The potential liability
issues that prevail, particularly in
America, may now need to be
nally and ully addressed.
Now you could argue we would
say this wouldnt we? But we genuinely
believe that reorm isdesirable and that
the auditing proession can and should
make a signicant contribution.
For more inormation please contact:
Brendan Nelson
Vice Chairman, KPMG in the UK
Global Chairman, Financial Services
Tel: +44 20 7311 6157
e-Mail: [email protected]
Scott Marcello
Joint Regional Coordinating Partner,
Financial Services, Americas region
Tel: +1 614 249 2366
e-Mail: [email protected]
2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.
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JumpstartReviving the US fnancial system:
The Financial Stability Plan 2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.
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Howard Margolin
Calls to action in combating the ongoing economiccrisis are coming rom all parts o the globe. Inparticular, governments are aced with ar-reachingpolicy decisions to try to stem the tide o oreclosures,job losses, and disappearing savings. With the USnancial system taking much heat or its role in therecent economic turmoil, many acknowledge that astrong US nancial system is also one o the keysto recovery. Howard Margolinexplains.
O
n February 17, 2009,
President Barack
Obama signed into
law the Financial
Stability Plan (FSP) to
help stabilize the US
nancial system and restore condencein the markets. The FSP is a multi-
pronged oensive designed to boost
the nations economy by eliminating
the uncertainty surrounding nancial
institution assets and stimulating lending
while imposing new measures around
nancial service industry accountability,
oversight, and transparency.
The FSP includes the ollowing
components:
Capital Assistance ProgramAs a means o reducing uncertainty
over whether certain nancial
institutions have sucient capital to
weather the nancial storm, the Capital
Assistance Program (CAP) requires US
banking organizations with assets o
US$100 billion or more to undergo a
more thorough regulatory review. This
includes a comprehensive stress test
designed to asses the balance sheet
exposures o these institutions, should
there be a greater than expected
decline in the economic environment.
Should the results indicate that
capital is inadequate, such institutions
will have six months to raise the
necessary capital buer via private
unds. Lacking such private unds, they
may access capital through CAP in the
orm o convertible preerred stock.
Capital shortfalls for thelargest banks totaledapproximately US$75 billion.Many banks have issued, orplan to issue, common stockto meet the shortfalls.
The stress test results werereleased on May 7, 2009, indicating
that the largest banks had adequate
capital to meet adverse (not worst
case) economic conditions. Capital
shortalls or the largest banks totaled
approximately US$75 billion. Many
banks have issued, or plan to issue,
common stock to meet the shortalls.
Others plan to convert preerred
stock to common stock or sell assets.
A limited number o more capital-
constrained banks may be orced to sell
operations or curtail certain activities.
Public-Private Investment Program
The Public-Private Investment Program
(PPIP) has been created to address the
challenge o cleansing balance sheets
o legacy assets. PPIP seeks to lure
new private capital into the market byproviding government equity co-
investment and attractive private
nancing to reduce the risks inherent
in investing in these legacy loans and
securities. Equity co-investment is
intended to protect US taxpayers rom
overpaying or assets through a market-
based valuation approach as opposed
to prices being set by the public sector
and taxpayers stand to benet by
sharing in any prots derived rom
these assets.
Both potential sellers and buyersare still seeking clarication on many
ronts, such as pricing mechanisms, the
accounting impact o such transactions
on capital levels, and other sale terms.
The impact that recent changes by the
Financial Accounting Standards Board
relating to the recognition and
measurement o credit impairment
losses on debt securities has on the
demand or this program remains to be
seen. Additionally, the impact o the
stress test results on PPIP participation
has yet to be determined.
5
Topics | rontiers in nance June 2009
2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.
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Term Asset-Backed Securities
Lending Facility
This joint initiative o the Federal Reserve
and the Treasury Department seeks to
encourage consumer and business
lending through the renewed issuance
o certain asset-backed securities (e.g.
those supported by auto, credit card
and student loans, mortgages, andother assets) at reduced interest rate
spreads. Already in existence, unding
or the Term Asset-Backed Securities
Lending Facility (TALF) has been greatly
expanded under the FSP.
