After GFC, Now March Episode Has Alarmed Bankers: Experts At WEF 2024
The entire banking system across the globe is going through a phase of uncertainty and instability. The year 2023 was the time when the most significant system-wide banking stress took place post Global Financial Crisis (GFC) where over 11 days from 8 to 19 March 2023 (March Episode), four banks with total assets of about USD 900 billion were shut down, which were later put into receivership or rescued.
From here, the pertinent question that arises is, ‘Are banks ready for the future?’ From stressing the ongoing and upcoming issues in the banking system, a session has been held in Davos, World Economic Forum on Wednesday.
Gita Gopinath, Deputy Managing Director, International Monetary Fund (IMF) said that in the United States (US), banks which are at risk compose 9 per cent of the total banking assets along with this, issues in the real estate are also something worrisome.
Gopinath further stated, “What the March episode has taught us is that it takes only a couple of mid-sized banks to go under risk and consequently, a high systemic loss of hope in the banking system occurs.”
Gopinath also highlighted that all the emerging market economies (EMEs) excluding China have held up quite well and EME’s regulatory capital has been quite high, which has helped them tide over this difficult period (Covid and March Episode).
Sergio P. Ermotti, Chief executive officer (CEO), UBS said, “After the March episode, the banking regulators have acted hyperactive. Focused and well-designed regulation has helped to make the system more resilient.”
Ermotti further highlighted that the digitalised world would translate into a faster outflow of money.
“There is disconnectedness between monetary policy and prudential policy, so once a banking system goes into huge and rapid hike not realising what will happen to their weakest links, the results that they get may not be as per the expectations,” said UBS' CEO.
Mary Callahan Erdoes, Chief Executive Officer (CEO), JP Morgan Asset and Wealth Management highlighted the relevance of the relationship between a bank and its client. Emphasising upon this Erdos said, “A Bank is as good as its client. Therefore, how you choose your clients decides what is going to happen later.”
Mentioning the GFC, Erdos said that the bank clients in such kind of incidents were institutional clients who were uninsured depositors, hence everything boils down to proper stress testing. Erdos emphasised, “Stress test should be instantaneous in this fast-moving world.”
Erdos further mentioned that banking is not a commodity which you can pick and choose but it is a doctor who tells one what is correct for oneself and hence, a bank suggests what is good for the long-term health of the company.
Multiple steps have been taken post-GFC to strengthen the financial health of the banks and one of these is merger and acquisition. Mergers and Acquisitions (M&A) can help bring financial stability as well as lower the risk by getting support from more capital.
Ermotti said, “In the banking system, mergers and acquisitions mainly happen in a crisis. In the US consolidation of banks happened during GFC which made the banks stronger and bigger, unlike the Europe where the banks were made smaller and smaller, which consequently made those banks irrelevant.”
Experts also discussed the role of banks in green financing. They highlighted what are the challenges the banking system is facing as well as what can be the possible solutions to get climate change financing done in the right way.
Slawomir Krupa, Managing Director, Société Générale said, “We were financing the green energy in the 90s and at that time I do not see any regulator coming and telling us that 30 years from now it (Climate Change) will be a big deal." Krupa further said that banks can accelerate the change but the bigger responsibility is with the democratically elected government officials.
Gopinath talking the green financing said, “Not only the right regulation, but the right supervision is also important and this is what we have learned from the March Episode."
Ermotti also nodded to the points made by Gopinath and said that the banks are facilitators and the decision needs to be taken by a democratically elected government after a public discussion on the issue of climate change.
The global banking sector, marked by the unprecedented challenges of 2023 and lessons from the March Episode, faces the imperative of future readiness, underscored by the need for effective regulations, robust stress testing and responsible decision-making in the realms of green financing.
Experts suggested that a collective recognition of the health of the banking system is integral to the long-term well-being of the global economy.
