♪ francine: axel weber has held some of the most influential and important roles in european banking. he was the president of germany's bundesbank and a member of the ecb governing council from 2004 to 2011, which included the early years of the global financial crisis. now he is chairman of swiss banking giant ubs and a member of the group of 30, an international body that looks to deepen understanding of global economics and financial issues. today on "leaders with lacqua," we meet axel weber. axel weber, thank you so much for joining us. you have a great global view of the main challenges facing

financial institutions. what are they? how will this industry be transformed in 10 years from now? axel: i think the industry is in the middle of a transformation. the first 10 years after the financial crisis, the deregulation of the industry, and many, including ubs, have changed their business model. we were among the first. and now over the next 10 years, there will be different trends that will shape the industry. technology is one of them. overall, the business model will in my view be challenged by disruption. the question in the future will be, can incumbents like ubs rise to the challenge and basically transform themselves, rather than be disrupted? we have seen disruption in many industries. technology is the key driver for that. i think banks will continue to face those challenges. so i think we will rise to the challenge. we will basically adopt what is good through financial technology. the business model will change. it will become more technology

driven. it will become even more client-centric, because the main beneficiary of the technological disruptions will be the clients. francine: but how will the big banks not be disrupted, left behind? how do they not become obsolete? axel: what will get disrupted are banks that have a core model that has no distinguishment. many banks like ours focus on one business area -- we would not say niche, because we are the largest player in the world in wealth management where content matters. content will matter more in the future. the client experience will change through technology, but clients are getting more educated about financial markets through technology. clients are more risk sensitive. they have a different interaction with the banks through technology, and banks that will assimilate that into their business model but continue to provide content and be in the industry will survive. francine: do you think ubs is a blueprint for the rest of the european financials? axel: not necessarily. i would not want everyone to

move into wealth management. nobody has the core strength in the home market that we have. it is a small home market, but it is a very lucrative market. and also, because of the small size of our home market, we have a very early force at swiss banks to be very international. at the moment, this internationality helps ubs. francine: but what are the risks associated with wealth management, especially wealth management for a very high net worth individuals? axel: we are seeing an opportunity for them. if you look at what we announced with our investor day, we actually think the current trends in the markets will continue to produce one byproduct of this qe and monetary policy easing that is unwarranted, in my view undesirable. that is an increasing difference between the best performing in the economy and the least performing, so inequality will continue to rise. it will continue to produce very high income and very high wealth in many of the affluent parts of

our societies, and the middleman will continue to feel left on the sideways, and that will continue to open opportunities for large banks who can basically focus on the wealthiest of their clients and on the most affluent in the society, and ubs is one of those banks. it has a long track record in that and continues to work with these banks. francine: don't you service the globalists? if there is this wealth inequality increasing, there may be more populism and an anti-globalization sentiment, so it hurts your clients? axel: it hurts your clients, but if you look at the potential of top clients in china, what happens is almost every day a new billionaire emerges in asia-pacific. so, yes, there is disruption for the average economy, but for the most affluent parts of our societies and for the most dynamic parts of our economy, globalization is a fact that will continue. there will be some challenges, there will be headwinds, but i think 10 years after the crisis, usually these populist arguments are getting more headwinds as

the economy emerges from the crisis, and i think that is what we are starting to see. you know, if you look at the french election or some others, yes, there are nationalist movements, and there is populism, but internationalism has scored some points also recently. but i expect as the economy continues to heal from the crisis, many of the angry voters that look at the crisis and how they have been hurt will feel the new developments in the economy work for their better life and are starting to feel less angry about the crisis. francine: what do you think the future for these big, european, universal, global banks is? are some going to fold? are we going to see consolidation? axel: you will see consolidation info industry. you will still have calls for a national champion. i don't think that is going to work. what europe needs in order to catch up with american firms is european champions, banks that are larger in size.

francine: cross-border. axel: cross-border banks, pan-european consolidation, and that is actually a bit against the sentiment over what regulators have in engineering has led too big to fail, has led to a lot of regulation for the largest financial institutions. we are seeing in the u.s. that the trend gets slightly reversed. there is still a lot of regulation for top banks, but some of the midsized banks find it easier to get regulatory breaks, and that will enable them to basically start merging, and in europe you will see the same. francine: in 10 years, five big european banks or more? axel: no, i still think you will have quite a few more, but at the moment, you don't have any pan-european bank. we would see three or four pan european banks that would cover the entire euro area or the entire e.u., and being a swiss bank and being global, we will continue to be a competitor in these pan-european markets and also in the global markets.

