26 May 2009
“Are greater regulations needed? Yes, they are essential,” said a vice chairman from the commercial banking division of a large UK bank. He did not believe, however, that another US Glass-Steagall Act of 1933, which built walls between the investment and commercial banking divisions, was the solution.
The vice chairman, a guest speaker at the Financial Services Club, proposed that potentially what was needed was “more legislation instead of regulation”. He said that although the Americans thought that risk regulation, embodied in Basel II, didn’t do the job, many Europeans would say that it was ahead of the game. “Basel II was on the case but not pushed forward fast enough,” he said.
The meeting, held under Chatham House Rule, explored how the crisis has changed the bank-to-corporate relationship. The speaker pointed out that many corporates believe that the banks have exited the business of lending money, whether that lending was to each other, to businesses or consumers. “Lending depends on liquidity and confidence – and the market is lacking both. We have seen a recent shift back to banks as primary lenders: in 4Q2006 only 47% used the banks as primary lenders; in 3Q2008 that rose to 67%,” he said. “One question posed by the crisis is: is there less trade because there is no trade finance or because no one is buying the goods?”
With the globalisation process halted in its tracks, another question is will it be reversed with protectionist measures again developing in regions or blocs? The speaker believed that there will be a temporary reversal - or a short-term trend towards protectionism - but then the national markets will open up again. He wouldn’t hazard a guess as to when that would be, but said how “upbeat” he felt when he was in the Asia region where business is moving forward with a degree of optimism.
First published on www.gtnews.com
About Me
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- Joy Macknight
- Freelancer of the Year at Aviva Investors Sustainability Media Awards 2025. I am a former editor of The Banker, a Financial Times publication. I joined the publication in August 2015 as transaction banking and technology editor, was promoted to deputy editor in September 2016 and then to managing editor in April 2019. The crowning glory was my appointment as editor in March 2021, the first female editor in the publication's history. Previously I was features editor at Profit&Loss, editorial director of Treasury Today and editor of gtnews.com. I also worked on Banking Technology, Computer Weekly and IBM Computer Today. I have a BSc from the University of Victoria, Canada.
Friday, 23 October 2009
Thursday, 6 August 2009
UK Billion Pound Banking Bail Out: Will it Work?
14 Oct 2008
The UK government's bail out of the banks was welcomed across the industry as the way to unfreeze the clogged up financial system. But will that be enough?
Last week, the UK government took the plunge and agreed a £400bn three-pronged plan to bail out British banks, following closely on the heels of the Icelandic banking collapse. It has committed to injecting at least £25bn into the banking industry, but could offer as much as another £25bn in order to increase banks' capital. At the same time, the government will offer guarantees over as much of £250bn of new bank debt, effectively adding £100bn to the existing Bank of England short-term loan scheme.
The banks involved are the major high street banks: Abbey, part of the Spanish banking group Santander, Barclays, HBOS, HSBC, Lloyds TSB, The Royal Bank of Scotland (RBS) and Standard Chartered, as well as Nationwide Building Society. This week, the government has agreed to inject up to £37bn of taxpayer cash into RBS, Lloyds TSB and HBOS.
Although there is some debate over the exact amount the UK government has committed with different figures being bandied about, Andrew Gray, UK banking advisory leader at PricewaterhouseCoopers (PwC), told gtnews that it is important to draw distinctions between the two pools of numbers. "There is the amount of money that the government is looking to inject in additional capital - which stands at £37bn as of 14 October - that would effectively sit on the banks' balance sheets. Then there is the separate £400bn plus, depending on the figures, in relation to additional liquidity that could be injected through the Bank of England liquidity arrangements," he explained. "Even now neither of those two numbers are firm in terms of what the banks will actually use - it appears to be an expectation that banks have 8% Tier 1 capital."
The UK government is looking at both capital and liquidity, which marks it out from the US's bail out scheme. On the capital side, the UK government is looking to put in up to £50bn to allow the banks to raise additional capital through that route. "It is uncertain how much capital any one bank would call upon - current market expectations are ranging from £0 for HSBC with RBS requesting £20bn," said Gray. This money would be a cushion to protect them from future losses in line with other banking capital that they have in place. The Special Liquidity Scheme is about ensuring that when banks need to borrow intra-day or over short periods of time, they can fund day-to-day trading activities by accessing thescheme rather than relying on lending and borrowing to each other. "That is what had effectively become more expensive through the current Libor rates which still, despite the announcement last Wednesday [about the reduction in interest rates], remain very high compared to base rates, although these rates appear to be easing following the combined efforts of governments this week," he added.
The US government, on the other hand, is looking to make the US$700bn available to buy bank assets, so it is a different way of looking at the same underlying problem. At first sight, Gray thinks that by giving banks a mechanism to raise additional capital will provide a more comprehensive and longer-term solution to allow banks to become more robust, which is ultimately what everyone is trying to ensure. "I think that it is interesting that a number of other countries are looking at methods of providing additional capital because banks have found it difficult over the past year to raise capital. RBS and HBOS have been able to raise capital on the markets, Barclays managed to raise capital through direct access to funding from sovereign wealth funds, and Goldman Sachs has transformed itself into a bank and raised capital through billionaire investor Warren Buffet; but as a whole it would remain difficult for the banking industry to access large amounts of new capital in a reasonably cost effective way."
ACT Welcomes UK Government Action
This definitive action by the UK government has been applauded across the board from the bankers through to economic analysts, credit ratings agencies and corporate treasurers. The Association of Corporate Treasurers' (ACT) chief executive, Richard Raeburn, said in a recent press statement: "The actions in the UK and the US [new commercial paper (CP) lending facility to jump-start lending for companies] represent sound and stabilising steps to restore the financial markets on which companies depend for their funding; we hope that market participants will now work together to help restore systemic confidence. The initiatives by the authorities should play an important part in shortening the period of necessary adjustment in the wider economy."
Martin O'Donovan, assistant director, policy and technical at the ACT, told gtnews that he believes it is quite an imaginative and helpful package and, in particular, it addresses the specific problems in the financial system. "It comes at it from several angles. One element is to demand that banks top up their capital. Because many of the banks have had to make write-downs and losses, their capital has been whittled away, which limits the amount of business that they can prudently do," he said.
"The other side is the funding and liquidity side - from a corporate treasurer's point of view this is really where the problem has been. All the usual markets that a treasurer likes to use for bank borrowing have dried up, or if they haven't dried up, the liquidity has disappeared from the three-month period and shrunk back to the one-week level. This is all very well but it is not how you want to be managing your short-term borrowing with everything running overnight or needing re-fixing every couple of days," explained O'Donovan. "The UK government is making funding available under the Special Liquidity Scheme, which will allow the banks to fund themselves and, therefore, hopefully start lending to each other and the corporate sector." There is to be further help in the form of a Government guarantee of new or refinanced medium-term bank debt with the intention of reopening the market for medium-term funding.
An additional intention of the authorities is to manage interest rates. "What you have at the moment is that the overnight rate in the market is down near 5%, which actually should have dropped even more now that base rates have gone down. That bit is working - there is liquidity and the rates are broadly being kept at the appropriate level at that maturity. But when you want to access a three-month loan, the rates are still over 6% since there is no activity there and people that do need the money are having to bid the price up," he explained.
The third element is that the government is prepared to guarantee longer term funding up to three years. "Again this is trying to get the inter-bank market moving again. So the banks will be able to fund themselves and they will be able to get going and get back into the business of lending to corporates - it oils the wheels again and gets the liquidity back," said O'Donovan.
There is some concern that the banks may attempt to use the ‘market disruption clause' commonly found in loan agreements to push rates up even higher. This is when the banks can't fund themselves at the Libor rate, so attempt to push the costs onto their corporate clients, which usually borrow at Libor rate plus an agreed credit margin depending on the risk level of the corporate. To O'Donovan's knowledge, this has not happened in western Europe but commented that recently there has been "a lot of debate around this issue". The ACT believes that this should be a last resort and implemented only after certain other steps are taken.
Will the Bail Out be Enough?
Charlie McCreevy, European Commissioner for Internal Market and Services, when addressing the European Parliament Plenary Session on the Lamfalussy process follow-up, stated: "We are in the most serious crisis in living memory. What started as a sub-prime crisis has now moved way beyond this to embrace the whole economy. Fears about the ability to raise financing are creating even greater lack of confidence among all economic actors. Unless there is a rapid unfreezing of lending we face a continued downward spiral with obvious impact on economic activity. One thing we have seen over the past few weeks is that no economy or financial market is immune from what is taking place."
Across the globe, national governments are responding to the crisis through injecting capital into the system. But will this be enough?
The ACT's O'Donovan believes that it should. "We certainly hope these measures will work. They should provide a good deal of hope and help where it is needed, but the markets at the moment are so peculiar that it needs other countries to follow suite and provide the same quite extensive and targeted support packages. Governments have been quite supportive in protecting the retail customer with all their deposit insurance schemes, but moving on to the wider markets and getting the liquidity going will need further co-ordinated action to get everything up and running again." This weekend the G7 nations - which comprises the US, Japan, the UK, Germany, France, Italy and Canada - issued a five-point plan of ‘decisive action' to unfreeze credit markets, after a meeting in Washington. The details of this plan have not been released.
PwC's Gray was similarly cautious about the answer. "Time will tell. [The UK's government's action] is positive in the fact that action was taken when action had to be taken. Until we understand a bit more detail about how the scheme will work and the banks' ability to access and use it properly, it is going to be difficult to understand the full implications of it, although this week markets have so far responded positively," he said. "Clearly the ripple effect around the global economy is likely to become a stronger feature of the overall economic backdrop. The main UK banks with the additional capital look to be reasonably well-placed. I think there will be ongoing challenges, and it really depends on the overall economy and to what extent we do or do not go into recession and how deep it is."
Gray stands by his statement of two weeks ago (UK Financial Industry Predicts Gloomy Outlook for More Than Six Months) that the systemic risk within the UK banking system is being contained. "I think it is still true to say that no retail depositor has lost money. Clearly the government is looking to make arrangements to ensure that that continues to be the case. The government has stated that no retail depositor will lose money. In as much as the statement remains true for retail, then I stand by the statement.
"Clearly there is a risk there, but do I see it resulting in the collapse of the banking system as we know it? The answer is no," he said.
First published on www.gtnews.com
The UK government's bail out of the banks was welcomed across the industry as the way to unfreeze the clogged up financial system. But will that be enough?
