Within the sectors, the agriculture sector experienced a modest growth of 0.8% compared to 2023. In comparison, industries witnessed a significant contraction of 23.4%, and services declined by 5%, as reported by the department.

The central bank of Sri Lanka projects a GDP contraction of 2% for 2023, while the International Monetary Fund (IMF) estimates a more substantial contraction of 3%.

“Sri Lanka’s economy is showing tentative signs of improvement, in part due to the implementation of critical policy actions. But the economic recovery remains challenging. Now, more than ever, it is essential to continue the reform momentum under strong ownership by both the authorities and the Sri Lankan people,” IMF’s Deputy Managing Director Kenji Okamura said, during his two-day visit to the debt-ridden South Asian island nation.

Okamura’s visit came after the IMF’s March 2023, 2023 approval, which ensured 48-Month arrangements of about USD 3 billion under the Extended Fund Facility (EFF) with Sri Lanka. The official also noted that the island nation’s current economic crisis had its genesis in policy missteps aggravated by external shocks.

The first-quarter contraction was slightly higher than anticipated, ranging between 9% and 10%. However, experts, such as Shehan Cooray, the head of research at Acuity Stockbrokers, predict a return to positive growth in the year’s second half.

To stimulate the economy, Sri Lanka’s central bank recently cut its first interest rate in three years, reducing speeds by 250 basis points. Cooray believes that an increase in private-sector credit, expected to occur within the next six to nine months, will positively impact economic growth.

In 2022, Sri Lanka’s economy contracted by a record 7.8%, resulting in a severe financial crisis due to plummeting foreign exchange reserves. The country’s situation began to improve after securing a USD 2.9 billion bailout from the IMF in March 2023, along with enhanced dollar inflows and some reduction in inflation. However, completing debt restructuring talks before September remains crucial for the first IMF review.

The post Crisis-ridden Sri Lanka’s economy shrinks 11.5% appeared first on International Finance.

Following the 2008 crisis, central banks, regulators, and decision-makers were compelled to adopt exceptional measures. As a result, banks are now more capitalized, and the global financial system is experiencing less money sloshing. But new threats have also developed, as well as some old ones. The article will draw on ten years of financial markets research to examine what has changed and what hasn’t happened in the banking sector since the crisis.

Banks are safer but less profitable

Following the crisis, authorities and policymakers all around the world took action to fortify banks against potential shocks. For US and European banks, the average Tier1 capital ratio increased from less than 4% in 2007 to more than 15% in 2017. According to Jerome Powell, all banks now keep a minimum level of liquid assets. He stated that the largest systemically significant financial institutions must hold an additional capital buffer.

Scaled back risk and return

Most of the biggest international banks have scaled back their trading activity during the last ten years, including proprietary trading for their own accounts, which has decreased risk exposure. However, despite the extremely low-interest rates and new regulatory frameworks, many banks with headquarters in industrialized economies have been unable to develop new, viable business models. Since the crisis, the return on equity (ROE) for banks in advanced economies has decreased by more than half. For European banks, the pressure has been the strongest. They had an average ROE of 4.4% over the previous five years as opposed to US banks’ 8%.

Banks are only modestly valued above the book value of their assets by investors, who have a pessimistic view of growth prospects. The price-to-book ratio of banks in advanced nations was at or slightly below 2% before the crisis, reflecting expectations of rapid development. However, most advanced economy banks have had average price-to-book ratios of less than one since 2008. (including 75% of EU banks, 62% of Japanese banks, and 86% of UK banks). Nonperforming loans are a burden on the banking system in several emerging economies. More than 9% of all loans in India are non-performing. The recent currency decline in Turkey may increase the number of defaults.

In the post-crisis era, the best-performing banks have been those that have drastically reduced operational expenses while also hiring more risk-management and compliance personnel. In general, US banks have reduced more drastically than their European counterparts. But unless the sector revives revenue growth, banking might turn into a low-margin, commoditized enterprise. The industry’s average annual global revenue growth from 2012 to 2017 was only 2.4%, a sharp decline from the euphoric pre-crisis years of 12.3%.

Digital disruption

New digital players are posing a threat to established banks, just like they are to incumbents in every other industry. Platform firms like Alibaba, Amazon, Facebook, and Tencent threaten to snatch up some market share; this is already happening in the world of mobile and digital payments. According to predictions made by McKinsey’s Banking Practice, the banking sector’s ROE might reach 9.3% in 2025 as interest rates rise and other favorable factors come into play. However, if retail and business consumers transfer to digital providers at the same rate that people have in the past for new technologies, the industry’s ROE may decline much lower.

