Published on April 30, 2009
Agile May 2009 FINANCIAL TIMES Investment Management Outlook Middle East and Africa CUSTOMER SPOTLIGHT Increasing Market Share for Apollo DKV PERSPECTIVE Islamic Insurance in the Middle East ARTICLE The Aftermath of the Economic Crisis
May 2009 Editor’s Note Greetings! In our quest to serve those who conserve capital and grow wealth, we are pleased to provide our views on the investment and wealth management outlook in the Middle East & Africa and a perspective on Takaful Insurance in the Middle East. CONTENTS As I write, we are at the Annual BancAssurance Conference in Vienna, Austria to exchange views with industry leaders on this growing channel. Agile FT is sponsoring the Conference and presenting a paper on ‘Making BancAssurance Agile’! CUSTOMER SPOTLIGHT What is most exciting about BancAssurance is how it brings bankers and Increasing Market Share insurers together and this assembly is truly a meeting of minds as all sides for Apollo DKV 4 unanimously agree on the role of technology as a key enabler. Our AGILIS BancAssurance platform is being so well received that we decided to feature the same in this month’s Solution Spotlight. COVER STORY Investment Management We are passionate about innovation and feel a sense of great pride when Outlook: ME and Africa 7 our clients use our technology to innovate a business model. Apollo-DKV Health Insurance Company shares its experience on the use of Agilis and how they were able to leverage technology to increase their sales through ARTICLE portals like MakeMyTrip.com. The Aftermath of the Economic Crisis 10 We invite you to read Vikas Tandon’s perspective on Customer Privacy in the face of increasing Anti-Money Laundering scrutiny. Vikas Tandon is the Joint General Manager and Money Laundering Reporting Officer at ICICI INSIGHT Bank. Customer Privacy Regulation 15 A new and exciting addition this month is a contribution from our Chairman, Andrew Krieger, a well known luminary from the financial world. He shares an insider’s view on the aftermath of the economic crisis. You will get a PERSPECTIVE sense of déjà vu as we are taken down memory lane right from the Great Islamic Insurance in the Depression and are told that a cheery investment outlook awaits us in the near future. Middle East 17 We hope that you enjoy this edition and continue to write in with your SOLUTION SPOTLIGHT feedback. Here’s wishing everybody a great month ahead. AGILIS Bancassurance 20 Be Agile! PARTNER SPOTLIGHT Shefali Khera Chief Marketing Officer Expansion in Sub- Write to us at firstname.lastname@example.org Saharan Africa 22
CUSTOMER SPOTLIGHT Increasing Market Share for Apollo DKV This meeting of minds has given birth to a new era in health Apollo DKV Health Insurance insurance in India, bringing with it the double protection of preventive health added to insurance cover. It is a venture to Company, the association bring in a paradigm shift in health insurance from ‘post care’ to ‘prevention and wellness’. This ultimately is the core of between Apollo Group and the Apollo DKV’s unique brand positioning - ‘Lets Stay Healthy’. Deutsche Krankenversicherung Towards this attempt, it has implemented AGILIS, an (DKV) AG, is a strategic alliance integrated web-based software offered by Agile FT. to meet common goals in Through AGILIS, Apollo DKV has been able to sign up new customers thereby gaining incremental revenue. It has healthcare and health insurance. also achieved fast turn-around-time, a critical success factor in the travel insurance industry. Apollo DKV has provided Indian domestic/international It complements Apollo’s travellers a powerful on-line tool by which they can purchase travel insurance in a variety of ways. Corporate customers philosophy of ‘prevention and can issue policies at their end from the corporate portal. Travellers can purchase their insurance policies either from wellness’ and DKV’s dedicated travel agents who have been given access to AGILIS or from travel portals like MakeMyTrip.com. Branch office mission of ‘providing affordable employees of Apollo DKV at branch office can issue insurance policies to walk in customers from the employee and innovative health insurance portal. In all cases, the insurance policy is immediately processed, can be printed and made available to the solutions’. customer in real time. Health insurance is a highly competitive line of business since it is a part of every general insurance company’s portfolio. Travel insurance forms an integral part of the health insurance portfolio. Travel is a high-growth segment with international leisure travel expected to grow three times while the domestic travel market is currently growing at about 35%. The value of the Indian travel insurance industry is estimated to be $236 million in 2009, according 4
CUSTOMER SPOTLIGHT to Euromonitor International. Domestic and international air travellers typically buy insurance cover after they have purchased their travel tickets. This is usually at the proverbial last minute when they have very little time to seek an agent and buy travel insurance. Even if they find a travel agent or visit a general insurance company, it normally takes a few hours before the policy Krishnan document is provided. Ramachandran, Chief Operating In addition, the application forms are time consuming with Officer, Apollo details such as medical history, passport and other DKV, shares identification details to be filled. This affects the turn- his views around-time, a factor that is critical for the success of the exclusively with business, as well as the convenience of purchasing the Agile Financial insurance cover. Times. Background In its endeavour to become a first-choice partner in the What is your vision for Apollo DKV? health care sector, Apollo DKV is determined to increasingly automate processes, reduce human intervention Apollo DKV was licensed by the regulator in August 2007 and increase quality and speed. Apollo DKV currently offers and launched its first product in November 2007 on the several insurance plans - Easy Health Insurance, Personal retail side. We now offer a bucket of products in areas Accident Insurance