Post-Crisis ECB Considers How It'll Set Rates in the Future

Link: Post-Crisis ECB Considers How It'll Set Rates in the Future

Date: 24th October, 2018

Media: Bloomberg 

What happened?

After pumping cash into the markets for over than a decade, the European Central Bank (ECB) is considering the way it controls interest rates and transmits monetary policy. The ECB will have to determine its monetary policy framework to adapt it to a new era characterized by the contraction of the stimulus measures and the reduction of its balance sheet and excessive liquidity.

Whom and where it affects? 

It mainly affects the ECB and the national central banks of all countries that have adopted the euro.

What sort of public or private institutions are involved?

Among public institutions involved, we can find the European Central Bank (ECB), the Federal Reserve (FED) and the Bank of England (BOE). 

Why is it important for Banking and Finance? 

Changing the monetary policy framework of the Eurosystem could affect the entire banking and financial system. The main objective of the ECB is to maintain price stability in the euro zone; through interest rates, it can influence economic activity, alining it with inflation objectives. 

Focusing on the banking sector and taking into account that one of its main functions is to transmit monetary policy, a change in its framework would mean a turn on its business strategies.

What do you think will be the consequences in the foreseeable future?

Since the main objective of the Eurosystem is to ensure price stability and taking into account that the HCIP (Harmonised Index of Consumer Prices) is around 2.1% for the euro area, what we can expect is the implementation of monetary policies that prevent higher inflation. This will inevitably lead to the reduction of the quantitative easing programmes and the rise of interest rates on Main Refinancing Operations (MRO), Deposit facility, and Marginal Lending Facility.

The increase in interest rates will make borrowing more expensive and saving more attractive. This will have important effects throughout the entire financial system and affect growth development. Some of the plausible consequences of this decision could be: the increase of interbank lending rates (Eonia and Euribor) and the subsequent effect on assets that depend on these indexes; more expensive bank loans and credits and more attractive deposits, a situation that might improve banks' income statements; increasing yield expectations over bonds, rising financing costs both for governments and corporations, and putting pressure on stock markets, demanding higher returns.

Summing up, a change in the monetary policy framework would inevitably lead to a scenario of costly financing, investment decline and more savings that would cause a deceleration of economic growth. Nevertheless, it is important to emphasize the complexity of this decision, that would be made after careful deliberations and in the right time. 

Key words:

Monetary Policy, ECB, Deposit Facility, Eonia and Euribor.

Bank of England raises alarm over surge in high-risk lending

Link: https://www.theguardian.com/business/2018/oct/17/bank-of-england-high-risk-lending-leveraged-loans

Date: 17th October, 2018

Media: The Guardian

• What happened?

The Bank of England has issued a stark warning over the rapid growth in lending to indebted companies around the world, drawing parallels with the US sub-prime mortgage market that triggered the 2008 financial crisis. Gross issuance of leveraged loans by UK companies reached a record £38bn in 2017.

That is, they are making packages with the leveraged loans and the banks sell them to third-party investors, for this, the FPC (financial policy committee) said, adding that it would assess the risks to British banks in the 2018 banking industry stress tests.

• Whom and where it affects?

This situation affects the Bank of England and as a consequence, also the financial market.

• What sort of public or private institutions are involved?

The public institutions are the Bank of England

As private institution,  Reserva Federal de EE.UU .

• Why is it important for Banking and Finance?

Because there are growing concerns that companies will be unable to repay their debts as central banks begin to raise interest rates 10 years on from the crash, including three hikes this year by the US Federal Reserve; and this triggers a crisis.

• What do you think will be the consequences in the foreseeable future?

If the right measures are not taken now on the previous situation, it could trigger another systemic crisis, as happened with sub-prime mortgages.

• Key words: leveraged loans, sub-prime mortgages, stress test, financial crisis.

Europe should be wary of stealing London's financial sector

"Excessively large financial sectors damage productivity and growth."

Link: Europe should be wary of stealing London's financial sector

Date: 18th October 2018

Media: The Guardian

• What happened?

Due to the negotiations about the Brexit in United Kingdom, other European countries are using the deep uncertainty about the future financial regulation of the continent’s financial markets to include business and activities.

• Whom and where it affects?

