Currencies

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Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

Donald Trump has chosen Steven Mnuchin as his Treasury secretary, US media outlets reported on Tuesday, positioning the former Goldman Sachs banker to be the latest Wall Street veteran to receive a top administration post. Mr Mnuchin chairs both Dune Capital Management and Dune Entertainment Partners and has been a longtime business associate of Mr […]

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Banks

Financial system more vulnerable after Trump victory, says BoE

The US election outcome has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging. The BoE said on Wednesday that vulnerabilities that were already considered “elevated” have worsened since its last report on financial stability in July, in the […]

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Currencies

China stock market unfazed by falling renminbi

China’s renminbi slump has companies and individuals alike scrambling to move capital overseas, but it has not damped the enthusiasm of China’s equity investors. The Shanghai Composite, which tracks stocks on the mainland’s biggest exchange, has been gradually rising since May. That is the opposite of what happened in August 2015 after China’s surprise renminbi […]

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Financial

Hard-hit online lender CAN Capital makes executive changes

The biggest online lender to small businesses in the US has pulled down the shutters and put its top managers on a leave of absence, in the latest blow to an industry grappling with mounting fears over credit quality. Atlanta-based CAN Capital said on Tuesday that it had replaced a trio of senior executives, after […]

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Archive | November, 2016

Eurobonds: A change of gear

Posted on 30 June 2013 by

Fast Lane©Alamy

Fast lane: The group that built the Autostrada del Sole still uses bonds to finance projects

The Autostrada del Sole, which joins Italy’s north and south and was completed in 1964, was as much part of the country’s postwar revitalisation as Fiat 500 cars and film stars wearing Gucci loafers. Behind the company that built the toll road was a deal that transformed global finance.

On July 1, 1963, Autostrade had issued the world’s first eurobond. Despite its name, the bond was dollar-denominated and pitched at US currency investors operating across national borders.

    “Capital at that time was not so accessible and the company wanted to reduce its reliance on the Italian state,” says Giovanni Castellucci, chief executive of Autostrade. “It was the first very big toll road anywhere and it was then copied. Now every country has an Autostrada del Sole. But ours was the first.”

    Exactly 50 years later, European corporate bond markets could be on the verge of another significant shift. Today’s bond pioneers believe that weaknesses in the continent’s banking system and historically low interest rates will encourage companies to tap capital markets much more for finance and rely increasingly less on bank loans.

    Traditional bank ties remain strong, especially in continental Europe. On some measures, emerging economies have experienced a bigger shift towards capital market funding of companies since 2008. But just as the launch of eurobonds – which were named long before the birth of the European single currency – kick-started the globalisation of corporate finance, the crises of the past six years could bring Europe’s markets closer to the depth and liquidity of those in the US.

    “In five to 10 years, I think the European market will look broadly similar to the US market in terms of bank and bond percentages,” says Michael Ridley, vice-chairman of investment banking at JPMorgan, whose banking career began in 1978.

    Eurobonds were created out of necessity – as well as changes in the 1960s in US tax rules that encouraged investors to keep dollars outside the country. But their pioneers consider Autostrade’s launch issue as part of a broader shift in capitalism in the decades after the second world war.

    “It was a major step along the way to the globalisation of finance and foreign exchange markets,” says Stanislas Yassukovich, former deputy chairman of London’s stock exchange, who was involved in many of the early eurobond deals. “It was also a major step in the postwar recovery in Europe – and the rest of the world for that matter.” Chris Tuffey, head of investment grade capital markets and syndicate at Credit Suisse, adds: “It made the world a smaller place.”

    The success of eurobonds cemented London’s position as Europe’s financial capital: SG Warburg, based in the City, topped the list of bankers to the Autostrade issue, which also included Deutsche Bank. Cross-border markets were given a further boost from the 1980s when the development of international swaps markets made it easier for companies to borrow in foreign currencies and for investors to borrow in low-interest countries to invest in higher-yielding assets.

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    Then, in 1999, came the launch of the euro, the continent’s boldest experiment yet in economic integration. “Once the euro came into being, it accelerated hugely the growth of the European corporate bond market,” says Chris Whitman, global risk syndicate head at Deutsche Bank.

    The early years of this century saw a wave of issuance as European telecoms companies raised funds to buy 3G licences. “That was really the first time European markets had been aggressively peppered on a consistent basis by very large corporate deals,” recalls Bryan Pascoe, global head of debt capital markets at HSBC.

    Although capital market aficionados have a strict definition of a eurobond – its legal form and tax-free status – the phrase has fallen out of use somewhat in recent years. Some original features, particularly the provision for the anonymity of investors, have gone. But cross-border issuance of corporate bonds has become ubiquitous. “Eurobonds largely replaced domestic markets in Europe – there was no point launching a bond in just one country when you can tap an international investor base at no extra cost,” says Chris O’Malley, whose book Bonds without borders will be published next year.

