Macro-economic risks

Effects, zombie banks and financial crisis


RiskNET [Editor-in-chief]
Macro-economic risks: Effects, zombie banks and financial crisisPhoto Gallery

At the RiskNET Summit Dr. Jochen Felsenheimer, Chief Executive and Portfolio Manager at XAIA Investment, shifted the focus to "Macro-economic risks". His introductory question was: What has been the result of the low interest policy of the last ten years? "There have been a few effects", Felsenheimer explained. He believes that the low interest environment is not really a reason for celebration. According to Felsenheimer, the effects run from excessive risk taking – investors being forced to invest in more risky assets to make a return – to zombie banks. He also cited skewed distribution of wealth and income and a concentration of risk on ETFs. Although ETFs concentrate risks they enjoy huge dominance in the capital market. And, what is more: "ETFs have very systemic movements that can intensify price shifts in the market", said Felsenheimer.

In Felsenheimer's opinion, the most fatal effect can be seen in debt. The low interest phase has systematically led to higher absolute debt levels in all sectors of the macro economy. One example is excessive corporate debt. Felsenheimer said: "Many companies have been living beyond their means for years because they knew financing was secure." But this increases the risk of business failures. He also believes that many companies have an unattractive business model. But Felsenheimer is more worried about zombie banks, as they have a system relevance. "Many of these banks are being kept alive solely by subsidies from the ECB, when they really should be resolved." According to Felsenheimer, this is extremely inefficient from an economic perspective.

Felsenheimer went on to look more closely at the distribution of wealth he mentioned earlier. This distribution of wealth is skewed and he believes that is not good for an economy. This is particularly because of the kind of radical trends that are widespread here in Germany. This brings a risk of further destabilisation of democratic and macro-social processes. Felsenheimer addressed the possible introduction of a wealth tax, which is currently being widely discussed. He thinks introducing such a tax would be a "smart idea". On the other hand, an inheritance tax could also be a possible method and a good approach to consider. Whichever options are ultimately taken, new methods are needed to achieve a better distribution of wealth in Germany. Felsenheimer said: "These are the kind of issues we need to address."

Another is systemic risk. Here, Felsenheimer paints a rather pessimistic picture. In an interview with the RiskNET editorial team, he is sceptical on the question of how systemic risks in the global financial system can be restrained. "I don't think there is any chance of this being achieved through long-term risk mitigation alone". His summary is that there is likely to be a financial crisis in the foreseeable future, which will result in natural risk reduction.

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RiskNET Summit 2019 at Schloss Hohenkammer. A place full of history. According to legend, in the 8th Century there was a grand stone house at this site on the River Glonn – it was known as chamara. The name was derived from the Latin camera, meaning a room or chamber, which was translated as kamer in Middle-High German. The house was considered "noble" or "high", resulting in its modern name, meaning "high chamber".RiskNET Summit 2019 at Schloss Hohenkammer. A place full of history. According to legend, in the 8th Century there was a grand stone house at this site on the River Glonn – it was known as chamara. The name was derived from the Latin camera, meaning a room or chamber, which was translated as kamer in Middle-High German. The house was considered "noble" or "high", resulting in its modern name, meaning "high chamber".

More than 100 delegates at the RiskNET Summit 2019 in Schloss Hohenkammer.More than 100 delegates at the RiskNET Summit 2019 in Schloss Hohenkammer.

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[ Source of images: Stefan Heigl and Frank Romeike / RiskNET GmbH ]
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