‘May you live in interesting times’ goes the expression and it is not without a sense of irony that in these very interesting times, interest rates have been at historic lows to lessen the impact of the pandemic. The World Finance 100 recognises those who have gone above and beyond during this time, showing resilience and remarkable strength of character

As emergency government lifelines to companies decline in the wake of the pandemic, financial institutions face the balancing act of managing credit to the millions of businesses around the world that are still vulnerable. A study by the International Monetary Fund of firms of 26 European countries showed that the number of illiquid – effectively bankrupt – businesses would have more than doubled without official support. “Liquidity (ready cash) provided to companies prevented cascading bankruptcies,” IMF economists wrote in a blog in late 2021.

Yet the position of many firms remains dire as they struggle back to viability, making an unprecedented partnership between the world of finance and governments an essential element of a return to normality. The continuing support scheme in Ireland for small businesses, for instance, is fairly typical of the way forward. Investors are expected to share much of the burden while government agency Enterprise Ireland undertakes the task of assessing their long-term viability.

Meantime a vast debt-restructuring exercise will keep lenders occupied for years while insolvency specialists have a field day. As the IMF notes: “For those firms that have to restructure debt or be liquidated, out-of-date court debt-restructuring and insolvency regimes will need to be enhanced.”

In this searing process, NPL may become a household acronym. As Scope Ratings predicts in an analysis of risks to financial institutions, “the odds of a systemic banking crisis are low, but delinquencies arising from the pandemic will increase as banks move to formal recognition of non-performing loans (NPLs).” The consequences to banks will be weaker profitability in what is “a real issue.” Indeed the European Central Bank has expressed its own concerns about the quality of bank assets in this inevitably drawn-out recovery.

Going green

Looking ahead, in a sea change in the principles of credit, net-zero financing has become official as central banks reveal how they expect all institutions to follow new guidelines on sustainable lending. One of the first off the mark is the Bank of England, which in early November released details of how it will green its corporate bond purchase scheme that, it says, “is consistent with targeting a 25 percent reduction in the weighted average carbon intensity of the portfolio by 2025 and full alignment with net zero by 2050.”

This is a wake-up call for finance institutions and corporates alike. It means the Bank of England won’t buy firms’ bonds unless they satisfy its criteria. The greener the firm, the more attractive its bonds are. “Purchases of eligible firms’ debts will be ‘tilted’ towards the stronger climate performers within their sectors,” promises the Old Lady of Threadneedle Street in a clear warning to the rest.

"Most of the recent rise in prices reflects global supply shortages and bottlenecks"

The implications for corporate treasurers everywhere are profound because many central banks are following suit, prodded by the Financial Stability Board, which has been working along these lines for some years, and the European Central Bank. The all-important net-zero criteria that firms should follow are clear enough. The Bank of England has drawn up four metrics: the emission intensity of their activities, current progress in cutting emissions, the quality of their climate disclosure, and a clear target for reducing emissions. Firms whose targets have been verified by a reputable third party will earn more credit, which is central bank-speak for selling more bonds.

But there’s a sting in the tail. Firms that slip behind the criteria – weaker performers – face the prospect of reduced purchases, removal from the eligible list or even having their bonds sold off. The bank describes this carrot-and-stick approach as ‘incentivisation’ – and it certainly is that. So there’s a new lending paradigm sweeping the world of finance and there won’t be any excuses. “It’s not easy being green but that shouldn’t stop us,” said the Bank of England’s executive director for markets, Andrew Hauser.

How low can rates go?

One of the post-Covid headaches for investment and wealth managers alike is where interest rates are heading – and nobody really knows because of the all-pervasive quantitative easing that has skewed standard economic thinking. As the year drew to a close, most central banks were holding official rates at record lows. At the last count, the US Fed’s rate was 0.250 percent, Australia’s 0.100, South Korea’s 0.750 and the UK’s 0.100, posing a nightmare for retail banks, fixed-rate investors and the money markets in general. Only a few central banks were heading in another direction, like Chile on 2.750 percent.

The problem is that inflation is on the rise, but what’s causing it and how permanent is it likely to be? According to Ivan Petrella, professor of economic policy and forecasting at Britain’s prestigious Warwick Business School, “looking beyond the aggregate numbers shows that most of the recent rise in prices reflects global supply shortages and bottlenecks.” He expects price pressures to be temporary, in the UK at least.

Another complication is that the pandemic has distorted normal savings patterns. In late 2021, Bloomberg Economics calculated that Americans still aren’t spending excess savings while Europeans drew theirs down only slightly. Confounding predictions yet again, Italians actually saved more. If people aren’t buying, prices stay down, according to the classic economic dictum. But how long will that hold?

It is however certain that QE, a tool that only dates from 2009 in most economies, is here to stay for a while yet. As such, it continues to overshadow practically every sector in finance because of the way it depresses interest rates among other effects. And how long will QE take to unwind? The Bank of England’s QE programme, for example, has hit unprecedented proportions, bringing the bank’s balance sheet to about £1trn. That’s equivalent to half of Britain’s entire gross domestic product, which is, as the bank acknowledges, “an unprecedented figure in the Bank of England’s 327-year history.”