Those receiving FSP fundswill be required to engagein mortgage foreclosure
mitigation efforts; whetherother lenders may berequired or otherwiseencouraged to participatein these efforts remainsto be seen.
Mortgage Loan Modifcation
Program
The FSP includes a proposal to reduce
mortgage rates through FederalReserve and Treasury Department
purchases o up to US$600 billion o
Government-Sponsored Enterprise
mortgage-backed securities and debt.
Additionally, the FSP calls or issuance
o ormal loan modication guidelines
and standards applicable to government
and private programs. Those receiving
FSP unds will be required to engage in
mortgage oreclosure mitigation eorts;
whether other lenders may be required
or otherwise encouraged to participate
in these eorts remains to be seen.
Small Business and Community
Bank Lending Initiative
In light o the increased capital
pressures on lending institutions and
the lack o demand or Small Business
Association (SBA) loans in the
secondary markets, the FSP addresses
the precipitous decline in SBA lending.
A joint Treasury Department and SBAinitiative will seek to increase such
lending by nancing the purchase o
AAA-rated SBA loans and pursuing
eorts to increase the Federal guarantee
up to 90 percent or eligible loans.
Transparency and Accountability
Agenda
The Treasury Department will
require all FSP und recipients to
conorm to intensied requirements
or transparency, accountability,reporting, and monitoring.
Reporting requirements include a
one-time plan discussing the recipients
intended use o government unds to
preserve and strengthen lending
capacity. Further, there will be monthly
reporting on new lending activities and
tracking o CAP unds separate rom
other assets.
Additional FSP conditions include
restrictions on dividends on stock
repurchases and acquisitions, limitations
on executive compensation, andrestrictions on lobbying.
Each FSP component willhave unique accounting, tax,and nancial considerationsdepending on a companysparticular circumstances.
Implications
These ar-ranging initiatives have
broad consequences or both nancial
institutions and government agencies.
Each FSP component will have unique
accounting, tax, and nancial
considerations depending on a
companys particular circumstances.
Management should consider these
implications as strategic decisions aresurrounding participation in the FSP.
Similarly, assessments o modeling
techniques, expanded data and
disclosure requirements, systems
capabilities, and stang will be
essential to plans or moving orward.
The sheer magnitude o changes and
level o regulatory scrutiny will present
sizable implementation challenges, and
companies may nd the need or
project management teams to try to
keep all initiatives on track.
The private sector now has multipleronts through which to cleanse its
balance sheets and reinvigorate lending
activities. At the same time, these
initiatives signicantly expand the role
and power o government, necessitate
changes to current processes and
controls, and place additional
requirements on both nancial institutions
and government related to reporting,
monitoring, and compliance activities.
Over the coming months, additional
details will emerge regarding these
programs, and institutions should remainvigilant to the strategic opportunities
that could result, while maintaining
appropriate discipline and controls to
satisy the attendant increased
reporting and compliance activities.
For more inormation please contact:
Howard Margolin
Partner
Financial Services
KPMG in the US
Tel: +1 212 954 7863
e-Mail: [email protected]
2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.
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| rontiers in nance June 2009Topics
The US commercial real estate perspective
Ray Milnes
Economicturmoil
As numerous US
public and private
enterprises work to
jump-start the national
economy much
attention has been
paid to restoring the health o the
residential real estate market andthe banking system. Yet, as the
global recession has deepened,
the commercial real estate market
also aces distinct hardships.
A core challenge has been the lack
o available liquidity or transactions.
For instance, securitizing commercial
loans, especially via Commercial
Mortgage-Backed Securities (CMBS)
has been a signicant source o
liquidity, ueling the prior growth in
commercial real estate transactions.
However, the reezing o the CMBSmarketplace (issuances decreased rom
US$237 billion in 2007 to US$12 billion
in the rst hal o 2008 with virtually
nothing since then, according
to JPMorgan Chase & Co. data) has
caused transactions to grind to a halt.
This lack o transactions urther
complicates the ability to properly value
property in the current marketplace.
Real estate values have plummeted,
and investors are waiting to see how
low they will go. There is a ear among
industry specialists that this investor
inertia may cause a continuing
downward spiral in prices, or, at a
minimum, prolong the lack o activity.
