Martin Wolf: Global Banking Remains Fragile

Martin Wolf, Chief Economics Commentator at the Financial Times, gave a wide-ranging talk around global economic issues during a recent interview with Boston Consulting Group. He discussed the following points relating to the health of the global financial system:

  • The global financial system remains incredibly fragile. Wolf cites evidence of banks being highly leveraged with ratios of 20:1 increasingly common. This aspect means that banks have very little loss-bearing capacity in the event of a downturn.

  • Current levels of leverage in the banking system are huge by historical standards. Much has been made of new regulations to improve bank management and protect against future crises but current levels of leverage, the are historically unprecedented.

  • Banks aren’t supporting the real economy but are, again, heavily focused on property assets. Banks haven’t been providing much capital to the real economy and are instead focusing on leveraging up on property assets. Despite historically low interest rates, the banking system is doing a poor job of channelling finance to small-and medium sized businesses, who are the real source of longer-term economic growth.

Martin Wolf: Interview with Boston Consulting Group

Source: Youtube: Boston Consulting Group Channel

These points are discussed in more length in his upcoming book, The Shifts and The Shocks. While Wolf does have a book to promote, his is one of a growing number of cautionary voices highlighting the risks associated with the rapid build-up of government, corporate and household debt in recent years.

With extraordinary monetary policies at play in the world and the prospect that the world economy has in the last ten years undergone a fundamental change consistent with the secular stagnation thesis, it is indeed hard to judge exactly what the right level for debt should be for an economy and it is possible that dismal scientists quoted in this blog, such as Wolf, Rogoff, Hannoun and King, are merely overly pessimistic.

However, the themes highlighted in both Wolf’s interview and APAC Trends’ recent posts, such as rising enthusiasm for real estate, historically low levels of volatility, record equity market valuations and high debt levels across all key sectors, smack of trends consistent with financial crises of the past. One must hope that governments and businesses are paying attention. Given previous behaviour and the increasing regularity of financial crises, it hard to be optimistic on this count.

#Debt #MonetaryPolicy