    How the market develops will depend crucially on structural changes in the continent’s financial system, triggered by the crisis of the past few years. Not all are necessarily positive. “Eurobonds were created at a time when exchange and capital controls were being removed – when everything was being opened up,” says Mr Yassukovich. “Now the trend is completely the opposite. It is not an atmosphere in which finance can prosper.”

    One threat is the financial transaction tax planned by 11 EU states, which would hit bond markets as well as equities. Although the final shape of the tax is still subject to much debate in Brussels, its opponents warn that the taxing of bond trading would reduce the liquidity of markets and increase issuance costs.

    A less high-profile concern is that regulators have unintentionally dealt the market a blow by increasing the cost to banks of holding bonds on their books. The effect has been to reduce their role as “market makers” – increasing trading risks and of panic price reactions during times of stress.

    “Banks’ trading desks historically had an important role as warehouses and providers of liquidity in the credit markets. While still relevant this has certainly been impacted by the tougher regulatory environment.” says Mr Pascoe.

    Mr Tuffey from Credit Suisse says: “The move towards capital markets in Europe has been slower partly due to uncertainty over regulation but also [because of] the huge players out there defending parochialism. German and French banks, for example, have historically lent to local corporates at generous rates.”

    Meanwhile, many smaller European companies remain wary of the extra transparency required under today’s more stringent rules. “It will be some time before midsized European companies overcome their disquiet about the regular reporting required by capital markets,” says Paul Watters, corporate credit strategist at Standard & Poor’s. “If you have a relationship with a bank, the detailed information that you provide remains private.”

    Data on corporate bond issuance show a move this year towards companies funding themselves more in debt markets and relying less on bank loans. European corporates borrowed $377bn worth of debt from the capital market in the first half of 2013, the biggest ever and more than twice that in the first half of 2006, according to Dealogic. At the same time the volume of loans from syndicates of banks has fallen sharply.

    The figures are volatile and not yet convincing evidence of a long-term shift. In recent weeks, global bond markets have hit a bout of turbulence, triggered by Ben Bernanke, the US Federal Reserve chairman, signalling a possible slowdown in US quantitative easing. QE was instrumental in driving demand for corporate debt as part of a global “hunt for yield”. Since Mr Bernanke’s May speech, prices have fallen, yields risen – and issuance dried up.

    But bond markets have always had bouts of good times and bad times for companies to issue debt. “A little bit of stability and they will be piling back into the market,” Mr Whitman predicts.

    . . .

    Encouraging the shift will be low interest rates and increased concerns about the stability of banks – which have encouraged companies to pay much more attention to their funding requirements – and it could quickly become firmly established if European economies saw stirrings of a revival in growth. “Companies have battened down the hatches and cut back on discretionary spending. We have not yet got to the point where there is material demand for new debt funding to support growth,” argues Mr Watters. “Our gut feeling is that it is a bit like pushing a snowball down a hill. It starts slowly but picks up speed over time.”

    S&P argues that in coming years Europe could even have the opposite problem to a lack of demand – and there could be insufficient investor capacity in European bond markets to meet companies’ funding requirements, forcing them to tap dollar markets – just as Autostrade did in 1963. “The pressure valve in Europe has always been the liquidity available in the US dollar market,” says Mr Watters.

    With government finances under severe pressure and banks continuing to struggle, European policy makers want to promote alternative forms of finance. The European Commission has launched initiatives to encourage capital market development, and Andrew Haldane, the Bank of England official responsible for financial stability, warned in parliamentary evidence last month that Europe had “too much of a banking monoculture and that is not good for financial sector resilience”.

    “The US and Europe are on the same path towards greater and deeper capital markets but Europe just started later and is further behind,” says Monica Klingberg Insoll, a senior director at Fitch Ratings. “The market only started in 1999.”

    Paving the possible way ahead has been the rapid development of corporate bond markets in the world’s emerging economies. During the past quarter, emerging-market companies obtained three times as much funding from the bond markets as from bank syndicates, the biggest gap in at least a decade – even though the same regulatory pressures affecting European banks have hit emerging-market banks.

    “The trend of emerging-market corporates borrowing increasingly from the bond markets over their relationship banks has picked up noticeably in 2012, particularly in Asia,” says Shamaila Khan, portfolio manager at AllianceBernstein. “It is not just external debt that is growing, though. Local bond markets are getting bigger as well.”

    In spite of their rapid growth, however, emerging economies’ bond issuance volumes remain small compared with Europe’s. Autostrade’s managers see potential for further expansion.

