In the City
Chasing shadows
JUST as global trade is interconnected, so too is global finance. But while cross-border trade flows are transparent, similar money flows have become far less so. And therein lies much of the risk, both short and long term from the Trump tariff shock to world financial markets because of what another Donald – former US defence secretary Rumsfeld – once described as “the known unknowns, that is to say we know there are some things we know we do not know, but there are also unknown unknowns, the ones we don’t know we don’t know”.
Former Trump commerce secretary Wilbur Ross told the Financial Times last week: “We are in a period of extreme fear of the unknown.” A major reason is the growing potential systemic risk presented by the largely post-2008 phenomenon of “shadow banks” operating in opaque and under-regulated private equity and debt markets – non-bank financial players such as hedge funds, private equity groups, asset managers, family offices, sovereign wealth funds, pension funds and insurance companies. According to a report from the Financial Stability Board (representing the G20 countries) last December, the non-bank sector grew at twice the rate of banks in 2023 to a 49 percent share of global financial assets – a record $239tn. And global regulators admit they know far too little about this ever more important financial influencer. The International Monetary Fund in its latest global stability report last October warned of “the need for more active regulatory and supervisory engagement” to “reduce systemic risks”.
Those regulatory concerns were echoed shortly before the Trump shock by Nikhil Rathi, now the newly reappointed chief executive of the Fundamentally Complicit Authority, to the Commons Treasury committee: “This is one area where we need data… we want to make sure that we understand what is going on.” Significant leverage was being used to juice up returns, but also risk. Events of the past two weeks suggest it may already be too late.