and Easy Travel Insurance. such as health, travel and personal accident insurance for both retail and corporate and our goal is to become a It chose Agile FT as its partner to automate its Easy Travel health insurer of choice. Insurance Plan, a Short-Term travel insurance plan, with the main target population being young people who are very At Apollo DKV, our core philosophy is ‘manage health’ familiar with the existing travel insurance schemes available and our vision is to become a significant player in the in the market. The Individual Travel Insurance Plan covers health insurance industry, with our value proposition an individual of age between 6 months up to 70 years, being the ability to combine health care access and against any medical or non-medical emergency while delivery. travelling and is valid for a specific number of days. Apollo DKV offers the Easy Travel Insurance Plan in four different What is the rationale behind the on-line health ways: initiative? A secure travel insurance portal through which Very few insurance companies currently offer on-line corporate customers can issue their own policies. The health insurance with processes automated from issuing company has to maintain a deposit with application to policy distribution. By providing this Apollo DKV, which gets debited every time a new policy service, we have actually been able to increase the is issued. market size of the insurance industry as this user-friendly facility has roped in many first-time customers, many of Through the Agents Portal for travel agents. whom have now made it a practice to purchase insurance on-line whenever they travel, which is Through travel ticketing websites like MakeMyTrip.com, something they would not have thought of earlier. where travellers can buy the insurance policy along with the air ticket by just click-checking a box. What was the main reason for selecting Agile FT? Through branches which provide service to walk-in We chose Agile FT as a partner as they possessed both, customers. the technology expertise as well as people who had a deep knowledge of the insurance industry. Agile FT The policy is valid either for the duration of the round trip offered us a blend of technology and domain expertise travel or 30 days from the date of booking. The decision to use travel web sites as a distribution channel was to provide Without AGILIS we would not have been able to enter an extended solution to airline clients. This has given the into a partnership with MakeMyTrip.com. company a new dimension to the already existing on-line airline booking system. 5
CUSTOMER SPOTLIGHT While the primary focus of travel agents is on overseas not they would like to purchase an insurance policy. It also travellers, the focus of MakeMyTrip.com is on domestic as includes the facility of emailing the policy to the subscriber’s well as international travellers. email address. The back end runs a validation engine and checks the Supplier Selection information (such as age, length of travel, countries of During the launch of the Easy Travel Insurance Plan, travel) of the traveller. Most of the information is picked up Apollo DKV had time constraints and was unable to from the data provided on the tickets and compared to set custom-build a solution to cater to the travel insurance values. For example, the Easy Travel Insurance Plan is only product. The company was therefore seeking an ‘off-the- provided to customers who are less than 70 years old. shelf ’ product. “We already had a system in place which we Anyone at and above the age has to go through the customised to suit our business needs. We decided to go for underwriting process by visiting an Apollo DKV office. AGILIS since there was no time to add a separate module to the existing one,” says Ravinder Zutshi, Chief Technology After the validation, the application is passed through a Officer, Apollo DKV. payment gateway, where the payment is extracted from the customer’s credit card. In case of cancellation of a policy, the refund is made to the customer using the same forms, while the final transaction is settled between the travel “We chose Agile FT as they agents or MakeMyTrip.com and Apollo DKV at the company’s website. possessed both, the technology Business Benefits expertise as well as people who Within a few months of the launch of AGILIS, Apollo had a deep knowledge of the DKV received encouraging feedback from travel agents as they found the product easy to use. Their feedback has been insurance industry.” that AGILIS is customer friendly, easy to integrate into the existing system, cost-effective and performs well on underwriting and claims. - Krishnan Ramachandran AGILIS also helped Apollo DKV decrease the turn-around- time for issuing a policy to 2 minutes as compared to 15 Chief Operating Officer minutes earlier. Purchasing travel insurance was suddenly made very simple for travellers who were earlier used to Apollo DKV filling out lengthy application forms. For travellers who fit the policy underwriting criteria, all they have to do is to fill in their personal information on-line and the policy document is sent to their email account, without any human A key differentiator that separates Agile FT from its intervention. competitors is its domain knowledge. Apollo DKV selected AGILIS over similar products because of Agile FT’s proven Apollo DKV garnered significant incremental business with expertise and domain knowledge of the insurance sector. the addition of MakeMyTrip.com as a sales and distribution channel, especially because it was one of the early movers. The unique feature of this channel is that it creates an Technology impulsive buying decision for the travel portal user who can AGILIS is an integrated on-line IT solution designed to avail an insurance policy by just click-checking a box. automate all the functions of a general insurance company. It acts as a decision support system for underwriting, claims, Conclusion reinsurance and accounting and, as a result, directly enhances the business processes of an insurance company. Apollo DKV gained significant benefits due to the AGILIS The solution is flexible in terms of defining new or revising implementation. In addition to simplifying internal existing insurance products and facilitates dynamically processes, using AGILIS also reduced the turn-around-time altering the process in time with the market conditions. for the issuance of policies, thereby setting an industry AGILIS has the ability to cater to all classes of the general benchmark which few insurance companies have achieved. insurance business. Being one of the early movers in providing travel insurance policies in real time gave the company a substantial The front end interface is used to provide a choice to advantage over competition and helped it to increase travellers booking through MakeMyTrip.com of whether or incremental revenues significantly. 6
