Elections Pose Geopolitical Risks for Banks

In May, RMA’s Insider newsletter noted European Banking Authority chair José Manuel Campa’s advice to banks: enhance your scenario planning for rising geopolitical risks … ASAP. It seems he was on to something.

Recent global election results have introduced significant risks that could impact the banking sector. Election outcomes in Mexico, India, and the European Union have led to market volatility and regulatory uncertainties, posing challenges for financial institutions. Here are some takeaways from these recent developments:

• Anticipate Regulatory Changes in Mexico: Claudia Sheinbaum’s supermajority victory has investors “freaking out,” and raises the likelihood of constitutional changes that could increase state control over the economy. This includes potential reforms like higher minimum wages and eliminating independent regulators, which could complicate compliance and operational strategies for banks.
• Prepare for Market Volatility in India: Prime Minister Narendra Modi’s slimmed majority resulted in a significant sell-off in Indian stocks, reflecting investor concerns over the stability of economic reforms. Banks should expect continued market volatility as coalition politics might slow down or alter the trajectory of key economic policies.
• Monitor Policy Shifts in the European Union: The rise of nationalist parties, exemplified by Marine Le Pen’s success in France, could lead to shifts in EU policies, affecting trade regulations and financial markets. French President Emmanuel Macron’s decision to dissolve the National Assembly adds further uncertainty.
• Focus on Long-Term Economic Stability Indicators: Despite short-term political uncertainties, banks should also consider long-term economic indicators and structural strengths in these regions. For instance, India’s robust economic growth prospects and both India and Mexico’s strategic positions in global supply chains may present opportunities.

Buckle up, because the geopolitical uncertainty and volatility of 2024 is just getting started. “It’s great to know base cases and what’s baked into the market but what’s really very important is to pay attention to tail risk, the outside risks, and how those possibilities will play out,” Lindsay Newman, head of Eurasia Group’s global macro-geopolitics practice, told Bloomberg. “We’ll see more of that in elections ahead in the U.S. and U.K.”