Banks, Financial

Banking app targets millennials who want help budgeting

Graduate debt, rent and high living costs have made it hard for millennials to save for a house, a pension or even a holiday. For Ollie Purdue, a 23-year-old law graduate, this was reason enough to launch Loot, a banking app targeted at tech-dependent 20-somethings who want help to manage their money and avoid falling […]

Continue Reading


Eurozone inflation climbs to highest since April 2014

A welcome dose of good news before next week’s big European Central Bank meeting. Year on year inflation in the eurozone has climbed to its best rate since April 2014 this month, accelerating to 0.6 per cent from 0.5 per cent on the back of the rising cost of services and the fading effect of […]

Continue Reading


Wealth manager Brewin Dolphin hit by restructuring costs

Profits at wealth manager Brewin Dolphin were hit by restructuring costs as the company continued to shift its focus towards portfolio management. The FTSE 250 company reported pre-tax profits of £50.1m in the year to September 30, down 17.9 per cent from £61m the previous year. Finance director Andrew Westenberger said its 2015 figure was […]

Continue Reading


Travis Perkins and Polymetal to lose out in FTSE 100 reshuffle

Builders’ merchant Travis Perkins and mining company Polymetal face relegation from the FTSE 100 after their recent performances were hit by political events. The share price of Travis Perkins has dropped 29 per cent since the UK voted to leave the EU in June, as economic uncertainty has sparked concerns among some investors about the […]

Continue Reading


RBS share drop accelerates on stress test flop

Stressed. Shares in Royal Bank of Scotland have accelerated their losses this morning, falling over 4.5 per cent after the state-backed lender came in bottom of the heap in the Bank of England’s latest stress tests. RBS failed the toughest ever stress tests carried out by the BoE, with results this morning showing the lender’s […]

Continue Reading

Archive | November, 2016

Osborne reaps rewards from ‘enveloper’ tax

Posted on 31 July 2014 by

Chancellor George Osborne©Bloomberg

Chancellor George Osborne

In 2012, George Osborne, the UK chancellor, jacked up taxes on people who used companies to buy expensive residential property.

This was an effort to crack down on stamp duty land tax avoidance, which he described as “a major source of abuse”.

    Rules imposing a 15 per cent rate of stamp duty were placed on “enveloped properties”, (properties held through a company). The following year, an annual tax – ranging from £15,000 to £140,000 a year – was also introduced.

    In the latest Budget, the Treasury raised the rates and widened the scope of the tax, so it now affects properties valued at £500,000 or more.

    Treasury officials initially expected that few people – just 1,100 – would pay the new annual tax because they believed that the measures would deter people from buying “enveloped” property to escape stamp duty. It was originally expected to bring in £35m a year, together with the 15 per cent of stamp duty land tax.

    But it has raised far more than expected. The latest data show the annual tax alone has brought in £198m over the past 10 months. HM Revenue & Customs said it was too early to draw conclusions, but it was possible “enveloping is more prevalent than was first thought”.

    Advisers said a lot of property owners had decided against “de-enveloping” their properties. Some wanted to preserve their anonymity but, for many, the biggest factor in their decision was wanting to avoid triggering a capital gains tax charge – 28 per cent of the gain – when they removed the property from the structure.

    Inheritance tax planning is another consideration for many older non-residents and non-doms (wealthy foreigners living in Britain who keep their foreign income outside the UK tax net).

    Many non-doms put their assets in an offshore company before they reach the cut-off point – 17 years – after which they come under normal inheritance tax rules. Removing the property from its corporate envelope would expose it to inheritance tax, increasing death duties.

    The new taxes have damped but not destroyed the appeal of holding property through a company. But it has affected the market, according to Lucian Cook, residential research director at Savills.

    “The taxation had the effect of tempering price growth in the residential market”, he said.

    Puzzle of property in offshore vehicles

    Posted on 31 July 2014 by

    You need JavaScript active on your browser in order to see this video.

