With an eye on what lies ahead for the industry in 2013, SmartBrief conducted an e-mail interview with Derek Saunders, the chairman of the International Association of Credit Portfolio Managers. Mr. Saunders is the global head of portfolio management at HSBC Holdings, and he shared his insight.
What are some of the trends you see developing in international credit markets in the next year? How do you see credit-portfolio managers responding to these changes?
Credit Portfolio Management (CPM) remains extremely well positioned to respond to a very challenging environment and the trend for the financial services sector continues to be one of increased costs as new regulatory frameworks are progressively introduced. What has changed is a general and wider recognition that the Banking sector’s ability to lend—and indeed, banks are actually keen to do this– helps in part to drive the health of the underlying economy in which they operate. On the positioning of CPM, we find ourselves with something of a dilemma, on the one hand CPM functions are well placed to provide senior management informed views and analysis around strategic options for repositioning of the wider business franchise–the whole industry is going through change–and on the other, challenged Return on Equity targets and focus on cost in an environment of lower recycling has resulted in increased scrutiny for many CPM functions. My views here have remained consistent, CPM functions are best positioned as business enablers with a broad scope. The wider the scope the more capable we are of adding value at different points of the cycle. Nothing new here as CPM has a strong track record of being pro-active and responding to change. One thing is clear in the current environment and that is CPM has an increasingly crucial job to do.
Credit issues continue to impact worldwide. Looking ahead to 2013, what issues give you confidence? Any that make you cautious?
Although corporate balance sheets remain strong, history demonstrates that default levels increase as an economic downturn normalizes — this is an area where we need to remain diligent in the medium term. I have some concern about the intensity of focus on RWA, particularly in those geographies that have moved to a post Basel II implementation framework where it is all too easy for the discussion to center on RWA and RoRWA. These measures are not a substitute for good and diligent risk management.
Measuring regulatory capital is not the same as measuring Risk. Indeed there are many areas of the ‘Advanced’ Basel RWA calculation that if used in isolation would lead to incorrect risk assessment or incorrect pricing of the actual risk. We need also to think about when might be the best time to actively manage residual risk, with volumes at an all time low and credit spreads now significantly tighter we can be confident that we are closer to a normalization of the economic downturn and therefore, as mentioned, default levels that will increase. These are areas where CPM has an important forward looking role to play
Volatility around the Eurozone situation remains and full resolution is still some way off — as mentioned in my last update, so I continue to think there is no quick fix.
Sustainability of growth in some emerging markets is also being tested, although the key pillars of Asia, China, and U.S. look to be better positioned for a recovery. Watch out for those Consumer confidence numbers.
What is your view on the disagreement that seems to be taking place among regulators around the world about the implementation timeline for Basel III?
This is a difficult one to answer. As mentioned above, the impact on the real economy of higher capital ratios is now more widely recognized by many commentators. That said, getting this balance right is important, regulators are increasingly mindful of the relative stability of different jurisdictions and where we see differing levels of economic confidence.
This influences decision making, however, these are complex cross border issues. A widely anticipated change was the recent decision from the Basel Committee to make amendments to the Liquidity Coverage Ratio standards. The market has also reacted positively to the delay in implementation of CRD4 in Europe and Basel III in U.S.; however, the industry has been seeking something more of a level playing field across international boundaries for some time. The need for this has not changed.
Given the above conditions, how will the IACPM evolve to best serve its members?
IACPM continues to receive tremendous support and interest from its members. Both the Madrid and New York General Meetings were well supported and a huge success at a time when the environment was anything but stable.
In Madrid the quality and depth of dialogue across all sessions was second to none, I was hugely impressed. Indeed, the timing of our presence in Spain during May was inspired given how the Eurozone crisis unfolded. In New York, and as cost constraint increased for us all, I was very pleased with the number of attendees and with how engaged they were with the issues we discussed. The Strategic Review overseen by the Board has proved timely in ensuring that we remain focused on providing value for our members, implementation is underway and progress pleasing. In the future you will be seeing more from the IACPM in the important area of Regulatory Advocacy building on recent solid wins (the Regulatory Review is linked to in the section below) and more research reflecting the trends in CPM which are enormously helpful for interpreting the current environment. Finally on membership, we are seeing an increased inquiry level from Asia. Credit Risk and Portfolio Management are really starting to take hold across wider parts of the rapidly developing Asian markets.