China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

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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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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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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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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

Forecasting the world in 2016

Posted on 30 December 2015 by

©Sarah Hanson

A New Year beckons and the Financial Times once more indulges in the ritual of forecasting the 12 months ahead. Our experts and commentators set caution to one side and predict what will happen in everything from the US presidential election to the Euro 2016 football tournament.

A quick judgment on how they did last year. Ed Crooks correctly forecast that the oil price had further to fall, a brave claim at the end of a year in which it had already halved. Martin Wolf said the ECB would adopt full quantitative easing, which it did. Clive Cookson rightly opined that Ebola would be eliminated in west Africa by the close of 2015. Gideon Rachman said Vladimir Putin would annexe no further territory in Ukraine and Europe. Not many at the end of 2014 were saying that.

We got one wrong. Jonathan Ford was among many who assumed the British general election would end in a hung parliament (he went so far as to predict a national government). Otherwise, the fault last year lay not with the answers we gave but the questions we failed to ask. We did not foresee a surge of Isis-sponsored terrorism in France; that Russia would take military action in Syria; and that the migrant crisis would become a grave threat to the EU. In 2016 too, events will happen that are as yet beyond our imagination.
James Blitz

Will Hillary Clinton win the US presidential election?

©Sarah Hanson

Yes. It will be a rollercoaster election — and the nastiest in memory. Mrs Clinton will be pilloried by her Republican opponent, Ted Cruz, for her character flaws and weaknesses in the face of America’s enemies. A large chunk of the electorate will hold up the Clinton name as an emblem of all that is wrong — and corrupt — about today’s America. But elections are still won in the centre, or what is left of it, and Mr Cruz will be too far to the right of the median voter to make it to the White House. Despite uncomfortably close polls, Mrs Clinton will win the electoral college by a landslide. Democrats will take back the Senate. But she will start her term in a very polarised Washington. There will be no honeymoon.
Edward Luce

Will Britain leave the EU in the referendum expected in 2016?

In depth

Britain’s EU referendum

Britain in Europe

David Cameron is under pressure from all sides and faces a delicate balancing act in attempting to renegotiate an acceptable UK membership settlement with the EU

Further reading

No. Britain will vote to stay in the European Union. Not with any sense of enthusiasm or excitement but because the innate common sense of British voters ultimately will prevail. Forget the technical arguments about whether David Cameron manages to secure a good deal in his renegotiation or whether the UK gets back its contribution to Brussels in increased investment and trade. Consider instead the protagonists on both sides. In the end voters will choose between the calm logic of former prime minister John Major and the populism of Ukip’s Nigel Farage. My money is on Mr Major. If I am wrong, Britain faces truly turbulent times.
Philip Stephens

Will Bashar al-Assad still be in power 12 months from now?

Yes. Assad will remain nominally president of Syria in 2016, even if in reality he has already been reduced to the status of the biggest warlord rather than the ruler of a state. Militarily, he has been bolstered by the Russian military intervention that has targeted his rebel enemies. Politically, a US-Russian plan agreed in recent weeks envisages an 18-month transition and is fraught with risks. Even in the event that a peace process gains traction, Mr Assad will do his best to stall and hold on to his seat of power in Damascus.
Roula Khalaf

Will the Bank of England finally raise interest rates next year?

No. The Bank of England will flirt with rate rises through much of 2016, it will tease, but in the end it will not put its money where its mouth is. It has good reasons to avoid a decision. Inflation will lift off from zero very slowly, wage growth is weak; oil prices are weaker; and deficit reduction will prevent a boom. The BoE is keen to try its new powers to limit credit first before thinking about interest rates. The consequences of a spell of higher than target inflation are also limited. Later in the year, the BoE might decide to act, but even if it did, it would not make much difference. As far as interest rates are concerned, Britain is in what governor Mark Carney says is a “low for long” world for some time longer than 2016.
Chris Giles

Will at least one member of the group of 20 leading economies request an IMF assistance programme in 2016?

Yes. Within the G20, no developed member will need a rescue. The only conceivable candidate is Italy, given its high public debt. But the European Central Bank’s support, including quantitative easing, protects it.

The G20 also contains 10 emerging economies. Some are being buffeted by sharp falls in commodity prices (Argentina, Russia and Saudi Arabia are prime examples). Some run significant current account deficits (Saudi Arabia again springs to mind, along with Brazil and South Africa). Both India and South Africa have fairly large fiscal deficits. Others, such as Brazil, have a smaller deficit but a sizeable burden of public debt. The countries that tick all the boxes for instability are Argentina, South Africa and Brazil. Under stress, those countries have recently changed finance ministers. Argentina has a new government that promises a new approach. The IMF stands ready. Will at least one of these countries call upon it? It seems likely.
Martin Wolf

Will Brazil’s Dilma Rousseff be impeached before the Olympic Games begin in Rio?

©Sarah Hanson

No. But it will be a close-run thing. For now, Ms Rousseff probably has enough support in Congress to stop the process. But the more time passes, the worse the country’s recession and the weaker her political support becomes. Impeachment proceedings, even if the House of Representatives votes for them to go ahead, will probably only begin on February 10. Assuming the process’s complex sequencing then takes its full 180 days, Ms Rousseff could be impeached in mid-August. That would be after the Olympics officially starts on August 5 — phew — but, still in time for the high-jump final on August 16.
John Paul Rathbone

Will Angela Merkel still be German chancellor at the end of the year?

No. Although 2015 ended with Ms Merkel receiving a standing ovation at the conference of her ruling Christian Democratic Party (CDU), 2016 is likely to see the end of her long reign as chancellor. That ovation looked like conclusive proof that her job is safe — despite the pressures caused by the arrival of about 1m refugees in Germany in 2015. But Ms Merkel has now promised to reduce refugee flows next year. This is likely to prove undeliverable as desperate migrants, aided by people smugglers, continue to flow in.

