Excerpts from the Discussion with Josef Ackermann
By Max Bleyleben, Contributing Editor
You were one of the first Western bankers who pointed out that the financial crisis would require regulatory reform and you were quite active in pushing for regulatory reform. It has been almost six years now that we have been watching that reform make its way through the various legislative processes in the USA and Europe. It has been quite tortuous in many ways.
What are your thoughts on the reform package that has actually emerged from that process?Does it go far enough or does it go too far?
Many of the deficits that were known before the crisis have now been tackled and eliminated. The most important one is that we are now allocating capital to trading activities, which was not really the case in the past and made the system much more vulnerable.
A few things have been started but are not yet in a perfect state. For instance, “too big to fail” now they are the global concept. In order to have failed banks being run down over time globally will still be a challenge in a concrete situation. The question is should we stop here or should we include other areas, such as the shadow bank, which is not yet fully captured. The other thing is to have a level playing field. Are there differences in the regulatory field between regions, such the USA, Europe, Asia and so forth, which create some regulatory arbitrage? The last point is that we are not fully aware of the cumulative impact of all the different regulatory measures.
What does it mean for financing, economy and for actually allowing the banks to fulfill their most noble task; to help create jobs in the economy?
There are still a lot of open questions but overall, I think we are much better off than before the crisis and the system has clearly become more stable and less vulnerable than it used to be. However, the question is if we have dealt with the last crisis and are we prepared for a new crisis. That is a question no one can answer. Banks are stronger, they have more capital, they are better funded, they have reduced their risks in the portfolio, but the interconnectivity in the system and the question how to deal with that is still a challenge. Depending on where the threat comes from, you can imagine why we are still not completely immune to some sort of major global financial crisis.
The US is proposing some stricter interpretations of Basel III and amendment. Do you think that is a good thing or is it going to hinder the strengthening of the banking system?
It would be better to stick to the current regulatory demand and not to deviate too much from that. First of all, each regulator, each country would ask for some additions or amendments. This makes life for global banks very difficult. It is also fair to say that US banks and it system has recovered faster than the European for several reasons; first they restructured the banking landscape faster by letting failed banks disappear and taken over by stronger banks, which led to some sort of concentration risk in the system, whereas Europeans, with a few exceptions, try to bailout failed banks, kept them alive with taxpayers money and one day they will be back competitive environment so there is not the same restructuring. That is why US banks have become bigger and more profitable.
Secondly, the US economy has recovered faster, which allowed US banks to recover faster as well.
Thirdly the nexus between sovereign risk and banking risk is much more of a challenge in the European debt crisis context. In the USA do not have a sovereign crisis. In that sense there are differences in the US is more advanced. The last point that I would like to mention is that the US always puts more emphasis on the leverage element whereas the Europeans were actually opposed to leverage. These are factors which allowed European banks to increase the leverage in the balance sheet. This was a good thing in the US, that there is some sort of leverage ratio that they had to comply with.
How can we generate more growth in Europe without forcing banks to hold so much capital and strangle the economy?
The challenge was from where you got the capital. For a while, capital markets were relatively difficult to tap for banks. We did not have this type of a TARP program that the US had. Banks were not just given capital. By the way, I was always opposed to accepting capital from taxpayers without need because it also increases the political and reputational problems around banks, especially within the political framework.
In the UK but also Deutsche Bank was rumored that they would be required to take taxpayers money. Politicians were very critical of the strategy of compensation, of management and that is why that I was always very much of the view that you should stay away from taxpayers money in every way. The US is somewhat more pragmatic in that approach than Europe.
I don’t think that the sluggish European economy can only be explained at the fact that banks are possibly lending less than some would expect. It is much more important that we have structural imbalances in Europe and we have the problem of competitiveness in different parts of the world and in different parts of Europe. We should not forget that we are locked into a currency regime that has one monetary policy and one currency. It does not allow competitive devaluation that we had known for many years in countries such as Italy, Spain, Greece and some other countries in the periphery. Now the only way to increase productivity and competitiveness is by keeping costs under control and by higher innovation and more productivity and efficiency in the system. That is something in which those countries that are clearly lagging have not fully caught up with Germany and the stronger countries. It goes beyond the exclusive finance, banking issue that we have.