However, technology threatens more than just banks. It might also provide them with the boost in productivity they require. For increased efficiency, several institutions have already begun to digitize their consumer-facing and back-office activities. They can also improve how they employ big data, analytics, and artificial intelligence in risk modelling and underwriting. By doing this, they may be able to avoid the kinds of bets that went wrong during the 2008 financial crisis and increase profitability.

Global banks retrench

Banks in the Eurozone have taken the lead in this decline in global activity by becoming more regional and less national. Since 2007, their total foreign debts and other claims have decreased by $6.1 trillion, or 38%. Reduced intra-eurozone borrowing accounts for about half of the drop (and especially inter-bank lending). German banks, for example, had two-thirds of their assets located outside of Germany in 2007, but that number has since dropped to one-third.

The amount of business conducted abroad has decreased for some US, Swiss, and UK institutions. Since the financial crisis, banks have sold more than $2 trillion worth of assets worldwide. Global banks’ cutbacks are a result of a number of factors, including a new assessment of country risk, the realization that doing business abroad is frequently less profitable than doing business at home, national lending policies that favor domestic lending, and new capital and liquidity regulations.

The biggest international banks have also reduced their correspondent links with local banks abroad, particularly in emerging nations. Banks can conduct different types of business in nations where they do not have their own branch operations because of these connections. These services have been crucial for remittances, trade financing, and providing underdeveloped nations with access to valuable currencies. However, due in large part to a new evaluation of risks and regulatory complexity, global banks have begun adopting a tougher cost-benefit analysis of these connections.

A few banks, most notably those from China, Japan, and Canada, are diversifying their international operations. Due to the saturation of their domestic market, Canadian banks have expanded into the United States and other markets in the Americas. Japanese banks are expanding their footprint in Southeast Asia and increasing syndicated lending to US corporations, albeit as modest investors. Banks in China are increasing their loans internationally. They used to have almost no overseas assets, but today they have more than $1 trillion. The majority of China’s loans go toward supporting Chinese companies’ outbound foreign direct investment (FDI).

FDI is now a larger share of capital

From a peak of $3.2 trillion in 2007 to $1.6 trillion in 2017, global FDI has decreased, but this decline is less dramatic than the decline in cross-border financing. In addition to reflecting a substantial fall in cross-border investment in the eurozone, it also represents a decline in the number of firms using low-tax financial hubs. However, FDI accounts for 50% of cross-border capital flows in the post-crisis period, up from the average quarter before the crisis. Contrary to short-term funding, FDI shows enterprises adopting long-term business expansion initiatives. It is unquestionably the least erratic form of money movement.

According to Ben Bernanke, the “global savings glut” produced by China and other nations with sizable current account surpluses is what is causing interest rates to drop and the real estate bubble to expand. Interest rates were pushed lower because a large portion of this capital surplus was invested in US Treasuries and other government bonds. The result was a reallocation of portfolios and ultimately a credit bubble. This pressure has now decreased, along with the danger that unexpected withdrawals of foreign cash will plunge nations into crisis.

The reductions in China’s current account surplus and the US deficit are the most notable improvements. China’s surplus peaked in 2007 at 9.9% of GDP but has since dropped to just 1.45 of GDP. The US deficit peaked at 5.9% of GDP in 2006, but by 2017, it had dropped to 2.4%. Large deficits have similarly decreased in Spain and the UK. There are still some imbalances. The previous ten years have seen Germany maintain a sizable surplus, while certain emerging nations, such as Argentina and Turkey, have deficits that put them at risk.

Corporate debt danger

There is a risk associated with the increase of corporate debt in developing nations, especially if interest rates rise and the debt is issued in foreign currencies. Companies may become trapped in a vicious cycle that makes it impossible to repay or refinance their debt if the local currency depreciates. At the time of writing, a sharp depreciation in the Turkish currency is causing market tremors that expose international and EU banks.

Credit quality has decreased as the market for corporate bonds has expanded. Non-Investment grade “junk” bonds have seen significant growth. Even investment-grade quality is no longer acceptable. 40% of the country’s outstanding corporate bonds have BBB ratings, which are one step above trash status. We estimate that 25% of corporate issuers in emerging markets are already at risk of default; if interest rates increase by 200 basis points, that percentage may increase to 40%.

A record number of corporate bonds will mature globally during the following five years, and there will be a $1.6 trillion to $2.1 trillion yearly requirement for refinancing. It is reasonable to anticipate more defaults in the years to come given that interest rates are rising and some borrowers already have precarious financial situations. The significant increase in collateralized loan commitments is another issue that merits close attention. These instruments, which are related to the collateralized debt obligations that were popular before the crisis, use loans to businesses with poor credit ratings as collateral.

