The Financial Services Club's Blog

Eurocrash! The Musical

One of the good friends of the Financial Services Club is David Shirreff, European Business Correspondent for the Economist.

David’s written a few amusements outside work, including a couple of musicals.  The last one was Broke Brittania, a musical all about our wonderful Gordon Brown and his attempts to destroy Britain’s economy (Ed: did I say ‘attempts’ … thought he succeeded?).

Now David and his compatriots Russell Sarre (music) and Ross Livingstone (direction) have come up with another timely piece of fun: Eurocrash! The Musical. 

Meet Mark and Gilda – the Hansel and Gretel of Euroland – as they discover the fantasy world of European monetary union.

Meet Papa Kohl and Madame Mitterrand, the charming couple who hold it all together; meet the Snake, a clanky prototype; Jean-Claude Trichet, the last great eurocrat; the PIIGS, paying for past profligacy; the dark eminence of the mighty Bundesbank; and the wild, exotic currencies of central Europe.

All this melds together into a musical that sits somewhere between Gilbert & Sullivan and Berthold Brecht, with hard-hitting lyrics and great songs.

David promises me that it is a thoroughly entertaining show around an hour long, which will appeal to experts and laymen alike. No previous experience of the single currency is needed.

EuroCrash! made its debut in Barnes, West London, in September 2011, and will run there for two more days in January (updated to take in the latest antics of Cameron, Merkel and Sarkozy). Then, by kind invitation, the musical is coming to Berlin and Frankfurt, before continuing for a short spell at the Cockpit Theatre in London.

 

Performances at:

The Old Sorting Office, Barnes, London (January 20th and 21st) 8pm

Tickets from the box office +44 20 8876 9885

Prime Time Theater, Berlin (January 24th to 26th) 8.15pm

Tickets at http://www.primetimetheater.de/spielplan.html 

The House of Finance, Campus Westend, 60323 Frankfurt (January 27th to 29th) 8pm

Tickets from the Campus Shop, Campus Westend, 069 798 34553 and Frankfurt Ticket

http://www.frankfurtticket.de/eventshows.SHOWS.musical.46332

The Cockpit Theatre, London (February 8th to 11th) 8pm

Tickets at http://www.thecockpit.org.uk/show/eurocrash_the_musical

 

2012: an economic outlook

2012 is here and we all hope it’s better than 2011.  Sure, some of you may have had a very good last year, but most thought it pretty dire with job losses, austerity measures, civil uprisings, protests, a second financial crisis in the Eurozone and more being the name of the day.

Time Magazine named their Person of the Year as a collective Protestor, rather than an individual …

And the Times named Mohamed Bouazizi - the young market trader who set fire to himself outside the government offices in Tunisia as a martyrdom act that fuelled the Arab Spring - as their Person of the Year.

Is this a time when societies worldwide change their world or will media, finance and government, continue to control and direct?

Probably a mixture of both.

Thanks to this internet age, the individual can change things and change things fast – the Arab Spring, Occupy Wall Street, Anonymous and Wikileaks prove this – but those in power will still direct, as far as they can.

The question may be who is in power, as demonstrated by the Eurozone issues of 2011.

Where are we going in 2012, is therefore a key question.

To put this question in context, I said three years ago that the next resurgence in the economy would be in 2014, after plateauing in 2012. 

I still believe that.

This year is going to be a tough one, as things haven’t finished yet, but things are stabilising. 

Europe’s going to a have a mild recession, America is going to revive and Asia is going to wonder where it’s going.

So here are the four key things that reflect the economic times of 2012:

1. Asia’s light continues to shine, but not quite as bright
2. American equities is the place to invest
3. There will be a major European bank failure
4. A country will leave the Eurozone

Asia’s light continues to shine, but not quite as bright

Asia, particularly China, continues to astound. 

 

From Urban Times, 2010 

Ten years ago, China had more mobile phone users than America, and last year it manufacturer more and registered more patents.  In 2014, its retailers will sell more too and the day that China becomes bigger than America is getting ever nearer.

In 2003 – when Jim O’Neill coined the term the BRICs for Brazil, Russia, India and China – he estimated that China’s economy would overtake America’s by 2041.  Last year, that estimate had moved fourteen years nearer, to 2027, thanks to the economic crisis.  As the crisis has continued, the estimate is now that 2018 will be the year China gets to be bigger than the USA, according to Emma Duncan in the Times.

Nevertheless, with the American and European market demands contracting, China is not sailing a static sea.  For example, Reuters Breaking Views blog states that China’s growth may dip under the magical 9% this year – even falling under 8% – as multiple challenges hit: falling house prices, a slump in property investment, and slowing exports.  Add to this that salaries surged 40% last year – admittedly to just $160 per month – and we can see that global growth and stability will not be plain sailing at all in 2012. 

 

Source: PhilSTAR / Bloomberg

So where should you invest?

American equities is the place to invest

In a bout of good news for Barack Obama, in the year where he fights for his political future against Mitt Romney, the US looks to be a safe bet for investments in 2012.

Terry Ewing, head of US equities at Ignis Asset Management, believes the US can continue to surge, as its economy has differentiating growth characteristics that will underpin both earnings growth and the stock market.

Mr. Euwing has expectations of 2% GDP growth, compared with the 'inevitable European recession' this year. By way of history, US industrial production rose by 8% between 1993 to 1995 whereas Europe's shrank by 5% and he believes a similar divergence could well happen again.

He lives with good company, with Jim O’Neill of Goldman Sachs saying that American equities could rise by as much as 20% this year, and Paul Frank agrees.  John Paulson promotes buying US stocks over US government bonds, whilst James Paulsen sees this year as the ‘gear year’.

Source: PhilSTAR / Bloomberg

With all those “Pauls” behind it, something’s gotta be right and so yes, invest in America is the message in 2012.

Unfortunately, that means don’t in Europe.

There will be a major European bank failure

In July 2011, the European Banking Authority (EBA) issued its summary of how fragile the European bank system was after stress tests on 90 European banks.  Eight failed that test – nine if you include the German Helaba Bank that dodged it – and a further 16 were in the danger zone.

However, the tests did not include a sovereign debt default, such as the issues we now see in Greece.

And with the ECB lending €500 billion it should stabilise the system, except that the ECB is receiving a similar amount back in overnight deposits and European banks still have to face almost €2 trillion of toxic assets on their balance sheets.

Add on to this that European banks also face a major capital shortfall – at least €115 billion and more like €350 billion – and we are bound to see more European banks failing this year.

I said a third of European banks would fail two years ago.  It won’t be that many, due to the €440 billion European Financial Stability Facility, but there will still be some major failures with Commerzbank already in the frame.

It should be noted that this is not unique to Europe however, as 92 banks failed in the USA in 2011.  It’s slightly down on 2010 (157 failed) and 2009 (140) but it’s still high and will continue as an analysis by The Wall Street Journal suggests that failures are down because troubled banks aren't failing as quickly.

A country will leave the Eurozone

Due to fragility in the European banking system continuing, along with a lack of confidence in Europe’s leadership, one or more countries will be forced to leave the euro.

There’s already been lots of speculation that a Eurozone member will need to breakout of the euro.  Greece is the usual one cited, but Italy and others are also regularly debated.  There has been lots of simulation and planning for such an event and so, when it does, it won’t cause any major ripple in the markets at all.

It will be a disaster for the country concerned of course, but the idea of continuing the Eurozone where a third of the members – Portugal, Italy, Greece, Ireland, Spain and more – are being propped up by Germany, and to a lesser extent France, is just not workable long-term.

And I’m not the only one saying this.

The Wall Street Journal is charting its demise, whilst the Guardian is talking about it every day, as are many people in the countries affected themselves, such as Greece and Ireland.

The UK Treasury is planning for it to fail; as are most bank analysts, banks and companies.

In fact, the only ones saying it won’t happen are the ECB, obviously, and Wolfgang Schäuble, the German Finance Minister.

But what does it mean if it happens?

Well, it ain’t good, but it doesn't mean the end of the Eurozone.  Just that Europe has to rethink a lot of the Maastricht Treaty, and come up with a new Economic & Monetary Union approach.

Peter Sands, CEO of Standard Chartered, puts it succinctly:

“I think the probability of countries leaving the Eurozone has increased because we have had several successive plans announced to solve the problem of the Eurozone which simply haven't convinced the market.

“Nobody should underestimate what a big deal that would be, because it would be very difficult to manage the contagion risk, even if it was only Greece. The disruption from that would really be quite significant.

“That will have ramifications all over the world . . . because the simple maths is that the Eurozone is a very large part of the global economy and if it is going slower, then economic trade will be slower around the world.”

So there’s a short guide to the 2012 economic outlook:

• Asia’s light continues to shine, but not quite as bright
• American equities is the place to invest
• There will be a major European bank failure
• A country will leave the Eurozone

This is one of three 2012 outlook pieces:

• 2012: an economic outlook
• 2012: a banking outlook
• 2012: a bank technology outlook

 

UK banks pay £53.4 billion in taxes

Just got a press release that I would usually ignore ... but this one's interesting.  It's from Open Europe, a think tank, and says that the UK banking sector not only pays over £50 billion in taxes, but that the whole sector is in danger of being squashed by the EU.

Here it is for those interested:

UK Government should use EU Treaty negotiations to secure “emergency brake” on financial laws

Monday, December 05, 2011

Open Europe has today published a new briefing arguing that, at this week's EU summit and moving forward, the Government must seek to safeguard the economic benefits to Europe and the UK offered by the financial services sector. These benefits include a tax contribution to the Exchequer of £53.4bn and a £35.2bn trade surplus last year.

The briefing notes that while Britain has benefitted from EU financial regulation in the past through greater trading opportunities, over the next decade, as Europe enters a period of profound political and economic change, further benefits could be limited and previous gains are even at risk of being reversed. There are three reasons for this:

• EU financial rules are no longer primarily geared towards trade facilitation but are now more likely to restrict financial activity. There are currently no less than 49 EU proposals in the pipeline affecting the finance sector. Some of these are justified in the wake of the crisis, but very few of them are designed to facilitate growth and greater trade in financial services.

• As a result of the financial and eurozone crisis, the UK is increasingly losing influence over the shape and thrust of EU financial law, reinforced by EU voting rules which grossly under-represent Britain relative to the size of its finance industry.

• The EU market is likely to offer limited new growth opportunities for UK financial sector firms, at a time when opportunities elsewhere in the world are on the rise. Between 2005 and 2050, the BRIC countries' share of global banking assets is estimated to increase from 8% to 33%, while the EU will see its corresponding share drop radically.

Open Europe argues that to counter these trends, David Cameron should use future EU Treaty changes – which he may have a veto over – to, at the very least, insert a 'single market protocol' committing the EU to growth, trade and proportional financial rules. However, the option with the most certainty of safeguarding Britain's economic interests would be to seek a UK 'emergency brake', giving London the right to block disproportionate or protectionist EU financial regulation.

To read the full report, click here.

Key points:

The financial services industry is vital to the UK economy. In the 2009/10 tax year, the UK financial services sector as a whole made a total tax contribution of £53.4bn, 11.2% of the Government's total tax receipts for that year. Financial services accounted for a £35.2bn trade surplus in 2010 - the only industry sector in Britain that generated a substantial surplus apart from 'other business services', many of which are closely linked to financial services.

