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A new financial accident could come from the banking sector, says Allianz chief economist

Problem now is the very abrupt tightening, but then there is an additional layer of wrong risk management.

stock market, financial, global, economy, banking,
The sudden shift in global monetary policy characterized by aggressive interest-rate hikes gave rise to current tensions.

Investors should brace for months of market readjustments overshadowed by the threat of a new “financial accident,” according to Allianz chief economist Ludovic Subran. “We have all the ingredients of a so-called Minsky moment,” he told Bloomberg Television on Monday, referring to economist Hyman Minsky’s description of a precipitous drop in asset prices after a build-up of debt. “You see that everywhere, these liquidity pools or liquidity crunches are starting to be visible.”

Subran isn’t the first to have resorted to that description since a string of US bank failures began in March, but his use of the term and his list of associated risks highlight how the circumstances that gave rise to that turmoil and engulfed Credit Suisse Group AG too haven’t gone away.

“Of course the commercial real estate and the doom loop with the regional banks in the US is a concern,” he said. “I’m concerned about the mis-pricing of corporate-credit risk, especially when I think that high-yield spreads are still too compressed, to be honest. And I’m also looking at the non-bank financial intermediaries.”

While the sudden shift in global monetary policy characterized by aggressive interest-rate hikes gave rise to current tensions, there’s more to it than that, said Subran, who formerly worked at the World Bank and France’s Finance Ministry.

“Everybody’s problem now is the very abrupt tightening, but then there is an additional layer of wrong risk management,” he said. “A new financial accident could come from the banking sector, it could come from some very specialized hedge funds in commercial real estate, but it could come from a mixture of those two.”

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Investors are in for a bumpy ride, Subran added.

“We don’t think we are in the remake of the global financial crisis,” he said. “But I think these release moments, these cathartic moments are going to be more frequent in the next few months for sure.”

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First published on: 08-05-2023 at 18:25 IST