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Financial Markets: The End of Globalization?

May 29, 20:07 UTC+3
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Geopolitical factors and return to protectionism in the world’s leading countries have a significant impact on the international financial architecture. These processes take place amidst the rapid development of the fintеch sector that is transforming financial markets at the high technology level. Blockchain, virtual service channels, and online lending platforms gaining momentum may well result in a loss by financial instutions of their mediation functions and challenge their future.

A shift towards protectionism is one of the main reasons of investor uncertainty, said Tobias Adrian, Director of the IMF’s Monetary and Capital Markets Department, in his April 2017 quarterly report on global financial stability.

  • The IMF estimates that the US investors’ concerns about the fiscal policy may lead to a rise in interest rates and global risk premiums. Meanwhile, the current US Adminstration’s policy aimed exclusively at national interests may negatively affect the emerging economies.
  • According to the World Bank, a slowdown in the growth of investment in 143 countries is caused by protectionism that results in lower turnover, higher expenses and weaker international trade ties.
  • The European Central Bank (ECB) has drafted a proposal for the EU countries to toughen regulations for foreign banks classed as globally systemic leaders or those with at least EUR 30 billion of assets in the EU. If the proposal is accepted, banks from the US and Asia, as well as from the UK after the latter leaves the EU, will see their costs increase.

The Asia Pacific countries, which have gained the most from the global economy growth, are urging world leaders to return to the way of international economic cooperation.

  • At the World Economic Forum in Davos, China’s President of China Xi Jinping was advocating free trade and warning against a new wave of protectionism associated with Brexit and Donald Trump’s victory in the US presidential election.
  • Against this background, the traditional financial sector is facing an overhaul –the last decade has brought a ten-fold decrease in the volume of conventional international money flows.

Experts see the main reason for that in a considerable narrowing of global banks’ mediation functions and a reduced number of their overseas branches.

  • Borrowings have fallen one third globally, while the European banks have halved their loans outside the EU. However, the role of the European banks in the national markets is still important. The banks finance 70% of loans to individuals and non-profit institutions. To compare, only a third of such loans is extended by banks in the US.

Apart from the changing economic and political landscape, the world’s financial market feels a strong influence from the fintеch sector, which is offering new technology and innovative solutions in reponse to the decreasing efficiency of traditional financial instututions’ mediation functions.

  • P2P platforms gaining traction in consumer and corporate lending enable legal entities and individuals to borrow directly from each other.
  • Crowdfunding is becoming increasingly popular among small and medium-sized businesses as it helps to reduce transaction costs, opens up new areas for investors and offers borrowers a larger number of sources and greater volume of funds.

In PwC’s 2016 global fintech report, experts recommend traditional financial institutions to look at the popularity of P2P lending and such trends as blockchain, robo-advising (automated investment advice), and transition to virtual service channels.

  • However, analysts remark that it would be premature to speak of innovation startups having gained the upper hand over traditional financial institutions. Many financial companies have switched to the Fintech 2.0 strategy (symbiosis and development) encouraging all market players to move from competition to win-win cooperation with the fintеch sector.

The Russian Central Bank’s financial sector survey for Q1 2017 highlights a shift of activity from banks to other sector players (investment funds, insurance companies, microfinancing institutions, etc.).

  • Non-bank financing is growing mostly in small and medium-sized businesses due to softer borrower requirements.
  • Quite a lot of non-bank financial institutions are controlled by banks, hence the traditional credit institutions do not see their activity as a real threat.
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