The seismic turning point in global finance – Opinion

Andrew Sheng (ANN)

Hong-Kong ●
Mon July 19, 2021

finance, United States, banking, fintech, startup, blockchain, technology, artificial intelligence

August 15, 2021 marks the 50e anniversary of United States President Richard Nixon decoupling the US dollar from gold. Instead of a crisis, the next half-century marked the preeminence of the American financial system over world domination.

In 2017, U.S. Treasury Secretary Steven Mnuchin commissioned four major studies of the U.S. financial system that examined its efficiency, resilience, innovation, and regulation. These surveys highlighted U.S. dominance in the four areas of banking, capital markets, asset management, and fintech.

To quote: “America’s banking system is the strongest in the world”… “America’s capital markets are the largest, deepest and most dynamic in the world… (which) include the $ 29 trillion equity market. dollars, the market of $ 14 trillion. for US Treasury securities, the $ 8.5 trillion corporate bond market and the $ 200 trillion derivatives market (notional amount).

“Nine of the top 10 global asset managers are headquartered in the United States. In the area of ​​FinTech, “US companies accounted for nearly half of the cumulative $ 117 billion in global investment from 2010 to 2017.”

The success of the US financial system rests of course on the dominant role of the US dollar in pricing. The dollar accounted for 88% of currency pair trading in 2019 and 59% of official currency holdings. It is widely used in commercial invoicing in manufacturing, but less in trade in services.

As a major IMF study has shown, this pricing role has an impact on the exchange rate policies of emerging market economies (EMEs), as their devaluation would have only a limited positive impact on their exports, but amplifies the contraction of their imports. In addition, since EME debt is largely denominated in dollars, any appreciation of the dollar would have an overall constricting impact on EME liquidity and growth.

This is why US interest rate hikes are feared not only by the US Treasury, but also by almost all EME economies.

Several factors have combined to create the recent seismic shift in the global financial landscape. First, financial technology has eroded the dominant share of the banking system. The Financial Stability Board’s (FSB) 2020 report on non-bank financial institutions (NBFI) found that at the end of 2019, they accounted for 49.5% of global financial assets of $ 404 trillion, up from 38.5 % for banks. Indeed, total loans from NBFIs now exceed bank loans, in part due to tighter banking regulations and rising capital and liquidity costs for banks. “

Second, financial technology has enabled new entrants to the financial industry, which include not new fintech startups, but also big tech platforms that use big data, artificial intelligence, applications and their dominance of cloud computing. to provide more convenient, faster and more customer-oriented financing. for individuals and businesses.

This month, a major BIS study on the implications of fintech and digitization on the structure of financial markets showed how big tech has established itself in traditional banking services, particularly in payments services. , loans and even asset management.

Taking together the growth of NBFIs and Big Techs, traditional banking regulators and supervisors find that they regulate the financial system less and less, but central banks are responsible for overall financial stability! Regulating the complex financial ecosystem is like trying to tie up a huge elephant by a bunch of specialists each trapped in their own silos. And politically, no one wants to give a super-regulator the power to rule them all.

Third, the financial landscape has entered new minefields due to intense geopolitical rivalry. If global supply chains are to be decoupled by different standards and we come to a Splinternet of different technological standards, how should finance react? As the United States presses Chinese businesses and individuals through new sanctions and laws, financial institutions and businesses are struggling to cope with goal shifts and game changes.

The Ant Finance and Didi events further reflect regulatory concerns about whether large national big data platforms should be subject to foreign legislation with national security implications. Will India, for example, continue to allow foreign Big Techs to own all of their customer data?

Fourth, the regulatory trend towards “open financial data” in which banks open their customer databases to allow new players to access customer accounts and data will provide new products and services. But it also means serious concerns about customer privacy and data security. No country has yet figured out how to fairly handle competition in the fintech world when five companies (Amazon, Microsoft, Google, IBM, Oracle) dominate 70% of cloud-related infrastructure services.

Fifth, blockchain technology, cyber currencies and central bank digital currencies are now increasingly used, making possible payments and transactions that are less dependent on official currencies and also outside the scope of regulation. In short, official regulators are responsible for the stability of the system, but may not have access to what is really going on in the blockchain space. It’s an accident waiting to happen.

All of this suggests that the global financial system has grown faster, more complex, and more tangled than any country to manage on its own. If the largest financial systems are caught in an increasingly bitter geopolitical rivalry, what are the risks of financial accidents that can easily degenerate into financial crises?

During the 2008 global financial crisis, the Group of 20 united to implement a range of responses. This time, there is no unity as the United States continues to apply financial sanctions against its enemies and rivals, amounting to 4,283 cases in January 2021, including 246 and 8 respectively against Chinese entities. and Hong Kong.

The fintech valuation bubble that has fueled the rise in stock markets and investment in technology is fundamentally due to the lax monetary policy of the central bank. Central bank assets grew faster, on average 8.4% per year between 2013 and 2018, than banks (3.8%) or NBFIs (5.9%) to reach 7.5% of assets global financial institutions. Does this mean that financial markets can assume that central banks will continue to guarantee their prosperity?

As inflation emerges, central banks will have to reverse their accommodative monetary policy, putting strain on the global financial system. The global financial system has structural and regulatory cracks, but these can only be corrected by having some political understanding among the big players. Without it, expect a messy result.


The writer comments on world affairs from an Asian perspective. The opinions expressed are his.

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