Thank you very much.
It truly is an honor to address a group like this. Only in Singapore is it possible to convene such a diverse and high-powered gathering with all the top leaders in government and business. Part of that is owing to the compactness of this city-state. But it's also testament to the extraordinary concentration of talent on this island.
Citi has been here since 1902. Today we employ nearly 10,000 people in Singapore, making us the largest banking employer in the country … and only a little bit shy of Singapore Airlines, the country's largest private sector employer.
Singapore is Citi's fifth largest base of operations in the world. We offer our clients and customers the full range of our banking services, from retail branches to credit cards to cash management to private, commercial, corporate and investment banking.
In addition, Singapore is a key hub in the region. This is not only the financial capital of ASEAN and South Asia. It's also a home base from which Citi's processing and data centers service businesses in clients in 60 countries.
Singapore, as you can see, is very important to us. In fact, just last year, we hosted a board meeting here, our first outside the U.S. in many years.
Today, I'd like to talk about two things. First, let me share with you what the financial crisis was like from the inside—what Citi went through, and how we emerged, and how we are now positioned for the future. Second, I want to discuss some new ideas on how to bolster systemic safety in ways that, I hope, can prevent or at least mitigate a future crisis.
To me it is clear in hindsight that, crisis or no crisis, Citi had to be restructured. The crisis was the catalyst but the need was there. The company had, in my view, lost focus. It had lost sight of its core, historic mission.
Citi had become known as a company too much focused on buying and selling companies and businesses, putting this together and breaking that up, rather than on serving its clients for the long term, the way a bank should.
When I became CEO in December of 2007, figuring out what to do was the easy part. I knew we had to get back to the basics of banking, to Citi's core strengths. We had to put our capital to work for our clients. We had to focus on serving the real economy.
This year is our 200th anniversary. We were founded by a group of merchants who needed financing. Essentially, we were founded by our clients. We know what's worked for us in the past—and what hasn't. When we have focused on our core mission—serving our clients banking needs—we have thrived. When we have strayed, that's when we've run into trouble.
So I knew what we had to do. Doing it was a little harder.
I assembled a core team, split roughly evenly between Citi veterans and people I'd long worked with who had come with me to Citi. We immediately began raising capital. Since year-end 2007, we've added more than $140 billion to our capital base.
And we changed the structure by identifying what businesses were core and which were not core to our strategy and historic strengths. In January 2009, we formally reorganized the company into Citicorp—our core banking businesses such as retail banking, credit cards, transaction services, and institutional banking—and Citi Holdings, businesses and assets that we identified for sale.
Citi today is smaller, simpler, safer and stronger. We employed 375,000 people in 2007 compared to 261,000 today. Our balance sheet has shed some $600 billion, mostly of assets not core to our ongoing mission. We've sold more than 60 businesses and Holdings is now one quarter of the size it was in 2008 and only 10% of Citi's total assets as of the end of the second quarter—and still shrinking. Our capital strength is more than five times higher than it was during the crisis.
And our risk management function has been completely overhauled and our risk is down substantially. For instance, we carefully strive to match our assets and liabilities, country by country. A bank that is funded mostly by short-term funds that also owns a great many long-term loans will be far more complex to steer through a crisis than one whose assets and liabilities are more evenly matched.
The results—ten straight quarters of solid profitability—speak for themselves.
Today our strategy is consistent not only with this company's historic roots but is also aligned with the trends that are defining the global economy.
The two most important are the continued growth in the emerging markets—in particular, the rise of the emerging market consumer—and the unprecedented trade and capital flows resulting from globalization. Citi is the best positioned global bank to benefit from—and, more importantly, help our clients benefit from—these trends.
Citi is the only global bank with large, long-standing presences not just in North America and Europe but also throughout Latin America, the Middle East, and Asia. We maintain on-the-ground presence in 101 countries and jurisdictions and operations in 60 more. We are uniquely positioned to facilitate global trade flows by helping our clients enter new markets and expand in existing ones. No other global bank has a stronger presence in the emerging markets and we are positioned to and earn an increasing share of the growing trade flows within those markets. In light of increasing urbanization globally, we are also helping our customers pursue opportunities in the world's top 150 cities.
We understand banking to be both a public trust and a public good. The financial system is absolutely essential to the global economy. We all benefit from it. In that sense, it's the classic case of a "public good."
But our financial system is also a public trust. It's mostly privately owned and operated, on the free enterprise system of private profit and reward. That's how it should be. But because the system is so essential to everyone's standard of living—and even to political stability—those who run it share a profound responsibility to keep it safe.
It's this topic I want to discuss with you in the balance of my remarks.
We at Citi have been thinking about this issue a great deal over the past few years. We have worked and continue to work closely with regulators to improve the oversight of the financial system. Citi has been a strong supporter of financial reform since the crisis.
We think that the construct that has been built should work. The reforms put in place since the financial crisis mostly strike the right balance between the needs of economy and the safety of the system. This framework boils down to four core principles:
The first is capital: ensuring that banks hold enough capital to absorb shocks, ride out rough patches, and remain able to serve their clients with no disruption through any and all economic environments. Basel III addresses this issue very well, though there remain some concerns about calibration—how certain types of assets will be valued for the purposes of calculating a bank's capital strength. Calibration that recognizes the economy's need for capital while preserving the ability of banks to lend should be the goal for us all.
The second is liquidity: Basel rules will also impose a liquidity standard on banks and how that liquidity is invested. Even before the enactment of these rules, banks today are by and large more liquid than in the past. At Citi, our liquidity pool stands at more than $400 billion, which is conservatively positioned and primarily invested in cash and highly-liquid government securities.
