Conference Presentation, Panel
Brexit: A Red Flag for Global Financial Harmonization?
Milken InstituteRoss Westgate, Youssef Boutros-Ghali, Joe Cassidy, Colin Ellis, Dominic Lester, Sanjay Patel
- Global macroprudential infrastructure, including the FSB framework, is expected to remain largely unchanged despite retrenchment from globalization, though a few years of confusion may precede government efforts to partially redistribute globalization benefits to non-beneficiaries.
- The British economy, where financial and service sectors comprise approximately 80%, is projected to outperform Europe post-Brexit due to lighter labor laws and regulatory burdens, although the UK is unlikely to adopt a Singapore-style regulatory model given the lack of political desire to expand the financial industry's economic footprint.
- UK regulatory policy regarding Vickers proposals remains fixed as government policy, with specific impacts on bank behavior uncertain until measures fully take effect, while the separation of deposit-taking and investment banking remains an unresolved "live issue."
- European regulators are increasingly hindering credit pricing for consumers and SMEs, and the winding down of balance sheets by the Federal Reserve, ECB, and Bank of Japan is anticipated to trigger a calamity within institutions not integrated into the global macroprudential framework.
- The Euro area is identified by panel consensus as the highest hazard zone and most likely location for the next financial crisis within the coming year due to institutional flaws, political unwillingness to centralize fiscal authority, and a lack of "stake" in the currency union.
- The European Union's objective to establish a Capital Markets Union without the UK is deemed extremely challenging due to the loss of London as a distribution gateway, while political uncertainty in Europe is expected to persist for approximately 15 months leading up to 2018 elections.
- Brexit-related passporting privileges for UK institutions depend on regulatory equivalence between the UK and Europe under frameworks such as MIFID II, whereas the UK's protection of property rights, legal independence, and press freedom positions it as a preferred capital destination compared to parts of Europe.
- US President-elect Donald Trump may introduce instability by repealing Dodd-Frank or reimplementing Glass-Steagall, potentially overlooking the systemic risk reasons these laws were originally enacted in major financial centers.
- Fintech companies are expected to continue growing and influencing credit pricing for small businesses by leveraging analysis and servicing costs significantly lower than those of large banks, while regulators struggle to balance asset holding for growth in a low-interest-rate environment under Solvency II.
- Significant risks exist in the Italian banking system, including Montepaschi, where a massive gap between market capitalization and required equity creates a recapitalization "disaster," alongside potential Chinese non-performing loans in the real estate sector that could fuel the next crisis.
- A potential future economic alignment is suggested where the UK, US, Canada, Australia, and South Africa form an "Anglo-Saxon free trade area," leaving Europe behind, although such a scenario carries no guarantee of implementation.