Adams sets out his stall for IIF
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Adams sets out his stall for IIF

The head of the world's largest international lobbying group for financial firms issues a sharp warning on global regulatory fragmentation, risk-weighting of sovereign debt and China’s reform agenda.

Timothy Adams

Appointed as head of the bankers’ lobby group in February, Timothy Adams follows in the footsteps of his predecessor Charles Dallara, having also served under a Bush administration as under secretary for international affairs at the US Treasury.

Adams, like Dallara, is also a global banking advocate, with official-sector contacts and emerging-market policy experience, and boasts a reputation as a coalition-builder. In fact, given Adams’ biography, Euromoney cheekily suggested his candidacy for IIF leadership last September as the institute prowled for a new managing director. Adams has big boots to fill.

Under Dallara’s leadership, the Institute of International Finance (IIF) has expanded its mandate since its modest roots as a grouping of predominantly US commercial banks that negotiated Latin American debt restructurings in the early 1980s. Today, it is a global trade association for at least 461 diverse financial firms, half of which are headquartered in emerging markets.

On the occasion of the IMF and World Bank annual meetings in DC, hundreds of financial market players, as ever, snubbed official seminars on global economic affairs in favour of attending the IIF annual meeting. It hosts such heavyweights as Larry Fink, CEO of the world’s largest investor BlackRock, and dozens of globally systemically important bankers packed in one room that it’s surprising the Basel Committee has not issued a rule against such a concentration of risk.

Over nearly three decades, the institute, through its lobbying on regulatory and sovereign debt affairs, research and industry co-ordination, has established a reputation as a coveted talking-shop for bankers to wax lyrical about international finance, and as an influential global pressure group, for regulatory and monetary affairs.

However, in 2011 and 2012, the IIF was catapulted into the centre of western Europe’s sovereign debt, after Dallara secured a mandate to lead the international creditor consortium in the €100 billion debt reduction package for Greece, underscoring the institute’s role as an intermediary between the official sector and private financiers on occasion.

The IIF is now busy pushing for the retention of a market-based approach to sovereign debt restructuring, especially with respect to collective action problems, after the IMF signalled in April that it was in favour of greater official sector involvement to resolve inter-creditor equity issues.

The IIF’s greatest challenge is regaining its lobbying muscle against the avalanche of draconian financial regulation during the past five years amid the restructuring of the global banking system. However, it has a credibility problem. In September 2011, the IIF estimated that all regulatory measures combined would greatly boost the capital needs of banks relative to a base scenario of an additional capital requirement of $1.3 trillion by 2015. This central scenario could push up bank lending rates by more than 3.5% during the next five years, resulting in 3.2% lower output and 7.5 million fewer jobs, it said, adding the cost of regulation would fade by 2016. By contrast, the FSB at Basel, the OECD, the Bank for International Settlements and the IMF, and many private-sector economists, dispute this projection and argue the IIF has overshot in warning about the dire consequences of tighter regulation on bank-lending costs. The author of the study, the IIF’s long-standing chief economist Phil Suttle, departed this spring, replaced by Charles Collyns, a former assistant secretary for international finance at the US Treasury, who has a more mollifying manner than his predecessor.

Sitting in his office in Washington DC before the IIF’s annual meeting, Adams is circumspect. He echoes his predecessor’s fears about regulatory moves to balkanize the global banking industry, citing the increasing supervisory push within Europe for banks’ to ring-fence capital and liquidity buffers in each operating market, and a Fed surcharge on large foreign banks’ US operations by forcing these institutions to create a single separately capitalized holding company. The CFTC’s new rules on swaps that favours US operatives also adds to fears over regulatory turf wars.

“We want to avoid this fragmentation,” he says. “We need global solutions to global problems and not a tit-for-tat battle between global regulators. Next year at the G20 meeting hosted by Australia, we want a return to the spirit, if not the letter, of the Pittsburgh summit in 2009, and to at least see no further fragmentation going forward.”

Adams also fears the de facto regulatory push to see banks as public utilities, which threatens to torpedo credit growth while shifting credit intermediation to non-regulated entities. “There are still some regulators that would like to turn banks to utilities,” he says. “If you do that then the risk and innovation goes away. We need a variety of institutions and different models, playing out in the marketplace.”

The IIF is breathing sigh of relief. This spring, US senators David Vitter and Sherrod Brown pushed in vain for a bill that would impose draconian tangible common equity targets on banks, underscoring the view expressed by the anti-Basel III agitator Thomas Hoenig, vice-chairman of the Federal Deposit Insurance Corporation, that risk-weighted capital measures are inadequate or counter-productive to appropriate asset-liability management.

“There are some voices in the regulatory community that say this Basel risk-weighted capital regime is overly complex,” says Adams. “But this is now a shrinking view. [There is increasing acceptance of the view that an] exclusive use of the leverage ratio is inconsistent with the overall objectives of the Basel committee.”

The IIF is now mulling its response about Basel fears over the inconsistency of risk weightings for trading book assets generated by the internal ratings-based mechanism developed initially under Basel II.

As banks need to hold equity capital against RWAs, Adams denies claims that the differing approaches to risk-weighting of assets in the trading books between banks is a form of regulatory arbitrage and claims it’s down to the complexity of the exercise and differing supervisory processes.

Given the need to boost transparency in bank-accounting and market confidence in capital regimes, the Basel Committee is considering introducing more standardization to the process while banks instinctively tend to favour internal risk models. “Do the Basel findings mean we need more standardization?” asks Adams. “Our committee members are still thinking about that. Models are complex and our members have different views.”

More controversially, Adams takes issue with Basel’s zero risk weighting of high-rated sovereign debt, to determine capital ratios, arguing there is greater acceptance of the need to adjust this risk-weighting matrix in internal risk models to ensure there is always some capital held against even the highest-rated sovereign debt with any reforms to be introduced in a gradual fashion to reduce pro-cyclicality.

“All assets should reflect their true riskiness,” says Adams. “Any changes, however, will happen in an evolutionary fashion.”

While most of the Basel agenda is now being implemented, the IIF is engaging with discussions over a greater regulatory burden on the shadow banking system, reflecting the views of its diverse membership, which also includes insurance companies and asset managers, as well as the net stable funding ratio, with bankers cheered by Basel’s dilution of the liquidity coverage ratio.

Adams plans on focusing more on debating operational risk-management for banks as well as the role of technology in facilitating payments and expanding financial inclusion, a new subject for the IIF. “There are 2.5 billion people in the world that don’t have access to financial services,” he says. “It’s good for business to focus on that and technology is one way in addressing this,” adds Adams, citing how Google and cell phone companies represent a disintermediation challenge and opportunity for banks.

In other comments, Adams, who worked on the strategic dialogue with Beijing under the George W Bush administration, predicts the renminbi will be a fully international reserve currency in a decade’s time but downplays expectations for financial and labour-market reform at the plenary session of the 18th Party Congress in China in November, hailed as a make-or-break opportunity for China to shift its growth model.

“We, in the west, talk ourselves in a timeline that is divorced from how China sees things,” he says. “The way they do things is gradual via trials and pilots. These financial reforms, in particular, won’t happen in a big bang.”

Judging by Euromoney’s first meeting with Adams as IIF managing director, the former Treasury official is well-placed to ensure the pressure group can maintain its relevance and is cut from the same cloth as his predecessor.

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