Investment It seems ironical to talk about investment and wealth management, when so many mammoth organisations have Management collapsed and high net worth individuals (HNIs) have seen their net worth eroded in the Outlook span of just a few months. As we all know, the US downturn triggered a global Middle East and Africa slowdown during the second half of 2007, which quickly In early 2008, large US corporations began filing for bankruptcies, which severely spread to the other developed impacted their global operations. With mass unemployment across the globe, the regions as well. At the same scenario worsened in the second half of 2008 and as yet, 2009 does not appear time, emerging economies to be doing any better. continued to grow, albeit at a Countries within the Middle East and Africa were relatively well sheltered during slower pace. the second half of 2007 largely on account of the then-rising prices of commodities and natural resources. Africa additionally benefited from a liberalised economy attracting higher foreign direct investment (FDI) to propel growth. Wealth creation in both these regions reached record highs. According to a 2008 BCG report on Wealth Management, assets under management (AUM) in Middle East and Africa grew at a rate of 8.6 per cent versus the worldwide growth rate of 4.9 per cent in 2007. The World Wealth Report published by Capgemini and Merrill Lynch in 2008 mentions that the HNI population within Middle East and Africa experienced the highest growth rates of 15.6 per cent and 10 per cent respectively in 2007. Compared to this, the worldwide HNI population in 2007 grew only by 6 per cent in that year. While the financial crisis took its toll on most countries, the impact on emerging 7
COVER STORY nations was especially significant, since they were highly Sharp Shock’, forecasts a speedy recovery for the Middle dependent on the US and other developed countries for East during 2010. According to the report, the price of West foreign investments as well as exports. The impact on wealth Texas Intermediate (WTI), which is a benchmark for oil markets in Middle East and Africa has been quite severe. prices, will hover around approximately $60 per barrel in The Gulf Co-operation Council (GCC) stock markets 2009 and the production of oil will drop by 3 million barrels collectively lost more than $600 billion in market per day. In 2010, as the demand for oil increases and the capitalisation during 2008. Local exchanges in Dubai and Egypt were down more than 50 percent in 2008. The wealth erosion across both regions was primarily led by: In the absence of a major Declining commodity prices: In July 2008, crude oil black swan event, the prices declined by almost 70 per cent from a peak of $147 per barrel. The Middle East region with the largest demand-supply equation is crude oil reserves in the world, had to cut production due to decline in demand. Many mines in Africa closed bound to ensure prosperity down operations as the demand for commodities declined significantly. Prices of copper and cobalt within these regions. dropped to one-third of their peak-2007 prices. Declining foreign investments: There has been a decline in FDI in these regions owing to the economic slowdown and a current negative outlook towards the global economy starts to recover, there will be a marginal region. According to UNCTAD, FDI in the Middle East price recovery of oil, up to $75 per barrel. The report fell by 21 per cent in 2008, resulting in delays and reflects the consensus on a growth decline in 2009 for the cancellations of infrastructure projects that were heavily GCC countries - GDP growth in 2009 to decline by 20 per dependent on FDI. In six of the largest countries in cent over to $835 billion from $1.1 trillion in 2008, and the North Africa, FDI fell by 5.2 per cent in 2008 to $21.3 current account surplus to fall to zero as compared to $350 billion. billion in 2008. In 2010, however, the GDP is expected to grow by 20 per cent to over $1 trillion. Credit crunch and liquidity pressure: In both Middle East and Africa, the lack of liquidity resulted in a loss of Implications for Investment Management confidence amongst lenders and borrowers. As lenders became more stringent with respect to borrowing The implications of all this for the investment management norms, the number of loans accessed by the public industry in Middle East and Africa are far-reaching. Growth declined. in wealth is the leading indicator rather the leading driver for the wealth management industry. Therefore, while 2009 will be a watershed year for the industry globally, the key for Recovery Expected Post-2009 investment managers will be to maintain competitive However, the good news is that despite falling growth rates, positioning to garner growth opportunities on market both regions are widely expected to still keep growing. recovery. According to an IMF forecast, the GCC economy is expected to expand by 3.5 per cent in 2009 as compared to There is every reason to believe that the attractiveness of the 6.8 per cent last year. Another forecast by the World Bank Middle East and Africa as destinations for wealth (report on Global Economic Prospects) pegs the regional management will continue post 2009. The prime reason is growth in the Middle East (including GCC and other the already-existing wealth base, both at the retail level as countries as well) to