Geopolitics, stresses in the banking system and higher-for-longer interest rates could put a dampener on an expected uptick in capital market activity after a dull 2023, leaders from various top banks and financial service institutions said Nov. 7.

Speaking at the Global Financial Leaders’ Investment Summit, global finance chiefs addressed where the next crisis could emerge from for the financial services industry in the wake of bank failures and liquidity pressures earlier in 2023. The also spoke of the challenges

Here are the top comments from executives at the event, jointly organized by the Hong Kong Monetary Authority, the Securities and Futures Commission and the Hong Kong Academy of Finance. Some comments have been edited for clarity.

‘Challenges to democracy’

James Gorman, chairman and CEO of Morgan Stanley: It is likely to be something geopolitical or political. The challenges to democracy in some countries around the world are pretty evident.

Where the weak link is, I think, goes back to what we saw in March [with bank failures and liquidity difficulties]. I think we got a bit of a precursor. The policy objective is to limit the size of large banks, and by implication support smaller banks around the world, which may be a perfectly noble policy objective. From a practical reality of having these banks deal with the cyber [challenges], the regulatory oversight, all of the technology investments one’s got to make to be competitive in the AI space and so on, [it] means that they’re just less competitive. And when you put pressure on the system, the least competitive player falls back. So I don’t think we’ve solved … they’ve got this conundrum over policy desire against the reality that when the pressure hit, it was the largest banks that came in to help were not hurt.

Deutsche Bank AG CEO Christian Sewing: I’m nervous about the state of the capital markets because I think they’ve been extremely resilient if you think about what we have, what is going on in this world from a geopolitical point of view, still from an inflationary point of view. If you think about where interest rates have gone over the last 12 months, if you then see how resilient and calm the markets are … I mean, this is a level which is, in my view, far away from that what you would normally see in these situations. My biggest fear is that there is, for instance, one more geopolitical escalation, and that can happen pretty quickly. And the markets at some point in time, actually give up the calmness, and then you have a market event and in this regard. I think we all need to stay very much on alert with regard to risk appetite, stress testing and simply don’t do the mistake and simply think the markets will remain that calm as they are right now.

Colm Kelleher, chairman, UBS Group AG: Since 2008, the number of assets that have moved out of the regulated financial sector has grown by roughly 10%. Roughly 50% of global financial assets are now in what you call nonbank financial intermediaries, the shadow sector. … I think the next crisis when it happens, will be in that sector. It will be a fiduciary crisis.

Higher-for-longer

Bridgewater Associates LP Co-CIO Bob Prince: The markets are under discounting how long the tightening cycle is likely to go on in the US and Europe before we actually achieve some sort of equilibrium conditions of a 2% inflation rate with a 2% growth rate. I think you’re in this environment of the current level of short-term interest rates in the US and probably higher in Europe for some period of time, and the markets are under discounting that and the effects of it.

Peter Harrison, group CEO and executive director, Schroders PLC: Understanding corporate profitability and understanding defaults is particularly difficult right now. … The issuance cycle is against us all. I think we are in a really difficult period where the data is very noisy. There is a very significant outflow across pretty well all equity market platforms around the world. People are saying, ‘We prefer cash.’

We’ve got a long way to go before we feel some sort of normalization. We are one year into a new normal, but it takes more time for 12-13 years of party time to wash through. And that isn’t going to happen in a hurry. We are yet to find out where all that debt went. [The reset will be] measured in years, not months.

David Solomon, chairman and CEO, Goldman Sachs Group Inc.: In 2024, we’ll see a pickup in capital markets activity just because they’ve been closed for a period of time. Companies need to finance as the duration goes out. There’s more financing work that needs to be done. So we can operate with very, very healthy capital markets and a 5% interest rate environment. But the period of reset and acceptance takes some time. We’re on that journey. And I think you’ll see more a constructive market environment for capital markets as we move into 2024 and 2025.

C.S. Venkatakrishnan, group chief executive, Barclays PLC: People need to have business logic for what they do. They’ve got to bring companies to the market, or for mergers. But they’ve also got be secure about their financing and be able to to operate at that higher level of financing.