KPMG Banking Report 2009

| frontiers in finance – June 2009
frontiers in finance
for decision makers in financial services
June 2009
FINANCIAL SERVICES
The long road

to recovery
Making it a reality
Major changes ahead

Making sense of regulation
Clarity and reality
The role of the auditor
in financial services
Jump start
Reviving the US financial system
Confidence must return
An investment management perspective

foreword
frontiers in finance
June 2009
Brendan Nelson
Vice Chairman, KPMG in the UK
Global Chairman, Financial Services
The long road to recovery
T
he financial services recovery requires that trust in the
sector – like the global financial services industry be rebuilt.
economy as a whole – This is equally true in investment
faces a long and management – where there are
potentially bumpy road exciting opportunities ahead – as
to recovery. One of the is the case in banking and insurance.
foundations for long term stability Also in this issue, we focus on two
should be regulatory reform. While contrasting economies: Canada, where
regulation cannot eliminate all risk the financial services environment has
from financial markets, the old regime remained largely intact; and India, which
was in need of some redevelopment. despite suffering a battering from the
Regulators in many jurisdictions are crisis, is still on course for enviable
struggling to formulate new frameworks growth this year.
which will prove robust and effective. At KPMG, our member firms
As yet, it is not clear that there is work with leading financial services
agreement on basic principles. institutions across the world, providing
Furthermore, solutions are likely an opportunity to explore in detail how
to differ between the banking, companies are coping with these
investment management and insurance turbulent times. A number of recent
sectors. I believe the audit profession KPMG surveys – in investment
has much to contribute and hasty and management, insurance and payments
ill-considered action should be avoided. also assist in offering valuable insights.
At the same time, the speed at which On this journey to recovery, the
new regulations may be brought in financial services sector is going to
means that firms do not have the luxury need all the insight and advice that is
of waiting until the dust has settled. available. I hope this issue of frontiers
Some preparatory work has to start in finance goes some way to meeting
now. In this issue we highlight this that need.
from a range of perspectives.
The US remains the engine of the Brendan Nelson
global economy, and so the success
of the Financial Stability Plan will be
crucial for us all. We look at some of
its key features and implications.
More generally, we recognize
© 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services.
No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
Contents | frontiers in finance – June 2009
In this issue
12
For your information
fyi… 2
Topics
Major changes ahead: Making sense
of regulation 4
Perspectives on regulation in banking,

investment management and insurance 8
Clarity and reality: The role of the

auditor in financial services 2
Topics: Clarity and reality: The role
of the auditor in financial services
Jump start – Reviving the US financial
18
system: The Financial Stability Plan 4
Economic turmoil: The US commercial

real estate perspective 7
Confidence must return: An investment

management perspective 8
Renewing the promise: Time to mend

relationships in investment
management 2
Act now: The implications of

Basel II revisions 22
Topics: Confidence must return:
Quietly prospering: Canadian Investment management
24
financial services 24
A glimmer of hope 28
Show me the money: Insights into

global payments 30
Addressing the trust gap:

Renewing confidence in the financial
services industry 34
Separating value: Getting the most

from your disposals 38
Changing for the better 42

Topics: Quietly prospering: Canadian
financial services
Getting ahead – UCITS IV: Putting the
48
potential into action 44
Order returns… An economic overview 46
Series
Emerging markets: India: A brighter
future? 48
Insights
Updates from KPMG member firms,
thought leadership & contacts 52
Series: Emerging markets:

India: A brighter future?

frontiers in finance – June 2009 | For your information
fyi...
At your finger tips
frontiers in finance online
With our audience

growing rapidly, we wanted
to make frontiers in finance
more accessible to you,
our readers. The frontiers Focus on next practices,
in finance team is pleased not best practices
to bring you KPMG’s first
online magazine. This
P
rofessor C.K. Prahalad1,
one of the world’s most
exciting new version influential experts in corporate
means you will be able strategy visited KPMG in Finland’s
to read the latest edition top executive seminar on strategy
of the magazine at the in May in Helsinki. Prahalad revealed
that the key to creating value and
click of a button! But not only will you be able to view the future growth of every business
the entire magazine, you will also be able to download depends on accessing a global
individual articles, share them with your colleagues, view network of resources to co-create
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one at a time.
date with hot issues through our new section, frontiers He argued that the nature
supplements. These will be updated regularly to address of strategy has changed and the
specific aspects of interest in the financial services management focus has to be on
industry arena. Go to our online magazine now at anticipating new business
opportunities and on creating
www.kpmg.com/frontiersinfinance. next practices, not best practices.
According to Prahalad, the
competitive arena is shifting from a
product-centric view of value creation
to a personalized experience-centric
view of value creation and innovation.
Prahalad believes that competitive
Insights in Nigerian Banking
advantage will depend on a firm’s
approach to business processes, that
can seamlessly connect customers
T
here is no clear leader or levels from the larger corporate and resources and manage
preferred bank for SMEs respondents. Futhermore it goes simultaneously the needs for
(Small to Medium Enterprises). on to highlight opportunities for banks efficiency and flexibility. It will be a
According to the 2009 edition of in Nigeria to improve customer race to provide a unique customer
KPMG’s Nigerian Banking Industry satisfaction and in turn, increase experience at the lowest cost.
Customer Satisfaction Survey, it is customer retention and loyalty, a
evident that the SME market may hot topic we are seeing for financial
not be receiving the attention it services globally. For more information contact:
deserves from banks in Nigeria. KPMG in Finland www.kpmg.fi/en
This insightful report also
highlighted a progressive rate of For more information go to 1. For further reading: The New Age of Innovation –
diminishing customer satisfaction www.ng.kpmg.com Driving Co-Created Value through Global Networks,
C.K. Prahalad, M.S. Krishnan, McGraw-Hill 2008.
2
For your information | frontiers in finance – June 2009
Global Financial Forum 2009 frontiers in tax

Restructuring, consolidation
and government intervention
The 2009 issue of frontiers in tax,
our sister title, looks at the impacts
and consequences of the financial
crisis and identifies some of
Taking stock and the longer term tax risks and
opportunities.
looking ahead
In New York recently,
T
hrough the global network for foreign investors. In addition a
The Foreign Policy of KPMG member firms, recent trend in South East Asia sees
Association, Chatham our colleagues take a forward- authorities taking a stricter line on
House, and British looking view of the tax consequences foreign investors using treaty networks
of major developments in the industry for cross-boarder transactions.
American Business, such as the draft UCITS IV directive. Finally, this issue discusses
supported by KPMG This is a major development in the proposed changes to indirect tax
International, organized establishment of a single market in for financial services that could have
the Global Financial mutual funds within the EU which some unforeseen consequences for
has wide-reaching effects. the industry.
Forum. Our colleagues look into recent
reforms and tax changes in the
W
orld economic leaders Chinese insurance market which For further information visit
gathered to discuss the give rise to interesting opportunities www.kpmg.com/tax
state of financial services
and what is needed to move
Governance, risk
forward. Christine Lagarde, The
French Minister for the Economy,
and reporting
Finance and Employment pointed
out that what is unprecedented today
is not so much the consensus on a
need for stimulus, but rather the Draft EC Directive for
consensus on a need for financial Alternative Investment
services regulation.
Lord Turner, Chairman Financial
Fund Managers
Services Authority (the UK regulator),
I
highlighted three areas of regulatory n late April the European supporting the industry’s own
reform needed; a macro-prudential Commission published new agenda of building good practice,
approach, capital reform and a legislation for the regulation of and while the better run hedge
mechanism to reverse the funding Alternative Investment Fund Managers. funds will likely find little change
of long term obligations by short This follows global calls for reform to from many of the measures being
term risk. risks taken by financial institutions, introduced, the real challenge is one
President of the European Central which have been linked to the credit of implementation. Politicians need
Bank, Jean-Claude Trichet, noted crisis1. The proposals would require to ensure that the political agenda
the over-arching need to restore the alternative fund managers, not the doesn’t end up destroying the
confidence in financial services. funds, to register and seek government European hedge fund industry by
Some of these key themes are authorization which would include imposing sweeping changes that
discussed later in this edition. elements of reporting, governance are unworkable or unnecessary”.
and risk management standards2.
Tom Brown, partner KPMG in
1. ‘Hedge fund managers warn on EU plans’, www.ft.com,
For more discussion on regulation, the UK noted “while we can welcome April 29, 2009.
see page 4. the directive from the perspective of
2. ‘Hedge fund managers warn EU rules will cripple their industry’,
www.ft.com, April 30, 2009.

frontiers in finance – June 2009 | Topics
Brendan Nelson
Major
changes
ahead
Making sense of regulation
In some respects, the likely shape of the financial

services industry after the crisis may remain unclear.
But one thing seems certain: the nature, scope and
purpose of regulation will change substantially.
Politicians, regulators and treasury officials across
the developed world are setting out proposals for
a more robust and effective regulatory regime to
improve protection against future crashes.
The failure of the authorities The dangers of systemic risk
Responsibility for the crisis may were ignored, and the need for
reasonably be shared among a macro-prudential oversight forgotten.
number of interests. Central bankers As a consequence banks, especially,
declined to assume responsibility for are now coming under huge pressure
the growth of unsustainable asset from regulators to significantly
bubbles; governments failed to tighten improve their capital and liquidity
policy when public finances allowed positions and demonstrate sound
and regulation failed in its key task of and prudent management. A major
maintaining stability and confidence drive for regulatory reform is already
in markets and the financial system. under way.

Topics | frontiers in finance – June 2009

Regulatory reform will be needed to ensure that an

In the US, Treasury Secretary Tim effective and unambiguous system
Geithner is calling for comprehensive emerges. The criterion of systemic
A great deal of detailed regulatory reform: “not modest repairs importance, while intuitively clear, is
discussion and drafting will at the margin, but new rules of the merely the most high-profile concept
be needed to ensure that an game”. The European Commission’s de over which fierce debate is inevitable.
effective and unambiguous Larosière report suggests the creation There is also a risk that the real
of a European Systemic Risk Council progress made over the last 20 years
system emerges. to oversee a new system of regulation towards harmonization of global
and supervision. In the UK, the Turner standards will be undermined or
Review calls for higher minimum capital thrown off course.
requirements, counter-cyclical capital
buffers and limits on gross leverage. Capital adequacy
What is still unclear is how all of the The G20 proposals for a counter-cyclical
proposals currently being formulated capital adequacy regime are likely to
and discussed can be integrated into an be among the least contentious in
effective global framework which also principle, since they are consistent
reflects individual national priorities. The with current thinking from a number of
dangers of confusion, incoherence and sources. But they are likely to result in
promotion of regulatory arbitrage are real. a more formulaic regime, which could
At the G20 London Summit in April, constrain scope for flexibility at the
world leaders pledged action to build same time as imposing more stringent
a stronger, more globally consistent overall capital requirements. It remains
supervisory and regulatory framework to be seen whether any new system
for the future financial sector: will be truly balanced, or will simply
be used to impose higher limits during
‘Strengthened regulation and the good times. Nor is it clear that it
supervision must promote will be easy in practice to track the
propriety, integrity and economic cycle with sufficient
transparency; guard against precision. The rate and extent to which
risk across the financial system; capital requirements are tightened as
dampen rather than amplify the we emerge from recession will be a
financial and economic cycle; particularly sensitive decision.
reduce reliance on inappropriately One of the more challenging
risky sources of financing; and commitments of the G20 Communiqué
discourage excessive risk-taking.’ is that all G20 countries should
G20 Final Communique, April 2009 progressively adopt the Basel II
framework. However, no timetable for
They announced that regulation this has been agreed. One of the
and oversight would be extended obvious major stumbling blocks is that
to all ‘systemically important’ financial the US has, to date, failed to make any
institutions, instruments and markets, commitment to Basel II at all. In
including hedge funds. addition, it is not obvious that imposing
While the principles of the G20 Basel II on all banks, whatever their size
declaration are to be applauded, a great and degree of cross-border exposure,
deal of detailed discussion and drafting will turn out to be realistic.