slow down to 3.9 per cent in 2009 from well as at the sovereign level. The existing reserves of 5.8 per cent in 2008. The underlying assumption is that financial assets can be leveraged effectively for fuelling commodity prices will definitely not go down further and investments in prime projects, especially in infrastructure. crude especially is expected to recover to $65-70 per barrel For instance, UAE alone has reserves of $350 billion versus by the end of 2009. obligations of $10 billion in sovereign debt, and $70 billion owed by affiliated companies. Looking beyond 2009, the prospects appear to improve dramatically for these regions. While there is a general The confidence in the African markets is evident from the consensus on the global economic environment improving number of private equity (PE) companies which are in 2010, indications are that the turnaround will be much continuing to set up shop there. For instance, Kingdom quicker in Middle East and Africa. Zephyr Africa Management and Aureos Advisers (both PE players) have announced that they will continue to raise A recent MEED (Middle East Events) report titled ‘A Short, capital for their respective PE funds, as they continue to see 8
COVER STORY Growing maturity of investor culture: The investor culture is gaining ground in these regions. Mature investors have a better understanding of the complexities of wealth products and services, which acts a driver for further growth of the investment management industry. Some of the inherent challenges that countries within these regions face and will have to ultimately overcome to sustain and increase growth, include: Scarcity of experienced local finance professionals: Finance professionals are needed for the growth of investment management within these regions. Due to the geopolitical risks in these countries, professionals from opportunities in the African continent. They expect Africa developing nations are often unwilling to relocate to the to recover more quickly than the other emerging countries, Middle East. as Africa has been one of the fastest growing regions within the emerging economies. As for the Middle East, in the Nascent stage of some African markets: Although recent past, several international investment outfits (such as the African region opened up its economy to foreign ING IM, Insparo Asset Management, Australia’s Macquarie investment and trade in 2007 to an extent (and as a result Group among others) have either set up or are in the process experienced significant economic growth), it still has a of setting up offices in the Middle East. long way to go in relaxing norms that erstwhile did not allow foreign inflows. By doing this the region will attract Further, there are several strong fundamental drivers which hefty foreign investments. Further, the turbulent political will help these economies recover and grow: landscape in various parts of Africa could significantly impede growth. Diversification of sources of income: The countries within Africa and ME have been investing in other High expectations of HNI investors: HNIs have sectors to diversify and reduce dependence on a single become very sophisticated in terms of their financial and commodity or natural resource. For instance, tourism investment needs and seek comprehensive wealth has been a growth sector in the GCC and its share in the management services from trusted advisors. Clients not GDP is expected to go up further. As these economies only expect advice on investments but also expect diversify, there will be significant growth opportunities advisors to be able to understand the larger picture which will be tapped by investors. which encompasses personal and professional investment goals. Wealth managers therefore have to Rapid growth of Islamic finance: Financial services gear up to ensure these demands are adequately serviced. in the Middle East and some parts of Africa will be driven by growth in Islamic finance. Shari’a compliant The long-term outlook on commodities, which is a key financial services are expected to grow due to several economic driver in both these regions, is positive. Especially factors such as high availability of sophisticated Shari’a given that the take-up on alternative energy sources is still compliant products, increase in the number of low, the dependence on non-renewable energy sources will institutions offering these products and the formation of continue to be high. Therefore, in the absence of a major regulatory bodies to provide the necessary regulatory black swan event, the demand-supply equation is bound to oversight. According to a report by Oliver Wyman, ensure prosperity within these regions. Islamic finance (worldwide), although in its nascent stage, has grown by over 20 per cent over the last few According to a Standard and Poor’s survey of fund years. Its current assets are estimated to be in the range managers in the Middle East and North Africa, although a of $700 billion to $1 trillion. The report estimates these continued downward pressure on markets is expected in the assets to grow to over $1.6 trillion by 2012, with a short term, fund managers are very positive about the significant chunk of the contribution expected from the medium to long term outlook for these markets. They Middle East and Africa. expect growth to be driven by domestic investors such as sovereign wealth funds. Further, the increase in investments Liberalisation of financial markets: The opening up in infrastructure-related projects will see more foreign of both the Middle East and the African markets has capital flowing in. The result of the increase in individual spurred growth in these regions. Africa is continually and state-owned wealth will see an increase in demand for introducing reforms to make the environment business investment management. friendly and attractive to foreign investment. 9
