Our choice of theme had been driven by awareness that die past decade had seen sweeping change in the structure of financial institutions throughout the Western world. New technological possibilities had made their contribution to this; but the prime driver was the spreading impact of freedom, and of a sense of global economic interaction across national boundaries, with a freer flow of trade, of funds and even of jobs partnering greater enterprise and openness. Reduced asymmetry in the availability and use of information meant that financial services - essentially an information-based activity - found new patterns and new players. Resources could move around more freely and skills be more readily redeployed; competition was more vigorous, and old compartmentalisations - both geographical and functional - were breaking down.
One result had been to facilitate consolidation among corporations and activities, and this process was certain to continue. But the future, we were sure, was not one exclusively of a small number of mega-conglomerates. Even if the harvest of economy of scale, for example in large branch networks, was still not fully gathered, the principle was not of universal benefit in the financial field. Some participants argued vigorously that in some respects mega-conglomeration was positively undesirable; certain combinations of function could interact damagingly; very large organisations ran the risks of under-challenged “house views”; diversity might dilute expertise - the financial sector embraced very different functions with very different characteristics, as in respect of risk. A richer range of “niche” players, facilitated by the information revolution, made for a healthier and more resilient system overall.
Should we expect an upsurge of international partnership, merger and acquisition? That had not hitherto been a general road to business success, but perhaps improved information flow reduced past risks, and the spread of further consolidation - especially in wholesale as distinct from retail banking - would make it increasingly necessary to structure competition in cross-border ways. Euromarkets moreover were essentially homeless. There remained however significant impediments. Some popular financial products – house-purchase mortgages, for instance - were nationally distinctive; and even though information technology made location less significant than before, political gut-feeling still constrained migration and transfer.
The political constraint, whether logically or not, seemed to apply particularly to banks. These had, it was suggested, a special place anyway in any system, as the key source of liquidity and the key combiner of short-term liabilities and long-term assets; from another angle, they were large high-profile employers, and job-reducing change generated political concern accordingly. That said, at least in Europe (for all that professional standards were not generally inferior to transatlantic ones save in investment-banking, where US skills and versatility still led) there was evident banking over-capacity, which the advent of the Euro would probably intensify. Current profit margins - as in Britain - could scarcely be sustainable, and further restructuring seemed inescapable with the fuller opening of European financial markets.
The impact of IT naturally bulked large in our discussions, though we found no clear consensus on whether it should be seen as driver or as enabler of change - perhaps the question was artificial. It had clearly brought faster processing of transactions, and greater flexibility; we conjectured that the main directions of advance now related to cross-functional connection of information (though privacy issues might constrain this?) and two-way access to and communication with customers, perhaps in video format. Wary voices were to be heard about customer willingness to accept new mechanisms. Most of us however were minded to recognise that time usually brought acceptance (even if at different speeds from country to country) and that as mechanisms grew more skilfully user-friendly, customers would welcome IT help in coping with the near-explosion in product choice. More generally, we noted that the power of IT in connection and communication placed new commercial emphasis (perhaps more than most banks were accustomed to) on the value of “owning” customers - commanding their attention and loyalty - though we heard divergent opinions on whether customers would still attach much importance to the concept of one-stop-shop financial services.
We had time to pause only briefly upon IT dividends in staff training; IT constraints - perhaps short-term - in the availability of system-management expertise; and IT vulnerabilities - to technical breakdown, new sorts of fraud, and terrorism? But discussion on the power of IT to speed and refine the evaluation of risk took us fruitfully into new themes. We wondered, for instance, whether it would become publicly acceptable to exploit improved evaluation techniques so as to levy higher loan rates, or relatively heavier charges, upon higher-risk or lower-profit customers - not easily, some thought. But a bigger “risk” issue in our debate was that of risk to the customer.
We observed that - partly in a climate with a deepening public perception that high inflation was a phenomenon of the past, but also for wider politico-economic reasons - more and more individuals (and from further down the spectrum of relative wealth) were looking towards equity or similar investment rather than deposit saving - towards risk rather than debt capital. That shift was intensified by the increasingly massive shift, notably in Europe, towards defined-contribution pension schemes based upon private investment. But publics seemed as yet to have a poor grasp of the ineluctable fact of risk inherent in all this - a political time-bomb, one participant commented of the pension scene. (And it was not clear that publics generally had yet grasped that in a low-inflation environment rates of return familiar from a high-inflation one were not to be had without significant risk.)
