A Conversation with Citi and EY

International trade and investment in financial services is crucial to U.S. economic growth and job creation.

In this podcast, SIFMA managing director Peter Matheson sits down with Kimberley Claman, Director of International Government Affairs at Citi and Chair of SIFMA’s International Policy Committee, and Douglas Bell, Global Trade Policy Leader at EY and previously a senior trade policy advisor for the U.S. Department of the Treasury, U.S. Trade Representative (USTR) and the White House, to discuss why cross-border financial services are so important. Their conversation builds on SIFMA’s whitepaper, Financial Services and Main Street Supporting American Economic Growth and U.S. Competitiveness. This white paper demonstrates the fundamental role the U.S. financial services industry plays in the U.S. economy and highlights that, in an increasingly competitive global economy, it is vital that financial services are integrated into the U.S. international economic strategy.

Transcript

Edited for clarity

Peter Matheson: Thanks for joining us for this episode in SIFMA’s podcast series. I’m Peter Matheson and I’m Managing Director of International Policy and Advocacy at SIFMA. We are here today to answer the question as to why international trade and investment in financial services is crucial to see economic growth and job creation. In SIFMA’s new white paper, Financial Services and Main Street Supporting American Economic Growth and U.S. Competitiveness, is a primer on this issue and was published in June.

We developed this white paper to demonstrate the fundamental role the U.S. financial services industry plays in the U.S. economy and to highlight that in an increasingly competitive global economy it is vital that financial services are integrated into the United States’s international economic strategy.

To discuss why cross-border financial services are so important to the whole U.S. economy and the other issues set forth in the white paper I’m pleased to be joined today by Kimberley Claman, Director of Global Government Affairs at Citi and also currently Chair of SIFMA’s International Policy Committee, and by Douglas Bell, Global Trade Policy Leader at EY and previously a Senior Trade Policy Official in Treasury, USTR, and the White House.

Kimberley and Doug, welcome. Let’s get started with our first question. There’s a huge focus right now in the U.S. economy on the goods position part of it, including the manufacturing sector and its associated supply chain and a strong desire to see those sectors rejuvenated and to grow. How do financial services get into that picture? Let’s start with you, Doug.

Douglas Bell: Well, thanks, Peter, and it’s great to be here, and that’s a great question to start us off with. I think it’s, you know before we kind of get going on that I think it’s worth just reflecting on why is it such a major focus right now. And I think we look, you know if we’re all experiencing the supply chain aspect of it when you go to the store and you have the clerk telling you that your favorite mayonnaise isn’t there because of supply chain issues, it’s really on everyone’s mind.

And then that’s a function of a couple of things, right? I mean we have the pandemic and everything that has been going on with that, and the bottlenecks that it has introduced. It has also highlighted vulnerabilities in the supply chain, the concentration in manufacturing in certain jurisdictions.

You layer on that sort of the political and economic security concerns that are out there and you sort of have this perfect storm of, you know a real focus and the perceived need to really maybe make some adjustments, you know where goods are manufactured, building in greater resiliency into supply chains.

But what’s really interesting, and this is the first point I really want to make, is that in that conversation what you don’t hear is the bottlenecks in the financial system, or how the financial system, whether it’s trade finance or other areas, are really contributing to sort of that challenging environment that we’re talking about. And that’s really worth commenting on because that has not always been the case in the past.

With the financial crisis in 2008, 2009, that trade finance, for example, was a real problem. So that is a testimony to sort of how well functioning the financial system, you know the valuable regulation that has taken place and then just how well the system is serving. So if financial services are not part of the problem is the financial system part of the solution, and I think the answer there is a definite yes. And I think that that solution takes a couple of different forms.

First and foremost is well-functioning capital markets and financial intermediation to really address the needs that, you know the focus on manufacturing and supply chain. These things aren’t going to happen by themselves. They’re not necessarily self-funding so firms are really going to need to sort of, you know if building back better means accessing funds through capital markets or banking and they’re really is a real important role to play.

