Keynote Questions

The year 2023 has been possibly the most eventful in banking since the global financial crisis. What lessons we can take away so far?

The main lesson we have learned is about trust. We run a fractional reserve banking system, which in simple terms means if there is a loss of trust, and depositors want all their money back from an institution, there's no institution on the planet that can satisfy that demand. So trust is fundamentally important. Not only must banks be run in a relatively prudent, safe way, but they need to be seen to being run in that way.

Otherwise there are five micro lessons. First, the need for swift, decisive action by central banks and regulators. And we saw that in the case of Silicon Valley Bank (SVB), as well as that of Credit Suisse; and that, frankly, prevented global contagion. One can debate the details of what was done and how but speed and decisiveness mattered more than anything.

The second lesson, which the case of SVB highlighted, is the importance of basic risk management. That is, getting the balance right between the short term and the long term, between risk and reward--something SVB seemed to lose sight of.

The third lesson stems from the case of Credit Suisse. That is, if you are going to do a cleanup, or if you're going to change your business model, do two things. First, set and communicate clear milestones and then demonstrably and thoroughly meet those milestones. If you don't, you start to lose credibility. And with Credit Suisse, we ended up in a situation where the former president of FINMA (Swiss Financial Market Supervisory Authority) said there was a cultural problem that translated into a lack of accountability. When either situation arises, and perception becomes reality it's very hard for a financial institution to recover.

The fourth lesson concerns technology. The Credit Suisse situation showed that a lot of information can circulate on social media, be it true or not. Banks must ensure they manage it and show what action they are taking to improve capital and liquidity. But it's not enough. Given social media today, banks must have a proactive and decisive strategy around how they will wage the social media battle. Because even if on the technical front a bank is doing and getting everything right, if they are losing the media war, their position will become untenable. And there is a role for central banks and regulators for phase one in this space.

The final lesson concerns regulation. Two things are essential. First, we need to harmonize regulation supervision across different kinds of banks, so you avoid the SVB-type problem. Second, there must be absolute clarity about how much contingent liquidity will be made available to an institution by a central bank in lieu of its commercial assets. As long as you have that absolute clarity and the liquidity is made available without any kind of stigma attached to it, then in a crisis, market participants will be less jittery, and as a result that will lower the probability of things going seriously wrong.

What are the macroeconomic challenges facing banks in Asia-Pacific?

I see six main challenges. High interest rates and inflation; sovereign debt; asset devaluation; digital disruption; climate change; and finally ways of working and generational attitudes.

High interest rates and inflation.   We must be vigilant about the fact that many in the banking sector have never seen this magnitude of interest rate rise, and have never had to deal with the consequences. In the short term, banks are enjoying margin tailwinds. But in the medium term, I would prefer to see slightly lower rates and a humming economy. Banks would be healthier and that would ensure a more sustainable growth model.

Inflation is coming down and rates will too. As that happens, banks' income will come under pressure. At the same time, inflation has increased cost bases. We must deal with that.

We must also deal with the possible credit quality issues that arise from rates being high for so long. So it's a balancing act between being very conservative, and then opening the taps slightly so that economies can recover. That balance will be difficult to achieve.

Sovereign debt.  Average debt-to-GDP ratios are probably around the 55% mark. However, there are 30 to 40 countries globally that are struggling, and they will probably have to restructure their economies, and rebuild their fiscal buffers. And they will have to do so in an environment in which it is difficult to grow exports because much of the developed world is muted and has little appetite for imports. So it will be a challenge for these troubled economies to become healthier over the next two to three years.

Asset devaluation.   The poor state of China commercial real estate is one aspect of this. How will this affect China's growth? And how will it, in turn, affect global growth? Then there is the rapid devaluation of FinTech, crypto, etc. What does that mean in terms of investments in that sector? Does progress stall? Therefore, does the evolution of the financial services sector slow down again--that is something we must address.

Digital disruption.   We're seeing this particularly in the retail sector. It's also an opportunity. Traditional banking models will be disrupted very quickly, and banks must evolve accordingly.

Climate change.   This is a massive challenge. According to U.N. estimates, Sustainable Development Goals face a funding shortfall of US$2.5 trillion a year. Banks have a big role to play in terms of marshalling that financing, ensuring it goes to the right place, that it achieves maximum bang for buck, that there is no abuse, no greenwashing. It's also a great opportunity for us. Banks can do very well out of this if we get it right and we can also make a real difference to the world.

Working and generational attitudes.   Those in the Generation Z cohort have indicated their desire to work in areas that offer a high degree of innovation and creativity. They don't see banking as offering that. For us that's a challenge: how do we attract the best people to our industry? This is where digital disruption presents opportunity.

