Enhanced risk management for a safer financial system

EquitiesFirst shares global regulators’ commitment to protecting the financial system against systemic risks as well as corporate scandal and fraud.

The financial crisis of 2008 made it abundantly clear that poor risk management in the financial sector can have a very real impact on livelihoods and businesses in the real economy.

The collapse of the US sub-prime mortgage market, followed by the fallout from the bankruptcy of Lehman Brothers, triggered a global recession. Americans alone lost US$9.8 trillion of wealth in the crash and the recession caused a loss of nearly 4% of global Gross Domestic Product, according to Moody’s Analytics.^[1]

More recently, the build-up of debt in the Chinese property sector has captured global attention. Investment bank Nomura estimates that China’s developers have total debts worth US$5.2 trillion, with nearly half of that amount made up of bank loans.^[2]

Globally, a determination to guard against a repeat of the 2008 crisis and rebuild trust in the financial system has led to an ongoing focus on reducing risk. But episodes from Wirecard to Archegos and Evergrande have shown that the world is never far away from another financial scandal.

To protect the financial system and the real economy it serves, regulators globally have stepped up their monitoring of financial risks and taken action to prevent risk from building up across the system or in specific pockets.

One of the biggest post-2008 changes requires banks to hold more capital in reserve for every dollar they lend, reducing the risk that another bank will fail or need bailing out with taxpayers’ money.

The so-called Basel reforms led to core equity tier 1 (CET1) capital ratios for large international banks increasing by nearly 3% between 2013 and 2019, according to the Financial Stability Board (See Chart)^[3]. Experts believe that these stronger capital buffers helped ensure the stability of the banking system as the Covid-19 pandemic emerged in early 2020.

Trust and integrity

Following scandals over the manipulation of key interest and foreign exchange rates, benchmark lending rates are also being reformed to make them more transparent. This has resulted in the phasing-out of Libor – the most widely used reference for floating-rate loans – from the end of 2021.

Furthermore, companies and individuals must now pass more stringent know-your-client processes before being onboarded by financial institutions. This enhanced scrutiny is intended to protect the integrity of the financial systems by preventing money-laundering, sanctions evasion and the terrorist financing.

This heightened focus on risk management has underpinned a recovery from the recession of 2008. However, the loss of public trust caused by the Global Financial Crisis must be fully reversed for the financial sector to fulfill its purpose of converting savings into productive economic activity.

Indeed, the Organisation for Economic Cooperation and Development (OECD) noted in 2019 that market integrity, transparency and sound oversight are important drivers of restoring faith in the financial system. “The behaviour of institutions and participants in markets is critically important to maintaining society’s trust in markets, and forms a distinct component of investor confidence,” it said.^[4]

A long-term partner

At EquitiesFirst, integrity and robust risk management is at the heart of our business.

We operate in global financial centers including the UK, Hong Kong and Australia and are subject to stringent regulatory standards. EquitiesFirst and its regional subsidiaries are licensed and regulated across multiple jurisdictions.

We are committed to helping prevent money-laundering, fraud, market manipulation and other forms of illicit activity in the equity markets. Our compliance process begins with a comprehensive onboarding procedure that requires prospective borrowers to provide personal or corporate documentation.

EquitiesFirst’s private ownership also helps to safeguard the stability of our capital. We do not rely on external financing or credit lines that could be withdrawn in times of crisis, nor do we manage capital for external investors.

We have also invested in our own in-house research capabilities to help ensure full vetting of every opportunity and careful collateral management. We only lend against shares after a thorough fundamental and technical analysis, and we run a diversified portfolio across sectors and geographies to mitigate broader market risks.

Financial markets will always have periods of volatility, but we believe robust risk management, at the macroeconomic and institutional level, will help ensure stability and orderly markets even during difficult times. This is a priority for regulators around the world – and for EquitiesFirst.

[1] https://www.washingtonpost.com/business/economy/a-guide-to-the-financial-crisis–10-years-later/2018/09/10/114b76ba-af10-11e8-a20b-5f4f84429666_story.html

[2] https://www.wsj.com/articles/beyond-evergrande-chinas-property-market-faces-a-5-trillion-reckoning-11633882048#:~:text=Nomura%20estimated%20that%20as%20of,many%20of%20them%20junk%2Drated.

[3] https://www.fsb.org/wp-content/uploads/P130721.pdf

[4] https://www.oecd-ilibrary.org/finance-and-investment/oecd-business-and-finance-outlook-2019_af784794-en

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