REMARKS BY JOHN T. OLDS, VICE CHAIRMAN & CEO, DBS BANK
AT APLMA MEETING (8 OCT 99)
----------
(Press Release)
AFTERMATH OF BANKING CRISIS MORE DANGEROUS
THAN CRISIS, BANK EXECUTIVE SAYS
* * *
More Regulation, Continuing Reform and Leadership from Banks Are Critical
* * *
OFFERS PRESCRIPTION FOR RESTORING HEALTH
OF ASIA’S CAPITAL MARKETS
SINGAPORE, Oct 8, 1999 - John T. Olds, Vice Chairman and CEO of DBS Bank, said
today that the most dangerous part of the Asia’s financial crisis lies ahead, not
behind.
Speaking to the Asia Pacific Loan Market Association in Singapore, Olds quoted former
US President Richard Nixon who warned of situations with "your resources spent and
guard down, you’ve got to watch out for dulled reactions and faulty judgement."
Olds told the group that the Asian financial crisis "is almost a textbook example
of those sorts of dangers. With relative currency and interest rate stability,
there’s a tendency to believe that it’s once again safe to go back to business
as usual."
"What this crowd has conveniently forgotten," said Olds, "is that
foreign exchange losses experienced in 1997 and 1998 are of truly unprecedented size. We
can wish as hard as we like, but the losses won’t disappear."
"Nor will cash flow rise to a level that allows debt (or, more precisely, debt
service burdens) to be reduced to manageable levels. Because, in most cases, the size of
the devaluation and decline in capital values makes that impractical, if not
impossible," he said.
On the plus side, the former JP Morgan senior executive said the crisis has accelerated
what banks would have experienced in any event, that being greater accountability from
more senior managements.
"Importantly," he said "the recession has given the market a way to tell
future winners from losers."
Olds predicted the winners will not necessarily be the largest or the
longest-established institutions, but those companies most able to blend the virtues of
Asian capitalism, patience, vision and entrepreneurial instincts with international
sources of capital and know-how.
"The real question," said Olds, "is what can we do to speed the process
up and facilitate the necessary change? It’s [bank] management’s job to set the
tone. Directors, like regulators, only get in on the act on a day-to-day basis when
management fails to discharge their responsibilities successfully."
"It’s too early to know whether good governance will be as infectious as bad
governance was toxic!" he said. "But realistically, the changes underway in
management policies and practices in transparency and regulation and supervision and
surveillance are more likely to come in a series of gentle waves, not one overwhelming
tsunami."
Olds prescribed a five-point plan for speeding the recovery of Asia’s banks
"First," he said, "banks must be clear about the objectives and the
pathways people should take in reaching them." This clarity is not the same as
transparency. Transparency lets others see a company more clearly. But investors are less
interested in how you count their money than what you do to make it grow. Clarity lets you
see the business environment more clearly, from the inside out – a key to growing
investment.
"Second, stricter bank regulation is sine qua non for instilling
confidence." That means better rules, better supervision and better surveillance over
things like the early recognition of non-performing loans or the identification of loan
concentrations. Administrative guidance that ensures best practice reinforces confidence
and lessons the chance for a systematic breakdown. It is up to management to create a
climate for sustained self-improvement in corporate governance.
"Third, the formation of credit rating agencies and credit bureaux to capture and
exchange financial data for bona fide purposes." Their existence would reveal
excessive credit usage, loan concentrations, pre-existing security interests and debtor
payment records, help lenders develop a consolidated picture of exposure and prevent them
from doubling up through private or public debt offerings or committing fraudulent
behaviour.
"Fourth, harmonising listing requirements and giving shareholders and other
interested parties access to comprehensive financial information." Access to
reliable, timely data through a centralised clearing facility in the Asian time zone (like
Euroclear in Europe) would greatly enhance the development of liquid and efficient capital
markets, and take the burden off the banking system. In spite of the obvious constraints
and sensitivities associated with national markets, the only way to level the playing
field is to eliminate artificial advantages and hold all public companies to the same
standards of disclosure.
"Fifth and finally, there is a need for a cease-and-desist order on global
prescriptions and universal generalisations. For example, the IMF has only one programme
– designed for Mexico, Brazil and Argentina – that it applies with equal force
in all countries and to all banks. But the sheer diversity of Asian economies and
financial institutions cannot be stretched to fit a single model."
