'Look at where debt has gone’: MAS chief warns of 3 shifts in global financial risks

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)


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.”

Technology is shaking up the financial industry and big banks are struggling to adapt

  • Rapid changes in financial technology, or fintech, are shaking up the global banking industry.

  • Banks must adopt new technologies to survive an ongoing “extinction phase” wrought by such tech, according to Stephen Bird, Citi’s global consumer banking CEO.

  • While new technologies cannot be ignored, bankers say the primary aim is to use them to provide the best service to customers.

Pedigrees, some stretching back centuries, are of little use to global banks unless they aggressively adapt to new financial technologies.

That's long been true, but the pace of innovation means financial juggernauts now face what one top executive likened to a mass extinction event.

A revolution in financial technology — often shortened to fintech — has propelled an explosion of new entrants who are shaking up the sector. Established giants, for their part, are fighting to adapt, emphasizing that technology may be changing fast but banking fundamentals are not.

Stephen Bird, CEO for global consumer banking at Citi, said the current changes may be happening on an unprecedented scale, but his bank — established in 1812 — is set to make the transition.

"The benefit of being 200 years old is that we have a survival reinvention DNA and that is core to who we are," Bird said during a panel discussion Wednesday at the annual Hong Kong FinTech Week conference.

"We think of it as we are living through an extinction phase," Bird said. "It is not an incremental thing, it's an epochal shift."

Given the explosion in new financial players, he said, established banks will need a "tense and deep re-engineering" of processes to enhance speed, convenience and trust and get at what is most important: the customer.

Bird said Citi in the United States, for example, has gained an edge by developing new ways of doing things by actively listening to its customers through "co-creation." Citi had 20,000 such sessions, which Bird credited with helping Citi achieve what he described as the most rapidly growing mobile base in North America.

Hard figures on how much the new wave of technology has disrupted retail banking are hard to come by, but analysts have stressed that the challenge is real.

"The rise of digital innovators in financial services presents a significant threat to the traditional business models of retail banks," consultancy McKinsey & Company said in a 2016 report.

So far, at least, global banks are holding up, based on their most recent reporting periods. Citi, Standard Chartered, Bank of America, HSBC and Credit Suisse, for example, all reported third-quarter profit increases from the same period last year. Deutsche Bank's earnings, however, slumped.

Ben Hung, regional CEO for Greater China and North Asia at Standard Chartered Bank, which has roots going back more than 150 years, said that one constant in the sector has been what customers seek at a basic level.

"It's all about how they want to manage their money, tend their money and grow their money and that fundamental need I don't think has changed," Hung said during the same Wednesday panel in Hong Kong.

What has, he stressed, is the pace of technological development now necessary to meet those requirements, which he acknowledged can be intimidating.

"It's about how to address some of these needs through technology in different ways, but equally it can be quite daunting given the uncertainty and speed by which technology happens," he said.

"It's all very exciting, very, very daunting," said Hung, who also serves as his bank's CEO for retail banking and wealth management.

Bird, meanwhile, said that the pace of investment flows into financial technology suggests an attention-grabbing shift away from incumbents toward new players.

"We take that provocation as very, very real because it's the economics of what's happening," he said.

He said that Citi has hired people from companies such as PayPal and Amazon who possess the "mindset" needed to aid the bank's transformation.

Also crucial, he said, is for the bank to be where its customers are. That increasingly means social media platforms such as WeChat as well as Instagram and Facebook.

"So we must fintegrate," he said.

AI and machine learning spell radical changes for traders, asset management

ARTIFICIAL intelligence and machine learning are set to shake up traders' jobs by enabling them to generate their own alpha, boosting fund managers' returns in today's asset management industry, currently under pressure to justify fees with outperformance.

That's according to Seth Merrin, founder and chief executive of Liquidnet, a dark pool trading platform with more than 930 asset managers as members, across 46 markets.

Dark pools were originally designed for institutional investors to trade large blocks of shares without having to disclose their identities, volumes or prices, unlike traditional exchanges.

Members of Liquidnet manage assets totaling US$15 trillion.

In a recent interview, he said fund manager performance is the biggest problem in asset management today.

Seth Merrin, founder and chief executive of Liquidnet, says active managers have undershot their benchmarks over the last 10 or 15 years.

"You don't have to go very far to read that the active managers have underperformed their benchmarks pretty consistently over the last 10, 15 years.

Asset management in Asia in 'hyper-growth' mode

"We've seen massive amounts of money leave active management and go into passive management and exchange-traded funds (ETFs). Quite frankly, it's accelerated and if our members don't perform better, it's going to continue to accelerate."