Stimulating Credit Markets
One potential solution or this bleak
situation is the inclusion o CMBS
nancing in the US-government-sponsored Term Asset-Backed
Securities Loan Facility (TALF).
Designed to stimulate the credit
markets and restore stability by
providing nancing to purchase
asset-backed securities, TALF was
expanded by the Treasury Department
to earmark US$100 billion to leverage
US$1 trillion o lending. While TALFs
inclusion o CMBS should stimulate
the market, debate remains over
how vigorously the various players
will embrace the program.
Purchasing Legacy Assets
The US Governments Public-Private
Investment Program (PPIP) provides
public-sector equity and debt nancing
to private-sector investors to achieve
two critical goals: attracting idle assets
back into the market by tackling the
inertia o private investors, while also
reeing up embedded capital rom the
balance sheets o institutions. This
mechanism will hopeully achieve
the goal o creating a market or
these real-estate-related assets,
enabling institutions to unnel unds
into new credit ormation.
It is hoped that restoring liquidity
or new transactions including those
involving commercial real estate
will ultimately stimulate the economy.
Additionally, greater clarity about assetvalues gleaned rom the resulting
transactions should boost investor
condence, increasing the amount
o investment in the market or
urther transactions.
While investors and asset holders
are still waiting or greater clarity on
these programs to help determine the
extent o their participation, the US
Government has taken an activist
stance to help resolve some o the core
issues that initiated the global economic
crisis. With nancial leaders worldwidewatching and evaluating what happens
in the US economy, it remains to be
seen whether the depth and breadth
o this situation can be signicantly
aected by the actions o government.
For more inormation please contact:
Ray Milnes
Partner
Building Construction & Real Estate
KPMG in the US
Tel: +1 312 665 5023
e-Mail: [email protected]
2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.
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Everybody has been hurt by current market conditions. For example,hedge unds, traditionally ocused on absolute rather than relative returns,have inevitably been hit hard, although a number o unds are continuingto do well in attracting new investment. Dave Seymour argues thatinvestment management is likely to emerge changed but probablystronger rom the crisis. There are exciting opportunities ahead.
But success will depend critically on rebuilding trust and condence.
Topics
2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.
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| rontiers in nance June 2009
Dave Seymour
Confdence
must returnAn investment management perspective
The simplest way o
summarizing the current
state o the investment
management industry is
to say it is conused. A
large part o the industry
is still sitting on the sidelines. Funds
with private capital reserves still haveinvestable resources. But they cant be
sure the market has bottomed out, and
are wary o investing into assets which
may lose urther value. Overall, there
is a lot o uncertainty over where the
market is going and how to respond.
Historically, the mostsuccessful investment
management rms havebeen those which focusclearly on their customers.This is going to be evenmore important in the future.
Getting in shape
One sensible and eective strategy is
to concentrate on getting into shape or
the upturn, when it comes. Here, one
o the most important challenges is to
rebuild trust and condence by strong
customer relationship management.
Historically, the most successul
investment management rms have
been those which ocus clearly on their
customers. This is going to be even
more important in the uture. Whether
they are private capital investors or retail
investors, customers are increasingly
going to demand better, more requentand more transparent communication.
The crash, exacerbated by high-prole
rauds has made investors very
nervous. Risk management processes
have been called into serious question.
Perceptions o risk have changed. The
investor community is rattled, and
condence will not return easily.
The rms which come through
the crisis best are likely to be those
which are currently investing in creating
or growing meaningul customer
relationships.Successul rms are taking the
opportunity to improve the organization,
build new skills and capabilities, and
perhaps acquire complementary
expertise or capacity through corporate
restructuring. Those who have been
badly burned by the crisis need to
rebuild and re-organize their operations
or the new risk environment. As ever,
its the simple things which can count
or most. Ater a period o irrational
exuberance, ocusing on execution
will be the key to achieving returns.
Many rms are already beginning to
restructure themselves, their products,
teams and capabilities. In an industry
where many players dont have deep
in-house inrastructures, instead relying
on networks o third party vendors or
many operational activities, ocusing on
execution also means ensuring that thetotal risk prole is eectively managed.