Mortgage risk

One of the lessons from 2008 is how challenging it is to spot a bubble as it inflates. Real estate prices have increased dramatically since the financial crisis in high-demand real estate areas including San Francisco, Shanghai, and Sydney. Contrary to 2007, these run-ups are typically confined, and crashes are less likely to result in widespread collateral damage. But sky-high urban housing costs are also a factor in other problems, such as a lack of affordable housing options, financial strain on families, restricted mobility, and rising wealth disparity.

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Shadow banking is considered one of the major flaws in the financial system that contributed to the global financial crisis. Paul McCulley, an economist, first used the phrase “shadow bank” in a 2007 lecture at the annual financial conference held in Jackson Hole, Wyoming by the Kansas City Federal Reserve Bank. In Paul McCulley’s talks, shadow banking had a distinctly US focus and referred mainly to nonbank financial institutions that engaged in what economists call maturity transformation. Traditional banks engage in maturity transformation when they use deposits, which are normally short-term, to fund loans that are longer-term. Shadow banks do something similar. In the money markets, they raise (or, more often, borrow) short-term funds that they have and then utilize them to purchase assets with longer-term maturities. However, because they are not subject to regular bank supervision, they cannot borrow money from the Federal Reserve (the US central bank) in an emergency, unlike banks, and they do not have conventional depositors whose funds are insured, therefore they are considered to be in the “shadows.”

How does shadow banking work?

In the traditional lending model, a bank’s ability to lend depends on how much money it can borrow from the market and how much money it gets in deposits. The same principles apply to shadow banking as well. An investment fund, for instance, receives funding from investors and issues shares of the fund in exchange. The investment fund utilizes this money to purchase securities in an effort to generate a return on investment for its investors (for example, a bond issued by a country or company).

The investment fund acts as the channel linking investors and countries/companies to earn an investment return, just as the bank acts as the ‘middleman’ between savers and borrowers to earn a specified interest rate. Shadow banking firms act like banks by obtaining funding from investors and then lending this money to nations or businesses.

Many experts were initially drawn to shadow banks due to their increasingly important role in turning home mortgages into securities. The “securitization chain” began with the issuance of a mortgage, which was later purchased and sold by one or more financial institutions before becoming a part of a group of mortgage loans that served as the collateral for a security that was sold to investors. A mortgage-backed security’s value was linked to the value of the mortgage loans included in the package, and its income was funded by the interest and principal payments that the borrowers made on their own mortgage loans. From the mortgage’s inception to the sale of the security, almost all steps were completed out of regulators’ direct line of sight.

A group of financial and supervisory authorities from major economies and international financial institutions known as the Financial Stability Board (FSB) developed a broader definition of shadow banks that encompasses all entities outside the regulated banking system that carry out the core banking function, credit intermediation (that is, taking money from savers and lending it to borrowers). The four main facets of intermediary are as follows: maturity transformation which means obtaining short-term funds to invest in longer-term assets; liquidity transformation, a concept similar to maturity transformation that entails using cash-like liabilities to buy harder-to-sell assets such as loans; leverage which means employing techniques such as borrowing money to buy fixed assets to magnify the potential gains (or losses) on an investment; credit risk transfer which means taking the risk of a borrower’s default and transferring it from the originator of the loan (or the issuer of a bond) to another party.

By this definition, broker-dealers that use repurchase agreements to fund their assets would be considered shadow banks. In a repurchase agreement, an organisation that needs money sells a security to raise the cash and then promises to buy the asset back at a set price and on a set date to pay back the borrowed money.

Shadow banks are money market mutual funds that aggregate investor money to buy commercial paper (business IOUs) or mortgage-backed securities. Financial institutions that sell commercial paper (or other short-term obligations) and use the proceeds to provide loans to households are also included in this category. These intermediation services are currently being performed by a wide variety of businesses, and they are continuously expanding.

What oversight is there of shadow banking?

The majority of the shadow banking system in the EU is heavily regulated. Resident money market funds, investment funds, and finance businesses are subject to regulation in Ireland. Irish-resident special purpose entities are not regulated by the Central Bank as a sector, as is the case in other jurisdictions. However, compared to other jurisdictions, the Central Bank enforces more stringent reporting requirements on special-purpose corporations, which makes it easier to keep an eye on shadow banking activity.

Experts say, mainly because they obscure the shapes and sizes of objects within them, shadow banking can be frightful. Due to the fact that many of the shadow banking system’s companies do not file reports with government regulators, estimating its size is extremely challenging. The shadow banking system looked to be most prevalent in the United States in the years leading up to the global financial crisis, although nonbank credit intermediation existed in other nations and is still expanding, especially in China. Since 2011, the FSB has examined all nonbank credit intermediation as part of a “global” monitoring operation.

