S&P expects 2018 to be a “stable” year for global financial services, with continued economic growth and the still cautious stance of the major central banks driving stable financial conditions in most regions.
However, analysts warned that underneath the mostly sanguine market conditions, downside risks to financial stability have increased.
Shifting dynamics within politics, regulation, and financial markets are expected to cause greater disparity between regional credit outlooks and financial services sectors.
S&P explained that; “considerable monetary stimulus over a protracted period appears to have driven a sharp rise in asset prices and numbed market volatility even in the face of geopolitical uncertainty, and a potential reduction in the size of central banks’ balance sheets.
“All of which prompts the question whether monetary tightening by central banks–even if gradual–or other political events – such as Brexit or trade protection–could provoke unexpected market volatility and test the preparedness of banks and insurance companies.
“If this were to occur, it would threaten our base case expectations and put pressure on ratings. On the upside, if the global economy grows at or beyond the 3.7% pace S&P Global’s economists currently expect, the odds of considerable instability would certainly diminish.”
Re/insurers are facing significant changes to the prudential regulatory frameworks in many regions, while political risk will ramp up the risk for financial services in some regions with ripple effects expected to be felt across the globe.
In this environment, awareness around the potential impact of environmental, social, and governance (ESG) risks and opportunities is expected to continue to grow.
Despite these underlying headwinds, S&P expects most rated banks and re/insurers to see only moderate changes to performance and creditworthiness in a largely stable 2018.
