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The onset of 2024 is brimming with hope for the trajectory of the economy, with the US successfully sidestepping a recession despite the interest rate hike cycle. This resilience seems sustainable in light of the robustness of the labor market and consumer spending.
However, financial institutions always need to remain vigilant about potential risks. Throughout the year, interest rates are expected to remain high, putting strain on more vulnerable borrowers such as those in the commercial real estate sector.
Yet, the most perilous issues are often the ones that go unnoticed. As the World Economic Forum commences in Davos, Switzerland, your MM host interviewed influential individuals about the most pressing risks in the year ahead.
Robin Vince, CEO of Bank of New York Mellon: “Despite the slowdown in inflation and the enthusiastic market response to potential rate cuts, geopolitical upheaval in Europe and the Middle East serves as a reminder of the contagion risks within the markets. The risk of disruption beyond the banking system continues to escalate. Additionally, the growing prevalence of technologies like AI presents opportunities for further innovation in a clever and secure manner, always mindful of the risks and the ever-present shadow of cyber security looming around the corner.
Treasury Under Secretary Nelly Liang: “Technology and innovation are fundamental strengths of the U.S. financial system, but they also have the potential to fundamentally transform financial services and introduce unprecedented risks. Financial innovation enables both existing companies and new players to offer novel products and services that may be faster and more cost-effective, yet operationally more intricate and reliant on emerging untested technologies. Financial institutions and regulatory bodies alike need to evaluate how technological advancements impact consumer and investor protection, safety and stability risks, and the necessity to adapt regulatory boundaries as systems evolve.
Acting Comptroller of the Currency Michael Hsu: “I believe the most underestimated risk of 2024 is operational resilience, that is, the capacity to sustain services in the face of disruptions. It’s intricate and laborious, requiring substantial time, effort, and financial resources to address effectively. This is inversely linked to technology debt and the likelihood of deferred maintenance, makeshift solutions, and malfunctions. Responsibility for this is increasingly decentralized among multiple parties, giving rise to accountability issues. It is crucial that this does not become a secondary priority for everyone and is not continuously overshadowed by more prominent risks.
Sarah Bloom Raskin, former Deputy Treasury Secretary and one-time Fed Governor: “From a macro perspective, we may observe indications of an impact in 2024 caused by the disparity between current climate policies and the ongoing energy transition. For instance, the current US policy approach relies on the belief that the proliferation of private-sector clean energy projects, supported by subsidies, will be adequate to address the emerging broader challenges inherent in an energy transition within the market. However, challenges such as energy scarcity, shortages of critical minerals, price volatility, and distributional disparities can be substantial. If the private sector-led energy transition falters, we could witness greater demand for clandestine bailouts funded by taxpayers, as well as recourse to alternative methods, including the de-risking of high-carbon assets.
it’s Tuesday – Victoria is back from a break and will be guest hosting the newsletter this week while Zac Wambrod is in Davos. Send us suggestions here [email protected] And [email protected],
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Tuesday …The Atlantic Council hosts an event on reimagining global economic governance at 9:30 a.m….Fed Governor Christopher Waller speaks at the Brookings Institution at 11 a.m….
Wednesday …Fed Vice Chairman for Supervision michael barr Speaks on cyber risk at 9 a.m. … US Chamber of Commerce holds a conference at 8 a.m. with Fed Governors, including Michelle Bowman, and representatives andy barr (R-Q.) and bill foster (D-Ill.)…Public Citizen hosts an event featuring the SEC chair, starting at 1 p.m. gary gensler And representative. maxine waters (D-Calif.)…The Joint Economic Committee will hold a hearing on affordable housing supply at 2:30 p.m….
Thursday …The American Bar Association’s Banking Law Committee holds its annual meeting later in the week… OCC’s HSU speaks at 9:30 a.m. on bank liquidity and mergers at Columbia Law School… FHFA Director sandra thompson Speaks at National Fair Housing Alliance event at 9:10 a.m. on artificial intelligence… House Financial Services Oversight and Investigations Subcommittee holds a hearing on SEC’s climate disclosure rule at 10 a.m…. Senate Banking Committee on technology and China at 10 a.m. Hearing takes place at… House Small Business Committee holds a hearing on capital access at 10 am…
Friday …the Fed’s Barr and the FDIC Chairman Martin Gruenberg Speak on bank regulation at a National Fair Housing Alliance event at 1 p.m….