    “We’re still on the same page as 50 years ago,” says Mr Castellucci. Using bonds, not bank loans, the group is keen to maintain its edge in motorway construction – although not all of its projects have the same cachet as the Autostrada del Sole. Mr Castellucci boasts: “We did the first privately financed toll road in the UK – the M6 around Birmingham.”

    Additional reporting by Rachel Sanderson

    ——————————————-

    Borrowing: Investors punish companies for their location

    The launch of the euro was designed to bring the continent closer together, but in financial terms it has been growing further apart since the debt crisis as borrowing costs diverge sharply between the core and periphery, writes Michael Stothard

    In bank loans to small companies, the difference in average Spanish and German borrowing costs has never been higher, according to European Central Bank data, despite recent market improvements. In the bond market, there is a similar problem.

    Companies based in the periphery are forced by the markets to pay more than their rivals in the core, leading to complaints that they are being punished by investors purely for their location and regardless of the strength of their business.

    Even big multinationals, with a limited amount of business in their home market or Greece or Spain, complain of having to pay more at time of stress, as many investors dump whole geographies from their portfolios.

    “It is sometimes easier for fund managers to say that they are not exposed to credits in the eurozone periphery than it is to say that they are buying one or two companies that they have faith in,” says a strategist at a global asset manager.

    For this reason, some companies have thought about trying to game the system. Telefónica, the Spanish telecoms company, said it was looking to issue a bond via its German unit in a bid to tap into the lower borrowing costs in the core.

    The spread between yields on Spanish sovereign 10-year debt and the German equivalent has narrowed since last year after Mario Draghi, European Central Bank president, pledged to prevent a break-up of the eurozone.

    But Germany can still borrow 10-year debt at 1.7 per cent compared with 4.8 per cent for Spain.

    The difference in borrowing costs between core and periphery is reflected in the level of debt issuance as well.

    Companies based in France and Germany were able to borrow €102bn of ultra-cheap debt from the markets in the first half of this year, while companies based in Italy and Spain borrowed just €31bn at higher rates, according to data from Dealogic.

    In July Mr Draghi warned: “If we want to get out of this crisis, we have to repair this financial fragmentation.”

    ——————————————-

    Letter in response to this column:

    Caution is advisable on eurobonds / From Mr A. Edward Gottesman

    Investors move out of cash and into bonds

    Posted on 30 June 2013 by

    Investors switched billions of dollars out of the safety of cash into bonds as well as equity funds in the first half of this year, before the US Federal Reserve created market uncertainty by hinting at a possible slowdown in quantitative easing.

    Data for the first half of the year show that 2013 has not seen the sort of “great rotation” – a switch out of bonds and into equities – forecast by some strategists. Instead investors moved out of cash into both equity and bonds funds, and particularly high-yielding fixed income, on the back of an improvement in sentiment encouraged by rising hopes of an economic recovery, according to Goldman Sachs Asset Management.

      Globally, investors pumped $216.1bn into equities and $249.4bn into bonds, Goldman Sachs’ analysis of funds data shows. Mixed portfolios, which include a combination of equities and bonds, enjoyed inflows of $78.8bn. At the same time, investors withdrew $92.3bn from money market funds, which are considered a proxy for cash, as they sought riskier assets that offered better returns.

      Investors also pulled $16.3bn out of alternative investments, which include commodities and hedge funds. Some hedge funds remain affected by poor returns in recent years. Commodities such as gold have also suffered as, like cash, the metal does not offer investors yield.

      “The numbers don’t lie. There have been very good inflows into bonds and equities, which have come out of money market funds,” said Andrew Wilson, chief executive of Goldman Sachs Asset Management for the European, Middle East and Africa region.

      “With near zero [interest] rates and the prospect that rates are staying low, investors want to generate higher returns. This has prompted switching into equity and higher yielding bonds.”

      The flows have gone into reverse over the past month, according to the Goldman Sachs Asset Management analysis, following hints by Ben Bernanke, Fed chairman, about a possible “tapering,” or the winding down, of QE later this year. QE, which involves the injection of billions of dollars into the financial system, has been a big prop for markets since it was introduced by the UK and the US in March 2009.

      Outflows in June were $42bn in bonds, $21bn in money market funds and $19bn in equities. Alternatives were only a fraction down, while mixed assets were slightly up.

      However, Goldman Sachs Asset Management argued the outflows in June may have been a blip rather than marking a change into trend as there was a hardening view that markets had overreacted to Mr Bernanke’s comments and sold off more sharply than his signals justified.

      “We have to remember the Fed is moving from being extremely accommodating to less accommodating,” Mr Wilson said. “This is not a signal for tightening, so the initial sell-off because of Mr Bernanke’s comments was a little overdone. Flows may start to go positive again, although it depends on the economic numbers.”