Political considerations
and public anger are giving
extra force to demands for
tighter regulation.
Hedge funds should not be finalized over short

Political considerations and public periods where risks are managed over
anger are giving extra force to demands long periods – is surely sound. Similarly,
for tighter regulation. Although hedge recent high-profile controversies have
funds have had only a minor role in accentuated the need for non-executive
causing the crisis, they are widely directors and shareholders to be more
criticized – and misunderstood – and fully involved in and appraised of
are going to be drawn more tightly remuneration arrangements before
into the new regulatory framework. irrevocable awards are made.
Funds and their managers can expect However, it will be important
to be registered and subject to new that decisions in this area are fair,
disclosure requirements. The adequacy reasonable and proportionate, and
of risk management systems will likely do not succumb to ‘bash the bankers’
be probed. Institutions which have prejudice. The G20’s proposal that
hedge funds as their counter-parties supervisors should, where necessary
will likely need to develop mechanisms intervene in compensation policies
to monitor the funds’ leverage and set (with responses including increased
limits for single counter-party exposures. capital requirements) could be seen
Once again, though, the detail will be as a veiled threat. The Turner Review
critical. There is not yet even an agreed concluded that remuneration structures
definition of what is, or is not, a hedge played a less important role in
fund, let alone which criteria would contributing to the financial crisis than
identify one as systemically significant. inadequate approaches to capital,
In the UK, Lord Turner notes that hedge accounting and liquidity.
funds in general are not like banks; the
implication is that they should not be Overall
regulated in the same way as banks. Nobody can argue that the current
The UK’s Hedge Fund Standards Board, systems of regulation are sustainable.
while operating a voluntary framework, They have very dramatically failed to
has established a sound foundation prevent one of the worst financial crises
which global regulators could profitably in many decades. Financial services
build on. institutions have to brace themselves
for a much more muscular and
Remuneration interventionist regime in future. But
There is also widespread public what that regime ultimately looks like
concern – and anger – at the will depend on a great deal of argument
remuneration of those bankers and compromise, which is a process
perceived to have caused the crisis; only just beginning. Moreover it is
some extension of regulation to include essential that it avoids giving the
salaries and bonus arrangements is impression that all risk can be
politically inevitable. The argument eliminated from financial markets.
seems even more compelling in relation
to those institutions which have been
bailed out or taken into public ownership. For more information please contact:
The argument that compensation Brendan Nelson
arrangements should properly reflect Global Chairman, Financial Services
risk and, in particular, match the time Tel: +44 20 7311 6157
horizon of risks – so that payments e-Mail: brendan.nelson@kpmg.co.uk

Perspectives on:
regulation in banking,
investment management
and insurance
David Sayer Dave Seymour Frank Ellenbürger


From left to right:

David Sayer,
Dave Seymour and
Frank Ellenbürger.
Many authorities across the world are seeking to formulate new regulatory
frameworks in the wake of the crash. But the final shape of any new system
remains quite unclear; and it is unlikely to remain free of political distortion
and interference. David Sayer, Global Sector Leader, Retail Banking,
Dave Seymour, Global Sector Leader, Investment Management (IM)
and Frank Ellenbürger, Global Sector Leader, Insurance, met recently
to compare and contrast their different perspectives.
David Sayer (Banking) Looking at Dave Seymour (IM) I agree. Frank Ellenbürger (Insurance)
what’s happening at the moment, it Just following up on the political Of course by contrast with the huge
seems to me important that this crisis dimension for a moment, there is a stress and uncertainty in the economy
is seen to have been caused by the great deal of debate over the extent caused by the banks, insurance and
banks. So the diagnosis is focused on to which US executive and legislative the insurance markets have continued
bank failures and the need to stop this policies during the mid 1990s, such to operate normally, without any major
happening again, often to the exclusion as the modifications made to regulate disruption. The same is true for
of other potential causes of the crisis and strengthen the Community reinsurance markets. The impact of
including: trade surpluses, fiscal Reinvestment Act anti-redlining the crisis on insurers has mainly been
deficits, regulatory policies and so on. procedures, as well as other legislative on the life side, with the value of
actions, may have impacted the crisis. investments tumbling. Those that have
Policy makers are now trying to fix it, been most affected deviated from their
but given the complexities, it is difficult core operations into financial products
to know what, or how much to regulate. developed without understanding the
risk that underpinned them. But the
business model of insurers and the
largely uncorrelated relationship
between insurance risk and market
risk have so far been stabilizing factors;
hence insurance is much lower on
the political and risk radar.

There is always a political dimension to

financial markets. The world has discovered
not only how dangerous financial markets
can be, but how valuable functioning
financial markets are to economies.
Dave Seymour
Sayer In the case of the banks, Ellenbürger Before any action is Ellenbürger It will be interesting to see
though, there is huge pressure now taken, it should be well thought through how the banks adapt to the anticipated
for taxpayers to provide guarantees and balanced, taking into account the counter-cyclical requirements requiring
and bailouts. These include liquidity macro-economic considerations. them to significantly shore-up their
support through guarantees and Intervention should not create an capital holding. Intrinsically insurers
protection of savers and borrowers, uneven playing field between different have always had to calculate their capital
asset purchases, forced recapitalization, sectors of the financial services adequacy because of their exposures
bad bank schemes and so on. But the industry. Although banking has been to risk when underwriting. But with the
big questions that I think should still the crux of the crisis, a new framework 2012 EU-wide implementation deadline
be answered are to do with how to or set of rules should look beyond this of Solvency II, Europe’s insurers will
reduce systemic risk in the banking sector; introducing a ‘one-size-fits-all’ have to fundamentally review their
system. This involves a range of issues: response will only lead to future capital requirements and risk
the nature of financial regulation; complications. Each industry will management standards. Whether other
strengthening regulators; reducing require separate revisions. key global insurance markets look to
the impact of failure of financial firms; replicate this framework locally remains
protecting and supporting customers; Sayer In the banking sector, some to be seen, and undoubtedly regulators
improving competition. trends are clear. The quantity of capital will be heavily involved.
required will be high, and counter-
Seymour And this raises the key issue cyclical requirements will be imposed Seymour And that makes it even
of whether we can recreate a fiduciary to make banks hold more capital in more difficult to see how greater
society with a common framework the good times (unlike the Basel II regulation can effectively be extended
and set of rules, or whether we are framework, which is pro-cyclical). to investment management. The G20
inevitably faced with a much more rigid, But it is yet unclear how this is going couldn’t agree on regulating hedge
strict set of rules. Do we really need to work in practice, and in different funds. The European countries are
more regulation? economies. The other problem with pushing for regulation, while the US is
imposing counter-cyclicality is that looking for registration. The European
cyclicality will always be there. Commission’s draft directive on the
Someone has got to turn the lights issue is itself proving highly contentious
out just as everyone else is enjoying among member states. Investment
the party. And that’s really difficult. funds are products, not companies,
Looking back, it’s hard to see how and this makes providing safeguards
macro-prudential regulation would for investors a different matter than in
have been accepted in say 2005 or the banking sector. There is as yet no
1987 when the last booms were clear idea of how to tie investment
getting going. funds into the systemic risk argument,
especially in view of the easy flow
of funds into and out of different
economies and jurisdictions.
1
Although banking has

been the crux of the crisis,
a new framework or set of
rules should look beyond
this sector.
Frank Ellenbürger
Ellenbürger Nevertheless, the Ellenbürger International groups

systemic risks resulting from an overtly may benefit from diversification effects
complicated banking system with an but also be exposed to accumulation
inadequately developed regulatory or contagion risks. Those need to
In my view, the global role
framework have been one of the be mirrored by supervision on a should be about ensuring
causes of the current crisis, and these cross-border basis. consistency between
need to be addressed. The precondition national frameworks and
for creating an anti-cyclical regulatory Seymour Any regulatory reform must
environment is to obtain transparency look to prevent the next crisis, not the
limiting the scope for
and a holistic view of the global financial last one. regulatory arbitrage.
system, without leaving large parts David Sayer
unregulated. Sayer It’s also important that regulation
avoids the moral hazard problem, and
Sayer The debate over whether or avoids giving investors and customers
not a global regulator is necessary, the impression that all risk has been
or possible, will inevitably go on. But removed from financial markets.
however global the framework, it’s a
fact that global institutions come home Seymour I guess one thing that we
For more information please contact:
to die. In the end, failing banks are the have certainly learned is that there is David Sayer
responsibility of their home regulators. always a political dimension to financial Partner
In my view, the global role should be markets. The world has discovered not Global Sector Leader, Retail Banking
about ensuring consistency between only how dangerous financial markets KPMG in the UK
national frameworks and limiting the can be, but how valuable functioning Tel: +44 20 7311 5404
e-Mail: david.sayer@kpmg.co.uk
scope for regulatory arbitrage. financial markets are to economies.
Regulation itself needs to remain local. Wm. David Seymour
In Europe, though, there is a particular Sayer It’s going to take time to work Partner
problem caused by the single market. out solutions in the banking sector. Global Sector Leader,
Since the single market requires free What has happened by way of Investment Management
KPMG in the US
and open movement of capital, the case emergency action was what needed to Tel: +1 212 872 5988
for a single European regulator may be happen, but the rest, a new approach e-Mail: dseymour@kpmg.com
stronger. It’s not going to be politically to regulation, will take time. And that’s
easy to achieve, but the potential a good thing. We need to take the time Frank Ellenbürger
Partner
accession of Iceland to EU membership to get this right.
Global Sector Leader, Insurance
may be a trigger. KPMG in Germany
Tel: +49 89 9282 1867
e-Mail: fellenbuerger@kpmg.com
11
Brendan Nelson and Scott Marcello

explore the possible need to expand the
future role of the auditor in financial services.
Brendan Nelson Scott Marcello
The role of the auditor in financial services:

Is reform desirable?
Clarity
and reality
F
inancial Reporting today value accounting for investments. fair presentation of a company’s
is clearly complex and often Some people strongly support the use financial statements and, in some
not well understood. Why of fair value, others hate it. Probably a cases, the internal controls relevant
is this the case? One key majority believe it is a valid principle, for financial reporting. But there is a
reason is that we often lose but have significant concerns about vast amount of information included
sight of what should be when it should be viewed as the most in companies’ filings that is not
the overriding objectives. Too often, we relevant attribute for measurement in subject to audit work. Users of financial
succumb to treatments and positions financial statements. Vast amounts of statements may be quite surprised to
that we believe to be conceptually pure energy have been invested in this issue learn that many pieces of information
or technically superior but that are but confusion remains. that they view as being very significant
potentially less than relevant and all Another issue is, frankly, who reads to their analysis are not covered by the
too often not understandable. all of this information anyway? Annual audit – liquidity for example.
In the extreme, what good is reports today have grown to hundreds So how can the auditing profession
served if each and every accounting of pages, including information of contribute to improving the global
pronouncement is perfectly consistent, widely varying importance and paradigms for regulation and financial
globally harmonized, and aligned with relevance. How many people read and reporting? Accountants, when you think
well developed conceptual really understand all of this information? about it, can help in leading the debate.
underpinnings, if users find that Is it more than a handful of people? When it comes to accounting rules and
information wholly irrelevant and And how many is that when you financial statement reporting, they can
incomprehensible? Adding to this, the exclude the auditors, certain members help keep the real goals in sight and
objectives or underlying concepts used of management and certain regulators? in proper perspective. Apart from the
to develop accounting standards are not The role and involvement of the regulators, accountants are one of
really agreed; this is particularly true auditor with respect to information also the few groups uniquely qualified to
when you consider issues from a global may often be poorly understood. Most understand complex financial institutions
perspective. This was evident in the people recognize the technical content and provide genuine insight about their
recent debate in the US regarding fair an auditor provides: their opinion on the business, their operations and their
1
On this last point, a critical question

is whether this intellectual capital will
flow freely and to its full extent if it is
Apart from the regulators, accountants are one of the hampered by the potential for significant
few groups uniquely qualified to understand complex legal liabilities. The potential liability
financial institutions and provide genuine insight about issues that prevail, particularly in
their business, their operations and their reported America, may now need to be
finally and fully addressed.
information. They can bring a varied and global Now you could argue we would
perspective, and professionalism and objectivity say this wouldn’t we? But we genuinely
to important and challenging debates. believe that reform is desirable and that
the auditing profession can and should
reported information. They can bring redundant information has to make a significant contribution.
a varied and global perspective, and be eliminated from the equation
professionalism and objectivity to second guessing should be
important and challenging debates. minimized while still respecting
Progressing that thought, together, the need to protect stakeholders For more information please contact:
management, regulators and auditors it needs to be recognized that the Brendan Nelson
have to move toward providing insight role of financial reporting is to Global Chairman, Financial Services
and important perspective rather than provide relevant and reasonably Tel: +44 20 7311 6157
expanses of accurate, but possibly reliable information, not to predict e-Mail: brendan.nelson@kpmg.co.uk
less relevant information: the future with certainty
and it’s important to recognize Scott Marcello
Joint Regional Coordinating Partner,
more relevant and important the judgment and intellectual capital Financial Services, Americas region
information has to be prioritized that can be added by management, Tel: +1 614 249 2366
and unimportant, obvious, or regulators and auditors e-Mail: smarcello@kpmg.com
13
Jump
start Reviving the US financial system:
The Financial Stability Plan
14
Calls to action in combating the ongoing economic

