A system at risk
With the rise of nation-first politics in the US and Europe, industry leaders must work to preserve an integrated financial system
Just as political leaders must balance short-term political considerations – such as electoral votes – with long-term policy considerations, so too must c-suite executives balance short-term market fluctuations with long-term strategy.
But with such pressing near-term concerns, how can politicians and financiers deal with the most vexing issues facing the planet, ranging from climate change and the removal of nuclear weapons to demographic shifts and the need for a strong and sound financial system?
The struggle to deal with such profound and complex challenges is one reason for the rise of nation-first politics, from the US to Europe and the UK, which has the potential to impact heavily on future trade and finance flows, threatening the growth and integration of the global financial system.
“History has shown us that nation-first politics are not good for the global economy or individual national economies. What we need to do – as businesses, governments and analysts – is to think about how we make the case for globalisation again,” said Tanvi Madan, fellow and director of the India Project at the Brookings Institution.
While the twin political shocks of 2016 – the UK vote to leave the European Union and the election of Donald Trump as US president – remain the clearest examples of the rise of nation-first politics, more recent instances of populist unrest include the significant role played by the far right in 2017 elections across Europe – from France and Austria before the summer to Germany more recently – as well as the Catalan crisis in Spain following a disputed independence referendum in October.
End of an era
The fallout from these developments dominated discussion across several sessions at Sibos 2017, with consensus being that we are living through unprecedented times, as multiple jurisdictions retreat from the path of globalisation that has been followed for many years. As the UK prepares to withdraw from the EU and the US considers withdrawal from international organisations and agreements, the future of the global financial system looks uncertain.
“We’re seeing greater protectionism, localisation, fragmentation and balkanisation,” said Tim Adams, president and chief executive of the Institute of International Finance. “We see it in the regulatory discussions – it’s the end of financial globalisation; that great era that existed since the mid-70s.”
But while the Trump administration has certainly expressed willingness to retreat from international regulatory alliances and amend some of the provisions of the Dodd-Frank Act, radical finance sector reform does not appear to be high on the president’s ‘America First’ agenda.
“Financial regulation is not a top priority for the administration,” said Aaron Klein, fellow and policy director of the centre on regulation and markets at the Brookings Institution, speaking in one of several other Sibos 2017 sessions focused on trends in financial regulation. “But there is going to be a pull-back of the US as a leader in global finance, because that leading role is antithetical to the concept of America First.”
While the leadership that the US has historically shown on key international bodies such as the Basel Committee on Banking Supervision and the Financial Stability Board could well be constrained under the Trump administration, the push towards Brexit will also see the UK lose its seat at the European negotiating table.
A more limited role on the international stage for these two G-7 economies could be a game changer for the financial system, creating an opportunity for China, India and other emerging economies to gain in power and influence. As Sibos 2017 coincided with the Communist Party’s 19th congress in China, it presented the opportunity to consider the country’s future position.
“We can do nothing about China being a global player – this is part of life and we should welcome it, but at the same time we have to keep in mind that this is a country that uses state aid and single party rule. [The Communist party] is the biggest political party in the world, and whether we want it to play a role in our economies is an open question,” said Philippe Le Corre, senior fellow at the centre for business and government at the Harvard Kennedy School.
With the internationalisation of renminbi, the growing depth of talent in the country and its active participation in international institutions at a time when the US is stepping back, China is fast outpacing western economies on the international stage. The emergence of Shanghai as a financial centre also offers a possible alternative to London after Brexit. A poll of the plenary audience suggested Frankfurt, Singapore and Shanghai could all be well positioned to displace London in the future.
“This depends on how open China will become financially, whether the internationalisation of renminbi will carry on and whether the debt issue will be sorted out. Shanghai has the shape of a financial centre, but does it have the heart of a financial centre? I’m not sure,” said Le Corre.
Beyond the possible displacement of London as a leading financial hub, the broader implications of Brexit for trade flows and financial integration were also highlighted, although Heather McGregor, executive dean of the Edinburgh Business School, suggested the potential fall-out may be exaggerated.
“It astonishes me that we’re all spending quite so much time worrying about the secession from the EU of a small group of islands off the north coast of France with particularly bad weather. For corporations and banks, capital is a truly international phenomena – it can move overnight – and I don’t think Brexit will make very much difference at all,” said McGregor.
But such optimism was not widespread, as both Le Corre and Adams expressed regret at the gradual move towards a ‘hard Brexit’, which could see the UK leave the single market without a strong trade agreement, London relinquish its role as a major financial hub and many banks move staff and resources elsewhere.
“I think we’re going to get a hard Brexit, I think they’re running out of time and I think all of our member firms are already starting to move people and operations. Industry leaders tell me we have about six months to finalise some sort of deal that allows them to make decisions that aren’t immediate and capricious. Already the tone has had a deleterious impact on the business community,” said Adams.
Financial market infrastructures, which typically operate across borders to mitigate systemic risk, also stand to be adversely impacted by any retreat from globalisation or deterioration of cross-border cooperation between central banks, regulators and market participants. Speaking in a separate panel on this topic, Paul Symons, head of government relations at Euroclear, considered the specific challenges Ireland may face as a result of Brexit.
While Ireland will remain part of the EU, its economy is closely integrated with the UK, with a large chunk of its imports and exports flowing to and from the UK without tariffs or hindrance. The imposition of international tariffs would pose a major threat to Ireland’s economy and the many corporations and institutions operating there, warned Symons.
“We [at Euroclear] have Brexit challenges as a market infrastructure provider for the Irish securities market. We will have to restructure in order to be able to continue to serve Ireland post-Brexit. But I also see some positive benefits from Brexit for the EU27, as they now really prioritise the development of a single capital market that can compete with the UK and the US,” said Symons.
While some silver linings were uncovered during the discussions, the geo-political clouds over the financial system are unlikely to disperse in the near term. As the post-crisis reform chapter draws to a close, it will be the responsibility of both politicians and industry leaders to ensure that the next phase of the financial system’s evolution is not hampered by the nation-first agenda.
“We’ve seen a huge amount of de-risking because of regulatory cost, but if we want to see global growth and we want to see interconnectivity, then we have to ensure that capital continues to flow. What we see now is fragmentation and balkanisation in the global financial system. We need to run against that,” said Adams