If we show willingness to change and evolve, and willingness to consider new experiments, we will then attract the right people who will accelerate this tendency to change and evolve. So we could turn this into a virtuous circle.

Work-from-home arrangements are a further challenge. How do we make employees feel part of a team? How do we create that loyalty?

China has been in the news a lot recently. What do you make of China's economic challenges?

China faces short-term, cyclical challenges. It's looking to spur property buying, stoke consumption, and encourage expats to return. It has made steps in the right direction. It has urged banks to lower mortgage rates; it has eased deposit limits for first- and second-time buyers, offered tax breaks, and lowered stamp duty. We will await the impact.

We must also bear in mind that for all its problems China probably grew 5.5% in the first half. Its full-year growth rate is probably going to be near 5%. For a very large, developed country, that's a strong growth rate. There are signs its opening-up is continuing.

In line with this we see four themes. Our income from China new-economy business grew 40% year-on-year in the first half. Second, we are seeing an increase in the volume of transactions in renminbi in various ASEAN markets. Third, there has been an increase in cross-border client flows in and out of China. China institutions and corporates are going out to the rest of world and investing and trading. Our income from China-ASEAN flows grew almost 80% year on year.

The last theme is mainland wealth, that is, personal wealth being increasingly invested cross-border, outside of China. This has been strengthened by the state of the property market onshore. We are seeing these trends strengthening almost month on month, and we think this is structural; it will continue for the long term.

We see manufacturers diversifying operations outside of China--will this trend affect its growth prospects?

We have seen multinational corporations in recent years start to do China-plus-one, a business approach that encourages companies to diversify their operations by expanding outside of China while still maintaining a presence in the country.

But there's a more fundamental, exciting trend here. China is doing the same thing. Its economy is undergoing transformation. There is less emphasis on the so-called old economy of property etc., and more focus on sophisticated sectors such as engineering, pharmaceuticals, services, and consumption.

Take electric vehicles (EVs), for example. Ten years ago, China was manufacturing virtually nothing. Last year it produced 7.2 million EVs. Equally important is the acceptance of new technology. Last year, global electric vehicle sales were 10.5 million--59% of that was in China.

So when you have this symbiosis--new technology being developed, and acceptance of this new technology among consumers--it becomes a virtuous circle. That's what we are going to see across China. The old economy will transition to a new economy.

It's also slightly geography-specific in that it's occurring in the country's coastal regions. So effectively, you have a two-speed economy in China. One part of the economy slowing down or receding, the other part becoming stronger. The stronger bit is happening in areas that are already very prosperous.

The Greater Bay Area, for example, has an economy larger than South Korea. Its GDP per capita is more than US$20,000. It is a high-wage developed economy and there are many other regions of China like this.

What does a strong inventive company do when it operates in an area like that? It moves basic low value-add manufacturing offshore. That is what Chinese entities are now doing.

So the biggest trend we are seeing out of China is not OECD multinationals doing China-plus-one. The biggest trend is China doing China-plus-one. And this will occur on a massive scale. China will be dominated by this new economy, much more advanced engineering and manufacturing. And it will create a lot more jobs, employment, and prosperity across ASEAN and South Asia.

So when we ask the question: will the offshoring of manufacturing have an impact on Chinese economy? Yes, it will allow the economy to evolve in the right way, in a sustainable way, and it will allow ASEAN and South Asia to grow much faster, and it will reinforce trade and investment links across Asia.

What's your view on tech innovation in finance and banking?

There is going to be disruption. It's going to carry opportunity and risks. The holy grail is much greater accessibility, particularly to unbanked individuals and underbanked small business. The other aim is to make banking frictionless, so things happen faster, and more cheaply, while reducing financial crime. That should boost property and global trade. It should also lead to more sustained economic activity.

Another development is central bank digital currencies (CBDCs). As part of Project mBridge, the Hong Kong Monetary Authority in partnership with People's Bank of China (PBOC), the central bank of the UAE, and Bank of Thailand, is seeking to create infrastructure that allows CBDCs from different jurisdictions to be exchanged and settled. What this can achieve is very cheap, fast, safe cross-border payments, and far greater accessibility for anyone who wants to use these services.

A more micro example is the e-HKD (Hong Kong dollar), which the HKMA announced in May 2023. We will see equivalents in many, many countries.

A lot is going to happen. But if you ask, what will a bank look like in 10 or 20 years' time? I don't think we know the answer. We need to be ready to evolve. We need to be ready to do experiments.

Writer: Lex Hall

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