ARTICLE The Aftermath of the Economic Crisis Andrew Krieger Chairman, Agile Financial Technologies Having been violently shoved to the edge of the abyss, the a huge blunder and they knew it almost immediately. Leaders global financial system has gone through an amazing two- of the G20 were then faced with a daunting choice - either year period. During the summer of 2008, the world’s sit by idly and watch the demise of the global financial financial markets were becoming progressively unstable as system or take drastic measures to forestall its final death by the magnitude of the balance sheet problems among leading throwing vast amounts of money at the problem. It was a banks, brokerage firms and insurance companies was big gamble, but the leaders didn’t really have much of a starting to sink in. One firm after another announced multi- choice except to start pumping in money. They needed to try billion dollar losses resulting in plummeting investor to buy enough time for the world’s biggest financial confidence. The entire system was already in a very institutions to get back on their feet and start operating in a vulnerable condition when talk of major liquidity issues at more healthy fashion. Lehman Brothers started to filter through the market. When it became apparent that Lehman’s problems were real, the The gamble seems to be working so far, but the long term U.S. authorities surprisingly decided not to step in and ramifications of these measures will last for generations. intervene. Therefore it is incumbent on us to understand more fully the consequences of the policy shifts that have taken place. Their decision was clear -- Lehman was not too big to fail - - and on September 15, 2008 Lehman Brothers announced In order to get a handle on the magnitude of the current that it would seek Chapter 11 bankruptcy protection. The economic weakness let’s consider some of the following already unstable markets became uncontrollable. The facts. The U.S. economy, far and away the largest in the brewing crisis took on a new dimension once this venerable world, shrank by 6.3% and 6.1% in the last quarter of 2008 institution, formed in 1850, was forced to close down. and the first quarter of 2009, respectively. These are the Lehman was a major player in essentially all the global worst numbers in over fifty years. U.S. unemployment now markets and their bankruptcy sent violent shockwaves stands at 8.5% and is on its way to double-digit levels, but around the world and brought the global financial system to this number grossly understates the true state of affairs. its knees. Roughly 5% of the workforce is considered permanently unemployed, which means they are no longer even seeking Whatever remaining trust banks held for one another jobs so they don’t even show up in the statistics. The evaporated as they worried about what toxic time bombs economy’s weakness has been widespread, with a collapse in might lay hidden in their counterparties’ balance sheets. consumer demand, manufacturing, inventories, and home Interbank lending shut down and credit markets froze. sales all showing up in the data. Optimists look at the drop Global liquidity dried up and the system was teetering at the in inventories as a sign that growth will bounce back in the edge of a bottomless ravine. The U.S. authorities had made form of increased production when sales demand finally 10
ARTICLE picks up. But when will this demand pick up, and how strongly? The pace of the decline in manufacturing, housing, exports, and factory orders is slowing, but the numbers are alarming. Property values continue to drop. In many areas the pace of decline has slowed, but in others, such as New York City, the drop is actually accelerating. Prices in New York City have fallen by about 25% in the past several months and more weakness is predicted. The U.S. is hardly alone in its suffering. Global growth this year will be negative, probably to the tune of 1.5%. Data from Asia is very weak, with export- dependent nations showing the largest drops in export data in over half a century. Japan’s economy, the second largest in the world, will be down approximately 3.3% and China’s growth has slowed sharply despite massive fiscal spending packages. Europe is likewise suffering, and in some instances, it is actually in worse shape than the U.S. Eastern Europe is performing terribly and Western Europe is posting very weak numbers. For example, German GDP is growing at roughly -6%, and Spain’s economy has fallen sharply, showing 17% unemployment today, on the way to 20%+. Banks in Europe are under tremendous pressure and liquidity remains very poor. In the bigger picture, bear in mind that Japan has now suffered through nearly two decades of moribund economic activity and it is only because of their extremely high personal savings and investments that they have been able to cope with this extended economic malaise. This protracted slowdown created a number of “zombie” banks and this is something the U.S. and European authorities desperately want to avoid. On the other hand, while the numbers are bad, they aren’t nearly as catastrophic as those experienced by the U.S. during the Great Depression. From 1929 until 1933 total output in the economy dropped by 42%. Unemployment peaked at Andrew J. Krieger began his roughly 25% and consumer prices dropped by about 25%. Hardship within the meteoric rise on Wall Street at U.S. was truly horrible, but the impact extended globally. European economies Salomon Brothers in 1984, were weakened for years. The UK economy, for example, didn’t bottom out until 1932, and the French economy didn’t fully crater until 1935. then at Soros Fund Management, after which he In terms of understanding where we are today, however, we need to bear in moved to Banker’s Trust in mind that most of the economic damage during the Depression was due to 1986. He holds a BA in severe weakness in the banking system - weakness largely due to the fact that many of these banks were not following sound lending practices and had Philosophy (Magna Cum speculated too heavily in the 1920’s. As overall confidence collapsed, the banks Laude, Phi Beta Kappa,1978); were not spared, and thousands of banks were forced to close. The entire MBA in Finance from the period from 1930 until 1933 was marred by runs on multiple banks. University of Pennsylvania; and In January, February, and March of 1933 (the months leading up to the