In the 1990s and 2000s, the benefits to the UK of EU financial regulation rested on two premises. Firstly, while EU-wide financial rules have often increased compliance costs for firms in Britain, they generally allowed the Government to influence regulation across Europe in line with UK thinking, serving to reduce barriers to trade and creating opportunities for UK-based firms.

Secondly, London was and is seen as an entry point to the EU's single market in financial services - a market which experienced significant growth in the 2000s as financial services developed rapidly. For example, between 2000 and 2008, France and Italy's financial sectors grew substantially and in the process contributed additional GDP growth in both countries of around half a per cent.

However, as a result of institutional changes in the EU, the financial crash and the continuing eurozone crisis, the economic and political weather has changed. The premises from which the benefits of EU financial regulation to the UK have traditionally derived could alter fundamentally in the 2010s and onwards:

Firstly, the UK's level of influence on new European financial rules has decreased; regulation is now less geared to financial services growth but more towards curtailing financial market activity, irrespective of whether such activity is good or bad. There are at least 49 new EU regulatory proposals potentially affecting the City either in the pipeline or being discussed at the EU-level – while some are justified, very few of these are aimed at promoting financial services trade.

Not entirely without reason, the perception in many Continental capitals and in the European Parliament is that 'Anglo-Saxon' light-touch capitalism needs to be reined in. Therefore, whereas in the 1990s and early 2000s, EU politicians and policymakers generally (but not always) felt constrained from imposing financial regulation on the UK this has now ceased to be the case.

In the wake of the regulatory failures that led up to the crisis, more effective supervision of financial markets is needed. But while UK regulation has also shifted away from the "light-touch" concept to some extent, its new focus on regulatory 'judgement' looks set to clash with the prevailing ‘rules-based’ culture at the EU level. Similarly, the apparent conflict between the Vickers Commission's recommendations to impose higher capital requirements on banks and the European Commission’s proposed approach of imposing maximum EU-wide standards is another example of differing approaches.

In addition, the eurozone crisis is increasingly likely to create exceptional needs and political incentives for the euro countries to act in the interests of the eurozone 17 rather than the EU-27, with UK concerns seen as peripheral at best. This new dynamic has already been expressed in a series of new proposals, including an EU-wide financial transaction tax, possible short-selling bans and the European Central Bank's insistence that transactions in euro-denominated financial products are cleared by central counterparties within the eurozone rather than in London. These proposals not only represent a challenge to UK concepts of financial regulation but also the UK's access to the single market.

These political pressures are reinforced by the structural bias in the EU's voting system against the UK's financial industry, which was more or less acceptable so long as UK influence over financial services regulation was sufficiently high and rules were broadly pro-competition. The UK accounts for 36% of the EU's wholesale finance industry and a 61% share of the EU's net exports of international transactions in financial services. However, under new voting rules coming into force in 2014, it will only possess 12% of the votes in the Council of Ministers and 10% of the votes in the European Parliament. In contrast, France accounts for 20% of the EU's market in agriculture, but enjoys a veto over the EU's long-term budget and therefore retains substantial control over the sizeable EU subsidises received by its farmers.

Equally important, over the next decade, growth opportunities for financial services within the EU are likely to be more limited than elsewhere in the world. Many European countries are likely to undergo economic stagnation and deleveraging. In 2005, the five largest EU economies accounted for 27% of global banking assets. In 2050, that will have decreased to 12.5%. Meanwhile, the BRIC countries' share of these assets will have increased from 7.9% in 2005 to 32.9% in 2050. Therefore, the benefits to London of acting as the gateway to Europe are becoming less convincing and the need to keep the door open to emerging markets elsewhere across the globe far more important.

The UK has two broad strategies it can pursue in response to its decreasing influence over the direction of EU regulation and the need to keep the City open for business in the global marketplace:

1) Work with likeminded countries to seek assurances that Britain's influence over EU financial services law will be safeguarded. This could be codified in a new 'single market protocol', inserted via the first available EU Treaty change. Such a protocol could commit the EU to a pro-growth, outward looking and proportionate regulatory regime while safeguarding the UK from decisions taken solely by the eurozone for all 27 member states.

2) Seek UK-specific, legally watertight safeguards that will ensure that the UK is not overruled on a vital financial measure and cement London's ability to do business and compete in global markets. Though it will be resisted by EU partner, met with resistance from EU partners, this could include a 'double lock', acknowledging Britain's prominence in this sector and giving the Government the right to refer any disproportionate or discriminatory laws to the European Council, where it has an effective veto over regulatory proposals.

In the list of priorities in the on-going EU negotiations that are inevitable in the wake of the eurozone crisis, safeguarding financial services should be at the very top. While the EU policies governing fishing and agriculture, for example, are in need of fundamental reform, these two industries together only account for 0.7% of UK GDP. In contrast, financial services account for at least 10% of UK GDP. It is therefore clear where the UK should concentrate its political capital.

 

As my SEPA gently weeps ...

I hosted a dinner last night with a focus upon developments with SEPA and innovation.

What innovations has SEPA introduced?

Long silence.

To be honest, there are some – the ability to cash concentrate direct debits into the most efficient countries using SDDs (SEPA Direct Debits) for example –but the list is real short.

We found the reasons why are multiple.

First, there’s innovation and change in wholesale versus retail, with the former taking much longer than the latter.

Second, there’s cooperative innovation where countries and operators need to work together to agree change and standards, which is why it takes the time.

Third, there’s delivery of a wholesale change across a wide economic area, which is not just eating an elephant but a humongous great Blue Whale.

Nothing is simple in the SEPA game, or end-game.

And is there an end-game?

Sure, we’re talking about end-dates, with a single end-date now mooted for end of 2014.

If 2014 is achieved, then twelve years after the creation of the European Payments Council we might get something implemented … but it’s still ‘early days’ as someone said.

Twelve years and it’s still early days?

Jeez.

Another banker said that “just as we’ve started to deliver innovation with SEPA, it may never happen”.

Hmmm … life is what happens to you whilst you’re busy making other plans, and twelve years after inception, SEPA might be delivering a stillborn infrastructure if the Eurozone implodes, as many appear to be predicting.

If you don’t think they are, then talk to a few banks around the City here and they’ll tell you that they’re seriously planning for a euro breakup, and modelling what that means to their systems, structures and processes.

No wonder when most respected media are now saying we’ve reached crunch time.  From this morning’s Washington Post:

“After two years of failed efforts that world markets have swept aside as inadequate, Europe’s politicians face an increasingly sharp divide in combating their financial crisis: either take the sort of politically difficult steps that would tie their economies more closely together, or prepare for the breakup of the euro currency zone.”

So where are we in reality with SEPA?

The EPC’s latest numbers show that, “as of August 2011, the share of SEPA Credit Transfers (SCTs), as a percentage of the total volume of credit transfers generated by bank customers, amounts to 20.12 percent in the euro area”, whilst “the share of SEPA Direct Debit (SDD), as a percentage of the total volume of direct debits generated by bank customers, amounts to 0.13 percent (ECB SEPA Indicators)”.

SCTs have been around since January 2008 (that’s four years near enough) and SDDs since November 2009 (two years).

The reason for the slow take-up of SDDs is down to incompatibilities between country implementations of SDD, and specifically repudiation and revocation rights which have been compromised due to country opt-outs allowed under the rules (derogations).

So we don’t really have any innovation here yet.

Just a slow-burn.

Oh, one thing that was viewed as innovation in this wholesale space however is ISO20022.

“The ISO 20022 standard provides the financial industry with a common platform for the development of messages using:

• a modelling methodology (based on UML) to capture in a syntax-independent way financial business areas, business transactions and associated message flows;
• a central dictionary of business items used in financial communications;
• a set of XML design rules to convert the messages described in UML into XML schemas, whenever the use of the ISO 20022 XML-based syntax is preferred.”

Yea.

ISO20022.

The Nirvana of financial messaging.

And yes, if SEPA delivers a compliance and move to ISO20022 across the Eurozone’s corporations and banks, then yes, that’s good.

According to those around the room, this has to happen as part of SEPA delivery.

OK.

But I’m not going to place any bets on this happening.

And, as if to prove the point, put “ISO20022 SEPA” into Google and what you get back is a whole bunch of articles … from 2008.

Finally, about 30 entries down the list, you get a link to the EPC’s website where an article from October 2011 states: “the existence already of multiple interpretations of the ISO 20022 message standards; i.e. multiple domestic SEPA formats, threaten to undermine key objectives of the SEPA initiative.”

Maybe it’s just me but I’m thinking that, after ten years of evolution and little revolution, this thing ain’t working.

Anyone want to argue the toss?

 

 

Reasons to reject the euro

There’s still lots of debate about the euro and Eurozone, with Greece imploding and now Italy et al all going up the Furka Pass, so to speak.

Now I’ve been purposefully avoiding getting into the fray, as it’s not my place, although I’m quite outspoken in media outlets about such matters (checkout this Bloomberg video about European Banking Authority’s stress tests of banks in July 2011, if interested). 

Anyways, we now have David Cameron and Angela Merkel at loggerheads about such matters.  Luckily they came to some agreement, although the bank transaction tax is still causing huge disagreements.

Meanwhile, some believe that Britain will regret not being part of the euro.  This is down to the new controlling stranglehold in Europe of the inner sanctum – those in the euro – and the rest – those not.

This may create a rift in European Union, but is necessary if the Germans are going to keep paying for holding the Eurozone together.

This is why some folks, even those within the Conservative Party, believe the UK must one day join the euro too.

Nevertheless, talks of joining the euro are more divisive in Britain than ever, and is still unlikely in my lifetime. 

One of the reasons why we would never want to join the euro of course, is because we like the Queen and the Pound.

For example, in a survey by Demos published over the weekend – which showed that Muslim Brits are more patriotic than all other Brits! – they itemised what we consider to be ‘national treasures’.

Shakespeare came out tops, closely followed by the National Trust (our ‘green and pleasant land’) and the armed forces (keep our country ours).

Interestingly, the pound came fifth, above the monarchy who came seventh.

BEST OF BRITISH TOP 10

How people rate our cultural icons:

Shakespeare                                    75%

The National Trust                           72%

The armed forces                            72%

The Union Jack                                71%

The pound                                       70%

The NHS                                          69%

The monarchy                                  68%

The BBC                                           63%

British sporting achievements            58%

The Beatles                                      55%

 

Hmmm … this intrigued me and got me thinking.

Then I spotted a remarkable item about a chap in Poland who’s been designing their bank notes all of his lifetime.

He’s a national treasure there, and an artist designing everything from military medals to passport covers, coats of arms to postage stamps; and his name is Andrzej Heidrich.

Now in his 80s, Andrzej Heidrich’s artwork is being celebrated by Poland’s National Bank...

... including many banknote designs ...

Some of which were never actually issued.  For example, this 100 zloty note was never issued:

A better version was demanded by the Central Bank and, a bit like album covers in days of old, we treasure the designs and have rigorous standards.

This is why such designs become treasured and is why it is no wonder that countries who have no euro, and view their banknotes and artwork around those notes as ‘national treasures’, have such resistance to being in the euro.