The third is resolution planning, as required by the American Dodd-Frank law. Sometimes called "living wills," these are detailed plans that banks must submit to the regulators that explain how, in the event of looming failure, a bank can be wound down without systemic disruption or taxpayer support. We submitted ours earlier this year and it ran to 2,300 pages! And that's not even the longest one submitted. All of that information gives regulators and executives alike a clear road-map should the worst happen. Resolution planning ends "Too Big to Fail."
In addition, Citi is coordinating our resolution planning across all our material legal entities to ensure that our planning in major financial centers such as Singapore is consistent with our resolution planning in the U.S.
The fourth principle is simply strong supervision—both externally and internally. I think the recent reforms, in many parts of the world, have accomplished that on the regulatory side. In addition, banks have responded to the crisis and to the new wave of regulation by enhancing board supervision and strengthening corporate governance. And the move toward greater transparency, which we applaud, imposes more market discipline.
While governments and private financial institutions have accomplished a great deal over the past several years, much unfinished business remains.
One major concern that should trouble us all is the amount of capital flowing into the unregulated financial system, sometimes known as shadow banking. Since 1990, the size of the non-bank financial sector in the U.S. has risen from half the size of the total financial system to two-thirds. In other words, everything we've been talking about so far only applies to one-third of the American financial system. Identifying and properly regulating non-bank financial institutions are vitally important tasks. Every piece of regulation we are talking about today has but one goal: to enhance the safety and soundness of the financial system. But this goal will not be achieved if all that we accomplish is to impose more requirements on the formal banking sector while leaving the non-bank financial sector relatively untouched.
What is likely to happen—and we've seen it before—is that costs and restrictions imposed on activities conducted by regulated bank entities will push those activities into unregulated or less regulated financial entities. As a result, not only is risk not reduced. It may actually rise as the non-bank financial system expands, and the incentive to embrace risk there increases. Investors recognize this opportunity afforded by light regulation on the shadow banking system, which is one reason why stocks in those companies have risen 23% so far this year.
A level playing field is essential for systemic safety but thus far too few voices recognize its importance. Making the same or similar rules apply to the whole system should be at the top of the agenda. Otherwise, all our great work could be for naught—like a house with the finest lock on the front door, but a window open in back.
Given the sheer size and complexity of the shadow banking system, direct supervision alone is not a practical solution. It's impossible for even the most effective regulatory body to see everything—every transaction, every trade, every asset, every loan. Stronger product regulation could help address many issues that supervision can't adequately oversee.
For instance, consumers tend to assume that a credit card with the lowest annual percentage rate is best, but that's not always true. In the U.S., Citi offers a product called the Simplicity Card. Customers are not charged annual fees or late fees and are not assessed penalty rate hikes. The interest rate is higher than the rate for many other cards. But for a customer used to being charged those fees, the actual cost of using the card is lower.
Similarly, when buying a car, a consumer is likely to choose the financing plan with the lowest up-front cost. Yet once every other cost and fee is factored in, the car with the lower monthly payment is often more expensive than the one parked next to it with the higher monthly payment. Think of the pre-crisis explosion of adjustable rate mortgages, no-down payment loans and the like—they looked cheap but turned out to be very expensive.
Many countries—especially here in Asia—have addressed this problem by setting loan-to-value ratios for mortgages. These countries have clearly decided that it's not enough to leave things at caveat emptor. Some of the real-life patterns we see in consumer behavior lead to decisions that harm individuals' balance sheets and threaten systemic safety. As we learned from the credit crisis and housing bubble, bad individual consumer decisions are not necessarily isolated events that hurt only the decision makers. In the aggregate, they can threaten the prosperity of the entire global economy. The point of rules against behavioral arbitrage is less to protect individuals from their own poor decisions than it is to protect the rest of us.
Safety and soundness can't be accomplished through regulation alone. Banks have core responsibilities that we all must meet. And none is more important than establishing and maintaining the right culture. Systemic safety relies on the culture of each individual bank. If that culture is sound, the bank will be sound. The more banks that have a strong culture, the safer the system will be. It's as simple as that.
The heart of Citi's transformation since 2007 has been a cultural transformation—or, really, a restoration. We had to realign the culture with the strategy. Essentially, our strategy today is an updating of the strategy that saw Citi rise to worldwide prominence under legendary CEOs George Moore and Walter Wriston. The same culture that made this bank great—client-driven, focused on the basics, dedicated to serving the real economy—is the culture we set about rebuilding.
If one phrase defines our culture, it is Responsible Finance. This means that before we enter into any transaction, we ask three questions:
All three answers must be "yes" for us to do the transaction. We have—and we will again—turn down business that does not meet these criteria. We've also incorporated responsible finance metrics into our employee assessment process and linked compensation to meeting them. Serving our shareholders, clients and customers, while important, is just not enough. It is every bank's responsibility to do what is right for the safety and soundness of the financial system as a whole. Our concern for systemic safety extends well beyond simple attention to the bottom line.
For two hundred years, Citi's core mission has been to enable progress for our clients. We're embarking on our third century as a bank. In those two centuries our bank has built an impressive record of achievement. We've financed some of the world's most transformative projects. We've been through panics, wars and even depressions and always emerged stronger than before.
We've survived—and thrived—by meeting our responsibilities to our clients and communities. These proposals I have discussed today to help bolster systemic safety are part of our commitment to responsible finance. We don't pretend they are the last word. We hope they will contribute to a fruitful and necessary conversation.