The uture o regulation
The chorus o calls or tighter regulation
should be met with care. Many o the
participants at the G20 London meeting
are seeking to build new regulatory
rameworks, to curb what they see as
the excesses o Anglo-Saxon capital
markets. There is a tendency to
characterize hedge unds, in particular,
as opportunist players who damage
rather than support local economies.Tighter regulation is an understandable
and instinctive response.
A risk with stand alone or knee-jerk
regulatory changes is that they can
open up arbitrage opportunities
between dierent markets and
stimulate rms to nd alternative ways
o investing capital in situations which
match their risk appetite. Financial
markets are very creative, and will seek
to invent new structures, products and
techniques in the pursuit o a return
on investment.
Topics
2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.
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Smaller, nimbler rms willincreasingly dominate themarket in the years to come.And customers will nd iteasier to relate to andunderstand simpler, morefocused rms as well.
Furthermore, traditional regulatory
rameworks, rom the Securities
Exchange Commission (SEC), Financial
Services Authority (FSA), the G10sBasel Committee and the like, are
ocused on corporate entities. But
investment unds are not companies,
and are not like companies. They are
products. Any move to greater
regulation may be more appropriate
i it ollows the model o consumer
product saety regulation in order to
satisy the objective o protecting
investors. The authorities need to move
careully i they are to avoid rustrating
the markets natural recovery and
readjustment ater the crisis.They should also seek to guard
against appearing to guarantee investor
protection, since this could lead to
distorted consumer behavior. In the
particular case o hedge unds, there
is a risk that i these are more tightly
regulated it could give investors the
alse illusion that this type o
investment has the same risk prole
as a traditional und or example.
People could then misunderstand the
risk o hedge und investing mistaking
higher regulation or lower risk.
A return to boutiques
One area where the market already
seems to be in tune with regulators
concerns is in the increasing move
back to smaller boutique operations.
The last 15 years or so have seen agreat deal o consolidation in the
industry, with asset managers being
acquired by large institutions, nancial
conglomerates expanding into third
party business and so on. Financial
institutions have become complex and
opaque, and the potential or localized
risk management ailure to contaminate
entire corporate balance sheets has
become painully apparent. Regulators
and politicians have begun to call or
smaller, simpler and more transparent
institutions.The market already appears to
be responding. Among the major
global institutions, one has exited
rom retail asset management; another
is divesting a high-growth business
to a private equity rm; continued
pressure to deleverage and bolster
balance sheets will inevitably lead to
more de-consolidation over the next
ew years. Conversely, traditional und
management rms are looking to make
acquisitions to develop complementary
capabilities or increase capacity.Talented individuals are already
moving in the same direction. Since
the major investment houses became
mainstream banks, a steady stream
o start-ups and boutiques has been
orming. The dierence today is that
the inrastructure o third-party vendors
which has developed over the
intervening period provides a ready
made, mature support environment or
these new boutiques. Smaller, nimbler
rms will increasingly dominate the
market in the years to come. Andcustomers will nd it easier to relate
to and understand simpler, more
ocused rms as well.
The uture is ull o opportunities
The recession and its atermath will
provide great opportunities or the
investment management industry,
magnied by demographic and
geo-political trends which have been
under way or some years. We expect
private capital to play a critical role in
deleveraging the nancial system.
Many economists argue that we
are seeing not simply the bursting o
another bubble like that o the dot-com
crash, but a more undamental
realignment to a higher-saving world
much like the Asian markets. Theconsumer spending boom will
give way to more restrained behavior
as individuals and amilies respond
to uncertainty and the ear o
unemployment and repossession.
History suggests that undamental
changes in attitude persist or many
years ater a major nancial crisis.
I savings ratios rise to consistently
higher levels, more assets will be
under management and the demand
or investments o all types will grow.
Against this, however, are some keydemographic trends, especially the
great transition in developed western
economies as the baby-boomers move
into retirement and begin drawing down,
rather than building up, their savings.
In addition, the long-term transers o
wealth rom the developed world to
the oil-rich nations and the developing
world will be o crucial signicance.
Middle-Eastern and other sovereign
wealth unds are already major players
in the investment community.