crisis are coming from all parts of the globe. In
particular, governments are faced with far-reaching
policy decisions to try to stem the tide of foreclosures,
job losses, and disappearing savings. With the US
financial system taking much heat for its role in the
Howard Margolin recent economic turmoil, many acknowledge that a
strong US financial system is also one of the keys
to recovery. Howard Margolin explains.
O
n February 17, 2009, Should the results indicate that
President Barack capital is inadequate, such institutions Public-Private Investment Program
Obama signed into will have six months to raise the The Public-Private Investment Program
law the Financial necessary capital buffer via private (PPIP) has been created to address the
Stability Plan (FSP) to funds. Lacking such private funds, they challenge of cleansing balance sheets
help stabilize the US may access capital through CAP in the of ‘legacy’ assets. PPIP seeks to lure
financial system and restore confidence form of convertible preferred stock. new private capital into the market by
in the markets. The FSP is a multi- providing government equity co-
pronged offensive designed to boost investment and attractive private
the nation’s economy by eliminating financing to reduce the risks inherent
the uncertainty surrounding financial in investing in these legacy loans and
institution assets and stimulating lending
Capital shortfalls for the securities. Equity co-investment is
while imposing new measures around largest banks totaled intended to protect US taxpayers from
financial service industry accountability, approximately US$75 billion. overpaying for assets through a market-
oversight, and transparency. Many banks have issued, or based valuation approach – as opposed
The FSP includes the following to prices being set by the public sector
components:
plan to issue, common stock – and taxpayers stand to benefit by
to meet the shortfalls. sharing in any profits derived from
these assets.
Capital Assistance Program The stress test results were Both potential sellers and buyers
As a means of reducing uncertainty released on May 7, 2009, indicating are still seeking clarification on many
over whether certain financial that the largest banks had adequate fronts, such as pricing mechanisms, the
institutions have sufficient capital to capital to meet adverse (not ‘worst accounting impact of such transactions
weather the financial storm, the Capital case’) economic conditions. Capital on capital levels, and other sale terms.
Assistance Program (CAP) requires US shortfalls for the largest banks totaled The impact that recent changes by the
banking organizations with assets of approximately US$75 billion. Many Financial Accounting Standards Board –
US$100 billion or more to undergo a banks have issued, or plan to issue, relating to the recognition and
more thorough regulatory review. This common stock to meet the shortfalls. measurement of credit impairment
includes a comprehensive ‘stress test’ Others plan to convert preferred losses on debt securities – has on the
designed to asses the balance sheet stock to common stock or sell assets. demand for this program remains to be
exposures of these institutions, should A limited number of more capital- seen. Additionally, the impact of the
there be a greater than expected constrained banks may be forced to sell stress test results on PPIP participation
decline in the economic environment. operations or curtail certain activities. has yet to be determined.
15
Implications
Term Asset-Backed Securities Small Business and Community These far-ranging initiatives have
Lending Facility Bank Lending Initiative broad consequences for both financial
This joint initiative of the Federal Reserve In light of the increased capital institutions and government agencies.
and the Treasury Department seeks to pressures on lending institutions and Each FSP component will have unique
encourage consumer and business the lack of demand for Small Business accounting, tax, and financial
lending through the renewed issuance Association (SBA) loans in the considerations depending on a
of certain asset-backed securities (e.g. secondary markets, the FSP addresses company’s particular circumstances.
those supported by auto, credit card the precipitous decline in SBA lending. Management should consider these
and student loans, mortgages, and A joint Treasury Department and SBA implications as strategic decisions are
other assets) at reduced interest rate initiative will seek to increase such surrounding participation in the FSP.
spreads. Already in existence, funding lending by financing the purchase of Similarly, assessments of modeling
for the Term Asset-Backed Securities AAA-rated SBA loans and pursuing techniques, expanded data and
Lending Facility (TALF) has been greatly efforts to increase the Federal guarantee disclosure requirements, systems
expanded under the FSP. up to 90 percent for eligible loans. capabilities, and staffing will be
essential to plans for moving forward.
The sheer magnitude of changes and
Transparency and Accountability level of regulatory scrutiny will present
Agenda sizable implementation challenges, and
Those receiving FSP funds The Treasury Department will companies may find the need for
will be required to engage require all FSP fund recipients to project management teams to try to
in mortgage foreclosure conform to intensified requirements keep all initiatives on track.
mitigation efforts; whether for transparency, accountability, The private sector now has multiple
reporting, and monitoring. fronts through which to cleanse its
other lenders may be Reporting requirements include a balance sheets and reinvigorate lending
required or otherwise one-time plan discussing the recipient’s activities. At the same time, these
encouraged to participate intended use of government funds to initiatives significantly expand the role
in these efforts remains preserve and strengthen lending and power of government, necessitate
capacity. Further, there will be monthly changes to current processes and
to be seen. reporting on new lending activities and controls, and place additional
tracking of CAP funds separate from requirements on both financial institutions
other assets. and government related to reporting,
Mortgage Loan Modification Additional FSP conditions include monitoring, and compliance activities.
Program restrictions on dividends on stock Over the coming months, additional
The FSP includes a proposal to reduce repurchases and acquisitions, limitations details will emerge regarding these
mortgage rates through Federal on executive compensation, and programs, and institutions should remain
Reserve and Treasury Department restrictions on lobbying. vigilant to the strategic opportunities
purchases of up to US$600 billion of that could result, while maintaining
Government-Sponsored Enterprise appropriate discipline and controls to
mortgage-backed securities and debt. satisfy the attendant increased
Additionally, the FSP calls for issuance reporting and compliance activities.
of formal loan modification guidelines
Each FSP component will
and standards applicable to government have unique accounting, tax,
and private programs. Those receiving and financial considerations For more information please contact:
FSP funds will be required to engage in Howard Margolin
depending on a company’s Partner
mortgage foreclosure mitigation efforts;
whether other lenders may be required
particular circumstances. Financial Services
KPMG in the US
or otherwise encouraged to participate Tel: +1 212 954 7863
in these efforts remains to be seen. e-Mail: hmargolin@kpmg.com
1
The US commercial real estate perspective
Economic
Ray Milnes
turmoil
A
s numerous US inertia may cause a continuing these real-estate-related assets,
public and private downward spiral in prices, or, at a enabling institutions to funnel funds
enterprises work to minimum, prolong the lack of activity. into new credit formation.
jump-start the national It is hoped that restoring liquidity
economy – much Stimulating Credit Markets for new transactions – including those
attention has been One potential solution for this bleak involving commercial real estate –
paid to restoring the health of the situation is the inclusion of CMBS will ultimately stimulate the economy.
residential real estate market and financing in the US-government- Additionally, greater clarity about asset
the banking system. Yet, as the sponsored Term Asset-Backed values – gleaned from the resulting
global recession has deepened, Securities Loan Facility (TALF). transactions – should boost investor
the commercial real estate market Designed to stimulate the credit confidence, increasing the amount
also faces distinct hardships. markets and restore stability by of investment in the market for
A core challenge has been the lack providing financing to purchase further transactions.
of available liquidity for transactions. asset-backed securities, TALF was While investors and asset holders
For instance, securitizing commercial expanded by the Treasury Department are still waiting for greater clarity on
loans, especially via Commercial to earmark US$100 billion to leverage these programs to help determine the
Mortgage-Backed Securities (CMBS) US$1 trillion of lending. While TALF’s extent of their participation, the US
has been a significant source of inclusion of CMBS should stimulate Government has taken an activist
liquidity, fueling the prior growth in the market, debate remains over stance to help resolve some of the core
commercial real estate transactions. how vigorously the various players issues that initiated the global economic
However, the freezing of the CMBS will embrace the program. crisis. With financial leaders worldwide
marketplace (issuances decreased from watching and evaluating what happens
US$237 billion in 2007 to US$12 billion Purchasing Legacy Assets in the US economy, it remains to be
in the first half of 2008 with virtually The US Government’s Public-Private seen whether the depth and breadth
nothing since then, according Investment Program (PPIP) provides of this situation can be significantly
to JPMorgan Chase & Co. data) has public-sector equity and debt financing affected by the actions of government.
caused transactions to grind to a halt. to private-sector investors to achieve
This lack of transactions further two critical goals: attracting idle assets
complicates the ability to properly value back into the market by tackling the For more information please contact:
property in the current marketplace. inertia of private investors, while also Ray Milnes
Partner
Real estate values have plummeted, freeing up embedded capital from the Building Construction & Real Estate
and investors are waiting to see how balance sheets of institutions. This KPMG in the US
low they will go. There is a fear among mechanism will hopefully achieve Tel: +1 312 665 5023
industry specialists that this investor the goal of creating a market for e-Mail: rgmilnes@kpmg.com
1
Everybody has been hurt by current market conditions. For example,

hedge funds, traditionally focused on absolute rather than relative returns,
have inevitably been hit hard, although a number of funds are continuing
to do well in attracting new investment. Dave Seymour argues that
investment management is likely to emerge changed but probably
stronger from the crisis. There are exciting opportunities ahead.
But success will depend critically on rebuilding trust and confidence.
1
Confidence
Dave Seymour
must return An investment management perspective
T
he simplest way of Historically, the most successful Many firms are already beginning to
summarizing the current investment management firms have restructure themselves, their products,
state of the investment been those which focus clearly on their teams and capabilities. In an industry
management industry is customers. This is going to be even where many players don’t have deep
to say it is confused. A more important in the future. Whether in-house infrastructures, instead relying
large part of the industry they are private capital investors or retail on networks of third party vendors for
is still sitting on the sidelines. Funds investors, customers are increasingly many operational activities, focusing on
with private capital reserves still have going to demand better, more frequent execution also means ensuring that the
investable resources. But they can’t be and more transparent communication. total risk profile is effectively managed.
sure the market has bottomed out, and The crash, exacerbated by high-profile
are wary of investing into assets which frauds has made investors very The future of regulation
may lose further value. Overall, there nervous. Risk management processes The chorus of calls for tighter regulation
is a lot of uncertainty over where the have been called into serious question. should be met with care. Many of the
market is going and how to respond. Perceptions of risk have changed. The participants at the G20 London meeting
investor community is rattled, and are seeking to build new regulatory
confidence will not return easily. frameworks, to curb what they see as
The firms which come through the excesses of ‘Anglo-Saxon’ capital
the crisis best are likely to be those markets. There is a tendency to
Historically, the most which are currently investing in creating characterize hedge funds, in particular,
successful investment or growing meaningful customer as opportunist players who damage
management firms have relationships. rather than support local economies.
been those which focus Successful firms are taking the Tighter regulation is an understandable
opportunity to improve the organization, and instinctive response.
clearly on their customers. build new skills and capabilities, and A risk with stand alone or knee-jerk
This is going to be even perhaps acquire complementary regulatory changes is that they can
more important in the future. expertise or capacity through corporate open up arbitrage opportunities
restructuring. Those who have been between different markets and
Getting in shape badly burned by the crisis need to stimulate firms to find alternative ways
One sensible and effective strategy is rebuild and re-organize their operations of investing capital in situations which
to concentrate on getting into shape for for the new risk environment. As ever, match their risk appetite. Financial
the upturn, when it comes. Here, one it’s the simple things which can count markets are very creative, and will seek
of the most important challenges is to for most. After a period of irrational to invent new structures, products and
rebuild trust and confidence by strong exuberance, focusing on execution techniques in the pursuit of a return
customer relationship management. will be the key to achieving returns. on investment.
1
A return to boutiques Many economists argue that we

One area where the market already are seeing not simply the bursting of
seems to be in tune with regulators’ another bubble like that of the dot-com
concerns is in the increasing move crash, but a more fundamental
back to smaller boutique operations. realignment to a higher-saving world –
The last 15 years or so have seen a much like the Asian markets. The
great deal of consolidation in the consumer spending boom will
industry, with asset managers being give way to more restrained behavior
acquired by large institutions, financial as individuals and families respond
conglomerates expanding into third to uncertainty and the fear of
party business and so on. Financial unemployment and repossession.
institutions have become complex and History suggests that fundamental
opaque, and the potential for localized changes in attitude persist for many
risk management failure to contaminate years after a major financial crisis.
entire corporate balance sheets has If savings ratios rise to consistently
become painfully apparent. Regulators higher levels, more assets will be
and politicians have begun to call for under management and the demand
smaller, simpler and more transparent for investments of all types will grow.
institutions. Against this, however, are some key
Smaller, nimbler firms will The market already appears to demographic trends, especially the
increasingly dominate the be responding. Among the major great transition in developed western
market in the years to come. global institutions, one has exited economies as the baby-boomers move
And customers will find it from retail asset management; another into retirement and begin drawing down,
is divesting a high-growth business rather than building up, their savings.
easier to relate to and to a private equity firm; continued In addition, the long-term transfers of
understand simpler, more pressure to deleverage and bolster wealth from the developed world to
focused firms as well. balance sheets will inevitably lead to the oil-rich nations and the developing
more de-consolidation over the next world will be of crucial significance.
Furthermore, traditional regulatory few years. Conversely, traditional fund Middle-Eastern and other sovereign
frameworks, from the Securities management firms are looking to make wealth funds are already major players
Exchange Commission (SEC), Financial acquisitions to develop complementary in the investment community.
Services Authority (FSA), the G10’s capabilities or increase capacity. In the 1980s, the US was the world’s
Basel Committee and the like, are Talented individuals are already largest creditor nation. Today that role
focused on corporate entities. But moving in the same direction. Since has been taken by China, overtaking
investment funds are not companies, the major investment houses became Japan to hold some US$1 trillion of
and are not like companies. They are mainstream banks, a steady stream US debt. The US itself has become
products. Any move to greater of start-ups and boutiques has been the world’s biggest debtor nation.
regulation may be more appropriate forming. The difference today is that How these unsustainable imbalances
if it follows the model of consumer the infrastructure of third-party vendors are sorted will prove of vital importance
product safety regulation in order to which has developed over the for 21st century geopolitics.
satisfy the objective of protecting intervening period provides a ready While the immediate outlook remains
investors. The authorities need to move made, mature support environment for uncertain, the medium- and long-term
carefully if they are to avoid frustrating these new boutiques. Smaller, nimbler opportunities are tremendous, and
the market’s natural recovery and firms will increasingly dominate the tremendously exciting. Those investment
readjustment after the crisis. market in the years to come. And funds which keep their nerve,
They should also seek to guard customers will find it easier to relate concentrate on improving transparency
against appearing to guarantee investor to and understand simpler, more and communication with customers,
protection, since this could lead to focused firms as well. and get themselves in shape for the
distorted consumer behavior. In the new financial world order stand to enjoy
particular case of hedge funds, there The future is full of opportunities an exciting and profitable future.
is a risk that if these are more tightly The recession and its aftermath will
regulated it could give investors the provide great opportunities for the
false illusion that this type of investment management industry, For more information please contact:
investment has the same risk profile magnified by demographic and Wm. David Seymour
Partner, Global Sector Leader,
as a traditional fund for example. geo-political trends which have been Investment Management
People could then misunderstand the under way for some years. We expect KPMG in the US
risk of hedge fund investing – mistaking private capital to play a critical role in Tel: +1 212 872 5988
higher regulation for lower risk. deleveraging the financial system. e-Mail: dseymour@kpmg.com
20
A recent KPMG report provides insight into the

new world facing investment managers after the
crisis. Reviewing its key conclusions, James Suglia,
and Tom Brown argue that the key to recovery
lies in mending relationships.
James Suglia Tom Brown
Renewing the promise