    No video

    Property ownership through an offshore company evokes an image of a rich foreign buyer wanting to protect their privacy and minimise taxes.

    Despite belated UK government attempts to impose taxes on offshore property ownership, the advantages of secrecy, as well as the prestige and convenience of owning prime central London property, make it attractive for the globally wealthy.

    One Hyde Park, London’s most expensive block of flats, epitomises how the rich stash their money through offshore companies in luxurious property that can remain empty for much of the year.

    Among the most prominent occupants of the sleek glass-and-metal building in Knightsbridge is Rinat Akhmetov, Ukraine’s richest man. His holding company invested £135m in what at the time was the UK’s most expensive flat through a British Virgin Islands company, the Financial Times found in 2011.

      Central London is particularly attractive. An FT analysis of Land Registry data shows that half of the properties in England and Wales held via offshore vehicles are in Greater London, many of them in the prime areas of Westminster, Kensington and Chelsea.

      However, the government’s difficulty in determining who owns property held in offshore vehicles is a source of concern, as money-laundering rules tighten around the world and economic sanctions are put in place against particular individuals and countries.

      The latest country under scrutiny is Russia, with EU countries imposing sanctions on individuals with close ties to President Vladimir Putin.

      The UK government has pushed for greater transparency in corporate ownership, but David Cameron, prime minister, acknowledged that until such information was available in every country, the “cloak of secrecy that is allowing corrupt regimes to stash their money abroad under false identities” would never be lifted.

      Of the 91,248 properties featured in the Land Registry data, some are commercial properties owned by bona fide companies that pour much-needed investment into the UK’s property market and want a tax-efficient vehicle to do so.

      However, campaigners have raised concerns that corrupt government officials and criminals may be hiding funds in expensive property owned through offshore companies.

      Money laundering is a worry for property lawyers and estate agents. Regulations already require them – as well as banks – to verify the identity of their clients, including the beneficial owners of a company involved in the transactions.

      “We consider that our regime for professionals including estate agents is the harshest, most effective in the world,” says Felicity Banks, head of business law at the Institute of Chartered Accountants.

      But experts acknowledge that it can be challenging to identify the beneficial owner. “The directive clearly says you should find out who the beneficial owner is and that is probably the most difficult task that an agent has,” says Peter Bolton King, global residential director at the Royal Institution of Chartered Surveyors.

      The Land Registry data suggest that owning property – both commercial and residential – through offshore jurisdictions remains attractive despite the increase in taxes. Just over 7,000 properties bought in 2011 are owned by offshore companies, compared with just over 10,000 purchased in 2013.

      However, there appears to be a small reduction in the overall number of properties held through offshore companies. A snapshot by the Land Registry in February 2012 – before the latest taxes were introduced – listed 94,760 properties, 3,512 more than in May this year.


      Methodology for the FT’s analysis

      The FT requested data from the Land Registry on all companies registered outside the UK that owned properties in England and Wales. The data show how many properties bought between the start of 1999 and May 2014 are owned through such companies. It does not show the total number of transactions.

      FT research revealed limitations in the Land Registry data. More than 35 per cent of titles do not list a purchase price and there are suspected duplicates in the data. A deal to buy a property may include several titles. Each title may list the purchase price for the overall deal, rather than a breakdown of the price for each title.

      The FT filtered out potential duplicates by removing price data in cases where the same company bought several titles at the same purchase price on the same date. These duplicates may account for up to £93bn. The sum of all price data in the data set is £236bn, but our conservative estimate of the total involved is £122bn.

      Tax haven buyers set off property alarm

      Posted on 31 July 2014 by

      LONDON, ENGLAND - OCTOBER 08: A man hangs a property for sale sign in a shop front in Sydenham on October 8, 2013 in London, England. The Government launched their 'Help to Buy' scheme today, which is hoped will enable first time buyers who can afford only small deposits to buy a home with only a 5% deposit. (Photo by Dan Kitwood/Getty Images)©Getty

      At least £122bn of property in England and Wales is held through companies in offshore tax havens where ownership is difficult to trace, a Financial Times analysis of Land Registry data has found.