Admiration for the chancellor’s courage and moral leadership will give way to uncertainty and discontent. The cracking point could be a revolt from local governments, who pronounce themselves unable to cope with the numbers. That, in turn, would finally provoke a challenge to the chancellor from within the CDU, making her position untenable.
Gideon Rachman

Who will win the Euro 2016 football tournament?

Belgium, the best team in the world, according to recent Fifa rankings. That arcane coefficient overstates Belgium’s quality, but not by an exorbitant margin. Through an advanced system of scouting and coaching — and a liberal naturalisation policy for immigrants — this small nation under a rickety state has produced a torrent of elite players. Belgium can field an attacking trio of Eden Hazard, Kevin de Bruyne and Romelu Lukaku, Premier League stars whose combined market value would touch £150m. The German squad is more seasoned, Spain’s more cohesive, but Belgium lacks little in sheer technical quality. With France playing host, there is also something akin to home advantage.
Janan Ganesh

Will China devalue the Renminbi significantly next year?

In depth

China tremors

China has been roiling global markets all summer as its authoritarian leaders try to stop a huge stock bubble from bursting and its slowing economy from stalling

Yes. China has good reasons to want to keep the renminbi stable against the US dollar in 2016 — a strong merchandise trade surplus, massive foreign exchange reserves and a desire to show the world that the “redback” is a worthy reserve currency. But the renminbi is still likely to depreciate to about Rmb7 to the US dollar, down from about Rmb6.48 currently. The flagging Chinese economy is likely to need at least two interest rate cuts next year while the US dollar is supported by continued Fed tightening. That should keep capital outflows from China at a high level, putting downward pressure on the currency. The renminbi’s trajectory is unlikely to be smooth. This may well be the most volatile year ever for the Chinese currency.
James Kynge

Will Jeremy Corbyn still lead Britain’s Labour party a year from now?

Yes, and for several reasons. The first is that a majority of the party, if not its MPs, want him to. Despite Labour’s weak showing in the opinion polls, the rank-and-file seem happy with the direction the party is taking. Then, there is the congenital loyalty of Labour MPs. Unlike the Tories, the party has never excelled at assassinations. And in any case if, as now seems likely, Mr Corbyn tweaks the party’s unclear leadership election rules to ensure that the incumbent is on the ballot come what may, any challenge would be quixotic at best. It took the full rhetorical force of Ernest Bevin to hound Labour’s last pacifist leader, George Lansbury, into retirement in 1935 when the then union boss persuaded the party to stand up to fascism. Today’s Labour is still waiting for its Bevin. They seem unlikely to show up next year.
Jonathan Ford

Will Abenomics fail in 2016?

No. The record of Abenomics is mixed, but on balance, it has done Japan’s economy more good than harm. That will continue in 2016. True, the central goal — to get inflation to 2 per cent — has been missed. Because of the oil price collapse, inflation, as normally measured, is still hovering around zero. Shinzo Abe’s government compounded the problem by prematurely raising consumption tax, taking money out of people’s pockets just when it wanted them to spend. Yet the broader reflationary goals of Abenomics are working. Stripped of energy prices, inflation is about 1 per cent. Public debt has stopped rising as a percentage of nominal output. Japan’s companies are making record profits. Mr Abe’s problem is that he has pledged to raise the consumption tax again in 2017. That is when the crunch could come.
David Pilling

Will Russian athletes compete in the 2016 Olympics?

Yes. There is no political will to punish Russia for resurrecting the mass doping of the Soviet era. Last month, it became the first country in history to be suspended indefinitely from athletic competition until it can prove it is clean. But Moscow and the west are keen to minimise the embarrassment of an independent report that listed some of the worst abuses the sport has seen. To compete in Rio, Russia will have to fire any officials that have been part of doping programmes, resolve all pending disciplinary cases, investigate its doping culture and demonstrate that it has changed its ways. The Russians say this will take three months.
Malcolm Moore

Will sales of cars with diesel engines fall in Europe in 2016?

In depth

Volkswagen emissions scandal

VW emissions scandal'

The German carmaker is engulfed in the worst scandal in its 78-year history after it admitted to manipulating emissions test data on its diesel vehicles in the US and Europe. The deepening crisis has wiped billions of euros off the company’s shares and rocked the European car industry.

All the news and analysis

Yes. European car buyers were already growing less enamoured with diesel engines, and the autumn revelation that Volkswagen had installed software to cheat on emissions tests in 11m diesel vehicles worldwide will exacerbate the decline. Diesel’s penetration among new European cars peaked at 55 per cent in 2010 and has been dropping fast in France, where subsidies have been reduced and scepticism about the environmental impact has risen. VW is a particularly big maker of diesel engines and its sales dropped more than 20 per cent in key markets in November after the scandal. In 2016, diesel’s share will shrink so fast that it will outweigh the growth in the overall car market.
Brooke Masters

Will Brent crude end the year over $50?

Yes. The oil market in 2015 was brutal for anyone trusting in a rapid rebound from the previous year’s crash. The tenacity of the US shale industry and surges in output from Iraq and Saudi Arabia meant the world was awash with crude. Next year, the lifting of sanctions on Iran could bring yet more oil to the market. Still, the financial torments of oil producers worldwide are forcing them to cancel projects and cut drilling programmes, curbing future supplies, and the impact will become apparent. Brent crude below $50 per barrel is too low for the industry to make the investments needed to meet growing global demand. Providing the world economy does not skid into recession, this looks like being the year that the oil price heads back to more sustainable levels.
Ed Crooks

Will George Osborne scrap tax relief for pensions in his March Budget?

Yes. The UK chancellor put off making a decision on the matter at November’s Autumn Statement. But he sent a strong signal that far reaching change is coming. Upfront tax relief on pension contributions currently costs the exchequer nearly £50bn a year. A mooted “Pensions Isa” would slash this bill as workers would accumulate savings out of their taxed income instead, with the guarantee of withdrawing it tax-free upon retirement. The change would take years to implement. Taxpayers could prepare by making maximum contributions into pensions before the end of the tax year in April.
Claer Barrett

Will 2016 be the year virtual reality finally takes off?