      Kuwait eyes $5bn investment for UK

      Posted on 30 June 2013 by

      The Kuwait Investment Authority is seeking to invest as much as $5bn directly over the next three to five years in infrastructure assets mostly in the UK, echoing a similar move by Qatar, as sovereign wealth funds look for ways to boost returns amid low interest rates.

      The pledge, which highlights the fund’s positive view on UK investment conditions, comes just weeks after a failed £5.3bn takeover offer for British water utility Severn Trent by the KIA and partners Borealis of Canada and Britain’s Universities Superannuation Scheme.

        The UK utility, whose board rejected three bids from the consortium saying it did not properly value the company, fits the profile of assets the Middle Eastern fund is eyeing – existing, highly regulated, cash generative infrastructure projects rather than new ones, KIA managing director Bader al-Saad told the Financial Times in London in his first interview with a foreign newspaper.

        “We are looking at brownfield projects because of the cash flow streams and to diversify our portfolio, as we don’t think there is any money to make in fixed income, because of the zero interest rates,” Mr Saad said. “Development is a different ball game, we are not developers. We are providers of long-term capital.”

        The KIA, which on Friday celebrated the 60th anniversary of the establishment of its London arm, the Kuwait Investment Office, is one of the world’s largest sovereign wealth funds with more than $400bn of assets under management, according to estimates.

        After more than doubling its asset base organically and returning 9.5 per cent annually over the past 10 years, the KIA is now ready to take on more risks than mostly investing in funds run by other managers. After expanding its reach to emerging markets and all types of assets, a direct exposure in current infrastructure is a relatively cautious step to achieve that goal.

        It is building a team of six investment professionals, which will ultimately double, to look at those projects under the helm of Osama al-Ayoub, a former Goldman Sachs banker who heads the KIO.

        They will look at “companies that work in industries with a strong regulatory environment – water, power distribution and generation,” Mr Ayoub said, praising the UK for offering the best ecosystem for investors. He added that he is waiting for the outcome of a study by the UK government into ways to reduce development risks in new projects.

        Mr Ayoub also said the KIO, which has developed a reputation as a conservative and friendly investor, will always stay clear of hostile bids and will look to partner with other investors, citing the Severn Trent attempt. He declined to comment however on whether the KIO may approach the water company again.

        ““It’s a chapter and we’ve closed it,” he said.

        UK buyout market drops in volume

        Posted on 30 June 2013 by

        The UK’s buyout market dropped in the volume and the value of deals in the first half of 2013, as private equity groups sought to use buoyant credit markets to refinance their existing investments instead.

        There were 81 UK buyouts over the first six months of this year totalling £6bn, compared with 117 amounting to £8.6bn in the same period last year, according to data compiled by the Centre for Management Buyout Research at Imperial College.

          “The fundamentals for a healthy deal market are in place, there is an appetite for deals and the debt market is buoyant but, despite these positive signs, the market is still challenging and deals are taking longer to complete,” said Sachin Date, head of private equity for Europe, Middle East, India and Africa at Ernst & Young, a sponsor of the research.

          North American buyers have initiated 12 of the 17 buyouts worth more £100m or more, as evidenced by the acquisition of cinema chain Vue by Canadian pension fund Omers Private Equity.

          Private equity groups have, however, taken advantage of cheap debt to lead a record number of refinancings, according to CMBOR. There were 25 refinancings for £7.6bn, compared with 20 for a combined £3.4bn in the same period last year.

          Firms had also accelerated the pace of asset sales.


          EU will regret not having a banking union

          Posted on 30 June 2013 by

          The EU has effectively buried the idea of a banking union. It is a decision that will have profound economic consequences for the eurozone. It kills the last chance of a resolution that could have ended the depression in the eurozone periphery. In the brave new world of the EU’s resolution regime, all risks will be shared between various categories of bank creditors, which are mostly domestic institutions, and the banks’ home states.

          The European Council, the gathering of EU heads of government, has long become silent on the ceremonious pledge, made in June 2012, to break the link between sovereigns and the banks. Last week’s agreement did not break it. It has not even been diluted. It has been reconfirmed.

            But has the European Stability Mechanism, designed to provide assistance to members of the eurozone, not been given the right to recapitalise banks directly – up to a total of €60bn? Yes, it has, but there is a catch. For each euro the ESM uses to recapitalise a bank, it has to post two euros as collateral to maintain its own credit rating. If the ESM were to use the entire pot of €60bn, its total available free lending capacity would shrink to some €200bn – not enough to meet the obligations it is likely to face in the next few years. The way the €60bn bank recapitalisation facility is constructed, the eurozone finance ministers will have a strong incentive not to use it as a bank recapitalisation fund at all. My conclusion is that the €60bn is there not to be used. And, as I argued last week, the losses of the banking system are so large that this amount would hardly make a difference anyway.

