European monetary policy is moving from “an extended period of low interest rates and abundant liquidity fuelled by central bank liquidity support programmes to a post-pandemic landscape of monetary readjustments and monetary tightening,” said a speaker during one of the panels at Deutsche Börse Group’s Global Funding and Financing Summit on 31 January 2024. The conference, which was held under Chatham House rules, saw industry executives and government officials discuss market trends and provide their perspectives on “new paradigms”--the theme of the summit.

Interest rates have been negative for the “best part of eight years,” the speaker noted, and the sharp rise in interest rates has reduced excess liquidity and led to a rise in the cost of funding in the market. Financial firms have had to retool for a new set of conditions in the market.

“Not just another business cycle”

In the decade following the 2008 financial crisis, central banks have employed “loose monetary policy to really support the markets and support economic growth,” said another speaker, which led to a lot of stability. “I think the paradigm that we’re in now is quite different,” they argued. “There’s a lot less flexibility. Central banks are focused on inflation and the ability to stimulate faltering growth prospects in many economies.”

Now, investors need to be more tactical. “I think it’s really important to recognise that it’s not just another business cycle,” the panellist argued. There’s a macro shift underway, with ageing populations, shrinkages in the workforce, artificial intelligence, the transition to a low-carbon economy, rewiring of supply chains and geopolitical tensions in the spotlight. These topics will be with us for a long time, they said, and 2024 will be about being more tactical, more active in asset allocations as compared to previous paradigms. “I think it’s a big change.”

It’ll be important to be able to move quickly--which means operational models will need to be made tighter, the person said. And on the other hand, higher rates now mean that if something goes wrong--such as with overdrafts or late payments, for instance--all of those get more expensive.

Alternative financing and lending options

Panellists also discussed the importance of alternative financing and lending options during the conference.

One speaker said they’ve had “peer-to-peer” as part of their programme for more than 10 years, “with the idea that if you can create diversification of your borrowers” and are able to satisfy those needs, “then--to the extent that there is appetite to borrow securities in other parts of the market--that can happen through the programme.”

Things to consider include easing routes to market, ensuring the necessary “systems are set up to make it as easy as possible to be able to get a broad range of borrowers available to clients, and also be able to be set up for a broad range of lenders,” the person noted. “I think peer-to-peer does have a place in a world where there’s constraints and different borrowers.”

Is this really a new paradigm?

The theme of the summit was “new paradigms.” But, as an attendee pointed out, people have been talking about new paradigms for decades. Are there not parallels between what’s happening today and previous periods?

For one of the panellists, the truth is probably somewhere in between. “There are always parallels to periods of time in history that we’ve seen. And the longer you go back, the more likely it is that you’ll find something that looks very similar.”

But when compared to the period after the 2008 financial crisis, central banks are not able to support markets, because they are “first and foremost” focused on fighting inflation. With the previously mentioned “macro forces” in play, “I think it’s really hard to argue that that is not inflationary, and will not lead to high inflation. So I do think it’s a different paradigm to what we’ve seen over the last 10+ years, but I would agree that there are parallels to times that we’ve seen before, and that will always be the case.”

To add to that, artificial intelligence and digitalisation have also “created a slightly different paradigm,” noted another speaker. It’s important to think about digital formats, what the new world looks like, embedding new technologies, and how AI and other tech can boost efficiency.

Still optimistic

Asked whether they were optimistic or pessimistic about the future, the panellists said they were optimistic. There are headwinds, one speaker admitted, but at the same time there will be new sources of demand and clients can take advantage of these opportunities to generate more income. Things like central clearing can lower entry barriers, allowing smaller funds to participate in this market, they added.

“We’ve reached the point where we’re not talking about whether we’re going to innovate--innovation is real, collaboration is real,” said another panellist. “I think there’s so many things to look forward to. There’s lots of interesting routes to market… There’s lots of market considerations that are going to mean that we’re going to have to find new ways to do things.”

Under Chatham House rules, individuals can be quoted but they and their affiliation cannot be identified.