Category Archives: Economy

Economy, business, trade, banking, finance and other economic activities.

Economy

Iraqi economy to grow at 9% in 2013: IMF

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The IMF said Thursday that on the back of rising oil production and robust non-oil activity, Iraq’s economic growth remained strong at about 8 percent in 2012. They forecast that Iraqi economy would grow around 9% this year helped by surging oil production from just under 3 mbpd in 2012 to 3.3 mbpd in 2013.

In 2012, inflation was contained at 6%, and the IMF projects it to decline slightly this year. On account of strong oil proceeds, CBI reserves reached US$70 billion at the end of 2012, while the Development Fund for Iraq (DFI) rose to US$18 billion.

It’s worth noting that Iraq achieved a budget surplus of about 4% of GDP in 2012, although that’s largely due to higher-than expected oil revenues. But the IMF said that Baghdad needs to do more to support private, non-oil business. Public financial management should be strengthened, notably by phasing out off-budgetary spending practices and reliance on state-owned bank financing to support public enterprises. Approval of additional spending commitments during the fiscal year should also be avoided.

The IMF noted that the economy “continues to suffer from severe structural weaknesses such as a small non-oil sector, high unemployment, public sector dominance, and a weak business environment.”

It suggested that the government needs to formulate a long-term strategy to foster the growth of the non-oil sector, opening more opportunities to private business and providing more room for private banks.

Economy

Food e-cards ~ an innovative experiment for food relief

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Now, Syrian refugees do not wait in line for food at a Turkish camp nor do they crowd around aid delivery trucks, but instead, they go to the ordinary supermarkets  to pay for the goods using their debit cards.

Under the experimental project launched by the UN World Food Programme and the Turkish Red Crescent, thousands of refugees who have fled the conflict raging in their homeland now receive debit cards charged with aid credits rather than boxes of basic supplies.

Food e-cards were initially distributed to 13,000 Syrians in Kilis in October 2012. After Kilis, the Food e-Card programme was expanded in other camps in Hatay. The programme are planned to be expanded to include a higher number of families, as cooking facilities and access to shops become available in other camps.

Each Syrian family receives an electronic Food e-Card that is loaded with 80 Turkish Liras (US$45) per family member per month. This is enough to provide a basic diet (at least 2,100 kcal per person per day). Nearly 22,000 Syrian refugees in Turkey were benefiting from the “Food e-card” project at the end of November, according to the WFP.

The Visa Electron cards, supplied by Turkey’s Halkbank, are accepted only in certain stores operated by a private Turkish retail chain. The supermarkets are stocked with fresh vegetables, meat and a wide variety of staple food products and basic necessities. But there are some restrictions. Purchases of chocolate and cigarettes are not allowed with the cards, and alcohol is not sold in these shops. At the register, the products are scanned and so is the user’s finger, which is checked against the fingerprint stored on the card’s electronic chip.

The WFP and Red Crescent said that while one potential consequence of humanitarian programmes is that an influx of aid can distort economies, they hope the combination of technology and using local suppliers used in the “Food e card” scheme could strengthen the local economy and serve as a role model in the region.

This is an interesting innovative effort to provide food relief to refugees as this is not going to affect the local economy adversely as a consequence of sudden influx of refugees from a neighboring country. But it needs advanced economy and banking system in the host country for making this type of programme to be successful.

Economy

Barclays adds a new chapter in CoCo history

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Barclays broke new ground in the global capital markets on Wednesday, 14 November 2012 when it priced a USD 3bn CoCo bond that is the first total loss high trigger capital security ever offered by a bank.

CoCos or contingent convertible notes, are slightly different to regular convertible bonds in that the likelihood of the bonds converting to equity is “contingent” on a specified event, such as the stock price of the company exceeding a particular level for a certain period of time.

The UK bank is paying only a 7.625% coupon for the BBB- rated Tier 2 10-year bullet that attracted USD 17bn of demand despite the structure being the most aggressive of its kind yet.

As per Reuters, under the terms of the deal, which was led by Barclays, Citigroup, Credit Suisse, Deutsche Bank and Morgan Stanley, the notes will be automatically written down to zero if the bank’s Common Equity Tier 1 ratio falls below 7%. In a typical contingent convertible, or CoCo bond, the regulatory trigger causes the bondholders to become  equityholders with a stake in the company. For the Barclays bond, however, the value of the asset simply falls to zero, and there is no conversion to equity, making them extra risky.