No. But it will be the year in which many experience for the first time what may one day be the most transformative of all technologies. The first view through a VR headset — the chunky goggles used to view alternative 3D versions of reality — is, for most, unforgettable. But great demos don’t make an industry. While VR games are starting to appear, there is a shortage of content for the devices. And the applications that will push it into the mainstream — like visiting a doctor or holding an office meeting in virtual space — are more dream than reality. Still, the technology is set to captivate the public imagination. Physical reality will never seem the same again.
Richard Waters

Banks’ new normal leaves system exposed

Posted on 30 December 2015 by

Janet Yellen...FILE - In this Dec. 17, 2014 file photo, Federal Reserve Chair Janet Yellen speaks with reporters at the Federal Reserve in Washington. The Federal Reserve ended 2014 with a pledge to be ìpatientî in raising interest rates from record lows. The way things are going, its patience may endure for a long while. (AP Photo/Cliff Owen, File)©AP

Janet Yellen, chair of the US Federal Reserve

Western policymakers took big strides in 2015 towards returning the global financial system to some kind of normality. The December interest rate increase from the US Federal Reserve — nine years after the last rate rise — was neat evidence of a broader shift.

During the year there had been solid progress on the last slug of post-crisis regulatory reforms. New rules governing the windup of insolvent banks were outlined, requiring banks’ bonds, in extremis, to be “bailed in”, through being convertible to equity. Leverage rules, limiting banks’ debt-to-equity levels, were toughened.

    At the same time, punishments began to wane. The cost of settlements relating to foreign exchange manipulation and mortgage and protection insurance mis-selling still ran into the tens of billions of dollars. But for the banks, the end came into sight.

    Evidence that the regulatory pendulum was swinging back from the extremes of recent years was clearest in Europe. Martin Wheatley, the hardline head of Britain’s Financial Conduct Authority, was sacked. Chancellor George Osborne signalled an easing of the tax burden on banks. Lord Hill, the EU financial services commissioner, suggested there may have been an overload of EU regulation.

    Europe’s banks also made decisive breaks with the past. Deutsche Bank, Credit Suisse, Standard Chartered and Barclays all appointed new chief executives and lenders across the continent embarked on the kinds of cost cuts, staff lay-offs and strategic restructuring that took place in the US several years earlier.

    It would be foolhardy, however, to believe that the outlook for the world’s banks is bright. Many European lenders, in particular, remain hospitalised. The creation in January of the Single Resolution Board, to wind up insolvent banks, will pose another challenge for weaker institutions.

    Lord Hill’s great white hope is to foster a “capital markets union” — spurring bond markets to replace banks as companies’ core source of funds. The US balance of corporate finance, with three-quarters of funding secured through markets and only a quarter through banks is seen as a model for Europe, where the current structure is the inverse. Mimicking the US, though, is not the panacea that some make out. Even if stubborn national legal structures could be rationalised, Europe simply does not have the flow of investment, coming from private pensions, or pre-funded state retirement structures, to support European companies’ debt requirements.

    Plenty of challenges lie ahead in 2016. Despite the Fed’s December rate rise, the distortive effect of extended low interest rates will resonate for some time. As well as constraining banks’ recovery through compressed margins, there is a host of assets whose valuations have been inflated by investors’ desperate search for a decent return — the infamous “hunt for yield”.

    There is a well-trailed danger of these asset bubbles bursting, most obviously in China and other emerging markets exposed to a strengthening dollar. The post-crisis financial system is in some ways readier to absorb such shocks. Bank capital and liquidity are much more robust than they were before 2008. As 2016 dawns, however, other weaknesses should worry policymakers.

    Most concerning is the vast scale of the asset management industry, combined with banks’ inability to buffer market volatility through traditional market making. If monetary policy is to continue its return to normality, the world urgently needs to develop more effective financial stability policies.

    World Bank exit highlights China fears

    Posted on 30 December 2015 by

    Postal Savings Bank of China©Reuters

    Postal Savings Bank of China

    When the Postal Savings Bank of China announced it had raised $7bn from a group of international investors it marked a significant step towards what is expected to be one of the biggest Chinese listings in 2016.

    Alongside China Life and giants of global finance such as UBS and JPMorgan, it raised funds from the World Bank’s private sector arm, the International Finance Corporation, representing a turnround for a state bank that just three years earlier had seen its president charged with corruption.

      But the deal has ​become​ emblematic of the often subtle ways in which Beijing and Washington battle for influence behind closed doors at the World Bank. It has also cast a shadow over the departure of China’s most senior official at the World Bank, former Goldman Sachs banker Jin-Yong Cai, who after a turbulent three years at the helm​ of the IFC leaves this week to return to Asia and the private sector.

      While Mr Cai and other senior World Bank officials insist that he is leaving 10 months before the end of his four-year term for personal reasons and there are no allegations of any wrongdoing, his exit ​followed an unusual rebuke by the World Bank’s board for the Postal Savings Bank of China transaction that he championed. It comes amid what senior bank officials say were mounting concerns by the US and others over alleged favouritism involving a growing number of IFC deals with Chinese state-owned companies.

      At $300m, the IFC’s investment paled in comparison with the $2.5bn China Life paid for its 5 per cent stake in the Postal Savings Bank. However, it was the largest the IFC had ever made in a Chinese bank and Mr Cai saw it as an example of the “big bang” deals for which he ​h​​oped​ to be remembered.

      According to senior World Bank officials though, big shareholders questioned how the investment fitted with the IFC’s mandate to lend to private companies in places where capital was either unavailable or too expensive and other investment options were not available.

      ​Plenty of other ​investors were​ lining up for a stake in the Postal Savings Bank of China. Moreover, it was unclear, the officials said, just what the development impact — a crucial test for IFC investments — would be despite Mr Cai’s claims that it fit with the bank’s “financial inclusion” strategy.

