Gibraltar as an International Financial Centre for Wealth Management Strengths, Trends & Challenges Javier de Mendieta Lombard Odier Darier Hentsch Private Bank Limited May 2009
Spreading of the crisis Spreading of the crisis Policy responses US & Global banking problem Subprime problem Global liquidity squeeze US housing correction Housing recovery plan (voted end of August 08) Fed-orchestrated Bear Stearns takeover by JP Morgan (March 17, 08) Fed unorthodox monetary policy measures (from March 8 onwards) Bank recapitalizations (ongoing) Hedge funds International financial crisis Massive central bank liquidity injections (from August 7 onwards). Major coordinated central bank action to improve liquidity (Sept. 18, 08) LBO loans US bank failures (Lehman Brothers) US GSE crisis Treasury recapitalization of GSEs (Sept. 8, 08) AIG bailout (Sept. 16, 08) Global corporate bonds US credit card/auto loans US prime mortgages US commercial real estate Ban on short selling (Sept. 19, 08) US Treasury bailout plan (Oct. 3, 08) Unprecedented & coordinated central banks rate cuts (Oct. 8, 08) Javier de Mendieta May 2009 2
Understanding the crisis early warnings «How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?» Alan Greenspan, Former Federal Reserve Board Chairman, in a speech given at the American Enterprise Institute in 1996 Javier de Mendieta May 2009 3
Understanding the crisis early warnings «The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear...[they] are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.» Warren Buffet, Chairman and Chief Executive, from his Letter to Shareholders, 2002 Berkshire Hathaway annual report Javier de Mendieta May 2009 4
Understanding the crisis Lost through destructive creation Greed, a compensation culture, which sometimes was highly immoral, fraud, cheap money, managerial failure and lax regulation, all played an important part of this crisis but at its heart there was the complexity and opacity of modern finance. Source: Javier de Mendieta May 2009 5
Risk Management «In future qualitative judgement should take precedence, with data supporting, rather than driving, decision making in what has become a volatile and unpredictable market.» Source: Frontiers in Finance Javier de Mendieta May 2009 6
Risk Management «The crisis has highlighted shortcomings in banks' pricing, monitoring and managing of risks. Too much reliance has been placed on quantitative models, based on historical data, to make assessments of current risk exposures.» Source: The Day after Tomorrow Javier de Mendieta May 2009 7
The financial crisis is serious but not unprecedented «As economic historians can tell you, this is an old story, not that different from dozens of similar crises over the centuries.» Paul Krugman, Nobel Prize in Economics 2008 The stock market crash in the UK caused by real estate speculation in the US spreads to the rest of Europe and then the US The credit crisis in the US sends equity prices tumbling; economic recession in all countries connected by monetary, financial and economic links Financial crisis in the UK due to speculation on railroads, a stock market crash ("Black Friday") and then a panic leading to a liquidity shortage and banking crisis The crash on the Vienna stock exchange begins the era of the "great stagnation" in the world economy between 1873 and 1896 Market crash on Wall Street causes a banking crisis that throws the US into the Great Depression and unleashes the largest world economic crisis in the 20 th century Collapse of the bond market, followed by that of the equity market The September 11 attacks lead to systemic risk by impacting numerous vital communication hubs crucial for payment and clearing systems on the financial markets General financial crisis and a drastic market crash which almost entirely paralyzes the interbank market 1825 1857 1866 1873 1929 1987 2001 2008 Javier de Mendieta May 2009 8
The renaissance of classic banking «In future this 'Nouveau Classic' banking model will be simpler, more risk averse and more transparent. Profits will be lower, but risk-adjusted returns will not drop by as much, because the risk profile of the business mix will also decline.» Source: The Day after Tomorrow Javier de Mendieta May 2009 9
Desire for privacy «If there was one common priority across the HNWI taxpayer community, it would be privacy.» Source: Financial Services Javier de Mendieta May 2009 10
Cross-border asset management Criteria for seeking offshore wealth management services 3.27 3.06 2.92 2.87 2.60 2.56 2.49 2.11 Quality of advice Discretion/ privacy Lack of political security in home country Need for global solution/ access Image/ reputation Lack of service at home Diversification of banking relations Second domicile (e.g.vacation) Average of 177 clients, scale of 1-4 (1=least relevant, 4 = most relevant) Question: "How important are the following reasons for going abroad for wealth management services?" Source: Wealth Management Study 2009 Javier de Mendieta May 2009 11
Cross-border asset management Criteria for selecting an offshore bank 3.69 3.50 3.47 3.27 3.11 3.07 2.61 Political stability Legal framework Center of competence Discretion/ banking secrecy Image/ reputation Geographic reach Cultural fit/ language Average of 177 clients, scale of 1-4 (1=least relevant, 4 = most relevant) Question: "What are the criteria for selecting a foreign location/partner for wealth management services?" Source: Wealth Management Study 2009 Javier de Mendieta May 2009 12
Wealth Management in Gibraltar I Private Banking Wealth Management Clients High-net-worth tax residence Albert Isola Personal & Corporate Taxation Melo Triay Funds James Lasry / Malcolm Ruffell Asset Management Company Joseph Caruana Finance Centre James Tipping Financial Services Commission Marcus Killick Javier de Mendieta May 2009 13
Wealth Management in Gibraltar II Government Bodies Gibraltar Finance Centre Council - GFCC Gibraltar Banker's Association; 18 institutions licensed under the banking ordinance Association of Trust and Company Managers - 44 members Gibraltar Association of Stockbrokers and Investment Managers Society of Trust and Estate Practitioners - 41 member firms Gibraltar Society of Chartered and Certified Accountancy Bodies The General Council of the Bar - 220 practicing barristers Finance Centre James Tipping Funds James Lasry / Malcolm ruffell Finance Centre James Tipping Clients High-net-worth tax residence Albert Isola Personal & Corporate Taxation Melo Triay Asset Management Company Joseph Caruana Financial Services Commission Marcus Killick Javier de Mendieta May 2009 14
Reflections on the crisis - a more positive note «The London market has been rocked by massive bankruptcies. It is difficult to know how far the effects of this will be felt. This long-predicted crisis has finally arrived and has a powerful intensity. I do not know if we will be sheltered from this storm. I certainly hope that the cautious approach we have long been following, especially over the past few months, will help us to do so. Having said that, the general decline in securities has hit a number of stocks that we failed to divest ourselves of in time. But we are pleased to have escaped so lightly and to have sold the majority of them. We are therefore out of danger s reach and can face events without too many concerns. It is distressing to see the gaping holes in some people s wealth caused by financial disasters; but we have seen very little of this in our relationships and our clientele, because our client dealings have been broadly limited to our clients means, and if clients do make losses, these would be manageable. We now appreciate the benefits of a measured approach. I only wish that I had been even more prudent on everyone s behalf.» Alexandre Lombard, Diary, September 20, 1847 Javier de Mendieta May 2009 15
Reflections on the crisis a more positive note Economic growth will return - it always has - only on a sounder and stronger footing. Investors will once again seek real value creation. Gibraltar is ready to embrace these new post-crisis opportunities. Javier de Mendieta May 2009 16
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G I B R A L T A R Wealth Management Seminar May 2009 Lausanne NEXT