Do you expect there to be further consolidation in the world banking industry?
Kalff: There is no doubt that there will be extensive further consolidation in the world banking industry. Most countries are overbanked and certainly overbranched. In the increasingly competitive environment low costs are essential, and therefore larger scale. This will cause hundreds of mergers and takeovers every year in the developed countries alone.
Will there be large-scale cross-border as well as domestic bank mergers?
Kalff: The consolidation will take place for the most part through takeovers, but also mergers will occur. As in a merger the transaction itself, but certainly also the all-important work that has to be done afterwards, is more complicated than in an acquisition. [Therefore] the number of mergers will be relatively low. This is certainly the case with cross-border mergers, where differences in culture, management style, language, corporate governance and other sensitive but important elements play a much bigger role than in the case of a local merger.
Do you see banking consolidation putting any downward pressure on professional salaries?
Kalff: The result of banking consolidation will be that there will be a greater divergence between the top and lower quartile in professional salaries. Top performers’ salaries will stay at present levels but perhaps there are possibilities to defer more of the cash compensation. Because of the rapid expansion of consolidators it is unlikely that there will be a large oversupply of top people.
What is a bank?
Kalff: A bank is an institution which provides a large number of financial services to its customers through various distribution channels like branches, direct marketing, call-centres, internet etc.
As securities markets continue to grow worldwide, is there a future for bank lending to companies?
Kalff: Without any doubt there will always be a need for bank lending to companies. There will be always a demand for funding that cannot be provided by way of securities because, for example, the transaction is too small, has an unknown tenor beforehand, is too risky, the amount is fluctuating, the underlying transaction is too complicated, needs a special collateralization, should be drawn in many currencies, and/or in a few countries. In general a credit is more flexible and can be more tailor-made than ever a securities transaction can.
How important will the securities business be to your bank in the coming years?
Kalff: The securities business will become increasingly important to our bank. There is a continuous tendency towards more securitization and trading of assets in liquid form. A good example is the difference in corporate financing between the us and, for instance, Germany. In the us 22% only of corporate financing is done by bank loans. In Germany this is still 78%. I expect this to move down in the direction of the us. Furthermore there is still a vast array of private companies in Europe. Public offerings will become more and more a necessity for those companies to transfer the corporate wealth from one generation to the other. Finally the wave of privatizations is far from over. Our bank, through its client base, is participating actively in all those trends.
How important is it for your bank to expand in non-banking areas such as insurance and asset management?
Kalff: Selling insurance products and asset management has been a core business for ABN-Amro for a very long time. These activities will become even more important for us, as there are even more links between these products and the other banking products.
What or where is your bank’s biggest risk?
Kalff: The single biggest risk of a bank is an external disaster leading to prolonged breakdown of data communication.
How important will proprietary trading be to your bank going forward?
Kalff: Proprietary trading will continue to play an important role for our bank although our philosophy is to have a sales driven business through our largely decentralized securities network. For instance in fixed income I expect an increasing shift from currency-spread to credit-spread trading. Also, in markets that are heavily commoditized, like foreign exchange, proprietary trading is a must. However, it should be backed up by healthy commercial sales to industrial and financial corporations, including mutual funds, to benefit from the information flows. Top information will be critical for having a successful proprietary trading operation. Again, with our bank being represented in 70 countries, we should be in the loop of the information flow.
What is the most important qualification or quality needed to be a bank CEO? Do you see this changing in future?
Kalff: The most important qualification for a bank ceo, is the ability to create and maintain a team of first-class bankers which together run the bank in a professional and stimulating way . This will not change in the future.
What do you worry about?
Kalff: [Currently] my worry is the situation in Asia. What started early July with a devaluation of the Thai baht has since developed into a real crisis in many Asian countries with exceptionally large devaluations, steep falls [in] the stock markets, high interest rates and as a consequence an enormous drop in growth rates. If the international parties are not successful in restoring confidence, I wonder how and when the contagion will stop.
How important is it for a bank CEO to have an intimate understanding of derivatives and risk management?
Kalff: As you know we run our bank on a sort of partnership basis where our eight member board jointly is responsible for the results of the bank. It is therefore critical to make sure that at least two of my colleagues are intimately familiar with derivatives and risk management. We have organized it in that way today and my two colleagues running our investment bank spend a large amount of their time on market risks and another one on credit risks. I am myself involved in the large credit risk decisions.
How would you like to see the regulation and supervision of banks improved?
Kalff: The most desired improvement would be the adaptation of capital requirements to bring them in line with the true risks of the credits. The risk perception of the banking industry for market risks in trading books is now by and large in line with the capital requirement of the supervisors. Such a statement cannot be made for credit risk. The framework for solvency requirement laid down almost 10 years ago has been very instrumental in the effort to create an international level playing-field. These capital requirements however, are no longer in line with the risk perception of prudent bankers. For example market prices for first-class risks imply lower capital requirements than the regulators require. For lower-grade risks the opposite applies. The danger of the current system is that short-term returns are enhanced by shifting the loan portfolio to lower quality loans. My argument is that it is in the interest of both prudent bankers and supervisors to work together on risk measurement systems that can serve as a basis for both internal loan portfolio management as well as for regulatory capital requirements.
How will the introduction of the European single currency affect your bank?
Kalff: The introduction of the Euro will have a profound impact on most of our activities. In a number of ways this impact will constitute a threat: loss of foreign exchange income, loss of our home currency advantage, increased necessity of low-cost production, increased competition. But we also see a lot of opportunities: cross-border commercial banking, debt and equity origination, asset management and transactional banking.
Overall we feel that the scope of the new opportunities outweigh the threats and the up-front costs associated with the introduction of the Euro. Because of our strong European network, with commercial and investment banking presence in all of the 15 eu countries, we are uniquely positioned to take advantage of these opportunities and increase our market share in the European corporate market.
Why have banks been much more profitable in the 1990s than they were in the 1980s? Will this continue?
Kalff: Banks have been more profitable in the 1990s than in the 1980s because in general the economic and business climate of the 1990’s has so far been more favourable than in the 1980s: low loan losses, vibrant financial markets and favourable interest yield curves. Perhaps bankers have also learned from their mistakes of the 1980s.
How will technological developments change the shape of commercial and retail banking?
Kalff: All business strategies for commercial and retail banking will have an integrated it [strategy] because it is no longer a following function but also a shaping function. New business trends that are enabled by it can only be realized through a perfect alignment with the use of it. The most important trends are globalization, virtualization, integration and disintermediation, time compression, innovation of processes, [and the] convergence of industry sectors and market segments into one.
The use of it for example by internet banking will create much more transparency for customers on a global scale. Thus added-value services in commercial banking will become more important. For retail banking one of the consequences will be that branding will be a crucial issue.