Time to mend relationships in investment management
T
he credit crisis is Rebuilding trust Differentiation
fundamentally reshaping The trustworthiness of financial For many years, investment managers
investment management. intermediaries has been hard hit by did not have to try very hard to be
A new report, drawing the crisis. This is on top of a string of successful in the industry. Today, the key
on the findings of a global scandals in recent years, from market to success has become differentiation.
survey of 288 investment timing abuse to Ponzi schemes, which The study highlights the importance
managers, investors and senior had already damaged this trust. of personal relationships and service
executives working in the industry, Investment products can be complex quality as well as delivering on clients’
provides valuable pointers to how and difficult to understand for most expectations. Achieving differentiation
the industry will develop as a result1. members of the general public, while is really about getting ‘back-to-basics’:
If firms are to grasp the potential of failure is easy to see and measure. determining what clients need, getting
these changes, mending relationships Investment managers need to help the value proposition focussed and
with investors, regulators and other intermediaries, who sit with clients, to communicating it clearly.
stakeholders will be key. explain the risks and benefits, the costs
and the small print. This should deliver
Corporate governance and risk the message to their investors in all of For more information please contact:
management these areas. Unfortunately, the research James Suglia
Partner
Many investment managers could indicates that there is still a wide gulf to KPMG in the US
benefit from lifting their game in this bridge between investment managers Tel: +1 617 988 5607
area. Investors believe that independent and intermediaries. e-Mail: jsuglia@kpmg.com
assurance and adherence to a best
practice code of conduct need Regulation Tom Brown
Partner
improvement, despite investment There are widespread concerns about KPMG in the UK
managers believing that they are the impact of potential new regulations, Tel: +44 20 7694 2011
performing well in these areas. This especially in the areas of leverage, e-Mail: tom.brown@kpmg.co.uk
is a disconnect that managers really disclosure to clients and the external
need to address to avoid alienating their assurance. The great majority of
investors. Managers who have strong respondents felt that regulators clamping 1. Renewing the promise: Time to mend relationships in investment
management, KPMG International, June 2009; in partnership
programs need to be more transparent down will seriously increase costs for with Datamonitor.
(i.e. better at communicating them) investment managers. In many cases,

while other managers must first work managers will be unable to pass on
on strengthening their practices. these associated costs to their clients.
Investment managers need to Likely regulation in areas like shorting
About the report
clearly articulate their risk appetite and and leverage will damage many
The full report,
transparently communicate this. When business models. Many hedge funds Renewing the
risk appetite is properly understood and could find life very hard. Greater promise:
clearly defined, it becomes a powerful transparency may also mean that Time to mend
tool for enhancing overall business investors begin to question the fees relationships in
investment
performance. A clear and effective risk they are being asked to pay for hedge
management will
management and governance structure and other alternative funds. In response be available in
gives both the investment manager and some alternative fund managers will June, please visit
investors confidence that investments entrench but many will diversify and www.kpmg.com
can be competently managed in a seek to migrate into more traditional for copies.
controlled way. activities.
2
Act now W
The implications of Basel II revisions
hen the current
version of the
Basel II Accord
on capital
adequacy and
supervisory
arrangements for banks was finalized in
2006, it was clear that further updates
would follow. Even though many banks
would have preferred a ‘regulatory
Public confidence in banks has been badly damaged break’ for a few years, detailed work
by the financial crisis. In its wake regulators across under the aegis of the Basel Committee
for Banking Supervision has been
the world are working intensively to fashion a new proceeding since, at the same time
framework for the financial services industry. The as the financial crisis has taken hold.
Financial Stability Forum is emphasizing the need The crisis has given major new impetus
for better risk and capital management. The Basel to the Basel process. Much of the
debate at the G20 London summit,
Committee is pressing ahead with revisions to the and the principles captured in the final
current Accord. Details are still under discussion. communiqué, are feeding directly into
But as Thilo Kasprowicz and Klaus Ott claim, updating Basel II. Conversely, the Basel
banks do not necessarily have the luxury of being Committee had already formulated
proposals which, in some respects
able to wait until all the details are finalized. anticipated the G20 recommendations.
22
Similarly, many banks should wake Organization and IT

up to the potential implications now. In These proposals will have implications
view of the high political pressure to act for many aspects of a bank’s systems,
on the lessons learned from the crisis, processes and infrastructure. Some
the European Union and others are risk management and disclosure
already anticipating expected changes. processes will need to be redesigned.
They are issuing detailed directives and Management information systems
draft regulations to strengthen banking may have to be reconfigured to support
Thilo Kasprowicz Klaus Ott supervision and improve risk and capital new reporting procedures and facilitate
management of banks even before enhanced communication with
December 2009 or 2010. The luxury supervisory authorities. Banks should
of waiting until proposals are finalized prepare for a much closer interaction
and regulations drafted in detail before with regulators, who will increasingly
planning how to comply is simply not use their intervention to monitor
Current proposals available. Most aspects of the revised business and risk strategies.
In January 2009, the Basel Committee framework are already clear in principle. Underpinning process changes will
published three discussion documents Banks should be urgently working out be requirements to reconfigure and
addressing critical areas where they how to respond. enhance IT architectures and system
believe the current framework needs functionality. Databases supporting cash
to be strengthened: Strategies, methodology flow information, portfolio composition,
A number of the new proposals will disclosure and risk management will
Enhancements to the overall involve banks in reconsidering strategic almost certainly need to be upgraded.
framework: these are aimed at decisions. For example, certain trading Issues of skills, resources, staffing and
strengthening risk capture in Pillar 1 book products will attract higher capital cooperation across departments are
(minimum capital requirements); charges, and some banks may need likely to arise, both as banks undertake
improving corporate governance to review whether or not to continue the necessary change programs, and
and risk management and their in a particular securitization markets, as they comply with the new regime
supervisory oversight (Pillar 2); and whether as originator or investor. on a continuing basis.
improving disclosure of financial Changes to capital definitions will Basel II has been a significant
exposures to enhance market mean banks will have to review the challenge for many banks to date.
discipline and allow third parties to issuance of some capital instruments, Even before the current framework
develop better understanding of a for example hybrids. Proposals on has been fully implemented, new
bank’s overall risk profile (Pillar 3) concentration risk will mean that credit challenges are now apparent. It may
Revisions to the market risk portfolios will need to be scrutinized be tempting to think that the proposed
framework: the current framework critically. Credit risk management revisions to the framework are simply
fails to capture some key aspects teams should re-think their approach slight enhancements or variations.
of market risk and will be extended; to active portfolio management. But the changes will impact even
in addition, stressed value-at-risk Basel II will also involve changes on banks using the less demanding
requirements will be imposed to methodologies and valuations. Basel II standardized approaches.
Incremental risk in the trading book: Stress testing will almost certainly be There is a lot to do and, as we have
since the crisis began, a number of imposed more widely, and potentially seen, the timetable is tight. Given the
banks have suffered large losses even applied to integrated underlying present political momentum for change,
from trading exposures, and the portfolios of securitizations. Liquidity it is more likely that deadlines will be
committee now proposes a regulations will involve the thorough brought forward rather than be delayed.
supplementary incremental risk identification of cash-flow positions for Analyzing the strategic impact of
capital charge, based on estimates a wide range of products and the need the new regulations and planning
of potential losses for adequate processes for liquidity risk for implementation should not be
management. Furthermore, the delayed for further clarification.
Consultation on these proposals has calculation of risk-weighted assets for
now ended, and there are clear target some products will change. Changes
dates for complete implementation of to disclosure, in particular for For more information please contact:
the final conclusions: December 2009 securitizations, trading book activities Thilo Kasprowicz
Partner
for the overall framework enhancements, and the use of special purpose vehicles, KPMG in Germany
December 2010 for the market risk and are likely to accelerate the move to Tel: +49 69 9587 3198
incremental trading risk proposals. bring internal management reporting, e-Mail: tkasprowicz@kpmg.com
Since the revised Accord can only take external statutory and financial reporting
legal effect when it is implemented into according to IFRS into closer alignment: Klaus Ott
Partner
individual national jurisdictions, it is clear banks should be looking at consistent KPMG in Germany
that these implementation timetables disclosure strategies, capital market Tel: +49 69 9587 2684
are extremely challenging. communications and reporting policies. e-Mail: kott@kpmg.com
23
Canadian financial services
Quietly
prospering
24
Ann Davis
Largely away from

the gaze of international
commentators, financial
services in Canada remain
in robust health, and in
certain cases are positively
booming. A number of
factors are responsible,
including a generally
conservative culture of
excessive risk-avoidance,
strong regulation, and a
welcoming business
environment. Ann Davis
explains.
A
cross the developed
world, the financial
crisis has seen banks
collapsing, being bailed
out by governments or
being taken into public
ownership. More than a trillion US
dollars of value has been wiped out
from bank balance sheets. However,
many Canadian banks have proved
much more resilient than those of any
other major economy. Last November,
Time magazine called Canada ‘the new
gold standard in banking’1. The 2009
Global Competitiveness Report from
the World Economic Forum ranked
Canada No 1 for soundness of banks2.
By any measure, Canada’s banking
sector is one of the strongest – if not
the strongest – in the world. How so?
25
Ten years ago, the Financial Times top-50 ranking of

the world’s biggest banks was dominated by US and UK
banks. No Canadian banks made the list. Today, all of
the ‘Big 5’ Canadian banks are now in the top 505.
Canada’s banking Five major banks dominate more than C$5 billion equity – must
sector embraces: Canada’s banking sector (see box), remain ‘widely held’. Bank mergers
which in total embraces 21 domestic have been proposed as a route to
banks, 55 foreign-owned subsidiaries greater international competitiveness,
21
domestic banks.
and branches and 47 Trust companies.
The financial services sector as a whole
has shown remarkably steady growth
of about 3.5 percent per year over the
last ten years, to reach a total turnover
of C$80 billion3. Over the same period,
but have been vetoed at the political
level. Limits on foreign ownership have
been imposed and mergers between
banks and insurance companies are not
allowed. A further significant factor is
that during the 1980s, the big banks
the ‘Big 5’ has collectively doubled their bought most of the large independent
market capitalization4. Ten years ago, investment dealers, thereby integrating
the Financial Times top-50 ranking of them into the more prudential banking
55
foreign-owned
the world’s biggest banks was
dominated by US and UK banks. No
Canadian banks made the list. Today,
all of the ‘Big 5’ are now in the top 505.
Royal Bank of Canada and Toronto-
structure.
These strengths have been
consistently recognized by the
International Monetary Fund. In its
regular Financial System Stability
Dominion are among only seven Assessment in 2008, the IMF
subsidiaries and global financial institutions to hold a concluded6:
branches. triple-A credit rating from Moody’s.
Regulation is part of the reason for The Canadian financial sector is
the solid success of Canadian banking. among the world’s most highly
Cultural attitudes are also crucial. In developed
47
Trust companies.
both of these respects, Canada has
maintained a distinctive tradition, the
roots of which extend deep into the
early half of the last century. That
regulatory framework, coupled with
a conservative attitude to risk-taking,
The five large banking groups that
form the core of the system are
conservatively managed and highly
profitable
Stress tests suggest that the large
Canadian banks are able to withstand
has helped to ensure a consistently a broad range of shocks
prudent approach and a greater
degree of openness and transparency Of course Canada’s banks have
than in many other systems. not been unaffected by the global crisis.
Another key feature is that mergers Nevertheless, none have collapsed,
and acquisitions in the banking sector none have needed government bailout
are constrained among the ‘Big 5’, and there has been no need for
which has limited the size of individual injections of government capital. There
banks and avoided concentration of risk. may have been an air of confidence in
Government policy encourages the the comments by the governor of
establishment of new banks to promote the Bank of Canada, Mark Carney,
competition. Large banks – those with when he claimed in April 2009 that
26
Canada’s ‘Big 5’ Banks 9