      “It is unclear to me what the role is for the IFC in [the Postal Savings Bank of China],” says Peter Woicke, a former JPMorgan banker who ran the IFC from 1999 to 2005 and oversaw its initial investments in China’s banking sector. “If that [investment returns] is why you are doing it you might as well be Goldman Sachs. But the job of the IFC is not just to be Goldman Sachs.”

      The IFC and Mr Cai argue the investment in the Postal Savings Bank will help bring financial services to many of China’s “unbanked” and provide a healthy investment return as well.

      Jin-Yong Cai, executive vice president and chief executive officer of International Finance Corporation (IFC), speaks during an IFC panel discussion in Washington, D.C., U.S., on Friday, May 16, 2014. The event was titled "How Infrastructure Investment in Developing Countries can Spur Economic Growth." Photographer: Andrew Harrer/Bloomberg *** Local Caption *** Jin-Yong Cai©Bloomberg

      There are always different views on projects in China. I understand that

      – Jin-Yong Cai, departing World Bank official

      T​he clash surfaced when the World Bank’s board considered the IFC’s $300m investment in June. When the 25-member board gathered to vote on it June 9, according to minutes, the representatives for the US, Japan and big European shareholders including the UK, Germany and France all abstained. Altogether nine directors responsible for 56.4 per cent of the IFC’s voting shares withheld their approval.

      Because those directors abstained rather than voted against, the investment went ahead. But in the nuanced arena of World Bank board politics where outright votes against projects backed by powerful shareholders such as China are rare the vote amounted to a dramatic rebuke to Mr Cai.

      “It’s very unusual,” said Chad Hobson, executive director of the Bank Information Center, a Washington-based campaign group focused on the World Bank. “They don’t [normally] go to the board when they are going to lose a vote.”

      The vote, according to current senior bank officials, came after the US had for more than a year been expressing growing concerns about a number of IFC transactions involving Chinese state-owned companies around the world. Those concerns had seen the US either abstain or vote against a renewable energy project in Pakistan and a proposed $140m in investment in IFC projects involving Chinese state-owned grain trader COFCO.

      It also came as Chinese stock markets were in turmoil and just ahead of the release in July by the World Bank of a report, which the bank later pulled, in which it warned that China’s “distorted” financial sector was in urgent need of reform.

      China loses its top voice at the World Bank

      World Bank President Jim Yong Kim AFP PHOTO / Saul LOEBSAUL LOEB/AFP/Getty Images

      Jin-Yong Cai’s replacement by a European could deepen Beijing’s frustration with the bank and IMF

      Mr Cai defended the investment but noted that anything to do with China often had extra sensitivities attached.

      “There are always different views on projects in China,” he said. “I understand that.”

      With its 40,000 mostly rural branches, the Postal Savings Bank of China allowed the IFC to help spread financial services further into China’s countryside where some 235m still did not have bank accounts, Mr Cai said. It would also enable the IFC to learn from one of the world’s biggest postal banks. “How do we gain our experience? We can’t just get it by reading books. We have to be involved in transactions,” he told the Financial Times.

      Mr Cai insisted it was a good investment for t​​he​ IFC, which​ has had to sell other equity holdings in China to fund dividend payments to the World Bank to finance its low-interest lending to the world’s poorest countries.

      Some of the IFC’s other equity investments had had a difficult time, he said. In the year to June 2015 it​ took $700m in writedowns on its equity investments in emerging markets, according to figures provided by the IFC. Chin​a​ had been a rare bright spot, Mr Cai says, although the IFC declined to provide details of how its investments there had performed amid​ recent turmoil in the Chinese market.

      “We have made so much money from our investments [in China]. We are so lucky. We thank the Chinese for giving us this opportunity,” Mr Cai said.

      Challenger banks have hurdles to clear

      Posted on 30 December 2015 by

      A branch of TSB©Bloomberg

      With three lenders getting the green light to launch, Aldermore and Shawbrook floating and the acquisition of TSB by Spanish bank Sabadell, 2015 has been trumpeted as a significant year for UK challenger banks.

      Despite the fanfare, these lenders face significant hurdles as they try to compete with the large incumbent retail banking groups.

        The challengers share a common root as groups that are starting with a clean slate, unencumbered by legacy systems or misconduct issues that plague the established lenders.

        But the term also covers a wide range of companies, stretching from TSB at the larger end, to digital start-ups that have yet to launch. Among the latter are Atom Bank and Tandem — the first UK lender to be based predominantly on mobile services.

        Warren Mead, of accountancy firm KPMG, believes that for challengers to be successful, “banks need to either develop a cost advantage or differentiate in order to compete effectively”.

        Indeed the smaller, specialist banks that are targeting niche sectors, such as lending to housebuilders, delivered a return on equity of 18.2 per cent on average in 2014, while the larger challengers, serving the mainstream retail market, returned on average 2.1 per cent.

        However, all challengers, no matter their size, face the same fundamental challenge: UK customers rarely switch their current accounts and the big four high street banks still dominate this crucial relationship.

        Just over 2 per cent of current account holders changed providers in 2014, and Lloyds, Barclays, HSBC and Royal Bank of Scotland have 70 per cent of the market.

        A report by YouGov this year found that only 2.5 per cent of current account customers held their main account with a challenger, while only 23 per cent of UK current account users held any type of account or financial product with one of the newer groups.

        The most successful alternative to the big four remains Santander UK, the British arm of the Spanish bank. It gained the most customers who switched in the first quarter, increasing its market share to 10 per cent.

        The UK’s competition watchdog is reviewing the current account market and is seeking ways to boost choice for consumers.

        But regulatory changes and new taxes also threaten to stunt the growth of upcoming banks as they seek to wrestle market share away from the big four.