And it’s also, and I think Kimberley will comment on this too, is directly through payment systems and other schemes that have been used by companies to transfer funds the financial system has been an incredibly important part of it. So I think when you just take a step back, look at the big picture, it’s pretty clear that the financial system has a really important and positive role to play in the transition that we’re envisioning in both manufacturing and supply chains.

Peter Matheson: Thank you, Doug. Kimberley?

Kimberley Claman: Thank you, Peter, and great to be here with you and Doug today. I like what Doug said about let’s take a step back for a second and think about the fact that financial institutions provide capital to every sector of the U.S. economy and that it’s crucial to allowing firms and industries to invest and innovate, grow and create jobs.

It’s important to recognize the dynamism that this capital unleashes and through investments in agriculture, manufacturing, and other service industries the positive impact of finance multiplies and helps generate much more in terms of growth and jobs than the financial sector accounts for directly. And manufacturing is a powerful example of the importance of financial services in the supply chain and as a foundation of the whole economy.

I want to just give three examples of how the financial services industry is fundamental to U.S. manufacturing, to its operations and helping to employ 12 million people throughout the economy. First, the spectrum of financial services provided to manufacturers is wide-ranging, including financing for research, construction of plants, production, and the supply chain to get manufactured goods to customers in the U.S. and overseas markets.

I want to pick up on one point that Doug alluded to in his remarks which is on trade finance. Trade finance is a crucial way in which financial services firms support U.S. manufacturers. And just to give a little detail trade finance represents the financial instruments and products that are used by companies to facilitate international trade making it easier for importers and exporters to transact business.

It’s used to protect against international trade’s unique inherent risks such as currency fluctuations, political instability, issues of nonpayment, or the creditworthiness of one of the parties involved. Estimates suggest it is worth around $75 billion per annum. It really demonstrates the point of how important finance is to manufacturing. Finally, the presence of an international financial services industry is also qualitatively important to the global success of our manufacturing base.

For U.S. manufacturing to succeed internationally it is crucial that it has access to global finance and the expertise that goes with it.

Peter: Thank you, Kimberley. We’re hopefully now emerging from the COVID crisis, which has been with us now in the United States for around 16 or 17 months. It has affected all of us, it has affected the business community and the economy and people’s everyday lives. How is the financial services industry engaged with countries and communities wrestling with the huge challenges posed by COVID? Let’s direct this question to Kimberley.

Kimberley: Thanks, Peter. This has certainly been a challenging year, year and a half for everyone. I’m really hopeful that everyone is doing well and being safe and in good health. The U.S. financial services industry is fundamental to our economy and that matters every day of the year. But the past year and a half has demonstrated particularly vividly how central to our livelihoods financial services are. Financial firms have been integral in helping our communities mitigate many of the economic effects of the COVID-19 pandemic.

This proactive support to communities across the country has taken multiple forms and has ranged from help to individuals, to small businesses, and governments. I’ll highlight just a few examples. Financial firms have led the huge increase in social bond issuance to help respond to the crisis. These bonds have raised funds for health care provision, nursing homes, and various forms of support to low-income and unemployed groups.

Early in the crisis banks eliminated fees on a wide range of products and took steps to expand access to digital banking tools such as the acceleration of the availability of contactless payment via credit cards. In fact, according to a study by a global management consulting firm between March 2019 and April 2020 overall contactless card usage in the U.S. grew by 150 percent.

Financial services firms also administered the paycheck protection program loan applications for small business owners and have been critical to intermediating a wide variety of government support measures to support individuals, firms, and the wider economy. And because capital markets and financial institutions are fundamental to saving, investment, and job creation it will also be essential to the recovery for the COVID-19 crisis in every sector of the U.S. economy.

Peter: Thank you, Kimberley. We’ve already discussed the focus on the composition of the recovery in terms of growth of manufacturing, growth of services, and the linkages between those sectors, how services, financial services in particular, contribute to the rest of the economy and help those then grow. But as we see economies recover from the COVID crisis there’s also a strong focus on the quality of economic growth, not just its quantity.

And by that one particularly important dimension will be the sustainability of the recovery from an environmental perspective. What part can financial services play in helping realize that? Let’s direct that one to Doug.