      The figure – more than the total value of all housing stock in Westminster and the City of London – reveals for the first time the detail of the scale of offshore property ownership in the UK. It raises concern that London property in particular has become a haven for dirty money from around the world.

        “Property is a key risk area for the UK,” says Robert Barrington, executive director of Transparency International UK. “From Abacha to Marcos and the Gaddafis, corrupt leaders have used shell companies and trusts to hide their identities and safeguard stolen fortunes, often in property.”

        Nearly two out of three of the 91,248 foreign-company owned properties in England and Wales are held via the British Virgin Islands and Channel Island structures. Just under two-thirds of the offshore-owned property by value is in Greater London, with 27 per cent in the City of Westminster. The Land Registry data do not allow a breakdown between residential and commercial property.

        When Prime Minister David Cameron last year announced that details of who owned UK-based companies would be made publicly accessible, the government highlighted the need for transparency to tackle tax evasion, money laundering and other crimes.

        Yet Land Registry records show only the owner or entity holding a property, not the ultimate owner of the company through which the asset is held.

        Transparency International has called for the introduction of a list of beneficial ownership of property to mirror the UK government’s push to reveal the owners behind British companies.

        Anti-money laundering regulations require estate agents and lawyers to carry out due diligence on those involved in property transactions, which includes making checks on beneficial ownership. But doing so can be difficult.

        “When you have a company hidden offshore, it is I think almost impossible for your average estate agent to find out what on earth is going on,” says Peter Bolton King, global residential director at Rics. “You have to make a professional judgment whether you are satisfied with the information that you are provided with.”

        During the 2011 Libyan revolution, it emerged that the late Libyan dictator Muammer Gaddafi’s son Saadi owned a £10m London mansion through an offshore vehicle. Many of London’s “trophy houses”, including Witanhurst, a 65-room mansion overlooking Hampstead Heath, are owned by offshore companies whose ultimate owners are hidden. Witanhurst is registered to Safran Holdings, an offshore company registered in the British Virgin Islands.

        You have to make a professional judgment whether you are satisfied with the information that you are provided with

        – Peter Bolton King, global residential director at Rics

        Besides offering privacy to individuals and companies, BVI and the Channel Islands are attractive because of their tax regimes, and because of their strong ties with London’s banking and business community and their robust judicial systems. The 128 jurisdictions of choice for property investors include more unusual ones such as Iran and Niue, the tiny South Pacific island nation.

        A Land Registry official said there were no plans to introduce a register of beneficial ownership of property and that it would be “misleading to suggest that registering land or property in a company name amounts to allowing individuals to conceal information on the register for illicit purpose”.

        The total value of offshore ownership of property is likely to be considerably higher than £122bn. Limitations on how the Land Registry holds the data mean the true picture is difficult to ascertain. More than a third of the data provided by the Land Registry do not contain a purchase price. The Land Registry does not capture price information when properties change hands through the purchase of an offshore corporate vehicle for example.

        Additional reporting by Kate Allen

        You need JavaScript active on your browser in order to see this video.

        No video

        European banks feel backlash of clean-up

        Posted on 31 July 2014 by

        A picture taken on April 14, 2012 in Paris, shows the entrance of a BNP Paribas bank. AFP PHOTO LOIC VENANCE (Photo credit should read LOIC VENANCE/AFP/Getty Images)©AFP

        Investors in European banks received a harsh reminder of the risks posed by tougher regulation and closer scrutiny of financial balance sheets on Thursday as two big lenders announced record losses despite an improving economic outlook.

        Shares in Banco Espírito Santo fell 40 per cent after Portugal’s central bank ordered the country’s biggest lender to raise fresh capital and said former board members could face legal consequences for “harmful management”.

