The New Regulatory Framework for a
Post-Crisis Financial System:
Priorities for the Middle East
Andrew Cunningham
Presentation to the Fourteenth Annual Meeting of Middle
Eastern and North African Bank Chief Executives
Organised by the IIF and Emirates NBD
Dubai, 17-18 October 2011
1
International Financial Sector Reform
Banking Sector (1), strengthening existing structures
Basel III: capital, liquidity and macro-prudential oversight
Banking Sector (2), new areas of regulatory focus
Global Strategically Important Financial Institutions (G-SIFIs)
Resolution of failed banks
Bankers’ pay
Broader financial system (bank and non-bank)
Regulation and de-risking of “shadow banking” system
Much trading in derivatives to be moved onto formal exchanges
Structures of financial regulation
New relationship between central banks, bank supervisors and
financial sector stability
Strengthened powers for supra-national bodies (e.g. CEBS becomes
European Banking Authority and Financial Stability Forum becomes
the Financial Stability Board.)
2
Public Policy Issues
Avoid taxpayers having to pay for bank failure
Bailing out banks is expensive, so we need to reduce likelihood of
bank failure by strengthening banks, re-aligning the
incentives/motivation of those who work in banks, and ensuring that
when banks do become insolvent/illiquid they can be wound down in
an orderly manner which minimises the cost to the taxpayer.
Ensure banks continue to facilitate economic growth
If banks are weak, the flow of credit into the economy will slow and
economic growth (and prosperity) will be compromised.
3
Public Policy Issues (Middle East)
1. The reform of financial systems in the west is being driven by the
need to prevent the financial system straining government finances
and/or causing economic recessions…
…In the Middle East, the financial system does not represent such a
threat to national governments because it is smaller as a proportion
of national economic activity. Furthermore, bank bailouts are funded
from government resources without the need to increase or
introduce taxes.
2. In the west, the focus is on de-risking/constraining financial sector
activity while trying to ensure that financial institutions continue to
be able to facilitate economic growth…
…In the Middle East, the focus needs to be on building large, efficient
and diverse financial sectors which will promote economic growth.
4
After the Global Financial Crisis: Agenda for
Financial Sectors in the Middle East
5
1.
Continue to promote reform and development of financial sectors
2.
Respond to specific challenges presented by the global financial
crisis in the Middle East
3.
Take advantage of the work/thinking being done on financial
markets following the financial crisis, and selectively adopt the
the re-regulation agenda.
Financial Sector Development in the Middle East
Still trying to emerge from
legacies of the past
Algeria
Egypt
Iraq
Libya
Syria
Yemen
6
Enlarging and strengthening
existing financial
system
f
All six GCC countries
Jordan
Lebanon
Morocco
Palestine
Tunisia
Domestic Credit extended by banking sector
% GDP (2010)*
Arab World
32%
Latin America and Caribbean
East Asia and Pacific
South Asia
Sub Saharan Africa
71%
133%
68%
82%
European Union
160%
* Source: World Bank
7
Reform and Development Agenda for Middle
East Financial Markets
Ownership
Privatise banks and insurance companies
Human and other non-financial “capital”
Upgrade skills of staff through training; upgrade I.T.; and
upgrade physical infrastructure such as bank buildings
Financial ecosystem
Diversify financial market through introduction/strengthening of nonbank financial institutions such as leasing companies, consumer
credit companies, small-cap stock exchanges
Market & legal infrastructure
Improve credit bureau coverage; standardise contracts; strengthen
legal infrastructure
8
Respond to specific challenges presented by
global financial crisis
Losses on mark-to-market securities: 2008/09 was not the first
time GCC banks have lost large amounts of money investing in
securities issued and sold by western banks.
Shortage of dollar liquidity: central banks need mechanisms to
inject liquidity into banking system
Regional co-operation: risk of capital flight due to uncoordinated
action by monetary authorities
Deposit insurance schemes: need to be formalised, rather than
based on blanket, and sometimes temporary, guarantees.
Losses on real estate – more a result of excess liquidity arising from
high oil prices than the global financial crisis; but a continuing
problem in the Gulf due to lack of economic diversification.
9
Adopting the Reform Agenda (1)
Banking Sector: New Areas of Regulatory Focus
Enhanced scrutiny of systemically important financial institutions
But issues of SIFIs not as important in Middle East as in Western
markets because banks are smaller relative to GDP and less
complicated/interconnected.
Resolution mechanisms
Banks do fail in the Middle East, so requiring banks to have some
form of resolution mechanism would be beneficial.
“Banks are already discovering things about themselves that they
did not know.” FDIC official speaking about U.S. banks writing “living
wills.”
