Buildings stand silhouetted in Hong Kong. (Photographer: Paul Yeung/Bloomberg)

A Decade From Crisis, Banks Face Risks From Italy to Trade Wars

(Bloomberg) -- The world is still full of risks for the banking industry, despite reforms put in place since the financial crisis 10 years ago.

That was the main subject of discussions this weekend in Bali, where bankers gathered for the annual meeting of the Institute of International Finance. From market turmoil and trade tensions to rising leverage and the implications of Italy’s rule-busting budget, challenges abound -- and, bosses said, banks need to do more to protect themselves.

A Decade From Crisis, Banks Face Risks From Italy to Trade Wars

“The recurring theme is that finance has been strengthened, but not quite fixed,” Fabrizio Saccomanni, chairman of UniCredit SpA and a former deputy governor of the Bank of Italy, said on one of the panels. While a lot has been done to strengthen banks’ balance sheets, “the global factors of crisis are not really under control.”

There’s one over-arching reason why the situation is different from a decade ago. Back then, the world’s major economies banded together to calm markets and restore growth. But now their leaders are struggling to find common ground, with a trade war between the U.S. and China showing little sign of ending and emerging markets struggling to cope with an exodus of capital.

Italy’s rule-busting budget plans and accusatory rhetoric against its European partners repeatedly cropped up among ministers and central bankers at the parallel meetings of the International Monetary Fund and the World Bank, also held on the tropical Indonesian island.

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.

Tumbling stock markets last week underscored the fraying international consensus, though signs of calm returned by Friday.

But more worrying than the market turmoil was the blow-up of volatility-linked products when stock markets collapsed back in February, said 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,” Brooks said in an interview on the sidelines of the conference. “So that’s a big risk.”

Similar dangers may be lurking among the swath of non-bank lenders that have emerged since 2008.

“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,” Brooks said.

Other things we learned from the IIF conference:

Trade wars really are a big concern

  • “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.”

No one (apart from Trump) thinks the Fed is crazy

  • 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. The U.S. central bank “have a license to normalize” policy
  • In fact, the Fed ought to be moving faster, said Lorenzo Bini Smaghi, chairman of Societe Generale SA 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”

Some fear recession, but many don’t

  • “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 U.S. growth may slow but that it won’t disappear. 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
  • An economic slowdown in China is being offset by the pickup in other economies, Standard Chartered Plc CEO Bill Winters said

Much needs to be done on fintech

  • The transformation of the financial sector as a result of artificial intelligence “is the biggest challenge for the industry and therefore for regulators and supervisors,” said Fed Vice Chairman for Supervision Randal Quarles. “It’s a huge challenge, particularly for machine learning”
  • Financial regulators may need to pair up with telecoms regulators as more payments go mobile, according to Huw van Steenis, a senior adviser to Bank of England Governor Mark Carney

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