Shaukat Aziz, former Pakistani prime minister and ex-high-flyer at Citigroup, has defended the embattled universal banking model – days before the US government adds to the pressure to break up global finance houses by releasing “stress test” results.
Aziz, once tipped alongside current chief executive Vikram Pandit as a prime contender for Citigroup’s top job, said that “too big to fail” remains a necessary and viable model for the banking industry – in spite of growing calls to scrap global institutions given the systemic risk they pose.
“I’m not in agreement that the days of global institutions are over”, he told Emerging Markets in an interview. “Policy-makers and regulators may not appreciate that these are global institutions.
“[But] while they may be large in size, they have an economic reason to exist. They have to be managed in a way that their size becomes a strength, not a weakness, and it is possible.”
Although he declined to say whether his former firm should be broken up, Aziz said that Citigroup’s “various businesses around the world complement each other”. In theory “they can function together very well as one entity as a large global institution”.
He added that global banks still have “a role but they have to be managed differently and managed appropriately. They are important catalysts for global investment and trade.”
Sheila Bair, chairman of the US Federal Deposit Insurance Corp (FDIC), last week sought authority to close “systemically important” financial firms, saying no bank is “too big to fail.” US regulators have delayed releasing the results of stress tests conducted on the nation’s largest banks until May 7.
Aziz said that authorities have further to go in weeding out failed management at big banks. To address “the root causes of what happened” authorities must take steps that include “changing the management and boards of financial institutions” which received government capital.
“Some have done it, more needs to be done,” he said. Aziz added that he saw “more pain to come” as the credit portfolios of banks face “new risks.”
Since stepping down as prime minister in November 2007 Aziz has come under fire in Pakistan for what some see as his role in contributing to the country’s economic collapse last year.
But he defended his record in office against critics who maintain his government botched an opportunity to put the economy on a sustainable footing. The facts speak for themselves, he said: “Our ratings went up, FDI was the highest ever, the reserves were at the highest levels, the exchange rate was stable – all these were good indicators.”
The coalition government that took office in March last year lambasted Aziz’s administration, for having allegedly papered over a hole in public finances, which resulted in a rapid downward revision in GDP targets and a leap in the fiscal deficit.
But Aziz attributed the country’s dramatic reversal of fortune last year –which forced the authorities to go cap in hand to the IMF in November – to the sharp spike in oil prices. “Suddenly your whole balance of payments, current account goes out of whack because energy prices, which are a core factor for growth, get so high.”