In the 1980s, the US was the worldslargest creditor nation. Today that role
has been taken by China, overtaking
Japan to hold some US$1 trillion o
US debt. The US itsel has become
the worlds biggest debtor nation.
How these unsustainable imbalances
are sorted will prove o vital importance
or 21st century geopolitics.
While the immediate outlook remains
uncertain, the medium- and long-term
opportunities are tremendous, and
tremendously exciting. Those investment
unds which keep their nerve,concentrate on improving transparency
and communication with customers,
and get themselves in shape or the
new nancial world order stand to enjoy
an exciting and protable uture.
For more inormation please contact:
Wm. David Seymour
Partner, Global Sector Leader,
Investment Management
KPMG in the US
Tel: +1 212 872 5988
e-Mail: [email protected]
2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.
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James Suglia Tom Brown
A recent KPMG report provides insight into thenew world acing investment managers ater thecrisis. Reviewing its key conclusions, James Suglia,and Tom Brownargue that the key to recoverylies in mending relationships.
Time to mend relationships in investment management
Renewing the promise
T
he credit crisis is
undamentally reshaping
investment management.
A new report, drawing
on the ndings o a globalsurvey o 288 investment
managers, investors and senior
executives working in the industry,
provides valuable pointers to how
the industry will develop as a result1.
I rms are to grasp the potential o
these changes, mending relationships
with investors, regulators and other
stakeholders will be key.
Corporate governance and risk
management
Many investment managers couldbenet rom liting their game in this
area. Investors believe that independent
assurance and adherence to a best
practice code o conduct need
improvement, despite investment
managers believing that they are
perorming well in these areas. This
is a disconnect that managers really
need to address to avoid alienating their
investors. Managers who have strong
programs need to be more transparent
(i.e. better at communicating them)
while other managers must rst workon strengthening their practices.
Investment managers need to
clearly articulate their risk appetite and
transparently communicate this. When
risk appetite is properly understood and
clearly dened, it becomes a powerul
tool or enhancing overall business
perormance. A clear and eective risk
management and governance structure
gives both the investment manager and
investors condence that investments
can be competently managed in a
controlled way.
Rebuilding trust
The trustworthiness o nancial
intermediaries has been hard hit by
the crisis. This is on top o a string o
scandals in recent years, rom markettiming abuse to Ponzi schemes, which
had already damaged this trust.
Investment products can be complex
and dicult to understand or most
members o the general public, while
ailure is easy to see and measure.
Investment managers need to help
intermediaries, who sit with clients, to
explain the risks and benets, the costs
and the small print. This should deliver
the message to their investors in all o
these areas. Unortunately, the research
indicates that there is still a wide gul tobridge between investment managers
and intermediaries.
Regulation
There are widespread concerns about
the impact o potential new regulations,
especially in the areas o leverage,
disclosure to clients and the external
assurance. The great majority o
respondents elt that regulators clamping
down will seriously increase costs or
investment managers. In many cases,
managers will be unable to pass onthese associated costs to their clients.
Likely regulation in areas like shorting
and leverage will damage many
business models. Many hedge unds
could nd lie very hard. Greater
transparency may also mean that
investors begin to question the ees
they are being asked to pay or hedge
and other alternative unds. In response
some alternative und managers will
entrench but many will diversiy and
seek to migrate into more traditional
activities.
Dierentiation
For many years, investment managers
did not have to try very hard to be
successul in the industry. Today, the key
to success has become dierentiation.The study highlights the importance
o personal relationships and service
quality as well as delivering on clients
expectations. Achieving dierentiation
is really about getting back-to-basics:
determining what clients need, getting
the value proposition ocussed and
communicating it clearly.
For more inormation please contact:
James Suglia
Partner
KPMG in the US
Tel: +1 617 988 5607
e-Mail: [email protected]
Tom Brown
Partner
KPMG in the UK
Tel: +44 20 7694 2011
e-Mail: [email protected]
1. Renewing the promise: Time to mend relationships in investmentmanagement, KPMG International, June 2009; in partnershipwith Datamonitor.
About the report
The ull report,
Renewing the
promise:
Time to mend
relationships in
investment
managementwill
be available in
June, please visit
www.kpmg.com
or copies.
2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.
