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Global Financial Services Outlook 2018: Uncomfortably Numb

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Global Financial Services Outlook 2018: Uncomfortably Numb

Most rated banks and insurance companies around the globe will experience only moderate changes in their creditworthiness and performance in 2018, S&P Global Ratings said in a report published today.

S&P Global Ratings expects continuing global economic growth, stable financial conditions in most regions, and the still cautious stance of the major central banks to remain supporting factors.

"However, we also see increasing downside risks to financial stability, perhaps belying the sanguine signals that markets are currently sending," said one of the authors of the report, S&P Global Ratings credit analyst Alexandre Birry.

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, Mr. Birry said.

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," Mr. Birry added.

Beyond the global macroeconomic story, we believe that common drivers of a regulatory, political, and monetary nature will lead to divergence in the credit outlook regionally, and between the various financial services sectors.

Key Takeaways

  • We expect continuing global economic growth, stable financial conditions in most regions, and the still cautious stance of the major central banks will remain supporting factors for financial services in 2018.
  • However, we think downside risks to financial stability and our forecast have increased, belying the sanguine market conditions.
  • Common drivers of a regulatory, political, and monetary nature are likely to lead to divergence in regional credit outlooks, and between the various financial services sectors.
  • For banks, regulatory regimes are moving into implementation and execution, while insurers are facing significant changes to the prudential regulatory frameworks in many regions.
  • In a number of regions, we believe that political risk will continue to drive risk to the downside for financial services ratings, affecting developed and emerging economies alike.
  • Awareness around the potential impact of environmental, social, and governance (ESG) risks and opportunities will continue to grow.