so you will see not just domestic banks become more pan-european, you will also see u.s. banks taking a bigger stake in europe and asia because their clients will want exposure to global banking as well. francine: what kind of transformation technologically? i don't know whether it is automatization, robotization, globalization, or finding a different language to speak to millennials that will be your biggest challenge? axel: banks have tried to drive digitalization themselves. at the core, banks are technology companies, but this disruption, banks will monitor the successful in the market of fintechs, and they will basically work with them and integrate them into their value chain, integrate them into what they are doing, and become better banks, with the same client experience that the client is looking for outside. plus they bring the scope, they bring the size, and they bring the globality that many fintechs would work decades together. you will see the most successful fintechs become part of the establishment in banking through

mergers, acquisitions, collaboration, and that will give them a big incentive to be successful fast, because they can then work with the incumbents for better banking solutions. francine: coming up, we talk political risk and what the biggest global flashpoints are. more with axel weber next. ♪

francine: there is no shortage of flashpoints now in the markets for european banks to contend with. political risk is big in italy, germany, and the u.k. central banks are unwinding from their decade-long emergency monetary policy, and the world's two biggest economies, the u.s. and china, are involved in a trade spat that does not seem close to resolution. so, how do bankers contend with

these risks? axel weber is still with us. you were pivotal in dealing with the financial crisis as head of the bundesbank back in 2008. what did you wish you knew then that you know now? axel: i think at the time what we experienced was, it looked like a cardiac arrest of the global economy. and like a lot of cardiac arrests, it takes a long time to heal, it takes a long time to recover. i think the expectation at the time was if we fix these problems, we can go back to normal. we have not gone back to normal. we will not go back to the old normal. the world has moved on. markets are different now. some products are gone, i think for the better. and in the future, it is all going to be about how we can navigate this more complex world where sort of complexity is, you know, ever increasing. that is really the challenge in financial markets. central banks are only in a way providing liquidity to banks. what you really see now with market-based finance increasing

with a lot of risks migrating away from banking, which is regulated now into better market-based finance, central banks will find it harder to provide liquidity to problem areas, because they will not be the core counterparties like banks that have access to central banking. i think what you need to do, you need to rewrite the rules, banking, central banking for more complex financial markets, including capital markets. which europe is still a project. the capital market union is a project. it is not there. capital markets will become a reality in europe. central banks are not equipped for that reality. francine: are you concerned for example the banking union, the rules will be obsolete by the time we have a banking union? axel: no. i am just concerned we know how to deal with failing institutions if they were banks, too big to fail, resolution, recovery, liquidity planning, capital planning. all of that focuses on the banking industry. but what do you do when the risks migrate to the non-bank financial segments?

central banks are still the core institution that need to stabilize the financial system, but they have much less information day to day from the nonbanking world than they do from banks. and we see it in some buoyant markets. credit risk is migrating to insurance companies, pension funds, market-based finance. a central bank that wants to regulate banks cannot really start a boom in credit markets just by tightening conditions. liquidity matters and markets matter more. and central banks have to become much more market focused in what they are doing. at this moment, many central banks have not gotten that experience. francine: where do you see the next crisis coming from? i have heard everything from shadow banking in the u.s., to shadow banking china. is china pivotal? again a lot of our policymakers definitely can't regulate. axel: i am not that concerned about china, because china in the past has always been able with the central bank to focus on problem areas emerging. it is a centrally run economy. and if you look at financial markets, they are just starting to develop. they are massive in size, but they haven't got a lot of

complexity. regulating non-complex financial markets and stabilizing them is much easier than doing the same with a very complex, sophisticated financial system. i'm not concerned about china. yes, there are some headwinds, but i think the authorities are focused on that, and we have seen already the disimbursement of some anti-cyclical stabilization measures that will continue to be used to stabilize the chinese markets. where i see headwinds is in non-market-based finance, in more complex systems like the united states. at the end of a long cycle with a lot of distortion and risk-taking through monetary policy, there will be some risks that really, as monetary policy continues to normalize, will come to the fore, and that is where i think we need to be prepared. francine: we understand the linkage, which we did not in 2008. if there is something ugly happening, will we be able to

