Political events are intrinsically linked to financial markets. As events unfold around the world, markets react in real time – sometimes wiping out billions of dollars of value in a single day. For example, the eventual outcome of Brexit is of utmost concern not just to the London Stock Exchange but to markets the world over. What are the wider, long-term implications for banks when it comes to political uncertainty? And should events such as Brexit be treated in isolation or as part of a sea change in global politics?
According to Dr Angela Gallo, a lecturer in finance at Cass Business School, City University of London, political tensions and global trade tensions go hand-in-hand, and the uncertainty they cause is one of the biggest threats banks face today. Global banks in particular are vulnerable as increasing global tensions raise concerns about global growth and asset prices. What are the risks of contagion spreading to financial institutions if the situation worsens?
From a wider historical perspective, periods of globalisation have generally been followed by periods of nationalism, often spurred on by the inequality created by globalisation. Dr Gallo believes we have already started a new cycle, where we’re moving from globalisation to nationalism. Political uncertainty is therefore going to be with us for a while. That is grim news for banks that tend to thrive in periods of stability and increasing globalisation. The effect on banks will depend on their ability to adapt to uncertainty.
Typically banks (and other organisations) would postpone investment, reduce expenditure and mitigate risk in these circumstances but, according to Dr Gallo, in prolonged periods of uncertainty, that is not necessarily the best course of action.
Political tensions around the world, just like the global financial industry itself, are intertwined. Dr Gallo worries that organisations tend to think of each political situation as independent from the others. We focus on the outcome of Brexit, or what the next election results might be, and we lose sight of the bigger picture. When you take all of the various political tensions into account, the implications are more severe, especially for global banks that will be vulnerable to multiple tensions around the world.
It is unlikely to be one tension in particular that causes problems; it is more likely that the action and reaction chain from multiple events, in multiple territories, will cause complex challenges that banks might find difficult to deal with.
You can listen to Dr Gallo discuss political uncertainty and the implications for banks in this the podcast at the top of this page. Gallo will be presenting at Sibos London on Tuesday 24 September in a session entitled – Living in an Era of Political Uncertainty: Implications for Banks.