Sustainable growth

The chance for banks to show their worth

Being a bank that’s a force for good is just as important as being one that fosters economic growth and development

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. Recent political controversies about globalisation 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. 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Although the US has withdrawn from the proposed Trans-Pacific Partnership (TPP), protectionist rhetoric has not, so far, translated into substantial actions that would undermine the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 Federal Reserve has already started to raise interest rates in the US and other major central banks are considering starting to normalise monetary policies.

There has also been a willingness of international regulators to reconsider specific regulations that may have led to adverse unintended consequences. Banks are considerably stronger, with more capital, and are investing in new technologies to become more efficient and provide better services.

But let us not be complacent. In many advanced economies real wages are stagnant, productivity is weak and trend rates of growth are lower than before.

There are also geopolitical uncertainties whose exacerbation or materialisation would lead to a decline in confidence and adverse economic and financial consequences.

Finally, there are risks stemming from the normalisation 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 which are more leveraged or exhibit weaker fundamentals.

Achieving sustainable growth

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 do to contribute to this goal?

Policymakers 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 cooperation framework that has served the world so well.

We, international banks, must continue to enhance our own performance and tackle our own challenges to better support global growth. We must 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 critical to regain the loss of trust in banks by society as a result of the crisis.

We should not forget that there are established links between the global economy, international banks and trade which are fundamental to providing the growth and prosperity on which the world depends.

The economic recovery from the financial crisis is a classic example. The recovery has, to a large extent, been driven by activity in emerging markets, particularly in Asia. Latterly, growth in Europe has picked up and the US economy remains strong. But the role of Asia in supporting world trade is critical and a genuinely historic development.

Belt and Road – boosting world trade

China, a leading world economy, is overtaking the US to be the driver of world free trade. It is the world’s mega-trader. China’s share of world trade rose to nearly 14 per cent in 2016, up from close to 9 per cent 10 years ago.

The US may have pulled out of TPP, but China has pressed on with attempting to finalise its own regional agreement, the Regional Comprehensive Economic Partnership (RCEP). This covers countries amounting to about a third of global GDP and will substantially benefit manufacturing by removing tariffs on goods. While these benefits might not be as large as those TPP offered, they are very welcome.

The biggest Chinese initiative is, however, the Belt and Road (B&R), a potentially major force to boost world trade and investment and to foster globalisation by deepening links between East and West. China has signed co-operation agreements with over 30 countries along the B&R route and six key trade corridors, with economies along the route accounting for about 60 per cent of global population and 30 per cent of global GDP.

Fortunately, China is not alone in embracing economic reform. A progressive series of market-friendly reforms over the last decade have improved economic governance and made economies and financial systems more resilient than they were in the crisis of the late nineties.

That said, many emerging economies do need to address outstanding vulnerabilities, notably those derived from the significant increase in corporate and household leverage in recent years. China stands out, with corporate debt of more than 160 per cent of GDP. The authorities recognise this, and are taking steps to address it.

In advanced economies, while financial systems have become stronger and budget deficits reduced, there has been insufficient focus on enhancing growth and productivity through structural reforms and investment, especially in infrastructure, R&D and education.

Do banks have a social purpose?

The role for international banks in this environment is vital. We are able to support world trade and investment, by lending our expertise to clients and governments and providing the financing to corporates needed for a growing economy.

International banks support exports by facilitating access to finance and providing products that exporters need, such as letters of credit to overcome credit risk and derivatives to hedge currency risk. This link between international banks and cross-border trade, which is itself an important driver of investment and economic growth, is absolutely fundamental to understand our role.

Bankers are often asked; what do they do that is socially useful? The answer is simple. We support the real economy, by financing trade and investment 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.

A version of this article originally appeared in The Banker, a Financial Times magazine, on 1 September 2017.