You were quite closely involved in the negotiations surrounding Greece’s bailout. What you think were the main lessons from the Greek bailout in its various phases?
There are many people who are critical of the fact that sovereign risk suddenly becomes not risk-free. That was the biggest change in perception.
It may be a good thing the long run, but it will change the way that governments and countries are capable of funding themselves. Secondly, there was a clear focus on the private sector in the public sector was not willing to participate in any restructuring. Thirdly we started on a relatively modest level and it became more and more obvious that the net present value of the debt would be much lower so in the end that restructuring became much more costly and much more important. Then you have the fact that some people started buying into the market and making good money.
Overall, from a Greek perspective, as well as a European perspective, I think it was quite a successful restructuring with private sector involvement in it clearly helps to stabilize situation and we have not seen the contagion impact into other countries that some people were extremely concerned about.
Would you say that the allocation of the cost of that bailout was ultimately quite fair between the Greek taxpayers, the corporate bondholders, the hedge funds even, and the sovereign holders for the European banks that help a lot of that debt?
We tried to be as fair as possible to those who were involved. In these instances you’re always in a negotiation mode but I think overall it was a relatively fair burden sharing between the different units. Those who held more sovereign risk on their balance sheet, based also on promises made by political leaders who, for a while, said that there would be no restructuring of sovereign debt, and others who said that they would stay the course and not allow some type of restructuring, all paid a high price. It is not a bad lesson to have learned that sovereign risk is not completely risk-free and that you should analyze more in-depth the quality of sovereign debt and ask ourselves whether really want to…
Switching focus to China for a moment, what do you think needs to be done to ensure that as Chinese economic growth slows that their banking system stays stable and China has a soft landing?
China is going through a transformation. They are clearly putting more emphasis on internal demand and are becoming a little bit less exposed to export, which we always ask them to do so that is a positive. They are also putting more emphasis on cleaner energy and cleaner production, which is also a good thing. Such a transformation will take time and it will slow down, to some extent, their economic development. I am still optimistic that they will still achieve the 7.5%.
In the banking system, the major banks have been a good thing in restructuring and changing their business model and are actually very profitable. The problem starts more in the less regulated and smaller banking units and shadow banking, where they have to focus more on reducing risks and not allowing to create some sort of bubble in that field. That has been recognized by the regulatory and governmental bodies.
On the other hand, Chinese banks have been quite clever in expanding their business activities beyond their borders. You do not seen Chinese banks being overly aggressive in acquisitions or given the acquisition currency, I think that shows that they are trying to improve the standing of their banks first before they really start growing internationally. That has been quite a successful exercise. They show a big difference from the Japanese experience in the 80s and the early 90s.
I guess that mirrors what they have done with some of their technology companies, for example, they built up first and created a reputation before venturing abroad.
Yes, very much so, as well as focusing more on their domestic market, learning, and adding international expertise, recruiting people from international banks to help them bring in the necessary knowledge base. That was all done pretty well. I did several presentations within the Chinese banking system before the IPOs and people were very eager to learn and implement what they had learned from other international banks.
I just came from Greece where we are doing a roundtable about the new leaders of Greece. One thing I heard a lot was that this crisis has sort of boosted the spirit of entrepreneurs. Have you seen anything like that, a form of improvement coming up in the next generation?
Creating new jobs has become the most important challenge. We all know that startups and smaller companies are very important in creating jobs. Many of the big companies are scaling down and their resources are under scrutiny by regulators and politicians. The SME role is becoming more important and that creates a lot of interest among young people to become entrepreneurs.
Also with all this scrutiny on compensation, if you are an entrepreneur your somehow outside that debate. If you are a manager or an employee you are in the middle and it’s in the media so there is a lot of appetite for more entrepreneurial thinking. This is actually a good thing in the long run.
What do you think are the main qualities of a leader in the business world?