The additional risk versus senior bonds means investors demand extra compensation. As per The Wall Street Journal, the 10-year bonds sold at par to yield 7.625%, below earlier price guidance on the deal of 7.75%. That’s more than double the 3.1% yield of Barclays’s senior 10-year debt, according to prices in the secondary market on a trading platform operated by MarketAxess.

Barclays’ Common Equity Tier 1 ratio is expected to be at 12.1% by the end of next year, giving a 510bp buffer above the trigger level. Currently, Barclays’s Tier-1 ratio is 10.4%.

There are mixed views on the market about the CoCos. As this security is junior to equity, and weakens shareholders’ incentive to prevent excessive risk-taking by management. The Barclays deal’s T+603.7bp spread – about 300bp wider than existing Barclays Lower Tier 2 debt – was also a major attraction. Some institutional investors find CoCos are an acquired taste, arguing that their success is proof of a raging bull market.

Economy

Will Libor cease to be the global benchmark?

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The hunt for a credible replacement for Libor – long the most accepted market measure of short-term interest-rate moves – is heating up. Banks are testing alternatives to the London interbank offered rate, which is coming under increased scrutiny after regulators accused banks of manipulating the rate. Libor suffered a fresh blow to its credibility recently, when Barclays admitted that its traders attempted to maneuver the rate and agreed to pay fines totaling $455 million.

Libor is not a market determined interest rate; rather it is a trimmed mean from a survey of banks participating in a survey conducted on behalf of the British Bankers Association (BBA). There are a number of problems inherent in the survey-based Libor calculation. First, there is the stigma associated with a higher than average Libor posting. This stigma results in an under-reporting of Libor. Second, there have been incentives for banks to attempt to manipulate Libor by submitting Libor postings that would alter the trimmed mean. The ethics of such manipulation are materially different from the aforementioned stigma associated under-representative of Libor. Here the manipulation was an attempt to foster Libor rates that enriched trading operations of the submitting bank.

Japan’s Nomura Holdings Inc. and Swiss bank UBS AG are among banks trying out a rate linked to the market for repurchase agreements – GCF Repo Index, which is published by Depository Trust & Clearing Corp., the group that clears and settles financial contracts. Unlike Libor, the GCF index is based on actual, not estimated, rates paid for repurchase agreements, or “repos,” which are a crucial source of short-term funding for many banks. While some say the GCF Repo index might be a better barometer of bank borrowing costs than Libor, others counter that the index isn’t an easy substitute. They say repurchase agreements involve collateral such as Treasurys and are therefore less risky than loans in the Libor market.

Before Libor, banks and securities dealers tended to hedge their short-term interest-rate risk with futures on U.S. Treasurys. While bank funding costs can mirror Treasury rates, they often don’t track well during times of panic, when investors rush away from private borrowers and lend at very low rates to the U.S. government.

There are other measures of short-term borrowing costs, but none of them have become broad benchmarks on the scale of Libor. They include the Fed Funds Effective rate, an overnight rate at which banks lend to one another, as well as Treasury bill rates. Its detractors say the federal-funds rate is subject to changes in the Federal Reserve’s monetary policy. And there is uncertainty about how the market will react when the Fed eventually unwinds the entire monetary stimulus it has in place.

Finding a successor could take years. Libor has been growing in influence as a benchmark interest rate since the 1980s and currently is used to set rates for an estimated $800 trillion of derivatives and borrowings, including loans to consumers, companies and governments. Much like credit ratings, it is deeply embedded in the way financial markets function.

Economy

Is London losing its status as world’s top financial center?

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Home to about 250 foreign banks, London is the world’s biggest center for foreign-exchange trading and cross-border bank lending and trades $1.4 trillion of interest derivatives daily, according to the Bank for International Settlements. It is also ranked as the world’s number one financial center by research firm Z/Yen Group Ltd.

London now risks losing its status as the world’s top financial center as the $360 trillion interest-rate fixing probe follows a series of market abuses by banks that eroded trust in a city already shrinking faster than rivals.

JPMorgan’s trading loss of at least $2 billion, the alleged $2.3 billion fraud at UBS and the investigation of at least a dozen banks including Barclays for rigging global interest rates all happened in London in the last year. AIG, Lehman Brothers and Bear Stearns & Co. all traded swaps in London that led to their bankruptcies or bailouts.

