What a difference a year makes. Bankers and other delegates at this year’s IMF/World Bank meetings in Washington, DC, have surprised even themselves with their upbeat mood over the past week.
“Last year everyone was worried about whether Deutsche Bank was going bust – this year everyone is wondering who will buy Commerzbank,” one global banking head tells Euromoney amid a packed client meeting schedule. “That tells you everything you need to know.”
It’s a neat illustration of what has been a startling change of tone, all the more startling given the many geopolitical and economic worries still hanging over markets.
A further year of coming to terms with the Brexit vote in the UK has hardly eased worries about its impact – if anything, fears being expressed privately are greater now than before, even if the public messaging is mostly a breezy get-on-with-it mentality.
That said, Euromoney was assured repeatedly by senior bankers attending the meetings that there was a growing feeling that Brexit might not happen after all – or at least be so watered down as to be almost unrecognisable. Much of the hope was based on the recent speech at the Sorbonne in which French president Emmanuel Macron outlined a possible multi-speed European Union structure.
But at every reception in Washington, it was also impossible to avoid talk of the political machinations in the UK, in particular the growing moves within the Conservative party against soft-Brexit cheerleader Philip Hammond, the Chancellor of the Exchequer.
There is little doubt that the IMF delegate throng see his survival as critical to the chances of a face-saving deal at the point when Britain should theoretically be exiting the bloc.
Jamie Dimon, CEO of JPMorgan
Back in the US, the presidential election had not delivered the result that had been expected at the time of last year’s meetings. Frustration at the slow pace of US policy delivery – particularly on tax reform – is palpable.
The rhetorical conflict with North Korea presents potential outcomes that markets can scarcely fathom – and that participants are largely incapable of hedging.
When asked to rank four concerns as the biggest risk to the US economy, the audience for a US CEO panel session at the meetings of the Institute of International Finance (IIF) – which take place alongside the annual World Bank jamboree – put North Korea top, with 35% of the vote. Fed balance sheet unwinding, disappointment on US tax reform and an equity market correction all tied for second place.
At least fears over the viability of individual institutions have eased. The global economy is looking healthier, the conversation between banks, their clients and investors has moved markedly from cost control as the only route to better profitability and towards a search for top-line growth. Markets are still buoyant – quantitative easing (QE) has inflated all values except volatility.
Mifid II is a headache, but there is movement on a broader tweaking of bank regulation in the US. The second Treasury white paper, on watering down capital markets regulation, published just before the IMF meetings put a spring in bankers’ step, and the start of the Q3 results season has been steady, albeit not remarkable.
Bankers still fret about the prospect of QE – and the reaction of markets to it – but the Sunday meeting of central bank governors in Washington looked to have pushed that further down the track, given persistently low inflation.
Low volatility is ‘biggest risk’
Many of the themes occupying the minds of delegates were aired at the IIF’s usual US CEO panel discussion, always one of the most attended sessions.
This year it kicked off in a positively apocalyptic manner, with moderator Tim Adams striding out to the ominous strains of Wagner’s Ride of the Valkyries. But the conversation itself, featuring JPMorgan’s Jamie Dimon, BlackRock’s Larry Fink and Morgan Stanley’s James Gorman, was more upbeat than that.
Dimon argued that if JPMorgan was a harbinger of the broader state of the economy, then things would be fine. He pointed to Q3 results that his bank had announced the previous day that showed the consumer bank was healthy and deposits were rising, even if credit losses were beginning to tick up from a low base.
Dimon and Gorman are a fine double act. While Dimon rolls out optimism and rage in roughly equal measure, Gorman offers a more measured brand of caution and scepticism. He saw little reason to describe rising bank stocks as something remarkable, for instance.
“I look at the banks in this country and the fact that they are recovering is not exactly heroic,” he said.
For him the market environment was strange: there were profound geopolitical risks and political complications around the world, but against that backdrop were economic fundamentals that were pretty good.
The message Gorman got from clients was that they were trying to understand the political environment and juxtapose the geopolitical and political issues with the daily new highs in markets. Gorman himself sees no mystery in markets going up while corporate earnings are improving: “Everyone is behaving as if it is a surprise.”
Dimon argued that it was important to take a step back from the geopolitics and focus on fundamentals.
“You could open the newspapers at any time over the years and be scared shitless too,” he said. “It’s heightened today, but if you try to price that into the market it’s hard to do.”
Ultimately, things were moving well, and Dimon rattled off a trademark list: “There is M&A out there, plenty of cross-border deals, plenty inside Europe. Everyone is growing at 2%, China at 6%, Brazil has gone from negative to zero – that’s what drives most of these other things.”
BlackRock’s Fink agreed, but was worried about volatility – it was far too low, raising the prospect of a nasty spike.
“The biggest risk we have in the world today is the volatility number,” he declared. It might be comforting at face value because it suggested risk was low, but he argued that if were normalized to historic levels then there was as much risk in the system as there was in 2007.
“I don’t see economically any reason to have a spike … but if there is a political event that is a real problem, then we would have a large setback,” he said.
Fink cautioned that even during the Watergate hearing in 1974 the economy continued to grow considerably, but that there was a big market correction when president Nixon finally stood down.
“We need to be mindful that everything looks great because we do have growth and a low vol number, but if we had a normalized number then we are sitting with a lot of risk,” he said.
