tv In Conversation With Douglas Flint Bloomberg January 2, 2017 1:00am-1:31am EST
♪francine: hello, i'm francine lacqua. hsbc is europe's largest bank with more than 235,000 employees across 71 countries. douglas flint is the bank's chairman, a role he has held for six years. during his tenure, flint has helped guide the bank during its economic realities and this year's rise of populism has brought a raft of new political realities. in an exclusive interview, i sat down with douglas flint and asked how he would rate 2016? douglas: very interesting year.
a lot of things were unexpected. we have achieved a lot of things in 2016. pretty turbulent market. at the beginning of the year, then things quiet down a bit, and we have these two unexpected political events -- the brexit referendum, the presidential election of the united states, which produced results that were not expected. that led to some volatility and uncertainty a great deal of thinking about what the implications would be, but we closed 2016 with both those events being factored in better than expected. so, it has been a very nteresting year. lots of surprises, but i think one of the great things was how well markets and institutions of the markets coped. francine: what will 2017 bring? ore of the same?
is there a sense of not being able to trust the polls and not knowing what is next? douglas: play 17 will be more interesting because we are sort of leaving the honeymoon period and you get to the hard realities and find out if the promises can be delivered or whether they will be changed. we have got, three, four, five or six really important elections in europe next year, hich could add to clarity or add to elements of uncertainty, so i think it will be interesting. we got finalization of the basel framework, so a lot of things have been bubbling for a year that will get finalized. francine: what can you tell me with certainty about the markets of 2017? more volatility? douglas: more volatility i think. which in many respects is good for banking business in the sense that people think carefully about what they need to hedge and how they position themselves and what kind of contingency facilities they need. but on the other hand, it's bad for economics to the extent it slows down people making investment decisions, and sort
of holding back on strategic options because they do not quite know what will happen next. francine: douglas, it's hard to argue it has not been difficult eing a banker given that you have low rates, low growth around the world, you have regulation. what is the biggest risk in 2017? douglas: the biggest risk must be something you have not fully factored in. think it has been a period of unusual uncertainty, but to an extent, you factor all that in. so, something that would be completely unexpected would be something you fear more than anything else, and that's why i think businesses and indeed anks are pretty cautious about their financial position, to make sure that that unexpected vent can be catered for.
you know, i think one of the great advances since the financial crisis has been the depth of the stress tests that have been mandated by regulators around the world, but supplemented what we did already. so, you have gone through many, many stress events in theory, but it gives you confidence that if it came to the real thing, even if it was not what you plan for in the stress test, that you have a lot of levers you can pull and reserves you can draw on, so i think that is one of the positive things. but we are in a period of unusual uncertainty in the political sphere, which is very difficult to call. francine: does that impact banks, or are you thinking of something more systemic? another lehman brothers-type of moment that we have not factored in or modeled? markets you saw the
react very well to individual institution events in 2016. and i think one of the xtraordinary features of the referendum in june was people went to bed that night with the markets, commentators, pundits, pollsters, bookmakers predicting ne result and woke up in the morning with a different outcome. market volumes were six times normal, though huge volatility. banking stocks predominantly based in europe with european customer bases suffered 20%-30% declines, commodity prices were all over the place, and everything worked. you know, everything settled. you know, all the traits can be executed -- you know, all the trades can be executed. there was liquidity to do everything. and i think you stand back and say the ecosystem has been built
that can withstand the system, -- something that can withstand the system, so that gives you confidence that the system in aggregate is a great deal more resilient than it was. francine: what worries you now about brexit? douglas: just the period of uncertainty. i mean, i think you could model almost every option that you think might happen. the sooner there is some clarity and direction of travel and what the ambition is, you can get to means you can discard some of the options and get on with prosecuting the others to make sure that for our clients and for our staff that are impacted, they can begin to find their affairs and it can be business as usual. the sooner we get to some kind of element of clarity -- francine: what kind of clarity? for example, a buffer? we know mark carney has been working on modeling some kind of buffer or transitional agreement. would that be the most helpful thing for banks? douglas: it would be helpful to know if that is in the planning. we think it needs to be. in the sense when you think of the regulatory reforms we have them through, implementation so people can collect the information and present it being required. it's difficult to think about something as significant as changing the relationship with europe, you can hardly say day zero, we're move from the system
-- we are moving from that system and a one, you can accommodate everything that has changed within your system, so i think there has to be some period of transition. and again, in terms of the planning, if there is not a believe there will be some comparable of transition, -- some period of transition, you have to plan for the fact that there might be none, and that accelerates decisions. francine: and you have not got any assurances from the bank of england or london in expectation that they have a transitionary phase they are planning for? douglas: nobody has clarified that, but at the same time, everybody recognizes the importance of making sure the arrangements on both sides of the equation are as smooth or customers as possible. it is not about the financial system, per se. we are a reflection of what is happening to our customers, so if our customers find things awkward and ugly, that will affect economic activity, which is not good for the economy. so, i think it is in everyone's interest to make it as smooth as
possible, which i think is transition, as i said, i think is necessary. francine: what do you think the government need to do today? do they need to give assurances to you workers that they can stay in the u.k.? with that be the first of? douglas: i think that would be a good step, but all these things are known. at this point, it's a question of at what point you finalize your approach and negotiating position. all of the factors you want to take into account before you lay them out. i agree that you need to work out what your underlying framework is going to be and then you've got something you can talk about. francine: up next, hsbc chairman douglas flint weighs in on president-elect donald trump and his plans to deregulate wall street.