I think it is very important that you are willing to take the lead. If you do not want to lead I think you will always feel somewhat in the second position. Secondly in today’s world, you have to have a clear understanding of your industry, of your business, and also that you’re capable of integrating different cultures. Being a global leader has become more challenging than in the past. Physical robustness is also very important considering all the traveling and the long hours. If you can’t do that it is probably very difficult. Especially after the crisis, character and integrity are absolutely key.
The last point is to be willing and capable of giving impulses but also allow the people around you, your team, to excel. Don’t take all the glory from the team because that is somewhat frustrating for the team around you. The very last point is communication skills. Now you have to be so much more of a communicator in political, social and corporate terms. Being a good communicator plays a much greater role than the past in which the media was different. Now you are constantly asked to express your view or your company’s view on many issues. Whether people like it or not, the CEO makes a huge difference regarding the reputation and the perception of the company. If he fails the company will also suffer.
How influential would you say was your early career in the Swiss military in making you a stronger leader?
Josef Ackermann: You learn to be able to analyze things even if you are tired or after a few days in the cold during winter. That gives you some physical fitness. Secondly, it allows you to get to know people from completely different social backgrounds and gives you a good understanding of different characters and cultural backgrounds, which is also a bit global. You learn at a very early age to lead people, to take responsibility and that is something we should not underestimate in preparing you for a future job.
You have been through your fair share of tough times since the beginning of the financial crisis, culminating most recently in your departure from Zürich Insurance Group. How do you maintain confidence and stamina in the face of so much public scrutiny for everything that you do?
If the scrutiny would have been caused by nonperformance I would be suffering a bit more. But the scrutiny was much more about if I was overly ambitious in setting targets, if we had been too aggressive exploring opportunities in parts of banking, if I had been too demanding. I can live with that because it is part of my character. I would have been much more emotionally involved if people had said that I was a loser and I was not winning, but that was not the case. The criticism and scrutiny around things that I fully supported has been the easier thing to deal with but it is clear that if you’re in the top position you will have a lot of scrutiny. If you can’t stand the heat in the kitchen should not be the cook! That’s obvious and that’s what I meant about being robust, emotionally and physically robust; that is a key element of leadership.
You recently – together with Peter Loescher – joined the board of Renova Management to run the Russian group’s international assets. This sounds like a very different engagement compared to what you have been doing over the past few years. What attracted you to this project?
First of all and the strong believer that you should help companies from emerging economies to get integrated into global business. If you can help to improve their corporate governance standards, audit, compliance, legal and other things, it is a very important part of helping these companies to excel, which of course is different in a global company that has history of over 100 years. In that sense, the entrepreneurial part of it is what I find quite attractive.
How can leaders like yourself and others that you network with in Davos and elsewhere better spread the word about leadership qualities and more dialogue internationally?
As I said in one of my lectures in the US, politicians have become more involved in business so business leaders have to be somewhat more involved in the political debate. We have to express ourselves more and not only talk about economic issues but also political and social issues. Quite often if you just talk about economic issues we forget most people in society are more interested in social and political themes. That is something that we have to learn. We have to allocate time and effort to do that.
Last but not least, the fact that we have to go out and give interviews or go to talk shows and explain it a relatively simple words what you are doing and how you see the world is very important, otherwise the whole sphere is dominated by those who may be quite critical of business. We should also, politicians and business people, have the courage to say that good CEOs make a difference. Everyone says that a good soccer player, a good sportsman or a good pop singer makes a huge difference and they entertain people. But a CEO and his team could make a huge difference for 100,000 people. If we say that anybody can do that, we have sort of playing down the importance of that job and I find that completely wrong. We should have the courage to say that a good team makes a huge difference. In the financial crisis, some banks had to be bailed out, they lost billions and billions of taxpayers’ money, others did not need any taxpayers’ money and I think that there is a difference there in the quality of management. Why not talk about this?
As a last question, is it anything you would like to add for audience in China?
I still think that China has tremendous potential and what is actually happening right now in refocusing a little bit the direction is the right thing to do. It will take some time but it is clearly the right approach for the running of one of the major economic powers on the global scale. I’m still very positive on China in the long-term. There will be ups and downs over the next few years.