The International Monetary Fund-World Bank Group annual meeting and concurrent private-sector meetings in Washington Oct. 8-10 were instructive in terms of what financial services companies are likely to face over the next several years.
Some of the brightest minds in finance gathered for presentations by international leaders, including central bankers, regulators, Treasury officials and financial services executives.
On the whole, the meetings were sobering in terms of the global economy and the U.S. economy in particular. The buzzword of the day is rebalancing. The general view is that the global economy is out of balance, with a number of countries — the United States, for one — having structural trade and fiscal deficits, and many countries — mostly in Asia, and notably including China and India — having structural surpluses. This imbalance is exacerbated by currency imbalances.
The general view was that until there is a rebalancing, which most likely will involve a new currency-exchange system, the global economy, at least in the developed world, will underperform or worse.
However, even if a new equilibrium is achieved, there is also an enduring concern that robust global growth would be hard to come by so long as the U.S. remains more the caboose than the engine of economic growth. While Asia and Latin America — particularly China, India and Brazil — are growing rapidly, they are not yet large enough from a global perspective to substitute for a weak U.S. economy.
Many felt that the country is going through a structural (as opposed to a cyclical) downturn caused by decades, particularly in the last one, of consumer overspending and declining business productivity. Many also felt that until the foreclosure overhang is dealt with, the country's economy would remain in a precarious state. Many also believed that notwithstanding the long-term need for a balanced U.S. governmental budget, stimulus might be needed in the short term.
I personally agree with this position, and have long thought that the right stimulus would include sizable infrastructure projects, such as true high-speed rail service and green energy independence initiatives.
In short, the expectation of many wise heads seemed to be that the U.S. economy would continue in slow- or no-growth mode for at least the next three to five years.
On the regulatory front, the meetings were similarly sobering. Many in the private sector argued that the swing toward increased regulation and large Basel III capital charges would increase the likelihood of a decade of economic underperformance. And there was some annoyance expressed by private and public sector leaders outside that the United States that the country has gotten ahead of where it should be on legislative matters. However, the "official sector" was not buying the arguments that this was the time for regulatory moderation.
Happily, bank bashing was on the wane, but if a buzzword could characterize the regulatory meetings the way "rebalancing" fit those on the economy, that word would be "re-regulation." Fear of another financial crisis like the one we have just lived through remains visceral, and government officials around the world appear resolved to increase regulatory pressures and capital changes to levels that make such a financial crisis unlikely. If that eats heavily into profitability, the mood seems to be, so be it.
One story that was making the rounds at the meetings was that of a banking organization board member who reportedly declared with great annoyance after a board encounter with a bank regulatory agency, "We the board members are still running this company. The regulators are not running this company." This view of who is running the company at the end of the day — i.e., who is in charge, setting the rules — was greeted behind closed doors with a certain amount of public-sector derision.
My take-away from the weekend was that for the next few years regulation and controls will be central to the financial service company experience. Those firms that follow regulatory guidelines and have strong controls will do materially better than those that don't. This will not only be a U.S. phenomenon but a global one.
