UniCredit chief Andrea Orcell’s warnings for more bailouts of US regional banks agree with assessments by leading economists that a prolonged period of high interest rates will lead to turmoil in the banking system. Moreover, the global economy is entering a new era of geopolitical changes, de-globalization, which is changing the trade map and the only certainty is uncertainty.
More precarious is the American banking sector
“In the US it’s about bailing out troubled banks, I don’t see any troubled banks being bailed out in Europe,” Orcel said in an interview with CNBC’s Joumanna Bercetche, adding that “in the US, judging by yesterday, there could be more.”
The ongoing global banking crisis
The First Republic came under severe pressure as the Fed raised interest rates to fight inflation, affecting the value of bonds and loans the bank bought when interest rates were low, leading to outflows from filings and regulatory interventions by US authorities. In a white knight role, JPMorgan on Monday acquired a significant majority of First Republic’s assets, which included about $92 billion in deposits. The First Republic’s seizure came after the collapse of Silicon Valley Bank and wider concerns about the stability of smaller US banks amid higher interest rates from the US Federal Reserve. Top economists told CNBC that further rate hikes could reveal more weakness in the U.S. banking sector.
But banking authorities in the European Union, where Italy’s UniCredit is based, have repeatedly said they don’t see the same level of risk in the region, arguing that European banks are well capitalized and subject to strings attached. strict rules governing the functioning of the banking system. . And if someone cites the case of Credit Suisse as an example, Orsel points out that its takeover and rescue by UBS took place outside the borders of the European Union.
The profound change in macroeconomic conditions
“We may see more bailouts in the United States, in my opinion, but in Europe these types of acquisitions will not be a driver of consolidation,” he explains, adding that after the pandemic and the invasion of Ukraine by Russia, the greatest risk is instability.
Few bankers can match Andrea Orcell’s depth of insight into the rapidly changing financial landscape. The CEO of Italy’s UniCredit, which operates banks in 13 Central and Eastern European countries, in an interview he gave two weeks ago to Bloomberg, again referred to banking crises on both sides of the EU. ‘Atlantic. And as a former head of investment banking at UBS Group AG in Switzerland, he had a fuller picture of rival Credit Suisse’s collapse. And in this merger, he focused on the profound change in macroeconomic conditions, stressing that bank chiefs should watch out for trouble.
“After years of globalization, positive momentum and a favorable economic environment, we face an uncertain future. Look at inflation, which will remain high for structural reasons. Look at interest rates. Look at geopolitics. Look at the economy. Look at the de-globalization, the reset of the value chains. All of these things are happening in parallel. It’s almost inevitable that something bad will happen, and governments won’t have a playbook because our playbook is about past crises, not the next crisis. That’s why I tell my team: the only certainty is uncertainty.” he says characteristically.
The delicate balance between inflation and stability of the banking system
Top economists are also sounding the alarm over the bailout of First Republic Bank by JPMorgan Chase, which says a prolonged period of higher interest rates is making the banking sector more vulnerable, potentially undermining the ability of central banks to contain inflation.
The Federal Reserve’s decision is expected today, with converging estimates that it will go ahead with a 25 basis point hike, while attention will turn to comments from Chairman Jerome Powell that will show whether the central bank has completed its tightening cycle. . But economists warn that inflationary pressures will remain elevated for a longer period.
The WEF Chief Economists Outlook report released on Monday highlighted that inflation remains a major concern. Nearly 80% of chief economists surveyed said central banks must manage “a trade-off between fighting inflation and maintaining financial sector stability” as they believe they will struggle to achieve their inflation target.
“Most chief economists expect central banks will have to balance their goal of further reducing inflation with the financial stability issues that have also emerged in recent months,” Zahidi told CNBC. As a result, he explained, this trade-off will become more difficult to manage, as around three-quarters of economists surveyed expect inflation to remain high or that central banks will not be able to act. quickly enough to reduce it to the objective.
The new era and hotbeds of instability
But several leading economists told a panel at the World Economic Forum’s Development Summit in Geneva that rising inflation and greater financial volatility are here to stay.
“The world has not adapted to the new era, which will be structurally more inflationary, the post-globalization world where there will not be the same scale of exchanges with more barriers to exchanges, with an aging population which makes retirees who are savers won’t save in the same way,” says Karen Harris, managing director of macro trends at Bain & Company. “Additionally, the workforce is small, requiring investments in the automation of many markets, so less production of capital, less free movement of capital and goods, more demands for capital. This means that inflation, the inflation push will be higher.”
Jorge Sicilia, BBVA Group Chief Economist, believes that after interest rates have risen sharply over the past 15 months, central banks will likely want to “wait and see” how this change in monetary policy will feed through to the EU. economy. But he said potential “volatility hotspots” that the market is currently unaware of are of more concern.
“In a world where debt is very high because interest rates have been at very low levels for a long time, where liquidity will not be as abundant as before, no one will know where the next problem will be,” he said. he declared.
He also drew attention to the reference in the latest International Monetary Fund Financial Stability Report to the “interconnectedness” of leverage, liquidity and these pockets of instability.