Last week, the UK government took the plunge and agreed a £400bn three-pronged plan to bail out British banks, following closely on the heels of the Icelandic banking collapse. It has committed to injecting at least £25bn into the banking industry, but could offer as much as another £25bn in order to increase banks' capital. At the same time, the government will offer guarantees over as much of £250bn of new bank debt, effectively adding £100bn to the existing Bank of England short-term loan scheme.
The banks involved are the major high street banks: Abbey, part of the Spanish banking group Santander, Barclays, HBOS, HSBC, Lloyds TSB, The Royal Bank of Scotland (RBS) and Standard Chartered, as well as Nationwide Building Society. This week, the government has agreed to inject up to £37bn of taxpayer cash into RBS, Lloyds TSB and HBOS.
Although there is some debate over the exact amount the UK government has committed with different figures being bandied about, Andrew Gray, UK banking advisory leader at PricewaterhouseCoopers (PwC), told gtnews that it is important to draw distinctions between the two pools of numbers. "There is the amount of money that the government is looking to inject in additional capital - which stands at £37bn as of 14 October - that would effectively sit on the banks' balance sheets. Then there is the separate £400bn plus, depending on the figures, in relation to additional liquidity that could be injected through the Bank of England liquidity arrangements," he explained. "Even now neither of those two numbers are firm in terms of what the banks will actually use - it appears to be an expectation that banks have 8% Tier 1 capital."
The UK government is looking at both capital and liquidity, which marks it out from the US's bail out scheme. On the capital side, the UK government is looking to put in up to £50bn to allow the banks to raise additional capital through that route. "It is uncertain how much capital any one bank would call upon - current market expectations are ranging from £0 for HSBC with RBS requesting £20bn," said Gray. This money would be a cushion to protect them from future losses in line with other banking capital that they have in place. The Special Liquidity Scheme is about ensuring that when banks need to borrow intra-day or over short periods of time, they can fund day-to-day trading activities by accessing thescheme rather than relying on lending and borrowing to each other. "That is what had effectively become more expensive through the current Libor rates which still, despite the announcement last Wednesday [about the reduction in interest rates], remain very high compared to base rates, although these rates appear to be easing following the combined efforts of governments this week," he added.
The US government, on the other hand, is looking to make the US$700bn available to buy bank assets, so it is a different way of looking at the same underlying problem. At first sight, Gray thinks that by giving banks a mechanism to raise additional capital will provide a more comprehensive and longer-term solution to allow banks to become more robust, which is ultimately what everyone is trying to ensure. "I think that it is interesting that a number of other countries are looking at methods of providing additional capital because banks have found it difficult over the past year to raise capital. RBS and HBOS have been able to raise capital on the markets, Barclays managed to raise capital through direct access to funding from sovereign wealth funds, and Goldman Sachs has transformed itself into a bank and raised capital through billionaire investor Warren Buffet; but as a whole it would remain difficult for the banking industry to access large amounts of new capital in a reasonably cost effective way."
ACT Welcomes UK Government Action
This definitive action by the UK government has been applauded across the board from the bankers through to economic analysts, credit ratings agencies and corporate treasurers. The Association of Corporate Treasurers' (ACT) chief executive, Richard Raeburn, said in a recent press statement: "The actions in the UK and the US [new commercial paper (CP) lending facility to jump-start lending for companies] represent sound and stabilising steps to restore the financial markets on which companies depend for their funding; we hope that market participants will now work together to help restore systemic confidence. The initiatives by the authorities should play an important part in shortening the period of necessary adjustment in the wider economy."
Martin O'Donovan, assistant director, policy and technical at the ACT, told gtnews that he believes it is quite an imaginative and helpful package and, in particular, it addresses the specific problems in the financial system. "It comes at it from several angles. One element is to demand that banks top up their capital. Because many of the banks have had to make write-downs and losses, their capital has been whittled away, which limits the amount of business that they can prudently do," he said.
"The other side is the funding and liquidity side - from a corporate treasurer's point of view this is really where the problem has been. All the usual markets that a treasurer likes to use for bank borrowing have dried up, or if they haven't dried up, the liquidity has disappeared from the three-month period and shrunk back to the one-week level. This is all very well but it is not how you want to be managing your short-term borrowing with everything running overnight or needing re-fixing every couple of days," explained O'Donovan. "The UK government is making funding available under the Special Liquidity Scheme, which will allow the banks to fund themselves and, therefore, hopefully start lending to each other and the corporate sector." There is to be further help in the form of a Government guarantee of new or refinanced medium-term bank debt with the intention of reopening the market for medium-term funding.
An additional intention of the authorities is to manage interest rates. "What you have at the moment is that the overnight rate in the market is down near 5%, which actually should have dropped even more now that base rates have gone down. That bit is working - there is liquidity and the rates are broadly being kept at the appropriate level at that maturity. But when you want to access a three-month loan, the rates are still over 6% since there is no activity there and people that do need the money are having to bid the price up," he explained.
The third element is that the government is prepared to guarantee longer term funding up to three years. "Again this is trying to get the inter-bank market moving again. So the banks will be able to fund themselves and they will be able to get going and get back into the business of lending to corporates - it oils the wheels again and gets the liquidity back," said O'Donovan.
There is some concern that the banks may attempt to use the ‘market disruption clause' commonly found in loan agreements to push rates up even higher. This is when the banks can't fund themselves at the Libor rate, so attempt to push the costs onto their corporate clients, which usually borrow at Libor rate plus an agreed credit margin depending on the risk level of the corporate. To O'Donovan's knowledge, this has not happened in western Europe but commented that recently there has been "a lot of debate around this issue". The ACT believes that this should be a last resort and implemented only after certain other steps are taken.
Will the Bail Out be Enough?
Charlie McCreevy, European Commissioner for Internal Market and Services, when addressing the European Parliament Plenary Session on the Lamfalussy process follow-up, stated: "We are in the most serious crisis in living memory. What started as a sub-prime crisis has now moved way beyond this to embrace the whole economy. Fears about the ability to raise financing are creating even greater lack of confidence among all economic actors. Unless there is a rapid unfreezing of lending we face a continued downward spiral with obvious impact on economic activity. One thing we have seen over the past few weeks is that no economy or financial market is immune from what is taking place."
Across the globe, national governments are responding to the crisis through injecting capital into the system. But will this be enough?
The ACT's O'Donovan believes that it should. "We certainly hope these measures will work. They should provide a good deal of hope and help where it is needed, but the markets at the moment are so peculiar that it needs other countries to follow suite and provide the same quite extensive and targeted support packages. Governments have been quite supportive in protecting the retail customer with all their deposit insurance schemes, but moving on to the wider markets and getting the liquidity going will need further co-ordinated action to get everything up and running again." This weekend the G7 nations - which comprises the US, Japan, the UK, Germany, France, Italy and Canada - issued a five-point plan of ‘decisive action' to unfreeze credit markets, after a meeting in Washington. The details of this plan have not been released.
PwC's Gray was similarly cautious about the answer. "Time will tell. [The UK's government's action] is positive in the fact that action was taken when action had to be taken. Until we understand a bit more detail about how the scheme will work and the banks' ability to access and use it properly, it is going to be difficult to understand the full implications of it, although this week markets have so far responded positively," he said. "Clearly the ripple effect around the global economy is likely to become a stronger feature of the overall economic backdrop. The main UK banks with the additional capital look to be reasonably well-placed. I think there will be ongoing challenges, and it really depends on the overall economy and to what extent we do or do not go into recession and how deep it is."
Gray stands by his statement of two weeks ago (UK Financial Industry Predicts Gloomy Outlook for More Than Six Months) that the systemic risk within the UK banking system is being contained. "I think it is still true to say that no retail depositor has lost money. Clearly the government is looking to make arrangements to ensure that that continues to be the case. The government has stated that no retail depositor will lose money. In as much as the statement remains true for retail, then I stand by the statement.
"Clearly there is a risk there, but do I see it resulting in the collapse of the banking system as we know it? The answer is no," he said.
First published on www.gtnews.com
Optimising Business Value in the New Financial Landscape
19 May 2009
Over 600 representatives from across the payments industry gathered in London last week at IPS 2009 to discuss issues affecting the European payments landscape, such as the PSD and SEPA.
Three-quarters of the participants surveyed at the International Payments Summit (IPS) in London last week felt optimistic regarding the fate of global transaction banking (GTB), and payments in particular, in 2009, with the results rising to 92.6% when looking at 2010 and beyond. Over 600 representatives from across the payments industry heard how GTB is now ‘sexy’ because it is a strong income generator for banks and a provider of liquidity for corporates.
In a straw poll of the participants, the value of transaction banking today was seen by 32.7% as a stable source of revenue and profit, 23% see it as a source of liquidity and an equal amount saying that it provides infrastructure, while 25% said that it anchors products for clients.
Peter Hazou, head of strategy, GTB for cash management, trade finance and supply chain at Unicredit, says that although the business cycle had hit a snag, the industry wasn’t falling off the cliff. “GTB is sexy. There has been a fundamental shift in the relevance of transaction banking to its customers. These are glory days for GTB because there is money to be invested in system infrastructures and operating models. Banks need to invest in GTB because it is deeply relevant for today’s environment.”
“The danger is that ‘back to basics’ is seen just as the flavour of month, but it’s not,” he adds. Participants were polled to see what ‘back to basics’ meant to them: over half (57.1%) saw it as core products, while 27.3% thought it meant a client focus and 9.1% thought credit and risk management. Only 5.2% thought it meant cost cutting, with 1.3% identifying ‘back to basics’ with a lack of innovation.
The New Financial Landscape
Paul Camp, global head of cash management, financial institutions, Deutsche Bank GTB, opened the IPS conference on a sombre note, pointing out that world payments and trade flows are down 30%, while China exports are down 25.7%. However, he predicts that the worst of the financial crisis is over. “There is a silver lining,” he says, “as the unprecedented government policy response will lead us out of the crisis in the near future. I am optimistic because even though we are suffering now, we can use the pain to reassess our business. The challenge is not to focus on the pain of the past eight months, but make hard decisions about our business that isn’t made in the good times.”
The majority (57.6%) of the audience surveyed believes that the global economy will improve by mid or late 2010; only 12.1% thought it would happen this year.
The sentiment that the global economy could now see the light at the end of the tunnel was reiterated by a number of speakers, including Stéphane Garelli, professor at the International Institute for Management Development (IMD) and University of Lausanne, who likens the world economic situation today to a blue screen on a computer: it is “time to re-boot” the system, he says.
The audience agreed - a survey found that over a third (38.2%) were focussing on new revenue in 2009, while meeting regulatory requirements (22.4%) and risk management (19.7%) were less of a priority. The results for 2010 changed significantly: 82.9% predicted that growing new revenue streams was going to be their top priority, with only 5.3% choosing regulatory requirements and 4% risk management. The optimism of the audience shone through with only close to 4% focusing on survival either now or in the future.
