G20 Executive Talk Series





Authored by: Chris De Noose

Making Globalization
Work for Everyone:
Locally Focused Banks’ Role

People are seeking solutions to cope with globalization. Perhaps that is why, more than ever, the G20 process becomes even more important.

Aforce for shaping global financial policy, the G20 impacts greatly the 7,000 locally focused banks that make up the World Savings and Retail Banking Institute and the places where they serve. When we share our G20 messages with policymakers and stakeholders, two big themes are always conveyed.

First, we always discuss better regulation. More specifically, that any new and existing legislation should apply the principle of proportionality. In general, this principle has been well placed in the mind-set of decision makers. We find that in Europe, however, savings and retail banks, with normally less-complex models, are hit with the same post-crisis banking rules designed for globally active banks in mind. That mismatch can and should be fixed.

Second, policy should keep in mind the special role savings and retail banks play in local communities and local economies. Building on that, policymakers should see savings and retail banks as an agent to relay the benefits of Globalization at local level. A big part of that revolves around expertise in lending to the real economy, namely SMEs.

People Increasingly Reject Globalization
To the man on the street, they have little connection with G20. They are, however, increasingly perceiving Globalization as a threat. We have witnessed results in UK and America as case in point.

There is a real disconnect between people and the facts about Globalization. First, it creates efficiencies and opportunities from open markets. Globalization creates wealth and foreign currency to local economies when they buy local resources, products and services. The extra money created by this investment can be spent on education, health and infrastructure. Globalization makes people more aware of the world around them. The good side of globalization sets the world economy into a virtuous cycle of income and employment growth.

With all the pluses of Globalization, so much of the time we hear the minuses. People hear and see first-hand the risks and uncertainties that Globalization brings. But it doesn’t need to be that way.

That is where locally focused savings and retail banks come in. Close to the customer, and in their communities for the long haul, they are ideally placed to help people better navigate their financial future in an inter-connected world. Local banks give citizens a chance to participate in the real economy, to start a business or expand a business and seek export markets. The Economist magazine once noted that SMEs, especially mid-sized firms, hire people regardless of the business cycle. Their approach is in contrast to large companies, who oftentimes slash payrolls when times are tough.

Despite so much upside, SMEs remain in a funding challenge, especially in developing countries. The International Finance Corporation reports that around two-thirds of SMEs in poor countries cannot borrow as much as they would like, compared with a sixth in the rich world. The credit gap in developing countries was about $1 trillion in 20111, while the credit gap for microenterprise was estimated at more than $300 billion.

Who is best to bridge that gap in lending? We argue that it is local banks. They know best when it comes to how local businesses work and spend a lifetime doing it. Our just-published Institutional Position to the G20 offers solutions to help narrow the gap.

To the man on the street, they have little connection with the G20. They are, however, increasingly perceiving globalization as a threat.

Proportionality and Financial Market Stability
Financial market stability is another pressing issue. Bank lending remains the primary source of SMEs finance, but a wave of new regulations proposed under Basel III have not helped our cause. Hastily prepared during the crisis, they lacked the right balance between mitigating risk and fostering growth.

The post-crisis rulebook needs a second look. Policymakers have to check them for balance and whether they are proportionate. For new banking rules, they must be pre-tested via detailed impact assessments that take into account the impact on smaller and less complex banks as well as the interactions between different rules. A pause is also needed on banking regulatory reforms at international level to focus more on unleashing more economic growth.

Most agree that global fora like G20 are crucial to consistent global guidelines. But those guidelines have to be set while avoiding the pitfall of one-size-fits-all. Regional and national level tweaks to rules will have to be made. Relatedly, there is real need as well for the principle of proportionality and should be weaved into all aspects of regulation.

Infrastructure Finance and SMEs Finance
Like the G20, addressing infrastructure project finance is high on our policy radar as well. We acknowledge that projects to build roads, bridges and schools can no longer be financed through bank loans alone. New rules and the economic climate have shown that there is an urgent need to look beyond the traditional bank-based model. Our policy idea is straightforward: partnerships between banks and institutional investors should be incentivised to benefit from the know-how of banks and the investment capacity of institutional investors.

On diverse non-traditional bank financing instruments and channels, we see the vast majority of SMES – normally the start-ups and smaller sized firms – sticking to their bank for financing. Alternative sources of finance such as capital market instruments in a broad sense may be useful for some SMEs in some stages of their life cycle, but should come as a complement to bank lending.

Green, sustainable finance activities is also important, especially when it comes to new products that promote areas like energy efficiency.

Thriving Locally
Globalization has proven to make the world more prosperous and move society forward, but some still feel left out. Locally focused banks can help bring those people in and more fully participate in the local economy. They can do both better with the right rules framework. But if that framework is missing, expect people to push back even more against a globalised world.

Chris De Noose is Managing Director of the World Savings and Retail Banking Institute and the European Savings and Retail Banking Group. A member of the European Banking Industry Committee, European Payments Council and The Business and Industry Advisory Committee to OECD (BIAC), he serves on the boards of the Hochschule der Sparkassen-Finanzgruppe and Child and Youth Finance International. Secretary General of the Mediterranean Confederation, he is also Executive Committee Chairman of WSBI Advisory Services.