This issue afects the rest of the business and countries in the European Union.

• What sort of public or private institutions are involved?

It involves all institutions, mainly financial and bank sector, the Brexit pretends a financial rethinking about a major financial centre is, of course, unambiguously good for Porsche dealerships, upmarket champagne bars and table dancing clubs.

• Why is it important for Banking and Finance?

Is very important because the relationship between the rest of Europe banks and United Kingdom banks. This banks had lost the capitalization also the interest rates are at historic minimums, apart of the financial crisis because of the brexit, the GDP also suffers a contraction. There was a drop in housing prices, specifically 33%. In addition to all, United Kingdom has  a void on the part of the rest of countries of the European Union, costing them thus to obtain financing outside of UK. 

• What do you think will be the consequences in the foreseeable future?   

The United Kingdom will participate in a real-world experiment that tests the economy. It will produce the substancial relocation of financial activity unless it realice a major advance in the Brexit negotiations. If it happen , the BIS economists won't make a mistake. 

Key words: Brexit, capitalization, GDP, EU, UK, uncertainty, bank, financial, interest.

Barclays And Deutsche Bank: A Tale Of Two Investment Banks

Link: https://www.forbes.com/sites/francescoppola/2018/10/24/a-tale-of-two-investment-banks/#70a819b15f6a

Date: Oct 24th, 2018

Media: Forbes

What happened?

Barclays and Deutsche Bank are leading European banks by total assets (in billion €) and they have released their third-quarter results.

Although at first glance, these results look good, as their profits increased, poor performance in their investment banking divisions is bad news for both banks.

Whom and where it affects?

It affects both banks in Europe, and therefore, their investors, shareholders or clients.

What sort of public or private institutions are involved?

Barclays is a British multinational investment bank and financial services company headquartered in London; and Deutsche Bank is a German investment bank and financial services company headquartered in Frankfurt, Germany.

Why is it important for Banking and Finance?

As these banks are the most important banks of Europe, their bankruptcy or their financial problems, can cause a financial instability in the European economy or even systemic risk.

What do you think will be the consequences in the foreseeable future?

There is a possibility that Deutsche Bank merges with Commerzbank (also German bank). Bolting the two “ailing German giants” together might perhaps create a bank large enough to compete with the Americans, though it’s a risky strategy - mergers of this kind can have the unfortunate effect of amplifying the weaknesses of both banks. In case this happened, Barclays could suffer too much pressure and it wouldn't resist to compete succesfully once again with the American giants.

Key words:

Investment bank, Shareholders, Investors, Europe, Deutsche Bank, Barclays, Results/performance.

Banks to check account names to beat transfer fraud

Link: https://www.theguardian.com/money/2018/oct/18/banks-to-check-account-names-to-beat-transfer

Date: October 29th, 2018

Media: THE GUARDIAN

What happened?

In recent years, as a result of fraud in the UK payment industry, criminals have developed increasingly sophisticated tactics to steal money. Criminals have been hacking the email accounts of builders, lawyers or other merchants, to send large amounts of money to criminal accounts. Starting next year, the so-called "beneficiary confirmation" system will mean that clients can verify that they are paying the right person.

Whom and where it affects?

Due to this scam network, there are many banks and users that have been affected by these frauds. In short, banking customers in the United Kingdom.

What sort of public or private institutions are involved?

There are several institutions involved in this wave of fraud.

These institutions were not directly affected by these frauds, but they did participate in them.
For example Barclays, a financial services company, which operated on the same account as the scammer used to accept your money. Barclays says he does not inform the police of such crimes, because "the bank is not the victim."

Another case is HSBC Bank, which was recently splashed, Falciani hacked the accounts of thousands of customers and delivered the information to the French authorities.

Why is it important for Banking and Finance?

In order to detect the growing wave of fraud in bank transfers. Because they withdraw large amounts of money, and currently the measure for these types of transfers or withdrawals are not safe.

What do you think will be the consequences in the foreseeable future?

That the frauds will be reduced, but perhaps the process would be slower, since it is necessary to confirm a great variety of documentation corresponding to the person who is doing the transfer.

Key words: Bank security, Electronic accounts, Bank transfers, Fraudulent payments, Payment confirmation, Scams