In his speech, Bertrand Lavayssière, managing director at Capgemini Global Financial Services, drilled down into what the current conjuncture meant to GTB, highlighting the strengths and weaknesses of the banking division: “The good news is that the fundamental growth volumes are still there. The bad news is the market conditions, the volumes are down, and the regulatory pressures, such as the PSD [Payment Services Directive], SEPA [single euro payments area] and the G20 regulations that are yet to come, are putting pressure on the banks,” he says.
PSD and SEPA: What Happens Next?
The IPS conference was very much focussed on the drive towards harmonisation and standardisation in the European payments industry and the imminent impact of the new regulations, particularly the PSD and SEPA. Interestingly, the almost half of the audience (42.4%) saw SEPA as an opportunity for GTB; yet only 11.9% thought the PSD offers the same potential.
Daniela Umstätter, national expert, retail issues, consumer policy & payment systems, internal market, European Commission (EC), reminded the summit participants that the PSD was asked for by the payments industry because it needed a legal framework for harmonisation and standardisation of payments. “The good news is that the PSD in on track, with the exception of Sweden that has said it will be late in implementation,” she says. Both the PSD and SEPA Direct Debit (SDD) schemes are to be implemented on 1 November this year.
But there are a number of outstanding issues that will affect whether or not the PSD succeeds in its aim of harmonisation, not least because that each country can transpose the directive with different interpretations. It is well accepted that the PSD will protect some legacy payment products. Approximately two-thirds of the participants did not believe that the PSD would be homogenous across Europe. How to manage this complexity was the subject of much debate during the summit.
Gerard Hartsink, chairman of the European Payments Council (EPC), was pragmatic regarding this issue: “We can’t embed everything into the rulebooks. The majority’s best interest has to be looked at and we should avoid importing all specifics from the local situation.”
Gianfranco Tabasso, co-ordinator of the European Association of Corporate Treasurers (EACT), said he was curious to see how different options - such as the classification of microentities - is taken up by different countries. He warned that these issues must be cleared up in the next few months or the 1 November deadline won’t be met. The other issues, such as value dating, execution times, direct debit refund timescales, and transaction reporting demands, also need quick resolution in order for banks, corporates and SMEs, and public administrators to complete their change programmes.
The PSD deadline is not the only one under threat - there are concerns that the deadline for the SDD schemes will also slip. Already France’s National SEPA Committee has announced that it won’t be ready with SDDs until November 2010. Although Wiebe Ruttenberg, head of the market, integration division at the European Central Bank (ECB), tried to paint this decision in a good light by saying it was a positive sign that the French have committed strongly, EC’s Umstätter said that although they respect the decision, it was an “unfortunate” signal to the market. “Legally speaking, they must be reachable by 1 November 2010,” she says.
She is referring to the European Parliament’s approved proposal extending the provisions of Regulation 2560/2001 on cross-border payments in euro, whereby banks are not permitted to impose different charges for domestic and cross-border payments. Main changes include: the extension of price parity requirements to direct debits, rules on multilateral interchange fees for direct debits and mandatory reachability for SDD collections in the euro area from 1 November 2010.
Debate still rages within the payments industry about the SEPA migration end date, i.e. when legacy instruments must be switched off. This is despite the fact that the European Parliament has called on the EC to set a clear, appropriate and binding end date, which should be no later than 31 December 2012. Ruttenberg, as well as many other speakers, points out: “There is no start date without an end date.”
EACT’s Tabasso says: “The industry as a whole is not ready and won’t be until the end date is decided and all the legacy systems are switched off. We won’t even know until August how the legacy systems are changed by SEPA. Banks are not providing information to their customers because they are waiting to see what happens. My hope is that an end date won’t be mandated without consultation with end users.”
Umstätter states that running two parallel systems is costly and therefore a SEPA end date has to be set “as soon as possible to avoid a long dual period but as long as possible to coincide with technology investment cycles.” The EC is developing a SEPA Action Plan that should be published in the summer and the roadmap will tackle the question of the end date. This will include a paper for consultation.
Massimo Battistella, manager of accounts receivable, administration services, Telecom Italia, is one who argues for two end dates - one for SEPA Credit Transfers (SCT) and one for SDD. Mario de Lorenzo, director of payment systems at SIA-SSB, agrees that two end dates are needed in order for the industry to keep the forward momentum.
De Lorenzo makes the point that SEPA is a reality, so doing nothing is not an option. “The train has left the station and we are on the right train. SEPA gives the end users ground for asking their banks for new services. We need to be developing processes beneficial to all users,” he says.
What Should a Bank do if it Hasn’t Started its SDD Project?
With six months left until the deadline, time is very tight if a bank hasn’t started its SDD implementation project. Two solutions were launched at IPS to directly address this need, one by Deutsche Bank and Logica and the other by SIA-SSB.
Deutsche Bank's GTB division and Logica launched an outsourced SDD solution that combines a new SEPA Connector offering with Deutsche Bank’s SEPA processing solutions to provide its financial institution clients with low-cost 'plug and play' SEPA functionality. The SEPA Connector will initially be targeted at debtor banks requiring a solution for complying with mandatory SDD reachability requirements in readiness for the November 2010 deadline, but also supports SCT.
Michael Mueller, managing director of wholesale solutions, GTB at Deutsche Bank, says: "This solution is aimed at all banks that need to be reachable by the 2010 deadline but don’t want to invest in SEPA infrastructure in the short-term. This will give them the ability to buy some time and still be compliant.”
SIA-SSB has launched two SEPA solutions. Smart SDD is a hosted solution aimed at banks looking for cost reduction as well as SDD adherence. With this solution, SIA-SSB manages the payment data, and stores, converts and validates it before sending to the STEP2 clearing system. It does the same processing in the opposite direction, from STEP2 to the bank.
The centralised solution has two distinct characteristics:
1.Proximity to STEP2 - makes it competitive in terms of the cost of interconnectivity and processing efficiency. In the medium to long term it is important because the PSD is focussed on processing time.
2.Independent processor - independence is an important feature for small financial institutions.
The second SEPA service is an interface for manual processing, not straight-through processing (STP) as such. The main target for this tactical solution are banks that are not ready in their back office and don’t want to invest in revamping it. So SIA-SSB takes charge of the SDD processing for the bank through a web interface, which allows the bank to connect to SIA-SSB’s system and download payment information. There is no cost for integration because it is solely a web connection.
Mario de Lorenzo, director of payment systems at SIA-SSB, says: “The banks that want this service are playing a passive role with regards to SEPA. If banks are under customer pressure for SDD but won’t make the deadline then this service allows them to upload payment info and we send to the pan-European automated clearing house (PE-ACH).” He claims that there are 10 banks presently trialling the solution that are expected to go live for the November deadline.
Supply Chain Finance and Financial Supply Chain Management
When the audience was asked if the credit crisis created an increased focus on supply chain finance (SCF), it was split down the middle between yes, the focus is on the lack of finance to supply chain partners, and no, corporates were still concerned more with their own working capital. Interestingly, 71.4% thought that optimal SCF could only be achieved once the financial supply chain management (FCSM) has been optimised, while only 20% of the participants were sure of the difference between the two.
John Gleason, EMEA regional treasurer at Dell, participating in a strategy roundtable, listed what were the pressing issues for him:
1.Compression of the cash conversion cycle.
2.Days sales of inventory (DSI) to increase.
3.Renewed focus on working capital: senior executives - CFO, CEO - involved in the Working Capital Council.
4.Trade finance: letters of credit in the emerging markets.
5.Credit crisis: concerned receivables reserves; structured financial supply chain; reverse factoring.
6.Alternative payment methods, giropay, Paypal.
7.Technology infrastructure: looking at SWIFT and diversifying banking partner, as well as automation in countries underserved.
Gleason says that within the supply chain there are big crises brewing. “Our customers are stretching us longer, while our suppliers are also squeezing us. Where do we push back? We need to make structures work, including information flows, risk management, and liquidity flows.”
Roque Damacela, head of trade finance, EMEA at Citi, adds: “The industry is in an adjustment phase to deal with the crisis. But when will things normalise? There is a drive for liquidity by corporates and banks need to look beyond balance sheet towards the positives of a company.”
In an earlier session discussing how payments fit into the cash and liquidity landscape, Tanveer Yaqoob, senior treasury accountant at Vodafone, made the point that today corporates need basic levels of services done very well - more efficiently than before. “We need transparency in payments. We don’t want funds tied up in clearing systems. It is hard for banks to deliver what corporates want because of constraints in the marketplace. This reveals the weaknesses in banks’ payment systems. Banks need to get back to basics - and corporates can have valuable input into the discussion. Cash management and payments are both growth areas for banks.”
Case Study - HP
Hedi Ezzouaoui, worldwide director, financial markets at HP, illustrated how HP had worked both with its banks, bank clients and suppliers in order re-define its strategy in the economic crisis:
•With our banking relationships, we re-visited our assessment of counterparty risk and took steps to mitigate this risk.
•HP has 400 bank customers that the company supplies with technology and services. As the credit crunch hit, the financial supply chain experienced a moment of panic as banks lost market capitalisation and some went out of business. The banks needed to assess their strategy and the main issue became cost elimination, not just cost reduction. Bank clients looked at fixed costs and variable costs in terms of IT and business operations. We saw that high fixed IT costs were a real problem for our customers, so we started to discuss different possibilities with our bank clients, for example shared services utility, and re-examined leasing conditions. We amended our sales strategy to help banking customers navigate out of the crisis.
•There was a severe liquidity challenge in the overall supply chain, plus high credit and counterparty risk in terms of our suppliers. We needed to mitigate all the different types of risk on the supplier side to protect out business. We started to run stress test scenarios in order to identify points of possible failure in our supply chain. We assessed failure impacts and proactively prepared for supplier help. We needed to put in place a mechanism so that we knew if they were in trouble, there was something we could do. It was important to engage with the supplier through a consultation process so that we could understand our priorities and develop back-up plans.
•In terms of supplier financing, we pushed supplier payment conditions to 45 days. Then we offered to pay our bills faster in exchange for a discount to provide liquidity to our suppliers; we could do this because we are a cash rich company and have good oversight of our cash.
First published on www.gtnews.com
Over 600 representatives from across the payments industry gathered in London last week at IPS 2009 to discuss issues affecting the European payments landscape, such as the PSD and SEPA.
