The changing contours of private credit
The financial cycle is never eradicated, nor is financial instability ever really extinguished. On the contrary, financial risk moves like liquid mercury out of certain entities and into others. And increasingly credit-fuelled economies are especially prone toward credit crises. In many ways, regulation can be backward-looking, and thus can often be directed toward the last crisis. Over 17 years since the Global Financial Crisis (GFC), regulators maintain a keen focus containing banking crises; justifiably so, as the recent banking wobbles in the United States (US) in March 2023—and those which rippled across the Atlantic—demonstrate that risks are still inherent (and perhaps contagious) within the global financial system.
And yet, looking beyond the traditional banking system, potential vulnerabilities lurk within certain elements of the system of non-bank financial institutions (NBFIs). The late American economist, Hyman Minsky observed that strong medicine can have strong side effects. And one side effect of the regulation imposed upon globally systemic important banks (GSIBs) in the wake of the GFC has been for a swelling of assets under management (AUM) held by the NBFIs. As shown in Figure 1, since the GFC, the spread between the global AUM held by the shadow banks (NBFIs) and those held by the traditional banks has widened considerably. Accordingly, the Financial Stability Board (FSB) has been focused on 'strengthening the resilience' of the NBFIs on a global basis, given the lack of transparency and systemic stress testing within the industry.
This paper can be accessed here.
This paper is authored by Alexis A Crow, ORF, New Delhi.
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Business Standard
an hour ago
- Business Standard
Trump gets economy he wants, but growth risks may spoil his victory lap
President Donald Trump is getting his way with the world economy. Trading partners from the European Union to Japan to Vietnam appear to be acceding to the president's demands to accept higher costs in the form of high tariffs for the privilege of selling their wares to the United States. For Trump, the agreements driven by a mix of threats and cajoling, are a fulfillment of a decades-long belief in protectionism and a massive gamble that it will pay off politically and economically with American consumers. On Sunday, the United States and the 27-member state European Union announced that they had reached a trade framework agreement: The EU agreed to accept 15 per cent US tariffs on most its goods, easing fears of a catastrophic trans-Atlantic trade war. There were also commitments by the EU to buy $750 billion in US energy products and make $600 billion in new investments through 2028, according to the White House. We just signed a very big trade deal, the biggest of them all, Trump said Monday. But there's no guarantee that Trump's radical overhaul of US trade policy will deliver the happy ending he's promised. The framework agreement was exceedingly spare on details. Most trade deals require months and even years of painstaking negotiation that rise and fall on granular details. High-stakes negotiations break Trump's way Financial markets, at first panicked by the president's protectionist agenda, seem to have acquiesced to a world in which US import taxes tariffs are at the highest rates they've been in roughly 90 years. Several billion in new revenues from his levies on foreign goods are pouring into the US Treasury and could somewhat offset the massive tax cuts he signed into law on July 4. Outside economists say that high tariffs are still likely to raise prices for American consumers, dampen the Federal Reserve's ability to lower interest rates and make the US economy less efficient over time. Democrats say the middle class and poor will ultimately pay for the tariffs. It's pretty striking that it's seen as a sigh of relief moment, said Daniel Hornung, a former Biden White House economic official who now holds fellowships at Housing Finance Policy Centre and the Massachusetts Institute of Technology. But if the new baseline across all trading partners is 15 per cent, that is a meaningful drag on growth that increases recession risks, while simultaneously making it harder for the Fed to cut. The EU agreement came just four days after Japan also agreed to 15 per cent US tariffs and to invest in the United States. Earlier, the United States reached deals that raised tariffs on imports from Vietnam, Indonesia, the Philippines and the United Kingdom considerably from where they'd been before Trump returned to the White House. More one-sided trade deals are likely as countries try to beat a Friday deadline after which Trump will impose even higher tariffs on countries that refuse to make concessions. Trump's long-held theory now faces reality The US president has long claimed that America erred by not taking advantage of its clout as the world's biggest economy and erecting a wall of tariffs, in effect making other countries ante up for access to America's massive consumer market. To his closest aides, Trump's use of tariffs has validated their trust in his skills as a negotiator and their belief that the economists who warned of downturns and inflation were wrong. Stocks rose slightly on Monday morning on tariffs that once seemed unthinkably risky. Where are the experts' now? Commerce Secretary Howard Lutnick posted on X. But the story is not over. For one thing, many of the details of Trump's trade deals remain somewhat hazy and have not been captured in writing. The US and Japan, for instance, have offered differing descriptions of Japan's agreement to invest $550 billion in the United States. The trade deals do seem to count as a qualified win for Trump, with other countries giving the US favourable trade terms while accepting US tariffs, said Eswar Prasad, a Cornell University economist. "However, certain terms of the deals, such as other countries' investments in the US, seem more promising in the abstract than they might prove in reality over time.' Trump is also facing a court challenge from states and businesses arguing that the president overstepped his authority by declaring national emergencies to justify the tariffs on most of the world's economies. In May, a federal court struck down those tariffs. And an appeals court, which agreed to let the government continue collecting the tariffs for now, will hear oral arguments in the case Thursday. And he's yet to reach an accord with China which has deftly used the threat of retaliatory tariffs and withholding exports of rare earth minerals that are desperately needed for electric vehicles, computer chips and wind turbines to avoid caving in to Trump's demands. The US and China are talking this