        In France, BNP Paribas reported a record €4.32bn loss in the second quarter, stung by the effect of the almost $9bn in fines the French bank paid in May for violating US sanctions in Sudan, Iran and Cuba.

          The news comes as the European Central Bank carries out its comprehensive assessment process – cleaning up lenders’ balance sheets before the launch of Europe’s banking union later this year.

          “People have moved to underweight over the summer in the bank sector,” said James Chappell, analyst at Berenberg. “I don’t think people will come back to the sector until we are through the ECB’s comprehensive assessment process.”

          When a handful of big European financial institutions, including Santander, the eurozone’s largest bank, reported first-half results on Thursday, the broad economic rebound boosted underlying earnings, as provisions for bad loans fell and net interest margins rose.

          But at BNP and several other groups, problems related to misbehaviour and regulation overshadowed the generally positive picture.

          In the UK, Lloyds Banking Group reported an almost 60 per cent drop in statutory pre-tax profits for the first half of the year after setting aside a further £600m for claims of payment protection insurance mis-selling, taking its total provision for the issue above £10bn.

          You need JavaScript active on your browser in order to see this video.

          No video

          Austria’s Erste Group slumped to a €1.03bn net loss in the second quarter, as it wrote down its Romanian business and set aside money to comply with a Hungarian law forcing banks to compensate borrowers for foreign-currency loans.

          By far the biggest surprises have come from Portugal’s BES, which launched a €1bn capital increase in June to prepare for the ECB’s stress tests and asset quality review. Its prospectus revealed the serious difficulties facing the Espírito Santo family group, the bank’s biggest shareholder with 25 per cent.

          Lex on BES


          Portuguese bank needs lessons in how to handle a PR crisis

          Continue reading

          “These hidden losses in bank balance sheets continue to get uncovered, as people are unable to support those debts,” Mr Chappell said.

          BES is struggling to avert a government rescue by hurriedly patching together a private-sector capital increase after the Portuguese lender posted a first-half net loss of €3.58bn. That halved its common equity tier one capital ratio – a vital measure of a bank’s strength – to 5 per cent, below the regulatory minimum of 7 per cent.

          “These banks have been through a lot of economic stress and have big balance sheets, which is exactly why the ECB’s stress test and asset quality review are trying to establish a clean slate across the sector,” said Daragh Quinn, analyst at Nomura.

          Analysts said BES could struggle to persuade investors to contribute to a second capital increase in only a few months.

          Despite purchasing shares at a discount of almost 40 per cent, investors who participated in BES’s €1.04bn capital increase in June have already seen the value of their stock fall more than 75 per cent.

          Hopes remain of deal on Argentine debt

          Posted on 31 July 2014 by

          You need JavaScript active on your browser in order to see this video.

          No video

          Argentina’s debt saga has been dragging on for more than 12 years and, with the country slipping back into default on Wednesday, it is far from over. Hopes remain that a deal with the private sector can still be reached.

          A last-minute proposal by a group of Argentine banks collapsed behind the scenes shortly after economy minister Axel Kicillof announced that the “vulture funds” had rejected the government’s offer. But other proposals are in the works, according to local media.

            “This isn’t over yet,” said Daniel Kerner, an analyst at Eurasia Group in New York. He argues that a settlement involving local banks remains the most likely outcome, with further meetings expected to take place in New York on Thursday.

            A deal would involve a consortium of banks buying the defaulted bonds of the holdout creditors, who rejected debt restructurings following Argentina’s previous default in 2001 but won the right to be paid in full in a 2012 US court ruling.

            Payment of the holdouts – mainly US hedge funds – would enable Argentina to continue paying the rest of its bondholders, after it failed to meet a deadline to pay bondholders on July 30 after its payments were blocked by US judge Thomas Griesa.

            “Other proposals could flourish,” admitted a person involved in the failed negotiations between the banks and the holdouts, who requested anonymity. The proposal, which had been led by the Argentine banking association, Adeba, and had the backing of several US banks, including Citigroup, HSBC and JPMorgan, consisted of an offer to buy the holdouts’ $1.6bn claim at a 20 per cent discount, or $1.4bn, with an initial instalment of $250m.

