Rhodes sounds alarm on global growth threat

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Europe's failure to craft a stable banking system threatens to torpedo the global economy while beggar-thy-neighbour financial regulation adds to the risks, William Rhodes, Citi's veteran emerging market financier, has warned.

The godfather has spoken. William Rhodes, former senior vice-chairman at Citi  –  with four decades of experiences negotiating emerging market sovereign debt crises – waxes lyrical on the eurozone crisis, emerging market growth prospects, and the recent banking scandals. In an interview with Euromoney in his office in New York, he also shares his thoughts on financial regulation and the emerging global banking landscape.


On the eurozone crisis:

We need an economic growth package, such as the one seen in Brazil soon after the launch of the Brady Plan. The primary question is what to do with the European banking union. The European authorities are talking about a single regulator for this – probably the European Central Bank in conjunction with the European Banking Authority.

But above all, it is important for the banking union to come on-stream as quickly as possible. Up until now, the sovereigns and banks have been completely intertwined. But if you don’t have banks that are well capitalized and functioning, you will never get economic growth. Period. People focus too much on the micro, such as sovereign bond spreads and potential defaults. Instead, the real issue is how you get banks to lend. And that’s especially critical since Europe is more dependent on bank finance than the US.

The global macro-economic climate:

The concern now is that Europe could experience a lost decade like Japan. The euro-crisis is having a big impact on the global economy – emerging markets are suffering. Delinking is a myth. Chinese banks won’t play the same role – in stimulus terms – as in 2008. They did the greatest amount of lending I have seen in my lifetime and, probably, in historical terms. But growth in China is lagging – though I don’t see it dipping below 7% – and the authorities will need to take measures, such as adjusting reserve requirements and interest rates. China is suffering in terms of exports and there is even now a slowing down in foreign investment.

Growth in India is slumping more than anyone expected.Brazil is doing everything possible to bring interest rates down and for the year they might only notch 2% growth. Money is also flowing out of Russia. In other words, you have a real global growth problem, provoked by the European crisis. The only way out of this crisis is a growth plan. And you can’t keep telling people in the crisis countries in Europe: austerity, austerity, austerity. You have to show them a road to growth.


The emerging global banking landscape:

You need to get banks lending again rather than the current fragmentation and balkanization of the global financial system you are seeing. Banks are under pressure from home regulations, who say ‘yes lend to our country and, if you have to cut back from eastern Europe and emerging markets, more generally, then do so’. And true to form, a number of banks in the eurozone area have been cutting back, in particular, and cutting assets worldwide.

This is an opportunity for emerging-market banks to benefit, competition-wise, especially as European banks pull back. Chinese banks, in particular, are interested in expanding but you can’t do this overnight. They need to go into the right markets and train the right people. As a result, emerging economies, in general, need the expertise of international banks.


On financial regulation:

You cannot go back in history to Glass-Steagall – you have to move forward. The point now is that Basel standards need to be implemented on a globally coordinated basis – which is one of the mandates of the Financial Stability Board – not on an ad-hoc basis that results in balkanization, regulatory arbitrage and, ultimately, protectionism.

For banks, internal risk management is key. The sell-side often tries to overwhelm the risk side. That is the beginning of the governance problem. It is important that the heads of risk management report to the CEO and have complete access to the board of directors. Strong supervision with regulators is key but a bank’s culture and its focus on its own reputation are two factors that are just as important as a bank’s capital position.

There is a growing understanding in the international financial community that we need the kinds of reforms that I believe are necessary. It is in the interest of all parties to have a strong banking system to ensure there is a sound transmission channel for credit in the real economy. Bankers need to be seen again as the good guys, working constructively for and with the communities they serve.

Rhodes, who remains a senior advisor to Citi, is author of Banker to the World: Leadership Lessons From The Front Lines of Global Finance.