Author: World Finance

As the US prepares to end its monetary easing programme, what potential financial stresses should the federal government keep an eye on? Former Fed governor Randal Kroszner talks unemployment, manufacturing and the tricky question of whether the US people have confidence to invest again.

As the US prepares to end its quantitative easing program, many question what is going to happen to the economy in the days, months, years to come. Former governor of the fed reserve Randall Kroszner joins me now. Thank you so much for joining me today.

World Finance: So as I said, what is going to happen, do you think the US is really ready to end this program?

Randall Kroszner: Well I think the fed felt that there had been enough progress in the labour market. The US economy was sturdy enough to stop the additional asset purchases. We have to remember that the fed’s balance sheet is now $4.5tn. It had been $800bn, so it’s dramatically larger. Even though they’re not purchasing more asset, they’re still providing a lot of support for the economy. 

World Finance: Absolutely. Now you were in charge when the 2008 financial crisis hit. Bernanke, many say, was quick to respond. Do you think that he put in the measures that needed to be taken at that time?

Randall Kroszner: We tried to act very quickly. One of the things that really haunted us was what happened in the 1930s when the shocks came and the fed did nothing. Milton Friedman, one of the great University of Chicago economists, had said that the depression became the Great Depression because the fed didn’t act, and so we were certainly not going to make that mistake. We undertook a lot of programs to avoid a deflation, avoid a repeat of the Great Depression. Was everything perfect? Certainly not. But did we avoid the worst outcomes? I think we did a reasonably good job.

World Finance: Do you think the labour market was hit too hard by the measures that were put in place?

Randall Kroszner: We were trying to provide support for the economy and for the labour markets. The shocks hit very hard across large and small financial institutions, people who owned homes, and in the US the main savings vehicle for people are their homes and they fell dramatically in value, so consumption was down, and it was a challenge overall. So we’ve had a slow recovery, but we’ve had a steady one. It hasn’t been as robust as we would like, but fortunately it’s been a bit stronger than many other major countries around the world. 

World Finance: So do you think that the US labour market is now poised to continue the slow but steady growth that we have been seeing?

Randall Kroszner: So I think that’s likely. There could be so many shocks that come in, there are so many geo-political uncertainties, whether it’s the Middle East or the Ukraine. We see what happened Vladimir Putin storming out of the G20. That doesn’t suggest that everyone’s working perfectly together. So there are lot of risks out there, but if there’s no major shock that comes in, it’s likely that the labour market will continue to recover, but we’ve still got a long way to go. There are a lot of people who are not in the labour force who would like a job, there are a lot of people working part time that would prefer to be full time.

World Finance: The precarious balance that we face right now, a lot of focus has been on what is it going to do to the wider economy? But as you and I know, a lot of American money that comes in is fuelled by a stable currency, but the currency rising, what is that going to do to manufacturers who rely very heavily on exports?

Randall Kroszner: We’ve had a lot of productivity growth in manufacturing in the US over time, and I think the manufacturing sector in the US will be reasonably robust to these changes in the exchange rate. The main challenge is going to be weak demand in much of the rest of the world.

World Finance: How do you think the US can stave off the impact of that in addition to the end of the monetary stimulus programs?

Randall Kroszner: So it’s challenging times, and as I mentioned, there could be a lot of geo-political shocks that come in. But it seems that there’s a gradual restoration of confidence, a gradual willingness to hire and hire full-time rather than part-time, although we still haven’t made as much progress there as we would like, and as those trends continue we should be on a reasonable path, not an incredibly robust path. The US is much less of a manufacturing economy than it once was, so we’re not as dependent upon manufacturing in our core growth, but it’s still an important contributor.

World Finance: Do you think we’re looking at a different USA, different qualitatively in terms of the mood, the willingness, risk projections. Do you think that people are really ready to take that next step to invest, to buy homes, that sort of thing?

Randall Kroszner: I think that’s a very important point, because there’s a lot of uncertainty, particularly on the fiscal side. People are not quite sure what taxes are going to look like, they’re not quite sure what the level of government expenditures are going to be, and we haven’t really lifted that cloud of fiscal uncertainty either in the short run or the long run, and that’s something that’s really been holding back investment, particularly by firms. 

If firms aren’t investing, they’re not going to be hiring as much, and if they’re not hiring as much and they’re not giving the capital goods for the workers to work with, we’re not going to see wage growth to be that strong, so I think that’s the major gap in US policy right now, is that fiscal uncertainty both in the short and long run. 

World Finance: And what impact is political divisions going to play in the future of the US economic system?

Randall Kroszner: If we’re optimists, we could say well this is what happens in the last few years of the Clinton administration, a Democratic president, Republican congress, and they actually got a lot of things done.
 
I’m not as optimistic now to be able to restore that kind of working together relationship, but I think both the Republicans as well as President Obama want to get some things done, and I think we’ll be able to make at least some progress on some small things. I don’t think the big issues related to fiscal uncertainty, the long term unsustainability of our spending trajectory, that’s not going to be resolved before the next presidential election, but I’m hopeful that we can make some contributions. We’ll see. 

