I need to ask you about this, just the events these last two weeks or so, are
we done? I mean, are we past the worst?
Or do you feel like things get a little bit worse before they get eventually
better? Hopefully.
I hope for through the worst. And I think there's still some some
questions around business models around the world as it is.
Had there been weaknesses that have been exposed in the business models of any of
the companies that have had trouble that need to be addressed at this point, but
it certainly seems that the acute phase of the crisis has done the a lot of this
comes down. I was listening to the panel that you
just came from. Of course, there's one part is liquidity
issues. Right.
And the other part is confidence. Yes.
Really? That's really how you stitch together
what happened in the US. You know what took place in Switzerland,
of course. Have you heard enough from regulators to
be able to address? Do you think they've done enough to sort
of bolster confidence at this point in time?
I think regulators should take an extraordinary steps first in the U.S.
and that obviously subsequently in Switzerland to to make sure that the
banking system stays safe while individual banks had had their troubles.
Obviously, we'll we'll all be reflecting on what could we have done to prevent
this, because you never want to get to the point where you have to take the
actions that the that the Fed and the FDIC took in the U.S.
or that the regulators in Switzerland. You don't want to get there in the first
place. But once they're there were relatively
few choices. And I think they pulled out the big guns
and they come markets and that's it. At that particular point.
That's the critical thing. I think they succeeded.
One of the sort of side effects we've seen is this sort of almost transfer of
RTS wealth, transfer of deposits from the smaller lenders into the big ones.
And I would imagine, of course, we would consider you as one of the big ones.
Have you seen any of that these last few weeks or so?
Have you seen a lot of inflows, whether that's client funds or just clients
themselves, kind accounts? Yeah, I mean, look, we were very well
capitalized going into this period of turmoil.
Obviously not expecting the turmoil itself that we're very, very liquid and
we've had it. We have an extremely liquid balance
sheet and have had for years. So I don't think that's appropriate for
any of us to say that we benefited from this, because overall, I don't think any
of us had benefited. But in terms of the resilience of our
business, it's been evidence. And of course, that's a good thing
when markets are trying to figure out whether we're past it.
So they look at things, for example, we got the data from I think it was the Fed
a couple of hours ago, another week of banks in the USD tapping the discount
window. I don't want to see credit default swaps
still underway. I mean, shouldn't these things still
concern us or are they still remnants that eventually you think go away?
I think I've got. I think we have to flow through from
from the from the acute phase of the crisis.
So, you know, we saw the Fed rate to 25 basis points.
The market not too long ago had been thinking 50 basis points.
It would seem to be a nod. And in fact, in fact, it was at least in
part, a nod to financial conditions. And which means that the Fed is fighting
two different fights, that there may be conflicting with financial condition
management on the one hand and inflation on the other.
Sustained higher inflation is not a good thing for any of us.
Would we want inflation to be back under control?
So I think I think the Fed has a particular challenge in managing to a
reasonably pressing challenges that are coming at them.
I think they're striking the right balance.
But there will be implications. The implication will be on the
assumption that this this financial turmoil doesn't flow through to the real
economy. And that's a big question.
I mean, are we going to lose? Or is there going to be a real economy
impact in the US or in Switzerland or elsewhere in the world as a result of
the failure and seizure of these banks or the challenges to business models for
other banks? Short order, it would appear to be no
longer term. It could be if the market is deprived of
some lending capital that would that that can't be replaced by other banks or
by capital markets. I suspect that it will all be replaced
by banks and capital markets. But we'll see the.
And that takes us into some of the lessons, perhaps the lessons for
potentially hopefully we're going to learn from this.
Are there business models out there that you think are just not sustainable,
given, of course, hindsight, but given what we know right now, we need to
revisit some of these things, for example, and maybe also from a
regulatory perspective. Is there a role there, too, for
regulation? I wouldn't I wouldn't generalize about
it by business models that are not sustainable.
I think there are some some truisms in banking which we have to reflect on.
You've got to keep your deposit base diversified and you've got to keep your
balance sheet liquid. This is a truism in banking.
And of course, it did in Egypt of social media and bank runs by Twitter or
whatever the phrases are that they get used.
We have to reflect on whether we've all really accomplished everything that we
know we must accomplish. And
I feel very confident that Senator Rogers has done the right thing and is
in the right place. I think most banks are there, maybe some
that need to adjust their business models.