The G20’s 20 largest advanced and emerging market economies have mandated the exercise, which now includes the European region and 28 other countries. The first findings were unreliable since they included “other financial institutions” as a catch-all category, but today the FSB now looks at shadow banks by ‘function’ rather than an entity. Using the entity-based approach, the most recent report (data from the end of 2015) reveals that the US shadow banking system has decreased from 33% to 28%, making the euro area shadow banking system the largest globally at 33% of the total, up from 32% in 2011. The global shadow system peaked at $62 trillion, across the jurisdictions contributing to the FSB exercise in 2007. It dropped to $59 trillion during the crisis, then increased to $92 trillion by the end of 2015. According to the ‘functional’ category, which includes only 27 jurisdictions, asset-management-related operations account for about 22% of the $34.2 trillion in total shadow banking.

Although the FSB’s decision to focus on activities (rather than institutions) rather than institutions brings the measurement of risks closer, it is still insufficient to accurately assess the hazards that shadow banking poses to the financial system. Additionally, the FSB does not assess the amount of debt used to buy assets (often referred to as leverage), the system’s capacity to amplify issues, or the pathways by which issues spread from one industry to another (although there has been some attempt to gauge these latter linkages using balance sheet data between nonbanks and banks).

Over time, it has become clear that shadow banking in several countries is replacing banks’ function as credit intermediaries. Although it is still unclear what the underlying dangers are associated with these behaviours and whether they are systemically significant, we are getting better at tracking their scale.

What are the advantages/disadvantages of shadow banking?

Shadow banking has the benefit of reducing reliance on traditional banks as a source of financing. This is advantageous for the economy since it diversifies the financial system and serves as an extra source of lending. On the other hand, there is a chance that excessive lending in the economy could be a result of shadow banking. This has the potential to lead to a harmful downturn.

How big is the shadow banking system in Ireland?

Over €2.3 trillion in assets were thought to be held by the shadow banking sector functioning in Ireland as of the end of 2017. This makes the majority of investment funds, money market funds, and special purpose entities. They possess non-Irish assets and primarily represent foreign investors. This means links to the home economy are weak.

China’s message of shadow banking to the world

Considered the greatest economy in the world, China has also seen the danger of uncontrolled shadow banking. Following the global financial crisis, the Chinese government encouraged economic growth by providing easy lending and fiscal stimulus, much of which was distributed to the economy by shadow banks that were frequently linked to traditional banks. In 2019, the non-bank sector made up 8% of the nation’s financial industry, by 2016, it had increased to a third of it. The Chinese government covertly supported this trend, and in some cases actively promoted it.

“Shadow banking expanded rapidly based on a combination of regulatory arbitrage by banks trying to channel credit to restricted sectors, along with a widespread perception that government guarantees at some level, central or local, would ultimately backstop any losses,” says Logan Wright, Director of China Markets Research at Rhodium Group, a research firm.

While many inexperienced retail investors were entering the local stock market, problematic loans were steadily burdening Chinese financial systems with dangerously high levels of credit risk as the system developed leverage. Its crash in 2015, which caused major shares to lose up to a third of their value within a month, convinced the authorities that the non-bank sector’s growth posed a threat to financial stability. In response, regulators implemented reforms that mostly involved limiting the interest rates that shadow banks might charge in order to limit their ability to lend. As a result, from 2017 to 2020, the country’s shadow banking assets shrank by RMB11.5 trillion ($1.6 trillion), falling from over 100% of GDP to roughly 80%.

According to Logan Wright, the changes had undesirable side effects even if they were successful in shrinking the sector and lowering liability risks. As additional defaults happened as a result of numerous institutions being cut off from financing, credit risk increased significantly on the asset side of the balance sheet. The crackdown effectively undid the financial system’s deepening, which had benefited underserved borrowers including lower-income people, while undercutting the government’s strategy to create the ‘shared prosperity’ development model, which is intended to promote more equal growth. Although their reliance on shadow banks increased during the COVID pandemic, SMEs, which banks have historically avoided in favour of lending to huge state-run businesses, were particularly hard impacted.

Real estate is another industry that has been severely impacted because some of the main users of shadow banking channels are property developers. The industry, which contributes up to 30% of the nation’s GDP, is currently experiencing a severe crisis, putting some of China’s major property developers at risk of going bankrupt.

“The deleveraging campaign contributed to the property market crisis by encouraging property developers to rely more heavily on pre-construction sales as a primary mode of financing,” says Logan Wright, adding, “Presales effectively became a substitute form of credit for shadow financing channels, which were contracting under the deleveraging campaign. This process also produced a significant expansion of housing supply and new construction at a time when fundamental demand among owner-occupiers was slowing.”