week in Stockholm, Sweden. Economists remain sceptical of the impacts for US consumers There is also skepticism that tariffs will produce the economic boom claimed by Trump. Analysts at Morgan Stanley said the most likely outcome is slow growth and firm inflation, but not a recession. After all, the 15 per cent tariffs on the EU and Japan are a slight increase from the 10 per cent rate that Trump began charging in April during a negotiation period. While autos made in the EU and Japan will no longer face the 25 per cent tariffs Trump had imposed, they will still face a 15 per cent tax that has yet to appear in prices at US dealerships. The administration has said the lack of auto price increases suggests that foreign producers are absorbing the costs, but it might ultimately just reflect the buildup of auto inventories to front-run the import taxes. Dealers built stocks ahead of tariff implementation, damping the immediate impact on retail prices. That cushion is starting to wear thin, Morgan Stanley said in a separate note. Our Japan auto analyst notes that as pre-tariff inventory clears, replacement vehicles will likely carry higher price tags. Economist Mary Lovely of the Peterson Institute for International Economics warned of a slow-burn efficiency loss' as US companies scramble to adjust to Trump's new world. For decades, American companies have mostly paid the same tariffs and often none at all on imported machinery and raw materials from all over the world. Now, as a result of Trump's trade deals, tariffs vary by country. US firms have to change their designs and get inputs from different places based on these variable tariff rates,' she said. It's an incredible administrative burden. There's all these things that are acting as longer-term drags on economy, but their effect will show up only slowly.' Mark Zandi, chief economist at Moody's Analytics, said that the United States' effective tariff rate has risen to 17.5 per cent from around 2.5 per cent at the start of the year. I wouldn't take a victory lap,' Zandi said. The economic damage caused by the higher tariffs will mount in the coming months. (Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)
Time of India
an hour ago
- Time of India
Trump and Starmer trade compliments but defend differences
U.S. President Donald Trump spoke warmly about the "special relationship" with Britain on Monday, lavishing praise on Prime Minister Keir Starmer, King Charles, and his own mother's Scottish homeland from the ballroom of his Turnberry golf club. But mixed in with the compliments were warnings for Starmer on energy policy, immigration, and tax, as well as a pointed attack on London Mayor Sadiq Khan, Starmer's political ally. Explore courses from Top Institutes in Please select course: Select a Course Category Artificial Intelligence Management MBA Data Science others Leadership MCA Digital Marketing healthcare Product Management Degree Operations Management Data Science Technology Project Management Others PGDM Finance Cybersecurity Public Policy Data Analytics Design Thinking Healthcare CXO Skills you'll gain: Duration: 7 Months S P Jain Institute of Management and Research CERT-SPJIMR Exec Cert Prog in AI for Biz India Starts on undefined Get Details Seated side-by-side, Starmer and Trump fielded more than an hour of questions from media in a whirlwind tour of global affairs that included setting a new deadline for Russia to agree a ceasefire in Ukraine and announcing food centres to ease starvation in Gaza. When it came to the Anglo-American relationship, Trump's often outspoken - and sometimes confrontational approach - to such media appearances was replaced with a charm offensive. "The prime minister, he's been so supportive of us and so strong and so respected, and I respect him much more today than I did before, because I just met his wife and family. He's got a perfect wife, and that's never easy to achieve," Trump said. Live Events Starmer, who spoke for only a small fraction of the 72 minutes the two spent in the gaze of the world's media, reciprocated the compliments freely in what was the latest chapter of a burgeoning friendship between the two leaders, who hail from opposing sides of the political spectrum. "It's fantastic to be here - thank you for your hospitality - and to see this amazing golf course. I'll invite you to a football ground at some stage, and we can exchange sports," Starmer joked. DEFENDING KHAN However, the British leader jumped in when Trump - who argued publicly with London mayor Khan during his first term as president - said Khan was doing a bad job running the British capital and called him a "nasty person". "He's a friend of mine, I should add," Starmer interjected, before Trump continued: "I think he's done a terrible job." Starmer listened to Trump talk about cutting immigration - an area in which the British leader is seen by the public as failing. Trump said that policy was key to his 2024 U.S. election win, alongside his promises to reduce taxes and boost the economy. Starmer's government, only a year after winning a landslide victory, is facing a fiscal crunch caused by a stagnant economy, and many analysts expect tax increases later this year to plug the gap. On energy, the two talked up the potential of small nuclear reactors, but set out opposing positions on other sources of power. Trump gently urged Starmer to make more of Britain's oil and gas resources and renewed criticism of the offshore wind turbines that dot the coast near his golf course, and which form a key part of Starmer's plans for a carbon-free energy system. "Wind is a disaster," Trump said. "It's a very expensive energy, it's a very ugly energy and we won't allow it in the United States." Starmer replied: "We believe in a mix." STATE VISIT Smoothing over their differences on policy, the two looked ahead to Trump's next visit in September when he will be hosted by King Charles for a state visit. "I hate to say it, but nobody does it like you people in terms of the pomp and ceremony," Trump said. "I'm a big fan of King Charles. I've known him for quite a while. Great guy, great person." After accepting an invitation presented to him during Starmer's visit to the White House in February, Trump will become the first world leader in modern times to undertake two state visits to Britain. "This is going to be a historic occasion, and we're all very much looking forward to it," Starmer said. In May, Washington and London announced the first bilateral trade deal made in the wake of steep new tariffs on global imports imposed by Trump. Trump's visit concludes on Tuesday, when he will open a new golf course near Aberdeen named after his mother, Mary Anne MacLeod, who was born and raised on a Scottish island before emigrating to the United States.
