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Global Investor/ISF 25th anniversary: John Nugee, SSGA – key events of the last 25 years

03 September 2011

John Nugee, head of State Street Global Advisors official institutions group, explains what made the Asian Financial Crisis so important, and why ATMs are a lesson for the financial sector

Read more: SSGA Asian Financial Crisis Bank of England HKMA Volker ATM

Was Paul Volcker right when he said the ATM was the banking sector’s only contribution to society in the past 25 years because, "at least it was useful"?

Clearly he said that for effect – but I think he is right in the sense that the banking sector needs to remember it’s a service industry, and one of the things to emerge out of the crisis is that it had lost sight of this.  Things were done in financial engineering on the basis of, 'if it can be done, it should be done’.  But sometimes it's important to ask, 'does anyone actually benefit from this?’
And in this context, if you look around at what the banking industry has done in recent years the ATM is something that has really revolutionised the man in the street’s life from his perspective.

That doesn’t mean, however, it is the only useful innovation from the banking sector.

The man in the street doesn’t understand that mortgages are easier to obtain - or at least were easier to obtain in the early 2000s, than previously. One remembers mortgage rationing, one remembers the mortgage queue.  Even though the banking system isn’t still working properly mortgages are more available than they were 25 years ago because of the greater innovation in the financial sector.

So to say nothing else has been of any use is clearly an exaggeration, however, the statement hones in on the idea that the banking sector is a service sector, and it must benefit customers.

Has the recent crisis ended the discussion over whether there should be a separation of monetary and supervisory powers?

It looks as though the experiment of separating the FSA didn’t work. But you have to be careful when you say the FSA didn’t work, because what you are actually saying is, 'had the Bank of England been in charge throughout then the UK system would not have got into this crisis’.

I think that is a strong statement that's not possible to make. You can have good regulation done in separate bodies and bad regulation done in combined bodies.

Is the growth of leverage the most important financial development of the last 25 years?

It’s an answer that will be easier to give in five years time because leverage throughout the industry is being rapidly reduced. Recapitalising the banking sector is simply another way of saying it’s reducing its leverage.  But it’s clear that leverage in all forms - by banks, by investors, and financial instruments - certainly enabled the financial sector to grow more rapidly than the economy that it served.

Should the regulators have intervened earlier?

I don’t think you want the regulator to say, 'you are growing too fast, don’t’. I think it is entitled to ask, 'is there an end user demand for what you're doing, is it well funded?’

I do wonder if historians in 50 or 100 years time will look back on the period form 1998 to 2008 and ask, 'did nobody notice the real economy was growing at 5% nominal, and the financial sector which supported it was growing at 15% nominal?' It’s as if restaurants were growing at three times the rate of people eating at them. 

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