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        George Osborne, the chancellor, revealed a tax surcharge on UK-focused banks in his summer budget. Shares in challengers plunged more than 10 per cent in some cases after the announcement. The tax is expected to dent the ability of new banks to lend to small businesses by £6bn over the course of this parliament.

        Challenger bank chief executives are also concerned about proposals to boost capital requirements for certain types of lending.

        The latest consultation by the Basel Committee on Banking Supervision focuses on banks that use the “standard” method for calculating capital needs. It calls for such lenders to set aside more capital against buy-to-let mortgages and loans to established housebuilders, both important lines of business to some challenger banks.

        UK challenger banks target business loans

        LONDON, ENGLAND - SEPTEMBER 09: TSB (The Trustee Savings Bank) re-opens on September 9, 2013 in London, England. To meet competition rules set by the European Commission, owners Lloyds Banking Group have disposed of a number of branches that will open as the TSB. (Photo by Peter Macdiarmid/Getty Images)

        Limited success in poaching customers from main four lenders prompts shift of focus to SME market

        In some cases, capital needs would double, making it much harder for banks to make profitable loans.

        The proposals are particularly threatening to smaller challenger banks, which use the standard method, because their larger competitors, who use their own models, are expected to have lower requirements.

        Nigel Terrington, chief executive of Paragon Group, said: “It’s a bizarre world where a good loan-to-value buy-to-let mortgage has a higher risk weighting than an unsecured credit card. It calls into question Basel’s objectives and the basis of evidence they have used to reach these conclusions.”

        Nonetheless, some investors believe a number of challengers have exciting growth prospects.

        Jan Luthman, a fund manager at Liontrust Asset Management, said: “Challengers are high growth, and legacy-free. There is a lot of focus on how tiny they are, but they have growth prospects.”

        He added that there is “strong political encouragement for the establishment of new smaller banks”, which are “not systemically risky”, and are able to provide lending to small businesses in particular, filling the void left by the large high street banks after the financial crisis.

        In spite of the regulatory obstacles, challengers focused on superior service and different products to the big high street lenders are on track to claw away some of the market share of the large banks. Those that reflect the model of the existing incumbents, however, face a tougher task ahead.

        Mortgage brokers warn on stamp duty

        Posted on 30 December 2015 by

        An employee changes a residential property information leaflet displayed in the window of an estate agent in this arranged photograph in the Clapham district of London, U.K. Photographer: Simon Dawson/Bloomberg©Bloomberg

        Housing chains will be put at risk by the UK government’s insistence that people pay a surcharge on stamp duty when homeowners temporarily hold two properties, mortgage brokers have warned.

        The Treasury this week published details of its proposals for a 3 percentage point surcharge on stamp duty land tax on second homes and buy-to-let properties. As part of its plans, those who are replacing their main residence but encounter unforeseen circumstances such, as their sale falling through, would still pay the extra, even though they had no intention of owning two homes at once.

          However, buyers can claim back the extra stamp duty if they succeed in selling the previous home within 18 months of the transaction.

          Property market experts said the arrangement would cause some housing chains to collapse by pushing buyers into unaffordable levels of debt.

          “It could be the straw that broke the camel’s back,” said Ray Boulger, technical director at broker John Charcol, since many buyers seeking to replace a main residence already stretched themselves to the limit on home loans.

          “Inevitably in this situation there will be some people who will find it difficult, or impossible, to find the extra 3 per cent, especially at short notice, and others who could do so, perhaps by increasing their new mortgage or obtaining a bridging loan, but balk at the extra cost and pull out as a result.”

          The surcharge arrangement would hit older homeowners wishing to downsize, others warned, since these buyers often had the capital to buy ahead of selling and often do so for peace of mind and flexibility.

          Stephen Johnson, managing director of commercial lending at Shawbrook Bank, said he was “nervous” about the impact on this segment of the market. “These buyers will be caught by this. To add another 3 per cent seems penal and they are clearly not the focus of this initiative.”

          Those wanting to sell and buy at different times might face higher long-term mortgage interest rates as a result of the measure. Adding a 3 percentage point surcharge to a mortgage on a loan-to-value ratio of 75 per cent might push a stretched buyer into a higher LTV bracket, carrying higher repayment costs.

          In depth

          UK housing market

          For sale signs uk

          Price indices have presented wildly contrasting pictures of the health of the housing market: according to some the boom is back, while to others the slump staggers on

          Further reading

          TSB, for instance, has a five-year fixed rate mortgage at 2.54 per cent on a 75 per cent LTV. If the loan was 3 percentage points higher, the borrower would face a higher rate of 2.79 per cent — a rate that would continue to apply for the five-year period of the fix.

          George Osborne, chancellor, is raising stamp duty for most buy-to-let purchasers as part of moves to cool the sector’s rapid growth, in the belief that landlord investors were “squeezing out families who can’t afford a home to buy”.

          Richard Lambert, chief executive of the National Landlords Association, which opposes the surcharge as well as a separate move to limit tax relief on buy-to-let mortgage payments, said the consultation document underlined the government’s apparent aim to “stamp out investment in the private rented sector.”

          The “convoluted” exemptions listed in the consultation document showed the difficulties the measure would introduce into the market, he added, and revealed a lack of understanding of the role that landlord investors had played in the past decade in meeting increased demand for rented accommodation.

          “It has been harder to become an owner occupier since the financial crisis and harder to get social housing. If you choke off buy-to-let it’s going to become more expensive to bring new stock into the private rented sector.”

          Landlords are increasingly looking at types of property that are exempt from the surcharge, such as mixed-use properties that combine a commercial or retail unit with an adjoining residential property.

          Steve Olejnik, sales director at buy-to-let broker Mortgages for Business, said he had had more enquiries for these properties from buyers intending to apply for planning permission to turn the commercial premises into residential. “It’s the professional landlords with a portfolio of investment properties that are more likely to move into these sorts of investments,” he said.

          The Treasury consultation ends on February 1. The final structure will be announced in the March 16 Budget and will come into effect on April 1.