an MA in South Asian Studies. inauguration of Franklin D. Roosevelt) the run on the U.S. banks reached Andrew has authored the book, shocking proportions. By the time FDR took the oath of office on March 4, “The Money Bazaar” in 1992, 1933, Americans were in a state of panic. Banks were failing every day and and has been a contributing people clamored to withdraw their money. Ordinarily they would have accepted paper money in the form of gold certificates, but people feared that the Columnist for Forbes and government might resort to printing worthless money to meet the massive Forbes Global. He co-chairs withdrawal requests. They didn’t want paper. They wanted gold. To make the Microcredit Summit Council matters worse, people who had gold certificates rushed to redeem them for real of Banks and Commercial gold. Financial Institutions and is In 1933, the U.S. government defined the dollar as being worth precisely 23.22 Founder CEO of IMGE grains of gold. Since there are 480 grains to a troy ounce, this works out to Emergency Relief Fund and about $20.67 per troy ounce. This meant that if you had a $20 gold certificate, MD of Access Capital you could redeem it for roughly 1 troy ounce of gold. Each certificate bore this solemn statement: “This certifies that there have been deposited in the Management. 11
ARTICLE Treasury of the United States Twenty Dollars in Gold Coin being strictly separated from one another. Another reform payable to the bearer on demand.” There are two promises was the creation of the FDIC, the entity which insures banks here: First, the gold is there waiting for you. Second, you’ll deposits in the U.S. get the gold when you demand it. So in March of 1933, thousands of people decided to make the government The Glass-Steagall Act survived for over sixty six years honor its commitment, but they quickly learned that the before it was repealed in 1999. The basic premises Treasury was not standing by its promise. Just two days after underlying the Act are important to consider. Among them his inauguration, President Roosevelt ordered a “bank is the fact that conflicts of interest characterize the granting holiday”, closing all the banks in the country from Monday, of credit (lending) and the use of credit (investing) within March 6 through Thursday, March 9. He proclaimed that the same institution. Conflicts arise when the same there was a “national emergency” caused by “heavy and institution does both, so the law was designed to prevent unwarranted withdrawals of gold and currency” for the potentially abusive practices. In addition, depository purpose of “hoarding.” In this case, “hoarding” simply institutions are deemed to have great power by virtue of the meant that people wanted to hold on to their own money, fact that they are handling other people’s deposits, and this but Roosevelt, eager to blame the government’s woes on the power must be held in check. In particular, it was felt that people’s vices, used the term “hoarding” to make it seem like bank managers must be required to be conservative, evil behavior. After virtually no debate, on March 9 the prudent, and protective of the customers’ funds. Senate passed the Emergency Banking Act, which gave the Encouraging - or even allowing - banks to engage in Secretary of the Treasury the power to compel every person speculative activities could potentially endanger the security and business in the country to relinquish their gold and of the institution and imperil depositor’s cash. Securities accept paper currency in exchange. The next day, Roosevelt activities can be highly risky and volatile, so the logic was issued Executive Order No. 6073, forbidding people from that these activities belonged outside of the banking system. sending gold overseas and forbidding banks from paying out Moreover, there was (and still is) no evidence that banks are gold. This was quite a first week in office, but there was particularly good at taking speculative positions and much more to follow. On April 5, Roosevelt issued managing risky portfolios, so the separation seemed to be a Executive Order No. 6102 which enabled the government to logical step. Thus, the wall between commercial and confiscate everybody’s gold. The order commanded the investment banks was erected. populous to deliver their gold and gold certificates to the Federal Reserve Bank where they would be paid in paper This separation was challenged may times, but not until the money. U.S. Citizens could keep up to $100.00 in gold, but passage of the Gramm-Leach-Blilely Act of 1999 was the anything above that was illegal. Glass Steagall Act repealed. It enabled commercial lenders such as Citigroup, which at that time was the largest U.S. Gold had become a controlled substance. Possession was bank by assets, to underwrite and trade instruments such as punishable by a fine of up to $10,000 and imprisonment for mortgage-backed securities and collateralized debt up to 10 years. Now the only people with a claim to gold in obligations and establish so-called structured investment the Treasury were foreigners holding dollars. Roosevelt vehicles, or SIV’s, that bought these securities. (These were didn’t want foreigners to be treated any differently, so on just the kind of financial instruments Glass Steagall kept January 31, 1934, Roosevelt issued another Executive Order: away from commercial banks.) The year before the repeal of He declared that one gold dollar of 23.22 grains would Glass Steagall, sub-prime loans were just 5% of all mortgage immediately be reduced by 59%, to 13.71 grains. Effectively lending activities, but by the time of the crisis in 2008, they the dollar was devalued by more than 40% and everyone was had grown to 30% of the total. Although some maintain stuck. It used to cost only $20.67 to get a troy ounce of gold. that the seeds of the recent financial meltdown were sown With the sweep of his pen, it shot up to $35.00 per troy with the repeal of the Glass-Steagall Act, the real cause is far ounce. more complex. The crux of the issue is that improper risk management was prevalent in many of the world’s leading The U.S. Government passed many laws to