Basically, if we can get a few small things done that will be a good sign, but if by the end of the year we can’t get anything done, then unfortunately it’s going to be business as usual.

Banking regulation is tightening worldwide, and Basel III is at the head of these changes. Ricardo Anhesini, Head of Financial Services for Latin America at KPMG, discusses the outlook for Brazil, Argentina, and the region as a whole in light of the tougher demands.

Banking regulation is tightening worldwide and Basel III is at the helm of those changes. Here to tell us whether Latin America is ready for the wave of change that’s upon it is Ricardo Anhesini of KPMG.

World Finance: Ricardo we know that Brazil of course was able to benefit from the commodities boom a few years ago. Now the economy has slowed down, the banking sector is going to play a key role is shoring up any sort of economic development. Do you think that the country is going to be able to build on the capital shortfall that has existed in the past and be able to draw investors in the future?

Ricardo Anhesini: Yes Kumutha, absolutely. Listen, the situation in Brazil is complex. I think Brazil has under delivered over the last couple of years, with respect to a measure of momentum, which was the general election. So we now have a new government, which happens to be the former government re-elected. But in general what we see is that the new government will look at what is necessary for the economy to catch up. The banking community will play a very important role in this catch up.

We have several things that need to be addressed. We need to look at infrastructure finance. We need to look at credit for consumption, especially because credit for consumption was pretty much the basis for keeping momentum in previous years in Brazil. And we also have to look at the global regulation, and the implications of global regulations in Brazil – as Brazil is normally following BIS guidance on that particular set of rules.

World Finance: So do you think Brazil is ready for these changes, as you discussed some of them that need to be made?

Ricardo Anhesini: I don’t think Brazil is ready – I think Brazil will be ready. You know, there’s a lot of expectation that came out from what happened in the election. But from what I heard this morning for example when we debated here at Felaban, the Brazil economy perspective from 2015 – 2020, it was quite encouraging. We heard from the economists a number of positive things about the current structure of the Brazilian banking system and how that can play a role in the future.

Over the last, lets say five to six years, the central bank was quite keen in being present, dictating and adapting the Brazilian rules to the global regulations. And that created some sort of protection to the Brazilian system and the Brazilian banks, and we had quite a consistent level of capital, getting ready to comply with Basel III. We have credit at a level that has grown a lot, as I said, but it’s still below average of the developed world.

World Finance: Is it the right type of capital to move the country forward?

Ricardo Anhesini: Absolutely. Brazil needs to get more investment, a higher level of investment either by local savings or getting investment from abroad. It’s absolutely imperative that Brazil, we meet leverage and delivery expectations, finance infrastructure, and be able to move from where we currently are manufacturing to a higher level, if we get higher levels of investments.

So you’re absolutely right, we need to get more capital and better capital. Now as far as it relates to capital movement in the financial institutions, in the financial system – this seems to be quite right. Our tier one level in Brazil remains high. From a Basel III point of view Brazil is one of the most prepared countries in the region. So we have to deal with other issues coming from different regulations. But on capital I think either on financial institutions, financial systems in general, I think we’re quite right.

World Finance: Let’s go from specific to general. Latin America as you said – robust economies, still there are some issues that riddle these economies. Anti-money laundering, anti-fraud – these are regulations that any country that wants to move forward, is going to have to make sure it is very responsive to the changes that Basel calls for, as well as the other regulatory partners. Are they ready?

Ricardo Anhesini: When you talk about anti-money laundering, when you talk about anti-corruption, owing that to the conduct codes and fair lending – all those strengths are already present in Latin America. Either because the national banks that play an important role in the region, or because the local central banks from Brazil, Mexico, Argentina, are looking at those regulations in a very relevant way, and putting them quite high at the top of their agendas for the banks to deal with.

If we talk about the humour of the banks and the regulations – we are ready now. What it takes to get there, what it takes to implement in terms of technology, in terms of restructuring the governance of the financial institutions that is still to come. And an important piece on that is also about what we just said, about the appeal to make further investments in building the infrastructure of those financial institutions, to get it delivered.

World Finance: Now let’s look at another significant economy – Argentina. We know Argentina is still grappling with some significant issues, trying to control inflation, reduce the exchange rate. How likely is it in the next few years, to be able to be responsive enough to the changes that are required at the Basel level, international regulation?

Ricardo Anhesini: Argentina has of course gone through its issues and problems, but it cannot be ignored. When we look multiple years ahead, Argentina needs to find a way to solve its internal problems, its political issues, its inflation issues and be prepared to absorb and realise the potential the country has. And financial institutions and financial institutions are looking at Argentina with the expectation that those issues will be solved, and Argentina will deliver on those expectations. Now the big question is, how long is it going to take? And I have no answer to that.

World Finance: I wish we all had that crystal ball, but in trying to prove the virility of any banking sector and the potential for future mergers and acquisitions – how much of a role is Basel III playing in those conversations? 

Ricardo Anhesini: The two discussions are quite connected – Basel III implementation and the consolidation of the market in the region. M&A in the region is going to be big in upcoming years. There is no way that the change on the business models, how the banks are operating – they need to control costs, they need to leverage capital to make sure that we get the proper levels under the required regulations.

