Banking chiefs say market vulnerable to ‘geopolitical escalation’, regulatory push

By Selena Li

HONG KONG (Reuters) -Top global banking chiefs on Tuesday said they are concerned the financial sector’s next crisis may come from rising geopolitical uncertainty which could test financial market resiliency, while the industry remains vulnerable to regulatory tightening.

The trigger for the next global financial crisis is likely to come from the geopolitical or political space, said Morgan Stanley Chairman and CEO James Gorman.

Gorman was among more than a dozen top executives of international firms speaking at the Global Financial Leaders Investment Summit hosted by the Hong Kong Monetary Authority.

“The challenges to democracy in some countries around the world are pretty evident,” Gorman said without elaborating.

The comments come as an unfolding Israel-Gaza conflict adds uncertainty to the global economic outlook, while the Russia-Ukraine war drags on and Sino-U.S. tension simmers despite efforts to bring leaders of the two super powers closer.

Deutsche Bank CEO Christian Sewing said markets have largely been resilient in the face of global events but this could change.

“My biggest fear is that one more geopolitical escalation – and that can happen pretty quickly – and the markets at some point in time actually give up the calmness and then you have a market event,” Sewing said.

Policymakers on both sides of the Atlantic rallied in March to prevent a possible re-run of the 2008-2009 global banking crisis after nervous depositors pulled record sums of cash from several regional U.S. lenders, including Silicon Valley Bank.

Just days later, Swiss authorities raced to broker UBS’s historic rescue of ailing rival Credit Suisse in a deal the European Central Bank described as “instrumental” in reassuring markets.

“Central banks have paused interest rate increases, but uncertainties remain in terms of the appropriate level,” UBS said in an earnings statement separately on Tuesday.

“As a result, the outlook for economic growth, asset valuations and market volatility remains difficult to predict. In addition, the ongoing geopolitical tensions including the conflicts in the Middle East and Ukraine continue to cloud the macroeconomic outlook.”


The global banking bosses also took the stage of the Asia summit to voice their concerns in an unusually aggressive joint effort to push back on a set of stricter banking rules.

Widely referred to as the “Basel Endgame”, a sweeping overhaul that would direct banks to set aside billions more in capital to guard against risk was brought forward in July.

“While we want the system to be safe and sound, when I looked at these rules I think they go way too far,” Goldman Sachs Chief Executive David Solomon said in a separate panel, referring to the banking regulatory tightening.

“If implemented, the way (the rules) are outlined, it is a significant additional economic tightening on the system at the time when I don’t think that’s in the best interest of economic activities and growth,” Solomon added.

In the U.S., the banking regulator has announced sweeping proposals to impose stricter capital rules for big lenders following runs on smaller banks earlier this year, whereas the industry has argued there is no justification for significant capital increases.

“Certainly I think movements from certain regulators at the moment to try and talk about capital are misguided. They should be focusing on other issues,” said UBS Group Chairman Colm Kelleher, without specifying regulators.

Kelleher also suggested the next financial crisis was likely to erupt in the so-called shadow banking sector, where an increasing volume of global assets were now managed, according to comments reported by the Financial Times.

“The policy objective is to limit the size of large banks,” said Morgan Stanley’s Gorman.

But “when you put pressure on the system the least competitive players fall back,” he said, adding it was challenging to predict next crisis until the policy conundrum is solved.

(Reporting by Selena Li,Kane Wu, Xie Yu, Scott Murdoch and Summer Zhen; additional reporting by Sinead Cruise in London, Editing by Tom Hogue, Christopher Cushing, Lincoln Feast and Christina Fincher)