Today’s deficits are a real concern, given the high level of government debt. Debt as a percentage of GNP in both Greece and Italy was 115 percent in 2009. In the U.S., it grew to 83 percent, compared to just over 50 percent 10 years ago, and it’s forecasted to rise still further to 110 percent in the United States in five years. So both Europe and the United States face extraordinarily high government debt levels, combined with aging populations that make this, quite frankly, difficult to manage.
So how do we tackle this issue of government debt? Well, I can tell you the problem will not be solved by increasing taxes, so it has to be managed by a reduction in public spending, and more importantly, by spurring private-sector economic growth.
Over the last three years, we’ve seen the private sector in the United States show tremendous resilience as it has adjusted to the environment by deleveraging, restructuring and increasing productivity. In that period, private sector employment fell 7 percent, and productivity grew by as much as 6 percent year on year.
In the same time frame, U.S. government debt grew 50 percent to almost $12 trillion, and employment in the public sector rose, with no improvement in productivity. We now need to unwind that position. The timing’s important because reduced public spending won’t kick in until next year in many countries. That gives a window for private sector recovery to take the lead in driving economic growth.
For the private sector to drive economic growth, it must have access to the funding it needs. It has to be able to manage its risks, and it has to be able to carry out business across borders. In this context, the banks have a very critical role to play, so it’s up to us, corporations and banks, to work together to stimulate the economic growth that we need.
Working Together
There are three areas where I think it’s important for us to work together. The first is when businesses work with banks to borrow and to manage their risks. The second area where we need to work together is in attracting new finance through the capital markets. For example, Sensata
is a global producer of controls for manufacturers in the car, aircraft and air conditioning industries. They raised over $500 million in an initial public offering earlier this year—the largest IPO in the United States in 2010. And in order to access the widest range of investors, we talked to clients not just in the United States, but in eight other countries in Europe and Asia. Again, the only organization that could help them do all these things was an integrated global bank with both cash and derivatives, working closely together as one business.
The third area where corporations and banks have to work together is in stimulating economic growth via cross-border trade. It’s interesting that foreign-directed investment from the private sector to the emerging economies is far larger than development aid from governments and from charities. In 2007, the top 10 emerging market recipients of foreign-directed investment received over $300 billion, while the top 10 recipients of development aid received just 10 percent of that—$30 billion.
A Sound Financial System
The other reason this is a critical moment is that regulators around the world are now making decisions about financial reform. Let me be clear—it’s a myth that banks resist reform. We welcome it. Strong banks want strong regulation. And those of us who did not take any government money certainly don’t want to go through a similar crisis again.
No taxpayer money should ever, ever be put at risk again. And it’s in everyone’s interest that we have a safe and sound financial system.
That’s why banks have made changes. Since the start of the crisis in mid-2007, we’ve been operating with more capital, with higher quality capital, with less leverage and with stronger liquidity buffers.
Barclays is not alone in taking these actions— actions that help create a safe and sound financial system. Banks understand that the world has changed. But we need to balance a safe and sound financial system with generating economic growth and job creation. We’ve been working very closely with the [Obama] administration, and we are very supportive of the new legislation.
There are three areas in particular that are very important to get right for all of us. The first is capital. We all know we have to operate with more capital, so we’re working closely with regulators to assess the aggregate impact of new capital requirements on our ability to lend, our ability to underwrite financing and our ability to make markets liquid and to help you transfer risk. For example, if U.S. banks are required to hold five percent of all the assets they securitize, as the Senate bill proposes, the securitization markets would virtually close.
The second area is derivatives. We support much greater transparency in derivative markets, so that regulators can understand the kinds of instruments being used, and that regulators can know where there is excessive concentration. Barclays was one of the first to support electronic trading and clearing. We invested heavily in our platforms in this area.
At the same time, our clients—whether they’re corporations, pension funds or governments—continue to need customized derivative products, both for raising capital and for managing their risks.
The third area that’s important for all of us concerns the size and the model of banks. The notion of breaking up banks that are “too big to fail” is simply, overly simple. As I’ve said, the world in which we operate is global, and the reason banks are big is because our clients are larger, more international and require global services. There is no empirical evidence that big is bad.
Big banks can have safer business models and risk management than small ones. Some 140 small retail banks in the United States collapsed last year, with 78 additional institutions confirmed so far this year. But what’s most important of all in this debate is what’s required to stimulate economic growth. We need large global banks to support global clients in cross-border trade in order to stimulate world trade and global growth, because that helps jobs and prosperity here in the United States.
It’s time to work together to achieve what’s in everyone’s best interest. Of course, banks have made some very serious mistakes leading up to this financial crisis. There was no bank or banker that didn’t make mistakes, and I include myself in that. But there were also mistakes in public policy and in regulation.
We have to get past playing the blame game now, and move on to make sure that we do the best for everyone in the future.
The president of Barclays PLC shared his views on the firm’s rise to the top tier of investment and global banking, financial reform and the current and future state of financial services. Robert E. Diamond Jr. expressed grave concern about rising deficits both here in the United States and abroad. He claims banks welcome regulation and says there is no room for “too big to fail.” Today’s global businesses require access to capital and no effort should be made to separate derivatives businesses from banks, he asserts. What follows is an edited transcript of his remarks. (To view a webcast of Diamond’s address in its entirety, visit www.directorship.com.)