            In theory, a bail-in rule should shift some of the financial burden away from the bank’s home state. But this only works to the extent that some of those shareholders and bondholders are foreigners. The trouble is that the banks have become more national since the crisis. They are the buyers of last resort of their home countries’ national debt.

            In return, the governments backstop their domestic banks. Most of their creditors are domestic. It therefore matters little whether the Spanish state bails out its banks or whether mostly Spanish bondholders get bailed in. The bottom line is that all the risk remains in Spain. As such, it is a liability of the Spanish state in the final consequence.

            The debt ratio that matters as a guide to the country’s overall solvency is not the much-quoted ratio of net public debt to gross domestic product but total external debt, public and private sector combined.

            In the case of Spain this was almost 170 per cent of GDP at the end of 2012, according to the latest data of the World Bank. For Spain, a banking union that cuts the link between the state and banks would have been a necessary, and possibly even sufficient, guarantee for sustainable membership of a monetary union. However, that would hold true only as long as the political support for fiscal adjustment and economic reforms remains in place. Without that guarantee, I cannot see how that is possible.

            When policy makers last year portrayed banking union as a less onerous step than a fiscal union, it was already clear that they were either not serious about the project or at least not serious about it as an instrument of crisis resolution. As the reality about the new regime sinks in, the doubts about the viability of the monetary union could quickly resurface.

            In normal times, even the unsustainable can last surprisingly long. But that is not necessarily the case in times when the banking systems of several large European states are underwater.

            The situation in Italy is different from Spain in some important respects. Italy’s banks are not sitting on mountains of bad mortgage debt. Italy has a lower gross external debt position, at 124 per cent of GDP. But the problem in Italy is a vicious circle of a credit crunch, a recession, and a public sector with little fiscal room for manoeuvre to fix an undercapitalised banking system. The new government’s focus on a petty scheme to reduce youth unemployment when its real problem is a liquidity crunch is unbelievably misguided. With the rise in global market interest rates, the country is getting closer to an ESM programme, which would then trigger bond purchases by the European Central Bank. But the ECB cannot recapitalise the Italian banks. Nor can the Italian state. Nor can the ESM. According to Mediobanca, an Italian investment bank, the degree to which Italy can tap private wealth as a source of new funds is limited, since wealth taxes are already relatively high. So even Italy’s sustainability in the eurozone is not assured in the absence of a joint-liability banking union.

            How could it have come to this? It was my reading of the political situation a year ago that a majority in the European Council was quite serious about a proper banking union to be followed by a fiscal union in the future. Germany had yet to be persuaded. Then came the ECB’s celebrated backstop last summer. And that killed it. The politicians no longer saw a need for policies that would be a hard sell back home.

            There is a still project with the name of banking union but it will be irrelevant to this crisis. That leaves the ECB. The central bank can do a lot but it cannot fix the banks.

            munchau@eurointelligence.com

            Barclays’ threat on lending under fire

            Posted on 30 June 2013 by

            Antony Jenkins, Barclays chief executive, has come under fire for threatening to curb lending to businesses to meet more stringent capital requirements imposed by UK regulators.

            Robert Jenkins – a former member of the Financial Policy Committee, the UK’s new stability regulator – criticised the warning as either “hubris, reflex or plain stupidity” in a letter published by the Financial Times.

              An outspoken advocate of tough bank regulation who has worked in banking and asset management, Robert Jenkins left the committee earlier this year after not being reappointed by George Osborne, chancellor.

              He said there were a number of measures Barclays could take to meet its capital commitments, such as retaining earnings, raising equity, cutting costs or reducing bonuses.

              “Or it could cut back on lending to the real economy to bring down its assets without bringing up its equity,” he said. “Of all the options the last in this list was the one its CEO chose to mention. Was this meant as a threat? Was it hubris, reflex or just plain stupidity? Is this the new Barclays?”

              Antony Jenkins on Friday said Barclays would be able to strengthen its leverage ratio – a measure of its dependence on borrowings – under pressure from the Prudential Regulation Authority after the regulator identified capital shortcomings at UK banks in June.

              But in his comments to investors he also warned: “An aggressive acceleration requirement from the PRA would require additional actions.” These included potentially restricting “lending to the UK and other economies, which is something we want to avoid”, he said.

              The PRA irked banks when it included a 3 per cent leverage ratio target in its assessment of UK lenders’ capital health. It identified shortfalls at Barclays and Nationwide, the UK’s largest building society, which have projected leverage ratios of 2.5 per cent and 2 per cent respectively under PRA tests.

              Both need to outline to the PRA by the end of this week how they plan to reach the target. The Bank of England said curbing lending would not be accepted.

              Regulatory pressure is being felt across Europe and banks have been cutting assets partly by reducing lending to the riskiest of their clients. The region’s lenders are expected to shrink their balance sheets by another €1.5tn, as lending to businesses reaches a six-year low, according to research by Ernst & Young.