address the banks. Greedy management and poorly thought out problems of the Great Depression. One of these, the first compensation packages that rewarded risky short-term gain Glass-Steagall Act, was passed in February, 1932 in an effort drove much of the behavior that led to the global financial to stop deflation. Glass-Steagall enormously expanded the system to the brink of disaster. By the time the Bear Stearns Federal Reserve’s powers with regard to the rediscounting of mortgage back funds went bankrupt in the summer of 2007, various forms of collateral. The second Glass-Steagall Act having burned through 100% of their capital, the was passed in 1933 in reaction to the collapse of the international banking system had put on the largest American commercial banking system earlier in the year. It leveraged bet in the history of modern society - that the was geared to control excessive speculation by U.S. banks prices in the U.S. housing market in the United States had and eliminate their participation in the underwriting of only one way to go, up. Imprudent lending practices, securities that caused so many of the problems in the first excessively leveraged balance sheets, overconcentration of place. Banking institutions were divided by their types of risk, inadequate risk management systems, and a host of activities, with commercial banking and investment banking related issues all contributed to the problem. It is easy to 12
ARTICLE blame the problem on regulators, but history is strewn with remember that the $12.8 trillion recent commitment by the meltdowns and bubbles. Volatility has occurred for U.S. is largely in the form of commitments by the Federal thousands of years, and it is unlikely to stop any time soon. Reserve ($7.76trillion). The balance of the commitments comes from the FDIC ($2 trillion), the Treasury ($2.7 Although there are significant differences between the trillion) and HUD ($.3trillion). Although the Fed’s current environment and the conditions during the Great commitments may not hit the nation’s balance sheet in the Depression, there are enough things in common that we same way, the risks to the U.S. taxpayers and the potential need to pay close attention. As noted, both situations costs are still very real and very, very large. The picture is stemmed from breakdowns in banks and financial going to look a lot worse each year for the foreseeable future institutions. The recent collapse in the credit markets and as the growing debt burden continues to compound with no the general loss of liquidity in the global system has created reasonable prospects of debt reduction through budget huge deflationary pressures. Today’s leaders are keenly aware surpluses for the next decade or so. of the economic and social dangers of deflation and they are using a wide array of tools to remedy the situation. The So where do we go from here? First it is clear that this is a U.S. alone, in the past two years, has already committed a very dangerous time. Credit markets are a mess and banks’ staggering $12.8 trillion towards the creation of money in balance sheets need to be further healed before lending can one form or another. Yes, that’s right, $12.8 trillion, and that resume in a healthy manner. At the same time, the heavy doesn’t include what is still to come. Nor does it include the deficit position of the U.S. and many other nations, coupled ongoing costs of debt service that will make this problem with dismal growth prospects, makes the deflationary increase over time. The magnitude of today’s situation can alternative far too dangerous from every perspective because be better grasped when one considers the scope of this vast with deflation, every dollar of debt gets proportionately wave of monetary creation. Imagine where the economy larger. If deflationary pressures take hold, we could very would be today without the loans, guarantees, financing likely head into a frightening state of global social unrest facilities, and bailouts by the Federal Reserve, the FDIC, and unlike anything the world has seen. the Treasury, not to mention the measures taken by central banks and governments around the world. The Chairman of the Federal Reserve, Ben Bernanke, is an accomplished scholar on the Great Depression. He is well Given these numbers, it is clear that the U.S. economy is in aware of the broader societal implications of deflation in a shambles, and much house cleaning and restructuring needs debt-ridden society, so he is certainly going to use every to be done. Prior to the credit crisis, the U.S. was already available tool to prevent this from happening. This means debt-ridden. Domestic savings rates had collapsed from that we should expect that Bernanke, like his predecessor roughly 12% to 0% since 1980. Irresponsible practices by Alan Greenspan, will err on the side of inflation. U.S. banks and financial institutions and the subsequent loss (Greenspan was also a scholar on the Great Depression and of liquidity have now exacerbated what was already a he too wanted desperately to avoid deflationary dangerously imbalanced system. The largest financial developments in the debt-ridden U.S.) Barnake’s willingness intermediaries focused far too much on the riskier aspects of their business, rather than tending to their more traditional role of providing liquidity and safekeeping funds. To address this problem the U.S. is taking a gigantic gamble. The reality of persistent trillion dollar deficits has been firmly established, yet nobody has mentioned an exit strategy. To date, no one has challenged Congress on how and when they are planning to repay these gigantic loans. The American taxpayer is about to be crushed by multiple generations worth of debt, yet those same taxpayers had little to do with the creation of the problem. Consider for a moment the adjacent charts, which reflect the total debt in the United States and the public or national debt. The graphs show the national debt skyrocketing from 1980 to 2010 in both nominal terms and as a percentage of GDP (and the situation is only getting worse). As of April 7, 2009, the total U.S. federal debt was $11,152,772,833,835 or about $36,676 per capita. Also, 13
