CGTN Europe spoke to Richard Werner, Professor of Banking and Economics at the University of Winchester Business School, to discuss the impact of tariffs and countermeasures on global banking stability.
Category
🎵
MusicTranscript
00:00And let's get more on all of this with Richard Werner, Professor of Banking and Economics at the University of Winchester Business School here in the UK.
00:07Thank you very much indeed for being with us today.
00:09We just heard Mitch, our correspondent there, talking about Jamie Dimon warning of considerable turbulence.
00:16I mean, what kind of risk do these tariffs and the countermeasures pose to the stability of the global banking system?
00:22Well, the banking system is very closely connected to the economy and really how companies are doing.
00:34And that's also the mechanism that, you know, through which the banks could be affected.
00:39The interest rates, you know, in recent years have been rising and also the recent turmoil has actually kept rates, long rates high.
00:49That is fundamentally positive for banks because usually then the profit margins, the interest margin, you know, the interest rate that you're charging on loans is higher, significantly higher than the ones that you're paying on your deposit.
01:05But if your customers that you've given out loans to start to actually get into trouble, now that would be a problem because you don't want non-performing loans to rise.
01:14That could damage the banking system.
01:16I see. And just generally, how has investor sentiment shifted then this year?
01:21Are we seeing short-term positioning or are there some deeper structural changes taking place, do you think?
01:29Well, I think until the recent, you know, a tariff to and fro, the fundamental trend since, you know, actually late 22 has been positive for banks.
01:43And that is because of the, you know, the greater profitability due to the greater interest margins.
01:51And we've seen some of these results, I mean, extraordinary positive results surprising the markets for some of the banks, JP Morgan and so on.
01:59But the tariff situation is raising doubts now.
02:08And so I think investors are now exactly asking the question that you asked, you know, do we need to make more fundamental changes?
02:17Should we actually move away from the banking sector?
02:19And we saw on the short term, of course, the banking sector was affected.
02:23And the fundamental reason is that prosperity comes from trading, whether it's domestically or internationally.
02:31One way or another, you know, trade creates the prosperity as people and companies exchange goods and intermediary components and so on.
02:42And if that process gets disrupted, then essentially the power of the real economy to generate wealth gets disrupted as well.
02:54And that could have been a big impact on banks' customers.
02:59And so then banks' profitability estimates would have to be revised down going forward.
03:05You know, so this will be for the future.
03:07At the moment, it's hard to see what actually will be the result because, you know, we've had these tariffs announced and they were, well, suspended for 90 days.
03:16But for China, they're on.
03:18And so it's not yet quite clear to analysts and investors.
03:23But, you know, there is now a higher risk for the banking system because of those factors.
03:28And what do you make of the extraordinary swings we've seen on the markets this week?
03:33And given this volatility, do you think that's going to likely continue?
03:38And how are banks modeling for the rest of this year, do you think, for different scenarios?
03:42Yes.
03:43Yes.
03:44And, of course, well, on your last question, the banks are actually required by the regulators to always model particular stress situations.
03:53The stress testing is one of the big exercises that regulators require.
03:58There are prescribed scenarios, including a run on a bank, you know, liquidity being with deposit being withdrawn, liquidity risk.
04:05And then the various crisis scenarios, 2008-type, 2020-type crises.
04:15I suppose we will get in the coming year the regulators formulating a new stress test for trade disruption due to, you know, tariff disputes between countries.
04:27At the moment, each bank, because there's no regulation, you know, prescribed stress test for that.
04:35So each bank will have its own way of trying to model that and will be quite diverse and different.
04:40But I think it's mainly via potential non-performing loans of their actual loan customers.
04:47Now, sadly, this affects the smaller banks more because they're the banks that do the traditional lending to businesses for productive investment, which is the one that's really important for the economy, create jobs.
05:02Unfortunately, they get a bit punished at the moment, whereas the big banks that engage more in financial speculation and fee-oriented business, they tend to be less affected by this.