Falling real estate sales are increasingly affecting the banking industry and putting many non-bank businesses’ ability to stay afloat to the test. According to data provided by ‘Use Trust’, Chinese trusts missed payments on financial products with real estate connections totalling almost $9 billion in the second half of 2022.

According to University of Tennessee professor Sara Hsu, an authority on China’s shadow banking sector, one potential reaction would be to further expand the nation’s bond and stock markets.

Sara Hsu said, “The Chinese shadow banking system underscores the need to provide finance to SMEs and early regulation, as well as the need for market-based solutions, even though the West doesn’t have an exact analogue to China’s shadow banking system.”

Shadow banking across the world

In many other emerging economies with unbanked small businesses, shadow banking has risen quickly. An example of this is Mexico, where the tiny size of the banking industry and the low level of trust in SMEs have increased their desire for other finance sources. The credit provider AlphaCredit defaulted first, followed by Credito Real and Unifin, as the boom broke in 2022. Many other non-banks have since been affected by the contagion, and they are now financing themselves with ever-higher interest rates. In total, the three insolvent businesses loaned nearly $6 billion, in addition to releasing about $4 billion in unsecured bonds and debt to international banks. As hundreds of smaller businesses fear running out of financing, the crisis has spread to the actual economy.

Victor Herrera, Partner at Miranda Ratings Advisory, a Mexican financial services firm, and former CEO of S&P Global Ratings in Mexico, said, “Contagion has already set in, and it is very difficult for all remaining players to obtain funding and refinance maturities.”

The economy of the nation is impacted more broadly by default on shadow bank bonds. “Normal Chapter 11 procedures have not been followed and bondholders feel they have been mistreated because of Mexican debt restructuring practices,” Victor Herrera said, adding, “All bond issuers in Mexico, regardless of the sector they are in, will suffer the reputational effect.”

The overarching problem, according to Victor Herrera, is the lack of regulation and supervision. “One questions why a $100 deposit in the bank benefits from ample regulatory supervision, but if a doctor or teacher buys a $100 bond, no government body monitors the risk the retail investor is undertaking, many times without knowing it,” he added.

The crisis ahead

Many analysts worry that authorities may soon discover they have even less control and comprehension of the non-bank financial sector than they anticipated as gloomy clouds gather over the global financial system. The amount of the correction is impossible to forecast because “shadows” do not promote openness, according to Copsey from ABL Business. Increased borrowing costs may have caused asset valuations to become overvalued, which could cause problems with liquidity or possibly insolvency. The financial sector is also facing issues from the oil crisis and the conflict in Ukraine, but complexity is likely the largest problem. According to McMahon of Parallel Wealth Management, “We just don’t know what the trigger event will be.”

The post Shadow Banking: Threat to global economy appeared first on International Finance.

Particularly younger people prefer using this payment method over credit cards. The report stated that nearly 60% of consumers are using this payment method.

PYMNTS’ survey respondents provided several explanations for their preferences. According to respondents, ‘Buy Now, Pay Later’ payments are easier to manage than credit card repayments, there is a simple approval process, and ‘Buy Now, Pay Later’ options do not carry interest if the debt is paid back on time.

According to Insider Intelligence, this preference is fueling a surge in ‘Buy Now, Pay Later’ services. The Consumer Financial Protection Bureau (CFPB), which has plans to regulate ‘Buy Now, Pay Later’ corporations similarly to how it regulates credit card companies, has expanded regulation of these services.

However, a large number of new businesses have emerged to provide ‘Buy Now, Pay Later’ services, and by the end of 2022, the value of the sector is anticipated to exceed USD 76.20 billion in US payments volume.

Consumers Should Be Cautious
The growing accessibility of ‘Buy Now, Pay Later’ services is both a blessing and a curse for consumers. According to Christine Roberts, CEO of Citizens Pay, a ‘Buy Now, Pay Later’ service provided by Citizens Bank, many younger customers are drawn to such services since they saw their parents suffer from credit card debt during the 2008 financial crisis and many perceive ‘Buy Now, Pay Later’ services as a “safer” alternative.

This might be accurate in some circumstances. Numerous ‘Buy Now, Pay Later’ services automatically verify your payment information and plan out your next payments. This means you won’t need to keep track of when to pay back your purchases. You typically won’t pay interest on your debt if these payments are completed on schedule.

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Nandalal Weerasinghe recently said that he thought inflation had reached its peak, even though the crisis-hit country still needed to fix its economy and finances.

In September, a key indicator of Sri Lanka’s consumer inflation rose to 69.8%. This shows the central bank’s problem as the South Asian country deals with an unprecedented financial crisis.

Nandalal Weerasinghe, however, asserted in the interview that “it will be turning around, and if that is lower in October, as we anticipate, then we can see that trend will continue.”