ARTICLE to monetize; i.e. print money, should not be underestimated, and this will have broad implications for the fixed income, equity, foreign exchange, commodity and other markets for many years to come. The enormous ocean of liquidity that Bernanke is creating is held in check right now by a dysfunctional global banking system, but once banks have been recapitalized and credit starts to flow, the liquidity streaming into the mainstream economy will need to be Global controlled to prevent a tidal wave of cheap funding, which in turn could start the dangerous cycle all over again. This is a balancing act that will require great skill and a lot of luck, Update because the alternative will be an inflationary surge that will shock many by its speed and force. Offsetting this massive creation of money will be a dizzying set of new regulations, which are inevitable in the aftermath A quick review of industry news from of the U.S. bailout of so many major institutions. The new around the world regulations will be implemented in Europe and Asia and well, so improved risk management tools will be required for most financial institutions, along with improved controls World’s Largest Islamic Bank: Saudi billionaire Sheikh and sound practices. Such upgrades would be wise to Saleh Kamel, Chairman of Al Baraka Banking Group, is implement in any event, but they will probably be required heading an alliance to launch the world’s biggest Islamic in the new regime. One might ask whether it makes sense to bank before the end of this year, with an initial public burden banks and financial institutions with new regulations offering of $3 billion. The ‘mega bank’ will have an initial now that the damage has already been done, but this reactive capital of $10 billion through a number of initial public process is simply the way of big government. Regulation will offerings and private stock options. Al Baraka is keep the crowd’s speculative impulses under wrap for a controlled by Saleh Abdullah Kamel who owns a 28.10 while, but eventually the pool of liquidity will make the percent stake. Saudi conglomerate Dallah Albaraka, money-making opportunities too appealing to pass up. founded by Kamel, owns a 42.32 percent stake in the Speculative forces will always find a way to express bank. Al Baraka, which has a market capitalisation of themselves, but regulation will hopefully make banks less $1.46 billion, recently posted full-year net income of $201 active players in the business of excessive risk taking. million. Economic recovery from the current recession will be neither fast nor powerful. More likely, we should anticipate a Overseas Banks in India May Have to Sell Stakes in stabilizing of the current weakness over the balance of 2009 Local Units: Overseas banks in India may have to sell at as the lingering excesses in the system are played out. least a 26 per cent stake in their local subsidiaries and Growth will start to pick up modestly in 2010, but don’t meet government targets for lending, under proposals expect a robust v-shaped recovery. Banks still need to reduce made by a joint central bank and finance ministry panel. their leverage, and toxic assets on their balance sheets have A committee that included Central Bank Deputy not yet been fully priced into the market. The IMF estimates Governor Rakesh Mohan and Economic Affairs that total losses among U.S., European, and Japanese Secretary Ashok Chawla released a report stating that financial institutions will be $4.1trillion (of which foreign banks should list their subsidiaries on Indian $2.5trillion will be in U.S. institutions), which means that stock exchanges, capping their ownership at 74 per cent, more losses are coming and more capital will be required. As and that overseas lenders should meet targets for noted, only after the banks’ balance sheets are fixed can the lending to farmers in line with local banks. The Reserve economy really start to grow in a healthy sustained fashion. Bank of India is due to review rules for overseas banks In the meanwhile, we should expect the IMF to take a more from next month. India, which limits the number of active role in the global economy henceforth, by providing branches that overseas banks can operate and restricts funding and much needed discipline to many countries and investments abroad by Indian lenders, has mostly institutions around the world. Trading and investment avoided the write-downs and losses by global financial opportunities will be fantastic for the next four or five years firms as the world economy entered a recession. The as the world works through its problems. Volatility in the global credit crisis has helped India’s state-run banks, markets will be high, which suits most traders, and lending which account for more than half of the nation’s banking opportunities will be almost unlimited. The profit potential assets, gain market share as depositors shunned private from this period will be very high, but we will need to bear and overseas banks. India’s central bank limits the ability in the mind the bigger picture so that we don’t lose sight of of local lenders to extend credit to high-risk sectors such the underlying forces and pressures that are driving the as real estate, trading in exotic derivatives and policy makers. expanding overseas. 14
INSIGHT Customer Privacy Regulation In conversation with Vikas Tandon, Joint General Manager & MLRO, ICICI Bank Handling data protection and privacy of personally Vikas Tandon, Joint General identifiable information has always consumed vast resources. What is the reality behind the rhetoric and how Manager and Money Laundering important are the stakes for banks in protecting such information? Reporting Officer, ICICI Bank, Stakes are pretty high indeed! Banks generally collect some discusses emerging privacy specific personal information of their customers, like
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Agile. May 2009 FINANCIAL TIMES Investment Management Outlook Middle East and Africa CUSTOMER SPOTLIGHT Increasing Market Share for Apollo DKV
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