Most albeit not all of us acknowledged that deposit, as distinct from investment, fell into a special category; though this constituted a declining proportion of citizens’ assets, it was politically and socially essential to protect depositors - especially modest ones - from losing their money. (More important still in the developing world, a voice noted. But we did not plumb that.) And this carried us into a wide-ranging debate on the regulation of financial services.
In some dimensions - notably the structural one - deregulation had already been found essential for efficiency and parity. But extensive mechanisms remained in place - indeed, new ones were often still being created as political pressure demanded response to particular mishaps; and it was not easy to remove mechanisms once created (unless wider use could be made of “sunset” provisions to limit their automatic life?) In an ideal world the blend of good management, sound law and due openness would sufficiently guarantee the working of financial services, as it did many other fields of business, and these components should all continue to be worked upon; but the blend did not on its own currently command adequate public confidence. The shortfall would continue to generate a demand for regulation to secure effective competition, to reduce the risk of criminality and to ensure openness and fairness in information.
It was, we felt sure, of great importance to avoid presenting regulation as a guarantee to the individual against risk; yet it was also very difficult to prevent its being so understood, and to bring home to publics that regulation was not cost-free - aside from the direct costs of the apparatus itself, there were costs and distortions imposed throughout the systems regulated. It was important moreover to distinguish clearly between two types of risk - systemic risk (as through the failure of a big bank, damaging confidence in the entire financial system) and individual or market-conduct risk. The latter, with vivid loss to the widow and the orphan, might carry a higher political voltage; but regulators needed to be clear which they were addressing (and perhaps, despite UK intentions, it was not wise to concentrate all sorts of risk-addressal in the hands of one mega-regulator?)
In the field of systemic risk we meditated upon the concept of “too-big-to-be-let-fail”. The prevailing sentiment was of scepticism albeit not outright dismissal. Proper competition needed the possibility of failure; we noted that the concept had once been assumed to apply automatically to countries, before the sovereign-debt crisis in the developing world; we heard approving references to the healthy example of robustness which had moved UK authorities to hold off in the Barings episode. The international widening of financial markets perhaps made the consequences of any single failure more easily absorbable. That said, regulators could not be indifferent to corporation failure, and would sometimes face awkward choices about the timing of any intervention.
We knew that investors were voters, and that elected governments could not just shrug shoulders at personal mishap. Individuals sought certainty, to simplify life; money was seen as not like other goods; the rigour of caveat emptor was socially hard to sustain in pure form. But risk was inescapable and salutary in market economies, and something to be managed rather than feared or shunned. If caveat emptor were abandoned there would be no incentive for investors to protect themselves responsibly. There remained a continuing if hard task of educating publics - perhaps from school onwards - in understanding the reality and meaning of risk, and the impossibility that regulators or governments could remove the downside from every investment.
It was strongly urged that in the new environment the better path for regulation lay not through prohibition or penalty but through openness and quality rating - the latter perhaps by private-sector provision, which was becoming increasingly skilled. We heard approving reference to the idea of careful professional licensing of financial advisers, whose role bulked increasingly large in service to financial-service customers. And there was salutary reminder that competent management (supported by effective audit and compliance mechanisms) and alert shareholders were, on a broad view, key players also in regulation.
We considered the need and scope for international regulation, or at least more consistent international rules, to foster efficiency and openness and prevent evasion, money-laundering and unhealthy arbitrage. We found it hard to see international enforcement structures as realistically likely - the IMF, most thought, was too overloaded and inescapably politicised to serve in this. The most promising route might be to work, for example in the World Trade Organisation, for the spread of harmonised international standards with national enforcement, or just occasionally a “lead” regulating country; but even shared standards might not easily be found, amid differing commercial cultures and fears of hidden hegemony or protectionism.
