Banking industry 'more resilient' now than before the global financial crisis

The banking industry is far more resilient than it was before the global financial crisis and is in a stronger position to face changing macroeconomic dynamics amid rising interest rates and rampant inflation, panellists told the Future Investment Initiative.

The US Federal Reserve is moving on a defined path of raising policy rates to control inflation, which could significantly impact the economy's direction, Charles Scharf, chief executive of US bank Wells Fargo, said.

There are geopolitical events, “which can certainly change everything”, and the markets are factoring in all these eventualities, MrScharf, told delegates during a panel discussion on Thursday.

However, what is perceived by equity markets should be separated from the real economy as bourses are “appropriately incredibly nervous but the real economy is still particularly strong”, he added.
“The banks per se are just in really great shape,” Mr Scharf said.
“The [financial] institutions are so much stronger today than they were pre-financial crisis and it's not just their capital levels.”

Banks across the globe have taken measures to improve the quality of their assets and have changed the way they book businesses, whether extending loans or underwriting mortgages.

This comes after many institutions failed and several were rescued by governments after the 2008-2009 financial crisis, which was triggered by the collapse of Lehman Brothers.

Banks have also evolved their contingency systems and undergo regular stress testing to assess their ability to weather severe economic and financial headwinds.

The resilience of lenders in the UK and their ability to handle economic and financial stress has equally improved since 2008-2009 crisis, said Dame Susan Rice, chair of the Global Ethical Finance Initiative's global steering committee.

“The resilience is there and the desire to be resilient [as well] because no one wants to go through what happened in the financial crisis in terms of resilience and turn that on its head,” she said.

Lenders in the Gulf that faced a drop in profits and a rise in credit losses in the aftermath of the financial crisis have also significantly beefed up their capital buffers to meet potential macroeconomic and geopolitical changes.

The global economy, which is still emerging from the Covid-19 pandemic, is facing fresh headwinds as economic activity has slowed amid rising interest rates and spiralling inflation.

However, economic momentum in the Middle East, especially in the six-member GCC economic bloc, has bucked the global trend.

The Gulf economies that bounced back strongly last year from the pandemic-driven slowdown are expected to expand sharply this year amid elevated oil prices and inflation that is significantly lower than in US and European economies.

Saudi Arabia, Opec’s biggest oil producer and the world’s top crude exporter, offers significant investment opportunities, Samer Haj-Yehia, chairman of Israel’s Bank Leumi told delegates.

“The economy here is thriving, and you have significant progress [under vision 2030] well under execution,” he said.

Saudi Arabia’s economy grew 12.2 per cent in the second quarter, exceeding initial estimates and registering the fastest expansion in more than a decade on the back of higher oil prices.

Annualised real gross domestic product growth for the three months to the end of June was the quickest since the third quarter of 2011, according to the kingdom’s General Authority for Statistics (Gastat) data.

The kingdom's economy is set to grow at the quickest pace in a decade and could be one of the world’s fastest-growing economies this year, the International Monetary Fund said in August.

“So, there is a lot to do here from a GDP perspective, which is coupled with the banking industry,” Mr Haj-Yehia said.

“That, together [with when] we look at the population growing with a high percentage of youth … and you have a huge population that is unbanked or underbanked, the potential here is huge.”

The opportunities the kingdom is offering are “amazing” and the FinTech industry in particular is on the rise.

“We see companies are very healthy, unlike other economies around the world, and the prospects of the future are very positive,” he said.

From the regulations perspective, which is important for the growth of the country’s economy and its banking sector, regulators are providing “tailwinds”, he added.