Political pressures are building to push back financial globalisation and the will to resist such policies will be sapped if we fail to acknowledge that the process is already underway, warned Bank for International Settlements general manager, Jaime Caruana.
Speaking in Geneva, the former Bank of Spain boss said the retreat in international banking is put forward as the strongest evidence for what is sometimes called global financial disintegration.
His comments come amidst uncertainty over the Trump presidency in the US and Brexit in the UK.
During the speech, Caruana said it would be premature to declare that global financial integration has gone into reverse, arguing that the retreat in banking activity is a feature of European banking, not global banking.
And, that this shrinkage is mostly deleveraging after a banking glut.
“It is clear that one cannot gauge financial globalisation by bank activity alone. In this ‘second phase of global liquidity’, bond markets and asset managers – spurred by low yields and sometimes negative term premia – have taken the lead over banks,” he said.
This point emerges even more strongly given bond markets have gained on banking since 2009 in both the dollar and the euro.
“While the retreat in international banking is more regional than global, and while global bond market credit continues to grow apace, the political pressure to roll back global financial integration is very real,” Caruana said.
“Indeed, policies that tend in that direction may have already shaped European banks’ deleveraging. If there had been – or were to be – broad deleveraging, it would be a matter of fine judgment whether to interpret the result as financial deglobalisation.”
Will to resist
What the regulator is talking about here is “peak finance”, a parallel thesis to “peak trade”, which is commonly called “deglobalisation”.
Peak trade says that global trade is no longer growing faster than the world economy. Similarly, peak finance says we have seen the peak of global finance and that financial deglobalisation has begun.
And even if the data shows that financial deglobalisation is not happening, it is the case that pressures are building to push back financial globalisation.
In Caruana’s view, just because BIS figures do not support peak finance does not remove the risks to international financial integration.
During the speech, he urged his audience to think carefully about the following:
- If one thinks that peak finance is passed, then one may believe that there is less harm in policies that interfere with the free flow of capital.
- If one thinks that peak finance is passed, then one may believe that there is less harm in polices aimed at keeping national savings for one’s own workers.
- If one thinks that peak finance is passed, then one may believe that there is less harm in choosing purely national regulatory solutions and in reducing international cooperation at the risk of fragmenting financial markets.
Ultimately, he concluded, we should all beware of a clear and present danger.
“The thought that global finance has already peaked may sap our will to resist policies that push in that direction.”