Maybe the bet should be more on the Germans joining the Deutschmark than Britain, or Poland for that matter, joining the euro?

Ooops, scrub that:

In spite of the continuing crisis in the eurozone, the Polish ambassador says his country still aspires to adopting the currency as its own.

Guess, I should start using Bitcoin instead.

 

That European Joke (Part Two)

I’ve been loathe to talk too much lately about the Eurozone as it’s just too darned depressing.

What with Greece slipping and sliding away, Italy bunga’d out and now France being challenged, it’s just a crazy, crazy moment in history.

There’s even a discussion of the Eurozone disbanding, although officials deny this.

However, in my spirit of fun, I was prompted to find a bunch of European jokes after reading about Silvio Berlusconi:

He became notorious for off-colour jokes, including likening a German member of the European Parliament to a Nazi, accusing communists of boiling children and using them as fertilizer and calling President Barack Obama "suntanned".

While the 75-year-old openly flirted with female heads of state, he showed little talent for diplomacy and left German Chancellor Angela Merkel waiting at a NATO summit in 2009 while he finished a phone-call in front of her.

In a telephone intercept leaked to Italian press earlier this year he described Italy as "a shitty country" and said he could not wait to leave.

His quip to supporters that he should change his party's name to "Go Pussy!" to boost its popularity also fell flat and brought widespread condemnation.

Therefore, keeping up the levity, here are a few more Euro jokes for a frazzled French Friday …

How the European Union works

How the EU works: In Germany, they make the rules, in Britain, they obey the rules, in France, they bend the rules, in Spain, they break the rules, and in Italy they have no rules at all.

Working in Brussels

On a visit to the Headquarters of the European Commission, a visitor noticed that there was a big yellow line painted down the middle of the corridor. "What's that for?" he asked his host.  His host replied: "Oh, that's to keep the staff coming in late from colliding with the ones who are leaving early."

European Union

An Englishman, Frenchman, German, Belgian, Italian and Spaniard walk into a pub... and the landlord says: “Is this some kind of joke?”

European Disunity

An Irishman, Greek, Portuguese, Italian and Spaniard walk into a pub... the German pays.

Don’t take the peace

The EU has decided that the British colloquialism “to spend a penny” is no longer correct and must be replaced by the new expression: “to Euronate”.

Stand up for the Euro

The European Parliament has decided to change the design of the euro when noticing that the first one was a bit boring and sad.   The new design is a stronger and more aggressive one which will make people eager to consume ...

The European Union

A prize was to be awarded for the first person to discover a horse with black and white stripes like a zebra.

A German, a Frenchman, an Englishman and a Spaniard participated hoping to win the prize of €1 million.

The German decided to spend weeks in the National library researching into horses with black and white stripes. The Englishman went straight to a shop in Piccadilly which specialises in hunting gear, bought all the equipment necessary and set off for Africa in his quest for this strange creature. The Frenchman bought himself a horse and painted it black and white . The Spaniard went to the best restaurant he knew in Madrid, ordered an expensive meal for himself with a fine bottle of wine; after the meal he ordered an expensive Havana cigar and a Napoleon brandy, sat in a luxurious arm-chair in the hotel and began to consider what he would do with the 1,000,000 euros once he had found this remarkable horse with black and whte stripes.

The new Euro language

The European Commission has just announced an agreement whereby English will be the official language of the EU rather than German which was the other possibility.

As part of the negotiations, Her Majesty's Government conceded that English spelling had some room for improvement and has accepted a five year phase-in plan that would be known as "Euro-English".

In the first year, "s" will replace the soft "c". Sertainly, this will make the sivil servants jump with joy. The hard "c" will be dropped in favour of the "k". This should klear up konfusion and keyboards kan have 1 less letter.

There will be growing publik enthusiasm in the sekond year, when the troublesome "ph" will be replaced with "f". This will make words like "fotograf" 20% shorter.

In the 3rd year, publik akseptanse of the new spelling kan be ekspekted to reach the stage where more komplikated changes are possible. Governments will enkorage the removal of double letters, which have always ben a deterent to akurate speling. Also, al wil agre that the horible mes of the silent "e"s in the language is disgraseful, and they should go away.

By the fourth year, peopl wil be reseptiv to steps such as replasing "th" with "z" and "w" with "v". During ze fifz year, ze unesesary "o" kan be dropd from vords kontaining "ou" and similar changes vud of kors be aplid to ozer kombinations of leters.

After zis fifz yer, ve vil hav a reli sensibl riten styl. Zer vil be no mor trubl or difikultis and evrivun vil find it ezi to understand ech ozer. Ze drem vil finali kum tru! And zen world!

And one of the oldest jokes …

In Heaven: the cooks are French, the policemen are English, the mechanics are German, the lovers are Italian and the bankers are Swiss.

In Hell: the cooks are English, the policemen are German, the mechanics are French, the lovers are Swiss and the bankers are Italian.

Thanks to the BBC for the unaccredited jokes above.

This is Part Two of a European Joke series.  Part One can be found here.

 

The similarities between banks and landmines

Last night I was presenting to the MAG-net group.

MAG-net is the networking group in the City for the Mines Advisory Group, MAG, a charity supported by the Financial Services Club and others that clears areas of mines so that schools, villages and life can continue as it should in post-war territories.

They invited me to speak about anything I wanted, and so I created a new presentation about the similarities between banks and landmines (see UBS today).

The presentation developed around the idea of banks being mines that explode in economic terms, in a similar way in which landmines explode and blow away people and animals in the real world.

My premise was that just as landmines blow the legs away from humans, banks blow the legs off economies.

It’s obviously the case that this is true today, what with the Lehmans collapse with Credit Default Swaps creating the first financial crisis; and now sovereign debt in the Eurozone is developing the second.

How can such economic landmines exist in a world where we should have cleared them by now?

They exist because we allow innovation in financial instruments in an unregulated form.

That innovation is all around derivatives of derivatives.

Untried and untested weapons of financial destruction are being created every day and planted as hidden potentially unexploded bombs across the financial system.

This has been well documented in many books, with F.I.A.S.C.O. cited by many as a great illustration of the issues in a storybook form or, if you prefer the academic version, Infectious Greed, gives you the lowdown.

These two books by Frank Partnoy document the issues of derivatives, which are both good and bad.

They are good in creating leveraged risk which allows commerce to become more capable.   They are good in hedging risk, allowing trades to take place that otherwise could not.  They are good in bringing together mixed asset classes, so that previously unrelated goods and services can now be traded together.  They are good in offsetting future uncertainty, which is why they are used.

They are bad because they are so complex, most traders don’t understand them.  They are bad because they are called ‘exotics’, and are so exotic that they can explode.   They are bad because they allow firms, such as Goldman Sachs, to create a massively web of interlinkage between risk that ensures those in their world can have huge exposures whilst Goldmans themselves avoid such loss.  They are bad because they allow debt to be leveraged so greatly that it becomes unmanageable.

All of the latter are the landmines of economies, and are no better demonstrated than by Lehmans collapse and Europe’s sovereign debt crisis.

I illustrated these two points with two charts.

The first is from June 2008, and shows the notional exposure of Goldman Sachs’ main counterparties just before the collapse of Lehman Brothers (doubleclick image for larger version):  

Oh what a tangled web we weave, when first we practise to deceive! Sir Walter Scott 

Now don’t think I’m Goldman bashing because, as I said last night, they are the most effective bulge bracket player in the world’s markets in creating risk and therefore alpha returns.  That’s why their clients use them.  However, they are also the most effective institutions in the world’s markets in creating risks that can explode in the face of their clients.  That’s why they sell ‘crap’ to their customers (by their own admittance) and are happy to do it.  

The second chart I used to illustrate the landmines that firms such as Goldman Sachs lay in the world’s economies is the European sovereign debt crisis and a data visualisation of which countries are most exposed to whom:

Again, derivatives were used to package sovereign debt in the same way as mortgage debt, and has created this second loss of confidence in the European economies. 

The whole presentation can be seen here (needs the words to make sense probably) ...

The similarities between landmines and banks

View more presentations from Chris Skinner

... and the only positive note is that we can save human limbs by clearing landmines using mice to sniff the mines out.

Let’s get some more mice in the financial markets.

 

Postnote:

 In researching the presentation, I found large numbers of images of people with limbs missing.  Some were graphic, some were funny, some were moving and many were tragic.  Give MAG five minutes of your time http://www.maginternational.org/ to consider supporting them.  And any MAG-net member gets a 20% discount if they join the Financial Services Club so it’s worth supporting them for that reason alone surely?

 

 

In the bleak mid-summer

It seems like a long bleak summer in the financial markets, as banks are reporting dire results.  It’s a combination of investment banking in the second quarter suffering serious damage across all fixed income desks, along with the Eurozone and American debt crises.

There is no certainty in such times.

For example, banks that usually do well are reporting red.  Goldmans Sachs led the way:

Goldman said its net income in the second quarter of 2011 was $1.05 billion, more than double the figure from the same period last year, but well below analysts' consensus forecasts.  Revenues were $7.28 billion, down 18 per cent from the second quarter of 2010 and 39 per cent lower than in January-March of this year, Goldman said. Analysts had projected revenues of $8.14 billion. Earnings per common share were $1.85, substantially below the consensus analyst forecast of $2.27.

But there is worse. 

After first quarter revenues at:

• JP Morgan were down 1%;
• Goldman Sachs was down 7%;
• UBS investment bank was down 11%;
• Credit Suisse was down 6%;
• Barclays Capital was down 14%; and
• Citigroup was down 25%;

now, in the second quarter, UBS are already in trouble:

UBS Chief Financial Officer John Cryan told analysts, "UBS faces weaker second quarter earnings after capital markets turbulence led to a sharp slowdown at its investment bank and lower activity by rich clients".

Result, they are laying off 5,000 staff whilst Goldmans are laying off 1,000, and several other banks are in trouble:

Credit Suisse is expected to suffer the steepest percentage fall in revenues from its fixed-income, currency and commodities division of the big four European investment banks, with Morgan Stanley forecasting a 41 per cent quarter-on-quarter decline.

A significant rise in mergers and acquisitions activity and underwriting of debt and equity issues will partially plug the gap for European banks, analysts said. Globally, investment banking fees were up 23 per cent year-on-year in the first half, and 26 per cent in Europe, according to Thomson Reuters.

Overall, investment banking revenues at Deutsche Bank, UBS and Credit Suisse will be down by an average of 25 per cent from the seasonally strong first quarter, while net profits are expected to have tumbled by an average of 49 per cent over the same period, according to analysts at Citigroup.

In the UK, investment banking revenues at Barclays and Royal Bank of Scotland Group revenues are expected to be down about 30 per cent from the first six months of 2010, with pre-tax profits falling a similar amount on average.

Meanwhile, there is still a crisis in retail banking due to non-performing loans, as evidenced by AIB’s results this morning:

Allied Irish Banks (AIB) unveiled a 2.6 billion euro($3.7 billion) underlying first-half loss as more loans turned bad, but said it expected 2011 to be the last year of major loan writedowns.

Alongside such news is the challenge banks are experiencing in capital raising in order to shore up their capital reserves to comply with the EBA stress tests announced a week last Friday.

