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Macroscope | To avoid another global crisis, financial supervision must be beefed up
- Pressure from inflation and rising interest rates may have abated but global debt is rising again amid shadow banking risks, putting financial stability in jeopardy
- It’s time to set aside ‘light touch’ financial supervision and gun for something more assertive and intrusive
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Asian economies (with the critical exception of China) are showing some resilience in terms of growth and inflation. But the increasing size of the global debt mountain in and beyond Asia is a bigger threat than is generally realised.
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The International Monetary Fund (IMF) put out a report on September 18 to remind of the importance of “assertive and intrusive” supervision in ensuring financial stability. Financial stability, it warned, “needs supervisors with the ability and will to act” to avoid a repeat of past banking and financial crises, such as the 2008 global financial crisis and US banking crisis earlier this year.
Inflation may be easing, or at least not accelerating as rapidly, and interest rates may have paused their upward climb but the rise in debt at government, corporate and household levels shows little sign of abating as financial conditions tighten, and this points to potential crises.
One often-overlooked area of potential distress is trade finance – an area of critical importance to Asia’s biggest trading nations such as China and Japan. The Asian Development Bank (ADB) recently warned that the “global trade finance gap grew to a record US$2.5 trillion in 2022”.
Such numbers do not easily excite financial markets, which are more sensitive to things like inflation and interest rates or business activity and corporate earnings trends. But they are macro indicators of where things are heading at the micro level, and on the question of debt, the answer is: very much in the wrong direction.
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The latest figures from the Institute of International Finance (IIF) show that the global debt mountain has begun to grow again, after a modest shrinkage in earlier months.
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