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SPI Management Newsletter 31.03.2023

Yellen Advocates Reevaluating Bank Regulations After Recent Bank Failures

Treasury Secretary Janet Yellen suggested that it may be time to reassess banking regulations in light of the recent collapses of Silicon Valley Bank and Signature Bank. Speaking at an economics conference, Yellen emphasized the urgent need to finalize post-crisis reforms, evaluate the extent of deregulation, and address exposed weaknesses in the current regulatory framework.

Yellen, who has previously held high-ranking positions at the Federal Reserve, including Chair, acknowledged that the post-crisis reforms put in place helped mitigate the fallout from the recent banking turmoil and market volatility during spring 2020 caused by the Covid-19 pandemic. However, she pointed out that the government still had to deliver significant interventions to ease the pressure on certain parts of the financial system, which indicates that more work is required.

Some former regulators have argued that the focus in Washington may have been too heavily concentrated on the largest banks following the 2008 financial crisis. In 2018, lawmakers from both parties voted to increase the asset threshold at which banks automatically face strict stress tests and other regulations from $50 billion to $250 billion. Currently, the Federal Reserve is reconsidering its rules for banks with assets between $100 billion and $250 billion, while the White House is also advocating for tighter regulations for midsize banks.

Yellen also addressed the ongoing efforts to manage risks outside of banks, such as money-market funds, hedge funds, and stablecoins, which are digital assets typically pegged to the dollar. She stressed that these financial instruments pose a risk of creating fire sales of assets, potentially destabilizing markets in the process. To tackle these risks, the Financial Stability Oversight Council (FSOC), an interagency forum established after the financial crisis, is working on changing its rules to more easily subject such institutions to enhanced federal supervision. Additionally, Yellen mentioned that the FSOC has restarted a group studying hedge funds and is requesting Congress to pass legislation to regulate stablecoin issuers similarly to banks.

Chinese Consumers Bolster Economic Recovery

In March, China's services sector activity reached its highest level in over a decade, signaling that Chinese consumers are returning to stores and restaurants and driving economic recovery after nearly three years of strict Covid-19 controls. This rebound offers hope for the global economy, as it relies on Chinese consumers to support growth in 2023, while consumers in the US and Europe face challenges like rising interest rates, high inflation, and potential lending restrictions due to banking sector turmoil.

However, the sustainability of the recovery in Chinese consumption remains uncertain, as households have accumulated significant savings but are dealing with weak housing and job markets, and sluggish income growth. Despite these concerns, the World Bank increased its growth forecast for China in 2023 from 4.5% to 5.1%. The Chinese government has set a growth target of around 5% for this year, which economists believe is achievable given last year's weak growth.

Maintaining the current momentum could be challenging, as Chinese families continue to save and repay mortgage loans, and private businesses seem hesitant to invest and hire. The real test for the Chinese economy will come in the second and third quarters, with a potentially gloomy backdrop for global growth.

UK Joins Indo-Pacific Trade Bloc, Marking Largest Post-Brexit Deal

The UK has successfully negotiated to join the 11-member Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), marking the largest post-Brexit trade deal to date. The deal places the UK at the center of a dynamic group of Pacific economies with a combined GDP of £11 trillion ($13.6 trillion).

The trade bloc spans countries such as Canada, Japan, Australia, and Singapore, with the agreement expected to be signed by the end of the year, following approval from Parliament and the 11 member states. Joining the CPTPP is estimated to boost the UK's economy by £1.8 billion in the long term and increase wages by £800 million compared to 2019 levels.

The UK's trade commissioner for Asia Pacific, Natalie Black, emphasized the significance of the deal for the UK's future economic growth. However, it is yet to be seen how much this deal will actually benefit Britain's growth prospects, as it will raise long-term domestic GDP by only 0.08%, which might not offset the European trade losses resulting from Brexit.

Adapted from WSJ, Reuters, CNBC, NYT, Forbes

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