Three-quarters of the participants surveyed at the International Payments Summit (IPS) in London last week felt optimistic regarding the fate of global transaction banking (GTB), and payments in particular, in 2009, with the results rising to 92.6% when looking at 2010 and beyond. Over 600 representatives from across the payments industry heard how GTB is now ‘sexy’ because it is a strong income generator for banks and a provider of liquidity for corporates.
In a straw poll of the participants, the value of transaction banking today was seen by 32.7% as a stable source of revenue and profit, 23% see it as a source of liquidity and an equal amount saying that it provides infrastructure, while 25% said that it anchors products for clients.
Peter Hazou, head of strategy, GTB for cash management, trade finance and supply chain at Unicredit, says that although the business cycle had hit a snag, the industry wasn’t falling off the cliff. “GTB is sexy. There has been a fundamental shift in the relevance of transaction banking to its customers. These are glory days for GTB because there is money to be invested in system infrastructures and operating models. Banks need to invest in GTB because it is deeply relevant for today’s environment.”
“The danger is that ‘back to basics’ is seen just as the flavour of month, but it’s not,” he adds. Participants were polled to see what ‘back to basics’ meant to them: over half (57.1%) saw it as core products, while 27.3% thought it meant a client focus and 9.1% thought credit and risk management. Only 5.2% thought it meant cost cutting, with 1.3% identifying ‘back to basics’ with a lack of innovation.
The New Financial Landscape
Paul Camp, global head of cash management, financial institutions, Deutsche Bank GTB, opened the IPS conference on a sombre note, pointing out that world payments and trade flows are down 30%, while China exports are down 25.7%. However, he predicts that the worst of the financial crisis is over. “There is a silver lining,” he says, “as the unprecedented government policy response will lead us out of the crisis in the near future. I am optimistic because even though we are suffering now, we can use the pain to reassess our business. The challenge is not to focus on the pain of the past eight months, but make hard decisions about our business that isn’t made in the good times.”
The majority (57.6%) of the audience surveyed believes that the global economy will improve by mid or late 2010; only 12.1% thought it would happen this year.
The sentiment that the global economy could now see the light at the end of the tunnel was reiterated by a number of speakers, including Stéphane Garelli, professor at the International Institute for Management Development (IMD) and University of Lausanne, who likens the world economic situation today to a blue screen on a computer: it is “time to re-boot” the system, he says.
The audience agreed - a survey found that over a third (38.2%) were focussing on new revenue in 2009, while meeting regulatory requirements (22.4%) and risk management (19.7%) were less of a priority. The results for 2010 changed significantly: 82.9% predicted that growing new revenue streams was going to be their top priority, with only 5.3% choosing regulatory requirements and 4% risk management. The optimism of the audience shone through with only close to 4% focusing on survival either now or in the future.
In his speech, Bertrand Lavayssière, managing director at Capgemini Global Financial Services, drilled down into what the current conjuncture meant to GTB, highlighting the strengths and weaknesses of the banking division: “The good news is that the fundamental growth volumes are still there. The bad news is the market conditions, the volumes are down, and the regulatory pressures, such as the PSD [Payment Services Directive], SEPA [single euro payments area] and the G20 regulations that are yet to come, are putting pressure on the banks,” he says.
PSD and SEPA: What Happens Next?
The IPS conference was very much focussed on the drive towards harmonisation and standardisation in the European payments industry and the imminent impact of the new regulations, particularly the PSD and SEPA. Interestingly, the almost half of the audience (42.4%) saw SEPA as an opportunity for GTB; yet only 11.9% thought the PSD offers the same potential.
Daniela Umstätter, national expert, retail issues, consumer policy & payment systems, internal market, European Commission (EC), reminded the summit participants that the PSD was asked for by the payments industry because it needed a legal framework for harmonisation and standardisation of payments. “The good news is that the PSD in on track, with the exception of Sweden that has said it will be late in implementation,” she says. Both the PSD and SEPA Direct Debit (SDD) schemes are to be implemented on 1 November this year.
But there are a number of outstanding issues that will affect whether or not the PSD succeeds in its aim of harmonisation, not least because that each country can transpose the directive with different interpretations. It is well accepted that the PSD will protect some legacy payment products. Approximately two-thirds of the participants did not believe that the PSD would be homogenous across Europe. How to manage this complexity was the subject of much debate during the summit.
Gerard Hartsink, chairman of the European Payments Council (EPC), was pragmatic regarding this issue: “We can’t embed everything into the rulebooks. The majority’s best interest has to be looked at and we should avoid importing all specifics from the local situation.”
Gianfranco Tabasso, co-ordinator of the European Association of Corporate Treasurers (EACT), said he was curious to see how different options - such as the classification of microentities - is taken up by different countries. He warned that these issues must be cleared up in the next few months or the 1 November deadline won’t be met. The other issues, such as value dating, execution times, direct debit refund timescales, and transaction reporting demands, also need quick resolution in order for banks, corporates and SMEs, and public administrators to complete their change programmes.
The PSD deadline is not the only one under threat - there are concerns that the deadline for the SDD schemes will also slip. Already France’s National SEPA Committee has announced that it won’t be ready with SDDs until November 2010. Although Wiebe Ruttenberg, head of the market, integration division at the European Central Bank (ECB), tried to paint this decision in a good light by saying it was a positive sign that the French have committed strongly, EC’s Umstätter said that although they respect the decision, it was an “unfortunate” signal to the market. “Legally speaking, they must be reachable by 1 November 2010,” she says.
She is referring to the European Parliament’s approved proposal extending the provisions of Regulation 2560/2001 on cross-border payments in euro, whereby banks are not permitted to impose different charges for domestic and cross-border payments. Main changes include: the extension of price parity requirements to direct debits, rules on multilateral interchange fees for direct debits and mandatory reachability for SDD collections in the euro area from 1 November 2010.
Debate still rages within the payments industry about the SEPA migration end date, i.e. when legacy instruments must be switched off. This is despite the fact that the European Parliament has called on the EC to set a clear, appropriate and binding end date, which should be no later than 31 December 2012. Ruttenberg, as well as many other speakers, points out: “There is no start date without an end date.”
EACT’s Tabasso says: “The industry as a whole is not ready and won’t be until the end date is decided and all the legacy systems are switched off. We won’t even know until August how the legacy systems are changed by SEPA. Banks are not providing information to their customers because they are waiting to see what happens. My hope is that an end date won’t be mandated without consultation with end users.”
Umstätter states that running two parallel systems is costly and therefore a SEPA end date has to be set “as soon as possible to avoid a long dual period but as long as possible to coincide with technology investment cycles.” The EC is developing a SEPA Action Plan that should be published in the summer and the roadmap will tackle the question of the end date. This will include a paper for consultation.
Massimo Battistella, manager of accounts receivable, administration services, Telecom Italia, is one who argues for two end dates - one for SEPA Credit Transfers (SCT) and one for SDD. Mario de Lorenzo, director of payment systems at SIA-SSB, agrees that two end dates are needed in order for the industry to keep the forward momentum.
De Lorenzo makes the point that SEPA is a reality, so doing nothing is not an option. “The train has left the station and we are on the right train. SEPA gives the end users ground for asking their banks for new services. We need to be developing processes beneficial to all users,” he says.
What Should a Bank do if it Hasn’t Started its SDD Project?
With six months left until the deadline, time is very tight if a bank hasn’t started its SDD implementation project. Two solutions were launched at IPS to directly address this need, one by Deutsche Bank and Logica and the other by SIA-SSB.
Deutsche Bank's GTB division and Logica launched an outsourced SDD solution that combines a new SEPA Connector offering with Deutsche Bank’s SEPA processing solutions to provide its financial institution clients with low-cost 'plug and play' SEPA functionality. The SEPA Connector will initially be targeted at debtor banks requiring a solution for complying with mandatory SDD reachability requirements in readiness for the November 2010 deadline, but also supports SCT.
Michael Mueller, managing director of wholesale solutions, GTB at Deutsche Bank, says: "This solution is aimed at all banks that need to be reachable by the 2010 deadline but don’t want to invest in SEPA infrastructure in the short-term. This will give them the ability to buy some time and still be compliant.”
SIA-SSB has launched two SEPA solutions. Smart SDD is a hosted solution aimed at banks looking for cost reduction as well as SDD adherence. With this solution, SIA-SSB manages the payment data, and stores, converts and validates it before sending to the STEP2 clearing system. It does the same processing in the opposite direction, from STEP2 to the bank.
The centralised solution has two distinct characteristics:
1.Proximity to STEP2 - makes it competitive in terms of the cost of interconnectivity and processing efficiency. In the medium to long term it is important because the PSD is focussed on processing time.
2.Independent processor - independence is an important feature for small financial institutions.
The second SEPA service is an interface for manual processing, not straight-through processing (STP) as such. The main target for this tactical solution are banks that are not ready in their back office and don’t want to invest in revamping it. So SIA-SSB takes charge of the SDD processing for the bank through a web interface, which allows the bank to connect to SIA-SSB’s system and download payment information. There is no cost for integration because it is solely a web connection.
Mario de Lorenzo, director of payment systems at SIA-SSB, says: “The banks that want this service are playing a passive role with regards to SEPA. If banks are under customer pressure for SDD but won’t make the deadline then this service allows them to upload payment info and we send to the pan-European automated clearing house (PE-ACH).” He claims that there are 10 banks presently trialling the solution that are expected to go live for the November deadline.
Supply Chain Finance and Financial Supply Chain Management
When the audience was asked if the credit crisis created an increased focus on supply chain finance (SCF), it was split down the middle between yes, the focus is on the lack of finance to supply chain partners, and no, corporates were still concerned more with their own working capital. Interestingly, 71.4% thought that optimal SCF could only be achieved once the financial supply chain management (FCSM) has been optimised, while only 20% of the participants were sure of the difference between the two.
John Gleason, EMEA regional treasurer at Dell, participating in a strategy roundtable, listed what were the pressing issues for him:
1.Compression of the cash conversion cycle.
2.Days sales of inventory (DSI) to increase.
3.Renewed focus on working capital: senior executives - CFO, CEO - involved in the Working Capital Council.
4.Trade finance: letters of credit in the emerging markets.
5.Credit crisis: concerned receivables reserves; structured financial supply chain; reverse factoring.
6.Alternative payment methods, giropay, Paypal.
7.Technology infrastructure: looking at SWIFT and diversifying banking partner, as well as automation in countries underserved.
Gleason says that within the supply chain there are big crises brewing. “Our customers are stretching us longer, while our suppliers are also squeezing us. Where do we push back? We need to make structures work, including information flows, risk management, and liquidity flows.”