And I'm sure those are in the process of being adjusted and the regulators and
central banks have given. Market time to adjust those business
models by putting taking some pretty extraordinary steps with deposit
guarantees and an extraordinary liquidity facilities and things like
that. Yeah, a lot of your peers have had to
have really difficult conversations these last few weeks.
So I'll ask you directly and unequivocally, are you happy to do any
out of the ordinary liquidity controls right now?
No risk controls right now. You guys are in a fine place.
A if place. I mean, if you start in the right place,
these periods of turmoil are not as painful as if you start in a less good
place. And we started in a very good place
right now. What where do you think we go with the
81 bond conversation? Because certainly there's one aspect,
which is how do you get wiped out like that?
The other thing is how do you get from that point one point without even having
a conversation around who made that decision to wipe things out?
I think that I think those are questions that would be asked for some time.
And at the end of the day, you know, banks have equity and then they have
other Belen Securities. And they did the amount of balance
securities that I think ranges from something like 5 percent to 15 percent
of the overall capital. So it's not huge in the overall scheme
of things. It's it's cost effective for banks
because 1. These are our debt securities which
carry a lower coupon than the cost of equity.
And no surprise, in the immediate after aftershock from from the Credit Suisse,
that's the the effective yield on these 81 instruments was the same as the cost
of equity where everything was moving around.
So we can be very precise. But if no surprise, it was treated like
equity. So therefore, the market's going to
treat it like equity. It doesn't make sense if you think that
the hierarchy of equity first and debt second is going to be respected in
future. And of course, the Bank of England and
the ECB have come out and said very clearly that they will respect no
particular hierarchy, then they need to want to trade at a lower return than the
cost of equity. But in an ideal situation, of course.
Yeah, but the market's going to want some confidence.
So that's the case. As I just mentioned in the panel inside.
One of the key regulatory key questions regulators is how are you going to
assure the market that both these instruments are valuable in the sense
that they're less risky than the equity? And and second,
how are you going to give the market confidence that the process that you go
through before these 80 ones are bailed out and they're wiped out in banks that
appear to be solvent is an appropriate process because these are things that
leave questions in the market. So right now, the key ones are a lot
more extensive or I should say that's it for us as an issue or a cheaper one
than they were before. And that may be where we end up.
And if it is, then, then the market will will recalibrate.
Does it make you rethink? Well, I guess from do you expect your
funding costs to go up almost I mean, permanently, because at a premium that's
been built into the markets right now, that's one.
And does it make you rethink using that as a funding source?
I guess it's the other question to look at.
I think the market has given its verdict quite clearly that the cost of equity
for banks has gone up and that's our share price is well, partially recovered
is still below where it was prior to all these events happening, even though the
events had nothing to do with us. And we're not impacted either directly
or even indirectly if we assume that the economic impact is going to be minimal.
Why would our share price go down? Because the market has said your cost of
equity has gone up. I think regulators should be concerned
about that. The cost of equity for banks was already
quite high. High cost of equity for banking means
less credit available for that, for the market, for it, for the real economy.
So I think regulators should be concerned about that and they should be
taking steps to offer the transparency that will allow
investors to say that this is how these things are going to work in the
situations that I might be concerned about, not to overtly reduce the cost of
equity, but to take the equity risk premium out as a result of uncertainty.
The I mean, as you perhaps alluded to earlier, everyone's become almost a
banking analyst, right. From the real one all the way to
Twitter. Yes.
Right. One of the things that's really come up
also recently talking about funding, funding costs is just the rates
available on deposits, for example, has I wouldn't say scared away people.
It's this dis incentivized and from keeping them there and obviously the
crisis of confidence that's pushed out to into money market funds, is that
money for one? Is that something you're right about?
Number two, is does that incentivize you to increase your future cost of funding
costs? Yeah.
That we we have we have a very strong deposit base and people deposit money in
banks for different reasons. Sometimes they've got surplus funds.
And I just it feels like a good place to park your money person if it becomes too
expensive to leave your money in a lower, lower returning bank account.
You'll either move it into a time deposit or you'll move it out into some
other security. Right.
And that's that's absolutely ordinary course.
And interestingly, up until this this turmoil here, it has crises spread
depositors. Tumors had behaved pretty much along the
lines that we would have expected. Now, that said, the rate rise was
unprecedented in its in its pace. So we don't have models that say this is
the way people will respond when you increase rates by 400 basis points in a
year. I think that has not happened, but it's
all pretty much in line with what we expected, very much in line with our own
modelling, which we had communicated to the market.
We have seen no extraordinary migration of money out of bank deposits during
this period of turmoil. In fact, the opposite.
