International Financial Centres in the postcrash era

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International Financial Centres in the post-crash
era

• Vanessa Rossi, Senior Research Fellow, Chatham
  House

March 2009
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Overview

• The global recession and financial storm has not
  yet abated a stress test of survival
• The crisis has highlighted the massive increase
  in balance sheet risks compared with national
  incomes
• Iceland marked the end of the small country-big
  bank model of global finance
• Yet banks will become more important as financial
  intermediaries if saving deposits rise and retail
  investors shun risk the Tokyo scenario

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World trade smashed by storm

• 2009 may be down 20-30 versus 2007 data
  larger losses for Japan and the energy exporters

Exports in US trillion 2007 data versus 2009
estimates
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Source WTO
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Investment trends exodus from risk creates
global asset imbalance
High growth and inflation

• The US The Anglo Saxon Model
• US financial wealth was 60-65trn, over 4x GDP
• Under 15 of household wealth in bank deposits,
  as much as 50 in equities and corporate bonds

• The EU Balanced Portfolio
• Total financial wealth similar to US
• But household wealth held in equities lower

Risk averse
Risk taking

• JAPAN Cash
• Wealth 30 trn
• Nearly 55 of household wealth in bank deposits

Low growth and inflation
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Holdings of debt, equity and deposits 2008
shaded areas represent estimated losses in equity
values by March 2009
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Wealth losses almost 1 years GDP - equities
shrink, role of government rises
WORLD FINANCIAL WEALTH TOTAL SHRINKS FROM 200
TO 160 trillion?
GLOBAL TOXIC ASSETS 3-5trillion?
BANK DEPOSITS and CASH around 70
trillion Larger than world GDP of 55 trillion
TOTAL BONDS VALUE DOWN FROM 65 to 55
trillion Government share up from 50 to
60-65 Government debt up, corporate bonds fall
EQUITIES - OTHER ASSETS VALUE FALLS From peak
65 to 35trillion?
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Implications

• Big banks few global players, a cluster in the
  US, China and Japan and, arguably, the Gulf
  region backed also by oil deposits
• Europe - cross-border issues?
• Other IFCs will have to focus heavily on
  financial services with low balance sheet
  exposure stiff competition
• London may be the most affected of the major
  financial centres this crisis is the banking
  equivalent of previous restructuring in
  reinsurance and Lloyds of London

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Japans banks expand assets abroad liabilities
assets
JAPANESE BANK DEPOSITS TOTAL 10 trillion
Prudential reserves 0.2 trillion
PRIVATE SECTOR LOANS 5 trillion
LOANS TO GOVERNMENT 3 tn about 35 of Gov Debt
FOREIGN ASSETS 2 tn LIABILITIES 1 tn
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Chinas banks cash now mobilised liabilities
assets
CHINESE BANK DEPOSITS TOTAL 6.5-7.0 trillion
Prudential reserves Over 1 trillion
Policy easing
PRIVATE SECTOR LOANS 5 trillion
LOANS TO GOVERNMENT 0.5 tn about 100 of Gov
Debt
FOREIGN ASSETS 0.3 tn LIABILITIES 0.1 tn
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Economic ranking by size of GDP which countries
are big enough?
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Comparison of GDP and Stock Market
Capitalizations as Shares of World
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Shares of World GDP () (chart data at 1990
constant prices, own estimates)

• China the only economy gaining share
• It is the only sizeable contender of the BRICs
• Stock market capitalisations will broadly follow
  these GDP trends

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Japans shares in world economy and markets

• Japans shares in world wealth and other market
  indicators much larger than share in global GDP

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Japan is the 3rd largest bond market

• Larger share in global bonds than equities
  approx 15 versus only 8 share of world GDP and
  equities

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Holding of JGBs by foreign investors trend up but
still low, close to 0.5 trillion
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Potential growth in foreign investment in
Japanese markets

• High estimate bond holdings rise to match equity
  stakes
• Low estimate no increase in holdings except for
  modest increase in equity investments based on
  maintaining share of market

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The Asian debt market should expand

• Critical to rebalance global asset demand and
  supply and to fund development in low savings
  countries such as India, Bangladesh, Vietnam
  
• Potential to grow dramatically - possibly
  1trillion pa?
• Japan would be a key participant here
• e.g. Samurai bonds rare oasis during credit
  crunch. Froze after Lehman collapse but reopened
  in February 2.2bn (Westpac), 1.5bn (Indonesia)

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• MARKET OPINION?

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The March 2009 City of London Survey Tokyo and
Sydney drop below top 10
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Recommendations regarding the City of London
Surveys

• Two possibilities for consideration
• (1) The report may be more widely understood and
  accepted as a barometer of IFCs performance and
  strength if it were to adopt a two-pronged
  strategy and rankings
• Firstly comparing countries leading
  international financial centres (ex London, New
  York, Tokyo)
• Secondly comparing secondary (regional or niche)
  financial centres around the world (ex Chicago,
  Geneva, Channel Islands)
• This might help focus attention on the most
  critical factors in the international surveys and
  underlying changes in view.
• (2) Greater methodological weight could be placed
  on the size and development of financial sectors
  rather than on ease of access type factors. We
  agree that it is important to preserve the
  nuances brought into the survey by the direct
  personal input of market participants and these
  are not an issue.

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GFCI5 divided into international and secondary
centres more representative
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Other rankings looking beyond IFC
competitiveness surveys
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• THANK YOU
• www.chathamhouse.org.uk/internationaleconomics

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