Wall Street tells bank regulators: try again – Some of Washington’s top business groups are urging bank regulators to take further steps toward enforcing the most recent standards of the Basel Committee on Banking Supervision, as reported by Declan Harty. In a letter, the Bank Policy Institute, Financial Services Forum, SIFMA, and the Chamber of Commerce criticized the capital rule proposed on Friday and cautioned that any final rule resulting from it would violate procedural law.
The letter marks the latest effort by Wall Street to dismantle — or at least slow down — the planned rule. However, Todd Phillips, a longstanding investor advocate, argues that the warning presents an opportunity for regulators, outlining areas where they can enhance it. “And notably,” Phillips remarked, “the courts review the final rule for compliance with the administrative process, not the proposal.”
basal comment palooza – Public comments on the capital proposal are to be submitted to US bank regulators today in what is known to friends and foes alike as the Basel III endgame, and comment letters have already begun to arrive. (MM quotes a few below, but there are many more.)
- International Institute of Bankers asserts that the draft rules would create an uneven playing field between foreign and domestic banks, leading to higher capital requirements for so-called Category III and IV firms if they are foreign, but only 6 percent if they are domestic.
- National Association of Manufacturers enumerates several concerns regarding the proposal, including increased hedging costs, reduced options for managing their cash flows, and inflated costs of working capital loans.
- Derivatives Alliance for End Users warns that the availability and cost of derivatives will increase for all types of corporations if the proposed Basel rules are implemented.
- better market, a non-profit pro-regulation advocacy group, strongly supports the approach taken by the agencies, highlighting the benefits of higher capital, albeit noting that the proposal would not simplify capital rules.
Fed balance sheet in focus — Fed officials are beginning to contemplate slowing the pace at which they are reducing their bond holdings, a development that will profoundly impact financial markets, as reported by WSJ’s Nick Timirous.
Exclusive: BofA in Ukraine, meets Zelensky in Davos – Bank of America is taking a series of actions to support Ukraine’s financial recovery.
CEO of Bank of America brian moynihan revealed that the chairman of BofA International, Bernie Mensah, was in Ukraine on Friday as part of a small delegation with Penny Pritzker, the Biden administration’s point person for Ukraine’s economic recovery. According to a BofA spokesperson, Mensah will join Moynihan, Pritzker, and others in follow-up meetings with President Volodymyr Zelensky and other Ukrainian officials in Davos. Moynihan stated that BofA is providing capital markets advice to Ukraine. Banks are market makers in bonds.
Moynihan emphasized, “We didn’t have a lot of operations in the country, but you’re trying to give them the benefit of your advice about how to think about it. It’s a pretty good-sized economy. You have to start it all over again.”
Q&A: Ajay Banga – Zach also met with the President of the World Bank ahead of Davos, where they discussed climate and ESG, interest rates, and Donald Trump. Professionals can read it here.
Trump is on the minds of world leaders – Davos attendees are apprehensive about the possibility of Donald Trump becoming more anti-globalist if he returns as President of the United States, as reported by our Suzanne Lynch and Zach Report. The global elite “should be afraid.” [Trump],” Sen. JD Vance (R-Ohio) said in an interview with POLITICO. “If Trump stands for anything, I think it’s a rejection of his ideology, a rejection of the material benefits that come from it.”
JUST IN: Dirty money flows top $3T in 2023 – According to a new report from Nasdaq, $3.1 trillion of illicit money moved through the global financial system, including $782.9 billion from drug trafficking activity and $346.7 billion from human trafficking, as well as $11.5 billion from terrorist financing. Meanwhile, bank fraud and scams caused losses of $485.6 billion worldwide.
IMF report: 40 percent jobs exposed to AI – An International Monetary Fund study warns that forty percent of workers’ jobs globally will be affected by artificial intelligence. Mature economies – such as the EU, the UK, and the US – are at even greater risk, with more jobs requiring cognitive functions, according to our Peter Heck.
sanctions recommendations -The EU needs to bolster the enforcement of Western sanctions against Russia or risk potential punishment by the US for financial institutions headquartered in the bloc that fail to comply, warned the sanctions team of the think tank RUSI, reported by our European colleague Doug Busvine. Washington escalated its sanctions game just before Christmas during his presidency Joe Biden Signed an executive order empowering its Office of Foreign Assets Control (OFAC) to target foreign financial institutions for violating US sanctions. This highlights the EU financial institutions, which lack a central authority to enforce their own (very similar) restrictions and have inconsistent application of the rules by member states.
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