and what that could mean for uropean banks. how much will president trump, when he gets inaugurated january 0, deregulate wall street? douglas: no one knows. no one knows. don't think there is a chance anywhere in the world of regulation going back to light touch. francine: really? douglas: no. that was not a good period. our biggest risk is our industry. you do not want a part of the world where people can do more things with much less capital than is economically advisable. we are all exposed to each other. light touch regulation and competing with who can have the lowest standards is a really bad form of banking, and i don't think it would help. what we might see is some moderation of reporting rules, which are onerous in terms of capacity systems and so on, and there are multiple different ways of reporting around the
world. we haven't got a harmonized set yet. we might see some relaxation. that's what people talk about. whether that is on his mind, i don't know. i guess he's got a lot of things to think about and that is in debt and that would not necessarily be first. francine: if it is on his mind, does it impact european banks and put you in a much worse position? do you think regulators in europe would look at what is happening in the u.s. and often? douglas: i don't think so, and i -- i don't think they will soften, and i don't think they hould. i think europe has to make a decision as to what kind of an investment banking capability it wants or if it simply wants to import the skills that exist in wall street and say, "that's fine." we would rather not have the risk of the activity if that is the way it's judged." i think that would be a mistake. think one of the other issues that is interesting,
particularly in the context of brexit, is we are entering a world where in wholesale activities, the u.s. and european union have agreed that they are equivalent, which is important in terms of doing business in each other's markets. the u.k., of course, is in europe at the moment, so it is equivalent, but you can have a scenario where the u.k. has left europe and over time moves away from european regulation. think unlikely, but possible. the u.s. could change its regulation and therefore no longer be equivalent. you now got three systems when you only had one. that would be a pity. the fragmentation of the global framework would be i think expensive for our customers and would be systemically riskier than bringing everything together in the way it has been done successfully since 2008. francine: do you think that global growth will increase in 2017? douglas: yes. francine: coming from where?
douglas: two things. he measures that president-elect trump has talked about in relation to capacity reflating, building infrastructure, beginning to tighten the tax code to bring money that is sitting offshore back home are things that people have talked about for some ime. and he is saying let's have a go at doing it. i think china is beginning to reflate again, and those are the two most important economies in the world. so, i think we will see an uptick in growth in 2017. the difficult one to predict is europe because you have so many elections. there's all this discussion around brexit and whether that encourages activity to take advantage of conditions that
exist today, or whether people hold the back to see what the lay of the land will be going forward. francine: are you worried that u.s. may stoke inflation worldwide? douglas: there are those who would argue that is a good thing, so theoretically, it should. again, interest rates should begin to rise, and there are many ways these kind of interest rates rose because zero or 0% -- zero or near zero policy rates have no flexibility, and you begin to get a risk curve again and the savers begin to see some reward for their savings. so, you can argue both sides, and economists do. francine: you were mentioning europe and the fact you are more concerned about the economies of europe. is there anything politicians can do to stave off -- i don't know if you want to call it a wave of populism or being more in touch with the voter anger, let's call it that. douglas: obviously, i'm not a olitician or social scientist, reward for their savings. so, you can argue both sides, and economists do. francine: you were mentioning europe and the fact you are more concerned about the economies of urope. is there anything politicians can do to stave off -- i don't know if you want to call it a wave of populism or being more in touch with the voter anger, let's call it that. douglas: obviously, i'm not a politician or social scientist,
but it does seem to me that people react badly to uncertainty in their own osition. you know, they want to believe that the future will give them more opportunities to be able to do more for their families. their kids will have a better than they have had, and so on, nd so forth. and i think that means giving some confidence to populations about the kind of work that will be available in the future. i mean, we are entering a time of enormous technological change, where technology will transform many of the industries that have been less touched than manufacturing. that will have a big impact on the job market, so what will governments do to reassure people that they will invest in
the retraining, the rehabilitation of people whose jobs are going to be affected by the digitalization and artificial intelligence and all these things that are coming? down the road, which will be very positive in many ways but also will impact some of the job sectors that exist today. so, how do we retrain people and make sure the benefits of technology change as well as the global industry and the value of the benefits and using them to retrain and create opportunities for those who have then ffected? francine: is it is that what president-elect trump is trying to do is reflate the economy and bring america back to its manufacturing glory days? does this not almost go against what you've just said? the need for retraining to more advanced technology? douglas: i think there is an element. i think the rhetoric around bringing jobs back is a popular one, but the extent to which some industries can come back to higher wage economies is doubtful.
