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Davos Watch: ‘Underestimated’ Digital Revolution & Unsafe ‘Magic Money Tree’

Tim Alper
Last updated: | 3 min read

Senior political and economic figures have warned banks that they risk falling behind to digital finance networks and providers – and suggested it may be unsafe to overuse the “magic money tree” that has helped central banks around the world navigate their way through the coronavirus pandemic and its economic fallout.

Source: Adobe/mmphoto

Today, the speakers were attending an online session at the World Economic Forum, entitled Strengthening the Financial and Monetary System.

Mohammed Al-Jadaan, the Saudi Arabian Minister of Finance and the Acting Minister of Economy and Planning, stated,

“Conventional banks are underestimating the disruption that is coming [from digital players].”

Panelists had been asked about the role of “crypto, stablecoins” and more before the minister’s response.

Al-Jadaan added that traditional banks, “if they are not careful and quick enough,” ran the risk of “being left behind.”

And there were also stark warnings for central banks, who have been looking to spend their way out of the economic slump that has already blighted most countries during the pandemic. Most economists predict that wide-scale bankruptcies will follow once the pandemic subsides.

The minister added that central banks were playing a central role in ensuring the return of economic growth – and claimed there more stimulus packages were needed to encourage private-sector positivity, but insisted there was “still a need to be careful.”

And while Al-Jadaan has been keen to push major economies to consider debt reduction policies for developing countries, he added that policy-makers “must not impose our will on the markets,” instead urging a “balanced” approach.

But Thomas Buberl, the CEO of the French insurance giant AXA, went a step further, adding that the “magic money tree” must “be an exception, not a [new] normality” and that the prominent, interventionalist role played by central banks during the coronavirus crisis “should also be exceptional, not a normality.”

When it comes to propping up businesses, he also suggested that “natural selection methods” must not be stymied.

Buberl also suggested that central banks’ options may be limited, claiming that that “debt cancellation or reduction” would represent “a breach of trust” for lenders, saying, “for me this, would not be an option.”

Further austerity measures, he opined, were “also not on the table.”

And there are further pitfalls ahead for troubled central bankers, Buberl added, as exiting the current quagmire of low – and even negative – interest rates without spiking inflation would have to be “a focus point” for central banks post-crisis.

He said that “central banks have managed the first stage of the crisis well,” but there was a “risk of a backlash” in longer crisis scenarios.

However, Ana Botín, the Group Executive Chair of Banco Santander, refuted the notion that banks, in general, were underplaying the risks ahead.

She said,

“The banking sector, past-2008, is liquid, regulated […] and part of the solution, not the problem.”

During the same session, Yi Gang, the governor of the central People’s Bank of China (PBoC), stated that China was on track to make a strong recovery from the crisis.

He claimed that the pandemic would not detail the PBoC’s plans to help guide the country away from an export-based model to a consumption-powered version. He claimed that the transition would be “smooth” and stated that savings were down in China, a sign that consumers were already spending more in the domestic economy.
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