How ready is Latin America for Basel III? | Felaban 2014 | Video

Transcript

Banking regulation is tightening worldwide, and Basel III is at the head of these changes. Ricardo Anhesini, Head of Financial Services for Latin America at KPMG, discusses the outlook for Brazil, Argentina, and the region as a whole in light of the tougher demands.

Banking regulation is tightening worldwide and Basel III is at the helm of those changes. Here to tell us whether Latin America is ready for the wave of change that’s upon it is Ricardo Anhesini of KPMG.

World Finance: Ricardo we know that Brazil of course was able to benefit from the commodities boom a few years ago. Now the economy has slowed down, the banking sector is going to play a key role is shoring up any sort of economic development. Do you think that the country is going to be able to build on the capital shortfall that has existed in the past and be able to draw investors in the future?

Ricardo Anhesini: Yes Kumutha, absolutely. Listen, the situation in Brazil is complex. I think Brazil has under delivered over the last couple of years, with respect to a measure of momentum, which was the general election. So we now have a new government, which happens to be the former government re-elected. But in general what we see is that the new government will look at what is necessary for the economy to catch up. The banking community will play a very important role in this catch up.

We have several things that need to be addressed. We need to look at infrastructure finance. We need to look at credit for consumption, especially because credit for consumption was pretty much the basis for keeping momentum in previous years in Brazil. And we also have to look at the global regulation, and the implications of global regulations in Brazil – as Brazil is normally following BIS guidance on that particular set of rules.

World Finance: So do you think Brazil is ready for these changes, as you discussed some of them that need to be made?

Ricardo Anhesini: I don’t think Brazil is ready – I think Brazil will be ready. You know, there’s a lot of expectation that came out from what happened in the election. But from what I heard this morning for example when we debated here at Felaban, the Brazil economy perspective from 2015 – 2020, it was quite encouraging. We heard from the economists a number of positive things about the current structure of the Brazilian banking system and how that can play a role in the future.

Over the last, lets say five to six years, the central bank was quite keen in being present, dictating and adapting the Brazilian rules to the global regulations. And that created some sort of protection to the Brazilian system and the Brazilian banks, and we had quite a consistent level of capital, getting ready to comply with Basel III. We have credit at a level that has grown a lot, as I said, but it’s still below average of the developed world.

World Finance: Is it the right type of capital to move the country forward?

Ricardo Anhesini: Absolutely. Brazil needs to get more investment, a higher level of investment either by local savings or getting investment from abroad. It’s absolutely imperative that Brazil, we meet leverage and delivery expectations, finance infrastructure, and be able to move from where we currently are manufacturing to a higher level, if we get higher levels of investments.

So you’re absolutely right, we need to get more capital and better capital. Now as far as it relates to capital movement in the financial institutions, in the financial system – this seems to be quite right. Our tier one level in Brazil remains high. From a Basel III point of view Brazil is one of the most prepared countries in the region. So we have to deal with other issues coming from different regulations. But on capital I think either on financial institutions, financial systems in general, I think we’re quite right.

World Finance: Let’s go from specific to general. Latin America as you said – robust economies, still there are some issues that riddle these economies. Anti-money laundering, anti-fraud – these are regulations that any country that wants to move forward, is going to have to make sure it is very responsive to the changes that Basel calls for, as well as the other regulatory partners. Are they ready?

Ricardo Anhesini: When you talk about anti-money laundering, when you talk about anti-corruption, owing that to the conduct codes and fair lending – all those strengths are already present in Latin America. Either because the national banks that play an important role in the region, or because the local central banks from Brazil, Mexico, Argentina, are looking at those regulations in a very relevant way, and putting them quite high at the top of their agendas for the banks to deal with.

If we talk about the humour of the banks and the regulations – we are ready now. What it takes to get there, what it takes to implement in terms of technology, in terms of restructuring the governance of the financial institutions that is still to come. And an important piece on that is also about what we just said, about the appeal to make further investments in building the infrastructure of those financial institutions, to get it delivered.

World Finance: Now let’s look at another significant economy – Argentina. We know Argentina is still grappling with some significant issues, trying to control inflation, reduce the exchange rate. How likely is it in the next few years, to be able to be responsive enough to the changes that are required at the Basel level, international regulation?

Ricardo Anhesini: Argentina has of course gone through its issues and problems, but it cannot be ignored. When we look multiple years ahead, Argentina needs to find a way to solve its internal problems, its political issues, its inflation issues and be prepared to absorb and realise the potential the country has. And financial institutions and financial institutions are looking at Argentina with the expectation that those issues will be solved, and Argentina will deliver on those expectations. Now the big question is, how long is it going to take? And I have no answer to that.

World Finance: I wish we all had that crystal ball, but in trying to prove the virility of any banking sector and the potential for future mergers and acquisitions – how much of a role is Basel III playing in those conversations? 

Ricardo Anhesini: The two discussions are quite connected – Basel III implementation and the consolidation of the market in the region. M&A in the region is going to be big in upcoming years. There is no way that the change on the business models, how the banks are operating – they need to control costs, they need to leverage capital to make sure that we get the proper levels under the required regulations.

So I see, without question, that under the financial service M&A is going to be big. Now, to finish on Basel III and how that’s connected. I think that, you know, it’s absolutely necessary that you employ your capital in the best way possible to comply with the regulations. It is a lot more effective if you can combine capital, manage liquidity levels and manage regulatory capital levels, when you are bigger and focused on the larger slice of the region where you operate. I think those two things will really connect as we move forward.

World Finance: Do you think that we are going to see a new flourishing of banking products that are more in line with what Basel III and the international standards are calling for?

Ricardo Anhesini: In general banks the response is yes. I think we will see a lot of innovation in banking products. We need to deploy capital properly and we need to control costs. My response to that is yes. Now I don’t have the crystal ball here either, to tell you what those products are going to be – but a lot of innovation is coming into this industry in the coming years.