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The next financial crisis is likely to be in the “shadow” non-bank lending sector, UBS chair Colm Kelleher has said, warning that the growth of lightly regulated private markets since the 2008 crisis is a “real cause for concern”.
Speaking at a finance conference in Hong Kong on Tuesday, Kelleher said he was making the remarks “at the risk of upsetting half the people in the room, some of whom are clients and competitors”.
However, he said, a large share of financial assets globally “are now in the non-bank financial intermediaries, the shadow sector . . . I think the next crisis when it happens will be in that sector, it will be a fiduciary crisis”.
Private lenders have emerged as a big force on Wall Street over the past decade, increasingly replacing banks as a source of financing for companies, after crisis-era regulation forced institutions to rein in risk-taking. The largest private lenders have raised billions of dollars to finance leveraged buyouts and companies’ day-to-day operations.
Kelleher’s comments prompted a defence of the industry from the heads of private markets firms including Marc Rowan, chief executive of Apollo Global Management, who spoke on a later panel at the same event.
“When you move something from the banking system to asset management, you move it, for the most part, from a levered system to an unlevered system,” Rowan said. He said such lending “adds robustness to the system”.
Rowan said Apollo held “immense amounts of liquidity” and he could “barely get the fingerprint ink off my fingers” because his dealings with regulators were so extensive.
Goldman Sachs chief executive David Solomon, who was on the same panel, joked in response: “You could join our world and have more ink on your fingers if you’d like.”
Rowan said he thought risks came instead from mutual funds that offered daily liquidity while investing in illiquid assets.
Later at the event, Jon Gray, president of Blackstone, which has a large private lending arm, also defended the industry. He said it was relatively low risk “if we’re managing money for a state pension fund and we lend it out on [an] unleveraged basis”.
Kelleher also spoke about his bank’s takeover of Credit Suisse as it collapsed earlier this year. “It was clear we at UBS did not want to do the deal . . . we had our own strategy,” he said.
But “by October 2022, it was clear Credit Suisse was a total falling knife”, he added, and his bank enlisted “the mighty house of Morgan Stanley” to “get ready for this call we didn’t want”.
Credit Suisse’s collapse “was not about capital; this was about [its] business model and funding”, Kelleher said, adding “regulators in Switzerland need to be given more power to opine on these issues” and said it was “misguided” for regulators to focus on the need for banks to hold extra capital.
He was speaking as UBS unveiled a $785mn quarterly loss, its first in almost six years, following the takeover of Credit Suisse.
Several of the bankers at the event complained about stricter regulations, known as “Basel Endgame”, which would require lenders to hold extra capital.
“While we want the system to be safe and sound I think these rules go way too far” if implemented in their current form, Solomon said.
Morgan Stanley chief executive James Gorman said he did not know what would trigger the next crisis but “it’s likely to be something geopolitical, something political.
“The challenges to democracy in some countries around the world are pretty evident.”
Christian Sewing, chief executive of Deutsche Bank, said the thing that made him “nervous” was the state of capital markets.
“They have been extremely resilient,” he said. “If you think about what’s going on in the world from a geopolitical point of view, an inflationary point of view . . . my biggest fear is there’s one more geopolitical escalation and markets give up their calmness and you have a market event. We need to stay on alert.”