              Marie Diron, a senior Ernst & Young economic adviser, said: “We had hoped that the most destructive phase of deleveraging in the eurozone had passed but it is continuing at pace this year.”

              She added: “Total assets will have fallen to 2008 levels by the end of the year and total assets could fall further to 2007 levels by the end of 2014.”

              ——————————————-

              Letter in response to this report:

              Is Barclays’ threat to cut lending a case of hubris, reflex or just stupidity? / From Mr Robert Jenkins

              Banking is having its Spotify moment

              Posted on 30 June 2013 by

              Banks are changing dramatically amid an avalanche of regulatory change and widespread debt reduction. They will be safer and, sadly for users of bank services, costlier as a result. Yet, all of this may soon seem somewhat irrelevant, because technology could transform the way banking works far more profoundly.

              Banking is very “digitisable”. Cash is the only part of the industry that is inherently physical and that is a tiny part of what a bank does. The rest is really about transferring and modifying property rights and information of various sorts, all of which can be digitised. Of course banks have invested huge sums in technology – automating processes and enabling customers to bank online – but we have not yet seen the fundamental transformation of business models that have taken place in other sectors, such as music.

                It will happen and when it does, it will have a huge impact. Some of the consequences are clear from other industries. Intermediaries disappear or get marginalised unless they discover new ways of adding value. Look at what has happened to recorded music companies or book shops. Banks are the primary intermediaries of the financial world, so their margins will fall unless they reinvent what they offer their customers and how they work.

                In the digital world, things work differently. Scale and network effects drive competitive advantage. Winners tend to take all, as Google and eBay demonstrate. Discrete products get turned into bundled services. Customers of Spotify, a music service, do not buy recordings of individual songs – they buy a subscription to a cloud-based archive.

                Perhaps surprisingly, the transparency of the internet does not always lead to the disaggregation of bundles and the disappearance of cross-subsidies. Things get pulled apart and put together in different ways. Monetisation, costs and customer value can be even more often disconnected than in the physical world. New business models will emerge, as we have already seen: Lending Club’s peer-to-peer model is changing personal lending. Some will thrive, many will fail.

                Above all, customers will benefit enormously. Greater transparency will mean better prices for customers. Digital delivery will mean never having to go to a branch. More information and more flexible service configurations will put the customer in control.

                Why is it happening so slowly compared to other industries? Part of the answer lies in the banks themselves. Contrary to what many believe, banks are extremely risk-averse. They do not like failing – and it is almost impossible to innovate unless you are prepared to fail. In a context where trust is so important, and where there is increasingly little tolerance of any kind of failure, that is extremely difficult.

                But regulation is an even more powerful impediment – and not only because “financial innovation” is a four-letter word in banking supervision circles. Technology-driven innovation that leads to big winners and big losers, that replaces established products with flexible service bundles, that overturns established business models and blurs the boundaries of banking, and that sometimes fails to deliver quite what was intended, does not fit well with today’s regulatory zeitgeist.

                To be fair to the regulators, it is not like banks are straining at the leash. Mostly they are investing in technology to meet ever-increasing regulatory demands, or to reduce costs. There is relatively little investment in innovation that offers major changes in customer experience. The prevailing “zero tolerance” environment is toxic to new ideas. Moreover cybersecurity and privacy issues are becoming ever more acute. The more finance becomes digital, the more important it is to prevent intrusion, disruption and digital theft.

                Yet, despite such challenges, and whether they like it or not, banks and their regulators are going to have to embrace technology-driven innovation. Otherwise it will simply happen by stealth, driven by players outside the industry. We have already seen examples such as M-Pesa, the mobile payments solution pioneered in Kenya, the ubiquitous PayPal or most recently Bitcoin – the online currency. Given the scale of customer benefits, and the scope to seize competitive advantage, there are huge prizes for those who can innovate successfully. Too much of the debate about banking is about not repeating the mistakes of the past. We risk missing the opportunity to make banks much better in the future.

                We are stepping up the pace of innovation at the bank I run: generating more ideas, implementing them more swiftly, being quicker to discard the ones that do not work. By making everything digital, exploiting the power of big data and the ubiquity of mobile communications, we see huge opportunities to enhance the value to our customers, to increase efficiency and to manage our risks more effectively. The upsides are huge, and the downsides are stark. That is why accelerating technology-driven innovation is a top priority.

                The writer is group chief executive of Standard Chartered

                ——————————————-

                Letter in response to this article:

                Any innovation by banks has been self-serving / From Mr Andrew Mitchell

                Kuwaitis see UK infrastructure as priority

                Posted on 30 June 2013 by

                The pomp was impressive. The 400 visitors to the 60th birthday celebration of the Kuwait Investment Office at London’s Guildhall on Friday were greeted with walls of floral arrangements, free-flowing pomegranate juice and a guest-of-honour speech by Kuwaiti prime minister Sheikh Jaber al-Sabah.

