A decade after the global financial crisis, with its legacy of low interest rates, and amid the threat of disruptive fintechs, international banks must be a force for good, providing expertise and finance to encourage global trade.
Ever since the global financial crisis, international banks have been operating in a challenging environment. We have experienced a decade of lower economic growth, subdued world trade, low interest rates, stricter regulation and increasing competition, including from the new fintech sector. Recent political controversies about globalization and a rise in protectionist rhetoric – especially in the West – have further complicated the situation.
Yet we should not let the existence of such challenges obscure when things are changing in a more positive direction. Now could be just such a moment. Economic forecasts have been upgraded for the first time since the financial crisis, with global growth projected to improve this year and next, and world trade accelerating to advance faster than global output.
Although the US has withdrawn from the proposed Trans-Pacific Partnership (TPP), protectionist rhetoric has not, so far, translated into substantial actions that would undermine the existing global trade system.
Change of Tone
The US Federal Reserve has already begun to raise interest rates and, at the time of writing, other major central banks are considering the normalization of monetary policies. There has also been a change of tone towards banks among some governments and regulators.
For instance, both the US Treasury and the Financial Stability Board are conducting reviews into regulations introduced since the crisis, indicating a willingness to reconsider specific aspects that may have led to adverse unintended consequences. Banks are considerably stronger, with more capital, and are investing in new technologies to improve efficiency and provide better services.
But let us not be complacent. There are a number of headwinds out there. In many advanced economies real wages are stagnant, productivity is weak and trend rates of growth are lower than they used to be. These issues have understandably fueled social and political tensions, as well as calls for a deep rethinking of globalization to make it more inclusive. There are also important geopolitical uncertainties whose exacerbation or materialization would lead to a decline in confidence and adverse economic and financial consequences.
Finally, there are also risks stemming from the normalization of monetary policy in an environment of very low financial volatility and elevated market valuations. A faster-than-expected withdrawal of monetary accommodation in the US or a premature tightening in Europe or Japan could undermine the global recovery, provoke sharp market corrections and adversely affect emerging markets that are more leveraged or exhibit weaker fundamentals.
The question we now face is twofold. First, given these uncertainties, what should the authorities do to put growth on a stronger, more sustainable footing? And second, what can international banks themselves do to contribute to this goal?
Policy-makers in both advanced economies and emerging markets should continue to strive to implement a sensible monetary and fiscal policy mix, including measures to safeguard financial stability and much-needed structural reforms. It is also vital to preserve the existing multilateral co-operation framework that has served the world so well.
As regards to international banks, we must continue to enhance our own performance and tackle our own challenges so we can better support global growth by financing investment and world trade. It is essential that we continue to advance our internal transformation to establish business models that deliver sustained economic value. Our financial strength, culture and controls have all been improved but there is more to do to ensure ethics and the right values are deeply embedded in banking. This is crucial to regain the loss of trust in banks by society as a result of the crisis.
We should not forget there are established links between the global economy, international banks and trade that are fundamental to providing the growth and prosperity on which the world depends. The economic recovery from the financial crisis is a classic reminder of these links. To a large extent the recovery has been driven by activity in emerging markets, particularly in Asia.
While growth in Europe has picked up and the US economy remains strong, the role of Asia in supporting world trade remains critical and is a genuinely historic development to be celebrated. China, one of the biggest economies in the world, is overtaking the US to be the driver, the champion, of world free trade. It is the world’s mega-trader. China's share of world trade rose to nearly 14 percent in 2016, up from close to 9 percent a decade ago.
China's Belt and Road
China's place in the world trade system is reflected at a policy level. The US may have pulled out of TPP, but China has pressed on with attempting to finalize its own regional agreement, the Regional Comprehensive Economic Partnership. This covers countries amounting to about one-third of global gross domestic product (GDP) and will substantially benefit manufacturing by removing tariffs on goods. While these benefits might not be as large as those offered by TPP, they are very welcome.
The biggest Chinese initiative is, however, the Belt and Road, a potentially major force to boost world trade and investment and foster globalization by deepening links between East and West. China has signed co-operation agreements with more than 30 countries along the Belt and Road route and six key trade corridors. Economies along the Belt and Road route – which links Asia, the Middle East, Africa and Europe – account for about 60 percent of global population and 30 percent of global gross domestic product.
Fortunately, China is not alone in embracing economic reform among emerging markets. A progressive series of market-friendly reforms over the past decade has improved economic governance, and made economies and financial systems more resilient than they were in the crisis of the late 1990s or even the so-called Taper Tantrum of 2013, when the Fed indicated it would slow the pace of asset purchases.
That said, many emerging economies need to address their outstanding vulnerabilities proactively – notably those derived from the significant increase in corporate and household leverage in recent years. China stands out in this respect, with corporate debt of more than 160 percent of GDP. The authorities recognize this is an issue and are taking steps to address it.
In advanced economies, by contrast, while financial systems have become much stronger and budget deficits reduced, there has been insufficient focus on enhancing growth and productivity through structural reforms and investment, especially in infrastructure, research and development and education.
What Use are Banks?
The role of international banks in this environment is vital; we should be a force for good. One of our major tasks is to support world trade and investment, which we do by lending expertise to clients and governments and providing the financing to corporates necessary for a growing economy.
This is evidenced by some interesting recent research from economists at the Bank of England and the Bank for International Settlements entitled "The Role of Foreign Banks in Trade," which demonstrates that the presence of foreign banks in emerging economies leads to local firms exporting substantially more. Financial globalization helps trade globalization.
This finding supports our own business experience as international banks. Indeed, this has been the bread and butter of Standard Chartered – which operates in close to 70 countries around the world – for more than 150 years and we are currently, for example, involved in more than 40 Belt and Road-related projects.
International banks support exports by facilitating access to external finance and providing the type of financial products that exporters need, such as letters of credit to overcome credit risk and derivatives to hedge currency risk. By having a presence and relationships in multiple countries, international banks are better able to help clients overcome informational asymmetries and contracting risks specific to trade. They are well placed to tackle enforcement issues and to adapt to different customs and business practices.
This demonstrable link between international banks and cross-border trade (itself an important driver of investment and economic growth) is absolutely fundamental to understand our role. A good example of how an International bank can be a force for good, leveraging its footprint and capabilities to help clients and local governments can be seen in Indonesia, which I recently visited.
Indonesia is one of Asia's success stories, with tremendous potential to grow further. However, this potential has yet to receive the same level of recognition globally as for other emerging markets, such as China or India.
Standard Chartered has been present in Indonesia for over 150 years, and this extensive track record serves as a testament of our belief in the country's true potential. By partnering with the Indonesian government, we have been able to actively help and facilitate inward investment, supporting the government's priority projects, particularly in infrastructure development.
As the country's Sovereign Rating Advisor since 2013, we supported the government in attaining investment grade from three top global rating agencies – Moody's Investors Service, Fitch Ratings and Standard & Poor's. The new rating should pave the way for further inward investment flows into the country. We have also established what we call business corridors, forming teams spanning a number of our footprint markets designed to advise our clients as they look to invest in other markets, including Indonesia.
Bankers are often asked what they do that is socially useful. The answer is simple. We support the real economy, by financing trade and investment so as to foster economic growth and development. But we do not take that role for granted. In order to accomplish our goals for our own businesses, our clients and the societies where we operate, we must continuously work hard to put our own houses fully in order, including deeply embedding a culture of ethical banking.
Jose Vinals is the group chairman of Standard Chartered. A version of this article originally appeared in The Banker magazine.