Roque Damacela, head of trade finance, EMEA at Citi, adds: “The industry is in an adjustment phase to deal with the crisis. But when will things normalise? There is a drive for liquidity by corporates and banks need to look beyond balance sheet towards the positives of a company.”
In an earlier session discussing how payments fit into the cash and liquidity landscape, Tanveer Yaqoob, senior treasury accountant at Vodafone, made the point that today corporates need basic levels of services done very well - more efficiently than before. “We need transparency in payments. We don’t want funds tied up in clearing systems. It is hard for banks to deliver what corporates want because of constraints in the marketplace. This reveals the weaknesses in banks’ payment systems. Banks need to get back to basics - and corporates can have valuable input into the discussion. Cash management and payments are both growth areas for banks.”
Case Study - HP
Hedi Ezzouaoui, worldwide director, financial markets at HP, illustrated how HP had worked both with its banks, bank clients and suppliers in order re-define its strategy in the economic crisis:
•With our banking relationships, we re-visited our assessment of counterparty risk and took steps to mitigate this risk.
•HP has 400 bank customers that the company supplies with technology and services. As the credit crunch hit, the financial supply chain experienced a moment of panic as banks lost market capitalisation and some went out of business. The banks needed to assess their strategy and the main issue became cost elimination, not just cost reduction. Bank clients looked at fixed costs and variable costs in terms of IT and business operations. We saw that high fixed IT costs were a real problem for our customers, so we started to discuss different possibilities with our bank clients, for example shared services utility, and re-examined leasing conditions. We amended our sales strategy to help banking customers navigate out of the crisis.
•There was a severe liquidity challenge in the overall supply chain, plus high credit and counterparty risk in terms of our suppliers. We needed to mitigate all the different types of risk on the supplier side to protect out business. We started to run stress test scenarios in order to identify points of possible failure in our supply chain. We assessed failure impacts and proactively prepared for supplier help. We needed to put in place a mechanism so that we knew if they were in trouble, there was something we could do. It was important to engage with the supplier through a consultation process so that we could understand our priorities and develop back-up plans.
•In terms of supplier financing, we pushed supplier payment conditions to 45 days. Then we offered to pay our bills faster in exchange for a discount to provide liquidity to our suppliers; we could do this because we are a cash rich company and have good oversight of our cash.
First published on www.gtnews.com
Only a Quarter of Firms Use SEPA Processes
19 Aug 2008
Over six months after the adoption of the single euro payments area (SEPA) credit transfers, only 4% of firms are using SEPA schemes for both incoming and outgoing payments, while 22% use SEPA schemes for either incoming or outgoing payments, according to a survey of its clients by investment bank Dresdner Kleinwort. These are mainly large companies with a turnover of between €500m and €5bn. Almost 75% of those companies surveyed are not yet using the new schemes.
The slow uptake of SEPA has occurred despite the fact that two-thirds of all companies surveyed see benefits in adopting the schemes. From the 4% of companies already using SEPA for all payments, almost nine out of ten gave lower transaction costs for cross-border payments as the reason for implementing the new schemes.
The survey results also showed:
•Only slightly over 20% of companies were considering implementing the new formats and processes within the next six months.
•50% of companies are only willing to migrate when it becomes mandatory.
•Companies with a turnover of up to €100m or less than 10,000 payment transactions per year are particularly cautious about adopting the SEPA schemes.
•Companies see required changes to ERP systems as less of a challenge (36%) than the number of different formats in Europe (56%) and obtaining IBAN. Many also raised concerns about obtaining IBAN and BIC information from their business partners (47%).
•For companies already actively using the SEPA schemes, obtaining IBAN and BIC information is proving more difficult in practice than expected (78%), whereas changes to ERP systems (11%) and the different SEPA formats (25%) are rated less challenging.
In an interview with gtnews, Arne Borkowski, director, global cash management sales team at Dresdner Kleinwort, said that most firms have been hesitant to make the SEPA transition because SEPA is still incomplete. "We have the credit transfer but not the direct debit and most of the companies want to have both instruments in place before they embark on a change project. For many firms that do a lot of direct debits, it does not seem in their best interest to change to a half completed payments transaction package." SEPA direct debit is to be introduced in November 2009.
He said that most firms had high expectations that cross-border payments fees would be reduced but that is not the only aspect they look at when attempting to build a business case. "There are huge investments needed to migrate to SEPA and therefore it depends whether they can build a business case to do it. Banks had to do it because they had to be ready on 28 January this year, but companies don't have to be ready - they can wait for their business case."
Borkowski believes that an impetus for SEPA adoption will come from the public sector. "When a bigger part of the public sector is SEPA-ready, then this will have a big impact on all others that follow them. Because if the public sector is SEPA-ready, then they will request their counterparties to be SEPA-ready - and they have the power to do so," he said.
First published on www.gtnews.com
Over six months after the adoption of the single euro payments area (SEPA) credit transfers, only 4% of firms are using SEPA schemes for both incoming and outgoing payments, while 22% use SEPA schemes for either incoming or outgoing payments, according to a survey of its clients by investment bank Dresdner Kleinwort. These are mainly large companies with a turnover of between €500m and €5bn. Almost 75% of those companies surveyed are not yet using the new schemes.
The slow uptake of SEPA has occurred despite the fact that two-thirds of all companies surveyed see benefits in adopting the schemes. From the 4% of companies already using SEPA for all payments, almost nine out of ten gave lower transaction costs for cross-border payments as the reason for implementing the new schemes.
The survey results also showed:
•Only slightly over 20% of companies were considering implementing the new formats and processes within the next six months.
•50% of companies are only willing to migrate when it becomes mandatory.
•Companies with a turnover of up to €100m or less than 10,000 payment transactions per year are particularly cautious about adopting the SEPA schemes.
•Companies see required changes to ERP systems as less of a challenge (36%) than the number of different formats in Europe (56%) and obtaining IBAN. Many also raised concerns about obtaining IBAN and BIC information from their business partners (47%).
•For companies already actively using the SEPA schemes, obtaining IBAN and BIC information is proving more difficult in practice than expected (78%), whereas changes to ERP systems (11%) and the different SEPA formats (25%) are rated less challenging.
In an interview with gtnews, Arne Borkowski, director, global cash management sales team at Dresdner Kleinwort, said that most firms have been hesitant to make the SEPA transition because SEPA is still incomplete. "We have the credit transfer but not the direct debit and most of the companies want to have both instruments in place before they embark on a change project. For many firms that do a lot of direct debits, it does not seem in their best interest to change to a half completed payments transaction package." SEPA direct debit is to be introduced in November 2009.
He said that most firms had high expectations that cross-border payments fees would be reduced but that is not the only aspect they look at when attempting to build a business case. "There are huge investments needed to migrate to SEPA and therefore it depends whether they can build a business case to do it. Banks had to do it because they had to be ready on 28 January this year, but companies don't have to be ready - they can wait for their business case."
Borkowski believes that an impetus for SEPA adoption will come from the public sector. "When a bigger part of the public sector is SEPA-ready, then this will have a big impact on all others that follow them. Because if the public sector is SEPA-ready, then they will request their counterparties to be SEPA-ready - and they have the power to do so," he said.
First published on www.gtnews.com
SEPA: Lost in Transposition?
27 Jan 2009
SEPA implementation is still moving forward, if a little slowly. What obstacles stand in the way of payments harmonisation across the eurozone?
One year after the introduction of the single euro payments area (SEPA) Credit Transfer (SCT) scheme and SEPA Cards Framework, there still is much work to be done, including the more challenging implementation of the SEPA Direct Debit (SDD) scheme in November this year. It is important at this point not only to survey what has happened during the past year, but also to step back and remind ourselves of SEPA's main objective: to increase payment harmonisation across the eurozone.
Paul Taylor, managing director Europe at VocaLink, points out that SEPA is a political initiative to make the eurozone more competitive holistically than having a number of countries operating independently of each other. "Having achieved the miracle on the single currency, bringing the banking industry in line was an obvious next step," he says.
To that end, the payment industry came together to create industry bodies, such as the European Payments Council (EPC), to allow the industry to self-regulate. "This meant that the industry could respond to different challenges, be proactive and decide its preferred outcome. It came up with SEPA, put a vision in place backed by core principles and rulebooks," explains Taylor.
Taylor says that the launch of SCT on 28 January 2008 was a success, but that many in the industry felt a little deflated by the lack of reaction and uptake from the market. "I remember going to the SEPA launch meeting in Brussels last year and observing the different stakeholders all pointing at each other in regards to what was needed to happen in order to make SEPA successful," he says. "The corporates were pointing to the banks saying that they haven't delivered any products so why should they be interested; the banks were pointing to the governments saying that they haven't regulated this or made it mandatory for people to use it, so why should any of their customers want it; and the governments were pointing back to the corporates and asking why they weren't demanding it?"
This split between stakeholders has to be overcome in order to increase SEPA's uptake. In his article SEPA Migration Needs Commitment from All Stakeholders, SIA-SSB's Mario de Lorenzo argues that there are still a number of issues to be solved in terms of regulation and new instrument features before all the stakeholders will come to the table. Among the main issues are: SDD mandate management and migration and the multilateral interchange fee (MIF) structure; the extent of the Payment Service Directive (PSD) transposition in November 2009, which is subject to different national interpretations by the 30 countries (EU27 + European Economic Area); corporates requests and complaints about their inadequate involvement in SEPA's product definitions; and finally, the thorny issue of the commitment level of public authorities.
De Lorenzo adds: "Obviously, completing SEPA migration requires the commitment of all the stakeholders. Promoting the use of new SEPA services and setting a deadline for the migration as soon as possible can facilitate this process."
VocaLink's Taylor believes that the fact that there isn't an end date is a proxy for the fact that the industry as a whole hasn't been able to establish any discernible value from implementing SEPA. "No one can guarantee that there will be a mandate [to turn off legacy payments]. But it is far better to be proactive and take the opportunity created by SEPA to develop new products and services that add customer value and healthy new return for the banks. The lack of an end date is effectively a lack of confidence."
SEPA Direct Debits: In the Home Stretch?
Citi's Rajesh Mehta agrees that SCTs has made some progress in the past year, and believes that will improve with the launch of a new version of SCT next month, which embeds optional fields that will enhance reconciliation and straight-through processing (STP) levels for corporate users. In his article SEPA: Challenges and Opportunities for 2009, he also agrees that SEPA is still far from being a reality and says that it will be "necessary for some time for large pan-European corporates to be able to pay and receive via national legacy channels and payment systems, as well as moving initial volumes where possible onto SEPA products."