Able to be stable

Only those close to the action understood how close to chaos the world of finance was during 2020 and a good part of 2021. As America’s Randal Quarles, chairman of the Financial Stability Board (FSB) that has been in the forefront of managing the crisis, remarked in a speech in October: “Living through the events of last year was an experience of near chaos. The world had stopped functioning the way it should, leading to unexpected – and in some cases almost unimaginable – outcomes, including in our financial markets.” Among many other interventions the FSB worked with the world’s major banks to provide loan modifications to clients that helped keep them afloat in the interests of financial stability.

In the recovery, notes Quarles, non-bank financial intermediation markets will be crucial, citing in particular the short-term funding markets that have been roiled. “The money market fund sector has more than $8trn in assets under management globally,” he points out. Looking ahead, the FSB wants the money markets to become more resilient in what looks like a five-year programme. In this and other reforms designed to strengthen the financial sector as a whole, regulators will be more active than ever. “The global regulatory framework, done right, is like a tightly woven piece of fabric,” approves Quarles.

And the FSB is keeping a close eye on digital assets as they go through the roof. Between early 2020 and late 2021, the market capitalisation of crypto-assets soared from below $200bn to $2.4trn, while the rate of increase in stable coins isn’t far behind – from $20bn in market cap to over $130bn. As the FSB frets, crypto-assets aren’t easily regulated because “they operate in the digital ether where they can easily cross national borders.” That’s why nobody rules crypto-assets out as potential systemic risks.

Ever smaller

As Chinese regulators battle with the potentially catastrophic problem of ailing Evergrande, the country’s second-largest property developer, a cloud hangs over the world of finance. The crucial question is: can the markets survive a $300bn loss, which is the amount that Evergrande owes to banks, bondholders, employees and suppliers, without possibly causing systemic damage? In early November it was reported that a division of the group had failed to make over $80m of payments.

“The world is being forced to contemplate a scenario it had never seriously considered: a made-in-China financial crisis,” presciently notes University of London’s professor of international economics Paola Subacchi in an article for Project Syndicate. Certainly, the possibility of the property giant’s bankruptcy provoked earnest discussions at the International Monetary Fund’s annual meeting in mid-October.

"The global regulatory framework, done right, is like a tightly woven piece of fabric"

As Professor Subacchi notes, crashes of this magnitude all too easily have global ramifications, citing the Financial Crisis that followed the failure of Lehman Brothers in 2008, the US Fed’s bail-out of hedge fund Long Term Capital Management a decade earlier to protect the financial markets, and also in the 1990s the collapse of Japan’s real-estate bubble. Although Subacchi expects Chinese regulators to manage Evergrande as best they can, it raises big issues about China’s heavily exposed offshore credit market. The implications are fundamental because this market has been pivotal to the government’s long-term strategy of making the renminbi a genuine international currency.

Any major defaults would make foreign investors even more gun-shy than they already are about trading renminbi-based assets in the offshore market. Meantime, Chinese regulators have one of the biggest ring-fencing problems of all time if they want to instil confidence in the renminbi. Elsewhere in the region, the finance industry in Asia-Pacific has always been quick to adopt technology – indeed, much of the technology originated there.

And it looks like customers aren’t far behind. According to Fitch Ratings’ review of the fintech market in south-east Asia – a vast and populous region encompassing Indonesia, Philippines, Vietnam, Thailand, Myanmar, Malaysia, Cambodia, Laos, Singapore, East Timor and Brunei – bank clients have embraced digital banking pretty much in tandem with the spread of the internet. The implications for traditional banking could be profound, predicts the ratings agency. “South-east Asia’s fintech companies are likely to sharpen their focus on profitability as the industry gains scale,” it forecasts, citing COVID-19 as a contributing factor because it effectively kept people out of the branch offices.

The unbanked market

Other factors are at play in a region that promises to become a fintech powerhouse. There is a huge unbanked market among a total population of over 580 million – by some estimates more than half have no traditional bank accounts at all. In the Philippines, for instance, roughly 30 percent of the population do not have an account and less than 10 percent has ever borrowed from a financial institution, preferring to borrow from family or friends. Also, local regulators favour fintech because it will boost financial inclusion, provided the entrants abide by the rules. “Aggressive business practices are likely to attract a strong regulatory response,” warns Fitch. “We expect stiffer sector regulation as the industry expands.”

However, the incumbents are fighting back. Their deeper pockets can more easily pay for the essential new technology and most observers expect a battle royal to sign up the 290 million unbanked potential clients over coming years. Also, the incumbents may have the ear of the regulators in the region. As Fitch Ratings notes, they are increasingly reluctant to accept new applications for digital banking licences – or, like in the Philippines, have stopped altogether.

As a result, reports Fitch, “the largest conventional banks are unlikely to see material rating impact from the entry of neobanks, which are fully digital, in the near to medium-term.” That means that the Philippines will end up with up to seven neobanks compared with four in Singapore (so far) and up to five in Malaysia. After the havoc wreaked on the global finance sector by the pandemic, the prospect of many millions of people in this fast-developing region receiving the benefits of a bank represents a beacon of hope.

World Finance honours those companies that have gone above and beyond during 2021 in their respective fields.