Aurelia Butler

Regulating the financial sector is a bit like a game of whack-a-mole. Raise oversight in one area, and the risks migrate elsewhere. That is precisely what has happened with non-bank financial intermediaries, an assortment of institutions, often called “shadow banks”, that provide a range of investment and funding services but lie outside the scope of bank regulation because they do not take deposits. They have grown rapidly since the global financial crisis, filling the void left by tighter risk controls on commercial banks, rising from 40 to almost 50 per cent of international financial assets. This makes the health of NBFIs vital for financial stability — and the lack of comprehensive oversight of the sector all the more alarming. The disparate group — which includes insurers, hedge funds, pension funds and other asset managers — are an important part of the financial system. They provide credit and equity to the real economy. A diverse financial sector also acts as a shock absorber when the banking sector is under stress, much like a “spare tire” to quote Alan Greenspan, former chair of the US Federal Reserve. They buy bonds and drive global capital flows. But without effective regulation, NBFIs can exacerbate fragility. This was evident in March 2020 when hedge funds were sucked into a dash for cash by Covid-panicked markets and last year when the Bank of England had to come to the rescue of UK pension funds operating obscure investment strategies.Financial vulnerabilities built up over a decade of cheap money are now being exposed by rapid increases in interest rates by central banks. Although banking oversight has its flaws — as recent turmoil in the US and Europe showed — bank capital and liquidity has been strengthened since the financial crisis and there are pre-designed resolution mechanisms. Exposures in non-banks, meanwhile, remain something of a black box. The IMF cites three factors that make NBFIs a significant source of risk amid tight monetary policy and shrinking liquidity. These are the build-up of leverage in some institutions (albeit less so than banks), rising interconnectedness among non-banks and with banks, and the potential for asset and liability mismatches due to differences in liquidity and maturity. Crucially, NBFIs do not benefit from similar guarantees extended to deposit-taking banks.Regulators need to get a handle on non-banks quickly, particularly if high inflation persists and rates need to go higher. The Financial Stability Board, a global body monitoring risks in the financial system, needs to play a stronger role in providing remedies and ensuring they are actually implemented. Systemic oversight of the full array of NBFIs also often falls between the cracks of various national regulatory bodies that are geared to look at risks through either a banking or securities lens. Indeed, the US needs to bolster the non-bank activities of its Financial Stability Oversight Council and Office of Financial Research which surveil financial risks.As a basis for better regulation that de-risks rather than suffocates the sector, policymakers must reduce gaps in data, including on NBFIs’ liquidity and leverage. This requires more disclosures from institutions. Stress testing on non-bank financial markets risks needs to be a norm. The BoE recently announced plans to conduct the first such test. With the chain of exposures across borders, global co-operation to support risk mitigation remains vital. Ultimately, central banks will need to be prepared to provide appropriate liquidity support if incidents of systemic stress arise.Providing the right safeguards and keeping tabs on a dynamic and amorphous group of institutions is not easy. But with pensions, retail investments and lending to small businesses all at risk, it is crucial that national and international regulators shed more light on the shadow banking sector. More

Almost exactly a year ago, just before the IMF’s spring meeting, Janet Yellen, US Treasury secretary, launched a new buzzword: “friend-shoring”. The idea was that in a world of rising US-China tensions (and western hostility to Russia), American companies should move their “supply chains to a large number of trusted countries” — or friends. It initially sounded almost cuddly. After all, who can object to celebrating friendship, particularly if aggressive isolationism is the other option? Fast forward to 2023, however, and “friend-shoring” is sparking rising angst, for at least two reasons. One was on public display at this week’s spring meeting, where the IMF’s latest economic report lobbed an unusually forthright potshot at Yellen.More specifically, the IMF’s economists have crunched foreign direct investment data and concluded that these flows are splintering into politically aligned blocs. This started after 2008. But the “trend of geoeconomic fragmentation” is now accelerating, they say. If this continues, they calculate, it could reduce overall global economic output by around 2 per cent, with big damage to some emerging market countries. It could also produce financial jolts since “a rise of political tensions could trigger a reallocation of capital flows”. However, there is a second, less visible, issue haunting some of the executives at the spring meetings this week: how do you define a “friend” when you are making decades-long investment plans? In theory, the boundaries of Yellen’s would-be clique are clear: countries in Nato, the “five-eyes” security framework, North American Free Trade Agreement, and nations which seem pro-US and are wary of China, such as India or Vietnam. But the problem, as the British statesman