He highlights some of the issues still to be dealt with in terms of SDDs. "From a corporate client perspective, one of the chief priorities is that a way is found to migrate existing 'legacy' direct debit mandates in each eurozone country over to the SDD scheme in a way that ensures their ongoing legal validity, thereby avoiding the costly exercise of requiring debtors to sign fresh mandates," he says. "It is clear that resolving this issue will require different approaches in different countries - in some cases a legal solution will be necessary while in others a contractual solution might be feasible."
As a payment instrument, a direct debit is more complex in its construction than a credit transfer. Whereas a credit transfer is a push payment, where a company decides to send money to another entity, a direct debit is a pull payment where a company or person effectively gives another entity permission to go into their account and take money on a predictable basis. This requires common standards and a significant legal framework, particularly if this is to be done across markets.
VocaLink's Taylor says that this has created a greater level of concern within the banks around how the SDD process will work – and this is coupled with the concern that the market is not all that interested. "If there is no market demand and no government regulation to force the banks to do it, and if the proposed solutions that the industry is looking at will run into the millions, while the implementation will tie up the IT team for months and there is no guarantee of business at the end of it, then it makes it difficult for banks to feel compelled to do it," he says.
Guillaume de Longeaux at AND'co, in his article How to Build Confidence for a Successful SDD Appropriation, believes that it has already been widely advertised that creditors will face a heavy adaptation effort, only to be followed by a heavier daily management burden. His article presents a few practical examples from Germany to illustrate local best practices that already allow German payers to easily dispute direct debits.
James Clark at Pegasytems points out one concern that hasn't been widely publicised around the introduction of the SDD scheme - debit fraud risk - in SEPA Direct Debit: Meeting the Challenge. However, he makes the case that SDD offers benefits to all participants (creditors, debtors and their respective banks) in terms of lower cost, higher STP rates and reduced risk.
Clark says that corporate treasurers need to decide whether they wish to participate in the SEPA scheme from a pre-determined date and that this decision should be undertaken in close collaboration with several banking partners. "The reason for this is straightforward and pragmatic, as the unprecedented volatility of today's financial markets means that the risk of 'putting all one's eggs in one bank's basket' is a much tougher decision than might have been the case just 12 months ago," he says. "At the same time, corporate treasurers will want to understand the pricing impacts in each case, to ensure that the attractive headline of being 'able to do international business at a national price' will in reality deliver the savings indicated."
Payment Services Directive
In his article, 2009: A Good Year for Corporate Users of Payment Services, Tom Buschman from TWIST, the Transaction Workflow Innovation Standards Team which focuses on XML standards, says that the SEPA project has reached the point of no return with the driving force of the PSD, which will be also transposed into national law on 1 November. He says that there is a lot to be learned from other similar initiatives, such as the highly collaborative Australian roadmap for low value payments.
Buschman argues that corporate customers need to proactively ask for harmonised and PSD-updated services in tenders for payment services. "How can they ensure they ask for the right thing and do not push banks towards proprietary and expensive offerings? A good starting point can be a joint review with individual bank providers of the Australian list of high-level requirements. This list covers many of the items embedded in the PSD and points to fairly common requirements across the globe," he says. "Service providers must listen to their corporate clients. In 2009, banks in 29 European countries need to start proactively responding to long-standing corporate customer demands."
Impact of the Credit Crisis
George Ravich, chief marketing officer at Fundtech, made the point in an interview with gtnews that SEPA is "lost in conversation" because a more important conversation is happening – the one about survival. "In good times, there was time to talk about such things as how to get the best out of new regulations, but now there is another conversation happening," he says. He believes that some banks have done a little to make the changes needed for SEPA implementation, but most haven't done enough.
Simon Shephard at ING looks at SEPA and PSD from the perspective of the banks in his article The Impact of the Credit Crisis on SEPA Implementation – and how these new regulations will effectively cost a lot of money to roll out while at the same time cutting revenue across the payments business. "The extra compliance and regulatory pressure will create problems for a number of financial institutions because in order to adapt they will need to invest. But many banks will not want to invest at this time as their margins are being squeezed. At the end of the day, they will be forced to invest in regulatory compliance because it is mandatory, and therefore some investment will be tied up in compliance rather than investing in building the systems and infrastructure they need in order to grow," says Shepard.
He argues that now is the time for banks to reconsider their business model and look to outsource what is not core to their business to other providers. "Many of the smaller banks will be looking at an alternative, such as using a major provider as an agent to handle payments. They will save money by discontinuing investment in their legacy systems and also have a future-proof solution by outsourcing the problem to someone else. A larger bank has the critical mass in terms of volume and, although there will still be the pressure on its margins, getting a greater market share will compensate for reduced margins because it effectively reduces costs per item," he says.
Shephard believes that the payments landscape will not change dramatically in 2009, but that the year will see a continuance of the 'wait and see' approach, until a few financial institutions take the plunge and outsource their payments to another institution.
In his article Carpe Diem: the Business Case for SEPA and the PSD During an Economic Slowdown, Slava Gnevko at AlphaNostrum argues that the business case for both SEPA and PSD must be reviewed because the business cases have evolved under the changing economic conditions. He believes that the deterioration in the European and world economy and decline in the financial services markets can jeopardise the timeline and level of investment in SEPA and PSD.
"It is time for the European Commission and European Central Bank to reinforce the efforts of the national regulators with establishing a strong centre for co-ordination of the pan-European migration," says Gnevko. "The question we all face now is: would regulators be able to pick up the reigns of power and maintain the pace and benefits of migration for SEPA and PSD?"
Conclusion: The Challenges in 2009
As SEPA migration in some countries looks like it may be lapsing due to economic conditions, Paul Styles at ACI Worldwide outlines four main areas that need to be addressed to help SEPA regain some momentum in his article Is Outside Regulation the Answer to a Stagnating SEPA?. He calls on the EPC to bring together all stakeholders in order to move SEPA to the next critical stage; raises the need to set the end date for the retirement of the legacy payment instruments; raises the need for a discussion on how the basic SEPA product can be enhanced without creating market fragmentation; and lastly says that banks need to collaborate with each other more if SEPA is to be a success.
Styles believes that appropriate levels of regulation, administered perhaps by a body such as SWIFT, might just be the right ingredient to ensure that SEPA delivers on its promises. Citi's Mehta also believes that a focussed regulatory and market push, combined with a growing awareness of SEPA benefits among key clients including public sector entities, has the potential to have a significant impact on the pace of SEPA adoption during 2009 and into 2010.
At a time when Charlie McCreevy, European Commissioner for Internal Market and Services, speaking at the EP Committee on Internal Market and Consumer Protection (IMCO) on tackling the crisis, said point blank: "My message to you today is that ... the single market is one of Europe's 'most valuable assets'", the push to make SEPA a reality is top of the political agenda.
In the case of both SEPA products, the key to success is attaching the capabilities that have been created to some customer value. "The industry has not yet got its head around what is the customer proposition is or the customer problem that we are trying to solve," says VocaLink's Taylor. "Rather than starting from a political agenda, we need to move to situation where standardisation on this scale could lead to corporates having visibility of their cash management or liquidity, not country-by-country, but actually pan-European visibility, which would vastly improve their ability to predict their creditworthiness and liquidity and reduce the cost of banking for corporates who wouldn't be forced to operate separate bank accounts and separate infrastructures in separate countries."
First published on www.gtnews.com
SEPA implementation is still moving forward, if a little slowly. What obstacles stand in the way of payments harmonisation across the eurozone?
One year after the introduction of the single euro payments area (SEPA) Credit Transfer (SCT) scheme and SEPA Cards Framework, there still is much work to be done, including the more challenging implementation of the SEPA Direct Debit (SDD) scheme in November this year. It is important at this point not only to survey what has happened during the past year, but also to step back and remind ourselves of SEPA's main objective: to increase payment harmonisation across the eurozone.
Paul Taylor, managing director Europe at VocaLink, points out that SEPA is a political initiative to make the eurozone more competitive holistically than having a number of countries operating independently of each other. "Having achieved the miracle on the single currency, bringing the banking industry in line was an obvious next step," he says.
To that end, the payment industry came together to create industry bodies, such as the European Payments Council (EPC), to allow the industry to self-regulate. "This meant that the industry could respond to different challenges, be proactive and decide its preferred outcome. It came up with SEPA, put a vision in place backed by core principles and rulebooks," explains Taylor.
Taylor says that the launch of SCT on 28 January 2008 was a success, but that many in the industry felt a little deflated by the lack of reaction and uptake from the market. "I remember going to the SEPA launch meeting in Brussels last year and observing the different stakeholders all pointing at each other in regards to what was needed to happen in order to make SEPA successful," he says. "The corporates were pointing to the banks saying that they haven't delivered any products so why should they be interested; the banks were pointing to the governments saying that they haven't regulated this or made it mandatory for people to use it, so why should any of their customers want it; and the governments were pointing back to the corporates and asking why they weren't demanding it?"
This split between stakeholders has to be overcome in order to increase SEPA's uptake. In his article SEPA Migration Needs Commitment from All Stakeholders, SIA-SSB's Mario de Lorenzo argues that there are still a number of issues to be solved in terms of regulation and new instrument features before all the stakeholders will come to the table. Among the main issues are: SDD mandate management and migration and the multilateral interchange fee (MIF) structure; the extent of the Payment Service Directive (PSD) transposition in November 2009, which is subject to different national interpretations by the 30 countries (EU27 + European Economic Area); corporates requests and complaints about their inadequate involvement in SEPA's product definitions; and finally, the thorny issue of the commitment level of public authorities.
De Lorenzo adds: "Obviously, completing SEPA migration requires the commitment of all the stakeholders. Promoting the use of new SEPA services and setting a deadline for the migration as soon as possible can facilitate this process."
VocaLink's Taylor believes that the fact that there isn't an end date is a proxy for the fact that the industry as a whole hasn't been able to establish any discernible value from implementing SEPA. "No one can guarantee that there will be a mandate [to turn off legacy payments]. But it is far better to be proactive and take the opportunity created by SEPA to develop new products and services that add customer value and healthy new return for the banks. The lack of an end date is effectively a lack of confidence."
SEPA Direct Debits: In the Home Stretch?
Citi's Rajesh Mehta agrees that SCTs has made some progress in the past year, and believes that will improve with the launch of a new version of SCT next month, which embeds optional fields that will enhance reconciliation and straight-through processing (STP) levels for corporate users. In his article SEPA: Challenges and Opportunities for 2009, he also agrees that SEPA is still far from being a reality and says that it will be "necessary for some time for large pan-European corporates to be able to pay and receive via national legacy channels and payment systems, as well as moving initial volumes where possible onto SEPA products."
