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Fed Chair Janet Yellen indicated in December that rates are unlikely to rise “for at least the next couple of meetings,” or not before late April. Photo: Bloomberg
Fed Chair Janet Yellen indicated in December that rates are unlikely to rise “for at least the next couple of meetings,” or not before late April. Photo: Bloomberg

Fed-upset credit markets top concern for Jain, Davos bankers

The bankers' optimism about US growth contrasted with their concerns about Europe

Zurich: Deutsche Bank AG co-Chief Executive Officer Anshu Jain’s biggest worry this year? Unexpected aftershocks when the Federal Reserve starts tightening, especially in the corporate bond market.

“A disruptive credit event following a Fed turn would be at the top of my worry list," Jain said at a panel discussion at the World Economic Forum in Davos, Switzerland on Wednesday. “Sometime in the next six, max 12 months, we are going to get that Fed turn. That’s going to be very significant."

Jain stressed that his concern didn’t mean he necessarily predicted a crisis, and he endorsed a return to normal monetary policies. He and fellow panelists, which included Bank of America Corp. CEO Brian Moynihan and HSBC Holdings Plc Chairman Douglas Flint, warned against over-reliance on unconventional measures such as quantitative easing.

The bankers’ optimism about U.S. growth contrasted with their concerns about Europe, a day before the European Central Bank is forecast to announce a bond-purchase program to steer the euro area away from deflation.

“People shouldn’t be surprised that central banks will make adjustments to normal, at a pace that may surprise them, because of the fear that if they don’t start moving to normal we’ll never get there," Moynihan said. If the Fed raises interest rates because the US economy is growing strongly, “that is good news," he said.

Shock Absorbers

Fed Chair Janet Yellen indicated in December that rates are unlikely to rise “for at least the next couple of meetings," or not before late April. Federal funds futures markets show a 15 percent chance the benchmark interest rate will be 0.5 percent or higher in June.

The banking executives attending Davos cautioned that because of stricter regulations, financial institutions can’t provide the liquidity they once did, buying assets on the market to act as shock absorbers. The sovereign-bond markets have enough liquidity even if banks don’t “step up," Jain said. In credit markets, the situation may be different.

“I’m relatively comfortable that if there is a huge unwind of the Treasury carry trade, there are ways of working our way out of it," Jain said. “If the same thing were to happen in investment-grade credit, or worse still, high-yield or leveraged loans, where there has been a desperate search for yield now for multiple years, that would be at the forefront of my concerns."

Quantitative Easing

Jain said he’s also worried about political risks in Europe, with elections in Greece, Spain and the U.K. coming up, while Flint and Moynihan criticized the dependency on central banks to solve economic problems.

The risk of quantitative easing is that “political progress toward structural reform and competitiveness gets put on the back burner because central banks seem to have solved the problem," Flint said. “If QE doesn’t work, then the kind-of magical impact that central bankers are deemed to have suddenly isn’t perceived to be there, and you’ve got a lack of confidence."

For European banks, quantitative easing will mean “a real destruction" of revenue they get from lending and pain for deposit-taking businesses, Jain said.

“It’s going to have a profound impact on all aspects of our business model," Jain said. “We really have to adapt to this environment, and frankly it’s here to stay till European growth turns around, which could be a while." Bloomberg

Richard Partington in London contributed to this story.

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