Market Capitalization (Q3 2008)
Royal Bank of
Canada:
C$45 billion
Toronto-Dominion:
C$37 billion
Bank of Nova Scotia:
C$30 billion
10,000 chartered accountants8. Toronto offers solutions to many of the
Bank of Montreal: The city boasts the second largest issues facing administrators, through
CFA (chartered financial analyst) society the key competitive attributes of quality
C$17 billion in the world after New York. Toronto is
also more affordable than many other
and cost. Toronto has an excellent
telecommunications infrastructure,
major financial centers. All these factors the most fiber optic cable of any city
have driven one of Canada’s most in North America, the largest public
Canadian Imperial notable but little-appreciated, success transport system in North America after
Bank of Commerce: stories: the growth of hedge fund New York, and the fourth busiest airport
administration in Toronto. in North America. It is only the 54th
Canada’s domestic hedge fund most expensive city globally, and
C$18 billion market is comparatively small – perhaps
C$20-30 billion of assets under
Canada as a whole was ranked the
most economical of the G7 nations by
management. But the great untold story Competitive Alternatives, 2008 edition.
in the Canadian hedge fund sector is Strong stable banks, a steadily-
‘Our system is better’7. But who is the movement of global hedge fund growing financial services sector and
to deny that it certainly seems to be? administrators to Toronto and other a growing presence in niches such as
Complacency would obviously be parts of Canada. There is likely well fund administration – it is time for the
a mistake. Although the Canadian over a quarter of a trillion dollars of rest of the developed world to take a
financial system has weathered the global hedge fund assets being closer look at the Canadian system.
storm better than other global financial administered in Canada. Toronto has
institutions, the future remains unclear. always had a large domestic fund
Increased regulation will surely impact administration industry. But since the For more information please contact:
on all Canadian financial institutions, mid-1990s, hedge fund administrators Ann Davis
Partner
and Canadian banks will still need to such as Citco, Butterfield Fulcrum KPMG in Canada
work hard at remaining globally Group and SS&C Fund Services have Tel: +1 416 777 8587
competitive. But it has shown itself been setting up offices in Toronto, e-Mail: vadavis@kpmg.ca
to be an inherently stable system. Halifax and other parts of Canada, and
Beyond this, Canada has shown that existing traditional fund administrators
1. ‘Why Canada’s Banks Don’t Need Help’, Time, November 2008.
it’s a great place to do business for the such as State Street, Citibank and RBC 2. The Global Competitiveness Report 2008-2009, World Economic
Forum.
wider financial services community. Dexia have been expanding their 3. Banking and Financial Services: Prudence equals strength,
Halcyon Business Publications, March 2009.
Toronto, in particular, has proved itself services to hedge fund clients. 4. ‘Canadian Banks: A better system’, Financial Post, April 2009
5. Financial Times, March 23, 2009. www.ft.com.
to be a natural magnet for financial Seven of the top 10 global hedge 6. Canada: Financial System Stability Assessment – Update, IMF,
January 2008.
services. Over 200,000 people are fund administrators now have offices 7. Remarks to the University of Alberta School of Business Edmonton,
Alberta, March 30, 2009.
employed in the financial services in Toronto likely employing several 8. Hedge Fund Administration in Toronto, KPMG in Canada,
December 2008.
sector in Toronto, including around thousand hedge fund administrators. 9. Office of the Superintendent of Financial Institutions, 2009.
27
Managing risk and capital performance are significant

challenges following the financial crisis, but insurance
executives are still cautiously optimistic about their
growth prospects over the next 12 months,
says Frank Ellenbürger.
A glimmer
of hope
D
espite some recent
well-publicized casualties,
the insurance industry is
weathering the current
economic conditions
better than banking.
Mainstream business operations are
holding up well. Problems have only
arisen from exposures to risky financial
instruments like credit default swaps
(CDS) and collateralized debt obligations
(CDO) or losses in investment
portfolios. Profitability is more likely to
have been impacted than underlying
solvency. Currently troubled capital
markets, falling ratings and plunging
share prices have prompted many to
rethink their risk and capital
management strategies. With this in
mind, KPMG International recently
commissioned the Economist
Intelligence Unit to survey insurance
executives around the world to gain
insight into their current perception of
business prospects and risk priorities.
28
Greater focus doesn’t equal

more spending on risk
Interestingly, a significant majority
KPMG’s global risk and
of respondents regard themselves capital management
as already good at managing risk insurance survey 2009
activities. When asked to rate their
effectiveness in 11 different categories In April 2009, KPMG initiated a two-
of risk management, at least six in ten part research program to explore
Frank Ellenbürger respondents believed themselves to how the financial crisis is changing
insurance industry attitudes to risk
be effective in each area. And despite and capital management. We asked
devoting more time to risk from the senior executives how they are
board level downwards, not everyone responding to prevent further losses
was intending to spend more money and position their businesses for
on the risk function. Around half of the growth in future. The initial report,
capturing the thinking of 315 industry
respondents expected to invest more. executives from 49 countries, was
Insurers cautiously optimistic But this leaves a substantial proportion launched in early June 2009.
about growth (47 percent) expecting to achieve
The research found many were stronger performance with the same Key findings in April 2009
– Over half see positive prospects
anticipating that growth would improve resources in both risk and capital
for growth in the next 12 months
over the next 12 months. Over half of management as before, and no plans – Managing risk is a much higher
the respondents thought prospects for to increase training resources, recruiting priority and two thirds of
both organic growth and growth by or other investments in risk functions. companies have appointed board
acquisition/take-over were positive. level risk committees
– At least 6 in 10 think they are
North Americans appeared most Enough capital in the industry?
already effective at managing risk
confident, which may reflect a Meanwhile, there is an apparent across the board
perception that this region will rebound contradiction around responses heard on – Around half don’t intend to
most quickly from the current economic capital. Most respondents (85 percent) increase investment in managing
slump. The less optimistic news is that believe they are well-capitalized relative risk
– Top three activities where risk
the same executives said a continuing to their risks, and most believed that
management plays an active role
lack of confidence in the capital markets the industry as a whole has sufficient are new product development,
could stifle their recovery. Less than capital reserves. But more than half strategy development and pricing
four in ten respondents said that they nonetheless believe they will need to
expected an improvement in their share strengthen their capital over the next Part two of the
survey will track
price over the next year. Well-designed 12 months, which is more in line with
further changes
and actionable procedures for mitigating messages we are hearing from the in attitude and
the risks that created so much recent marketplace. The survey continues responses to risk
instability will likely be key to restoring over the summer and will track any management in
faith in the markets. shifts in attitude. the forthcoming
months. Results
are scheduled to
Risk management is a Link to better valuation be published in
significantly higher priority The impact of the current financial crisis an in-depth briefing in November
It is clear that concerns over the on the insurance industry is clear in 2009. For more information or
impact of the weakened economy, and terms of lower valuation in the market. copies of the first report, please
visit www.kpmg.com
particularly the capital markets, have But insurers clearly feel a sense of
prompted insurers to place significantly optimism that they have seen the worst
more emphasis on risk management now, and have the attributes to prepare
and capital performance. At board level, for a more favorable environment. If
the survey showed that the proportion they can demonstrate excellence in
of time spent on both risk management managing risk, continue to be profitable,
and capital management has increased and communicate this achievement
substantially. Over 80 percent of board effectively, we may well see market
members are now spending at least confidence and valuations boosted in
20 percent of their time on risk the year to come.
management issues. The survey
also found that almost two-thirds of
respondents have appointed board-level For more information please contact:
risk committees in addition to their Frank Ellenbürger
Partner, Global Sector Leader, Insurance
longer-established audit committees. KPMG in Germany
In terms of priorities, market risk and Tel: +49 89 9282 1867
credit risk are top of the agenda. e-Mail: fellenbuerger@kpmg.com
29
Show me
Oliver Kirby-Johnson
Steve Blizzard
the money
Insights into global payments
A
The financial crisis has recent KPMG
had less impact on the International survey
of industry regulators,
payments business than major banks and
The focus of investment
on other parts of banking. financial technology has moved sharply away
However, a recent KPMG companies explores from innovation, with small
International survey does how changing economic conditions have projects that will yield short-
affected the outlook for the global
reveal some significant payments industry and the factors likely
term benefits gaining a high
changes in emphasis. to drive change over the next five years1. proportion of the attention
Investment projects Payment processing is a fundamental and investment funds.
face greater risks and function for banks; as the cost of capital
increases and returns elsewhere are Investment in payments
tighter criteria for returns. constrained, banks will be looking to Banks are continuing to invest
There is a widespread fear squeeze more out of payments and significant sums in payments, but
of substantial increases in enhance returns from basic transaction the vast majority of discretionary
regulation, which is already processing. Many payment strategies investment is aimed at increasing
are possible, but a clear customer focus efficiency rather than introducing new
affecting banks’ behavior and benefit are needed to succeed products or services. The emphasis is
and investment plans. against the competition. on achieving efficiency through scale
Mobile payments continue Banks need to attract deposits in and by eliminating paper. Even small
to offer great opportunities order to bolster their balance-sheets changes (such as eliminating non-
and liquidity ratios. To a customer, the standard account numbers) have a
– but only in certain regions. bank relationship is not about balances, high priority if they have a positive
Oliver Kirby-Johnson and it is about how well and easy the bank effect on efficiency. Shared services
Steve Blizzard argue that makes or receives a timely, effective projects, previously abandoned, are
distinctive and definitive payment. Only a rich palette of payment being reconsidered, and many banks
types attracts high-quality deposits, are reviewing carefully the markets
business models will be while mass-market deposits must be they wish to serve, directly or indirectly.
key to future success. served by the most efficient payment The focus of investment has
services possible in order to keep costs moved sharply away from innovation,
down. Achieving this is going to require with small projects that will yield
innovative approaches to business short-term benefits gaining a high
models at the same time as regulatory proportion of the attention and
constraints are tightening. investment funds.
30
3
A rapidly-growing area of focus or simply deposit a pay packet for safety

is intra-day and counterparty risk. offer huge benefits. Mobile payments
The liquidity crisis which struck in may be the key to formalizing the
About the report
2008 brought home to many banks market and offering banking services to
To find out more, or get copies
the fact that they did not understand large swathes of the population. Many of the report The beating heart of
in sufficient detail exactly what their mobile telephone companies (telcos) are banking: Insights into global payments,
position was at any particular point. keen to offer such services. Business please visit www.kpmg.com
When an institution fails, payments models that allow cooperation between
can seize up, and gains and losses can banks and telcos, with the telco
be frozen unpredictably. Increasingly, managing the customer relationship but
banks are realizing the need to invest in the bank managing the funds and risk,
measuring intra-day risk across different are gradually emerging.
channels and instruments. In a similar In several Asian countries (including
shift in emphasis, regulators are also China, Korea and Singapore) Government
realizing the need to control these initiatives exist to promote e-payment Distinctive business models
risks, and will be imposing relevant and these are expected to lead to a With this variety of emphases in
requirements on banks. rapid decline of other instruments. different areas of the payments industry,
Nevertheless, some banks are holding In cards, there is a move from ATM the need for clear strategic focus has
back on investment because they fear cards to scheme-based debit cards, never been greater. It is no longer
that they could be swamped by and considerable interest in contactless enough simply to seek to manage
regulatory changes in the coming year. and mobile payments; customers in greater volumes with greater efficiency.
this region have shown a remarkable Institutions need a more discriminating
Regulation and competition willingness to embrace new approach, and the development of a
More regulation will inevitably lead instruments and payment structures. distinctive business model in which
to increased costs, but may bring few While conventional technology they can pursue competitive advantage.
real benefits for customers. developments addressing contactless This may be in a particular client sector,
Many more services will be brought cards and Near-Field-Communications or a specific currency or a leading
into the scope of regulated activities. (NFC) devices are no longer seen as technology. For example, national
Central banks will demand much more urgent in Europe or North America, government payments offer bulk and
reporting of liquidity. Banks and their there is likely to be continued growth scale in individual currencies; as we
customers will have to provide more in this area in South Asia. have seen, mobile payments offer
information on the other side of similar large-scale entry opportunities
transactions, especially for securities Payments in a new context in emerging markets.
and financial instruments. This will help Internally, some of the best opportunities Those payment service providers
to manage risk and identify illegal and come from bringing together common that most successfully grasp the
shadow economy transactions, and payment functions into a single, high- opportunities available will be those
should also help in the management efficiency and high-availability engine which pursue the most thoroughly-
of fraud and money-laundering. that serves multiple business areas. articulated and distinctive business
However this kind of reporting Convergence and standardization of models – whichever sectors of the
conflicts with the desire for privacy, payment classes still offers good market they focus on.
and growing levels of conflict are likely returns in the medium to long term,
between bank regulators on the one particularly with the introduction of
hand and competition authorities and ISO 20022 and xml messaging. In many For more information please contact:
privacy commissioners on the other. banks, there is still room to eliminate Oliver Kirby-Johnson
Partner
non-standard processes and paper, and Financial Services
Mobile and contactless payments to reduce repair costs for cross-border KPMG in the UK
In emerging markets, especially, mobile transactions, which will yield good Tel: +44 20 7311 4005
payments are continuing to receive returns in the shorter term. e-Mail: oliver.kirby-johnson@kpmg.co.uk
significant attention and investment Payments remain one of the most
Steve Blizzard
support. In countries with poor fixed profitable activities within the banking Director
telecommunications infrastructure and sector. Cash management and corporate Financial Services
low rates of access to banking services, treasury functions, once seen as boring KPMG in the UK
mobile payments offer far more benefits and unworthy of senior management Tel: +44 113 231 3737
e-Mail: steve.blizzard@kpmg.co.uk
to most people and small businesses attention, are now among the most
than conventional payment types. reliable revenue opportunities for banks.
Many people have access to a However, seizing the opportunities this
mobile phone. Mechanisms that allow offers requires a major shift in thinking
1. The beating heart of banking: Insights into global payments,
them to pay bills, send money to family for many senior executives. KPMG International, June 2009.
32
Addressing
the trust
gap Renewing confidence
in the financial services
industry
There are things that we take for granted. We trust and rely
on what are ‘givens.’ We turn on a tap and, in most places,
water comes out. We put money in a bank without question,
and when we want it, it’s there. The conventional assumption
is that the organization, and by association the people running
it, can be relied upon. However, in the past 18 months this
Freddie Hospedales convention has been broken. Freddie Hospedales argues
that rebuilding trust requires rebuilding brand identity in
the widest sense.
34
35
The Trust Gap The new stakeholder landscape