It is still being determined whether the central bank will stop raising interest rates for a long time.

Nandalal Weerasinghe said that, in addition to the inflation rate, “We need to evaluate the forecast, expectations, monetary expansion, the growth forecast, the level of reserves, and the policy on the exchange rate.”

Even though price increases were expected to slow down in December and January, the governor said the bank must keep rates high this month to fight inflation.

Sri Lanka started talking with its creditors about reorganising its debt last month, and officials are hopeful that a deal with the International Monetary Fund could be reached before the end of the year.

The International Monetary Fund and the government have agreed that the administration will give the legislature the budget for 2023 in the middle of November. This budget is expected to feature increased taxes and broader reforms of state-owned firms.

Sri Lanka had a financial crisis in 2019 because of several rating downgrades caused by the epidemic and the effects of significant tax cuts. This made it impossible for Sri Lanka to access global financial markets.

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A total of 44% of respondents said they expected a financial crisis worse than 2008. Additionally, over a third of those polled (41 per cent) said they are expecting to see a housing crash happen this year.

Only 14% of the population said they had forgiven the banks after the 2008 financial crash, according to a new poll from Spearvest, the wealth management firm.

As well as this, there is a significant distrust from consumers that banks have their best interests at heart. The survey found that over half (55%) did not believe this to be true, with only 13% believing they did.

The poll also found that consumers want banks to do more for good causes with 60% believing that banks should donate and fundraise for charities more.

The post Consumers expect a financial crash ‘worse than 2008’ this year appeared first on International Finance.

In a recent report Goldman Sachs warned Italy risks falling into a new recession, suggesting financial markets could end up forcing the government to change its economic policy. Investors are far from reassured by the political instability created by the Italian populist government, which has engaged in a “budget saga” with the European Commission for months. Brussels said that Italy’s budget plans were in “particularly serious non-compliance” with the rules, raising doubts about the solidity of Italy’s public finances due to its massive public debt pile. This has led some commentators to make a comparison with a Greece-like crisis. However, the circumstances that put Rome under the European Commission radar are very different from those that brought Athens under the Trioka’s supervision. Italy’s problem is so not much of a financial nature, but in its absence of political will in observing the rules of the European Monetary Union (EMU).

The row between Brussels and Rome has had a direct impact on Italian banks, which are the main buyers of Italian sovereign bonds, while investors’ demand for Italian debt has slowed down considerably and the sale of bonds dropped. A bigger selloff in two-year debt prompted deep concerns about the nation’s near-term financial solidity, mixed with the European Central Bank’s decision to tweak capital key and adjust the capital shares of national central banks in 2019, cutting Italy’s share in bond-buying. Moreover, it’s still unclear how the ECB will deal with its holdings of Italian securities as it rolls back gradually its loose monetary policy.

Niall Walsh, an analyst at Oxford Analytica, says “market optimism is unlikely to last for long” if the Italian government doesn’t respond adequately to EU’s demands the equity market could fall again and the spread could widen above 300 basis points. If interest rates on debt repayment were to grow to levels over 4%, the write downs of Italian banks on their government bond holdings would be so high that they would have problems with their capital ratios. Walsh noted “if the spread widens to 400 basis points, they will likely require fresh capital injections”.

Mario La Torre, a finance professor at the Sapienza University in Rome, also agrees that higher spread will impact first on the value of banks’ government bond portfolios, which lastly will put pressure on their free capital. However, he points out “Italy does not face any risk of a new banking crisis as the Italian banking system has put in place a significant effort in cleaning their balance sheets from non-performing loans”, while its largest banks have performed well at the last European Banking Authority (EBA) stress test.

Overall the Italian banking system doesn’t show any particular deviations that could trigger fears of a new crisis. According to figures from the Italian Banking Association (ABI) in October 2018 the spread between the average lending rate and the average rate on household and non-financial corporations funding remained at 188 basis points, showing a sharp decrease from more than 300 basis points prior to the onset of the previous crisis.

The Italian financial system, unlike the Greek one, can count on current account surplus and its debt has a longer debt maturity profile. Moreover, private savings and deposits offer a significant cash buffer, which makes it very unlikely that Italy would run out of money or miss its debt obligation, as instead was the case for Greece. The Italian national debt is about eight times larger the size of Greece’s debt, but over 70% is held by domestic creditors, and contrary to Greece, has yet no difficulty in refinancing its debt. Domestic savings can easily be used to cover for even a bigger fiscal deficit. Iain Begg, a Professorial Research Fellow at the European Institute of the London School of Economics (LSE), argues “we are still quite a way from a scenario equivalent to Greece because Italy is not insolvent, and unlike Greece, much of Italian debt is owned domestically by Italians”.