Across the financial-services sector as a whole there was, none of us doubted, much change still to come, and probably no less fast or widely than in the past decade, especially as the possibilities of open, cross-border, real-time access to information were more fully exploited. Most of us viewed the prospect with optimism, and even a degree of excitement But we did hear occasional Cassandran echoes. The management of risk at many “micro” levels was becoming markedly more sophisticated, but the developing structures overall had not yet been tested by major or radical shocks. Risk at a “macro” level had not been permanently exorcised, and sound economic management by governments was still a condition of the sector’s prosperity. The times would remain interesting.
This report reflects the Director’s personal impressions of the conference. No participant is in any way committed to its content or expression.
Chairman : Mr Grant L Reuber OC FRSC
Chairman, Canadian Deposit Insurance Corporation
Mr James C Baillie
Senior Partner and Chairman, Executive Committee, Tory, Tory, Deslauriers & Binnington, Toronto
Mr Ian E Bennett
Associate Deputy Minister of Finance
Mr Robert L Brooks
Executive Vice-President, The Bank of Nova Scotia
Mr John Crow
Partner, J & R Crow Inc; formerly Governor, Bank of Canada
Dr Charles Freedman
Deputy Governor, Bank of Canada
Mr Clyde Goodlet
Regulatory Policy Adviser, Bank of Canada
Mr Fred Gorbet
Executive Director, Task Force on the Future of the Canadian Financial Services Sector
Mr Jonathan J Guss
President and CEO, Credit Union Central of Ontario
Mr Robert P Kelly
Vice-Chairman, The Toronto-Dominion Bank
Mr Robert W Korthals
Commissioner, Ontario Securities Commission
The Honorable Roy MacLaren PC
High Commissioner of Canada to the UK; formerly Minister for International Trade
Mr Michel G Maila
Executive Vice-President, Bank of Montreal
Mr John D McNeil
Chairman, Sun Life Assurance Co of Canada
Dr Edward P Neufeld
Centre for International Studies, University of Toronto; lately Chief Economist, Royal Bank of Canada
The Honorable James Peterson PC MP
Secretary of State (International Financial Institutions)
The Honorable Robert K Rae QC
Partner, Goodman Phillips and Vinberg, Toronto; formerly Premier of Ontario
Mr Ronald S Ritchie
Formerly Chairman and CEO, The Canadian Depository for Securities
Mr Edward J Waitzer
Senior Partner, Strikeman, Elliott, Toronto; formerly Chairman, Ontario Securities Commission
Dr William Watson
Editorial Pages Editor, The Ottawa Citizen', Associate Professor of Economics, McGill University (on leave)
Monsieur François Lagrange
Conseiller d’Etat; Managing Director, European Investment Fund (1994-97)
NETHERLANDS/UNITED KINGDOM/UNITED STATES
Dr Jan Aart Scholte
Senior Lecturer in International Studies, Institute of Social Studies, The Hague
Mr Kent Atkinson
Group Finance Director, Lloyds TSB Group pic
Mr Michael Blair QC
Deputy Chief Executive and General Counsel, The Securities and Investments Board
Sir Nigel Broomfield KCMG
Formerly Ambassador to the Federal Republic of Germany
Mr Alastair Clark
Executive Director, Bank of England
Mr Nicholas Durlacher CBE
Chairman, The Securities and Futures Authority Limited
Sir Anthony Goodenough KCMG
High Commissioner to Canada
Mr George Graham
Banking Correspondent, Financial Times
Professor Paul Hirst
Professor of Social Theory, Birkbeck College, University of London
Mr Graeme Johnston
Director, Group Planning, Abbey National pic
Mr John Morrell TD
Chairman, John Morrell & Associate
Mr Jack Wigglesworth
Chairman, The London International Financial Futures & Options Exchange
Mr Tony Wyand
Executive Board Member, Commercial Union pic
UNITED STATES OF AMERICA
Mr T Jefferson Cunningham III
Chairman, Hudson Chartered Bancorp Inc
Mr Thomas G Donlan
Editorial Page Editor, Barron’s National Business and Financial Weekly
Mr Francis Finlay
Chief Executive Officer and Co-Chairman, Clay Finlay Inc, New York
Ms Mary O’Grady
Editor Americas Column, The Wall Street Journal
Dr Hany A Shawky
Chairman, Finance Department, State University of New York at Albany
Mr Robert F Wright
President, Robert F Wright Associates Inc, New York.