The EBA data showed Europe's banks held €98.2 billion of Greek sovereign bonds at the end of December, with two-thirds of that held by Greece's banks, 9% by German banks and 8% by France's.

Banks' exposure to Irish sovereign debt was €52.7 billion (61% held domestically) and to Portugal it was 43.2 billion (63% held domestically).

This sovereign debt data has been crunched by analysts at big banks over the weekend in tests that were toughened up with default scenarios – something the EBA was barred from doing by nervous EU finance ministers.

Europe's banks would need €41 billion to keep their core capital ratio above 7%, the new global minimum from 2013 under the Basel III accord and already required by markets in practice, according to Reuters' calculations.

This compares with the 5% pass mark in the test.

JPMorgan's Abouhossein said a tougher test of 27 of the bigger banks using EBA data would show 20 are a combined €80 billion short of capital.

His test applied a haircut to sovereign bond holdings in the banking book and required banks hold core capital of 7%.

Credit Suisse analysts said applying larger haircuts on peripheral eurozone bond holdings, including for Italy, as per current market prices, would leave a €45 billion deficit for 49 banks it tested.

But capital raising isn’t simple, as the Bank of Ireland is about to find out. 

Bank of Ireland is trying to raise 1.9 billion euros ($2.7 billion) in a rights offering that closes on July 26 … the government will likely end up controlling as much as 65 percent.

So we have investment bank revenues and profits collapsing, retail banks still finding bad loans on their books, and Europe’s banks seriously challenged in shoring up their already crippled balance sheets.

Combine this with the who-will-chicken-out-first game in the USA over their debt crisis, and times aren’t great.

That's all past and present however.  

Looking forward, add on a few more jitters by thinking about a Q3 that is normally quiet, low M&A activity, more challenges in equities and fixed income, a euro crisis that rolls on and on and on, and you can see why I’m not a happy bunny.

These are a few of the thoughts I shared with Bloomberg this morning.

The only ray of light is JPMorgan and Deutsche Bank who consistently seem to over perform.

Will Deutsche continue to do that as their boardroom battle comes to a head?

Will JPMorgan be the last bank standing?

 

Postnote (26th July 2011, 08:29)

Times change fast.  After writing this yesterday, today Bank of Ireland have sold their rights issue to private investors and avoided state control and Deutsche Bank have confirmed their succession planning.

Bank of Ireland Sells Stake to Investors
Business Week

Deutsche Bank names new chief executives
The Independent

 

But, as expected, UBS report they are going to cut costs heavily in light of bleak trading conditions.

 

UBS expected to cut jobs as it seeks to save $2.5bn

BBC

 

Shocker: Skinner thinks EBA stress tests not worthwhile

In my usual quiet way, I was interviewed by Bloomberg last Thursday in anticipation of the European Banking Authority (EBA), previously the Committee of European Bank Supervisors (CEBS), about the forthcoming stress tests released on Friday.

Last year, these tests were quite laughable and this year I expected more of the same.

Here's the whole ten-minute interview and, for those who missed it, I loved this article in the Telegraph:

Europe's bank stress tests as bad as 1979 Irish driving test

Seeing large numbers of his fellow citizens failing their driving tests, Mr Barrett – in a quick bid for votes – declared that anyone who had taken their test twice and not passed would automatically qualify for a licence.

The consequences were predictable. At any one time, about 40pc of the Irish population were allowed to drive on the roads without ever actually having passed a test. Traffic accidents went up and insurance costs followed.

Andrea Enria, the chairman of the European Banking Authority, may not like the comparison, but the limited bank stress test results he unveiled on Friday are born of a similar motivation that led directly to Ireland’s until only very recently dysfunctional driving test system.

Like the Irish government 32 years ago, the EBA and the European Union are under the impression that their power to pass and fail banks will translate directly into making them better at what they do.

The fallacy of this approach is as obvious as the needlessly ruined lives and extortionate insurance premiums that once-blighted Ireland will attest.

 

The Top 20 Banks of the World, 2011: China hits the Big Time

I’ve enjoyed the Banker’s Top 1000 listings for a long time now and, when last year’s listings came out, looked back over the last twenty years to see how things had changed.

This year’s list has now just been published (get a copy by subscribing) and makes for interesting reading, especially as Chinese banks have finally made the big time (doubleclick image to see large version).

All in all, this list when combined with my reflections in 2010 over the last twenty years, makes for a fascinating story of risk bubbles and bursts.

You had the banks from the rising sun rising up the charts in the early 1990s.

Then, as the Asian crisis nuked most of the region, the Japanese banks disappeared and the Anglo-Saxon banks took over.

The principle-led regulatory regime was rife and the Americans and Brits ruled until 2008 when their “debt whore” approach failed.

Now, everyone is bailing out everyone else, with PIGS, TARPS and QE’s by the shedload.

So last year’s list was interesting, in that we finally saw Chinese banks rising up the list and more diversity as the American and British banks stumbled a little.

I have been saying that China’s banks will dominate global banking since 2005, and certainly there is a growing swagger of China’s banks as they watched the failure of the West.

For example, it used to be that Chinese bankers were desperate to learn how the West did banking and would send troops of managers to European and American conferences to learn their ways, as well as hiring the best talent to import into Chinese territories.

Back then, we all scoffed at Asia for their poor risk management of credit leading up to the 1997 crisis, with debt defaults and NPLs everywhere. 

Now the Asians and Chinese may scoff at the West for the same reasons, although there is still risk in the Chinese system as most enterprise is propped up by financing given through the governmental influence over the banking system.

That aside, the fact that China's market capitalisation will rise to $41 trillion by 2030 from $5 trillion today, according to Goldman Sachs, makes it a market that cannot be ignored.  After all, this would make China's stock market the biggest in the world, as American market capitalisation rises to $34 trillion from $14 trillion over that time.   

This is one of the reasons why this year's Banker list is important as, for the first time, THREE of the TOP TEN banks of the world are Chinese.  Last year, there was just one.

This year, four of the top twenty banks of the world are Chinese, when there were none just a few years ago in 2004’s list.

So, no matter the risks, China’s banks have finally risen to the top ... but at what risk?

The original Asian crisis was created by a higher than expected percentage of Non-Performing Loans (NPLs) and Moody’s has recently downgraded China’s banks on the basis that “8 to 12 percent of all the loans made by Chinese banks could go unpaid.  Moody's had earlier estimated only 5 to 8 percent of the loans would be classified as ‘non-performing’.”

If China has a financial crisis, then we really will all be up the swanee ...

 

 

 

That European Joke

I’m quite pro-European as it goes. 

Roughly translated, as I’m British, this means that as long as the Eurocrats stay in Europe and out of the UK, that’s fine.  It's also because the main benefit is that I enjoy holidays without having to worry about changing currencies.

In truth, I'm quite pro-European because I've been intellectually entertained  by the major regulatory programs, such as the MiFID and the PSD. Both have kept me busy for near a decade, and are valuable examples of widespread banking transformation unseen elsewhere in the world (if you haven’t noticed, we’ve just started another survey about this).

And yet, everything I read these days talks about the end of the euro.  Here are just a few examples:

• Is it the end of the Euro? - The European Courier
• How the euro crisis end game might look - Telegraph
• I told Ken Clarke that the euro project would end in disaster - Telegraph
• Euro end game draws nearer Outside the Box - MarketWatch

Admittedly, many of these headlines are being sparked by the implosion of Greece, and the expectation that they may even need a third bailout.  The fact that Greece has had to get a bailout for a second time, has not only inflamed those in Europe but those in Greece, where the punishment for being tied to a currency they don’t want is mass unemployment and budget cuts.

And the jokes are rife, much to the upset of my Greek friends.

 

Greece – a country that by its very name would make the Union slip-slide away.

Greece – a country where Euro means toilet, and that’s where it’s going.

What's the capital of Greece?  About €3.

 

Mind you, humour is one thing that always crops up during a crisis, as demonstrated recently in Ireland, where they had a whole weekend comic fair dedicated to it:

 

Q: Why is the Irish economy in such a crisis?

A: Because they always think their capital should be Dublin.

 

Ireland’s been downgraded from AAA+ to AA.  Before, they were a battery for the remote control, but now they're only good for a Walkman.

 

It gets worse.

 

A Greek, an Irishman, and a Portuguese go into a bar. The German pays.

 

Hmmm ... how many jokes can we take?

And perhaps some of this is no joke.

After all, the Germans saying that they’re going to holiday in the Greek Islands for the next ten years because they’ve prepaid ... may go down well in Germany, but any German trying that in a Greek hotel, may find themselves out on their arsch.

So what is the reality?

Well, the euro is at breaking point and Greece – along with Portugal, Ireland and Spain – are really testing its mettle. 

And what happens if Greece does default on its debt? 

Well, that’s no good for the country.  They return to the drachma and become a former EU pariah that is Euronated on by everyone?  What does that mean for the SEPA and the MiFID?

Not a great deal in my view, as the infrastructures are built and the remaining countries will continue to process via those infrastructures, including those that now fall away from the euro and back to their old currencies, such as Greece.

Greece will not rip out their EBA connected clearing just because they go back to the drachma.  No.  Instead, the systems continue but now support one less EU member state in the Eurozone.

I’ve blogged about that in more depth before.

Meanwhile, Europe will continue but with the tensions you would expect in any region where every country is radically different. 

For example, the EU plans to have Turin and Lyons joined by a high speed train network have hit the rails in Italy. In riots over the weekend, Italians tried to stop consutruction work starting, as the plans will ruin an area of outstanding national beauty.

Meanwhile, the Brits and Germans continue to throw jokes at each other.

The Sun started it when they talked about a report from biologists at University College, London, who found that a Y chromosome found in nearly all German and Danish men is surprisingly common in Britain. This is due to the invasion of thousands of Anglo-Saxon immigrants in the fifth and sixth centuries, after the Romans left.

As a result, the Sun ran an article that opened with the lines: “do you have a craving for sausage or get upset about bad timekeeping? Then you might actually be German!”

They then set a test for readers to answer A, B or C to find out their “oompah-pah” rating, including questions such as:

 

What is your favourite number?

A. Seven.

B. Eight.

C. Nein!

With members of the opposite sex, are you attracted to their...

A. Bottom.

B. Eyes.

C. Herr.

Ladies, when your armpits are a little hairy do you...

A. Reach for the razor.

B. Wear a long-sleeved top.

C. Take every available opportunity to remove your top and put your hands on your head.

When you see a picture of the late Steve McQueen, do you think...

A. Ah... The Great Escape. What a film. What a hero.

B. Is that the fella who was in that PoW film who almost got away on a motorbike?

C. That sneaky escape artist - get him back in ze Cooler!

All in the worst possible taste, as demonstrated by Der Bild’s response:

 

When you hear the word dentist, do you:

A.           Look it up in a dictionary

B.           Remember your last visit 30 years ago

C.            Open a bottle of beer with your last-remaining teeth

 

How do you like your beer?

A.            Lukewarm

B.            Without a head

C.            By the gallon

Talking about holidays, what do you think of sun block?

A.            It's for Krauts only

B.            Doesn't taste good in gin

C.            My skin is my sun block
 

 

When are English women at their most beautiful?