          Fresh fall for crude hits wider sentiment

          Posted on 30 December 2015 by

          Stock Market©Dreamstime

          Sustained pressure on oil prices set a fractious tone to trade on Wednesday, hitting energy stocks, which were among the main fallers on European stock indices.

          The pre-Christmas rebound in Brent crude prices was little more than a memory, with the international oil benchmark down 2.1 per cent at $36.99 per barrel. That left it within reach of the intraday low of $35.98 touched on December 22, from where it rallied to $37.98 on Christmas Eve. West Texas Intermediate fell 0.9 per cent to $36.96.

            The pressure was being felt on equities markets. The Euro Stoxx 600 fell 0.5 per cent, with national indices in Germany and France down by the same margin. The UK’s resource-heavy FTSE 100 lost 0.6 per cent, with the London index’s financial stocks adding to the losses.

            “Markets still can’t escape the clutches of soft commodities and their impact on inflation,” said Kit Juckes at Société Générale.

            “The first effects of the commodity price downtrend were felt in macro indicators [including] lower capital spending and lower growth in producers’ economies, and soft consumer price inflation. Second-round effects — including how the corporate sector reacts to weaker income in the longer run — may dominate in 2016.”

            The overnight downgrade from Moody’s of commodity trader Noble Group’s credit rating to junk status chimes with the wider, fragile mood.

            Asian stocks were unable to hold their high points for the day as the faltering oil price rattled nerves. Japan’s Nikkei 225 held above the flatline, closing up 0.3 per cent, but it lost wider gains of 0.7 per cent. It was the final trading day of the year in Tokyo, and the move took the Nikkei’s gain for 2015 to 9.1 per cent, after a decline of 3.6 per cent over December.

            In China, the Shanghai Composite inched up 0.3 per cent and the Hang Seng fell 0.5 per cent.

            The dollar was stronger overall, with the index tracking the world’s reserve currency up 0.1 per cent at 98.150. But there was room for the euro to rally. The shared currency gained 0.2 per cent to $1.0941. The pound also ticked higher, up 0.1 per cent at $1.4819.

            Delay to EU pay rules a bonus for brokers

            Posted on 30 December 2015 by

            City of London skyline©Getty

            City of London skyline

            The City of London’s brokers received an early Christmas present as it emerged that the threat of draconian rules on bonuses and research that had overshadowed them for much of 2015 was likely to be watered down.

            However, the sector is still grappling with permanent structural changes: lower trading volumes, pressure on fees and better technology.

              The challenges come as European regulators said in December they had delayed by a year restrictions on bankers’ pay — known as CRD IV — to give authorities time to craft exemptions for smaller lenders and brokerages. This has come as a relief for many brokers who were alarmed by the European Banking Authority draft guidelines, initially published in March, that would have subjected them to the same rules as large banks.

              Now, the EBA, which sets out banking regulations for the EU’s 28 countries, has delayed the regulation until January 2017, allowing the EU to exempt “smaller and non-complex” institutions and individuals who get small bonuses from the full scope of the rules.

              While these institutions and individuals will still be caught by a cap on bonuses at two times salary, under the proposal they would not have to split bonuses into cash and shares, or defer them over several years.

              Brokers operating in the Square Mile were similarly relieved when it was announced in November that Mifid 2 — new European regulation designed to shake up Europe’s trading landscape — will also be postponed by a year until January 2018. At the heart of this has been the issue of “unbundling” — the separation of asset managers’ research spend from trading commissions.

              Now, officials have opened the possibility, under strict conditions, for asset managers to retain an existing transparency system for research charges, known as “commission-sharing agreements”. This means that managers could be spared the legal and administrative burden of having to unpick their existing arrangements.

              This is a boon for small and mid-cap brokers who argue that a move by regulators to prevent asset managers paying for research out of client commissions would mean that they cut back their research spend, which would ultimately force brokers to retreat from research as well, to the detriment of capital markets.

              Oliver Hemsley, chief executive officer of UK broker Numis Securities, said full unbundling has the “distinct possibility” of reducing research coverage of small and mid-cap companies.

              UK banks fight back against EU bonus cap extension

              British financial institutions have launched a rearguard action against an EU plan to extend restrictions on pay to more than 1,000 of the UK’s smaller banks, asset managers, brokers and hedge funds. 

              “This will denigrate London’s position, drive up the cost of capital and eventually stop capital reaching these companies. Now that implementation has been moved out until the start of January 2018, we should think about the impact of this legislation,” Mr Hemsley said.

              These regulatory headwinds came during a year in which both the number and volume of initial public offerings on Aim, the London Stock Exchange’s junior market, which this year celebrated its 20th anniversary, were down substantially compared with 2014.

              Macroeconomic uncertainty surrounding May’s general election in the UK, an economic slowdown in China and falling commodity prices collectively took their toll on fund manager appetite for listings.

              There were just 30 IPOs on Aim this year, raising £560m. That compares with 2014 when 80 IPOs on the junior market raised £2.8bn. Secondary fundraising increased 27 per cent to £4.15bn on the previous year.

              However, there are signs that investors are backing slightly larger and more mature companies on Aim than in previous years: the average market cap of the 57 companies that joined the stock exchange this year was £100m, almost 40 per cent larger than the average Aim company.

              The main market held up better, with the number of listings largely on a par with last year. In 2015, 60 IPOs raised £12.6bn, just below the £14.1bn raised by 58 IPOs on the main market last year. Figures for 2015 are up to and including December 18.

              Performance among the small and mid-cap brokers has been polarised with those that receive substantial retainers from corporate clients or fees from M&A outperforming. For example, Numis reported record revenues in its latest financial year, as its growing mergers and acquisitions business offset a volatile year for IPOs. Revenue increased 6 per cent to £98m, and profit before tax increased 7 per cent to £32.7m in the 12 months to September 30.