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Thilo Kasprowicz Klaus Ott
Current proposals
In January 2009, the Basel Committee
published three discussion documents
addressing critical areas where they
believe the current ramework needs
to be strengthened:
Enhancements to the overall
ramework: these are aimed at
strengthening risk capture in Pillar 1
(minimum capital requirements);
improving corporate governance
and risk management and their
supervisory oversight (Pillar 2); and
improving disclosure o nancial
exposures to enhance market
discipline and allow third parties to
develop better understanding o a
banks overall risk prole (Pillar 3)
Revisions to the market riskramework: the current ramework
ails to capture some key aspects
o market risk and will be extended;
in addition, stressed value-at-risk
requirements will be imposed
Incremental risk in the trading book:
since the crisis began, a number o
banks have suered large losses
rom trading exposures, and the
committee now proposes a
supplementary incremental risk
capital charge, based on estimates
o potential losses
Consultation on these proposals has
now ended, and there are clear target
dates or complete implementation o
the nal conclusions: December 2009
or the overall ramework enhancements,
December 2010 or the market risk and
incremental trading risk proposals.
Since the revised Accord can only take
legal eect when it is implemented into
individual national jurisdictions, it is clear
that these implementation timetables
are extremely challenging.
Similarly, many banks should wake
up to the potential implications now. In
view o the high political pressure to act
on the lessons learned rom the crisis,
the European Union and others are
already anticipating expected changes.
They are issuing detailed directives and
drat regulations to strengthen bankingsupervision and improve risk and capital
management o banks even beore
December 2009 or 2010. The luxury
o waiting until proposals are nalized
and regulations drated in detail beore
planning how to comply is simply not
available. Most aspects o the revised
ramework are already clear in principle.
Banks should be urgently working out
how to respond.
Strategies, methodology
A number o the new proposals willinvolve banks in reconsidering strategic
decisions. For example, certain trading
book products will attract higher capital
charges, and some banks may need
to review whether or not to continue
in a particular securitization markets,
whether as originator or investor.
Changes to capital denitions will
mean banks will have to review the
issuance o some capital instruments,
or example hybrids. Proposals on
concentration risk will mean that credit
portolios will need to be scrutinizedcritically. Credit risk management
teams should re-think their approach
to active portolio management.
Basel II will also involve changes
to methodologies and valuations.
Stress testing will almost certainly be
imposed more widely, and potentially
even applied to integrated underlying
portolios o securitizations. Liquidity
regulations will involve the thorough
identication o cash-fow positions or
a wide range o products and the need
or adequate processes or liquidity riskmanagement. Furthermore, the
calculation o risk-weighted assets or
some products will change. Changes
to disclosure, in particular or
securitizations, trading book activities
and the use o special purpose vehicles,
are likely to accelerate the move to
bring internal management reporting,
external statutory and nancial reporting
according to IFRS into closer alignment:
banks should be looking at consistent
disclosure strategies, capital market
communications and reporting policies.
Organization and IT
These proposals will have implications
or many aspects o a banks systems,
processes and inrastructure. Some
risk management and disclosure
processes will need to be redesigned.
Management inormation systems
may have to be recongured to supportnew reporting procedures and acilitate
enhanced communication with
supervisory authorities. Banks should
prepare or a much closer interaction
with regulators, who will increasingly
use their intervention to monitor
business and risk strategies.
Underpinning process changes will
be requirements to recongure and
enhance IT architectures and system
unctionality. Databases supporting cash
fow inormation, portolio composition,
disclosure and risk management willalmost certainly need to be upgraded.
Issues o skills, resources, stang and
cooperation across departments are
likely to arise, both as banks undertake
the necessary change programs, and
as they comply with the new regime
on a continuing basis.
Basel II has been a signicant
challenge or many banks to date.
Even beore the current ramework
has been ully implemented, new
challenges are now apparent. It may
be tempting to think that the proposedrevisions to the ramework are simply
slight enhancements or variations.
But the changes will impact even
on banks using the less demanding
Basel II standardized approaches.
There is a lot to do and, as we have
seen, the timetable is tight. Given the
present political momentum or change,
it is more likely that deadlines will be
brought orward rather than be delayed.