A.            After 12 beers

B.            After a day in the sun

C.            In complete darkness

This was all accompanied by a photograph of the typical sort of British male we all aspire to be:

All of this is just general jest and fun.

However, one thing that will really hack off every European, whether member state or not, in crisis or not, is the news last week of the European President’s plans to build the Europa, a presidential palace that will cost €300 million to build.

In order to promote the idea, Herman van Rompuy spent €120,000 producing a fancy brochure outlining the plans for the building.

Not surprisingly, as you can see, it is already being nicknamed the E-Uterus for its womb-like central structure.

The building will be completed in 2014 and, knowing how Brussels works, this will go through without a whimper, as demonstrated by blogger, the Reluctant Bruxellois, who posted the true way in which the EU works.

A joke was proposed by a Belgian to be the Official European Joke, in order to improve the relationship between the nations, as well as promote our self humour and our culture. The Joke went as follows:

European paradise is when you are invited to an official lunch. You are welcomed by an Englishman. Food is prepared by a Frenchman and an Italian puts you in the mood and everything is organised by a German. 

European hell is when you are invited to an official lunch. You are welcomed by a Frenchman. Food is prepared by an Englishman, German puts you in the mood but, don't worry, everything is organised by an Italian.  

The European Council met in order to make a decision. Should the joke be the Official European Joke or not? 

The British representative announced, with a very serious face and without moving his jaw, that the joke was absolutely hilarious. 

The French one protested because France was depicted in a bad way in the joke. He explained that a joke cannot be funny if it is against France. 

Poland also protested because they were not depicted in the joke. 

Luxembourg asked who would hold the copyright on the joke. The Swedish representative didn't say a word, but looked at everyone with a twisted smile. 

Denmark asked where the explicit sexual reference was. If it is a joke, there should be one, shouldn't there? 

Holland didn't get the joke, while Portugal didn't understand what a "joke" was. Was it a new concept? 

Spain explained that the joke is funny only if you know that the lunch was at 13h, which is normally breakfast time.    

Greece complained that they were not aware of that lunch, that they missed an occasion to have some free food, that they were always forgotten.  

Romania then asked what a "lunch" was. 

Lithuania et Latvia complained that their translations were inverted, which is unacceptable even if it happens all the time.   

Slovenia told them that its own translation was completely forgotten and that they do not make a fuss.   

Slovakia announced that, unless the joke was about a little duck and a plumber, there was a mistake in their translation.   

The British representative said that the duck and plumber story seemed very funny too. 

Hungary had not finished reading the 120 pages of its own translation yet .

Then, the Belgian representative asked if the Belgian who proposed the joke was a Dutch speaking or a French speaking Belgian. Because, in one case, he would of course support a compatriot but, in the other case, he would have to refuse it, regardless of the quality of the joke. 

To close the meeting, the German representative announced that it was nice to have the debate here in Brussels but that, now, they all had to make the train to Strasbourg in order to take a decision. He asked that someone to wake up the Italian, so as not to miss the train, so they can come back to Brussels and announce the decision to the press before the end of the day .

 "What decision?" asked the Irish representative. 

 And they all agreed it was time for some coffee.

 

Are payments infrastructures fit for purpose?

During the spring, we reached out and asked readers and FSClub members to provide their views, via an online survey, of the world's largest payments infrastructures and whether they are fit for the purpose they are being used for today.

Last night, we released the results of the research at a dinner hosted by survey sponsor, Cognizant, and with a panel discussion of the report's findings with:

• Chris Dunne, Strategy Director, Vocalink;
• Gilbert Lichter, Secretary General, the Euro Banking Association (EBA);
• Arun Aggarwal, Managing Director, SWIFT UK;
• José Beltrán, Director for SEPA at STET; and
• Tony Virdi, Head of Financial Services Division EMEA, Cognizant.

If you would like a copy of the report (3MB PDF) then email our administration and they will send you a copy.

Some of the report's headlines include:

•  96% of retail banks cite the internet and 82% cite mobile technologies as having most important impact on payments infrastructures

• 63% expect significant or major changes to payments infrastructures in complying with regulatory change

• 49% expect Fedwire to face regulatory challenge 

• 40% will be using two to three key payments infrastructures in ten years’ time, compared to the nine used today

• 19% expect VocaLink will be most impacted by developments in mobile payments 

• 27% expect SWIFT and Eurogiro (24%) to be most impacted by Internet developments

 

The key messages from the report are:

• There will be consolidation as well as increased competition. The process of consolidation will be slowed by certain national and domestic interests, with the largest countries of the world – the BRICs and America – protecting their national infrastructures

• There will be fewer payments infrastructures in ten years than there are today and increased competition from both existing and new payment providers

• European Clearing houses for retail payments – such as Equens, VocaLink and STET – will be locked in a competitive battle

• Asian and other clearing services will also be consolidating and some panregional or potentially global players are likely to emerge

• Common standards will drive the process towards renovation and consolidation, as XML and ISO20022 work hand-in-hand to make interoperability easier

• Whilst payments infrastructures were viewed on the whole as being ‘fit for purpose’, Fedwire, Eurogiro and CHIPs scored highest in the ‘out of date’ category

• SWIFT, VocaLink, Equens and EBA are viewed as innovative, although banks and non banks views varied in this regard SWIFT and the EBA have very strong support for the long-term from their banking community advocates, and are likely to remain central to payments for the foreseeable future as standard setters and low-cost processors

• Payments processors need to be on top of rapid developments in mobile, internet and cloud computing to continue to be fit for future purpose. In Retail, changes will be driven by changing customer behaviours relative to social media and the way we pay, with mobile contactless and online payment systems driving real-time connectivity

• As the number of providers and the pace of technology increases there will be greater need for payment risk forecasting, monitoring and the real-time tracking of payments processing by the customer 

If you would like a copy of the report (3MB PDF) then email our administration and they will send you a copy.

2010 Review: Payments

So, there are a lot of things we’re juggling around with in the payments arena, from real-time to TARGET2 to SEPA to SWIFT ISO20022 to mobile to contactless to biometrics and more.

I guess I can summarise this area best by using the results from this year’s payments survey because the last section of the survey asked people what's hot, hot, hot in payments this year.

EUROPEAN PAYMENTS

What was not hot is the world of the Single Euro Payments Area (SEPA) and the Payment Services Directive (PSD).  Interest in these areas due to stagnation and indecisiveness had, to be honest, become flatter than the Flat Earth Society's annual party.  In fact, an indication of how much euro interest exists was articulated well in an insight article on CNBC that claims that: “The European Union Is Over”.

I wouldn’t go that far but, in reviewing the developments of this year, I would say that everything in the Eurozone got a bit tired, tainted and tense.

Thank goodness therefore that the SEPA end-date is in sight, with the European Commission approving the forced migration of national instruments to SEPA credit transfer and direct debit schemes 12 and 24 months after the new regulations for migration are approved.

So that puts SEPA to bed (lol), and leaves me to hone in on other key areas such as mobile and contactless payments.

MOBILE CONTACTLESS

Often breathed in the same breath, these are distinctly different areas even though they are converging as we speak.

For example, Orange has just committed to rollout contactless payments and NFC capabilities across all of their European network next year, whilst Google and Apple are committed to incorporate NFC into Android and iPhones.

 

Picture stolen from Brett King 

So we’re definitely in the era of simple mobile payments.

This was voted the #1 item of interest amongst those responding to the survey this year, and is top of mind with everyone.

What’s surprising is that mobile contactless may be top of mind, but it’s transient.

We’re already into using NFC tags everywhere and the mobile operators’ movements will simply decimate the NFC stick-on tag business (sorry taggo, bling nation et al).

Meanwhile, the fundamental issue is still not addressed: where can you use an NFC chip?

Barclaycard have been pushing Visa Paywave for a couple of years now, and yet I hardly ever get a chance to use it.

Sure, we may now have a few London taxi’s wirelessly enabled, but it’s hardly dense terminal acceptance or usability.

And there’s the rub: we need more terminals.

Maybe they could learn something from Zapa in Ireland, where AIB Merchant Services have worked closely with them to rollout terminals that can use the tags.

Half of all AIB’s merchant terminals are now Zapa ready: that’s 40,000 of their 90,000 terminals, with over 1.5 million contactless transactions in the year to September 2010.

Compare that with Barclaycard who have rolled out just 42,500 merchant terminals to date and processing just over a million transactions by November 2010, and you can see the challenging dimensions they face.

Hmmm ... but there’s no doubt that this will grow ... except that by the time it does, technology will have moved on and direct mobile-to-mobile, or M2M payments, will be the order of the day.

Ah well, we always roll out three-year old technologies to meet three-year ahead needs.

Behind mobile contactless, real-time payments is the next big deal.

REAL-TIME PAYMENTS

Real-time payments are big news because everything is moving into real-time, a point I’ve made often.

What real-time really means is real-time information transfer. Information about money moving worldwide in real-time. Not the money itself, which will still be gated and subject to the laws and barriers required to ensure money moves at the pace of AML, KYC, repudiation and revocation needs.

But real-time is a game changer, as real-time information, risk, cash and enterprise management is delivering real differentiation for corporates and clients worldwide.

That’s why banks need to focus upon it.

For example, in corporate treasury, real-time information that consolidates all the knowledge about a corporation's cash positions across all of their operations, geographies and subsidiaries would be invaluable.  In fact, it amazes me that most companies do not have this capability.  

That is because they are multi-banked and multi-country.

Banks that focus upon aggregation of information in real-time to provide additional knowledge about money will win business.

That's why real-time is important.

OPERATIONAL MANAGEMENT

After these big ticket items, everything becomes a bit more mundane with new pricing models for European payments post-SEPA, SWIFT MX and ISO20022, payments processing hubs, liquidity management and such like being on the ‘must-do’ list.

It’s all about standards, cost reduction and ensuring efficient processing. In other words, good operational management focus.

I could write a lot more about this, but it's covered pretty well elsewhere by SWIFT and other forums, so I'm not going to get all techie today (phew!).

The only point that’s really worth noting on the ‘new for 2010’ model from my side is the fact that there are a lot of new payments institutions appearing out there.

NEW PAYMENTS INSTITUTIONS (PIs)

PIs are new, non-bank payments processors taking out licences across Europe to process payments instead of, or on behalf of, banks.

Funnily enough, when we mention PIs, most people normally think of institutions like PayPal except that PayPal respond by saying: “we are a bank”.

First Data, Western Union, Mobile Telecom firms are also keen PIs, with over 70 licenses registered with EU authorities so far this year to offer payments services in this form.

But the most intriguing new PI for me is Voice Commerce.

Not because they were the first non-bank PI to register with the EU after the implementation of the Payment Services Directive (PSD).

Nor because they were the first PI to become a Visa and, more recently, MasterCard Principle Member.

No, the reason for Voice Commerce being of interest is that they use the idea of the human voice biometric being an identity authentication method.

Bearing in mind that yesterday, all things were moving to mobile and today, all payments are moving to mobile, the idea of using a human voice biometric on mobile seems to be a non-brainer.

And yet, according to our survey, voice biometric fraud management is the least interesting aspect of 2010s innovations.