intervene quickly? axel: we just wrote a report in the group of 30 and we said, yes, in principle we understand the linkages, but the problem is some of these early dispensed measures in central banking have really by now been much more restricted. for example, require parliamentary approval. and if you remember when tarp when it was first discussed, it was not passed by the u.s. congress, and it had to go back a second time to be passed. we know what to do, but it is much harder to master getting parliaments behind some of these additional measures if we were to embark on them again. the financial crisis has shown the early intervention was unpopular, and now central banks will be much less able to do it as quickly and as uninfluenced by parliamentary processes than in the past. so things will get a lot more discussed between policymakers and central banks. francine: is populism actually a sideshow or consequence of the financial crisis? axel: i think to some degree it is a consequence, because as i said before, there is a lot of

inequality that emerged as a side effect. if you focus on the policy that basically supports equity markets and risk taking, by design, i mean, qe was designed to improve risk-taking capacity, and the ones that are able to take risk are better endowed financially, and that has created huge returns for those that invested in equity markets, but fixed income, which many of our european citizens are still largely invested in, has really been having depressed returns over the recent decade, and so some of the side effects of monetary policy is contributing to the inequality. i'm not saying it is causing it, but it is contributing to it, and that is something that will make a similar set of monetary policy is much more difficult to master next time around. francine: coming up, leading in trying times. we talk to axel weber about the financial crisis a decade on and the hardest decisions he had to make. ♪

francine: axel weber has led in turbulent times for europe. being at the helm of the bundesbank during the start of the financial crisis. he has since moved from central banking to the private sector, taking over as chairman of swiss banking giant ubs in 2012. so, what kind of leadership style does it take? we are back with axel weber. axel weber, what does it mean being a leader today? axel: sometimes it means taking difficult decisions, taking decisions where you are unable

to consult with a lot of people around you, where you basically have to show leadership in a short moment in time. my experience was in the financial crisis, we had to do that. and very often, i saw the role of the central banks as providing collective rationale where sort of the individual rationale would not have lead to a solution of the problem. and so in the financial crisis, all leaders of financial institutions behaved individually for their institution, rationally, but the sum of all these behaviors would have amounted to a major financial crisis. so the central banks had to come in as the provider of a collective rationale that led to a better outcome, and that is the sense of leadership where i feel providing that collective rationale was something many of the central banks and political leaders did at the time, and in my view, that was key for solving the crisis. francine: do you remember a

particular day, particular hour, particular phone call in 2008 where you thought, oh, this is ugly? axel: 2008 we were already one year in crisis mode. i remember july 2007, we had the first bank globally, ikb bank, get into trouble, a aa bank, and -- get into trouble, and we had to provide a solution for that bank in a short time, over the weekend before the markets opened in japan. that was bringing everyone to the table and recognizing that the group of banks that had exposures to that single player were better off supporting the bank than insisting on the bank going it alone. and we have been having many, many repercussions like that in financial markets till we came to 2008. 2008 was the time where we ran out of individual solutions, where you gather people around the table that were banks or financial market players. at that point in time, we needed outside money.

we needed taxpayer money. we needed politicians to come up with the solutions for these problems. that is where in germany, for example, we had a 500 billion program that helped us to solve these problems. it was unpopular, but it was the fastest piece of german legislation and within a few days, chancellor merkel, who is still the chancellor here, and minister steinberg went through all the parties to get this going. that was in my view the most difficult time we had. francine: was it your most difficult day, or the day you decided not to run for ecb president? axel: that was a difficult day. that was much later. i think the reaction of the ecb to the crisis had been -- the ecb over time became the repair shop for a lot of bad banking decisions, bad fiscal decisions by member states. francine: that is a central bank, isn't it? axel: for fiscal decisions by member states, you can argue that. i think there is, there was tried and tested avenue at the time.

