The biggest risk to investors is not another financial system crisis but a global shock that has been underestimated.

Graham Harman, investment strategist, Asia-Pacific at Russell Investments told an audience at the Paul Woolley Centre for the study of Capital Market Dysfunctionality in Sydney, that investors should be more concerned of a risk hitherto underestimated, such as a nuclear winter or the internet breaking down, rather than an internal financial system failure.

Harman made this case in a debate on whether financial institutions have become less vulnerable to shocks, which took inspiration from a quote Alan Greenspan made in 2004 that “the financial system as a whole has become more resilient”.

He argued that multi polarity of global financial centres and heterogeneity of financial providers was improving market resilience, in particular, he took comfort from government macro-economic policies becoming desynchronised.

Those who were concerned at another GFC, he said, were building a Maginot Line and preparing to fight the last war.

“One thing you can bet on is the thing that went wrong last time is not going to go wrong this time,” he said. “The next thing to go wrong, will be something we have become blasé about, a nuclear winter or the internet going down, but it is not going to be a financial crisis.”

Brian Parker, chief economist of Sunsuper, in conjunction with Ross Barry, head of research at First State Super, gave the other side of the debate, spelling out reasons to be fearful of another financial collapse.

Parker firstly listed the natural exuberance of markets to over-estimate how long a bull market will last and suffer the consequences.

He highlighted the capital constraints on banks introduced since 2008 as limiting the liquidity of bond markets. Banks hold a substantially smaller inventory of bonds, he said, so that the role banks had previously played in helping liquidity and stability in bond markets was now no longer there.

He also expressed pessimism on the growing use of derivatives. Pointing out that the large notional amount of derivatives outstanding, especially in interest rate markets, was similar to that prior to the GFC.

He questioned whether how many of these positions were taken for sensible risk management reasons.

“For every one who hedges their exposure sensibly there is a Santos on the other side,” he said, pointing out that derivatives added to the complexity of the system and the greater probability that those in charge did not fully understand the risks they were taking.

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