Amazing how short-sighted we can be when it comes to seeing what may be the most disruptive developments sitting right in front of our eyes or, in this case, right in front of our mouths.

 

What happens if a country leaves the Eurozone?

It’s a funny old world.

One minute we’re all talking about the great European plan, the Lisbon agenda, the Directives are rolled out, SEPA and MTFs are spawned, the level playing field of the Eurozone is harmonised and so on and so forth.

The next is OMG, it’s all doom and gloom.

What about Greece? Ireland? Portugal? Spain? Italy?

This is a disaster!

Meanwhile, the Eurocrats continue to focus upon euro enlargement with Serbia, Macedonia, Montenegro, Albania and Bosnia all in the frame, as well as Turkey of course. In fact, Turkey’s chief negotiator on EU accession believes that: “the European Union needs Turkey more than Turkey needs the European Union”.

Very diplomatic ... and possibly true as Turkey represents the point where West meets East for many.

So what’s the reality?

I was thinking about this the other day, as someone asked me about Ireland’s future.

To be honest, I don’t think there’s a problem if a country has to leave the European Union or the Eurozone.

Think about it.

So far, the reason why we balk at such an idea is because no-one’s ever done it before.

No country has left the European Union so far.

Some have changed and adapted, as in Germany is different today than twenty years ago thanks the Berlin Wall coming down.

The UK is different to what it was twenty years ago, as we now have a Welsh and Scottish Assembly and a more stable Northern Ireland Assembly.

Belgium is breaking apart into Franco-Belgique Wallonia and Dutch-Belgique Flanders (correction).

Yugoslavia exploded into the Serbian-Bosnian war, but it hasn’t stopped Serbia and Bosnia seeking to join the Union.

So what of the future?

Could Portugal leave the euro, as recently implied by their foreign minister, even though just nine months ago there was an emphatic view this could never happen.

And what does it mean if a country leaves?

For the UK, it was a good thing.

The UK left the Eurozone plan in 1992 thanks to George Soros and, ever since, we’ve thanked our lucky stars we did.

UK sterling looks like a good bet in the short-term against the euro, and we have been able to fully engage in actions to halt the slide into depression by printing money through the Quantitative Easing (QE) program and rapidly reducing interest rates to zero.

All of the latter actions are impossible for Eurozone countries to engage in, as they are dependent on the policy across 16 countries controlled by the European Central Bank (ECB).

And there’s the issue.

The UK can issue bonds, t-bills, print money and create more debt because we are a strong country with strong investment yield and credit rating.

Portugal, Ireland, Greece and Spain don’t have any of these capabilities.

First, they are not strong countries with good credit ratings, as demonstrated by the downgrade of Greece in April by Standard & Poors that kicked off this crisis of confidence.

Second, they cannot control any fiscal policy effectively as all interest rates are controlled by Frankfurt, which handcuffs these economies to centralised control.

Even more of an issue for these countries is that they cannot ease their debt burden by priniting money through QE as the UK and USA has done. This is because it would have to be issued through the ECB again, and they have been loath to delve into such areas.

Even if Portugal, Ireland, Greece and Spain could print money, it would need to be substantiated by bonds and government treasury bills that had value to support such an increase in debt ... and these countries do not have the ability to sell such debt due to the downgrade of their credit status.

This is the real issue as Portugal, Ireland, Greece or Spain could leave the Eurozone and EMU ... but to go to what?

If Ireland went back to the punt and Greece the drachma, what does this give them?

It gives them the ability to control interest policies, print more money through QE and issue further debt ... but does anyone believe in or want such burdens from countries already teetering towards junk status?

Maybe ... Argentina survived such a crisis for example.

Others would say that, for the European Union, it’s a good thing to get rid of basket case countries that weaken the Union.

A small few might say that any country leaving the European Union or even the Eurozone is no issue. It may not have been done before, but that’s no reason why it shouldn’t happen and, if it did, it does not signal the end of the Union or the euro.

However, the bottom line is really that any country forced to leave the Eurozone would be an embarrassment to the Grand Plan.

That’s the main raison d’être for bailing out Greece and Ireland, and why Portugal would be bailed out too.

However, with over €1 trillion exposure in Spain, the big question is what happens if their economy tanks?

Mmmm ... we’ll deal with that when it happens I guess.

 

Postscript: the BBC studies the practicalities of a country leaving the euro today.

 

 

An Irishman, a Politician and an Economist walk into a bar

I don’t want to comment too much on the Irish problems, so collected a variety of the best news from around the world to share here.

First, some background on the issue: 

Q: Why is the Irish economy in such a crisis?

A: Because they always think their capital should be Dublin.

And some solutions?  

First, merge with Australia as they “have lots of mineral wealth but no water and no culture, whilst Ireland has no mineral wealth but lots of water and lots of culture.”

Second, even better, get the Corrs to save Ireland.

This is because Ireland has no prenuptial laws, so all that needs to happen is that Corrs sisters Andrea, Sharon and Caroline marry a few folks like Facebook founder Mark Zuckerberg, Mexican billionaire Carlos Slim and the world's wealthiest investor Warren Buffett.

They then immediately divorce them and take half their net worth, which would bring in about $US50 billion.

That's just about enough to bail out the banks.

Both of the solutions above are obviously far better than the Irish government’s best plan, which is to give all of their citizens free cheese.

This created a very negative reaction from some Irish folks, who were heard to say: “Cheese us Christ. They say that cheese can give you nightmares, and now the nightmares are giving us cheese. They’ve all gone em’mental.”

Worse, this week's the Week makes the point strongly with their front cover:

 

This is reinforced by some folks who believe Ireland should rest in peace, with this obituary notice placed in the local news rag:

Ireland, 1922-2010, after a terminal illness bravely borne.  Predeceased by founding fathers Arthur Griffith and Michael Collins. Survived by 4.3 million grieving children. Removal from Cowen and Lenihan’s funeral home to the Church of the IMF.

But it’s not that bad. Ireland’s purely been downgraded from AAA+ to AA.

“What does that mean? Before, we were a battery for the remote control, but now we're only good for a Walkman?”

If you appreciate the humour, most of the above was spawned by the Kilkenny Kilkenomics Festival.

As they say, it must be bad when economics becomes interesting, although economics is far too important to be left to the economists!

 

Understanding SEPA's long and winding road

At the Euro Finance conference in Frankfurt this week was a stream all about transaction banking which yours truly attended.

The great and the good of our transaction world were also in attendance, as demonstrated by this short list of speakers:

• Albert Lechner, Vorstand Zahlungsverkehr, Betriebs-Center für Banken AG, München
• Andreas Kaiser, Leiter Cashmanagement, Bayer AG, Leverkusen
• Andreas Wolf, CEO, Clearstream Banking AG, Frankfurt a.M.
• Annie-Claude Jacquet, Head of Products and Transversal Projects, Global Payments & Cash Management, HSBC France, Paris
• Armin Gerhardt, Geschäftsführer, EFiS Polska SP.Z.oo., Gdansk
• Björn Flismark, Deputy Chairman, Euro Banking Association, Paris
• Charles Cock, Head of Client Development and Member of the Executive Committee, BNP Paribas Security Services, Paris
• Christian Schürlein, Senior Project Manager, Market Development, Xetra, Deutsche Börse Group, Frankfurt a.M.
• Christian Schürlein, Senior Project Manager, Market Development, Xetra, Deutsche Börse Group,
• Claus F. Hilles, Regional Representative D-A-CH, EBA Group, Frankfurt a.M.
• Damian Preisner, Treasury Operations and Processes, Global Treasury, SAP AG, Walldorf
• Dominik Adler, Division Manager Financial Markets, Bundesverband deutscher Banken, Berlin
• Dr. Heike Winter, Bundesbankdirektorin, Grundsatzfragen Massenzahlungsverkehr, Deutsche Bundesbank, Frankfurt a.M.
• Frank Annuscheit, Group Chief Operating Officer and Member of the Board of Managing Directors, Commerzbank AG, Frankfurt a.M.
• Frankfurt a.M.Geert Vanderbeke, Head of Sales Europe, ABN AMRO Clearing Bank N.V., Brussels
• Gertrude Tumpel-Gugerell, Member of the Executive Board, European Central Bank, Frankfurt a.M.
• Gilbert Lichter, CEO, EBA CLEARING, Paris
• Harald Keller, Senior Manager, Payments Markets, EMEA, SWIFT Germany GmbH, Frankfurt a.M.
• Jörg Wiemer, Senior Vice President, Head of Global Treasury, SAP AG, Walldorf
• Karoline von Richthofen, Global Head of Payment Markets, Deutsche Bank AG, Frankfurt a.M.
• Marc Aguilar, General Manager Multi-Channel Bank, BGL BNP Paribas, Luxembourg
• Marc Bayle, T2S Programme Manager, European Central Bank, Frankfurt a.M.
• Marc Rommerswinkel, Head of Payment & Collection Management, Corporate Finance, Treasury Processing, Henkel AG & Co. KGaA, Düsseldorf
• Mark S. Garvin, Chairman, Treasury & Securities Services – International, J.P. Morgan Europe Limited, London
• Nils Jung, Principal Consultant, Payments, Capco, Frankfurt a.M.
• Ruth Wandhöfer, EMEA Head Payment Strategy & Market Policy, Treasury and Trade Solutions, Citi, London
• Thomas Egner, Group Banking Operations – Payments Processes and Vendor Management, Director, Commerzbank AG, Frankfurt a.M.
• Werner Steinmüller, Head of Global Transaction Banking, Member of the Group Executive Committee, Deutsche Bank AG, Frankfurt a.M.

As you can see, with that list of the great and the good, it was bound to be an interesting day, and it was ... although coming so soon on the back of SIBOS, it could have been dull as dishwater.

The reason it wasn’t for me, is that I spent most of SIBOS locked in the innotribe stream, so I was happy to be updated on SEPA, T2S, Treasury ops and all sorts of other dialogue I missed in Amsterdam.

Most of the SEPA discussion focused on end-dates, with everyone saying that SEPA will only succeed when the end-date is in place.

Tell me something we don’t know.

Nevertheless, when Gertrude Tumpel-Gugerell said that: “2012 for SEPA Credit Transfers (SCT) and 2013 for SEPA Direct Debit (SDD) would be a good agenda to follow”, I could see a lot of shaking heads in the audience, as the bankers are working to 2016 and 2018 respectively and the corporates even longer.

But an end-date will come, with consultations today in Brussels and the Commission claiming they will announce a regulated end-date for conformance with SEPA instruments by end of year.

That is good as, with no business case at all to justify using SEPA instruments today, something needs to be done.

As Gertrude herself admitted: “one of the biggest challenges was the design of SDD and, one year on, it still has no practical usage.”

Indeed.

In fact, in the later panel discussion on SDDs explicitly, there were some interesting comments made particularly by Karoline von Richthofen, Global Head of Payment Markets for Deutsche Bank. First, she made clear that there are cultural differences between France, Germany and Italy in relation to transitioning to SDD and you cannot treat all of them the same.

For example, Germany’s transition is challenged by IBAN. In France, it is not as the French account numbering system was a mess before and so IBAN has been a blessing there. In France and Italy it is far more to do with repudiation and revocation of an incorrect direct debit amount that is the issue.