The reputation and credibility of
many financial institutions, and the
people who work in them, have been
In many countries, a new stakeholder
landscape is evolving. It is important
to changing perceptions that financial
19%
significantly compromised. It is not institutions understand this change, and of Americans trust the financial
just that the system we have assumed do not assume that circumstances will system, and…
was safe has failed; trust in whatever ultimately go back to how they were.
comes next is lacking. Traditionally, core stakeholders included
In the US, a recent survey1 shows investors, regulators, staff, customers
that only 19 percent of Americans and the media. This is still the case, but
now trust the financial system, and
just 13 percent trust the stock market.
In the UK, research by a large
today, stakeholder groups should be re-
evaluated. Two examples illustrate this.
A significant development in the past
13%
advertising agency has shown that nine months has been the increase in trust the stock market.
25 percent of the UK population has government involvement in financial
no trust in banks2. markets. While governments have
By contrast, trust in banks in several always been significant stakeholders,
emerging economies has actually their role as major shareholders or
increased. While trust in banking has
dropped by 33 percentage points in the
United States, in China trust has risen
funders of financial institutions now
gives them greater influence. The
reaction to bonus payments by western
25%
from 72 percent to 84 percent, and in governments is one obvious example. of the UK population has no trust
Brazil from 52 percent to 59 percent3. Another stakeholder group to be in banks.
re-assessed is the media, particularly
Part of the cure is recognizing in view of their role at the height of the
the problem crisis, which some within the industry
While the focus for many organizations argue exacerbated market turmoil. While trust in banking in the
over recent months has rightly been on Some financial journalists, who have United States dropped by
liquidity, capital and risk management spent years obtaining a living from the
issues, the media have almost daily industry, were noteworthy in talking
picked on the leadership of one financial
institution or another, intimating bad
management and greed as factors
down the market rather than talking it
up when it needed it. Clearly their role
in the recovery is going to be important.
-33%
leading to the crisis. This impacts on
trust in a number of ways. First, general Bridging the trust gap
public confidence is damaged. But the Some firms have put in place classic …trust in banks in China rose by
same is true of capital markets, whose reputational risk management programs
confidence is fragile at best and which to monitor, measure and report on their
only need the slightest hint of bad news
to send markets falling.
This perhaps goes some way to
reputation. This is a great way to
prepare for and react to developments,
whether operational or in the external
+12%
explaining the increasing search for environment. However, in the current
blame, particularly since September climate the wider debate should focus
2008: people not knowing what they on perceptions and positioning of the …and in Brazil by
are buying or selling; bonuses paid on brand. Aspects of this have been
short term risk and in failed companies; overlooked or certainly under-valued
management not aware of systemic
risk; regulators focused on capital not
necessarily liquidity; politicians seeking
by some in the past 18 months.
In relation to brand perception, I am
referring not just to the retail context of
+7%
national political gain ignoring the fact financial services as is easy to assume,
this is a global issue. The list of those but to the wider market including rating
attracting blame is long. For many, it is agencies, fund managers, wholesale
time to review or re-think all, or parts of, banks and re-insurers. The modern
their business models and strategies. brand is increasingly concerned with
36
In banking especially, the

need to be seen as a ‘safe
pair of hands’ will be one
of the first priorities.
assembling and maintaining a mix Turning to the way a company regaining trust. For many this will
of values both tangible and intangible. does things, a number of changes require reviewing the business strategy,
In simple terms for this article, we can should happen. The increased role the brand in its widest sense and how
look at a brand as comprising three of governments in the ownership that is communicated in the new
core elements: what it does; the way of financial institutions will influence stakeholder landscape. Failure to do this
it does that (its culture/personality); their future behavior. This also raises may well mean that the long road to
and the symbols associated with the influence of the general public’s recovery will be longer than it need be.
that organization, its logos, colors, perception of how financial services
imagery etc. companies are seen to behave. Alistair
Looking at what a company does, Darling, UK Chancellor of the Exchequer, For more information please contact:
much has been written since the end speaking before the Parliamentary Freddie Hospedales
Head of Marketing & Communications,
of 2008 about how many banks need expenses scandal in May, said ‘Banks Financial Services
to review their business models, need to demonstrate to the public that KPMG in the UK
release non-core assets and revert to they’ve learned lessons from recent Tel: +44 20 7311 5264
being traditional banks (narrow banking). events,’ and continued, ‘but in order e-Mail: freddie.hospedales@kpmg.co.uk
In addition, the competitive landscape is to rebuild public trust, we also need
changing. As trust in banks - places to to reform banks’ culture’4.
keep our money safe, for companies to Looking ahead, managing
borrow funds from to develop and grow reputational risks will be a basic
– has eroded, alternatives with names requirement. But more widely, being
we trust more become more attractive. clear ‘what you will be known for’
For example, in the UK some well to various core stakeholders will be
known high street non-banking brands important in the new business
are looking at providing a wider range of environment after the crisis. In banking 1. The Chicago Booth/Kellogg School Financial Trust Index survey
of more than 1,000 US households, conducted over two weeks
offerings in the personal finance space. especially, the need to be seen as a in March 2009. The data was analyzed by two academics,
Paola Sapienza of the Kellogg School of Management at
In investment management a number ‘safe pair of hands’ will be one of the Northwestern University and Luigi Zingales University of Chicago
Booth School of Business. www.financialtrust index.org
of boutique houses are setting up, for first priorities. However, regardless 2. The McCann Erickson’s latest Moodier Britain survey, 2008.
Jeremy Lee, Marketing, November 25, 2008.
some, to move away from the damaged of which sector of financial services, 3. 10th edition of the annual Edelman Trust Barometer,
January 27, 2009. www.edelman.co.uk
reputations of larger institutions. restoring confidence requires 4. BBC News, www.bbc.co.uk, March 27, 2009.
37
Separating value
Getting the most from your disposals
As many financial services organizations may be taking their first

steps on the road to recovery, most analysts agree that there is likely
to be a wave of complex disposals and separations across the industry.
Smart sell-side separation planning could enhance your realized deal
value by as much as 30 percent. Scott Marcello, Moh Sheikh, and
Chris McGolpin discuss some of the common separation challenges
and present their blueprint for a positive separation.
38
Identifying the
hotspots
Separation could be more complex
and costly if your organization has:
– Shared service centers

Scott Marcello Moh Sheikh Chris McGolpin – Cross selling
– Shared sales forces
– Shared facilities / buildings
– Joint customers or intermediaries
– Group procurement contracts
– Single or shared brands
– Group policies and procedures
– Global systems / applications and
data sources
– Outsourced contracts / service
model questions
Ignore separation planning Good separation planning boosts

at your peril buyer confidence and protects value
Following the turmoil in the financial In a market subject to aggressive
services sector, a significant increase in ‘price chipping’ by purchasers, good
Demonstrating a detailed
the level of disposals and restructurings planning focused on value and risk understanding of what it
is expected. But in the rush to get drivers is one of the best tools to will take to transition from
the deal done, it can be easy to make the most of value from disposals. an integrated to a separated
underestimate the complexity and Demonstrating a detailed understanding
financial impact of separating businesses of what it will take to transition from
state will enhance the
– and that can have a serious negative an integrated to a separated state will vendor’s confidence in the
impact on the deal value, success of enhance the vendor’s confidence in the carve-out financials and
the separation efforts and ongoing carve-out financials and your ability to your ability to deliver the
success of the retained business. deliver the separation, giving potential
When it comes to carving out part purchasers less ground to discount their
separation, giving potential
of the organization, many businesses offer. In our firms’ recent experience, purchasers less ground to
lack a coherent grasp of how their prompt and well structured separation discount their offer.
people, processes, assets, contracts planning can help enhance valuations
and technology are integrated around by up to 30 percent. It also enables A detailed implementation plan should
the world and across functions. effective execution, mitigation of key also be in place. Key components of
Knowledge of these issues tends to issues and risks and maximizes the a separation blueprint should include:
be fragmented, with no infrastructure value of the remaining business.
to develop an informed view. This can
make separation very challenging and Building the separation blueprint 1.
more importantly, failing to address Working with a number of financial Confirm the separation principles –
this can increase complexity and services organizations KPMG firms’ define and agree at executive level the
destroy value. professionals have found that one core principles that will shape the scope
What can also be neglected is of the keys to effective separation and scale of separation. For example, do
the emotional and political impact is the creation of a detailed blueprint. you migrate the standalone business to
of separation on people. Managers It enables bidders to value the business a new technology infrastructure at deal
and employees tend to separate and, putting it together helps the close, or will you ‘clone and go’ or will
behaviorally before the deal is done. vendor and the separating business you carve-out the technology platform
It’s vital to deploy a process that aligns understand the nature of their future and transfer across? What basis will you
the interests of both the selling and relationships. The blueprint should use to decide which people go with the
separating entity, and fosters a clearly articulate what the business separating business? Issues like this
collaborative rather than an adversarial operating model looks like today, will affect the scale of work involved
approach to separation. Too often when the deal is closed and at in separating and enable timely and
we see clients failing to do this. full separation. consistent decision making.
39
Selling a business or division may make strategic sense,

but unless the separation challenges and the cost
implications are understood, it can massively impact
the sale value of the business.
2. 4. Learning from
Prepare a ‘separation hotspot’ matrix Create a separation cost adjustment
to identify key operational touch points model to understand the cost other industries
highlighting those that are materially implications of separation: what are the
The Jaguar Land Rover sale
significant and need to be addressed one-off costs of separation? What are
for deal close. Once interconnected the ongoing cost impacts of separation? Ford manufactures and distributes
parts of the business – like technology This will allow sellers to strip out group cars in over 200 countries around
platforms, people and shared service allocated cost and direct costs and the world. In separating it’s Jaguar
and Land Rover businesses for sale,
centers – are identified, it is easier to rebuild a bottom-up cost model for
KPMG’s assistance helped to
break down potential issues according the separating entity. highlight over 350 separation issues
to their impact on people, processes, that had to be addressed with the
technology, contracts and assets and Plan well = increase the value management teams. KPMG worked
to quantify the cost impacts and Selling a business or division may with Ford to help them develop a
separation plan and a robust
separation challenges. make strategic sense, but unless the
standalone business plan so that the
separation challenges and the cost separation issues were addressed
Often there are between 200 and implications are understood, it can and managed in such a way as
300 separation hotspots identified massively impact the sale value of to appreciably increase the value
between parent and separating the business. It can also leave the of the sale.
entity, where management originally operational team responsible for the Source: Getting under the bonnet: The Jaguar Land Rover
sale, KPMG in the UK, March 2008.
thought there were few. In our separation with a major headache.
firms experience the top 20 One of the key lessons is to invest time
‘hotspot’ issues typically account and effort upfront to identify all the
for 80 percent of the separation separation touch points and prioritize In the real world
costs, so it is imperative that these those where costs and risks will be
Maximizing valuation is a key area
are identified and actioned early. material as this can potentially boost of focus for Executives. Recent
Many organizations underestimate the sale price and mitigate the risk examples of businesses KPMG firms
the challenge and workload involved of damage to the parent business. have worked with highlight how you
in separation. can potentially improve purchaser’s
valuations by challenging key
management assumptions.
3. Information technology function

Define detailed functional Service A carved-out business which was
Delivery Models (SDM) – define how For more information please contact: accountable for 25 percent of
Scott Marcello revenues, after our analysis, needed
each function will operate at key stages
Joint Regional Coordinating Partner, only half the number proportionally
over the transaction cycle (as-is, deal of IT staff expected, thus making
Financial Services, Americas region
close and final separation) in terms of KPMG in the US significant savings.
people, processes, assets, contracts Tel: +1 614 249 2366
and technology. Separated entities e-Mail: smarcello@kpmg.com Value: +US$52 million to the
overall valuation.
may well not be fully standalone at
Moh Sheikh
deal close, so vendors need to prepare Finance function
Associate Partner
a broad range of Transitional Services KPMG in the UK An additional cost of US$8 million
Agreements (TSAs) early to decide Tel: 44 20 7311 4492 per annum was anticipated to
what is/is not offered and at what price e-Mail: mohammed.sheikh@kpmg.co.uk replicate the function. However, after
our analysis the lack of complexity of
to try to ensure operational integrity. the separating business meant that
Chris McGolpin
A detailed set of functional SDMs will cost was only US$2million.
Associate Director
assist the identification and articulation KPMG in the UK
of the required TSAs to support the Tel: +44 20 7311 1467 Value: +US$20million deal value.
standalone business. e-Mail: chris.mcgolpin@kpmg.co.uk
40
© 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
How do you cut costs

without killing the business?
It’s not just about too KPMG firms can help you
little or too much. It’s about do this. With accurate and
how and where to cut. Cut insightful information on
too close to the customer what’s driving which costs,
and you could lose them. we can help you cut waste
Cut too much talent and without laying waste to the
you may not have a organization. We can help
business to grow in the streamline and simplify the
future. Cut knowledgeably, business, and help build a
however, and sustained cost culture, from boardroom
business performance can to washroom. In fact, help
be achieved. you prune so your business
can blossom. To start, cut
along to www.kpmg.com/
succeeding.
Adrian Harkin
Martin Blake
Mark Smith
Changing
T
ypically, financial services
companies run anywhere
from 5 – 50 concurrent
for the better

major change programs
in the course of a year:
to embed new regulation,
refresh IT platforms, integrate
acquisitions, build new capability, enter
new markets or restructure businesses.
Following the credit crunch and global
financial meltdown, change capability
Financial services organizations are spending is needed more than ever. Change
billions of pounds every year on change initiatives, functions are now under even heavier
pressure to correctly address the
but many are unsatisfied with their results. challenges of managing change.
Having recently benchmarked some 30 major Challenges at their doorstep include
financial services organizations across Europe adapting to new bank ownership
and Asia Pacific, Adrian Harkin, Martin Blake structures, compliance with an
anticipated deluge of tighter regulation
and Mark Smith discuss how focusing on and action on cost and capital
leadership and accountability for change effectiveness to inject liquidity
could be the key to getting real value. back into the balance sheet.
42
Key areas of focus

