Changing economic and political policies mean that, whether they like it or not, banks will be forced to abandon their international plans, says Michiel Haasbroek.

While the future course of the coronavirus pandemic remains hard to map out, speculation is rife about the global order it will leave in its wake. This does not bode well for internationalists: the current crisis has seen a shortage of international co-operation, has rekindled the animal spirits of racism and added further fuel to the fire of competition between economic superpowers.

These factors build on and amplify an already existing trend: the rise of the nation-state at the expense of globalisation. The lack of international co-operation and global leadership creates a vacuum that forces national responses rather than a coordinated global one. 

Halting hyperglobalisation

Growing global trade tensions already set in motion a process of deglobalisation, as trade barriers were re-erected and the viability of global value chains was reconsidered. This question has come up again with more urgency. With regard to medical supplies, it has become apparent that the globalisation of supply chains has meant that, in effect, the provision of public goods such as adequate medical supplies and tests has come under pressure. With moves being made to curtail the excesses of hyperglobalisation, and knowing that finance follows enterprise, it is likely that banks will support the retrenchment of globalisation, willingly or unwillingly. 

Unwillingly, banks are held on an ever tighter leash by national governments. First, because of the symbiotic relationship that exists between the economy and banking; second, because of the ‘strings attached’ to previous rounds of support for the financial sector; and third, because of tighter regulation and the required support from the financial sector for areas previously monopolised by the state, such as anti-money laundering and financial crime detection. 

Willingly, banks’ risk management is key to their activity. During crises, there is a typical flight to safety that often sees capital outflows from emerging markets. Any perceived increased risk in these markets – based on the fact that emerging markets tend to be more fragile – drives such outflows. The particular nature of the current crisis only exacerbates this trend as banks are being implored to support domestic economies. Given the scarcity of capital, this will undoubtedly lead to less availability of credit to emerging markets. 

Retrenchment likely

The scarcity of capital is only set to increase under the new Basel rules, of which the national implementation dates have sensibly been postponed. For instance, McKinsey calculated a capital shortfall under the new rules of more than €130bn, already forcing significant retrenchment of European banks to their home markets.

During the financial crisis, authorities helped banks by providing additional capital through central banks’ bond-buying programmes, for example, and encouraged banks to take bad loans off their balance sheets. Now, however, with the crisis being economic rather than financial, authorities are calling on banks to mitigate the economic consequences.

These developments normally take place along national lines: governments have bailed out their banks and the banks are now asked to support the domestic economy.

Foreign banks, however, also fuel capital outflows. While during the financial crisis, there was a move towards cross-border solidarity – exemplified by the Vienna Initiative aimed at safeguarding the financial stability of emerging Europe – such solidarity is lacking this time. This has strengthened the symbiotic economic relationship between banks and the wider economy, but also strengthened the relationship between national regulators and internationally operating banks. 

National refocus

Since the financial crisis, banks have become smaller, less risky and better regulated. They are also increasingly co-opted in detecting criminal actions and terrorist financing, and reporting money-laundering schemes. In that sense, banks are providing a service previously monopolised by the state.

The current crisis has underscored that, in a capitalist system, banks are a public good. Their role extends beyond the provision of accounts and an infrastructure to settle transactions; a functioning economy needs financial stability and financial inclusion, meaning that entrepreneurs should have access to credit to finance their operations and expansion. 

From the rise of strongman politics and the trade war, we have learnt that national interest is again in full focus. Rather than relying on a system that would distribute outcomes fairly and evenly, national interests are actively safeguarded by emergency measures that are outside of the ‘normal’ rules-based system. National governments have temporarily waived or postponed regulatory measures aimed at ensuring bank safety so that banks can facilitate the provision of direct state support to troubled borrowers. 

These factors all contribute to a new global system that is more fragmented than we have seen in past decades. What we will see emerging then is a multi-polar, fragmented world, where the national interest – rather than adherence to global standards and principles – will be the driver of political and policy-makers’ agendas. In this new normal, banks will have to reorient towards supporting the domestic economy, whether they like it or not. 

Michiel Haasbroek is visiting research fellow at Xi’an Jiaotong-Liverpool University and a former chief risk officer for greater China at ABN Amro.


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