Therefore each country should be dealt with differently

This was a point raised in my own panel session.

My panel was focused upon the challenges to corporate for transaction banking, and consisted of

• Michael Hofmann, Branch Manager Germany, ABN AMRO Bank N.V., Frankfurt a.M.
• S. Rajgopal, Director, Head of Product Management, Standard Chartered Bank, Frankfurt a.M.
• Stefan Scheidgen, Head of Cash Management/Billing, Deutsche Post Renten Service, Cologne
• Alain Rividi, Treasury Program Manager Europe, IBM France, Paris

Michael Hoffman reinforced Karoline’s point by saying that he was in charge of the operations across Netherlands and Germany, and that the two countries are radically different.

In the Netherlands, everything is electronic and has moved to epay systems like iDEAL. In Germany, online banking and epayments are recognised but not nearly used as much as in the Netherlands due to concerns amongst citizens and businesses of the security and safety of online systems.

This raised an interesting question as you then have border overlaps, such as Northern Germany and the Netherlands, and Southern Germany and France.

A point underscored by an Austrian bank who could not understand what the hell were the demands of the Italian banks.

This led to other interesting dialogue.

For example, where is the demand for cross-border direct debits?

Karoline says it is from two camps:

Business-to-Business (B2B) which see the efficiencies and, for Business-to-Consumer (B2C) as an arbitrage of fees, where corporates in France want to collect consumer payments in Germany if the bank fees are less.

The latter point is particularly important in these border areas of France, Spain, Germany and Italy.

Equally, Annie-Claude Jacquet, Head of Products and Transversal Projects for HSBC France pointed out that such take-up would be limited in France for SDDs as: “5% of IBANs are incorrect which means that the rejects on SEPA payments are three times higher than on domestic payments for SCTs and is the reason why SDD is not taking off.”

Hmmmm ... teething troubles or long-term issue?

A final point worth noting on the practicalities of using SEPA instruments was raised by Stefan Scheidgen of Deutsche Post who gave a fascinating case study of their issues as a corporate user.

Deutsche Post has been used as a frontrunner for SEPA migration, and is moving all of their pension payments across to SCT formats.

That’s 26 million pension payments per month of which 24 million are domestic.

They moved 300,000 payments across in November 2009 and now make over 4 million payments through SCTs per month.

The problems they encountered however were multiple, specifically:

Legacy data migration

The continual changes in the financial industry

The requirements for global transaction processing

On the first point, a pension systems runs with account data that can be traced back over almost half a century for a pensioner, which creates big challenges due to multiple bank account formats over the years. Therefore, the legacy data migration from BBAN to IBAN was a big issue for the company, and although most banks offer some sort of data reconciliation services to the corporate clients, these are not consistent and do not cover all the bases.

The continual changes in the financial industry and the use of payments, for example, the move to new online and mobile payments, are causing problems. Just the migration to SEPA instruments within the banks and implementation of IBAN is an issue for example. Stefan believes there are far more frequent system changes and failures today than before, with five banks recently failing to deliver cross-border payment capabilities on time.

For these reason, it causes issues back to the corporate, with some banks limited the number of payments that can be communicated in each batch file to under 100,000. That sounds ok, but if Deutsche Post are to process 26 million pension payments per month at end of month, that’s more than 26 transaction files that have to be sent through on the last day of the month, cut and diced to suit the banks’ rather than the corporates’ payment processing capabilities. The reconciliation on those files is also a huge headache.

Finally, there are requirements from a corporate user to have an SGPA, Single Global Payments Area, rather than just a European one as the issue is global connectivity to payments systems, not just those within Europe.

The global processing requirements have not been addressed and most banks that call themselves Global Transaction Banks are just using this as a marketing label than a real capability. For example, they may be able to process across lots of regional hubs, but then the last mile is always a stretch. It might be the Cote D’Ivoire or Mauritius or Lagos or somewhere, but there’s always a part of the global transaction chain the bank has not got covered.

All in all a fascinating discussion of the challenges on both sides of the payments chain and maybe something I’ll spend some more time discussing later this week.

Meantime, just spent four hours at a foggy Heathrow trying to get to La Coruna, Spain, and now up in the air so it’s time for some relaxation ... something that European banks sound vastly in need of today.

 

The similarity between OTC derivatives and cheese

I recently chaired a conference focused upon FXMM, or foreign exchange money markets for those unfamiliar.

It’s a strange territory full of hedging and algo’s, but the bit of the day that really caught my attention was when Heather Pilley from the OTC Derivatives and Post-Trade Policy Division of the FSA, presented the plans for new regulations in this area.

She began by saying that the G20 has made it clear that by the end of 2012 there needs to be global regulations in place to ensure that OTC derivatives are traded on regulated exchanges.

This agreement is a drop dead date that the FSA, the EU and the USA are all working to such that, by 31st December 2012 or before, global markets will have fully regulated OTC derivatives markets.

On the 15th September, the European Commission released their proposed European Market Infrastructure Regulations (EMIR), and Heather made it is clear that these are similar, but not the same as, those proposed in the USA.

For example, EMIR includes FX exotics and forwards if they are being used for investment rather than commercial purposes. The US excludes FX forwards, so it’s different.

America restricts bank ownership of CCPs but Europe does not; EMIR instead strengthens the governance and surveillance requirements of CCPs but does not stop banks having ownership.

Similarly, smaller financial counterparties who are ‘not systemically important’ are excluded in American rules, but Europe bases ‘systemically important’ on a clearing threshold rather than the size of the counterparty.

This creates the shadiest area: the actual definition of what is ‘systemically important’.

Equally, a large OTC derivative contract for hedging based upon ‘commercial activity’ is excluded, whilst the same derivative if it is for investment purposes is included. Question: how do you separate and define these activities?

When a contract is made by an airline to hedge against oil price rises, is that commercial activity or investment activity?

This has not been defined in EMIR and are ‘still being worked upon’, hopefully in time for an agreement before the end of 2012.

Other areas that may confuse are that clearing obligations for these contracts are in two forms.

First, from a bottom-up view, the Central Counterparty (CCP) in Europe must be named and authorised by the national regulator, which will be identified through registration with the European Securities and Markets Authority (ESMA). This also determines the competent authority responsible for the contract, based upon the country of the CCP’s location.

Second, from a top-down view, ESMA determines which contracts must be cleared centrally and once a contract is in, it’s in 100%.

This begged the question as to whether that means every contract is reviewed on a contract-by-contract basis, or whether it is by definition of the type of OTC contract being made. According to Helen, it is based upon the class of contract, not every contract one by one.

Bearing in mind the confusion of the above, Helen then said that the legislation is likely to be ready by April 2011, the technical standards by Spring 2012.

With all of these things still to be defined, such as thresholds, this seriously worried the corporates in the room, especially the definition of ‘commercial activity’. For example, Malcolm Cooper, Global Tax & Treasury Director for the National Grid, asked a range of questions including: can we ensure that commercial activity includes cross-currency swaps where there is no trade involved, but it is a valid hedge of commercial activity? Has anyone looked at the cost implications, as few treasury departments will have the resources to cover intraday margin calls if that’s the direction such regulations take?

Heather reassured by saying that most legitimate trading would be allowed and that it is only the systemically important areas that are the focus of the regulation.

This led to Mike Hazell, Group Treasurer with Debenhams, asking whether a $500 million currency swap is systemically important, as that’s a pretty regular and common deal for his firm.

Heather responded that they would be looking at net exposures, and that this still needs further definition.

Another audience member asked why OTC regulations will apply to FX forward contracts for investment purposes which operate on a three-day cycle, but do not apply to FX spot trading which operates on a two-day cycle. Is it fair to exempt one and not the other, just for one day’s difference?

All in all, the whole conversation left me with the sense that those who are developing the regulations really do not know what they’re doing.

There are massive inconsistencies between the European Commission’s papers and views, and those of member states. Equally, there are big incongruence’s between the US view and the EU view.

Finally, the fact that the G20 has laid this down as drop dead by end of 2012, there’s a big danger of creating something so full of holes, that Emmental Cheese will look positively robust by comparison.

Which nation will be next global superpower?

As mentioned the other day, we are asking some big ticket long-term questions at SIBOS this year, such as:

• When will we know that financial systems work?
• How will we know when financial risk is not an issue anymore?
• What will America and Europe be doing when the economic power balance has shifted to Asia?
• Can we confidently create a way of investing for the long-term instead of our net present value short term view of today?
• Can we foretell a future where a human right includes "to not be poor", and what happens to work, life and war if there is no poverty?
• If money is just a way of exchanging value, and it's all now digitised, can we create digital money without the need for real money? How do virtual exchanges and virtual currencies change the commercial infrastructure?
• Could we create a world where financial transactions are sponsored, for example by Google ads, so that they are free? If so, what is the role of a bank and how will it make money, if all financial transactions are free?

This is all part of the focus upon the work of the Long Now Foundation and Long Finance group, of which I’m a part.

Long Now looks out at what will change over the next ten millennia, whilst the Long Finance looks out at a financial lifetime and how to build a financial system that could last 100 years.

In this series of discussions, I thought I would tackle one of the big questions we are considering: What will America and Europe be doing when the economic power balance has shifted to Asia?

Regarding the shift to the East, this is not a Long question, as the shift has already happened, if you listen to some folks.But does it matter?If America is no longer the great superpower but just a power, does it matter?If Europe has zero competitiveness due to its fragemented structures, does it matter?And what about Latin America and Brazil, don’t they matter?And Russia?And the Middle East?The answer to all of the above is that of course it matters.Any shift of economic or military power matters.For example, we could pose a different view to the above if we really want to be Long, and ask: what happens when the balance of economic power is determined by Africa?When we think of our land masses and populations, the real matters are determined by commodities, capabilities, processes and capital.So let’s look at these areas, and then consider who has the balance of power and who will get it.When we think of commodities, we think of oil, metals, cocoa, gold and similar.Those who have an abundance of scarce commodities that have value are naturally going to be richer than those who have none but need them. The Middle East has lived on their oil riches for long and will do so for the near future but, in the Long Now, some will fail.This is because the oil riches are a finite resource, and will eventually be drilled to extinction.The illustration of this issue is no better exemplified by Yemen, where poverty is rife having squandered away millions in oil revenues years ago, and being unable to create any substitute.This is unlike the Emirates, who ballooned into a prosperous construction, tourism and trading centre, built upon sand.So when we talk about commodities we are talking about a finite property, which is why there is scarcity and value. From a Long Now viewpoint, it must beg the question: what are you investing your finite billions in today for the infinite post-commodity years later?The answer is that these nations should be investing in education, knowledge, brains and science, as these capabilities build a sustainable future.The capability battle is one that Britain used well to build an empire a century ago, and that America used well to create prosperity through the twentieth century. It’s also what other nations, such as Singapore and India have realised in building their empires of today.It’s all about looking at things that humans can create that are of value and, by building leadership in this area, it means that your nation can stay ahead of the world when it comes to technological, scientific or commercial scarcity.Britain had that scarcity during Queen Victoria’s reign, with a technological leadership based upon naval and military strength. This allowed one small nation to colonise many other nations. By doing so, the strength of the nation increased by being able to access commodities of those nations, and gain commercial value, capital and further technological strengths which became a virtuous circle.This leadership faded as the industrial revolution led to America, with its vast swathes of land and resources, to take over as the manufacturing engine of the world.In America, that leadership came from building cars and computers, creating value through innovation, and through using knowledge to gain power over capital, commodities and resources.Today, this is the piece that is shifting to the East. China’s leadership is based upon people, processes, resources and investment in capabilities for building cheaper, faster and better. China’s a nation that saw the weakness in the model of the world – the cost of manufacturing – and exploited it to gain growth. Now, having gained that edge, they are investing in all the other things to generate wealth from science and knowledge, and to maintain and sustain future growth.

