Mr. Weber, perhaps we can start with the topic no bank has been able to escape since the crisis: regulation. Is a “regulatory endgame” in sight, or can we expect more rule writing?
Axel Weber: In some areas we are certainly seeing the end of the rule writing. The G20 regulators have promised to largely complete the core of the new re-regulation in their upcoming meeting in the fall. They want to finalize rules for capital, liquidity and leverage. Also, I think policymakers agree on the need for a common understanding at the global level about what recovery and resolution frameworks for global banks should look like.
So we are entering an age of regulatory certainty?
Not exactly. Take as an example the too big to fail issue. While I do think there is a global understanding on how resolution planning should be done in principle, we will never see full harmonization of rules. Recovery and resolution of complex financial institutions depends on the ability of national regulators to make globally binding decisions, for example in bailing in bondholders. There is no global legal system that can handle this, so it will inevitably remain tied to the national level and discrepancies between local requirements will persist. Other things are in flux as well, in particular with respect to regulations on banks’ legal structures. There is a Volcker rule in the US, a Vickers proposal for the UK, national requirements in Germany and France, and a Liikanen proposal for the EU. All are different with regard to the details. We are also waiting for a global consensus on what the future capital framework should look like, or the interconnection between the banking and the shadow banking sectors.
How does shadow banking fit in to the regulatory picture?
There is an open question of whether non-regulated financial intermediaries, commonly referred to as the shadow banking sector, will be regulated indirectly via their interactions with banks or directly – by for instance holding them to capital or liquidity standards similar to those for traditional banks. Taking the other tack, and regulating the shadow banking sector indirectly through tighter measures for traditional banks, would add another layer of complexity to the regulated sector. We cannot rule out that this will be the case, though in my view that would be an inadequate response. The fact is that financial risks are present in the shadow banking sector as well and they need to be addressed appropriately by the regulators.
Another important issue on the political agenda is the automatic exchange of information with tax authorities. You are on the record as a supporter of a global standard. Why?
It is clear that exchanging tax-relevant information will be the new reality. There is a strong international drive in this direction not just in bilateral relationships but also at the OECD level. Now the G20 – which represents some 90 percent of global GDP – has also endorsed the OECD proposals. This is commendable, as from our perspective it is of the utmost importance to see the final information exchange model – EU, FATCA and OECD – converge, including convergence in the implementation timetable and the safety standards applied to client information transmission. Another question that needs to be addressed in this context is the resolution of past problems associated with untaxed assets. The implementation of a global standard is among other things also a question of cost as well as operational complexity and risk. You want to be able to run your bank according to one standard.
Do you see any technical issues here? After all, a lot of information will now have to be shared widely between authorities around the globe.
There are a host of issues related to this. In my view one of the consequences of this new international standard is that it requires some countries, in emerging markets for example, to subscribe to a reporting standard for international taxpayers which they do not yet have for domestic ones. This will set in motion profound institutional transformations in these countries.
What about an individual’s right to financial privacy? Is that getting lost in this discussion?
This is a key question that needs to be addressed. Client information confidentiality remains extremely important. Transparency towards the tax authorities does not imply the end of data confidentiality. Banks, tax authorities and other regulators need to maintain a sphere of privacy for individuals, and be very conscious of privacy protection within the context of a transparent tax regime.
Another subject of high importance to banks today is technology. As the Chairman of UBS, how do you see technology affecting the industry? How can banks adequately incorporate technological change in their planning?
Like every innovation, technological progress has two sides; it can be a threat and it can be an opportunity. We need to be mindful of both.
Where do you see the threats?
Protecting the IT infrastructure and systems and confidential client information from outside attacks will remain an extremely important factor for the financial industry. As already mentioned, while there is no argument for intransparency on tax issues, there is a strong argument for protecting client information in general. Breaches can lead to vast legal, reputational and financial damage.
One major opportunity is in the interaction with clients. Just consider the mobile revolution today with the abundant use of smartphones and tablets. These are being taken up by both the younger and older generations at similar rates, which is unusual. Historically it has been the young who more readily adopt new technologies, but in this case it is across the board. For me personally, these new technologies are a very strong enabling factor, helping us as an institution to improve our client focus and interaction scope. As social interactions become more digital, for example with social networks, it is only natural for people to meet with their bank and client advisors over these channels as well. For banks, this means
you can have a higher frequency communication that at the same time can be much more targeted in catering to clients’ interests and demands, becoming more of a part of their everyday lives. Ultimately the goal needs to be to improve client satisfaction and we think this is a very important element. Technology is not just an enabler for wealth management clients though – it can have the same enabling effect across all parts of our business. I am thinking for instance of our Neo platform at UBS, which lets corporate and institutional clients more closely interact with our investment bank. If banks want to maintain a competitive edge, there is no question they will need to continue to invest in the latest technology. The banks which are able to not only be among the first movers in the usage of the new technologies but also to translate the technological potential into added value for clients will benefit most.
If technology is so important, will banks have to fear competition from technology firms, a Google or a Microsoft for instance?
To be frank, I don’t think so. It is true that technology is a key driver of competitive advantage for a bank. But, as we have been discussing, banks also have to comply with strict and ever increasing regulation. On average, global banks see roughly 60 new regulations every day. You can easily understand why compliance costs for banks are so high. The very existence of this regulation is therefore an entry barrier for new, non-bank players in the market. They face a huge up-front investment not just in banking technology, but also to meet these regulatory demands.
Technology also enables the individual. If I can get all the market information I need for free on the internet, is the role of a bank as a trusted advisor not in danger as well?
Quite the contrary, I think in the current uncertain environment clients will seek more advice from their banks, not less.
Because investors do not need more information, they need better information. We are living in a world that is becoming increasingly complex and difficult. Monetary policy is very loose, interest rates are at historic lows, yield curves are flat. Many of our clients, who have become much more risk averse since the crisis, are now focusing on preserving wealth and finding ways to invest sustainably over the medium and long term. Institutional investors, like pension funds or insurance companies, are facing great challenges meeting their future liabilities. Corporate clients have record levels of cash but are holding back. In many cases, clients are being driven into unfamiliar investment territory in the search for yield. Banks have a central role to play in helping them understand and navigate this very uncertain environment. Information alone is worthless if it is not interpreted correctly. We have seen this ourselves at UBS, where the Chief Investment Officer function has gained greatly in significance. Our mandates business for instance has increased in large part because of the CIO office’s advice, and because of the performance of some of the portfolios it has recommended.
You mentioned risk aversion among clients. Is this the new normal on the client side?
As soon as yields go up I expect to see higher activity by clients again. With the US business cycle bordering on to a sustained recovery, my expectation is that we will see the end of tapering and then a tightening of monetary policy in the US over the next 12 months. Monetary policy is on the verge of a turnaround in the UK too. My hope is therefore that over the next 12 to 24 months client activity levels will improve.
While we are on the subject of the new normal – governments have been playing an extraordinary role in the markets since the crisis. When, if at all, will this end?
The crisis has certainly led to governments, and particularly central banks, taking a much more central role. I expect this to remain the case for at least the next couple of years, as the central fragilities in the global economy remain and as central banks slowly but surely navigate the exit from unprecedented policy measures. Eventually we will see a normalization at some point, because market economies are not supposed to be organized in this way. I am optimistic that things will normalize faster in the US going forward, with the economic recovery so much more advanced there. In Europe the recovery is slower and more uneven, suggesting that in five years’ time European governments will still be more in the driver’s seat economically speaking than will be the case in the US.
Interview by Tom Lyons
Editor. UBS. The Bank for Banks