Monday, June 29, 2009

Optimistic but worried

Paul Vieira, Financial Post Published: Thursday, June 11, 2009

The chief executive of Royal Bank of Canada, Gordon Nixon, said the chartered banks are ready to step in where the shadow banking system has withdrawn and make credit available-- at the right price. Mr. Nixon was at the International Economic Forum of the Americas in Montreal, where the future shape of the financial services sector has drawn much attention. Jeffrey Immelt, the CEO of General Electric Co., told delegates on Tuesday that the financial services sector has forever changed and that players will have to deal with more oversight and regulation. Mr. Nixon said that may be the case in the United States, but no drastic changes are likely in store for Canada. He agreed to speak with Financial Post reporter Paul Vieira, who is covering the Forum of the Americas.

Q There is a consensus that the worst is over, but are we not headed for a weak period of economic growth.

A I don't know if I am worried about it, but I do think it will be a muted recovery. The most important thing is for the economy to find bottom. And I do think we are starting to see signs of that occurring. But next year and beyond, anyone who is expecting a dramatic bounce back, in my judgment, will be disappointed. This will be a long and slow recovery.

Q Are you worried about governments trying to overreach with regulation to ensure a crisis such as this one never occurs again?

A It is a much less concern for the Canadian banks than it should be for other institutions in other countries. To some degree, I think our regulatory model is being looked at and being viewed as a good one.

Generally within Canada, the regulatory changes will be more at the margin than they will be in terms of significant restructuring.
When you look at other markets, like the U. S. and Europe, the restructuring will have a more dramatic impact. And there will be significant deleveraging that will occur because the [debt] in their systems is much greater than in Canada.

Q But there's been talk, at this conference, about how governments have to ensure from now on that the financial services sector is regulated in a way to ensure less financial innovation and more credit creation?

A There is no question that credit is extremely important to the functioning of the economy. But that's not just about banks. Credit comes from the bond, equity markets, and the shadow banking system. Many of those areas have collapsed alongside some of the banking systems.

We want to extend credit, we want to grow our balance sheet and loan books, as long as we are doing it on a basis in which we are taking on reasonable risk and getting paid to take bad risk.

The need for banks in the system is probably going to increase going forward.

Q Is there a recovery for the shadow banking system?

A I think it will recover and I think banks will play a bigger role in terms of credit intermediation. Remember, in the 1990s, banks represented a much, much higher proportion of intermediated credit than they did in 2007. I think you will see the trend where banks play a broader and bigger role in terms of credit intermediation.

Q What do you make of the risks that governments will turn inward and stop collaborating once the recession subsides?

A I want to quote Madeleine Albright -- I am very optimistic but I worry a lot. Notwithstanding the fact that there always is this tendency toward protectionism when things are difficult I think lessons learned from the past in terms of importance of globalization and global trade will override that. There will be specific issues -- and of course Buy American is the big one for Canada. But I think these will be challenging irritants as opposed to massive changes in government policy around protectionism. I don't see that happening; there would be much lost.

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