Why the global financial landscape is undergoing a seismic shift
- Regulators are struggling to keep up with fintech’s rapid growth and the impact of big data, even as intense geopolitical rivalries mean accidents could easily escalate into crises
August 15 this year marks the 50th anniversary of US President Richard Nixon delinking the US dollar from gold. Instead of a crisis, the ensuing half-century marked the pre-eminence of the US financial system.
In 2017, then US Treasury secretary Steven Mnuchin commissioned four major studies on the US financial system that reviewed its efficiency, resilience, innovation and regulation. These surveys highlighted US dominance in all four areas of banking, capital markets, asset management and financial technology.
The reports proclaimed the US banking system “the strongest in the world”. Its capital markets were deemed “the largest, deepest, and most vibrant in the world”. According to the reports, “nine of the top 10 largest global asset managers are headquartered in country” and, in fintech, “US firms accounted for nearly half of the $117 billion in cumulative global investments from 2010 to 2017”.
Underpinning the US financial system’s success is the US dollar’s dominant currency pricing role. The dollar accounted for 88 per cent in paired foreign exchange currency trading in 2019 and 59 per cent of official foreign exchange holdings in 2020.
Second, fintech has enabled new arrivals in the financial sector, including big tech platforms that use big data, artificial intelligence, apps and cloud computing to provide more convenient, speedy and customer-oriented finance.
Given the combined growth of NBFIs and big tech, traditional bank regulators find they regulate less of the financial system, although central banks are still responsible for overall financial stability.
No country has yet figured out how to manage competition fairly in the fintech world when five firms – Amazon, Microsoft, Google, Alibaba and IBM – dominate 70 per cent of cloud-related infrastructure services.
Alibaba owns the South China Morning Post.
In short, the official regulators are responsible for system stability, but may not have access to what is really going on in the blockchain space. That is an accident waiting to happen.
All these suggest that the global financial system has grown faster and is too complex and entangled for any single nation to manage on its own. If the largest financial systems are caught up in acrimonious geopolitical rivalry, what are the risks of financial accidents that can easily escalate into financial crises?
Central bank assets have grown faster – at 8.4 per cent per annum on average in 2013-2018 – than banks (3.8 per cent) or NBFIs (5.9 per cent) to corner 7.5 per cent of global financial assets. Can financial markets assume that central banks will continue to underwrite their prosperity?
As inflation rears its head, central banks will have to reverse their loose monetary stance, putting the global financial system under stress. This system has structural and regulatory cracks, but they can only be fixed through some political understanding among the big players. Without this, expect a messy outcome.
Andrew Sheng writes on global issues from an Asian perspective