He highlights some of the issues still to be dealt with in terms of SDDs. "From a corporate client perspective, one of the chief priorities is that a way is found to migrate existing 'legacy' direct debit mandates in each eurozone country over to the SDD scheme in a way that ensures their ongoing legal validity, thereby avoiding the costly exercise of requiring debtors to sign fresh mandates," he says. "It is clear that resolving this issue will require different approaches in different countries - in some cases a legal solution will be necessary while in others a contractual solution might be feasible."
As a payment instrument, a direct debit is more complex in its construction than a credit transfer. Whereas a credit transfer is a push payment, where a company decides to send money to another entity, a direct debit is a pull payment where a company or person effectively gives another entity permission to go into their account and take money on a predictable basis. This requires common standards and a significant legal framework, particularly if this is to be done across markets.
VocaLink's Taylor says that this has created a greater level of concern within the banks around how the SDD process will work – and this is coupled with the concern that the market is not all that interested. "If there is no market demand and no government regulation to force the banks to do it, and if the proposed solutions that the industry is looking at will run into the millions, while the implementation will tie up the IT team for months and there is no guarantee of business at the end of it, then it makes it difficult for banks to feel compelled to do it," he says.
Guillaume de Longeaux at AND'co, in his article How to Build Confidence for a Successful SDD Appropriation, believes that it has already been widely advertised that creditors will face a heavy adaptation effort, only to be followed by a heavier daily management burden. His article presents a few practical examples from Germany to illustrate local best practices that already allow German payers to easily dispute direct debits.
James Clark at Pegasytems points out one concern that hasn't been widely publicised around the introduction of the SDD scheme - debit fraud risk - in SEPA Direct Debit: Meeting the Challenge. However, he makes the case that SDD offers benefits to all participants (creditors, debtors and their respective banks) in terms of lower cost, higher STP rates and reduced risk.
Clark says that corporate treasurers need to decide whether they wish to participate in the SEPA scheme from a pre-determined date and that this decision should be undertaken in close collaboration with several banking partners. "The reason for this is straightforward and pragmatic, as the unprecedented volatility of today's financial markets means that the risk of 'putting all one's eggs in one bank's basket' is a much tougher decision than might have been the case just 12 months ago," he says. "At the same time, corporate treasurers will want to understand the pricing impacts in each case, to ensure that the attractive headline of being 'able to do international business at a national price' will in reality deliver the savings indicated."
Payment Services Directive
In his article, 2009: A Good Year for Corporate Users of Payment Services, Tom Buschman from TWIST, the Transaction Workflow Innovation Standards Team which focuses on XML standards, says that the SEPA project has reached the point of no return with the driving force of the PSD, which will be also transposed into national law on 1 November. He says that there is a lot to be learned from other similar initiatives, such as the highly collaborative Australian roadmap for low value payments.
Buschman argues that corporate customers need to proactively ask for harmonised and PSD-updated services in tenders for payment services. "How can they ensure they ask for the right thing and do not push banks towards proprietary and expensive offerings? A good starting point can be a joint review with individual bank providers of the Australian list of high-level requirements. This list covers many of the items embedded in the PSD and points to fairly common requirements across the globe," he says. "Service providers must listen to their corporate clients. In 2009, banks in 29 European countries need to start proactively responding to long-standing corporate customer demands."
Impact of the Credit Crisis
George Ravich, chief marketing officer at Fundtech, made the point in an interview with gtnews that SEPA is "lost in conversation" because a more important conversation is happening – the one about survival. "In good times, there was time to talk about such things as how to get the best out of new regulations, but now there is another conversation happening," he says. He believes that some banks have done a little to make the changes needed for SEPA implementation, but most haven't done enough.
Simon Shephard at ING looks at SEPA and PSD from the perspective of the banks in his article The Impact of the Credit Crisis on SEPA Implementation – and how these new regulations will effectively cost a lot of money to roll out while at the same time cutting revenue across the payments business. "The extra compliance and regulatory pressure will create problems for a number of financial institutions because in order to adapt they will need to invest. But many banks will not want to invest at this time as their margins are being squeezed. At the end of the day, they will be forced to invest in regulatory compliance because it is mandatory, and therefore some investment will be tied up in compliance rather than investing in building the systems and infrastructure they need in order to grow," says Shepard.
He argues that now is the time for banks to reconsider their business model and look to outsource what is not core to their business to other providers. "Many of the smaller banks will be looking at an alternative, such as using a major provider as an agent to handle payments. They will save money by discontinuing investment in their legacy systems and also have a future-proof solution by outsourcing the problem to someone else. A larger bank has the critical mass in terms of volume and, although there will still be the pressure on its margins, getting a greater market share will compensate for reduced margins because it effectively reduces costs per item," he says.
Shephard believes that the payments landscape will not change dramatically in 2009, but that the year will see a continuance of the 'wait and see' approach, until a few financial institutions take the plunge and outsource their payments to another institution.
In his article Carpe Diem: the Business Case for SEPA and the PSD During an Economic Slowdown, Slava Gnevko at AlphaNostrum argues that the business case for both SEPA and PSD must be reviewed because the business cases have evolved under the changing economic conditions. He believes that the deterioration in the European and world economy and decline in the financial services markets can jeopardise the timeline and level of investment in SEPA and PSD.
"It is time for the European Commission and European Central Bank to reinforce the efforts of the national regulators with establishing a strong centre for co-ordination of the pan-European migration," says Gnevko. "The question we all face now is: would regulators be able to pick up the reigns of power and maintain the pace and benefits of migration for SEPA and PSD?"
Conclusion: The Challenges in 2009
As SEPA migration in some countries looks like it may be lapsing due to economic conditions, Paul Styles at ACI Worldwide outlines four main areas that need to be addressed to help SEPA regain some momentum in his article Is Outside Regulation the Answer to a Stagnating SEPA?. He calls on the EPC to bring together all stakeholders in order to move SEPA to the next critical stage; raises the need to set the end date for the retirement of the legacy payment instruments; raises the need for a discussion on how the basic SEPA product can be enhanced without creating market fragmentation; and lastly says that banks need to collaborate with each other more if SEPA is to be a success.
Styles believes that appropriate levels of regulation, administered perhaps by a body such as SWIFT, might just be the right ingredient to ensure that SEPA delivers on its promises. Citi's Mehta also believes that a focussed regulatory and market push, combined with a growing awareness of SEPA benefits among key clients including public sector entities, has the potential to have a significant impact on the pace of SEPA adoption during 2009 and into 2010.
At a time when Charlie McCreevy, European Commissioner for Internal Market and Services, speaking at the EP Committee on Internal Market and Consumer Protection (IMCO) on tackling the crisis, said point blank: "My message to you today is that ... the single market is one of Europe's 'most valuable assets'", the push to make SEPA a reality is top of the political agenda.
In the case of both SEPA products, the key to success is attaching the capabilities that have been created to some customer value. "The industry has not yet got its head around what is the customer proposition is or the customer problem that we are trying to solve," says VocaLink's Taylor. "Rather than starting from a political agenda, we need to move to situation where standardisation on this scale could lead to corporates having visibility of their cash management or liquidity, not country-by-country, but actually pan-European visibility, which would vastly improve their ability to predict their creditworthiness and liquidity and reduce the cost of banking for corporates who wouldn't be forced to operate separate bank accounts and separate infrastructures in separate countries."
First published on www.gtnews.com
Emerging Markets Look "Rosy" But for How Long?
24 Jun 2008
For the past nine months, the emerging markets (EMs) overall have withstood the turmoil in the financial markets and the downturn in the US economy, which led Fitch Ratings group managing director of sovereigns David Riley to say that things were looking "rosy in the emerging markets' gardens". At Fitch Ratings' Emerging Markets 2008 event in London, Riley pointed to the steady improvement in sovereign ratings, with Brazil being the last of the Brazil, Russia, India and China (BRICs) to receive an investment grade rating in May.
But there are some storm clouds ahead, specifically around the threat of inflation. Brian Coulton, head of EMEA sovereigns and global economics, sovereign group, Fitch Ratings, London, said that there were growing concerns regarding inflation in terms of credit and the possible economic impact (see figure below).
Coulton explained that inflation affects credit ratings because:
•High and volatile inflation undermines macroeconomic stability;
•It renders public finances more vulnerable to shocks;
•It reduces sovereign debt tolerance; and
•It creates an elevated risk of exchange rate crises and an elevated risk of banking crises.
Inflation also has an impact on EM local currency (LC) government debt markets: LC investors become more focused on domestic interest rate risk and it becomes harder for governments to sell long-term domestic bonds increasing market risk.
On a positive note, Coulton pointed out that domestic investment will drive the EMs' economies through 2008 and 2009. Most EMs are experiencing consumer spending dynamism. The macro economic picture also seems to be holding up with the commodity price rises and improving income levels. He agreed that the average EM credit rating continues to improve with an upward trend in the level of ratings, but revealed that this picture is changing: in 2008, Fitch oversaw 10 positive rating actions and 10 negative rating actions compared to a ratio of four positive to one negative in 2007.
Coulton likened the monetary policy in the EMs to US/UK policy in the 1970s in terms of the way that EMs responses are lagging today. He said that domestic overheating is starting to affect emerging Europe, while the Gulf Cooperation Council (GCC) monetary conditions and effective exchange rates are going the wrong way. "There has been an increase in soft exchange rate pegs in the last few years. This attracts concern because these pegs have yet to be tested in volatile markets. Plus inflation targets are being blown out of the water - in some cases, the gap is bigger than the target rate," said Coulton (see Figure 2). The top three most vulnerable EMs are Jamaica, Ukraine and Kazakhstan (see Figure 3).
Brazil, on the other hand, is experiencing heady days, particularly since the discovery of new oil deposits. Individuals, followed strongly by lending to SMEs, have led the loan growth in the country. Market turmoil has led to increased domestic demand from the corporate sector, which had been borrowing in international capital markets, leading to loan portfolio diversification. "The outlook in 2008 calls for some moderation," said Peter Shaw, managing director, financial Institutions at Fitch Ratings, "but banks are still predicting growth north of 20%, with resurgent corporate demand supporting this growth. So the outlook for 2008 is good, sustained by continued loan growth; and beyond 2008 - credit costs are key." He pointed out that funding for Brazilian banks is largely Brazilian; foreign investment is less than 10%, although it is still the biggest percentage in Latin America.