Lord Palmerston observed back in 1848, is that states “have no eternal allies, and . . . no perpetual enemies”. And right now the world is in geopolitical flux. After the four-decade-long cold war era, and the three-decade-long globalisation phase, a new fragmentation is afoot, which is also likely to last decades. But the contours of this new dispensation are still being defined. “We don’t even know what to call this yet,” as Michael Froman, former US trade representative and Mastercard executive, observed this week in Washington.Hence the uncertainty about “friends”. Take, for example, America’s Inflation Reduction Act. Before this was announced, European policymakers assumed they were in Yellen’s clique. So they were shocked when the IRA excluded Europe’s companies from green subsidies, and are now retaliating with their own Net Zero Industry Act.Thankfully, both sides are now trying to lessen the diplomatic damage. But this shock “will not be forgotten quickly”, one European chief executive tells me, noting that it has sparked “a lot of ‘what-if’ conversations at our board level”. If Donald Trump runs for US president in 2024 that will become even more intense.So, too, with Nafta. Yellen’s embrace of friend-shoring has created a “lifetime opportunity” for Mexico, as a Bank of America report noted late last year, since enterprises ranging from Apple to Ford are shifting some operations out of China. Indeed, government ministers have suggested that more than 400 American ventures are considering Mexican investments — on the assumption that it will always be a “friend”. One hopes so. But Mexico’s leftward lurch shows how unpredictable politics can be. The election of Trump as US president in 2017 underscores this: just before he won the vote, he threatened to rewrite Nafta, causing the share price of companies such as Kansas City Southern railroad (a transport group central to Mexican-US trade) to slump.Thankfully, Trump’s threat turned out to be toothless, and Kansas City Southern’s share price rebounded. Indeed, company executives say that business is booming, and appear convinced that there is no chance of Mexico ever being kicked out of Yellen’s friend-shoring clique, given how tightly the economies are entwined. But that 2017 share price swing should give corporate boards pause for thought, nonetheless. And when executives consider how places such as India, Indonesia or Vietnam might develop, it is clear that those “what if” scenarios need to be particularly imaginative — especially given the speed at which companies had to evacuate from Russia after the invasion of Ukraine.Is there any solution? The one that the IMF proposes is for nation states to play nice with everyone again, and re-embrace globalisation. That would be wonderful. But it seems highly unlikely now.So the only practical option for companies is to hedge these geopolitical risks by placing production with multiple different friends and/or to bring it onshore. And they are doing this. A survey by Capgemini late last year shows that over half of global companies have reorganised production in the last two years — and three quarters plan more “onshoring and reshoring”.But, as the IMF stresses, hedging carries a cost in terms of lower efficiency and higher prices. Which is one more reason to be sceptical that we will return to an ultra low-inflation world any time soon — even if Yellen herself is unlikely to give a friend-shoring speech that honestly acknowledges that. [email protected] More

The euro climbed to its highest level against the dollar for more than a year on Thursday, buoyed by a brightening of the eurozone economic outlook in recent weeks, and a broader retreat of the dollar as investors bet that the US Federal Reserve has almost completed its monetary tightening.The euro surged 0.63 per cent to $1.1067 on Thursday, eclipsing a previous peak in February to bring the currency to its highest level since early April 2022. Soaring gas prices following Russia’s invasion of Ukraine last year had sparked fears of a deep recession in Europe, but a warmer than expected winter and a reopening of the Chinese economy following pandemic-induced lockdowns have boosted business activity and consumer confidence, fuelling expectations of further interest rate increases.“Last year was a perfect storm for the euro of high energy prices, the war in Ukraine, China’s zero Covid policy and the ECB really behind the curve,” said Athanasios Vamvakidis head of G10 foreign exchange strategy at Bank of America. “Now we have low energy prices, better data from China and an ECB which is more hawkish than the Fed.” Official data published on Thursday showed factory output in the eurozone rose at its fastest pace for six months in February, increasing 1.5 per cent from the previous month. Business activity in the 20-country single currency bloc also expanded at its fastest rate for 10 months in March, according to a survey of purchasing managers published by S&P Global last month. Improving economic conditions in Europe have been met with a broader decline of the dollar. The Federal Reserve started its first of eight rate hikes in March last year, and with a current target of 4.75 to 5 per cent the market is only pricing in one more 0.25 percentage point rate rise ahead of cuts later this year. “The dollar really is suffering when you get even slightly softer US data,” said Chris Turner, head of FX strategy at ING, noting weak producer price inflation in the US on Thursday and predictions from Federal Reserve officials this week of a “mild recession” starting later this year.He added that the effect of turmoil among some regional banks