So I see, without question, that under the financial service M&A is going to be big. Now, to finish on Basel III and how that’s connected. I think that, you know, it’s absolutely necessary that you employ your capital in the best way possible to comply with the regulations. It is a lot more effective if you can combine capital, manage liquidity levels and manage regulatory capital levels, when you are bigger and focused on the larger slice of the region where you operate. I think those two things will really connect as we move forward.

World Finance: Do you think that we are going to see a new flourishing of banking products that are more in line with what Basel III and the international standards are calling for?

Ricardo Anhesini: In general banks the response is yes. I think we will see a lot of innovation in banking products. We need to deploy capital properly and we need to control costs. My response to that is yes. Now I don’t have the crystal ball here either, to tell you what those products are going to be – but a lot of innovation is coming into this industry in the coming years. 

Africa’s banking market – it offers vast potential, while remaining relatively untapped. Zenith Bank CEO Godwin Emefiele discusses the bank’s long history of strong risk management and corporate governance practices, and its importance for attracting investors in light of Zenith’s listing on the London Stock Exchange.

World Finance: Godwin, what level is banking in Africa currently at?

Godwin Emefiele:The level of banking in Africa has evolved from just a rudimentary level, I would say, several years ago, to, I would say, among some of the more developed in the world today.

If you consider the fact that African banks today rank among the biggest banks in the world. Certainly African banks have come a long way. Both in terms of shareholders’ funds, in terms of profitability. Some of the banks in Nigeria and South Africa particularly have really come of age, and I think we need to commend that.

“The level of governance in the financial system is a major advantage for Africa today”

World Finance: Well people talk about the potential in Africa, but in reality, how easy is it to operate there?

Godwin Emefiele: If you consider the fact that several years ago, Africa was mainly dominated by military regimes? Then today Africa has come of age, because practically all the countries in Africa today are democratically elected governments. I would think the level of development in terms of politics has really come of age.

And when you have an environment where democracy has been properly instituted, then you can be sure that a level of governance that you have in the financial system will be strong. And I think that is a major advantage for Africa today.

World Finance: Focusing on corporate governance now, and how developed is Africa in this field?

Godwin Emefiele: The level of transparency in doing business has improved, particularly in the very recent past. For instance, in Nigeria the monetary authorities insist that banks must publish their accounts at the same time. The monetary authorities have begun to insist that even the boards of banks need to get involved in some of the detailed issues that are involved in running banks today.

And so today I think, the level of governance has improved.

“The level of transparency in doing business has improved, particularly in the very recent past”

World Finance: What’s Zenith’s approach to corporate governance, and what challenges have you faced, and as a result, overcome?

Godwin Emefiele: We’re really come off it because in 23 years when the bank was set up, the bank was set up with strong risk management policies and practices put in place, and strong governance also was put in place. So today, when people begin to talk about, “Oh, what is the level of governance?” we take it for granted. Because the bank itself was set up with strong risk management and governance practices put in place.

World Finance: But what were the challenges you faced in that field, and how did you overcome them?

Godwin Emefiele: Some of the challenges are that because a new regulation is coming, and certain things need to be done the way they’re supposed to be done. At the initial stage they tended to be alien to our environment, but of course, we were able to overcome them by insisting that we had the right people in the board, we had the right people taking on certain jobs in the bank. And with that, the challenges became something very, very easy for us to overcome.

World Finance: How are Zenith’s shares distributed?

Godwin Emefiele: In 2004, Zenith became a publicly quoted company on the Nigerian Stock Exchange, and of course earlier this year our shares were quoted on the London Stock Exchange. So as a public company, you find that the shares can be easily traded publicly on the Nigerian Stock Exchange, you can pick up Zenith’s shares on the exchange.

“Before we listed a GDR on the LSE there were companies in different parts of the world that could not access our shares”

World Finance: Well you just mentioned that Zenith has been listed on the London Stock Exchange, so what impact has this had on your company?

Godwin Emefiele: The impact has been tremendous, in the sense that, you find that before we listed a GDR on the London Stock Exchange, there were certain companies in London and different parts of the world that would have liked to access Zenith Bank’s shares, but there were certain restrictions placed on them, that they cannot come directly into the Nigerian Stock Exchange to procure those shares. They couldn’t come to buy those shares, but by being listed on the London Stock Exchange, it is easy for them to go onto the floor of the London Stock Exchange to buy Zenith Bank shares.

World Finance: So finally, what would you say are the major challenges that the African banking sector faces, and how do you see them being overcome?

Godwin Emefiele: Basically two challenges here; challenges in the sense that banks, particularly in Nigeria, have to provide power for themselves. But of course recently, with government divesting from power, and then giving the authority to private sector institutions to generate and distribute power, banks will now begin to focus more on their banking business, rather than providing power.

Second, I would say the Nigerian banking industry was dominated primarily by cash. But with the Central Bank of Nigeria bringing the cashless policy into place, we find that less emphasis is being placed in picking up cash, but more on doing electronic banking.

World Finance: Godwin, thank you

Godwin Emefiele: Thank you very much.