Deposit insurance
Should be formalised rather than exercised through blanket
guarantees by Ministries of Finance
10
Adopting the Reform Agenda (2)
Broader financial system: bank and non-bank
Significant factor in the global financial crisis was that market
participants and regulators misunderstood how the financial system
had evolved:
* the size of non-bank financial activity: In early 2008, the
“shadow banking system” in the U.S. was $20 trillion, vs
$12 trillion for the banking system
* the fluid dynamics of financial transactions (e.g. trapped
cash, collateral calls, marks, effect of rating downgrades on
liquidity and price.)
As financial markets in the Middle East develop, participants and
regulators need to continue to understand how the loci of financial
market activities are changing and how the fluid dynamics would
work under stress
11
Adopting the Reform Agenda (3)
Changes to financial regulation
Scope
e.g. Under the Dodd-Frank Act the Federal Reserve has oversight of
systemically-important non-bank financial companies and may
impose prudential standards on such companies.
e.g. U.K. Financial Conduct Authority supervises firms which fall
outside the scope of the new Prudential Regulatory Authority
Structure
Creation of new bodies to focus on macro-economic risks (Financial
Stability Oversight Council in U.S. and Financial Policy Cttee in U.K.)
Mandate
U.K.’s Prudential Regulatory Authority (successor to FSA) has a
macro-prudential/financial stability remit as well as a microprudential. Will also oversee insurance companies.
12
The “Arab Spring” and Financial Sector
Reform
“Governance” is a key theme of the “Arab Spring.” In the
political sphere, citizens are demanding more transparency
and accountability in the way they are governed. The
financial sector should continue to set an example in this
area.
“Arab Spring” likely to divert time and resources away from
financial sector reform as political issues take precedence.
Privatisation will be postponed.
Short and medium term: the “Arab Spring” will place strain
on government budgets as welfare payments are increased.
13
Biggest banks (by asset size) % GDP
(2010)
Biggest banks in GCC
Assets % home country GDP*
1. Emirates NBD
2. Nat. Commercial Bank
3. Qatar National Bank
4. Nat. Bank of Abu Dhabi
5. Samba Financial Group
6. Nat. Bank Kuwait
7. Al-Rajhi
8. Abu Dhabi Comm. Bk.
9. Riyad Bank
10. Kuwait Finance House
Arab Banking Corp.
Bank Muscat
Nat. Bank of Bahrain
14
34
17
62
25
11
42
11
21
11
41
136
33
29
* 2009 GDP for Bahr, Kuw, Oman and UAE
Biggest banks in the World
Assets % home country GDP
1. BNP Paribas
2. Deutsche Bank
3. HSBC Holdings
4. Barclays
5. Royal Bank of Scotland
6. Bank of America
7. Credit Agricole
8. JPMorgan Chase
9. ICBC (China)
10. Citigroup
11. Mizuho Financial Group
Unicredit
104
77
109
104
101
16
83
15
35
13
34
61
Other Middle Eastern Banks % GDP
Assets % home country GDP (end 2010)
National Bank of Egypt
Commercial International Bank
Arab Bank
15
24
6
185
Audi Saradar
BLOM Bank
73
57
Attijariwafa
Banque Centrale Populaire
BMCE
40
28
19
GCC commercial banks ranked by
equity size (1)
End-1994
1. Nat. Commercial Bank
2. Riyad Bank
3. Arab Banking Corp
4. Nat. Bank of Kuwait
5. Al-Rajhi
6. Nat. Bank of Dubai
7. Samba
8. Saudi British Bank
9. Saudi French Bank
10. Arab National Bank
11. Qatar National Bank
12. Gulf International Bank
13. Nat. Bank of Abu Dhabi
14. Gulf Bank (Kuwait)
15. Burgan Bank
16
End-2010
1. Emirates NBD
2. Nat. Commercial Bank
3. Al-Rajhi
4. Nat. Bank of Kuwait
5. Riyad Bank
6. Samba
7. Qatar National Bank
8. First Gulf Bank
9. Nat. Bank Abu Dhabi
10. Kuwait Finance House
11. Abu Dhabi Commercial Bank
12. Saudi French Bank
13. Alinma Bank
14. Arab National Bank
15. Saudi British Bank
GCC Commercial Bank ranked by equity
size, (2)


17
Biggest 30 GCC banks (by equity) in 1994 all still exist in 2011,
with the exception of three which have been absorbed into larger
institutions. But those three were “underperforming” not “failed”
banks.
Of 65 GCC commercial banks in existence in 1994, only about 8
brand names have disappeared.
Stock market capitalisation % GDP (2010)
Jordan
Qatar
Bahrain
Saudi Arabia
Morocco
UAE
Egypt
Oman
Kuwait
Tunisia
112
89*
82*
81
76
48*
38
37*
32*
24
* 2009
Source: World Bank
18
United Kingdom
United States
France
Japan
Germany
Italy
138
118
75
75
43
24
Hungary
Poland
Czech Republic
Slovak Republic
20
17
7
7