some will, but as a general statement, it is going to be difficult to see that. nd you can see economies specializing in certain industries and exporting that across the world. i think that is unstoppable. we are in a world where the way people consume is not based on states at all. it's based on the internet. they go online and they click on something, and it arrives the next day, and they have no idea where the order was fulfilled or manufactured. and we can't see that unwinding. so again, there is a bit of consumer preference to take into account as well. francine: next, in my conversation with douglas flint, we will talk about the possibility of trade wars in 2017, and doing business in china.
president-elect donald trump has already sparred with china, and his policies could be of particular concern to hsbc. now, in my conversation with douglas flint, i asked him if he sees trade wars in 2017? douglas: i think we will see a lot of dialogue as to how the benefits of globalization should be shared, particularly in a world where it is less about where you manufacture and where the intellectual property is and how that is rewarded. i don't think we will see a major trade war, because we're in a situation with three major trading sounds in the world -- europe, the united states, and asia -- they are so intertwined that it's difficult to see that you can have a trade war without massively impacting your own
country that have invested there, and your consumers who re able to get goods and services from the other part of the world that are extremely good value, so it is a double-sided coin. francine: you believe the u.s. and china are both fully aware of that? douglas: absolutely fully aware of that, yes. francine: there's not a risk in your eyes because of your exposure to asia and china, that something happens between donald trump and the president of china in 2017? douglas: both sides are fully aware of the implications, so i think that is very unlikely. francine: what worries you? - what worries you in china?
douglas: i think, it is not a worry, the issue in china, an economy of that size and complexity, can you make the transition and change from a heavy industry -- from a heavy infrastructure-led, export-led economy to a consumer driven, technology-savvy, research and development economy smoothly? i mean, the transition is under way. big steps have been taken. heavy restructuring is under way. the population is supporting the transition. and that is reflected in political support. but it is a massive undertaking to transition the economy, but you can see the research side, the consumer side, the tech side is going very, very strongly. and the chinese firms are beginning to invest in lower wage economies in the same way that other businesses used to invest in china, so they are going into vietnam, myanmar,
africa, and effectively replicating the stage of development that they went through in other countries and building infrastructure to create trade flows, trade corridors. so, you know, as ever when you try to do something very ambitious, you worry, can something interrupt it, but i think china has managed it successfully so far. francine: how many non-performing loans do you think chinese banks have? douglas: you can see what they eport. many think there may be other elements there in the investment companies that are yet to be recognized. i actually think it is less relevant than how they are managed. managing impairment is about can ou manage it in a smooth way
without causing disruption? china has not borrowed heavily from the rest of the world so it is an internal issue. can you manage it in a way that you have the capacity to do it without causing disruption and unrest and an economic slump? so far, they have done it. i'm relatively confident they will continue to do it. and i think, their model is different from ours, and it's difficult to say -- they will not do at the same way it has been done in the u.s. or europe, but they know exactly what they have to do to manage the recycling of capital efficiently, but they have the capacity to do it. francine: right. markets worry about something ugly. do you think investors are underestimating the perils of bank asset qualities in china? douglas: in a way. the values in assets, simply put, depends on the cash flow that asset can generate. that more than anything depends on successful economic policy and no disruption to that. so, if you suddenly have an economic event like the explosion of shale gas in america that disrupts a market, or the decision in germanyo ove away from nuclear power,
you have a disruption to people's expectations of the future. if you don't have disruption, then assets should be where -- than asset values should be here people expect them to be. so, it is those disruptive events which are more around political events than economics that are unpredictable. francine: how do you think they should stabilize? the chinese trinity of the reserves, currency, and the outflows? douglas: it is certainly a omplex equation. china is a net exporter which is important for the rest of the world and the diversification of the chinese savings probe. clearly, they want to manage it in a way without severe volatility in the currency or in reserve movements that makes people nervous about their ability to control things. they've got a combination of market tools and regulatory tools and so on to do that. you know, i think, again from my side, we tend to extrapolate
single-month movements much more dramatically than they would internally, but you are absolutely right. t is a challenge to manage all these things, but china is becoming one of the major investors in the world, and i think that is a very positive thing for globalization in it's good form. francine: douglas, thank you so much. for giving us so much of your time. douglas: you are welcome. it's a pleasure.