This is why China has a space mission, as does India.

These are indicators of building capability leadership through scientific and technological research.

India saw a different weakness in the world’s model – the cost of service – and their strategy was therefore to invest in knowledge, and specifically to use their brainpower to gain economic growth. The use of English language and investment in technology skills, restructured the world’s knowledge chains in the same way as China re-engineered the world’s supply chains.It is these investments in human capabilities that led to other nations, who had the commodity resources to support the wealth of manufacturing and services growth in China and India, to also enter a growth phase, particularly Brazil and Russia.Now, Brazil has invested in human capabilities to sustain their growth, whilst Russia is still a fragile economy due to a lesser focus on building such a sustainable future.So that outlines two cycles of economic power shifts: commodities and capabilities.The thing that now makes the difference is that, if you start with an abundance of resources and use the investment capability of such resources to create capabilities, which nations get the Long Win, as in they become a superpower.This is all down to processes.The two go hand-in-hand, and are easily reflected by Germany and Japan.Since the 1970s, we all say that Germany and Japan are the world’s leading nations in terms of their excellence in making cars and electronics.This is because Germany and Japan had a huge squeeze on capital after the War, and therefore had to create efficiency and effectiveness in processes. Luckily they could do that, thanks to a clean spread of land and knowledge that had a focus upon creating processes that maximised the efficiency and effectiveness of manufacturing.Just look at the work of W. Edwards Deming in post-War Japan to see how Just-in-Time manufacturing re-engineered the world.So where does this lead us to, in thinking of the Long Now future world?Who will be the future superpower?Not Europe, if the region continues in its current form.This is because Europe has a problem with managing the four dimensions of commodities, capabilities, processes and capital, mainly because Europe is a grouping of 27 individual nations rather than a singular whole. This is why Europe is bad at dealing with these, although some nations within Europe excel, as in Germany. This is why Europe is grappling with the question right now as to whether the Union can survive long-term if one or two nations are good at building a sustainable model of wealth, whilst having to give it all away to support the nations that aren’t.China and America are different as they are a nation and not a region. Admittedly, they are not a singular whole either – China and America are a formation of many individual states, like Europe – but they do have centralised governance for strategic planning and control, as well as a common language and currency. Again, I know some will be tutting at this point, saying that Mandarin and Cantonese are different languages and almost half of America speaks Spanish, but it is fundamentally different. This is because these nations do have a cohesive structure for planning, investment and management of commodities, capabilities, processes and capital, whereas Europe does not. Europe may in the future but, right now, it does not.Equally, many claim that Europe fails due to disparate and historical legacy infrastructures, whilst America succeeds by starting as a new Nation, with a new currency and agenda. China’s a new nation, in terms of infrastructure, and again can exploit and leverage that capability.So when we look at the capabilities criteria, China and America are the two large nations that both fit. Russia, Brazil, India and Africa would be the other contenders.We can leave Africa off the list for the moment, as they suffer the same paranoia and fragmentation as Europe. Similarly with Russia, for they need some serious investment in people and capability if they are ever to maximise their resources and opportunities.So, America, China, Brazil and India are the four Long Finance nations on the radar.They are all single nations with central planning structures and a relatively new Nation mentality, which means that they are not bogged down by legacy infrastructures from an economic viewpoint.They all have strong capabilities and access to resources, so we don’t need to think of these as an issue.Therefore, for the next century, the superpower from these four will be based upon processes.And here’s where it gets radical.America has been very good on process, and India is very good on process.Everything is in signed off in triplicate, checked, double-checked and authorised.The thing is that this procedural approach to processes is not adept for the new millennia process, where the fast beat the slow.Today’s globalised world works in seconds, not years, and the heavy-duty processes and rigid disciplines of the twentieth century will fail in the twenty first.So, for these reasons, America and India may be hindered culturally in the Long Finance twenty-first century, which leaves Brazil and China.You probably think it’s China, don’t you?China will be the Big Superpower of the twenty-first century.Well, maybe not.Maybe Brazil holds the balance of power for the Long Finance world.The reason for this conclusion is that China will be contracting in power in 2050-2060, due to their single child policy.The lack of new blood and an aging population could drag China’s economic tiger into a toothless and clawless sloth in the Long View.Meanwhile, Brazil has the commodities, capabilities, processes and capital to be the world’s largest economic force in the next century.If that’s the case, North America will feed off South America, and will be the subservient economy to Brazil. It will be a reverse relationship to the structure of the twentieth century, where you had the poor South and rich North.Similarly, Africa will have been raised from poverty, and India and China will still be forces of power, but not necessarily THE force of power.Europe will still be fragmented, with member states fighting for capital and control just as they are today, and Russia will still be tipped as the next big economy and, if the government does invest more strategically in commercial capabilities and processes, it just might make it.Meanwhile, I’m moving to Australia as, in the picture I’ve just painted, the world has turned upside down. All the wealth and control that was in the Northern Hemisphere has moved to the South, and so the natural juxtaposition of London will to live in Sydney.Interesting.Instead of coming from a land down-under, I’ll come from a land up-over ... G’day mates.

MiFID II: the post-trade agenda

One of the big topics in capital markets is intra-day liquidity and post-trade transparency.

Such discussions are far more noticeable now because the whole reason for this crisis, according to some, was the loss of trust between counterparties. That loss of trust was based upon counterparties not having enough liquidity to cover their positions. After all, if Lehmans could collapse with billions of dollars of debt – and they were AAA rated – then anyone could collapse.

We then had this dialogue around the right levels of counterparty cover and collateral required in the markets at start of day, end of day and intraday to enable effective trading.

There were discussions of whether it should be like the Russian markets, where collateral has to be pre-posted every morning to cover the day’s trading.

Or whether there was a way to just put circuit breakers on the markets, like the Eurex Clearing model discussed last week, although that liquidity control is based upon self-management.

There have been other discussions about regulatory controls of liquidity risk, such as those provided by the UK’s FSA that requested real-time reporting of liquidity positions, at an estimated cost of £2 billion in new technology spending.

Meantime, Europe announced the de Larosière reforms a year ago, and these reforms are now coming into play as the three new regulatory authorities- the European Banking Authority, the European Insurance Authority and the European Securities Authority - come into play.

And, of course, America is trying their darndest to sort out the mess of OTC Derivatives and fragmeneted trade reporting.

So, in summary, we have global, regional and national regulations working together and apart to try and lock down this space, as illustrated by this slide (doubleclick image to enlarge):

Stolen from Harald Keller’s (Senior Manager, Payments Markets, SWIFT) presentation – for more click here

Overall, the focus of all these regulatory changes is around liquidity risk, which brings in several other key elements including collateral management, clearing and settlement and post-trade reporting.

For example, at last week’s meeting in Germany, Robert Barnes of UBS kept using the line: “post-trade reporting is the next pre-trade”.

What he meant by this is that if you have real-time trade reporting, then that helps the markets with transparency of investment strategies and where the next trades will come from. Therefore, if you can immediately see who traded those two million Apple shares on the dark pool, then you can immediately alter your algo strategies to suit.

Bring in the algo news feeds et al and he’s right.

The trouble with this is that post-trade reporting is good if people do it, but a lot of trading operations ignore trade reporting. In fact, the only post-trade reporting market that seems efficient is London thanks to Boat. In some other markets, T+3 is the order of the day ... or even worse.

So one thing that MiFID II is likely to do is to bring in some mandatory trade reporting requirements that strengthen the moves where the first version of MiFID failed.

Another facet to MiFID II will be some form of mandatory real-time reporting of trades, and a clearing and settlement directive incorporated as part of this.

Now that’s a leap of imagination –real-time trade reporting, real-time liquidity positioning and real-time clearing and settlement.

I’ve blogged about real-time opportunities before, and do NOT think that the European Securities Authority, the European Commission or the ECB would be silly enough to mandate real-time everything, but I do think they will want to see true interoperability across all clearing systems.

The LinkUp Alliance and Code of Conduct has gone some way down this route, but the situation is still pretty fragmented as can be seen from this chart, courtesy of Robert Barnes at UBS:

Sure, this is slightly out-of-date, but things haven’t changed that much and so transparency of trades, simple and straight through clearing and real-time liquidity management are definitely order of the day for the regulatory agenda.

This is Part Four in a Series of Posts on the Regulatory Agenda for Capital Markets:

• Part One: SEC to crackdown on HFT?
• Part Two: What was the cause of the 'flash crash'
• Part Three: Exactly what is and how big are 'dark pools'?
• Part Four: MiFID II - the post-trade agenda
• Part Five: Best Execution and Global Trading

These items also build upon a series of posts about the Deutsche Börse:

• If you can't afford the tech, get out of the market
• Circuit breakers on the Deutsche Börse
• Forget Frankfurt, I'm moving to Basildon

Forget Frankfurt, I'm moving to Basildon

Since I first met the Deutsche Börse guys, I’ve found it challenging to work out where they are.

Y’see, last year I went to Börsenstraße in Frankfurt, as you would assume that the Borse would be in the street named after it.

Well, it used to be ...

... but not anymore.

Now the Deutsche Börse is in Neue Börsenstraße, Frankfurt.

It’s a journey of only five kilometres, but it does mean that the new Börse building is not in Frankfurt itself.

Nevertheless, it’s new and modern and has a nice big foyer for hosting conference days, like the one I attended this week.

They moved here ten years ago, and it comprises eight five-storey buildings in the shape of a fan, providing almost 50,000m² of office space.

Pretty darned impressive ay?

Nope.

For tax reasons, the Deutsche Börse is on the move yet again, and will switch to Eschborn a little later this year.

Eschborn?

Where’s that?

Eschborn is another hop, skip and jump from the Frankfurt-Hausen suburb, where they are now, and about 12 kilometres from the centre of Frankfurt.

According to the guys at the Deutsche Börse, this will save them around €50 million a year between tax savings – Frankfurt’s quite punitive tax-wise – and building rental and running costs.

Great.

The new building has 20,000 m² of office space and views of the Frankfurt skyline and the surrounding Taunus hills.

Here it is:

 

 

And lots more pictures here.

Give it a few more decades and they'll be in Bonn!

The thing is that, to me, it’s like Frankfurt is no longer a financial capital if its Exchange is no longer there.

It would be like the London Stock Exchange being in Basildon, Essex, but that’s not going to happen is it?

p.s. June 21st Financial Times headline - Colt, Verizon, euNetworks picked for NYSE Basildon: NYSE Euronext are to open a new data centre in Basildon, Essex with a floor space of 315,000 square feet, or about four soccer pitches.