last month and tighter credit conditions made a US “hard landing” more likely and that parts of the US banking system were more exposed to unrealised losses on securities than European banks, allowing for the ECB to be more hawkish than the Fed. Policymakers in Europe were slower to respond to the threat of inflation than those in the US. The ECB started increasing rates in the second half of last year and investors expect the central bank’s deposit rate to increase from 3 per cent to around 3.75 per cent later this year. Eurozone inflation fell sharply to 6.9 per cent in March — its lowest level for a year — but underlying price pressures excluding energy and food kept rising to a new record of 5.7 per cent.The euro also strengthened against sterling on Thursday, as data showed the UK economy flatlined in February while industrial output in Europe was stronger than expected.Vamvakidis said the path of the euro would depend on global inflationary pressures. If central banks have to induce a recession to get inflation under control, the dollar may rebound thanks to its status as a haven in times of economic stress, he added. More

The writer is executive director of the International Energy AgencyInertia is a powerful force in energy systems — and a key challenge for efforts to transition economies to clean energy and tackle climate change. Why install a heat pump when your gas boiler works fine or buy an electric car when your petrol one does the job? Why build new power lines to connect solar plants to the grid when fossil fuel plants are already plugged in and running?But the ongoing energy security crisis has demonstrated how shocks can shake systems out of inertia. Russia’s efforts to gain political and economic advantage by pushing energy prices higher have spurred a major response by governments — not just in the EU but in many countries around the world — to speed up the deployment of cleaner and more secure alternatives.The effects of all this are becoming clearer by the day. Six months ago, the International Energy Agency showed that the repercussions of the war in Ukraine were reshaping the future of global energy, with a peak in fossil fuel demand clearly visible for the first time and set to happen before the end of the 2020s.This will be a historic shift: fossil fuels have held their share of global energy supply steady at about 80 per cent for decades. But the energy world is changing fast — and clean technologies are building momentum. The IEA’s latest data indicates that the peak in fossil fuel demand is moving even closer.For this, we can thank an array of clean energy developments, such as solar panels, wind turbines, electric vehicles and heat pumps, and the policies and investments that are supercharging their growth. It’s well known in energy and climate circles that these technologies are expanding quickly, but I think many people still don’t realise just how quickly. The implications need to be taken more into account, especially at a time when the energy crisis has prompted some countries and companies to push for new investment in large-scale fossil-fuel projects that may not actually start operations before the end of this decade.Take solar panels. Over the past two years, their global deployment has been fast enough to align fully with the rate envisaged in the IEA’s ambitious pathway to net zero emissions by 2050. Low-carbon electricity is also getting a boost from the comeback by nuclear power in many parts of the world.Sales of heat pumps, vital for the sustainable and secure heating of buildings, have been growing rapidly over the past two years, in Europe and elsewhere. Continued growth at this rate would almost double their share of heating in buildings worldwide by 2030. They are already outselling gas furnaces and boilers in the US and in a growing number of European countries — and demand remains robust in China, the world’s largest heat pump market.Electric car sales are soaring, accounting for close to 15 per cent of the global car market in 2022, up from less than 5 per cent just two years earlier. Government subsidies have been vital in bringing down the upfront cost of buying an EV, while the day-to-day running costs are generally much cheaper than those of conventional cars. Plus, the recent move by Opec+ countries to significantly cut oil production risks pushing oil prices to economically painful levels yet again, making the case for buying an electric car more compelling than ever.New IEA analysis in our Global EV Outlook 2023, to be published this month, shows that current trends in the rapidly growing global fleet of electric cars will avoid the need for the equivalent of 5mn barrels of oil a day by 2030. Strong government policies that encourage more people to purchase EVs can further increase this number. The IEA pointed out in 2021 that global demand for petrol had already peaked, thanks to the growth of EVs and improvements in fuel economy. Today, our latest analysis shows that global demand for all road transport fuels — petrol, diesel and others combined — will peak by 2025 as a result of these ongoing trends.The transition to clean energy is also accelerating in other sectors, including those where emissions are most challenging to reduce, such as steel. The project pipeline for producing steel with hydrogen rather than coal is expanding rapidly. If currently announced projects come to fruition, we could already have more than half of what we need in 2030 for the IEA’s net zero pathway. These transformative developments are speeding up the emergence of a new clean energy economy. With this in mind, the push by some companies and governments to build new large-scale fossil fuel projects is not only a bet against the world reaching its climate goals — it is also a risky proposition for investors who want reasonable returns on their capital. More