                But for Kuwait’s oil-funded sovereign wealth funds – London-based KIO and its parent group the Kuwait Investment Authority – the substance matches the style when it comes to UK commitment.

                  In a rare interview on the eve of the anniversary celebration, KIA managing director Bader al-Saad and KIO boss Osama al-Ayoub made clear that the UK, and more specifically the infrastructure sector, is a priority. “We think the infrastructure environment in the UK is one of the best environments globally,” Mr Saad said. “Any infrastructure investor would rather be in a regulatory environment that is stable, time-tested and transparent.”

                  The fund’s first attempted incursion into the sector – the proposed buyout of water group Severn Trent alongside the likes of Canadian infrastructure specialist Borealis – was thwarted in early June.

                  The KIA will not be drawn on whether it remains interested, stressing that Takeover Panel rules do not allow a repeat approach for at least six months. “It’s a chapter and we’ve closed it,” said Mr Ayoub cryptically. Might there be other chapters in the same book? “It could be a book of one chapter,” is his smiling response.

                  Whatever happens in that affair, however, the KIA has made a fresh commitment to invest $5bn in infrastructure “mostly in the UK” over the next three to five years. It is a substantial plan, but it is a tiny proportion of the KIA’s overall firepower.

                  According to the latest estimates, the fund has $400bn under management, with investments ranging across all asset classes and all parts of the world.

                  The KIA sees itself on a par with funds such as Norway’s NBIM and the Abu Dhabi Investment Authority – more conservative than some other Middle East and Asian rivals, and unencumbered by government interference. “We are not politicians, we are driven by commercial strategy. We never received a political order to invest,” said Mr Ayoub.

                  The KIA’s overall assets are essentially run as two operations – one a Middle East-focused “general reserve fund” which is operated solely by the KIA itself; the other an internationally focused “future generation fund”, co-run by the KIA and KIO.

                  The future generation fund by law receives 10 per cent of the country’s oil revenues – about $11bn – but in the past year the share was increased on a one-off basis to 25 per cent, or up to $25bn.

                  Asia, Africa and Latin America have become focus points, especially the financial sector.

                  The fund has participated in three of Asia’s biggest IPOs of recent years – buying significant stakes in China’s ICBC and Agricultural Bank of China, as well as Hong-Kong based AIA.

                  The KIA is also a major private equity investor, typically committing $300m-$500m apiece to big funds. It has also bought into firms themselves, including US-based TPG Capital and Providence and British group CVC Capital Partners.

                  Tougher regulations and a bleak economic outlook have convinced Mr Saad that “we shouldn’t expect a lot from the banks” in the west, but there is one exception. The KIA sounds in no hurry to exit a financial crisis-induced investment in Bank of America: “The outlook for the US economy over the next five years is relatively promising. Banking is a good proxy for the economy.”

                  When the prime minister arrived at the lunch in the majestic old library, Mr Saad swept through the crowds holding another man by the hand, so eager was he to introduce him to the sheikh.

                  That man was the UK head of Borealis, proof positive of the KIA’s UK infrastructure intentions – and evidence, perhaps, that the Severn Trent approach might well be revived after all.

                  Reporting by Patrick Jenkins and Anne-Sylvaine Chassany

                  Argentina unveils new payment method

                  Posted on 30 June 2013 by

                  An Argentinian flag flies as people walk past the Metropolitan Cathedral in Buenos Aires©Getty

                  Argentina gets a new payment method on Monday that, unlike the peso, can be swapped for much coveted dollars in a country where greenbacks are like gold.

                  Though designed for real estate purchases, officials say the new Certificate of Deposit for Investment, or Cedin, could also be used to buy anything from washing machines to holidays, provided buyer and seller agree.

                    Argentina has a history of resorting to funny money or emergency bonds as a substitute for cash in times of financial crisis, such as Patacones and Lecops.

                    Those bonds, issued by the province of Buenos Aires and the national government respectively during the country’s 2001-02 economic crash, when it defaulted on nearly $100bn of foreign debt, were used among other things to pay salaries.

                    The Cedin is different: the cash-strapped government, which introduced a strict clamp on legal access to dollars in October 2011 but has still seen central bank reserves decline at an alarming rate, is offering the bonds to people in exchange for dollars that have been held abroad or under the mattress without being declared.

                    The catch is that, to be cashed for dollars by the central bank, they must be used in a real estate or construction transaction. The government hopes, however, that they can then circulate freely and be used for other purchases. “People will be able to buy white goods or any other product, pay for foreign holidays or pay off debts,” says Miguel Angel Pesce, deputy governor of Argentina’s central bank.