Ninety percent of the organization may know something
is wrong, but they don’t tell the people in charge – Leadership Driving change strategy
delivery, organizational behavior
or even worse, they speak up but are not heard. and change culture
Transparency and Accountability

Portfolio management, change
governance, cost management
and delivery of benefits
Failure is not an option. But many Leadership is identified as the first
financial services organizations feel key to the successful implementation Capability People/skills/capability,
they are not getting the best value from of change. Time and again, we see tools/method/process
their investment in change. Some point organizations struggling to optimize
Source: KPMG International, May 2009.
to initiatives which fail to produce massive spending programs and failing,
expected levels of profit; others because there is no clear overall leader
experience high levels of program to drive and control the impact of
failure. Only about a quarter to a third change on the whole organization, to
of change programs are regarded as set priorities and allocate spending in a
strong successes. strategically balanced way. Responsibility
is spread across divisions, accountability
Change failures – the ‘elephant dissipates and conflicting priorities are
in the room’? never resolved. The result: poorly
Talking candidly to the teams involved managed change that eats away
in executing major change programs, productivity and wastes time and effort. latest tools and methodologies to
we have found that disappointing So let’s be clear: the change function succeed. But often organizations
performance is often acknowledged needs a single leader who ‘owns’ major devote most of their money and time
privately, but not addressed openly. change. This leader ensures the change to technology and processes, and
Ninety percent of the organization may portfolios align to the strategic priorities; neglect or under-plan aspects like
know something is wrong, but they ensure scare capital is allocated to behavioral and cultural change. A
don’t tell the people in charge – or even the correct programs; moves people significant investment in capability is
worse, they speak up but are not heard. between programs as necessary to required to enlist the support of the
Poor performance of change can also get results; and is accountable to the organization and guide it along the
be a result of focusing the program to board for change results. change journey. These ‘soft’ people
move too fast, or if it is managed by The second key is a strong focus issues can be the hardest to get right.
individuals who don’t fully understand on transparency and accountability. The pace of change will continue to
the change management process. With Transparency means clear governance, increase in the current climate, and so
spending on change in UK financial reporting, information and will the investment required. With clear
services organizations alone ranging communication, to ensure the whole leadership, a focus on accountability
from £5 billion – £7 billion annually, organization understands what is and transparency, and strengthened
disappointing performance is silently happening and what results are human capabilities, we should see
draining billions of pounds from required. Accountability means more businesses achieving greater
businesses at the most stressful exceptional clarity on who is value from their investment in change.
time in the industry’s recent history. responsible for each part within a
So what can be done? complex change program. Our
benchmarking confirmed a basic human For more information please contact:
Getting leadership right fact – people avoid accountability if they Adrian Harkin
Partner
is key to success can. Nobody likes to be too pinned KPMG in the UK
From our benchmarking, we have down. Leaders who emphasize clear Tel: +44 20 7311 6266
identified a direct link between the negotiations on accountability and insist e-Mail: adrian.harkin@kpmg.co.uk
value financial institutions gain from on transparency of information are more
their spending on change and three successful than those who do not. Martin Blake
Partner
key factors: The third key is investing in KPMG in Australia
capability. Capability means paying not Tel: +61 2 9335 8316
1 Treating leadership of change as just for systems and tools, but for good e-Mail: mblake@kpmg.com.au
a core organizational competence people and good quality learning as
Mark Smith
2 Focusing on transparency and well. It is people – not organizations –
Partner
accountability that make change programs succeed or KPMG in Canada
3 Driving capability deep into fail. Change is not a mechanical process Tel: +1 416 777 3395
change functions which simply requires application of the e-Mail: marklsmith@kmpg.ca
43
Getting
Vincent Heymans Richard Pettifer
ahead
UCITS IV: Putting the potential into action
T
The European Union’s (EU) he global financial crisis The six major amendments it
directive, Undertakings for and its wider economic introduces – the so-called ‘Efficiency
repercussions have had Package’ – have been widely applauded
Collective Investment in a severe impact on the by the industry as a valuable toolkit that
Transferable Securities sector, with total assets can enhance the effectiveness of the
(UCITS) – a framework for in UCITS funds falling UCITS framework, and will offer
the regulation of mutual 22 percent (or e1.77 trillion) last year, significant efficiencies to fund
while net outflows from UCITS hit organizations operating within it.
funds in the EU – has been e335 billion1. The situation has since The regulatory changes that make
undergoing a makeover. brightened somewhat, with the up the package will create significant
The changes, known as European Fund and Asset Management opportunities for investment
UCITS IV, come into effect Association (EFAMA) recording net management firms to:
inflows of e30 billion into UCITS in the
in just two years. So, first two months of 2009. Nevertheless, i. Cut the number of management
preparing now for what will question marks remain over the viability companies operating across Europe
likely be sweeping changes, of many of the funds still in existence in by leveraging the Management
is paramount for firms today’s highly fragmented European Company Passporting scheme,
funds market. With this as background and hence reduce costs and
keen to benefit from the the changes come at a crucial time. capital requirements
efficiencies available. ii. Concentrate assets in their best
performing funds and so improve
returns
iii. Decrease total expense ratios through
a centralization of the middle-office
and administration services
iv. Reassess the fund administrators
and custodians they use to service
the funds
v. Reduce time-to-market and
administration costs for funds
sold cross-border
44
The location freedom offered by the

Figure 1 Figure 2
Management Company Passport raises
similar considerations. For instance,
Plan of campaign some firms that have their investment The UCITS IV
framework management and product development ‘Efficiency Package’
functions in one of the larger countries
1. Understand and document such as the UK, may opt to centralize Undertakings for Collective
the ‘as-is’ the management company function Investment in Transferable Securities
2. Undertake the market analysis there as well. Others may prefer (UCITS) are regulated investment
3. Develop the hypothesis for the funds domiciled within the EU and
‘to-be’ Luxembourg or Ireland, because of capable of being sold across
4. Design the operating model lower tax rates and fund center status, boarders. First introduced in 1985,
5. Challenge, validate and approve or one of the Eastern European the aim of UCITS was to integrate
countries given their lower cost bases. the EU market for investment funds
by offering greater investment
But then there is the question of
opportunities to investors, as well
where to domicile the master fund. as greater business opportunities
For instance, to date Luxembourg has to the asset management industry.
Planning for Action been the customary jurisdiction for retail Since then UCITS have become a
With UCITS IV slated to come into funds, not least because of the brand world-renowned brand, enjoying
considerable success not only in
force in July 2011, planning and recognition Luxembourg UCITS have
Europe, but in markets in Asia, the
developing clear and strong product achieved around the world. And post- Middle East and Latin America.
strategies now will enable firms to get UCITS IV these traditional fund centres
a headstart in the greater flexibility the are likely to retain an advantage as UCITS IV, which is due to come into
new directive will give. Firms should domiciles of choice, given their wide effect in July 2011, introduces six
headline changes to the regime:
plan now those fund ranges they range of tried and tested fund servicing
expect to close, so that they can start structures. i. A full Management Company
to be wound down making eventual Passport, allowing a UCITS to
closure easier. Similarly, new fund Tax Uncertainties be managed by a management
launches can be restricted to those The area of greatest uncertainty company authorised in another
member state
fund ranges which will have a long term surrounding the UCITS IV provisions
ii. Establishment of a framework for
strategic future. By doing this, firms can and their potential benefits will not be fund mergers – no rules exist at
plan in advance those areas they expect addressed at all in the current process EU level in this area at present
to close, funds to consider winding – the tax implications that surround iii. A new framework for master-
down and possibly avoiding launching, the Management Company Passport, feeder structures – again, no rules
for such structures exist at present
making the eventual implementation cross-border mergers and the at EU level
of UCITS IV easier. establishment of master-feeder iv. Replacing the Simplified
Critical to this strategy will be structures2. Prospectus with a Key Investor
an understanding of how to leverage Depending on the rules of each Information document
the triumvirate of measures being jurisdiction, cross-border mergers v. A new regulator-to-regulator
notification procedure to speed
introduced: the framework for cross- may trigger tax charges, including up the cross-border funds
border mergers, master-feeder capital gains tax and stamp duty, even distribution process
structures, and the Management though investors do not realize their vi. Improved supervisory cooperation
Company Passport. A successful investments at the time a merger mechanisms
product strategy though, will depend occurs. In addition, there will be cases
on the idiosyncrasies of each fund where investors could face higher tax
promoter’s business model and the rates following a merger than if they
product range they currently offer, had remained invested in the original For more information please contact:
and as such must be forged on a fund, these issues need to be identified Vincent Heymans
case-by-case basis. Following the and addressed early. Resolving this Partner
KPMG in Luxembourg
herd will no longer be the best across the different countries in the Tel: +352 22 5151 7917
solution (see figure 2). EU will require a separate UCITS tax e-Mail: vincent.heymans@kpmg.lu
For example, while the provisions directive. That though, is years away.
on cross-border mergers pave the way An approach KPMG firms have Richard Pettifer
for consolidation, depending on the found helpful with clients to develop Director
KPMG in the UK
countries involved, tax liabilities may strategies is shown in figure 1. Tel: +44 20 7311 5749
arise and will need to be taken into The option of waiting for total clarity e-Mail: richard.pettifer@kpmg.co.uk
account. Taxation considerations fall on UCITS IV to be implemented may
outside the UCITS remit and so vary not bring the best success in the
1. The European Fund and Asset Management Association
substantially from country to country. medium to long term. For those acting (EFAMA) pointed out in its report, Trends in the European Fund
Industry in 2008.
The impact of this on firms will vary now to navigate the complexities, 2. For a fuller discussion on this topic please see article ‘Tax obstacles
to the success of UCITS IV’ – included in the latest edition of
according to strategy developed. the rewards should be worth the effort. frontiers in tax, KPMG International, June 2009.
45
Order
returns...
An economic overview
The current outlook is the most stable we have

seen for many months – the results of the stress tests
in the US banking system seem manageable, government
interventions in Western Europe are helping to stabilize
the banking system and, in Asia, the most stressed
geographies seem to be getting the support they need,
Jeremy Anderson says Jeremy Anderson.
46
Despite the immediate and

pressing impact of these
challenges, we need to begin
thinking about the future.
A
s we talk to senior But, despite the immediate and back on its feet the brightest and
bankers and regulators pressing impact of these challenges, best people in the industry should be
there is a common view we need to begin thinking about the retained, as well as attracting new talent.
that a semblance of future. The global economy needs an Now we are asking many of our people
order and predictability efficient and effective global banking to work harder than ever before while at
has returned to the system to transfer risk, provide credit the same time reducing compensation
markets. Perhaps, most importantly, there and support global trade. This has been and rewards. Although the days of
is now time to take more considered a facilitator and engine of global growth significant bonuses for ‘Day 1 Profit &
and collaborative decisions about what over recent decades, growth that has Loss’ may have gone, we should be
to do to re-build for the future. lifted many people out of poverty. We seeking to convince people that, as the
The increasing confidence and need the industry to be restored to full industry rebuilds sustainable and
potential optimism this brings are operation as soon as possible to help predictable profit streams, it will again
fundamental to making progress, create wealth in both the developed become a stimulating and rewarding
though we should be careful not to and the developing economies. The career path for high caliber people.
assume that the next few years will banking industry has re-invented itself Finally, we should not lose sight of
be easy. Many commercial and retail many times before and there should be the opportunities which still present
bankers remain very concerned about no reason why it cannot do so again. themselves. Although many countries
the likely scale of credit losses and The same issues face the have suffered, and will suffer difficult
provisions, with many expecting 2010 investment, savings and pensions economic conditions for some time,
to be worse than 2009. Commercial industry. In those countries where many areas of the world are less
real estate lending could create public and private sector debt has touched by the global crisis and still
headaches for banks in many parts of soared, the responsibility for long have healthy funding sources and
the world as rents, yields and the value term savings and pensions is going growth in their economies. For those
of property weakens. There is much to have to pass back to the individual, banks which have strong balance
‘unwinding’ of government intervention leading to higher savings rates. There sheets, and are unencumbered by
to be done over the next few years as will be a great need for secure, stable government or regulatory restrictions,
debt issuance guarantees are removed, and cost effective frameworks for there has never been a better
government shareholdings in banks are people to build their wealth, whether opportunity to acquire assets at a
sold, and toxic assets in bad banks and for retirement or for a ‘rainy day’. reasonable price. The banking ‘world
government insurance schemes are While there has been widespread order’ may not change dramatically,
wound down in an orderly manner. discussion of the rational issues which but looking back in 10 years time we
The wall of regulatory change face us we should not forget to address may well see that the winners are
hitting the industry is likely to not only the emotional aspects and, in particular, institutions that have managed to
bring additional rules, but will also the ‘war for talent’. To put the industry emerge most quickly from the current
challenge the viability of some existing turmoil and capture those opportunities
business units as capital and liquidity which present themselves.
requirements become more onerous.
It remains to be seen whether national
territorial regulatory approaches will Many areas of the world are For more information please contact:
prevail, reducing the efficiency of capital Jeremy Anderson
less touched by the global Regional Coordinating Partner,
and funding for global banks, or
whether global regulatory collaboration
crisis and still have healthy Financial Services, EMA region
KPMG in the UK
can produce a simpler and less costly funding sources and growth Tel: +44 20 7311 5800
regulatory and reporting environment. in their economies. e-Mail: jeremy.anderson@kpmg.co.uk
47
frontiers in finance – June 2009 | Series
A
brighter
future?
48
Series | frontiers in finance – June 2009
Emerging markets: India