What could help change the game is tapping the power of artificial intelligence and machine learning to analyse and generate insights from data.

"There are some hedge funds that are performing incredibly well because they were very early on in understanding the power of this technology. Most active managers have not."

Now, the change will take place in the asset management industry, starting with the trading side.

"Traders today are looked at as a cost centre. It's an amazing amount of technology, expense, time and effort that goes into simply implementing their portfolio managers' orders.

"We've created all this technology that actually helps the trader implement and find liquidity so much better than just a human being can," said Mr Merrin.

Liquidnet is introducing a new analysis tool called Discovery, that uses artificial intelligence and machine learning technology to analyse market information and alert traders and fund managers if there are market events that may impact the portfolio.

It helps traders take advantage of short-term stock movements in the market to generate their own performance, or trader alpha, alongside fund managers.

On the amount of upside fund managers would be able to generate above what they were previously, the company said it was too early to say definitively.

Lee Porter, Asia-Pacic head of Liquidnet, said the tool has currently been introduced to 100 members in the US and Europe, with 20 across Hong Kong, Singapore and Sydney on pilot.

In Singapore, Liquidnet was recently approved for a capital markets licence by the Monetary Authority of Singapore, which would allow its approximately 30 members here access to their full range of offerings, including Discovery when the tool is officially rolled out, aside from block trading.

Mr Merrin strongly believes the asset management industry needs to embrace technology to continue surviving.

"This whole industry has been very manual and very analog", he said. "They need this technology, they need this evolution, they need this value-add to help their RMs succeed and do better."

"I think most industries have continued to do things the way they've always done until there is a company or companies that can think differently and change the industry.

"This industry needs a little disruption."

Temasek to offer first retail bonds with planned issue of 5-year notes for up to $400m

Temasek is planning to offer new five-year bonds with a first-time public offer tranche for mom-and-pop investors, the state investment firm announced on Tuesday (Oct 16).

Indonesia weighs tax cut for bond investors after rupiah falls to 20-year low

Indonesia is weighing proposals to cut the levy on gains from its sovereign bonds and extend tax breaks to exporters who will park their dollar earnings in local banks for a longer period as part of measures to shore up a weakening currency.

SGX invests in corporate bond trading platform Trumid

THE Singapore Exchange (SGX) has led a US$53 million growth equity financing round in Trumid, a New York-based startup that runs an electronic corporate bond trading platform.

DBS Aims to Save 10,000 Manhours Through Whatsapp and WeChat Banking Service

DBS announced the launch of DBS Wealth Chat, a service that will allow DBS’ wealth clients to interact, exchange ideas and transact with their relationship managers via popular instant messaging platforms WhatsApp and WeChat.

The bank claims to be the first in Southeast Asia to enable this service for its clients. Developed in partnership with regulatory technology (regtech) start-up FinChat, it enables DBS’ clients to use their existing instant messaging platforms to access DBS’ wealth services while meeting rigorous compliance standards.


The Process

To access the service, relationship managers can register interested clients in a private chat group with the bank. Upon confirmation, DBS will set up a unique chat group administered by the bank between the client and his/her relationship manager

Once the chat group between the relationship manager and client is initiated, conversations and file exchanges that occur within the chat group will be archived by the bank without any intervention required from the relationship manager. The entire process is fully automated.

Why is DBS Enabling Their Banking Services via Popular Messaging Apps

At present, relationship managers need to ensure key client conversations take place via the bank’s phone lines, where they can be recorded. DBS Wealth Chat allows RMs to communicate with clients on the go, on their clients’ preferred instant messaging platform. This, in turn, allows for speedier service delivery to clients.

The introduction of DBS Wealth Chat is estimated to save some 10,000 manhours on a yearly basis, while enhancing the ease and quality of relationship manager and client interaction.

“We recognise that customers today are inundated with different apps and services and decided to go where our customers already are – WhatsApp has upwards of 1.5 billion users, while WeChat has close to one billion users. Our aim is to provide banking services that are embedded in our customers’ everyday lives, while maintaining client privacy and keeping to our rigorous security requirements,”

said Tan Su Shan, Group Head of Consumer Banking & Wealth Management of DBS.

In the first phase, DBS will begin to register and onboard interested wealth clients in Singapore on the service, where content such as DBS Chief Investment Office reports, research insights and ideas, and exclusive invitations will be shared. Additional investment-related transactions (such as trade placement) will be introduced progressively in 2019.