Hyun Song Shin on the New Financial Stability Risks

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:14)

And I'm Joe Weisenthal.

Tracy Alloway (0:15)

Joe, we are still here at Jackson Hole. We are coming to the end of our sort of discussion series, however, and I think one of the themes that has emerged from a lot of the people that we've been talking to at this event is this idea of living with high levels of public debt and high inflation, all while having basically a global financial system that is built on bonds, things that are supposed to be boring, they're not supposed to see their yields kind of swing wildly, and yet that's been what's happening.

Joe Weisenthal (0:49)

Two things. One is, to your point on yields, I mean, it's the story of the last year, but it's really also like the story of the last month, right? Sure.

Which is that you think things have mellowed out and suddenly you get a new spike, mortgage rates at the highest since 2000, 10 year or 30 year yields, highest at least since like 2010 The other thing is, can I just say, one fun thing about Jackson Hole is running into possible Odd Lots guests on a hiking trail.

Tracy Alloway (1:13)

Yes.

Joe Weisenthal (1:14)

Which is a really fun aspect of here, you know, it's like when we're back in New York, we have to do all this work to try to find guests, you know? Here, you just like, oh, hey, it's you.

Tracy Alloway (1:23)

You just pick them off in the wilderness. Like predators.

Joe Weisenthal (1:26)

You want to come on the show?

Tracy Alloway (1:27)

All right, well, one person we did actually run into while hiking is one of our favorite Odd Lots guests. We're going to be speaking to Hyun-Song Shin. He is of course economic advisor and head of research at the Bank for International Settlements. And we're going to try to synthesize a lot of the discussion points we've been having for the past day or so.

Joe Weisenthal (1:47)

Right. And to your point, you know, I do think that, and this was sort of part of the interesting thing we talked about with Daryl Duffy, which is that we came out of 2008, very focused, or 2008, 2009, like very focused on credit risk, right? Like downside risk, et cetera. And I think by and large policymakers, we probably did a good job of de-risking the system from the perspective of credit, right?

Then we got Silicon Valley, we got this rate spike. We got the highest inflation in at least four decades. We got Silicon Valley Bank. And suddenly they're like, oh, there's other risks out. It's not just credit risk.

Tracy Alloway (2:20)

Well, we reduced credit risk at the expense of interest rate risk, it feels like. And we sort of by design made bonds really fundamental to the way that, again, the financial system works. So we need to dig into these financial stability risks as they are now. So without further ado, let's bring in Hyun. Hyun, thank you so much for coming back on. I think this must be your fourth or fifth Odd Lots and Bloomberg Finance.

Joe Weisenthal (2:44)

But our first in person, which is really exciting.

Hyun Song Shin (2:46)

Absolutely, I mean, I was gonna say, it's such a pleasure to do this in person, Tracy.

And it's a great topic, of course. And I think you've had other people on during the day that have explored bits of this. But maybe the point to start with is just to take a step back and have an overview of the way that the structure of intermediation has changed since the GFC. As you say, Joe, the GFC very much was around the banking sector and in particular credit risk. The idea is that you need capital there to absorb losses on the assets because they're risky assets. And that's the way that you protect the depositors and other claim holders. I think what we saw in March 2020 with the stress episode in the treasury market is that even safe securities can be at the center of a financial stress event. I think the UK GILT episode last year, again, these are safe assets, but they were very much at the center of financial stress.

And I think what that does point to is the shifting nature of risks, the different propagation mechanisms and the different set of players out there. So we're going from banks to non-bank players. In the jargon, they're called MBFI, it's non-bank financial intermediaries, but it's not just the intermediaries. I mean, it's also the way that infrastructures, you know, CCP's, exchanges, they've also become very important as well. So this is, I think, a very, very important topic for us to touch on.