for example if a member state of the european union, a small unlike greece, runs into trouble, the imf could have been brought into help with their programs which are tried and tested for solvency issues of a state. the europeans decided to not bring in the imf with sole responsibility, but basically to escalate the problem to the ecb and brussels and the commission, and that is where i think it became difficult, because the resolution that was asked for involved more european money at the table than the collective rationale of the imf. i was never a fan of that solution. and since, you know, sometimes in life things bifurcate. since we went down that road and europe tried to solve the problem alone, we got deeper and deeper into that problem. the ecb still is to some degree the repair shop of markets. francine: the bifurcation meant you decided you could not be ecb president. was that a tough decision? axel: no, it was not a tough decision. i have always been somebody who felt if i'm doing a job, i am

convinced about what i'm doing, and if i'm not convinced about what i am doing, i will do something else. i have been an academic for many, many years. i love being an academic, but i felt i wanted to have some different challenges in the future, so i became a policy advisor, then a policy maker and a central banker. now i run a private organization. i find these different trades of life exciting, new challenges. for me, it is something i like doing. i never tie myself down to a single job that i do for the rest of my life. francine: what is the piece of advice you give to interns? somebody you know, wide-eyed, bushy tailed says, what is your secret sauce to a lifelong career? axel: basically when i was an academic, i was fascinated by meeting the 19 to 24-year-olds who basically then decide how they want to have their life, job, time to invest, education to invest. you see that less if you are at the top of financial institutions. i go out deliberately to younger leader clubs and branches where

we have young people, and i tell them they got to invest. they got to invest in training, they got to invest in education, and basically they got to invest in being at a good company and getting to the top by commitment, by looking at what we call in ubs behaviors and principles, so focus on what you are doing. be long-term oriented, and if you are in the financial services, focus on the clients, try and look at sustainability and challenge. if you see something that is a problem, challenge. have the self-confidence to go it your own way. francine: are you born a leader or can you become a leader? axel: i think you become a leader. i think people are born with a set of natural instincts and with some curiosity, but it really depends on what you do with these natural instincts and how you develop your curiosity. my sense has always been, you

got to know, you got to have an inner compass. for me, what mattered all my life was that inner compass. i don't mind if people disagree with me as long as i am convinced from my inner compass i am still going in the right direction. that is what matters. when i ended my career in central banking, it was a deep conviction that the direction we were traveling was the wrong direction for me. not saying it was the wrong direction. it was the wrong direction for me. now in banking, when i came to banking, i did not have a lifelong career in banking. it was the importance of knowing where you want to go to, focus on the long-term sustainable business parts of your business, move away from high volatility in market-based finance, and really focus on things like wealth management and retail banking as core of the bank. so it really has to come with some convictions that either you go for short term profit or you go for long-term gains. going for long-term gains requires a lot more commitment. it is a tougher road. and it has setbacks. you got to live through those setbacks.

i am still committed to that longevity in everything i do. francine: what was the best piece of advice you were given throughout your career, either young or less young, and who gave it to you? axel: i think i was given that by my parents. and that was, trust in yourself, because in the end, it has to be right for you. that is where i always ask myself. i do not want to please anybody if i do not think that is the right thing to do. so i have some confidence in the fact that i believe what i want to achieve, and if there are things that i see that i don't like, i say it, and if i want to help move a bank in a certain direction, i only do that if it is right for me. being a leader, you have the advantage of shaping that direction. because if you have a compass, you are at the steering wheel, you can determine the direction of your institutions. at ubs, we have a great leadership team, a dedicated group of people that want to do the same thing, focus on longevity, really look at sustainability, and making thinking better, not just as a

short-term, but a long-term direction. francine: axel weber, thank you very much. axel: thank you. thank you. ♪

♪ emma: coming up on "bloomberg best," the stories that shaped the week in business and around the world. it's a brand-new year, but many issues sound familiar. negotiations in washington over a government shutdown, concerns in china over an economic slowdown. >> both the private and official pmi are purely in contractionary territory. emma: apple rattles investors with its revenue forecast. >> we've been anticipating this for the last few months. this was bound to happen. reporthe u.s. jobs leaves policymakers more secure. >> 312,000 jobs added to the u.s. economy in december, smashing expectations. >> for the fed, this is "i told you so."