Douglas: Right, well, thanks, Peter. You know I think I would answer, there’s kind of a two-part answer to that. The first is a little bit of what, well, not a little bit, a lot of what Kimberley has been describing in terms of sort of the role of the financial system and in terms of developing economic growth, allocating capital, and when we think of the scope of what is going to be required to put the global economy less carbon-intensive basis, it’s profound.

And we talked about the rather large scale involved in recovering from COVID and these supply chain shocks to start us off, but this dwarfs that. If you just think of an industry just like steel and the critical role that it plays, you know what does it mean to have clean steel and sort of the capital investment required to do that, you’re talking trillions of dollars. And so the ability to mobilize that capital, to direct that capital, the financial system plays that role.

And so if that’s to happen the financial system is going to have to be able to do that effectively. And I think we do have that system in place, but it’s going to really require all elements, whether it’s capital markets, banking, venture capital, all the different cylinders of the financial system having to operate at full capacity. That’s one aspect. The other piece which I think is just starting to emerge and which is going to be incredibly important is sort of the whole what I would call pricing of climate risk.

And you know we started to see that, of course, in the financial markets where you now have big investors saying that we need to look at climate risk, that’s an important part of valuation. And that is a way, you know those types of tools and those mechanisms are really how you start to incentivize behavior and in a way that goes beyond the role that governments can play for example because the scope and the scale of this transition that I’m describing will have to, it will require a huge private sector component to it.

In fact, in many regards it’ll have to be, if we’re to be successful it will have to be driven by the private sector. So putting in place that ability to sort of capture that risk, price for that risk, and use that to allocate capital will be incredibly important over time and I think will be one of the secrets. And so we see it in other aspects as well in terms of like corporate reporting, again, starting to be driven by, you know out of the securities markets.

But all those things are going to play an incredibly important role. So it’s not just kind of the standard things that we look to our financial system to do, which is to allocate capital, but how it’s allocated and on what basis and capturing risk and really ensuring that that allocation is done in a way that’s going to be the most socially beneficial across the globe, so developing world, developed economies, across economies.

Peter: Thanks, Doug. We’ve talked a lot up until this point about the relationship between the financial services industry and the rest of the economy and the interlinkages there. I think it’s very important to recognize that the U.S. financial services industry is itself a source of huge competitive advantage to the U.S. economy. That’s reflected in a number of indicators. Those include the fact that New York is commonly regarded as the world’s leader and financial center.

But other major cities in the U.S. are also regarded as key financial centers. And if you look at reports that measure countries’ competitiveness the financial system is always identified as a key strength of the U.S. economy. My question here is does that competitive advantage in financial services translate into broader benefits for the rest of the U.S. economy. Let’s start on this one with Kimberley.

Kimberley: Thanks, Peter. First, I think it’s important to put the economic scale of the U.S. financial system in context. U.S. capital markets are the world’s largest accounting for 41 percent of global equity and 40 percent of global fixed income markets. Domestically they fund 72 percent of U.S. economic activity. As a result of this competitive strength, the United States has consistently run a trade surplus in financial services. Exports have risen steadily through the 21st century, and the financial services surplus is worth $95 billion annually.

The U.S. has surpluses on financial services trade with every other G20 economy. I think that’s a really important data point that crystallizes just how strong and competitive the U.S. financial services sector really is. As the SIFMA paper points out, more U.S. jobs are dependent on exports of financial services than are dependent on exports of motor vehicles or computers.

And because we are the most competitive country in the world in financial services over 670,000 U.S. jobs are dependent on exports of financial services. But that’s only the direct employment, that is people employed by financial institutions. And beyond that, it is estimated that 3.6 jobs are created in the rest of the U.S. economy for every one job in financial services.

I should also note that the international nature of financial services also benefits the U.S. through the $760 billion invested in the United States by foreign banks, brokers, and other institutions which collectively employ almost 400,000 workers in the United States. The benefits of the U.S. financial sector’s presence overseas are far broader than these direct impacts that I’ve just described, and I think they’re worth noting as well.

U.S. financial institutions operating abroad introduce greater competition in those markets increasing their efficiency and improving the quality of global investment. U.S. firms operating overseas raise the standards of financial services contributing positively to financial stability and the local economy. U.S. financial services firms are crucial in conveying U.S. values and business practices across the globe.

