The global banking industry needs to do more to protect itself against looming threats such as market turmoil, trade tensions, rising leverage and the implications of Italy’s rule-busting budget, according to executives gathered in Bali for the Institute of International Finance annual meetings.
“The recurring theme is that finance has been strengthened, but not quite fixed,” said Fabrizio Saccomanni, chairman of UniCredit SpA and a former deputy governor of the Bank of Italy, on one of the IIF panels. While a lot has been done to strengthen banks’ balance sheets, “the global factors of crisis are not really under control,” Saccomanni said.
Following the financial meltdown a decade ago, the world’s major economies banded together to calm markets and restore growth. But their leaders are now struggling to find common ground, with a trade dispute between the U.S. and China showing little sign of ending soon and emerging markets struggling to cope with a reversal in capital flows.
Tumbling stock markets in the past week underscored the fraying consensus, though signs of calm returned Friday. And Italy’s rule-busting budget plans and accusatory rhetoric against its European partners have repeatedly cropped up among ministers and central bankers at the parallel meetings of the International Monetary Fund and the World Bank in Bali.
The saddest thing about the Bali meetings is that “Italy is seen as one of the greatest risks in the world,” tweeted Davide Serra, the founder of Algebris Investments.
More worrying than the recent market turmoil was the blow-up of volatility-linked products that took place during a previous tumble in shares in February, according to Robin Brooks, the IIF’s chief economist and a former currency strategist at Goldman Sachs Group Inc.
“That’s an indication that after many years of low rates, there may be many pockets of leverage that we frankly just don’t know about, so that’s a big risk,” Brooks said in an interview on the sidelines of the conference.
Similar dangers may be lurking in the swath of non-bank lenders that emerged since the 2008 global financial crisis, Saccomanni said, and that’s also a concern for the IIF. “The problem with shadow banks is that they’re very difficult to document, so that’s something we’re certainly doing a lot of work on,” said Brooks.
Among the other issues addressed by bankers at the IIF conference were:
- “There’s really only one discussion that’s happening here, in earnest, and that’s intensity of trade disputes,” said Brooks
- “The U.S. and China will one day reach an agreement on trade,” BNP Paribas SA Chairman Jean Lemierre said. “China needs to come to an agreement.”
- President Donald Trump’s recent criticisms of the Federal Reserve are “just noise” with little actual impact, said Joachim Fels, global economic adviser at Pacific Investment Management Co.
- “The Federal Reserve is not crazy,” said Jacob Frenkel, chairman of JPMorgan Chase International, adding that the reversal of the long period of Fed policy easing is justified. “The performance of the U.S. economy is not episodic. We have a license to normalize.”
- In fact, the Fed ought to be moving faster, said Lorenzo Bini Smaghi, chairman of Societe Generale and a former European Central Bank executive board member. “The Federal Reserve is behind the curve and so are other central banks. With growth of 4 percent and inflation at 2 percent, there is still a big gap.”
- “There is a lot of nervousness” about the danger of recession, said Brooks. Recession risk in 2020 is “a big talking point out there.”
- Pimco’s Fels was more optimistic, saying he believes U.S. growth will continue but slow. Even though we’ve entered the late stages of an economic cycle, “there are no obvious imbalances in the economy,” he said
- There was too much optimism at the Davos meetings at the start of the year, according to UBS Group AG chairman Axel Weber. But now people are “too pessimistic” about the danger of a global recession, he said
- An economic slowdown in China is being offset by the pickup of other economies, Standard Chartered Plc Chief Executive Officer Bill Winters said.
- Financial regulators may need to pair up with telecommunications sector regulators as more payments go mobile, according to Huw van Steenis, a senior adviser to Bank of England Governor Mark Carney
- The transformation of the financial sector as a result of artificial intelligence “in general is the biggest challenge for the industry and therefore for regulators and supervisors,” said the Federal Reserve’s Vice Chairman for Supervision Randal Quarles. “It’s a huge challenge, particularly for machine learning.”
(Updates with comments on Italy’s budget in fourth and fifth paragraphs.)