            Nevertheless, the person admitted to being “confused” by the Argentine government’s actions, and said that opposing factions in the administration of President Cristina Fernández were the main obstacle to a deal with the private sector.

            “Kicillof’s speech scared us away,” said the person, explaining that his unexpected insistence on offering the holdouts the same deal as holders of debt restructured after the 2001 default was at the root of the problem.

            Another person said Juan Carlos Fábrega, the president of the central bank who was understood to have backed the negotiations led by Adeba, was expecting the deal to be announced during Mr Kicillof’s press conference.

            If a deal between the holdouts and the private sector fails to prosper, Argentina has other options.

            “Kicillof said he will use all legal remedies available to solve the new selective default, so perhaps they will adopt local legislation in line with Chapter 9 of the US Bankruptcy Code,” said Marcelo Etchebarne, an Argentine lawyer who follows the case closely.

            “Or perhaps they will attempt to restructure all US and UK law bonds under local law, as suggested by the government’s counsel, which I do not think is feasible,” he added.

            Otherwise, the government could choose to remain in default until the end of the year, when the RUFO (Rights Upon Future Offers) clause in the contracts of Argentina’s restructured bonds that has been the main stumbling block to a deal with the holdouts expires. Since the clause prohibits the holdouts from being paid more than those who accepted restructured debt, its expiration would enable the government to resume negotiations with the holdouts.

            Nevertheless, the outcome remains highly uncertain, with the most pessimistic observers expecting President Fernández to leave the problem unresolved until the end of her term in December 2015.

            “The only thing that’s for sure at this point is that Kicillof has burnt the ships and he’s going to find it difficult to get people to take him seriously in future talks,” said Luis Secco, an economist in Buenos Aires.

            You need JavaScript active on your browser in order to see this video.

            No video

            Mr Secco added that another likely consequence of Argentina’s downgrade to “selective default” by rating agency Standard & Poor’s is that investors in credit default swaps will seek payment.

            “This story has more plot twists than a bad horror film,” said Tim Samples, a professor of legal studies at the University of Georgia.

            Generali ‘back in the race’, says chief

            Posted on 31 July 2014 by

            Pedestrians pass a Banca Popolare di Vicenza Scrl bank branch located beneath the Rome headquarters of Assicurazioni Generali SpA in Rome, Italy, on Thursday, July 19, 2012. Assicurazioni Generali SpA was among three Italian insurers downgraded by Moody's Investors Service, which cited the nation's "weakening" creditworthiness. Photographer: Alessia Pierdomenico/Bloomberg©Bloomberg

            Generali’s chief executive said the Italian insurer is “back in the race” with rivals Allianz and Axa, announcing it would hit 2015 targets ahead of schedule after first-half profit rose to its highest level in 10 years.

            Generali, one of Europe’s largest insurers by premiums, on Thursday said operating profit rose 9.5 per cent to €2.5bn in the first half. Revenues from property and casualty rose 15 per cent. New products and business were behind a 3.4 per cent rise in written premiums to €35.4bn.

              The insurer is also close to signing a deal to acquire a Malaysian insurer for about €100m, according to people familiar with the matter. It is the latest sign of the group’s expansion into Asia as Mario Greco, chief executive, seeks to diversify beyond its core markets in Germany, Italy and France.

              “Our results show that we are quickly moving toward our targets ahead of plan,” Mr Greco said.

              Appointed in 2012 after a boardroom battle ousted the insurer’s former chairman and chief executive in swift succession, Mr Greco has raised nearly €4bn from the sale of non-core assets and is cutting costs and has doubled the dividend.

              Net profit was flat at €1bn after writedowns following the sale of non-core businesses, including most recently Swiss asset manager BSI to BTG Pactual. Generali said it made a writedown of €113m related to BSI.

