SINGAPORE: While the fault lines of the last global financial crisis have been mostly addressed, risks remain and have shifted in three ways over the past 10 years, said the Monetary Authority of Singapore’s (MAS) managing director Ravi Menon on Wednesday (Nov 7).
These can be seen in the build-up of leverage in emerging market economies, the shift of leverage from banks to non-banks and an increase in corporate bond issuances globally, said Mr Menon as he warned of the possibility of another global financial meltdown.
“There will be another financial crisis. We have not banished financial crisis, but it’s going to look very different from the last one,” he said at a panel discussion held on day two of the Bloomberg New Economy Forum in Singapore.
Moderated by Bloomberg Opinion columnist Clive Crook, the 40-minute long discussion also included Indonesian Finance Minister Sri Mulyani Indrawati and former US Federal Reserve chair Janet Yellen giving their takes on monetary policy-making and how to manage the spill-over effects of these policy moves.
Describing financial market risks using a physics dictum, Mr Menon said: “Energy is never destroyed, it just gets translated into other forms. One can almost say that for risks in financial markets – it just goes to different places.”
“Follow the leverage. Look at where debt has gone.”
The MAS chief pointed out that while advanced economies have weaned off high levels of debt, the opposite has occurred in emerging markets amid loose financial market liquidity conditions.
Meanwhile, the extension of credit has shifted from banks to non-banks – one of the areas that have not been given enough attention, said Mr Menon.
“Because of tighter regulations, lending by banks have been more responsible although there are still gaps in underwriting standards in some parts of the world. But by and large, a good part of lending have shifted to non-banks, subject to various degrees of regulation, and this is something we need to watch very closely.”
He raised the example of the United States, where more than half of all mortgages issued now are done by non-banks – a “huge shift” from the 9 per cent seen prior to the 2008 financial crisis. Similarly in China, credit extension has moved out of the regulated banking sector in the form of peer-to-peer lending.
The third shift comes in the form of rising corporate bond issuances across both advanced and emerging market economies, with an added dimension of risk for the latter given that “a good part” of these borrowings are US dollar-denominated.
“Risk is going to keep shifting around and our job is to be very alert and watchful where that risk and leverage is shifting because they go together quite well and (can) ignite crises,” said Mr Menon.
Agreeing, Dr Yellen said while she has a “glass half full” mentality when it comes to financial stability, she is worried about the migration of risks to other areas within the system.
Pointing to the emergence of new risks, such as the build-up of non-financial corporate debt, she added that regulators still lack sufficient tools. Even in the case of the US, it remains unclear whether appropriate tools are in place.
She also raised concerns about the ongoing sentiment moving in the direction of deregulation. While she is “sympathetic" to concerns about regulatory burdens, the former Fed chair said she is “worried” as it is “too soon to be moving in that direction”.
Former US Federal Reserve chair Janet Yellen attends a panel discussion titled "Managing the next financial shock" on Nov 7, 2018. (Photo: Bloomberg New Economy Forum)
COORDINATED COOPERATION OR GLOBAL SAFETY NET?
During the panel discussion titled “Managing the next financial shock” held at Capella Singapore, Ms Indrawati also raised the point of how the US central bank must pay attention to the spill-over effects of its policies on other economies.
Raising the example of her country, the finance minister said despite Indonesia doing well with strong growth and benign inflation, its central bank has had to raise interest rates to keep pace with the US Federal Reserve.
“For emerging countries, are monetary policies really local? It is not,” she said. “They look at the environment which is becoming a bigger threat, rather than domestic agenda.”
Ms Indrawati, who built up a reputation as a technocrat and economic reformer during her previous tenure as finance minister from 2005 to 2010, also did not mince her words when she mentioned how the global shift in capital away from emerging markets, prompted by the tightening cycle, has sent the Indonesian rupiah sliding in recent months.
Referring to Indonesia’s modest current account deficit that remains around 3 per cent of gross domestic product, she said: “It is not a sin to have a current account deficit, specifically a responsible current account deficit.”
Nonetheless, with rising financing costs and tightening liquidity, the minister said Indonesia will now have to be “very careful” and be “even more disciplined” when assessing its development goals.
When asked by the moderator if there can be an “institutional fix” or even scope for international cooperation to manage such spill-over effects, Mr Menon said ongoing “informal” discussions about global regulatory coordination, as well as recognising the knock-on effects of one’s monetary policy on other countries, may help.
The MAS chief also mooted the idea of a “global financial safety net” – something that is “sorely lacking” today.
“Even if everything is done to (keep the house in order), you are still subject to the vagaries of international financial flows which can be erratic and irrational,” he said, echoing Indonesia as an example of how a country can run its affairs well but still get influenced by external factors.
“Bad things happen to good countries,” said Mr Menon, while adding that the world needs to have “mechanisms to provide emergency facilities” in situations of dollar shortage in the current “dollarised” world.
Expanding on that, he cited the example of the Federal Reserve’s dollar swap lines, which was rolled out at the height of the 2008 financial crisis.
“They were not used but its … existence calmed markets. We need a similar mechanism.”
To that, Dr Yellen agreed that the swap lines were “extremely important” during the previous financial meltdown and in the event of a similar crisis, the US central bank would “look seriously again” at extending swap lines.
However, she stressed that the International Monetary Fund (IMF) would be a more “logical” organisation to take on the role of supplying global liquidity, given that the US laws do not mandate the Federal Reserve to be a back-up liquidity provider to other economies.
“When the Fed plays that role, it really needs, in defending that role to Congress, to explain why it is in the US’ interest," said the former US central bank chief.
"I think that was easy to do during the global financial crisis when problems stemming from the US were creating global problems with spill-back onto the US. But on a regular basis, it’s hard to justify it so I do think the IMF is the right organisation to be doing that.”