Olds said he was confident that Asia will emerge from the crisis stronger than before.
"But how happily," he said "will depend on some critical variables that are
as much a part of business leadership as they are of national or international policy.
"As the end of the day, said Olds "it’s management, not regulation and
reform that determines the success of the banking system."
"I’ll grant that the punishment of the last two years may not fit the
‘crimes.’ And I will understand the feelings of those who believe that local
sensitivities and local practices require a country-by-country approach to
governance."
"But the reality is that neither time nor tide is on the side of those who would
like to return to the old way of doing things," he said.
------------------------------
(Full Speech)
REMARKS - JOHN T. OLDS, VICE CHAIRMAN & CEO, DBS BANK
At Asia Pacific Loan Market Association (APLMA) Meeting
8 October 1999, Singapore
"Timing", as they say, is everything!
In November of 1997, two Harvard University professors published an
article in Foreign Affairs with the surprising title "Asia’s
Reemergence."
At the time, of course, many people were just beginning to figure
out that there was a financial crisis in Asia.
The crisis, of course, had broken out in July and August with the
devaluation of a number of East Asian currencies. Then, in September, the IMF and the
World Bank came galloping to the rescue -- their arrival reminiscent of that old saw:
"I’m from the government and I’m here to help!"
So, in November of ‘97 it seemed a bit premature to talk
about re-emerging from a crisis that was still very much developing.
All of which goes to prove what a fine line there is between sounding
like a luminary and sounding like a lunatic.
Now, as someone who’s acutely conscious of how easily events can
land you on the wrong side of that line, let me point out that my remarks today, though
shaped by recent experience at DBS Bank, aren’t to be taken as representing those of
the bank.
Fortunately, all of us in this room have now had the
benefit of more than two years’ experience of the Asian crisis. So today, we’ve
got a better knowledge base to work from than the authors of that Foreign Affairs
piece had in 1997.
And, at the risk of sounding revisionist, let me say that had the
Asian crisis not occurred, there’s a chance that transparency and good governance,
those words so often on the lips of bank managers and regulators, would have evolved
gradually anyway.
Because, after all, good governance and transparency are more
than just achievable ends in themselves. They’re also a means, both to
acquiring low-cost capital and to forestalling "event risk."
Unfortunately, the events of July 1997 spread so rapidly and the
downturn became so precipitous that the timetable for reform was dramatically accelerated.
Nike and Coca-Cola notwithstanding, the world’s still a pretty
complex place. To operate successfully these days, an experienced banker has got to have a
certain amount of "local knowledge." And that includes an appreciation of
often-Byzantine family structures and business connections and local
"entitlements."
It’s a bit like being a policeman. You need street smarts
and good instincts, in addition to training and experience - especially when things
don’t seem to add up the way they should.
But even the best cop or banker can get lured down a blind alley.
And during Asia’s unprecedented economic growth in the 70s,
80s and 90s, the sheer momentum of the expansion masked fundamental, but not yet
catastrophic weaknesses. As an old Asia hand says with wry humour: "The situation was
critical but not yet serious!"
Then, in the second half of 1997, it suddenly became both.
Richard Nixon, who knew a thing or two about crises, once said that the
most dangerous part wasn’t the crisis itself but the aftermath. It’s then
(he said) with your "resources spent and [your] guard down" that you’ve got
to "watch out for dulled reactions and faulty judgment."
The Asian financial crisis is almost a textbook example of those sorts
of dangers. Now that relative currency and interest rate stability, together with
improved liquidity, have returned to many Asian economies, there’s a tendency to
believe that it’s once again safe to go back to business as usual. The status quo
ante contingent contends that, as in Mexico’s Tequilla crisis of 1994, time and
tide will once again lift all boats.
What this crowd has conveniently forgotten is that the foreign
exchange losses experienced in 1997 and 1998 are of truly unprecedented size. We can wish
as hard as we like, but the losses won’t disappear as if they’d never been
crystallised. (That really would be an "economic miracle"!)
Nor will cash flow rise to a level that allows debt more (or,
more precisely, debt service burdens) to be reduced to manageable levels. Because,
in most cases, the size of the devaluation and the decline in capital values makes that impractical,
if not impossible.
Here's where the Asian Pacific Loan Market Association comes in.
It has become clear that backup forms of intermediation - functioning capital markets -
are a key to restoring sustainable economic growth by providing alternate sources of
capital to ease the burden on banks.