              Michael van Wegen, an analyst at Bank of America Merrill Lynch, said Generali was making significant progress in closing the performance gap with the sector.

              CME’s profits drop as trading volumes fall

              Posted on 31 July 2014 by

              CME Group, operator of the world’s largest futures exchange, reported a 15 per cent drop in second-quarter earnings, missing expectations as trading volumes tumbled.

              Terry Duffy, executive chairman, said the exchange was hit by “historically low levels of volatility” across the market during the quarter ending in June. But he said conditions could soon change.

                “We continue to see positive economic signs that could potentially lead to a more traditional Federal Reserve monetary policy,” he said. “This would . . . likely accelerate market activity as firms shift back into growth mode.”

                Trading volumes for CME’s flagship interest rate products tend to grow when traders believe a rate rise is coming. Speculation of a possible rate rise has been driven by the Fed’s decision to taper its asset purchases.

                But the Fed’s approach has caused some uncertainty as to when it will raise rates. On Wednesday the bank cut its monthly asset purchases by a further $10bn to $25bn-a-month, but also laid the groundwork for low interest rates.

                During the second quarter CME reported an average daily volume of 12.6m contracts, down 12 per cent from the same period last year due to low volatility.

                Clearing and transaction fees fell 12 per cent to $609m, compared to last year when CME said traders had reacted strongly to the Fed “chairman’s comments about potential tapering on quantitative easing”, CME reported.

                Mr Duffy said geopolitical uncertainty caused by the war in the Gaza Strip, the crisis in Ukraine and the downing of Malaysia Airlines flight MH17, has tamped down volatility in energy markets.

                “I think these are all confusing signals to any energy trader, and I would be afraid a little bit right now to trade at all,” he said to analysts on a conference call. “I think we’ll get more certainty on the geopolitical stuff, and that’s when you’ll see volatility come back into the marketplace.”

                The Chicago-based company reported earnings of $264m, or 77 cents a share excluding one-time items, compared to $311m, or 93 cents a share, during the same period last year. Revenues fell 10 per cent from $816m to $732m.

                Analysts had expected earnings of 79 cents a share on sales of $741m.

                The news came the day after CME said it would acquire GFI Group’s energy and foreign exchange software business in a deal worth $655m including debt as it seeks to expand its global reach.

                Shares in the company fell 2.5 per cent to $73.94 by close of New York trading.

                Help to Buy used by almost 40,000 people

                Posted on 31 July 2014 by


                Nearly 40,000 people have bought a home through the “Help to Buy” programme, ministers announced on Thursday, as they sought to rebuff Labour criticism of the coalition’s housing record.

                There were 27,167 properties bought using the Help to Buy equity loan in the scheme’s first 15 months to the end of June, up 4,357 in the past two months. That shared equity programme helps people, mostly first-time buyers, acquiring new-build properties.

                  The more controversial mortgage-support element of the programme helped 7,300 people buy a home – either new-build or old – in the same period.

                  Brandon Lewis, housing minister, said the figures proved that the scheme was providing assistance to “hard-working families”, while expanding the supply of new homes.

                  Housebuilding had climbed to its highest level since 2007 in part because of the momentum created by Help to Buy, he said.

                  “It’s no accident that since the start of the scheme private housebuilding has shot up by a third and continues to climb,” he said. “The construction sector has grown for 14 consecutive months, and companies are now taking on new workers at the fastest rate for 17 years.”

                  Stewart Baseley, executive chairman of the Home Builders Federation, said Help to Buy had contributed to the steepest increase in new housing starts for 40 years.