              At the other end of the spectrum, a recent profit warning from rival Panmure Gordon illustrates how a drop in equity issues and IPOs on Aim is taking its toll on the brokers advising these companies, who rely on the fees from these transactions. Two days before Christmas, rival Panmure Gordon said a “decline in capital market transactions” in the fourth quarter meant it expected to suffer a pre-tax loss of £4m-£4.5m this year, compared with a profit of £2.15m last year.

              Recognising the new paradigm of falling secondary commissions, City stockbroker Westhouse Securities this month announced it was changing its name to Stockdale Securities and refocusing its business on winning and retaining good quality corporate clients and executing their transactions.

              Market performance for 2015 in figures

              Posted on 30 December 2015 by

              BEIJING, CHINA - AUGUST 27: A Chinese day trader plays cards wit5h others as he watches a stock ticker at a local brokerage house on August 27, 2015 in Beijing, China. A dramatic sell-off in Chinese stocks caused turmoil in markets around the world, driving indexes lower and erasing trillions of dollars in value. China's government has implemented a series of top-heavy measures to manipulate a market turnaround including its fifth cut to interest rates since November. Concerns about the overall health of China's economy remain amid data showing slower growth. (Photo by Kevin Frayer/Getty Images) *** BESTPIX ***

                As investors approach the end game for 2015, here is the year’s scorecard for markets.


                The Shanghai Composite is 10.5 per cent higher after a year of tumultuous swings. Japan’s Nikkei is up 9.1 per cent and thanks to a stable yen is also 8.5 per cent higher in dollar terms on the year.

                Europe’s benchmarks did well this year in local currency terms, with Italy’s FTSE MIB up 13.9 per cent. The commodity rout hammered London’s FTSE 100, down 4.1 per cent on the year. Anglo American fell 74 per cent and Glencore dropped 69 per cent. The UK domestic-orientated FTSE 250 is up 9.1 per cent.

                In the US, the broad S&P 500 is only higher by 1 per cent, thanks to the oil and material sectors falling significantly this year. In contrast, the Nasdaq Composite is up 7.9 per cent, bolstered by the ‘Fangs’— Facebook, Amazon, Netflix and Google; and the ‘nifty nine’, which adds Priceline, eBay, Starbucks, Microsoft and Salesforce. This group of fast-growing technology companies have largely driven the long-running US equity bull market during 2015.

                Video streaming website Netflix has surged 144.1 per cent to lead the Fangs this year as its subscriber base has continued growing at a swift clip. Facebook is up 37.5 per cent, while Amazon has gained 125 per cent and closed at a record high of $693.97 on Tuesday. Google has risen nearly 50 per cent.


                Brazil’s Real stands out as a big decliner, down 31.2 per cent against the dollar, hurt by a weakening economy and political risk as the Petrobras corruption scandal snowballed.

                In a year of US dollar strength, buoyed by the Federal Reserve tightening monetary policy for the first time in nearly a decade, the Dollar index has risen nearly 9 per cent. Mirroring that performance, the euro has eased some 10 per cent. falling from $1.21 to about $1.09.

                Sovereign Debt

                Ukrainian, Russian and Greek government bonds offered some of the best returns this year. Ukraine and Greece came within a whisker of defaulting, and the prices of their bonds plummeted amid fraught negotiations with their creditors. But when they finally struck deals, their bonds rocketed and racked up hefty returns for those brave enough to be holding them.

                Among major countries, the Barclays US Treasury index as of December 29 had registered a total return for the year of 0.65 per cent. The bank’s long-dated Treasury index was down 2.1 per cent. For the eurozone, Barclay’s Euro Aggregate index of Italian issuers has a total return of 4.65 per cent for the year, while the Euro Agg Treasury index is up 1.5 per cent.

                Barclays Sterling Aggregate index has gained 0.8 per cent.

                Corporate Bonds

                US corporate high yield bonds have lost nearly 5 per cent according to the Barclays index, while European junk was on course for a total return of 3.4 per cent in 2015. For investment grade, US long-dated credit was set to slide 3 per cent. One notable standout in fixed income for the year, was US municipal debt, with the Barclays index showing a total return of 3.3 per cent.


                Slowing demand from China and supply gluts hit the sector hard in 2015 with oil sliding more than a third. Brent crude tumbled 35 per cent from $57.33 to $37 a barrel on Wednesday. Spot gold dropped 10 per cent, with copper falling by a quarter.

                The Bloomberg Commodity Index, based on the value of the 22 different futures contracts, has fallen 25 per cent in 2015, and is headed for the worst of five straight years of declines.

                Exchange traded funds run at record pace

                Posted on 30 December 2015 by

                US exchange traded funds look set to break last year’s inflow record, despite the patchy performance of financial markets in 2015, underscoring the seismic investor shift towards “passive” investments.

                The underwhelming performance and high fees of traditional money managers have in the past decade pushed many investors — both retail and institutional — towards vehicles that cheaply and passively track an underlying index.

                  US-listed ETFs had taken in $236.1bn of investor money this year by December 21, according to Convergex. Given traditionally strong flows in the last days of the year it is likely to surpass last year’s record $241bn, according to Nicholas Colas, the brokerage’s chief market strategist.

                  While the US mutual fund industry remains much larger, with about $13tn in assets under management, Mr Colas does not foresee the epochal shift towards ETF investing changing next year, barring a market meltdown.

                  “ETFs are still growing quickly, both in number and in total assets. I don’t see much to change that in 2016,” he wrote in a note.

                  US-listed equity ETFs dominated the inflows, taking in about 70 per cent of the total, while bond ETFs took in $53.9bn, or 24 per cent of the total, according Convergex’s figures. Even commodity ETFs managed to attract $4.9bn of investor money this year, despite the collapse of natural resource prices.

                  The global industry is close to matching last year’s record inflows, according to ETFGI, a data provider. By the end of November ETFs and “exchange-traded products” — a close relative — had gathered $319.4bn of net new assets, already 15 per cent above 2014’s inflows for the same period.