Also, it’s important to note that these overseas footprints contribute to global efforts against anti-money laundering and terrorist financing. And finally, importantly overseas investment strengthens activities and investment at home and benefits small and medium enterprises, the next generation of small business. And we can look positively to the future. All of this, all of this described, means that the strength of the U.S. financial services industry will continue to play a pivotal role in ensuring the future growth of our economy.

Peter: Thank you, Kimberley. Doug, what’s your perspective?

Kimberley: Well, Kimberley gave a pretty good primer, so she didn’t leave a lot on the table there, so. But I think it’s worth, a couple of additional points worth with just quickly making. I think the first is, is that the breadth, the scope of the U.S. financial system really makes credit available to a really wide swath of the U.S. economy, and it does it cheaply, competitively, and in a transparent manner for the most part. So that has just ripple effects across the economy.

And let me give a specific example because it’s one that’s studied and lots of other countries have tried to duplicate, and that’s Silicon Valley. And if you look at the role that it has played in innovation in the U.S. economy, how it has been able to do that, and there’s lots of things that go into it, of course, I mean, there’s good universities and a culture of entrepreneurship, and all those things are important.

But inevitably when countries have tried to duplicate that environment one of the things that they have the hardest time sort of duplicating is in fact the U.S. financial services industry and its ability to fund that kind of innovation. And whether it’s sort of bringing the capital to bear, whether it’s the specific institutional structures that finance that innovation, it’s really hard to duplicate that.

And so while I wouldn’t call the financial system a sufficient condition for that kind of innovation, it’s a necessary condition. And so I think it’s just really worth noting that when other countries are trying to sort of step up their economic growth, you know if it’s developing countries think of the emphasis that’s put on microfinancing. Policymakers recognize the role that the financial system plays.

A well-functioning, well-regulated market really makes a huge difference in terms of economic growth, whether it’s the allocation of capital, whether it’s ensuring that contracts are held to, that people earn a fair return. All of these kinds of features that we sort of tend to take for granted in the United States, but really the financial system is a distinctive feature in our economy and really contributes to growth.

And as we’ve been discussing some of the big challenges that we face going forward, whether it’s supply chain, resiliency, or dealing with climate change, again, the financial system will be a really important and critical part of the solution to those challenges.

Peter: Thank you, Doug. In concluding I think I’d just like to draw on a couple of observations that Kimberley and Doug made. Kimberley was talking there about the trade surplus that the U.S. has in financial services, and that’s definitely one measure of the competitiveness of the U.S. financial services industry and how well it performs out there in the global economy.

She also talks about the dependence of future growth on the health of the financial services industry and the contribution that it makes there. And Doug earlier on used the word “solution” thinking about financial services and how it can solve the problems and challenges that we are confronting in our economy today. And I think those are all really important lessons and concepts.

And I think for policymakers, and policymakers including here in the United States but also elsewhere, it’s very important for them as they are crafting and devising international strategy that they recognize the importance of the financial services industry not just for the purposes of the industry itself, but for the benefits that it provides to the other parts of the economy and the growth that it catalyzes in manufacturing, agriculture, and other parts of the services industry.

With that, I’d like to thank Kimberley and Doug for joining me today. It was a pleasure chatting with both of you. To read SIFMA’s white paper and to learn more about SIFMA’s work on international policy please visit www.sifma.org.

–

Peter Matheson is Managing Director of International Policy and Advocacy for SIFMA.

Kimberley Claman is Director, International Government Affairs for Citi and Chair of SIFMA’s International Policy Committee.

Douglas Bell is Global Trade Policy Leader for EY. Previously, he was a senior trade policy advisor for the U.S. Department of the Treasury, U.S. Trade Representative (USTR) and the White House.

 

 

Related Resources

• White Paper

  Financial Services and Main Street Supporting American Economic Growth and U.S. Competitiveness

  This white paper demonstrates the fundamental role the U.S. financial-services industry plays in the U.S. economy and highlights that in an increasingly competitive global economy, it is vital that financial services are integrated into the U.S. international economic strategy.