One area giving bankers cause to celebrate right now – in the US, at least – is the long-awaited prospect for easing certain post-crisis regulations. Two papers this year from the US Treasury have outlined ways in which these might be tweaked, most recently on October 6, just ahead of the IMF meetings.
Gorman noted that no one should argue for a rewriting of legislation since the crisis – “redoing Dodd-Frank on scale is a really bad idea” – and there was little to complain about some sort of periodic review. The problem was that the periodic review – the Comprehensive Capital Analysis and Review (CCAR) stress tests – now amounted to 45,000 pages for Morgan Stanley.
|Morgan Stanley’s CEO James Gorman|
Cue Dimon, channelling Donald Trump. “The press gets this wrong all the time. No major company is asking for a rewrite of Dodd-Frank.” And then he was off. “Treasury did an exceptional job of these reports, it’s all about calibrations, what is the right leverage ratio, should cash be included, how much liquidity do you need, how does CCAR work…”
JPMorgan does 200 stress tests a week – “Damn straight we worry about stress!” – but the CCAR test was becoming a “monstrosity”.
Meanwhile, measures that would have been constructive were untouched. The US had still not written mortgage securitization regulations eight years after the crisis. Dimon reckoned an extra $1.5 trillion of mortgages might have been written if proper rules were in place.
The bigger issue was that a lot of regulation designed to protect the system ended up making it more dangerous – a theme that he and JPMorgan CFO Marianne Lake have often spoken about during results calls.
“As things get more volatile, banks have to hold more capital so banks are unable to intervene,” he said. “It’s quite predictable.”
Gorman takes breaths more regularly than Dimon, but he too sees plenty to improve with CCAR even if he thinks it generally works as an annual health test.
One example: banks have to predict what their capital base would be under various scenarios, and then determine what their buyback and dividend policies would be. If they have got it wrong they have to cut those payouts, but if they have been too conservative they are not allowed to increase them.
Gorman’s solution is for banks to simply set their intentions after knowing the result of the test, rather than being forced to guess.
Tax and infrastructure frustration
US tax reform remains high on the agenda for delegates, and all the more so because it had been considered a priority of the Trump administration.
“The US tax rate is too high, we need to be competitive globally,” said Gorman.
For Dimon, it was crucial for business to be more vocal in the debate. “Business is not involved enough because it is frightened of retaliation,” he said. “Had the tax rate been 20% for the last five or six years, there would have been 5,000 US companies that would have been US-headquartered, not foreign.”
As it was, the logic was compelling for businesses to invest overseas rather than at home. And he returned to a familiar theme: “Our 2% growth is despite the dumb thing we’ve done in policy. If we have done the right things, it would have been 3%-plus.”
|Larry Fink, CEO of BlackRock|
Fink reckoned markets were discounting tax reform, meaning they would get another leg up if it actually happened. “We think it is imperative that this administration work with business and Congress to get things done,” he said.
Last year’s US CEO panel session featured a rant from Dimon on the slow pace of domestic infrastructure development. This year he held off from repeating himself, but left it to Fink to take up the baton. Fink was surprised that infrastructure policy had not yet been properly addressed.
“We could have done Make America Great Again bonds,” he said, referring to one of president Trump’s campaign slogans and comparing the concept to the Build America Bonds that President Obama introduced in 2009 as part of the post-crisis recovery effort.
Fink also cautioned that the infrastructure problem extended well beyond the federal level. Projects were frequently a state or local issue. Municipalities were not doing so well, he said, and were increasingly weighed down by pension burdens. All told, the result was that BlackRock had bigger infrastructure teams in Europe and even Mexico than it did in the US.
Tech: new and not new
Is data the new oil? The US CEOs were invited to consider the question, and the assertion that financial companies are all tech companies now.
Gorman gave that short shrift: “I don’t think we are tech companies. We are banks but we have large tech capabilities and applications – but we’ve always had that.”
For him the more interesting point was the pace of change – and the seriousness with which the topic was now treated. Morgan Stanley, for instance, has a global tech committee like its risk committee and at the same level of seniority within the firm.
Despite having promised just one day earlier never to talk about bitcoin again, Dimon seized the opportunity to lay into it again as he has done frequently in the past – most notably labelling it a fraud in September. Here he expanded on that theme: “The use case for bitcoin is Venezuela and North Korea, or criminal. Great product!”
He found an ally in Fink, who argued that the market value of bitcoin was evidence of little other than the current demand for money laundering. Governments would crush it one day, said Dimon.
But Dimon and Gorman are both advocates of the benefits that tech – including blockchain-based systems – can bring to their business, particularly in the area of operational efficiency. Both are working with Fink on such things, for instance. JPMorgan is working with BlackRock on a private blockchain between the investment firm’s securities transactions and its custodial banks.
“There is no one doing more than JPMorgan,” added Fink, in case anyone thought Dimon’s disdain for bitcoin extended to other areas of tech.
BlackRock has brought down its cost of trading by 70% between 2011 and 2017 through better technology and processing, Fink said.
Gorman saw no separation between the technology and the human side when it came to his financial adviser business. He has 16,000 advisers guiding clients to make rational decisions – the difference was that now there was technology to assist them, with virtual robo-advisers feeding into the team or to clients directly.
“There will be small clients and less complicated ones who only want the digital, and that’s fine. That’s just segmentation, it’s not a new phenomenon.”