Good afternoon. Last week it was the Dover border chaos in the news but this week, another aspect of post-Brexit mobility friction hit the headlines — schoolkids and musicians.The FT wrote about the “Kafkaesque” experience of a French school having 12-year-old children refused visas for an organised trip to Stratford (the kids were a flight risk, apparently); while the Guardian reported on the German punk band Trigger Cut being turned back at Calais, apparently for having day jobs. (One is a landscape gardener and the visa rules say you can’t have a separate day job when using the Permitted Paid Exemption route. Who knew? Not them, it seems). Still, it is good to know that the Home Office is keeping Fortress Britain safe from ageing punk rockers and French tweens looking to visit the birthplace of Shakespeare. And since both the rockers and the school have said they won’t bother trying again, there is yet further comfort in knowing that these policies are clearly having the desired deterrent effect.Facetiousness aside, the mobility issues thrown up by Brexit really need fixing. Immigration was a massive factor in the Brexit vote, but that related to illegal immigration and uncontrolled free movement. The semi-amateur rockers or the school kids wouldn’t get any residency rights, and I don’t believe Brexiters were voting to keep them out. Both sides need to sort it out.What these incidents also point to is the fact that two years after the new rules came into force, Brexit isn’t going away — the trade and mobility frictions that are thrown up by leaving the EU are permanent and corrosive — as the latest trade data is now showing. (More on this below.)In fact, starting in October and continuing into next year the EU-UK frictions are going to get worse as the UK belatedly introduces its own border checks on goods coming from the EU — something it has postponed multiple times since Brexit in order to avoid supply chain embarrassment and to give it time to put the necessary staff and infrastructure in place.Whitehall insiders tell me that this time, however, having announced a short consultation with industry, the British government is finally serious about introducing the checks, albeit in a lighter-touch way than originally envisaged.What this means depends on who you talk to: for farmers and trade negotiators, it’s a welcome levelling of the playing field with the EU whose businesses have been getting a free pass; but for hauliers and traders who rely on EU supply chains and imports, particularly in the agrifood sector, it’s a serious headache. For EU businesses that export to the UK, particularly smaller ones, it’s something they probably haven’t thought much about — but is going to hit them hard from October.In the topsy-turvy world of Brexit communications, the government spun these new border processes as a “saving” to business of £400mn. This was dutifully reported by The Telegraph as a Brexit win, by comparing it to the £820mn which was originally estimated as the cost of imposing a full-fat border in 2022.Or, put another way, business will now “only” face £420mn of additional costs from post-Brexit border controls.What that means in practice, according to Shane Brennan of the Cold Chain Federation lobby group, is that for EU business shipping “medium-risk” goods like meat, fish, dairy and some plant-related products, they will require a physical export health certificate, signed at the point of dispatch by a qualified vet.That means if you’re an Italian mozzarella maker or a German salami manufacturer who was happily exporting to the UK, from October 31, you’ll need to find and pay a vet and make sure all your paperwork is in order to send those goods to the UK. If you’re a UK supermarket reliant on those EU vendors, you’ll need to make sure that those EU suppliers are au fait with the new rules, or risk supply-chain snafus.As Shane tells me, that could well make things very interesting for Christmas time if EU companies react the way that many UK companies did in 2020 when the EU imposed these requirements — they simply stopped exporting because they didn’t have the bandwidth to deal with the paperwork. It remains to be seen how many EU exporters take this path.The government appears to think that it has foreseen this by only introducing documentary and risk-based identity and physical checks from January 31, 2024. But this somewhat misses the fact that the deterrent for business is generating the paperwork needed to load the lorry, not the fear of it being stopped by officials in peaked caps at the border.This isn’t to say that the UK doesn’t need border checks — arguably it’s pretty outrageous it’s taken this long. And as the IoD said in an excellent recent policy paper on exporting after Brexit, the uncertainty has eroded confidence in the business world that the UK government ever delivers on its promises.Indeed not so long ago Jacob Rees-Mogg was telling businesses they’d face no paperwork at all — to fury in Defra, the agriculture department, which has wrested back control of the policy from the business department. But all this chopping and changing takes its toll. As the IoD writes after its survey of 580 businesses: “Firms are . . . questioning how dependent they can be on future initiatives.” That needs to change if the Brexit trade and investment environment is to be stabilised.There are strong arguments for a proper border to avoid biosecurity risks (which we’ve reported on) but also to even things up with the EU. If the UK wants to push Brussels to do more to facilitate trade, then having EU exporters face the same pain as UK exporters could help create pressure from EU industries on their governments to argue for a more pragmatic approach. We’ll see.That doesn’t mean it won’t come as a shock to those EU businesses that had thought “Brexit was done” and were merrily exporting goods to the UK like nothing had happened to then be told Brexit was only just beginning — nearly three years after the Trade and Cooperation Agreement (TCA) came into force.HMRC and the government put great stock in the ability of digitisation and the phasing in of its (also delayed) Single Trade Window digital customs solution to reduce the bureaucratic pain, but when I speak to trade consultants they say there is no digital magic wand here. In the end it’s all additional cost and friction that is a drag on UK competitiveness.The UK will also phase in safety and security declarations from October 2024, albeit with reduced data fields from the current 37 to 24 mandatory fields — another piece of self-imposed pain from Brexit that was a consciously taken choice. The UK could have remained inside the EU security zone, but elected not to.The food industry is now consulting internally on what the new UK border controls will mean for its members, and which products will fall into the “medium-risk” category. There are quite a lot of grey areas, I am told.As one insider involved in the consultation with the government tells me, “it’s the sheer complexity of so many different products and where they sit in terms of risk. I think some EU SMEs [small and medium-sized enterprises] will be shut out, others will have to move away from ‘just in time’ groupage models (so more lorries, moving fewer goods).”Or as Brennan puts it with characteristic pithiness: “This is perhaps the last Brexit-transition sticking plaster that we have to rip off, but don’t believe them when they tell you it’s not going to hurt.”As a side note, another major headache is looming for agri-food businesses as a result of the Windsor framework which requires goods travelling through the light-touch ‘Green Lane’ to Northern Ireland to be clearly labelled not for consumption in the EU.The UK government has decided this should be a UK-wide requirement to ensure that the Northern Ireland market is not discriminated against — ie, because companies wouldn’t be bothered to put “NI-only” labels on goods for such a small market, reducing choice in Northern Ireland.The logical alternative is therefore a UK-wide requirement to label goods “Not for EU”, but that will impose burdens on all companies — both UK manufacturers, including those that might not export to Northern Ireland, and EU exporters to the UK, who will need to label their produce “Not for EU” or “GB-only”. None of that is attractive from both a cost and marketing perspective. All this is still being worked out, but as with the new border operating model, more bureaucratic Brexit pain is coming down the tracks.Brexit in numbers

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

This week’s chart comes courtesy of my colleague Valentina Romei who reports on the dismal UK trade performance since Brexit. UK export volumes, excluding precious metals, were more than 9 per cent below the 2019 pre-pandemic average in the last three months of 2022, which puts the UK at the bottom of the G7 pack. And to think Brexit was sold as a tonic for reviving British trade.It obviously isn’t — how could it be when you erect barriers to trade with your largest trading partner by far? As noted above, much of this is the predictable consequence of Brexit, but if we want to interrogate the choices that actually confront the UK there has to be honesty about where we’re starting from.As noted in previous editions, Sophie Hale at the Resolution Foundation was among the first to publish on how the ‘dash for gold’ was inflating UK export numbers. Some Brexiters will want to accuse the Office for National Statistics and economists of trying to cook the books to make a remainer point, but as Hale points out “gold and precious metal exports have little meaningful economic benefit for the UK”. They are just passing through, as it were, with no impact on GDP.Take these out (see chart) and Hale describes the UK’s performance as “a disaster”. There is, however, some hope when it comes to services — a subject that, barring breaking news, I shall return to next week, with kind help from Britain after Brexit readers.A quick reminder of next week’s FT Live event: politics professor Jane Green will be joining my colleague Stephen Bush and I for an exclusive webinar for FT subscribers on: Is a Labour victory over the Conservatives inevitable? (April 19, 1-2pm BST — sign up here)Britain after Brexit is edited by Gordon Smith. Premium subscribers can sign up here to have it delivered straight to their inbox every Thursday afternoon. Or you can take out a Premium subscription here. Read earlier editions on the newsletter here. More

WASHINGTON (Reuters) – International Monetary Fund Managing Director Kristalina Georgieva said on Thursday that the global economy has proven remarkably resilient to multiple shocks, but has yet to overcome a combination of weak growth and sticky inflation.The IMF’s global growth projections of 2.8% global growth “is not enough to bring opportunities to businesses and people around the world, and most worrisome is the projection for weak growth over a longer period of time,” Georgieva told a news conference at the IMF and World Bank Spring Meetings. More