It seems to be that every big trading disaster are now happening in London! I wish that BOE, FSA, BBA and others take necessary steps soon to  fix these aberrations.

Economy

What does society expect from the financial sector?

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In the panel discussions at BIS, Basel, Switzerland Mr. José de Gregorio, Universidad de Chile and former Governor of the Central Bank of Chile remarked on the subject on 24 June 2012. I have based this post on his remarks.

The financial system must operate in order to fulfill its goals without threatening financial stability or imposing costs at the aggregate level. What society really demands from financial systems is quite difficult to define. Society is a collection of actors, with different interests and different needs. People want access to the financial system at fair conditions. Therefore it is useful to think of society as everyone who is not related directly to the financial industry or policy making.

The society expects safer and fairer financial systems. Unfortunately, the view that financial markets were big casinos, where the betting was done with other people’s money and gamblers walked away unpunished, is quite common around the world. Undoubtedly, financial intermediation is good, and a well functioning financial system is key to prosperity. It promotes economic growth by channeling investment funds from savers to borrowers. It is central to promoting entrepreneurship and to facilitating investment, including human capital accumulation. It provides financing to households in order to smooth consumption, and provides insurance. It provides safe and cheap means of payment.

What went wrong?

First and foremost, the crisis was caused by the irresponsible behavior of the financial industry. The structure of incentives was unsuitable. It led to excessive risk-taking without proper risk management. Compensation was heavily biased towards deal-making, regardless of the quality of the deals. Commissions and fees were a very important component of the compensation scheme. In the end, all that mattered was granting credit indiscriminately, maximizing packaging and selling securities, etc. This was at the foundation of the originate-and-distribute model of financial services, and served to increase leverage to unsustainable levels. Well, linking compensation to productivity is efficient, but the devil is in the details.

There was indifference in policy circles. None of the policy makers saw it coming, at least not with the intensity with which it arrived, which still persists. Markets should provide enough discipline to balance risk and return, but that was not exactly the case. The market functioned poorly.

What else may go wrong?

Financial systems in emerging markets escaped from the crisis due to some extent to prudent regulation, built on a history of recurrent crises. But perhaps it was also due to the fact that they are somewhat slow to adapt to financial innovation. Indeed, many issues, such as the use of derivatives by the banking industry, were being discussed in emerging markets on the eve of the crisis.

Not everything is bright in emerging markets. There are many challenges. One issue that has not been a problem so far, but presents potential risks, is the role of public banks. If public banks are prudent and avoid jumping on the bandwagon of optimism during the upturn this is good – they may even soften credit constraints during the downturn. However, public banks may also be an instrument to pay back supporters of politicians, and certainly this is unfair and inefficient. Public banks may also be subject to capture by the electoral cycle, or used as an instrument to implement industrial policy.

An issue that has been on the agenda in most countries is financial consumer protection. It is important, however, for consumer protection to form an integral part of the regulatory infrastructure in order to avoid inconsistencies among agencies and risks to depositors and overall financial stability in the name of protecting consumers. Consumer protection also has a high risk of being captured by the political cycle. This could be specially damaging in the financial system – and therefore every effort should be made to make the institutions safeguarding financial consumers autonomous and technical.

Today we have the opportunity to tackle the task of building a safer and fairer financial system, but we also have to avoid shortcuts that may end up rebuilding a weaker financial system.

Economy

Are western banks ruining reputation of banks?

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Bank of England governor Sir Mervyn King has called for a change in the banking culture, saying that customers have received “shoddy” treatment. He added that bank leaders had “let down” the many honest and hard-working people in the financial sector.

Sir Mervyn’s comments come on the day banks were found to have mis-sold financial products to small businesses. It is the third major scandal this year, following manipulation of lending rates and loan insurance mis-selling.

Speaking at the launch of the Bank’s twice-yearly Financial Stability Report, Sir Mervyn demanded immediate and far-reaching action to reform the structure and culture of the UK banking industry. He said: “That goes to both the culture in the banking industry and to the structure of the banking industry, from excessive levels of compensation, shoddy treatment of customers, to deceitful manipulation of one of the most important interest rates and now this morning to news of yet another mis-selling scandal.”

