tv Big Problems Big Thinkers Bloomberg December 17, 2016 1:30pm-2:01pm EST
♪ francine: hsbc is europe's largest bank with more than 235,000 employees across 71 countries. douglas flint is the bank chairman, a role he has held for six years. he's helped guide the bank during its economic realities and this year's rise of populism has brought a raft of new realities. i sat down with him and asked how he would rate 2016. mr. flint: very interesting year.
pretty turbulent market so the beginning of the year, things quiet down a bit, and we have these two unexpected political events, the brexit referendum in the presidential election in 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 he, but we closed 2016 with both those events being factored in better than expected. so it has been a very interesting year. lots of surprises, but one of the great things was how well markets and institutions of the markets coped. francine: was there a sense of not being able to trust the polls and not knowing what is next? mr. flint: we're sort of leaving the honeymoon period and you get
to the hard realities and find out if the promises can be delivered. we have got, three, four, five or six really important elections in europe next year, which could add to clarity or add to elements of uncertainty, so i think it will be interesting. we have finalization of the basel framework, so a lot of things have been bubbling for a year. francine: what can you tell me with certainty about the markets of 2017? more volatility? mr. flint: more volatility, 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, 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: it's hard to argue it has not been difficult being a banker given that you have low rates, low growth around the world, you have regulation. what is the biggest risk in 2017? mr. flint: the biggest risk must be something you have not fully factored in. it has been a period of unusual uncertainty, but to an extent, you factor all that in. something that would be completely unexpected would be something you fear more than anything else, and that's why i think banks are pretty cautious about their financial position, to make sure that unexpected event can be catered for. i think one of the great advances since the financial crisis has been the depth of the
stress tests that have been regulated by legislators around the world that have supplemented what we do already. you have gone through 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, 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 unusual uncertainty in the political sphere is very difficult to call. francine: does that impact banks, or are you thinking of something more systemic? another lehman brothers-type of moment? mr. flint: i think you saw the markets react very well to individual institutional events in 2016. one of the extraordinary parts of the referendum in june was people went to bed that night with the markets, commentators, pundits, pollsters predicting one result and woke up in the morning with a different outcome.
market volumes were six times normal, 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. everything settled. all the trades could be executed. there was liquidity to do everything. you stand back and say the ecosystem has been built 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? mr. flint: just the period of uncertainty. you could model almost every option that you think might happen. the sooner there is some clarity and direction means you can
discard some of the options and get on with prosecuting the others to make sure that for our clients and staff, that they 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? or transitional agreement? would that be the most helpful thing for banks? mr. flint: 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 they are presented with 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 and day one, you can accommodate everything that has changed within your system, so i think
there has to be some period of transition. again, in terms of the planning, if there's not a belief that there will be some sort 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 in expectation that they have a transitionary phase they are planning for? mr. flint: 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 -- for customers as possible. we are a reflection of what is happening to our customers, so if our customers find rings 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 does the government need to do today? do they need to give assurances to workers? would that be a first step? mr. flint: 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. i agree that you need to work out what your underlying framework is going to be and then you have something you can talk about. francine: 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 european banks. how much will donald trump deregulate wall street? mr. flint: no one knows. no one knows. i don't think there is a chance anywhere in the world of regulation going back to where it was. that was not a good time. our biggest risk is our industry. you do not want a part of the world where people can do more things with capital than is economically advisable. it's 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. perhaps that's on his mind. i don't know. he's got a lot of things to think about. that would not necessarily be first. francine: if it is on his mind, does it impact european banks and put you in a worse position? do you think regulators in europe would look at what is happening in the u.s. and soften? mr. flint: i don't think so, and i don't think they should. i think europe has to make a decision as to what kind of 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. another issue 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 important, but you can have a scenario where the u.k. has left europe and over time moves away from european regulation. i think unlikely but possible. the u.s. could change its regulation and therefore no longer be equivalent. 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 together in the way it has been done successfully since 2008. francine: do you think that global growth will increase in 2017? mr. flint: yes.
i think two things. i think the measures 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 he has talked about for some time 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 mostly 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
exists today or if people react to what they see the landscape going forward. francine: are you concerned u.s. may stoke inflation worldwide? mr. flint: there are those who would argue that is a good in, 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% policy rates have no flexibility, and you begin to get a risk curve again and savers begin to see some reward for their savings. you can argue either side, and economists do. francine: you are of course a lot 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 voter angst -- let's call it that.
mr. flint: i'm not a politician or social scientist, but it does seem to me that people react badly to uncertainty in their own position. 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 life than they have had and so on and so forth, and i think that means giving some confidence to populations about the kind of work that will be available in the future. we are entering a time of enormous technology 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 to reach rein and create opportunities for those who have then affected? 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 said? mr. flint: 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.
you can see economies specializing in certain industries and exporting that across the world. we are in a world where the way people consume is not based on states at all. it's based on the internet. they click on something, and it arrives the next day, and they have no idea where the order was fulfilled or manufactured. again, there is a bit of consumer preference to take into account as well. francine: next, in my conversation with douglas flint, will talk about the possibility of trade wars in 2017 and doing business in china. ♪
already spared with china, and the policies could be of particular concern to hsbc. in my conversation with shared douglas flint, i asked him if he sees trade wars and 2017. mr. flint: i think we will see a lot of dialogue as to how the benefits of globalization should be shared, particularly around how intellectual property is rewarded. we're in a situation with three major trading zones in the world -- europe, the united states, and the asia -- where it is so intertwined that it's difficult to see that you could have a trade war without massively
impacting your own country and the investors and your friends 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? mr. flint: absolutely fully aware. francine: there's not a risk in your eyes that something happens between donald trump and the president of china in 2017? mr. flint: both sides are fully aware of the implications, so i think that is unlikely. francine: what worries you in china? mr. flint: the question is if you can make a change from a heavy infrastructure-led, export-led economy to a consumer
driven, technology-savvy, research and development economy smoothly. the transition is under way. big steps have been taken. heavy restructuring is under way. the population is supporting the transition. 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. 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. as ever when you try to do something very ambitious, you worry something interrupts it, but i think china has managed it successfully so far. francine: how many non-performing loans do you think chinese banks have? mr. flint: you can see what they report. i actually think it is less relevant than how they are managed. managing impairment is about you 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 effectively 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. 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: do you think investors are underestimating the perils of bank asset qualities in china? mr. flint: the volume of an asset safely put depends on the cash flow that asset can generate. that more than anything depends on successful economic policy and no disruption to that. if you suddenly have an economic event like the explosion of shale gas in america that disrupts a market or the decision in germany to move away
from nuclear power, you have a disruption to people's expectations in the future. it's those disruptive events which are more around political events than economics that are unpredictable. francine: the chinese trinity of the reserves, currency, and outflow -- how should we determined that? mr. flint: it is a complex equations. 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 that they do not have severe volatility in the currency or in reserve movements that makes people nervous about their ability to control things. they have a combination of market tools and regulatory tools and so on to do that.
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. it 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. mr. flint: you are welcome. it's a pleasure. ♪
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