I think the big, well capitalized banks have similarly not had any any deposit
stress. I don't know.
Well, we know you mentioned that the discount window borrowings smaller
borrowings under this concessionary Fed facility for four sort of to top up the.
Then you want the new one. The new one.
Okay. Yeah.
Okay. Roll was called the Vonnie Quinn the
heavens in the latest usage stats. That was less than the discount window
borrowings, but you know that. But clearly, some banks are feeling the
need to access those facilities. Those are U.S.
specific programs. I'm not aware of material discount
window borrowings or equivalent outside of the U.S.
So it doesn't appear to me that this is in any way global or systemic.
Okay. Back to the sort of monetary policy part
of the conversation. I mean, part of that is, is divorced
from this in a sense that there is an inflation problem that they still need
to address. Part of that also what's happened
recently, I guess, in some ways makes them reflect on.
Have we gone too far, too quickly? What's your sense of where we are?
Are we near the end of this tightening policy?
Bank of England, the ECB and the Fed, for example?
Su Keenan. Yeah, I think these are different
markets, but I wouldn't look at the real economy in the US is quite strong.
And as recently as yesterday, with with no better than expected jobless claim,
no guess again images which suggests that the underlying job market and
economy is quite robust and quite rude. Health and inflation prints are well
trending down. As the energy price spike from last year
is beginning to recede into into the core, inflation is still there.
So it does not feel like we're at the end of the ending cycle.
Now, maybe there's going to be an economic flow through from this.
This banking turmoil, as I said, it's not obvious to me that there's going to
be material. But if there was and that would be a
good reason for the Fed to say, let's just take a step back.
But again, it feels like we've got a little bit of a little bit further to
go. Now let's focus in on your business.
You're in this part of the world. Before, I guess, we talk about what you
can do yourself, this big transactions. Put it that way in Switzerland between
the two banks of force, UBS and credit. So it's not to comment directly on
those, but how do you think that affects the competitive landscape, particularly
in investment banking and wealth management in this part of the world?
I think it really depends on what UBS does with their newly acquired credits,
his business. Obviously, UBS has a very strong wealth
manager. Credit Suisse also had a strong wealth
manager. One would assume that they intend for
the combined entity to maintain all that market share.
But I guess customers will around the world who've maybe had an account both
and who many did might say, yeah, I wouldn't mind having a second bank.
I just had two banks before or three or four.
And I'd like to replace that. I guess that will happen.
We're certainly very focused on, as we have been for some time, further
penetrating our our customer base in terms of our own wealth management
products, in particular in Asia, Middle East and Africa where we offer it.
We've got a super strong business that has been has seen material net new money
inflows over the past several years. I guess that's going to to to be
maintained in part because of that. Maybe the bigger uncertainty is what
happens to that, that bit of what I think Credit Suisse is beginning to call
for Boston that was was going to be spun out or sold out of Credit Suisse.
What happens to that now? UBS will have to decide whether that
whether that structure or some other structure makes sense or do they keep it
and try to incorporate it into their investment bank.
I'm not going to get a headline out of it, but just in case, theoretically
speak, if UBS said some of these assets kind of don't make sense under article,
for example, which then to try to be, I guess, open to looking at some of these
CSR assets in the event, of course, that that is the scenario moving forward.
We we've always been interested in looking at things on which we can get a
decent return and which were strategic for us.
So if there are some of those things. Yeah, sure, we look at it.
You're heading to where after this vision.
OK, what's out there? China Development Forum.
Yes. First time in person in three years.
My first time back in China since since early 2020.
So I'm looking forward to do two of his IBEX China.
OK. Your key priority for that specific
business. Right?
On for Arjun. Boasting, of course, morale of your
team. Of course.
Yeah. Look, our China business has grown
extremely well even last year during all that.
Although the trail around Covid we generated 10 percent growth unsure and
25 percent growth offshore. And our business is a little bit more
offshore that onshore. So it's it's it's a super strong, fast
growing business. The economy is now kick back in full
speed. We're looking at that close to 6 percent
growth this year in China that the numbers that are coming in are
supporting now that that forecast. And so I'm quite keen to just get the
lay of the land, reacquaint with old friends, meet some of the new people,
because, of course, there's been a lot of personnel moving around in China and
obviously just to see the team in some seats in France.
Phil, have a great trip. Thanks.
We have a clip to catch. We want to keep you here.
Bill interests there. Group CEO of Standard Chartered.