                  FT Video

                  UK government profits from Help to Buy

                  File photo dated 28/02/12 of a general view of roof workers building new houses in Derbyshire as Britain's housebuilding recovery spurred the first rise in construction output for seven months in May, raising hopes the sector's slump may be easing. PRESS ASSOCIATION Photo. Issue date: Tuesday June 4, 2013. The fastest increase in housebuilding work for more than two years lifted the closely-watched Markit/CIPS construction purchasing managers' index (PMI) to a reading of 50.8 in May - above the 50 level which separates growth from contraction. See PA story ECONOMY Construction. Photo credit should read: Rui Vieira/PA Wire

                  May 2, 2014: FT research has revealed that rising house prices are set to give the UK government a £12.3bn stake in the housing market through its backing for the Help To Buy home ownership scheme. Property correspondent Kate Allen talks to the FT’s Daniel Garrahan about the questions the profit will raise over the government’s attitude to house prices.

                  But Alex Hilton, director of Generation Rent, a pressure group, said the programme was not delivering where homes were most needed: “Where there are jobs.” Instead the biggest number of sales had been in Wiltshire, Leeds and Bedfordshire.

                  Emma Reynolds, shadow housing minister, said on Thursday that the government had presided over the lowest level of housebuilding since the 1920s.

                  “We are not even building half the homes we need to keep up with demand,” she said in a speech.

                  The Labour MP warned that on the current trends Britain was heading for a housing gap equivalent to three cities the size of Birmingham: “If the Tory-led government’s record is repeated until 2020 . . . the gap between housing supply and demand under the Tories will have reached 1.3m homes.”

                  BBC Newsnight recently obtained a leaked document from the communities department suggesting that housing “starts” were likely to decline in 2014-15. That was because any increase in private housebuilding would be negated by a steep drop-off in new social housing.

                  Labour has since asked the department to clarify its expected housing start figures for 2014-15, only to get a reply about an expected rise in “private sector housing starts” – a figure that would ignore social housing.

                  Hilary Benn, the shadow communities secretary, has written to Sir Bob Kerslake, permanent secretary at the department, accusing officials of putting forward a “selective and distorted” view of the situation.

                  “There seems to be a cover-up going on in which ministers are trying to hide the figures DCLG has in its possession,” he wrote in the letter.

                  Mr Lewis retaliated by saying that Labour’s record on housing was “truly appalling” and that the average house price rose from just £58,403 in 1997 to £183,959 by the end of 2007. That was a 214 per cent increase, he pointed out.

                  Additional reporting Andy Sharman

                  Investors amplify boom and bust cycles

                  Posted on 31 July 2014 by

                  Market boom and bust cycles are exaggerated by life assurance companies and pension funds, increasing risks to the stability of financial systems, warns a research paper published by the Bank of England.

                  Evidence of “pro-cyclical” behaviour was apparent during the post-2007 financial crisis and during the “dotcom boom” at the start of the century, according to the study published on Thursday. The performance of economies could have been hit as a result.

                    The report’s conclusions are the latest example of policy makers shining the spotlight on fund managers and large owners of financial assets, and their potential for creating financial market disruption.

                    Earlier this year, Andy Haldane, a member of the BoE’s Financial Policy Committee, warned that the world’s asset management sector posed mounting risks to financial stability and urged regulators to develop new tools to deal with the challenge.

                    The Bank of England said the views expressed in the discussion paper, based on work by academics and industry experts as well as bank staff, including Mr Haldane, did not necessarily reflect its views.

                    Life assurance companies and pension funds manage more than $50tn of assets globally. Because of their long-term liabilities, they should provide finance to real economies on a similarly long-term basis and help spread risks in the financial system. By investing “counter-cyclically” – essentially, buying assets when prices are falling and selling when they are rising – they could help stabilise markets.

                    However, the BoE report found there was “some evidence of pro-cyclical shifts in asset allocation following the dotcom crash of the early 2000s, and to a lesser extent during the recent financial crisis”.

                    Evidence of “procyclicality” by pension funds was mixed. While pension funds in some countries appeared to have behaved counter cyclically during 2008-09, others had been net sellers of equities. “This arguably reflected structural shifts in these countries towards more conservative asset allocations, rather than being a reaction to market conditions, but nonetheless may have been destabilising in the context of market developments at that time.”

