Prominent figures in the global banking sector have raised alarm bells over the potential threat of a financial crisis stemming from increasing geopolitical uncertainty and regulatory tightening. These concerns were voiced during the Global Financial Leaders Investment Summit, hosted by the Hong Kong Monetary Authority, where more than a dozen top executives from international financial institutions gathered to discuss the evolving landscape of the financial sector.
Challenges to Democracy
James Gorman, Chairman and CEO of Morgan Stanley, pointed to the geopolitical arena as a likely trigger for the next global financial crisis. He emphasized the challenges to democracy in various countries worldwide but did not delve into specifics. The ongoing Israel-Gaza conflict and the prolonged Russia-Ukraine war, coupled with simmering tensions between the United States and China, have added to the atmosphere of uncertainty that surrounds the global economic outlook.
Christian Sewing, CEO of Deutsche Bank, expressed concerns that the markets, though resilient in the face of global events so far, could become more susceptible to geopolitical escalations. Sewing emphasized that a sudden geopolitical incident could disrupt the prevailing market calmness, leading to a market event.
Reflecting on the 2008-2009 global banking crisis, policymakers on both sides of the Atlantic moved quickly in March to prevent a potential re-run of the crisis. Swiss authorities played a pivotal role in brokering UBS’s rescue of ailing rival Credit Suisse, a deal praised by the European Central Bank for its role in reassuring markets.
The situation on a global level
Global banks have found themselves in a precarious situation, with central banks temporarily pausing interest rate increases. The ongoing geopolitical tensions, including conflicts in the Middle East and Ukraine, have further complicated the macroeconomic outlook, making it challenging to predict future economic growth, asset valuations, and market volatility.
In an unusual show of solidarity, the leaders of global banking institutions voiced their concerns at the Asia summit, objecting to a set of stricter banking rules known as the “Basel Endgame.” These regulations, implemented in July, would require banks to set aside additional capital as a safeguard against risks.
Skepticism about the rules
David Solomon, CEO of Goldman Sachs, expressed skepticism about the rules, believing they could result in economic tightening at a time when it is not in the best interest of economic growth. The U.S. banking regulator has also proposed stringent capital rules for major banks in response to runs on smaller banks earlier this year, a move that has been met with resistance from the industry.
Colm Kelleher, Chairman of UBS Group, raised concerns about the so-called shadow banking sector, where an increasing volume of global assets is managed. He suggested that the next financial crisis might emerge from this sector. According to Kelleher, the policy objective should be to limit the size of large banks, but he cautioned that the least competitive players might falter when the system faces pressure.