The nature of the Italian populist government, led by Eurosceptics forces, suggests that tension between Rome and Brussels is likely to continue in the upcoming months in the run-up to the European elections in May. However, the worst-case scenario of a possible “Italexit” is far from materialising anytime soon as that would have unquantifiable political and economic negative ramifications on Europe and the rest of the world.

The post Too big to fail but big enough to trigger a financial crisis appeared first on International Finance.

A decade on, and key economies have recovered. However, the scepticism towards banks has remained. This has in fact become a fertile ground for family offices to gain relevance again. Family offices have their roots in sixth century, when the King’s steward was held responsible for managing and safeguarding royal wealth. A modern family office, developed by financiers JP Morgan and Rockefellers in the 19th century, is one that manages private wealth and other family affairs. Since the 2008 financial crisis, the number of single-family offices in the UK has more than doubled to nearly 1,000, managing more than $1,000 billion in assets. One such company is Sun Global Investments, which manages a portfolio of nearly $350 million, comprised of ultra highnet worth (UNHWs) individuals and families. Based in London, Sun Global Investments focuses on idea-centric and innovative wealth management, covering emerging and developed markets.

One of the most critical aspects that led to the success of Sun Global Investments family office operations was the lack of personalised counsel for UNHWs and families, especially after the economic crisis following which banks were focused more on revenue generation. Udit Garg, head of wealth management, says, “Even for basic banking assistance, there are no resources available in the UK. So UNHW individuals and families felt even more at sea due to the lack of specialized, sophisticated assistance. This is what we wanted to address.”

In the UK alone, the number of high net worth individuals stood at 448,000 in 2009, and this number rose to 568,000 by 2016, according to Statista. Given the propensity of international businesses and sustained migration, this number is likely to increase over the years, feels Garg. “The role of the family office has really evolved in the last decade. We are witnessing an increase in investors, who are intelligent but lack the time to plan their investments. Family offices act as natural influencers on families as we manage their assets, understand their financial needs and plan their investments.”

Infact, Garg says it better.” We look at the emotional side of Financial Needs of our clients first & so its EQ before IQ”.

As technology and communication is making the world more connected and accessible, these two factors have even brought about a significant change in investor outlook. There is a heightened increase towards Green investing, with a foreseeable 15% increase annually. Garg believes this is a reflection of social awareness and investor maturity. “The new generation of investors are keen on paying forward and this ethos reflects in their investing behaviour. While investors are cautious, they are not averse to new avenues of investment, provided they understand the impact and scope for financial returns.”

One of Sun Global Investments most popular green investments is Smixin, a smart hand washing system that considerably reduces the use of water and soap. The company is intent on reaching its goal to save 10 billion litres of water by 2021. Sun Global Investments owns a significant part of the company, through investors as well as key management personnel, committing over $10 million in it. This is the company’s first major green investment, and Garg says investors are excited by the prospect of tangible social change. Moreover, with governments providing incentives and tax breaks for environmentally friendly initiatives, which makes it a more compelling cause for investment. Another project that’s in the works is related to tyre recycling, which directly tackles improper methods of landfills in developing nations, in which Sun Global Investments has invested $500,000.

Social impact, which can be seen to yield tangible results, is also luring investors who have the intent and capital to spend. Garg explains, “For the longest time, clients were wary of CSR activities as they were unsure of the gains and proposed impact on the masses. There is still a lot of goodwill among wealthy investors, but they’re also equally savvy and smart to ask where their money is being spent.” He elaborated about a CSR activity that Sun Global is working on for one of their key clients, which involves supplying food to the homeless across London’s tube. Not only did Sun Global help carry this out, but the company’s management personally invested in the cause too. Garg says, “Putting your money where your mouth isn’t easy, but wealth managers personally chipping is a huge show of trust and investor maturity. What we do is to ensure this investment is profitable financially and personally.”

Financial services across the world is being taken over by technology, but what Garg does is something that thrives on the personal touch. “People come to us with their hardearned money, with the hope that we can manage it responsibly. We bring with us a wealth of real, tangible experience, which I don’t see machines or technology replicating anytime soon.”

The post The Green Reaper: How to Responibly Multiply Your Assets appeared first on International Finance.

The shift in CFOs’ supply chain involvement is a direct result of the cost-pressure that organisations are faced with in increasingly competitive markets – markets that have also become prone to various waves of disruption. From the financial crisis to natural disasters and political upheaval, there are associated costs that CFOs must contend with and a better understanding of their organisations’ supply chains, helps CFOs be better prepared for all eventualities.