                    Global equity markets fell sharply after the collapse of Lehman Brothers investment bank in late 2008. But those fund managers that invested counter-cyclically saw handsome returns. Since the trough in March 2009, the US S&P index has risen 190 per cent, and the FTSE All-World index by 150 per cent, on the back of aggressive policy actions by the world’s central banks.

                    Possible causes of procyclicality are regulation, herding behaviour by fund managers, industry practices and accounting rules – including “mark-to-market” valuations. Pension fund regulators have “introduced elements of regulatory flexibility in periods of stress”, the report notes, but its conclusions could encourage measures that constrain funds from pushing prices higher in upswings.

                    Pro-cyclicality is potentially damaging because it increases price volatility, the report warns. “Although asset price volatility does not necessarily equate to financial instability, it can decrease the resilience of the financial system, and thereby potentially contribute to serious interruptions in the vital functions which the financial system as a whole performs in our economy.”

                    Eurozone inflation falls to low of 0.4%

                    Posted on 31 July 2014 by

                    Eurozone inflation has fallen to a fresh four-and-a-half-year low, moving the 18-country bloc a step closer to outright deflation.

                    Consumer price inflation in the euro area fell to 0.4 per cent in the year to this month, down from 0.5 per cent in June, according to a flash estimate from Eurostat, the European Commission’s statistics bureau.

                      The last time eurozone inflation was this subdued was in October 2009, when prices fell 0.1 per cent. The latest dip leaves inflation at less than a quarter of the European Central Bank’s target of below but close to 2 per cent.

                      The July estimate was slightly less than analysts’ expectations of 0.5 per cent, though some economists lowered their forecasts on Wednesday on the back of signs price pressures had moderated in two of the region’s largest economies, Germany and Spain.

                      Italian prices were the same as a year ago, according to data published on Thursday.

                      The weakness in inflation across the bloc has stemmed from lower energy and food prices, which are traditionally more volatile than those of other items. The core measure, which excludes these goods, stayed at 0.8 per cent, indicating the latest dip in price pressures is not the result of weaker demand.

                      Energy prices have fallen 1 per cent over the past year, according to Eurostat. Food, drink and tobacco costs are down 0.3 per cent.

                      While the ECB is committed to tackling a “too prolonged period of low inflation”, policy makers are unlikely to ease monetary policy at their meeting next Thursday.

                      Officials have signalled that, barring a significant economic shock, they will wait until the end of this year to assess the impact of a package of measures announced in June before deciding whether to act again.

                      A survey of credit conditions, published on Wednesday, showed lending standards for the bloc’s businesses had eased for the first time since the crisis began. There has also been better news in recent weeks on the bloc’s fledgling recovery, with economic activity strengthening in July.

                      Sonali Punhani, an economist at Credit Suisse, said: “As far as the ECB is concerned, we think [policy makers] will look through the current inflation weakness and we don’t expect additional monetary policy measures.

                      “That the inflation rate was low due to lower food and energy prices rather than weaker core inflation or weaker fundamentals might be positive for growth and consumer spending.”

                      Inflation could fall again next month, however, placing more pressure on the central bank to embark on large-scale asset purchases, also known as quantitative easing.

                      Fabio Fois, an economist at Barclays, said: “A further decline to 0.3 per cent in August is likely; this would be a new cyclical low. Weakness in prices persists, especially those for energy goods.”

                      Gizem Kara, of BNP Paribas, said: “Over the next couple of months we continue to expect inflation to remain around its current levels, with risks tilted to the downside.”

                      Meanwhile, Eurostat reported that unemployment in the currency bloc had fallen slightly from 11.6 per cent to 11.5 per cent in June.

                      Unemployment dropped by 783,000 between May and June, leaving 18.4m people looking for work.

                      Regional differences in joblessness remain vast. In Austria and Germany, about 5 per cent of the labour force is unemployed. In Greece, it is more than a quarter and in Spain it is just less than 25 per cent.