                  November was the 22nd consecutive month of net inflows, according to ETFGI, and the global industry now has close to 12,000 different products from 275 providers and total assets of $3tn. The overall hedge fund industry — which actively uses ETF — managed $2.87tn at the end of the third quarter, according to Hedge Fund Research.

                  Record ETF inflows in spite of poor performance from most major markets during 2015 underscores the strength of the trend towards passive investing.

                  In US dollar terms the value of global stock markets dipped by about $1tn in 2015, only the third year of overall losses in the past decade according to Bloomberg data (the others were 2008 and 2011). Even traditionally safer fixed income markets have had a bad year. The JPMorgan Global Bond Index has lost 2.5 per cent so far in 2015.

                  Within the ETF industry, one of the biggest shifts of 2015 has been towards so-called “smart beta” products. While ETFs simply track the return of an index — the “beta” in market jargon — smart beta ETFs do so with a twist, such as eschewing more indebted countries or favouring shares with momentum.

                  Smart beta was the most searched-for term on Investopedia this year, according to the investment website.

                  Moody’s, the rating agency, argued in a report this year that smart beta would be the “next battleground for asset management dollars”, highlighting how traditional mutual fund managers were jostling to position themselves to stem outflows by introducing smart beta ETFs or by buying providers.

                  Exchange deals to focus on new markets

                  Posted on 30 December 2015 by


                  Investors are anticipating a new round of dealmaking among some of the world’s biggest stock exchanges next year as they look to boost their revenue streams by accessing new markets and products.

                  Fuelled by buoyant share prices and regulatory amendments, a cadre of new, young chief executives at top bourses are exploring fresh areas for growth including assets traded away from exchanges, such as currency trading, and showing increasing confidence in making deals.

                    Analysts say many executives were feeling optimistic about the industry’s prospects, after emerging from the financial crisis as potential winners. Legislation such as the US Dodd-Frank Act and Basel III have sought to curb off-exchange trading between banks and mandated more transparency and trade processing that is standard business for a centralised market utility like an exchange.

                    “The current industry premium to the S&P 500 is the result of a return of volume growth, particularly in derivatives markets, with Dodd-Frank driving more trading on to exchanges and through central clearing,” says Peter Lenardos, an analyst at RBC Capital Markets in London.

                    Also coming to the fore are a breed of young ambitious CEOs recruited from banks and eager to make their mark. Deutsche Börse, Euronext and SGX, the Singapore exchange, have followed the path set by the London Stock Exchange Group’s appointment of former Lehman Brothers executive Xavier Rolet in 2009.

                    Indeed, new Deutsche Börse boss Carsten Kengeter — formerly with UBS — spent €1.5bn purchasing 360T, a foreign exchange trading network, and the outstanding stake in Stoxx, a data provider, in his first weeks on the job.

                    Deal talk has also played a part in fuelling speculation, after Intercontinental Exchange bought Trayport, a European energy trading venue, and Interactive Data Corporation, a data provider, for a combined $6bn. Nasdaq, the US’s third largest equities exchanges operator by market share, has bought share trading venue Chi-X Canada and SecondMarket.

                    “The industry could be at a turning point with regulation and globalisation as the key catalysts. Exchange leaders have already made calculated acquisitions based on what they believe the landscape will look like in a post-regulatory environment,” says Rich Repetto, an analyst at Sandler O’Neill in New York.

                    He expects exchange operators to examine opportunities in the fast-changing fixed income and currencies markets, long dominated by banks.

                    These markets — and the source of billions of dollars of fines in recent years — have worked as hybrids, with deals done over the phone and on electronic trading venues. But tough banking and markets regulation has crimped banks’ abilities to use their own balance sheets for trading, and the situation is compounded by low market volatility and flat global interest rates.

                    That was the rationale behind Intercontinental Exchange’s thinking when it bought London-based energy trading platform Trayport, for $650m in stock in November. The deal gave the US operator a stronghold in the European over-the-counter energy markets, including power, natural gas and coal.

                    Whether M&A talk will result in megamergers and complicated bidding wars seen in the industry nearly a decade ago remains to be seen. CME’s $9.4bn deal for Nymex or the long pursuit to take over the London Stock Exchange were undertaken before the financial crisis and in recent years exchanges bosses have found regulators scrutinising putative deals.

                    Executives remain scarred after many high-profile deals, between 2011-2012, fell apart, including SGX’s planned $8.8bn purchase of Australia’s ASX, and Deutsche Börse’s merger with NYSE Euronext.

                    Instead most companies are focusing on smaller, bolt-on deals. For example, Nasdaq’s Chi-X move was to strengthen its North American equities trading business.

                    But smaller deals, and new product launches, in recent years has accentuated differences between exchanges, which may inhibit the need to complete a big deal. As Mr Lenardos of RBC notes, no two exchanges are identical. Each has different business mixes, trading venues, asset classes and capital structures. That has reduced their need to combine to cut costs.

                    Instead, bourse operators increasingly view their paths to grow as forging new alliances based on specific products, such as the LSE’s links with the CBOE on data licensing and CurveGlobal, an interest rate futures venue.

                    As Phupinder Gill, chief executive of CME Group, recently told analysts, “[M&A] does not have to be an exchange necessarily, it has to be a service or a growth initiative around what the client base needs.”

                    In this new world executives are keen to examine potential deals for data providers and the emerging world of financial technology, which both could provide high-margin business that is more insulated from the uneven profits of daily market transactions.

                    However, valuations have soared in recent years, with companies such as MSCI, the index compiler, up 60 per cent in the last two years. That has made the industry more wary of spending big.

                    “Instead of big strategic moves we’ve seen a huge number of tactical deals,” says Hans-Ole Jochumsen, president of Nasdaq, with responsibility for global trading and market services. “In fact, we see the number of opportunities as pretty large. It’s also pretty pricey for the market at the time being.”