Another financial crisis is coming, and we’re still not prepared, warns Min Liao, Director-General of the China Banking Regulatory Commission. Part of an interview series for our Summit on the Global Agenda in Abu Dhabi.
Shadow banking, regulation, disruptive financial technology – what are the greatest challenges facing the global financial system in 2015?
Shadow banking – when institutions that are not banks carry out banking activities, in the shadows – is the greatest challenge. There are two reasons. First, intensified regulation on regulated financial institutions has shifted some riskier activities into the shadow banking sector. Under such circumstances, the overall risks increase as this risky business drops off the regulators’ radar. Second, new technology is amplifying the risks of shadow banking. China’s recent stock market turmoil testified to the risk-amplifying effect of shadow banking, which is armed with new technologies. The concern is the same in the US and Europe. The shadow banking sector, together with the cross-market activities it facilitates, has posed a great challenge for regulation and the global financial system as a whole.
How likely is it that the world will face another global financial crisis in the next five years, and how prepared are we to withstand it?
It is likely that the world will face another global financial crisis in the next five years. The reason lies in the fact that many of the problems behind the 2008 crisis remain unsolved. The fragility is still there, for instance in shadowing banking, high indebtedness, a lack of structural reform, the sustainability of emerging markets, and high leverage.
The way central banks and governments initiated rescues and reform after the 2008 crisis brought about changes and recovery in some parts of the world, but the super low-rate environment also delayed important structural reform and sacrificed market discipline. It is likely that another crisis will happen, but it’s difficult to determine where it will explode.
The real economy cannot recover to the pre-crisis level in the foreseeable future, and it remains uncertain whether the intensified regulation can control risks from shadow banking and disruptive technologies. Therefore, the next crisis will probably catch us unprepared once more.
What will be the most influential innovation or trend to impact the global financial system in the next five years?
The answer is internet finance technologies. The influence of internet finance is growing, gradually blurring geographical and business boundaries.
Internet finance includes online payment, small amount loans, P2P loans, crowd-funding, etc. It has penetrated into all financial sectors, from retail to wholesale, and from banking to insurance and securities. The traditional businesses of commercial banks will most likely be the next to follow.
Internet finance has changed the traditional way of doing business of banks. Thanks to these new technologies, a lot of transaction activities can now be conducted online and people don’t have to visit banks as often. Also, the connection between shadow banks and the internet has become tighter than ever. All this will continue to have an impact and bring new challenges to the global financial system in the next five years.
If you could help your council to make one thing happen in the next twelve months, what would it be?
The global financial system is changing fast after the 2008 financial crisis. To cope with these changes, the Basel Committee on Banking Supervision and Financial Stability Board have introduced and enforced many regulatory rules, and more of them are still in making and need to improve.
In the past few years, internet technologies have broken geographical boundaries, causing risks to accumulate and transfer more easily from one place to another. A comprehensive guideline is expected to be produced to lead the fight against new financial challenges.
I would like to work with members in the council and produce a suggestion paper on how to face challenges in the global financial system, especially those posed by technological innovation. So it would be helpful if the council could work out some suggestions in this regard as a reference to the international community, particularly on how to promote financial stability, regulation, and consumer protection.
The Summit on the Global Agenda 2015 takes place in Abu Dhabi from 25-27 October
Min Liao, Director-General of the China Banking Regulatory Commission, Director of the Global Financial Council of the World Economic Forum. Member of the World Economic Forum Global Agenda Council on the Global Financial System.
Image: A businessman walks on a road at Tokyo’s business district October 1, 2015. REUTERS/Toru Hanai