India
Abizer Diwanji
For much of the past

decade, the Indian
economy has been
booming. But while India
has not been as severely
hit by the credit crunch
as many other countries,
it does now face serious
economic difficulties.
Lack of credit and liquidity
in the market is causing
severe problems. And
companies’ reliance on
Foreign Currency
Convertible Bonds has
stored up an imminent
crisis in the corporate
sector. Abizer Diwanji
argues that one of the keys
to unlocking recovery will
be government funding of
infrastructure development
and making the corporate
bond markets in India more
attractive to investors.
49
frontiers in finance – June 2009 | Series
S
ince the millennium, India had ratios of 45–48 percent.
8-9% has been seen as one of

the key growth countries
among the developing
Half of depositors’ cash has been
locked up in government bonds.
In some respects, these
average growth of India’s economy nations – the third part of characteristics have helped to
per annum since 2002. the BRIC (Brazil, Russia, shelter the Indian economy from
India, China) quartet, whose dynamic the worst of the global crisis. With
new economies were set to challenge little exposure to complex structured
the developed world over the coming products, the financial sector has
-50% decades. From 2002, India’s economy

has grown by an average of eight to
nine percent per annum. The financial
been shielded from the Collateralized
Debt Obligation (CDO) subprime
disaster. There is a much smaller toxic
The drop in India’s stock market system has been progressively asset problem. Nevertheless, the
during the crisis. liberalized, and the country has country is far from immune to the crisis.
been increasingly integrated into So far in crisis, the stock market has
the world economy. fallen by 50 percent, and the rupee has
During this time, the stock market fallen significantly against other major
6% boomed, corporate profits multiplied

and foreign direct investment soared.
Demand for the rupee drove up the
currencies, mainly as cash has flowed
out of the Indian equity markets to
fund losses in home countries.
forecast growth of India’s exchange rate. Many politicians and Other aspects of the Indian financial
economy in 2009-10. business leaders grew accustomed to market have led to further challenges,
continuous growth and rising prosperity, in particular the limited market for
and looked to them to steadily alleviate corporate debt. Because companies in
the continuing problems of inadequate a rapidly-growing economy could not
US$500bn infrastructure and rural poverty.

Despite the boom, India is still far
from becoming a modern advanced
borrow easily at home to finance
expansion, they relied increasingly on
foreign capital and on equity issuance.
The amount estimated by the economy. The financial sector remains A lot of ‘hot’ money flowed into the
government that needs to be comparatively over-regulated. Indian stock market; private equity
invested up to 2012 to improve Securitization is limited. There is a very became a major source of funding
the country’s basic infrastructure. small and illiquid corporate debt market. outside of stock markets.
Banks have historically been generally A particularly notable feature was
wary of excessive credit risk. the development of Foreign Currency
Regulations that require Indian Banks Convertible Bonds (FCCBs) as a vehicle
to hold government bonds have meant to attract overseas funds. As the name
that while bank balance sheets have suggests, these are debt instruments
been strong, this has not translated into denominated in a non-rupee currency
commercial lending: by comparison which also give the investor an option
with banks in Europe and the US, to convert the debt into equity at a
with typical loan-deposit ratios of future date at a significant premium to
100 percent, Indian banks have prices on the date of issue. Companies
50
Series | frontiers in finance – June 2009
The Reserve Bank of India has taken a series of steps to

try to free up the market and inject liquidity. But although
banks now have greater liquidity, this is not necessarily
finding its way to private industry.
got cheaper funding with lower dilution suffering from significant contraction in incentivized to fund infrastructure
as conversion was considered inevitable demand. The already tight credit market demand. Core infrastructure funding
given the consistent rise in stock prices. is being further starved as many banks could also help develop demand in
FCCBs were attractive to investors as become even more reluctant to lend. commodities and ancillary infrastructure
equity conversions offered higher The Reserve Bank of India has taken related services. A demand push in
returns than conventional debt. Further, a series of steps to try to free up the industry would ensure banks start
there was always a redemption option market and inject liquidity. But although lending to corporates again. This
with back interest if the conversion banks now have greater liquidity, this is should restart the cash flow cycle.
option was not exercised. not necessarily finding its way to private Finding a way out of this infrastructure
However, all these attractions industry. One major route to getting the investment trap will be a key priority for
assumed that stock prices would economy moving again could be the new Indian government. But if it can
continue to rise and that FCCBs would government investment in infrastructure be achieved, the benefits in stimulating
be converted to equity. The collapse in development. Years of low investment the economy across all sectors could
the stock markets has scuppered this, have left India with crumbling roads and be immense. It is not as if the economy
destroying the value of conversion. transport infrastructure and inadequate is in the doldrums: forecast growth
Instead, issuing companies are faced public utilities. The government has of 6 percent in 2009–10 compares
with the prospect of paying interest on previously estimated that US$500 handsomely with the position in many
these bonds along with redemption of billion needs to be invested up to western countries. Once the current
principal when they mature. Since some 2012 to improve the country’s basic cycle turns upwards to greater easing
estimates suggest that Indian infrastructure. Originally, it was hoped of credit and liquidity, there is every
companies have issued up to US$20 that foreign capital would contribute chance that this particular BRIC
billion of FCCBs over recent years, with a substantial tranche of this. Now, this economy will boom once more.
none of the corporates planning cash is unlikely.
flows for redemption, this could lead to However, direct funding is not an
increased defaults in coming years. option given a high fiscal deficit. The For more information please contact:
As the crisis has taken hold, profits Government should seek to provide Abizer Diwanji
Executive Director
have evaporated; many exporters have appropriate guarantees to cover the KPMG in India
been hit; industrial sectors such as credit risk of large infrastructure Tel: +91 22 3983 5301
automotive, cement and real estate are projects. Banks would then be e-Mail: adiwanji@kpmg.com
51
frontiers in finance – June 2009 | insights
insights
New KPMG Thought Leadership
frontiers in tax, June 2009. The beating heart of banking: Insights
The third edition of frontiers in tax is into global payments, June 2009.
designed to interest, challenge and In the current environment, payments
stimulate tax professionals. This is a sister have proven to be a stable revenue base
publication to frontiers in finance – and as for banks, but the industry is still facing
the name implies, it focuses specifically on wide-spread development and change.
the tax issues facing the global financial KPMG International investigates the
services executive. In this edition KPMG trends, regional variations, investment
colleagues discuss the tax implications opportunities and insights in the global
of the current climate on transfer pricing, payments industry gained through our
new regulations, influence on savings member firms’ experience and in-depth
and opportunities in M&A. interviews with clients from banks,
infrastructure organizations, regulators
2009 Global Fund and Fund and industry groups.
Management Survey.
This year’s survey is being released at a A glimmer of hope: Risk and capital
time of great turmoil and uncertainty in management in insurance, June 2009.
the industry. Covering taxation, accounting This initial survey report is the first of
and regulation this annual Survey is a a two-part series produced by KPMG
broad ranging, authoritative point of International in cooperation with the
reference for financial services companies, Economist Intelligence Unit. It examines
marketing investment around the world. how the financial crisis is changing the
attitude of the global insurance industry to
risk and capital management, highlighting
2009 Global Hedge Fund Survey.
some key issues including preventing
The financial services industry is in one
further losses and positioning their
of the most challenging periods in history,
businesses for future growth. The survey’s
and in previous year’s has experienced
findings reflect the sentiment of the 315
substantial growth but now faces an
senior insurance executives across 49
uncertain future. Effective strategies are
countries who answered the survey.
critical to the success of a Hedge Fund
Manager – now in its third year this Survey
focuses exclusively on Hedge Funds, Renewing the promise: Time to mend
covering 25 countries. relationships in investment management,
June 2009.
With continued upheaval in 2009,
KPMG member firms provide a wide-ranging offering KPMG aims to address the question of
of studies, analyses and insights on the Financial Services ‘Where to next?’ for investment managers
industry. For more information please go to in this report. Conducted in partnership
http://www.kpmg.com/Global/IssuesAndInsights with Datamontior it is based on a survey
of 288 respondents globally with a
further 22 in-depth phone interviews.
Results include a number of interesting
‘disconnects’ between perceptions of
investment managers and investors
on the industry.
frontiers in finance editorial team

Editor: Alison Halsey
Editorial: Amber Stewart, Monica Eyers
Production: Shofna Uddin, Nina Muelders
52
insights | frontiers in finance – June 2009
global financial Brendan Nelson

services leadership
Global Chairman, Financial Services
Tel: +44 20 7311 6157
e-Mail: brendan.nelson@kpmg.co.uk
team
Jim Liddy Scott Marcello
Joint Regional Coordinating Partner Joint Regional Coordinating Partner
Financial Services Financial Services
Americas region Americas region
KPMG in the US KPMG in the US
Tel: +1 212 909 5583 Tel: +1 614 249 2366
e-Mail: jliddy@kpmg.com e-Mail: smarcello@kpmg.com
K T Kim Chee Meng Yap

Joint Regional Coordinating Partner Joint Regional Coordinating Partner
Aspac region Aspac region
KPMG in Korea KPMG in Singapore
Tel: +82 2 2112 0400 Tel: +65 6213 2888
e-Mail: kkim1@kr.kpmg.com e-Mail: cheemengyap@kpmg.com.sg
Jeremy Anderson Wm. David Seymour

Regional Coordinating Partner Global Sector Leader,
Financial Services Investment Management
EMA region KPMG in the US
KPMG in the UK Tel: +1 212 872 5988
Tel: +44 20 7311 5800 e-Mail: dseymour@kpmg.com
e-Mail: jeremy.anderson@kpmg.co.uk
David Sayer Frank Ellenbürger

Global Sector Leader, Retail Banking Global Sector Leader, Insurance
KPMG in the UK KPMG in Germany
Tel: +44 20 7311 5404 Tel: +49 89 9282 1867
e-Mail: david.sayer@kpmg.co.uk e-Mail: fellenbuerger@kpmg.com
Gottfried Wohlmannstetter Jörg Hashagen

Global Head of Audit Global Head of Advisory
KPMG in Germany KPMG in Germany
Tel: +49 69 9587 2141 Tel: +49 69 9587 2787
e-Mail: gwohlmannstetter@kpmg.com e-Mail: joerghashagen@kpmg.com
Adrian Curtis Freddie Hospedales

Global Executive Head of Marketing & Communications
KPMG in the UK KPMG in the UK
Tel: +44 20 7694 2275 Tel: +44 20 7311 5264
e-Mail: adrian.curtis@kpmg.co.uk e-Mail: freddie.hospedales@kpmg.co.uk
53
frontiers in finance – June 2009 |
kpmg.com
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The information contained herein is of a general nature and is not intended to address the circumstances of any particular © 2009 KPMG International. KPMG International is a
individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such Swiss cooperative. Member firms of the KPMG network
information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon of independent firms are affiliated with KPMG International.
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opinions expressed herein are those of the authors and interviewees and do not necessarily represent the views and opinions firm has any authority to obligate or bind KPMG International
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| frontiers in finance – June 2009

The long road

Major changes ahead

The long road to recovery

Perspectives on regulation in banking,

Clarity and reality: The role of the

Economic turmoil: The US commercial

Confidence must return: An investment

Renewing the promise: Time to mend

Act now: The implications of

Show me the money: Insights into

Addressing the trust gap:

Separating value: Getting the most

Changing for the better 42

Order returns… An economic overview 46

Series: Emerging markets:

At your finger tips

frontiers in finance online

With our audience

Global Financial Forum 2009 frontiers in tax

In some respects, the likely shape of the financial

Regulatory reform will be needed to ensure that an

Hedge funds should not be finalized over short

David Sayer Dave Seymour Frank Ellenbürger

From left to right:

There is always a political dimension to

Although banking has

Ellenbürger Nevertheless, the Ellenbürger International groups

Brendan Nelson and Scott Marcello

Brendan Nelson Scott Marcello

The role of the auditor in financial services:

On this last point, a critical question

Calls to action in combating the ongoing economic

The US commercial real estate perspective

Everybody has been hurt by current market conditions. For example,

must return An investment management perspective

A return to boutiques Many economists argue that we

A recent KPMG report provides insight into the

James Suglia Tom Brown

Renewing the promise

(i.e. better at communicating them) investment managers. In many cases,

Similarly, many banks should wake Organization and IT

Canadian financial services

Largely away from

Ten years ago, the Financial Times top-50 ranking of

Canada’s ‘Big 5’ Banks 9

Managing risk and capital performance are significant

Greater focus doesn’t equal

A rapidly-growing area of focus or simply deposit a pay packet for safety

The Trust Gap The new stakeholder landscape

In banking especially, the

As many financial services organizations may be taking their first

– Shared service centers

Ignore separation planning Good separation planning boosts

Selling a business or division may make strategic sense,

3. Information technology function

How do you cut costs

for the better

Key areas of focus

Transparency and Accountability

The location freedom offered by the

The current outlook is the most stable we have

Despite the immediate and