We've got to expect borrowing costs to rise as the recovery
proceeds. And since the cost of capital mirrors risk, what we have today is a situation
where interest rates are unsustainably low and lending margins artificially depressed.
Given these circumstances, how might we better position the
region's financial infrastructure to deal with the future and avoid some of the excesses
of the past?
To answer that question, we first have to ask ourselves if bank
managements can effectively change the business paradigm from within - given their
people, their systems, their customers and their controls? That's more than a question of skillset,
it’s also a question of mindset. Which is another way of saying it’s
a question of leadership.
In many parts of Asia, there’s still an obvious
disdain for so-called "international practices." But I believe that the smart
money already realises that high-leverage, disguised corporate interlocks, and what I
might call (for want of a better label) other outdated business practices are just
that - a thing of the past.
Naturally, with governments providing the lifeboat, it’s
impossible to drown. But when those temporary support systems have been withdrawn,
there’s no guarantee they’ll be re-launched the next time your bank
founders on stormy seas.
So, the crisis has been something of a catalyst though I’ll
admit it’s been a slow-reacting one. The crisis has accelerated what
banks would have experienced in any event, namely, more senior management accountability.
More importantly, the recession has given the market a way to tell future winners
from losers.
And who, precisely, will those winners be? I believe they’ll
be companies that are able to blend the many virtues of Asian capitalism, patience, vision
and entrepreneurial instincts with international sources of capital and, in some cases,
know-how. Those are the companies that will emerge better-positioned, better able to
expand and better able to take advantage of relatively low funding costs and high expected
values.
It’s too early to know whether good governance will be as
infectious as bad governance was toxic! But, realistically, the changes underway in
management policies and practices in transparency and regulation, and in supervision and
surveillance, are more likely to come in a series of gentle waves, not one overwhelming tsunami.
The real question is: What can we do to speed the process
up and facilitate the necessary change? Clearly, it’s management’s job to set
the tone. Directors, like regulators, only get in the act on a day-to-day basis
when management fails to discharge their responsibilities successfully.
Here are some thoughts on how to do just that:
First, let's be clear about our objectives and the
pathways people should take in reaching them. I can’t think of a single instance in
my years in banking when a long-range plan with clearly-enunciated corporate goals
didn’t have the effect of motivating people toward the objective.
And, by the way, clarity is not the same as transparency.
Transparency is letting others see your company more plainly, from the outside in.
Clarity is allowing you and your people to see the business environment more clearly, from the inside out.
And though transparency is certainly a laudable objective, if
it prescribes a treatise on international accounting practices the size of the New York
City telephone directory, that is not a sensible or achievable goal. Besides, adherence to
proper accounting policies doesn’t constitute a business plan or a tangible corporate
objective anyway.
Investors take for granted that managers know how to count
the beans. They’re interested in how they intend to plant them and make
them grow!
Second, stricter bank regulation is a sine qua non
for instilling confidence among depositors, investors and counterparties. By stricter
regulation, I mean better rules, better supervision and better surveillance
over things like the early recognition of NPLs or the identification of loan
concentrations.
While these forms of administrative guidance are necessary and
maybe even obvious, given the events of the last two years, like transparency,
they’re still not sufficient. Few things that central bankers can do,
individually or collectively, ensure best practices. But, like accounting
transparency, they reinforce confidence and lessen the chance for a systemic breakdown.
Even so, it’s still up to management not only to
comply with rules and regulations but also to create a climate for sustained
self-improvement in corporate governance.
Third, the formation of Credit Rating Agencies and Credit
Bureaux (whether locally or regionally) to capture and exchange financial data for bona
fide purposes would go a long way toward helping Asia put its financial house in
order.
They would reveal excessive credit usage, loan concentrations,
pre-existing security interests and debtor payment records. And they’d help lenders
develop a consolidated picture of exposure. This would prevent them from consciously or
unconsciously doubling up "passing the parcel" (to another, unwitting lender)
through private or public debt offerings or committing fraudulent behaviour.
For a banker acting as principal or distributor, the ability to
access reliable, comparative data from a central clearinghouse of credit information is
invaluable. And I can’t see how such a clearinghouse could in any way threaten client
confidentiality assuming it was properly run.
