Fewer restrictions and low protectionism supports innovation in financial services: Doha Bank CEO

The main factors contributing to innovation in financial services are technology revolution, legal and regulatory changes and economic environment, according to R. Seetharaman, Group CEO, Doha Bank. He was speaking at a panel discussion on ‘innovation and financial services’ at the Commonwealth Business Forum 2011 in Perth, Australia, recently.

He added: “Improved technologies have allowed ‘financial engineers’ to amass data, assess risks, and thereby design new products and services that can better meet the financial demands of individuals and enterprises. This contributed to securitization of many categories of previously illiquid loans. Fewer restrictions and low protectionism also supported innovation.”

International and Arab bankers, economists, top business professionals and key industry players participated in this event.

Mr. Seetharaman highlighted in detail how innovation became the root cause of the current global crisis. He said: “As a result, of financial innovation, new business models of banks emerged which changed the underlying economics of banking as new financial instruments enabled credit risk to be shifted away from the originators of loans. However, securitization also changed the nature of risks and, in particular, transformed credit risk into liquidity risk, then into a funding risk, and ultimately into a solvency risk.”

The experienced banker elaborated in detail the impact on the environment due to crisis. He said: “The market environment became one of uncertainty rather than risk that could be priced. In these circumstances, two trends emerged: it became difficult to price risk and assets which meant that trading ceased, and banks began to hoard liquidity rather than make funds available in the interbank market. As a result, a substantial premium opened up between inter-bank interest rates and central bank market intervention rates”

Mr. Seetharaman said: “We witnessed United States losing its AAA rating this year. We also saw divergence in monetary and fiscal policy contributing to the current European crisis. The emerging economies are recently witnessing stagflation. The financial economies mainly the G7 countries should have a fiscal discipline to come out of crisis. There is increased risk of recession in the current global scenario.”

Mr. Seetharaman stated that the new financial architecture is undergoing change. He highlighted the global regulatory reforms which are underway. He said: “The Dodd-Frank Act establishes a new framework for regulatory and supervisory oversight of the over-the-counter derivatives market, which is estimated at more than $600 trillion. According to Dodd-Frank Act the Commodity Futures Trading Commission and the Securities and Exchange Commission is to share regulatory and supervisory authority for OTC derivatives. The New Basel 3 rule increases the liquidity and capital adequacy requirements of banks.”

Mr. Seetharaman also highlighted the wealth management trends in Asia. He said: The global wealth had risen to US$231 trillion by mid-2011, up from US$195 trillion in 2010. This was led by growing wealth in South Africa, India, Australia, Chile and Singapore. By 2016, total world wealth will likely rise 50 per cent to US$345 trillion, equivalent to 8.4 per cent growth per year, driven by strong growth in emerging markets and a near doubling of total household wealth in China. China will replace Japan as the second-wealthiest country in the world, with total household wealth of US$39 trillion in 2016, compared to US$31 trillion for Japan”

The Doha Bank Group CEO also highlighted the opportunities and challenges in wealth management across Asia. He said: “Across the region, the majority of HNWIs allocated the biggest single share of real estate holdings to residential investments. Looking forward, Asia-Pacific excluding Japan is expected to remain the engine of global economic growth in 2011 and 2012, but increasing capacity constraints are likely to slow the rate of expansion. The actions Asia-Pacific governments take to restrain inflation, control foreign-capital inflows and deflate potential asset bubbles will certainly affect the pace of that expansion. Firms across the region are facing a range of local regulatory developments. International regulatory initiatives are adding uncertainty and cost inflation. Investors are becoming more demanding, and some firms are struggling to expand their revenues”