                    Idesa, a consultancy, says Cedins “will operate like a national currency, convertible into dollars . . . The government is forced to seek alternatives because the Argentine peso has stopped serving as a savings instrument and has many limitations as a transaction instrument”.

                    Argentines have a long-held love affair with the dollar, stemming from decades of painful experience of high or runaway inflation, currency crashes and economic turbulence – indeed the peso was pegged to the dollar during the so-called convertibility regime in the 1990s, though that experience collapsed in the 2001-02 crash.

                    The greenback remains the preferred currency for savers and real estate transactions traditionally conducted in dollars have screeched to a halt amid the government’s currency restrictions.

                    Since the government, in a bid to stem a haemorrhage of dollars flowing abroad, clamped down on accessing dollars, the black-market dollar rate has soared, virtually doubling the official rate in early May, sparking the announcement of the Cedin plan.

                    The official dollar rate is now some 5.39 pesos while the parallel rate – dubbed the “blue rate” – has eased to around 8.04 pesos.

                    The government dismisses the blue dollar as a tiny, illegal and illiquid market that has little relevance for most of the 40m population, but the “blue” has become a closely watched economic variable beside the overvalued peso.

                    The problem for the government is that, even with the clamp on dollars, central bank reserves in Latin America’s third-biggest economy have tumbled to a six-year low – now less than $37.2bn.

                    As such, the government sees the invitation to “launder” dollars for Cedins – and experts admit that the no-questions-asked attitude of the authorities could invite dirty money – as a way to boost reserves. Mr Pesce says it is credible to imagine $4bn being declared.

                    “The Cedin has two opposing goals – to reactivate house sales and accumulate reserves,” says Eduardo Levy Yeyati, head of Elypsis, a consultancy, who sees the scheme as a “Venezuela-style” attempt to intervene in the parallel dollar market.

                    But since house-sellers want to get their hands on dollars and are likely to swap the Cedin into dollars, the increase in reserves is unlikely to be lasting.

                    “The Cedin are short-term sales of reserves,” he says. “The risk is that they will issue them against the declining reserves thinking that people will hold on to them for a while. That will compromise reserves in the future,” he added.

                    Miguel Kiguel, an economist, said he struggled to see people using Cedins instead of pesos or credit-card purchases in instalments, which are very popular in Argentina.

                    “People who want dollars will want dollars, not Cedins,” he says. “This is obviously a backwards step.”

                    Chinese banks hit Hong Kong IPO hitch

                    Posted on 30 June 2013 by

                    China’s banks have been dealt a further blow as falling share prices put on ice a number of potential new Hong Kong listings.

                    Several smaller Chinese commercial lenders had been planning Hong Kong stock market debuts this year or early next year, including Bank of Shanghai, Guangfa Bank, and Bank of Chongqing.

                      However, little known regulations on bank capital raising, set by Chinese regulators, prevent mainland banks from raising funds in the equity markets at a price that values the company at a price-to-book ratio below one, an indication that investors do not believe the stated worth of a company’s assets.

                      With almost all similar midsized banks trading well below that level after the recent rout in Chinese shares, new issuers are now likely to find themselves locked out of the market, according to people with knowledge of the listing rules.

                      Investor confidence in China has been severely knocked by the recent liquidity crunch on the mainland, during which interbank lending rates spiked to record highs of more than 25 per cent at one point. Growth downgrades and concerns that government efforts to tighten credit conditions will hit company earnings have also had an impact, as has the global retreat from emerging markets.

                      The pricing issue also raises doubts about whether China Everbright Bank can proceed with its already twice-delayed Hong Kong listing.

                      Last week the Shanghai Composite fell below 2,000 points for the first time since December, hitting a 4½-year low and slipping into bear market territory in the process. On just one day – last Monday – the index fell 5.3 per cent. Financials have been among the worst hit, especially those reliant on the wholesale markets for funding.

                      China Minsheng Bank has lost 24 per cent in Hong Kong in the past month alone, while on the mainland, Shanghai Pudong Development Bank has shed 22 per cent.

                      The sell-off in Chinese shares has already had an impact on the new listing market in Hong Kong. Casino operator Macau Legend first postponed, then downsized its initial public offering, while a number of others have put their deals on hold.

                      Meanwhile the IPO market in Shanghai has yet to reopen from what was, in effect, a shutdown that began last year, as regulators have sought to clear a waiting list of nearly 900 companies.

                      Some analysts have attributed the poor performance of the Chinese market to fears that a flood of new issues would sap liquidity from the rest of the market.

                      Authorities have also issued new rules to improve the listing process, which had raised hopes that the market would soon reopen.

                      However, the recent volatility has cast fresh doubt on whether regulators are ready to give companies the go-ahead to raise new funds on the mainland.