Fourth, harmonising listing requirements and giving
shareholders and other interested parties access to comprehensive financial information
would add significant discipline to the system. And it would prevent filers from
engaging in regulatory arbitrage.
I need hardly tell this audience that access to reliable, timely
data, perhaps through a centralised clearing facility in the Asian time zone like
Euroclear in Europe, would greatly enhance the development of liquid and efficient capital
markets. At the same time, it would take some of the burden off the banking system.
In spite of the obvious constraints and sensitivities associated
with national markets, it’s clear that best execution depends on the elimination of
information advantages. The only way to level the playing field is thus to eliminate
artificial advantages and hold all public companies to the same standards of disclosure.
Fifth and finally, we need a cease and desist order on
global prescriptions and universal generalisations. For example, the IMF has only one
program and it was designed for Mexico, Brazil and Argentina. Or, consider the BIS capital
guidelines (which, by the way, are about to change yet again).
These guidelines apply with equal force in all
countries and to all banks. The sheer diversity of Asian economies and financial
institutions can’t be stretched to fit a single, one-size-fits-all model.
The goal of the Capital Adequacy Ratio is to provide a guideline
for managements and regulators. It’s a framework for gauging whether a particular
institution has sailed "off the charts" with its exposure to a customer segment
or a business sector, or whether it is still within the "safety zone." But, it's
only a guide.
Some U. S. banks, encouraged by the Fed, have taken these risk
frameworks and drilled them down into functional areas of their institutions using a
process called "Control Self-Assessment Ratings." Under this system, the people
on the firing line are required to sign-off periodically on the risks they encounter in
their daily activities.
I like that approach because it aligns authority with
responsibility. Because, to be really effective at managing risk, banks need to
translate risk assessment into operating policies.
So, there are five points to keep in mind as the period of
"distress" and "contagion" in Asia comes to a close, and a new phase,
a phase of "differentiation" begins.
In this new era of differentiation, countries, like companies,
will emerge from the crisis individually. The region as a whole will not move
forward in "lock step." In the same way, we can’t expect specific industry
groups like banks all to come right at once even though it sometimes seems that certain
value-based sectors like real estate do move more or less in synch.
Now, more than ever, companies need to compete for capital -
domestically and internationally. And the system needs to reform itself to prepare the
way.
Will Asia emerge stronger? Definitely. In fact, it turns out that
those two Harvard professors, Radelet and Sachs, proved quite accurate in their prediction
about Asia’s reemergence. And they’re back to being luminaries once more.
But, as I’ve tried to suggest, how happily the story ends
will depend on some critical variables, variables that are as much a part of business
leadership as they are of national or international policy.
From a competitive standpoint, the environment is certainly going
to be increasingly competitive and increasingly threatening. Regional and global forces
for consolidation are sweeping across banking and financial services; stealth competitors
are prowling the Internet for ways of stealing mind and wallet share. And all customers -
both borrowers and investors are imposing increasingly stringent standards of
cost/performance and service.
Still, at the end of the day, it’s management, not
regulation and reform, that determines the success of the banking system. And
management’s job is clearly to give people the resources, and the latitude, to
maintain the integrity of the enterprise and the latitude to extend the franchise -
figuratively and literally.
I’ll grant that the punishment of the last two years may not
fit the crimes. And I well understand the feelings of those who believe that local
sensitivities and local practices require a country-by-country approach to governance. But
the reality is that neither time nor tide is on the side of those who would like to return
to the old ways of doing things.
At a minimum, we have to find a way to harmonise local
business practices with global expectations. And, in this regard, bank managements need to
instill sound practices, and procedures in their organizations to build a culture of
success.
Let me leave you with a parable and a final thought.
There’s a folktale about a man who went to the marketplace
one morning and headed straight to the gold-dealers stalls where he snatched a handful of
gold and ran. Of course, the authorities caught up with him almost immediately and
arrested him. As they were leading him away, the police asked him why, with so many people
around, he would even attempt something so foolhardy.
"Well, when I did it," the man replied, "I saw
only the gold, not the people."
Sometimes, we need to remind ourselves that it wasn’t simply
capital that built the Asian economic miracle. It was frugality, hard work and
far-sighted entrepreneurship.
The same people with the same "natural" resources are still
very much in evidence as Asia emerges from the crisis. The task before us is to provide
the sound financial institutions and strong leadership to put the Asian miracle back on
course.
Thank you.
|