Analyzing the strategic impact o
the new regulations and planning
or implementation should not bedelayed or urther clarication.
For more inormation please contact:
Thilo Kasprowicz
Partner
KPMG in Germany
Tel: +49 69 9587 3198
e-Mail: [email protected]
Klaus Ott
Partner
KPMG in Germany
Tel: +49 69 9587 2684
e-Mail: [email protected]
2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.
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Quietlyprospering
Canadian fnancial services
2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.
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Ann Davis
Largely away romthe gaze o internationalcommentators, nancialservices in Canada remainin robust health, and incertain cases are positivelybooming. A number oactors are responsible,
including a generallyconservative culture oexcessive risk-avoidance,strong regulation, and awelcoming businessenvironment.Ann Davisexplains.
A
cross the developed
world, the nancial
crisis has seen banks
collapsing, being bailed
out by governments or
being taken into public
ownership. More than a trillion USdollars o value has been wiped out
rom bank balance sheets. However,
many Canadian banks have proved
much more resilient than those o any
other major economy. Last November,
Time magazine called Canada the new
gold standard in banking1. The 2009
Global Competitiveness Report rom
the World Economic Forum ranked
Canada No 1 or soundness o banks2.
By any measure, Canadas banking
sector is one o the strongest i not
the strongest in the world. How so? 2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.
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Ten years ago, the Financial Times top-50 ranking ofthe worlds biggest banks was dominated by US and UKbanks. No Canadian banks made the list. Today, all ofthe Big 5 Canadian banks are now in the top 505.
Five major banks dominate
Canadas banking sector (see box),
which in total embraces 21 domesticbanks, 55 oreign-owned subsidiaries
and branches and 47 Trust companies.
The nancial services sector as a whole
has shown remarkably steady growth
o about 3.5 percent per year over the
last ten years, to reach a total turnover
o C$80 billion3. Over the same period,
the Big 5 has collectively doubled their
market capitalization4. Ten years ago,
the Financial Times top-50 ranking o
the worlds biggest banks was
dominated by US and UK banks. No
Canadian banks made the list. Today,all o the Big 5 are now in the top 505.
Royal Bank o Canada and Toronto-
Dominion are among only seven
global nancial institutions to hold a
triple-A credit rating rom Moodys.
Regulation is part o the reason or
the solid success o Canadian banking.
Cultural attitudes are also crucial. In
both o these respects, Canada has
maintained a distinctive tradition, the
roots o which extend deep into the
early hal o the last century. That
regulatory ramework, coupled witha conservative attitude to risk-taking,
has helped to ensure a consistently
prudent approach and a greater
degree o openness and transparency
than in many other systems.
Another key eature is that mergers
and acquisitions in the banking sector
are constrained among the Big 5,
which has limited the size o individual
banks and avoided concentration o risk.
Government policy encourages the
establishment o new banks to promote
competition. Large banks those with
more than C$5 billion equity must
remain widely held. Bank mergers
have been proposed as a route togreater international competitiveness,
but have been vetoed at the political
level. Limits on oreign ownership have
been imposed and mergers between
banks and insurance companies are not
allowed. A urther signicant actor is
that during the 1980s, the big banks
bought most o the large independent
investment dealers, thereby integrating
them into the more prudential banking
structure.
These strengths have been
consistently recognized by theInternational Monetary Fund. In its
regular Financial System Stability
Assessment in 2008, the IMF
concluded6:
The Canadian nancial sector is
among the worlds most highly
developed
The ve large banking groups that
orm the core o the system are
conservatively managed and highly
protable
Stress tests suggest that the largeCanadian banks are able to withstand
a broad range o shocks
O course Canadas banks have
not been unaected by the global crisis.
Nevertheless, none have collapsed,
none have needed government bailout
and there has been no need or
injections o government capital. There
may have been an air o condence in
the comments by the governor o
the Bank o Canada, Mark Carney,
when he claimed in April 2009 that
Canadas bankingsector embraces:
21domestic banks.
55oreign-ownedsubsidiaries andbranches.
47Trust companies.
2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.
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Canadas Big 5 Banks9
Market Capitalization (Q3 2008)
Royal Bank oC