China, another of the BRIC nations, is expected to maintain its economic growth at around 10% in 2008/9. There are some problems: corruption within the development model is creating tension; the asset price bubble could generate social discontent; and increasing social inequalities and environment problems could also foster unrest. Overall, the long-term fundamentals are good, according to Frederic Gits, senior director, Tokyo at Fitch Ratings. "The race, or craze, to acquire land bank has weakened the financial structure of many companies. Government intervention is attempting to cool down the overheated property market and restrict speculation. These crises could lead to weaker players going under. The raw material price hike has mainly affected steel industry, airlines, auto manufacturing, refiners, as well as light manufacturing industries. Because China is a net importer of raw materials, Chinese companies are hungry for acquisitions in order to buy up raw material assets."
Gits said that the strong growth in China has lifted the performance of all corporates, even the poorly managed ones, but warned, "Although a rising tide lifts all boats, the problem is when the tide turns."
First published on www.gtnews.com
For the past nine months, the emerging markets (EMs) overall have withstood the turmoil in the financial markets and the downturn in the US economy, which led Fitch Ratings group managing director of sovereigns David Riley to say that things were looking "rosy in the emerging markets' gardens". At Fitch Ratings' Emerging Markets 2008 event in London, Riley pointed to the steady improvement in sovereign ratings, with Brazil being the last of the Brazil, Russia, India and China (BRICs) to receive an investment grade rating in May.
But there are some storm clouds ahead, specifically around the threat of inflation. Brian Coulton, head of EMEA sovereigns and global economics, sovereign group, Fitch Ratings, London, said that there were growing concerns regarding inflation in terms of credit and the possible economic impact (see figure below).
Coulton explained that inflation affects credit ratings because:
•High and volatile inflation undermines macroeconomic stability;
•It renders public finances more vulnerable to shocks;
•It reduces sovereign debt tolerance; and
•It creates an elevated risk of exchange rate crises and an elevated risk of banking crises.
Inflation also has an impact on EM local currency (LC) government debt markets: LC investors become more focused on domestic interest rate risk and it becomes harder for governments to sell long-term domestic bonds increasing market risk.
On a positive note, Coulton pointed out that domestic investment will drive the EMs' economies through 2008 and 2009. Most EMs are experiencing consumer spending dynamism. The macro economic picture also seems to be holding up with the commodity price rises and improving income levels. He agreed that the average EM credit rating continues to improve with an upward trend in the level of ratings, but revealed that this picture is changing: in 2008, Fitch oversaw 10 positive rating actions and 10 negative rating actions compared to a ratio of four positive to one negative in 2007.
Coulton likened the monetary policy in the EMs to US/UK policy in the 1970s in terms of the way that EMs responses are lagging today. He said that domestic overheating is starting to affect emerging Europe, while the Gulf Cooperation Council (GCC) monetary conditions and effective exchange rates are going the wrong way. "There has been an increase in soft exchange rate pegs in the last few years. This attracts concern because these pegs have yet to be tested in volatile markets. Plus inflation targets are being blown out of the water - in some cases, the gap is bigger than the target rate," said Coulton (see Figure 2). The top three most vulnerable EMs are Jamaica, Ukraine and Kazakhstan (see Figure 3).
Brazil, on the other hand, is experiencing heady days, particularly since the discovery of new oil deposits. Individuals, followed strongly by lending to SMEs, have led the loan growth in the country. Market turmoil has led to increased domestic demand from the corporate sector, which had been borrowing in international capital markets, leading to loan portfolio diversification. "The outlook in 2008 calls for some moderation," said Peter Shaw, managing director, financial Institutions at Fitch Ratings, "but banks are still predicting growth north of 20%, with resurgent corporate demand supporting this growth. So the outlook for 2008 is good, sustained by continued loan growth; and beyond 2008 - credit costs are key." He pointed out that funding for Brazilian banks is largely Brazilian; foreign investment is less than 10%, although it is still the biggest percentage in Latin America.
China, another of the BRIC nations, is expected to maintain its economic growth at around 10% in 2008/9. There are some problems: corruption within the development model is creating tension; the asset price bubble could generate social discontent; and increasing social inequalities and environment problems could also foster unrest. Overall, the long-term fundamentals are good, according to Frederic Gits, senior director, Tokyo at Fitch Ratings. "The race, or craze, to acquire land bank has weakened the financial structure of many companies. Government intervention is attempting to cool down the overheated property market and restrict speculation. These crises could lead to weaker players going under. The raw material price hike has mainly affected steel industry, airlines, auto manufacturing, refiners, as well as light manufacturing industries. Because China is a net importer of raw materials, Chinese companies are hungry for acquisitions in order to buy up raw material assets."
Gits said that the strong growth in China has lifted the performance of all corporates, even the poorly managed ones, but warned, "Although a rising tide lifts all boats, the problem is when the tide turns."
First published on www.gtnews.com
UK Financial Industry Predicts Gloomy Outlook for More Than Six Months
07 Oct 2008
A vast majority of UK financial services firms (99%) do not expect to see normal conditions return to the financial markets within six months, according to a recent survey by Confederation of British Industry (CBI) and PricewaterhouseCoopers (PwC), implying that disruption will persist well into next year. John Cridland, CBI deputy director-general, said that the general view is that financial firms need to roll with the punches and look to the second half of 2009 because the first half will be difficult.
Underpinning everything is the slowing economy, which is cooling so fast that growth estimates for 2009 have more than halved since June, according to the Economist. Andrew Gray, UK banking advisory leader at PwC, denied that there was systemic risk within the UK banking system. "There is stress and strain, but no, I do not believe that there is systemic risk. Northern Rock is the closest we have come to a run on a bank, but no retail depositor has lost money up to this point."
The CBI/PwC research found that the slowdown has become more entrenched and the downturn in commercial business first reported in June again emerges as a key factor of the current survey. Business sentiment fell sharply again, as a balance of 59% said they are less optimistic about the overall business situation in the financial services sector than they were in June.
Profitability is coming under intense pressure, with aggregate figures for the industry the most negative ever recorded by the survey, which started in December 1989. The report identifies two main concerns regarding profitability: the first - and most immediate - is the continuing threat of credit impairments; and the second factor is slowing revenue streams. Market spending and capital investment are being strongly cut back, and more than half of the respondents now expect to employ fewer staff by the end of the year.
Business volumes have also taken a record plunge. Only 10% of firms said they had risen, while 61% said they had dropped. The resulting balance of -51% was much worse than expected, and was the weakest result since the survey started. Volumes are expected to fall again over the coming three months, but at a slower rate (-31%).
Total operating cost growth stabilised (a balance of +3%) and a drop is now expected over the coming three months. Average operating costs have remained flat over the last quarter and are expected to fall over the next quarter mainly because of job losses, which are expected to rise sharply over the coming three months affecting a minimum of 12,000 out of a workforce of one million.
The steepest drop in confidence was seen with fund managers, which now feel uniformly pessimistic about their business situation. Customer activity has plunged with the balance statistic for business volumes swinging from +93% in June to -100% in the current survey.
Robert Mellor, financial services tax leader at PwC, said: "Fund managers thought that the way out was to look overseas for investors. The last quarter's trend was 'spend your way out', but that customer base has departed. Fund managers are becoming increasingly resigned to a long downturn, and are responding accordingly but the sector needs to consider how it can profit from increasing levels of risk aversion among investors." He added that the fund management area is now looking at job losses for the first time.
In an indication that credit continues to become more expensive, average spreads, which mark the difference between the rates at which money is borrowed and lent, widened for a third quarter running, although a gentler increase is predicted in the next three months.
"The survey paints an increasingly bleak picture of the [financial services] sector, but the dramatic turbulence across the world of finance over the past fortnight, and the renewed paralysis in interbank markets, will only have depressed market confidence even further," said CBI's Cridland. "Difficulties in this crucial sector will have huge implications for the rest of the UK economy."
First published on www.gtnews.com
A vast majority of UK financial services firms (99%) do not expect to see normal conditions return to the financial markets within six months, according to a recent survey by Confederation of British Industry (CBI) and PricewaterhouseCoopers (PwC), implying that disruption will persist well into next year. John Cridland, CBI deputy director-general, said that the general view is that financial firms need to roll with the punches and look to the second half of 2009 because the first half will be difficult.
Underpinning everything is the slowing economy, which is cooling so fast that growth estimates for 2009 have more than halved since June, according to the Economist. Andrew Gray, UK banking advisory leader at PwC, denied that there was systemic risk within the UK banking system. "There is stress and strain, but no, I do not believe that there is systemic risk. Northern Rock is the closest we have come to a run on a bank, but no retail depositor has lost money up to this point."
The CBI/PwC research found that the slowdown has become more entrenched and the downturn in commercial business first reported in June again emerges as a key factor of the current survey. Business sentiment fell sharply again, as a balance of 59% said they are less optimistic about the overall business situation in the financial services sector than they were in June.
Profitability is coming under intense pressure, with aggregate figures for the industry the most negative ever recorded by the survey, which started in December 1989. The report identifies two main concerns regarding profitability: the first - and most immediate - is the continuing threat of credit impairments; and the second factor is slowing revenue streams. Market spending and capital investment are being strongly cut back, and more than half of the respondents now expect to employ fewer staff by the end of the year.
Business volumes have also taken a record plunge. Only 10% of firms said they had risen, while 61% said they had dropped. The resulting balance of -51% was much worse than expected, and was the weakest result since the survey started. Volumes are expected to fall again over the coming three months, but at a slower rate (-31%).
Total operating cost growth stabilised (a balance of +3%) and a drop is now expected over the coming three months. Average operating costs have remained flat over the last quarter and are expected to fall over the next quarter mainly because of job losses, which are expected to rise sharply over the coming three months affecting a minimum of 12,000 out of a workforce of one million.
The steepest drop in confidence was seen with fund managers, which now feel uniformly pessimistic about their business situation. Customer activity has plunged with the balance statistic for business volumes swinging from +93% in June to -100% in the current survey.
Robert Mellor, financial services tax leader at PwC, said: "Fund managers thought that the way out was to look overseas for investors. The last quarter's trend was 'spend your way out', but that customer base has departed. Fund managers are becoming increasingly resigned to a long downturn, and are responding accordingly but the sector needs to consider how it can profit from increasing levels of risk aversion among investors." He added that the fund management area is now looking at job losses for the first time.
In an indication that credit continues to become more expensive, average spreads, which mark the difference between the rates at which money is borrowed and lent, widened for a third quarter running, although a gentler increase is predicted in the next three months.
"The survey paints an increasingly bleak picture of the [financial services] sector, but the dramatic turbulence across the world of finance over the past fortnight, and the renewed paralysis in interbank markets, will only have depressed market confidence even further," said CBI's Cridland. "Difficulties in this crucial sector will have huge implications for the rest of the UK economy."
First published on www.gtnews.com
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