Mint
2 hours ago
- Mint
EU and US Rush to Nail Down Final Details and Lock In Trade Deal
The European Union dodged an imminent trade war with the US this week, but markets and a growing chorus of critics have dispelled early hopes that the deal will bring a sense of stability back to transatlantic relations. The euro dropped the most in over two months against the dollar Monday, plunging more than 1%. That's after the common currency had surged to a near three-year high last week on the prospect of an agreement with the US. The EU over the weekend agreed to accept a 15% tariff on most of its exports, while the bloc's average tariff rate on American goods should drop below 1% once the deal goes into effect. Brussels also said it would purchase $750 billion in American energy products and invest $600 billion more in the US. 'The free trade principles that have underpinned transatlantic prosperity since the end of World War II are being systematically dismantled,' Karin Karlsbro, a Swedish member of the European Parliament's trade committee, said in a statement. 'The risk of European economic and political marginalization grows with each concession made.' German Chancellor Friedrich Merz, who initially cheered the deal as having 'succeeded' in avoiding a trade conflict and enabling the EU to safeguard its interests, seemed to sour on the accord. 'The German economy will suffer significant damage from these tariffs,' he told reporters Monday. 'I'm pretty sure this won't be limited to Germany and Europe. We'll also see the consequences of this trade policy in America.' French Prime Minister Francois Bayrou was also critical, saying on social media: 'It's a dark day when an alliance of free peoples, united to affirm their values and defend their interests, opts for submission.' The EU and US will seek to clinch a non-legally binding joint statement by Aug. 1 that will expand on some of the elements negotiated over the weekend, according to a senior EU official. Once the statement is finalized, the US will begin lowering its tariffs on specific sectors, in particular for cars and car parts, which currently face a 27.5% levy. The two sides will then start work on a legally binding text, said the official, who spoke on the condition of anonymity. The content and legal form of this document aren't clear, but it would require the support of at least a qualified majority of EU countries and possibly the European Parliament. The EU official said that reaching a consensus on the legal text could take a long time; many trade accords require years of negotiations. The EU won't start implementing the terms it agreed to — such as lowering tariffs on US products — until after this legal text is approved, according to the official. 'The agreement removes some tail downside risks but is short on details, which will need to be thrashed out over the coming weeks, risking new volatility,' Oliver Rakau — chief Germany economist at Oxford Economics — said in a note. 'Uncertainty is likely to remain elevated.' European Commission President Ursula von der Leyen said that the US agreed to bilaterally lower tariffs to zero on certain strategic products, including aircraft and component parts, certain generics, semiconductor equipment and certain agricultural products. One potential sticking point in negotiations will be EU metal exports, which currently have a 50% tariff rate. The EU is pushing for a quota on metals that would lower the levies on a certain volume of goods, while anything above that would pay the 50% rate, according to the EU official. 'Uncertainty remains regarding all the details concerning the European steel industry,' said Axel Eggert, director-general of the European Steel Association. Discussions are ongoing on whether some goods, such as wine and spirits, would be exempt from the 15% tariff rate, the EU official said. Another possible issue is the EU's promise to purchase $750 billion of American energy imports over three years, an integral part to securing the deal. Yet it's hard to see how the EU attains such ambitious flows over such a short time frame. Total energy imports from the US accounted for less than $80 billion last year, far short of the promise made by von der Leyen to Trump. Total US energy exports were just over $330 billion in 2024. The EU's pledge to invest an additional $600 billion in the US is just as problematic. The investment is just an aggregate of pledges by companies and not a binding target as the European Commission can't commit to such goal, said the EU official. The uncertainty from the trade war has weighed on EU economic forecasts, with the commission in May cutting its GDP growth expectations for the year to 1.1%. It projected a 1.5% rate in November. Despite the critics, the commission, which handles trade matters for the EU, insists this was the only course of action. 'This is clearly the best deal we could get under very difficult circumstances,' Maros Sefcovic, the EU's trade chief, told reporters on Monday. With assistance from Michal Kubala, Arne Delfs and John Ainger. This article was generated from an automated news agency feed without modifications to text.