Disruption on the rise

In 2016, one in every three organisations reported losses exceeding $1 million (approximately £750,000) in just one year according to the BCI Supply Chain Resilience Report, with loss of productivity, cost of working and damage to brand reported to have had the biggest impacts on organisations. And those losses are on the rise. Between 2015 and 2016, the loss of productivity rose from 58 percent to 68 percent while the cost of working rose from 39 percent to 53 percent. Reported damages to brand or reputation rose by almost 30 percent in the 12-month period, but the most shocking figure is the 43 percent of organisations that failed to insure for losses they encountered.

CFOs that are yet to take a deeper interest in their organisations’ supply chain can mitigate the risks associated with disruption, no matter how unexpected. But achieving this requires the CFO to have the clearest possible visibility of the supply chain as a whole. 2016’s Supply Chain Resilience Report also revealed that 66 percent of respondents did not have full visibility of supply chains, so those CFOs ready to roll up their sleeves must be provided with a high level of visibility.

A clearer view

Once CFOs are provided with a greater view of the supply chain, they will be able to effectively recognise problem areas where greater efficiency and other cost saving measures can be applied, with the added ability to plan and model the supply chain for various disruptive scenarios.

Nike is a prime example of an organisation using supply chain design to improve its competitive advantage and safeguard against disruption. The sports brand is in close competition with its rivals and has identified the reduction of lead times to the end customer as the area where it can glean a strong consumer-driven competitive advantage. Through close analysis of its supply chain, Nike has been able to meet is consumer target, reducing the lead time from 60 days to just ten days, reformatting its shipping network with strategically located nearshore facilities and investments in automation increasing efficiency.

Such a feat is only achievable with relevant data easily accessible for analysis, as well as the ability to collaborate easily with supply chain executives and other internal stakeholders invested in the supply chain. Providing CFOs with a clear view means ensuring that data is easy to access, digest and adjust for various readings and angles, providing separate narratives and outcomes when planning for different scenarios.

The key to supply chain success

In order to assert their influence on the supply chain, CFOs require the right supply chain design software that enables them to access, manipulate, share and discuss live data from all points of the supply chain. Only when provided with this digital toolkit can CFOs make informed decisions that impact the bottom line.

Data manipulation is essential to effective scenario planning, ensuring that the supply chain is safeguarded against any potential disruption. Software that enables the user to run different scenarios and simulate the effects of disruption on the models being tested will help CFOs make certain that the supply chain can withstand the same real-world scenarios.

Collaboration with executives and stakeholders across the supply chain is perhaps one of the most important aspects for the CFO, yet traditionally there would have been very little communication between either party. Effective supply chain design software must provide all who are invested in the supply chain with easy means of communication within the platform, providing an even greater level of visibility in supply chain operations while also promoting collaboration.

While organisations are becoming increasingly prone to disruption and are counting the costs, the CFO is presented with a significant opportunity to take greater control in the organisation’s financial stability through smarter, more informed decisions based on clever use of data and easier collaboration. With the right supply chain design software, this is now entirely possible.

The post Why CFOs should be involved in the supply chain for financial stability appeared first on International Finance.

President Trump however, withdrew from the pact in May,claiming that it would not prevent Iran from making nuclear weapons. He then followed up earlier this month with his decision to reimpose economic sanctions on Iran.

“As we continue applying maximum economic pressure on the Iranian regime, I remain open to reaching a more comprehensive deal that addresses the full range of the regime’s malign activities, including its ballistic missile program and its support for terrorism,” Trump announced.

The sanctions take effect November 4. Oil and crude exports form the backbone of Iran’s economy and represent the primary source of revenue and foreign currency for the government.

Authors of the Oxford Economics report state that it is unlikely that any efforts by other world powers can help Iran find a way to export oil.

“It now looks like the impact will be worse than we initially thought as the other signatories to the original deal have yet to spell out a clear strategy that would allow them to circumvent U.S. sanctions and continue importing Iranian oil,” wrote Mohamed Bardastani and Maya Senussi, the report’s co-authors, who are also senior economists with Oxford Economics.

“While deteriorating economic conditions will be painful for most Iranians, a real domestic political challenge to the current regime and a genuine change in its foreign policy (one of the main objectives of re-instating US sanctions) are nevertheless unlikely as both reformers and conservatives are united in defying the sanctions,” they added.

Iranian President Hassan Rouhani on Tuesday, failed to convince the country’s parliament that his plans will pull the country out of an economic nosedive worsened by America’s withdrawl from the nuclear deal. This further isolated his relatively moderate administration amid a current of nationwide anger.

For only the second time in its history, parliament ordered a sitting president to appear before it to answer questions, the last time coming amid widespread discontent in 2011 over Western sanctions during the government of hard-line President Mahmoud Ahmadinejad.

Rouhani did for a moment conceed to some of his errors.

“We have made mistakes,” he acknowledged at one point.

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