He called for the government to implement the recommendations of the Vickers Commission on banking, which said that more risky investment banking should be separated from day-to-day banking needs of individuals and small businesses.

His comments were echoed later by the Prime Minister, David Cameron, who said at the EU summit in Brussels: “British people are crying out for a return to good old-fashioned banking… and not put that at risk by big investment banking.”

As well as ripping off their customers, they have also harmed the reputation of banking business as a whole. Greed is what drives the Corporate masters and it is this need for greed which causes Corporations to make the decisions that they make on a regular basis.

The reputation of the banks and the bankers are at stake by such wrongdoings by major western banks. Needless to say that the basic tenets of banking is trust and it should not be diluted under any circumstance.  They should feel deep shame for the damage they have done to the reputation of the business of banking and those who are associated with it.

Economy

The internal audit function in banks

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A strong internal control system, including an independent and effective internal audit function, is part of sound corporate governance. An internal audit function provides vital assurance to a bank’s board of directors and senior management (and bank supervisors) as to the quality of the bank’s internal control system. In doing so, the function helps reduce the risk of loss and reputational damage to the bank.

The internal audit should function with sufficient authority, stature, independence, resources and access to the board of directors. Independent, competent and qualified internal auditors are vital to sound corporate governance.

The Basel Committee on Banking Supervision has recently issued in June 2012 revised supervisory guidance for assessing the effectiveness of the internal audit function in banks, which forms part of the Committee’s ongoing efforts to address bank supervisory issues and enhance supervision through guidance that encourages sound practices within banks. This document seeks to promote a strong internal audit function within banking organizations and to provide guidance for the supervisory assessment of this function.

An effective internal audit function provides independent assurance to the board of directors and senior management on the quality and effectiveness of a bank’s internal control, risk management and governance systems and processes, thereby helping the board and senior management protect their organization and its reputation.

The bank’s internal audit function must be independent of the audited activities, which requires the internal audit function to have sufficient standing and authority within the bank, thereby enabling internal auditors to carry out their assignments with objectivity. Professional competence, including the knowledge and experience of each internal auditor and of internal auditors collectively, is essential to the effectiveness of the bank’s internal audit function. Internal auditors must act with integrity.

The internal audit function should not be involved in designing, selecting, implementing or operating specific internal control measures. However, the independence of the internal audit function should not prevent senior management from requesting input from internal audit on matters related to risk and internal controls. Nevertheless, the development and implementation of internal controls should remain the responsibility of management.

Every activity (including outsourced activities) and every entity of the bank should fall within the overall scope of the internal audit function. The scope of the internal audit function’s activities should ensure adequate coverage of matters of regulatory interest within the audit plan.

There should be proper communication among the Head of Internal Audit, the Audit committee and bank supervisors. The main responsibility, nevertheless, lies with the Audit committee. The significance of internal audit has increased manifold after the recent revelations of malpractices in major international banks causing huge loss to the banks and the shareholders besides reputational damage.

Economy

Effective Cash Management in Banks

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Cash is to a business is what blood to a living body. In a business anything done financially affects the cash eventually. A business cannot run without its life blood cash and without cash management there may be no cash remaining to operate.

Cash movement in a business is a two-way traffic. It keeps on moving in and out of business. The inflow and outflow of cash never coincides. Important aspect, which is attached to cash is the fourth dimension – time associated with the movement of cash. Due to non-synchronicity of cash inflow and outflow, the inflow may be in excess of the outflow or vice versa at any particular point of time. Hence there is a direct need to control its movement through skillful cash management. The primary aim of cash management is to ensure that there should be enough cash availability when the needs arise, not too much but never too little.

Effective cash management processes are pre-requisites in banks to execute payments, receivables and manage liquidity. Banks are most significant players in any financial markets. They are the biggest purveyors of credit and they also attract most of the savings from the population. Banks also act as crucial channels of the governments in their efforts to ensure equitable economic development.

Cash management is a broad term that refers to collection, concentration, and disbursements of cash. It encompasses bank’s level of liquidity, its management of cash balance, and its short-term investment strategies. In some ways, managing cash flow is one of the most important jobs in today’s scenario. Efficient cash management involves monitored outflow and inflow of cash to improve liquidity and returns while implementing adequate controls to manage risks. Cash management is achieving tradeoff between liquidity and profitability.