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Banking in Macedonia

Banking in Macedonia

Global Banking & Finance Review interviewed  Mr. Vladimir Eftimoski,  CEO of Stopanska banka a.d. Bitola about the banking sector in Macedonia.

What are some of the main challenges and opportunities that the banking sector in Macedonia is facing?

The economic and financial turbulence on global level have their own influence over the situation in Macedonia and are, of course, one of the key challenges which the Macedonian banks are coping with. In conditions of uncertainty, all the positions in the work are placed in frames which should respond to the risks which may be imposed to the banks. In that regard, one should take into consideration the decreased economic activity, the worsened financial results of part of the business sector and the need of bigger liquidity.

In fact, from a macro-economic aspect, it is clear that all financial subjects should follow the directions dictated by the economy and the financial situation in the country. The Macedonian economy is highly dependent on the occurrences in the Eurozone because it is our greatest trading partner. Therefore, in the past several years, including 2015, the key exterior factor whose impact was reflected on the domestic economic situation was the global economic and financial crisis. In the Q4 of 2014 there was a difficult recovery of the economic activity (the annual growth rate of the GDP in the Eurozone was 0.9%), the industrial production slowed down, and the inflation rate was negative for the first time since 2009 and was -0.2%. This situation, as you know, continued in the first half of 2009 when the GDP growth rate in the Eurozone was 0.4% in Q1 i.e. 1% on annual basis. With regard to the inflation, there is an evident mild improvement, so the data for June show annual growth of 0.2%. However, the inflation rate is still the main objective of the ECB and the programme for quantitative facilitation continues and will be implemented by the ECB until the end of September 2016.

In Macedonia the numbers show an increase of the GDP in Q4 of 2015 of 2.7% and an average negative annual inflation rate of -0.3%. In the first half of 2015 the economic results show that the worsened economic trend continues. The average annual inflation rate was maintained on the level of 2015 and it was -0.3%. The GDP growth rate has also not marked any significant changes, so in Q2 of 2015 it was 2.6%.

I would like to underline that it is good that in such an economic situation the Macedonian banking sector has continue the trend of stability and has increased the level of liquidity. This enabled monetary loosening by decreasing the basic interest rate of 3.50% to 3.25% which was maintained in 2015. The additional changes implemented into the monetary policy is stimulating the growth of loans and have provided support for the private sector in conditions of decrease foreign demand which influenced the limitation of the growth in the domestic economy. The final product which we received was the increase of the assets at the level of the banking system by 8.33%, a growth of gross loans to non-financial subjects by 9.22%, increase in the deposits of the non-financial subjects by 10.67% and increase of the capital and reserves by 3.97% compared to the previous year. In that context more concrete challenges and opportunities are defined and these are the challenges which the banks in Macedonia are facing – how to use the increased liquidity in order to support the business and the economy. In that line, Stopanska banka a.d. Bitola marks a growth in the loan placement by 5.13% in the first semester of 2015 whereas the deposits of non-financial subjects were kept on the stable level achieved in 2014. The capital and reserves are increased by 12.99% which is a signal for an increased degree of capitalization of the bank.

Being the leader in the banking services for the population, what do you think, which were the initiatives that contributed for your success?

Even in this period which was difficult for the global and domestic economic surroundings, Stopanska banka a.d. Bitola has successfully completed 2014 with 187.26 million MK Denars in profits i.e. 3.04 million EUR, after the taxation and calculated pursuant to the IFRS. This is three times more compared to the profits in 2013. This result owes to several factors. First, in 2014 we had bigger net incomes from interest by 161.45% compared to 2013. In the same period we increased the incomes of accumulated and written off interest receivables in accordance with the agreement for liabilities settlement with a value of 4 million EUR.

In the past year, the Bank invested all its funds and resources to improve the quality of the services it offers to its clients through analysis of their needs, and with the purpose of creating an offer of services and products pursuant to the specific needs of each client. As a result of these efforts, in 2014 the Bank increased the number of clients, the scope of crediting and the works in the payment system. All these initiatives, together with good expenditure management, have positively reflected on the net incomes of commissions and compensations which were increased by 10.99% compared to 2013. In this period the net incomes of rate-exchange differences mark an increase of 12.87 million MK Denars and are bigger than 2013 by 70.03%.

The remaining incomes of the activities are doubled compared to the ones accomplished in 2013. This increase mainly owes to the profit made from the sale of part of the property. This position includes the incomes of investments in shares of investment funds, as a more profitable alternative compared to the investment in long-term national securities out of which in 2014 the Bank has gained an amount of 1.46 million MK Denars.

The number of employees was increased as a result of the increased number of clients and the increased activity in 2014. The Bank expanded its network of branches and ATMs which cause increase of the expenses for employees by 15.08%, the remaining expenditures of the activity were increased by 20.31% whereas the depreciation was higher by 16.27%. In the first semester for 2015 the trend of growth of the Bank continues, and so the expenses for the employees mark an increase of 13.22%; the remaining expenditures of the activity are increased by 6.04% whereas the depreciation is higher by 13.22%. In parallel with the increased scope of clients the Bank was also active in line of expanding the network of branches and ATMs. In that line, annually, the network of branches was increased by 26.67% in 2014, while the ATM coverage on the territory of Macedonia marks a growth of 41.18%.

When it comes to the increase of the clients base, the contribution of new clients – individuals is especially important – compared to 2013 it was 6.16%, a trend which continues in the first semester of 2015 with an increase of 1.07%. The positive changes within the clients’ base additionally contributed to the increase of 49.76% of the gross loan portfolio of individuals in 2014 compared to 2013 i.e. a growth of 6.92% in the first semester of 2015. The growth of gross loan portfolio of individuals positively reflected on the net incomes of interests which in 2014 were bigger by 192.94% compared to 2013 i.e. 269.59% in the first six months of 2015 compared to the same period in 2014. Having in mind the conditions of the economy in the country, I am especially glad to underline the support which the Bank is giving to the individuals by approving self-employment loans, a project realized in cooperation with the appropriate competent institutions in Macedonia. Moreover, there is an appropriate growth within the incomes of commissions from individuals which were increased by 9.40% in 2014/2013. The growth on this position in the first semester of 2015 compared to the first semester in 2014 was 7.10%.

I reckon that this growth is mostly owing to the unique approach which we as a Bank have towards our clients and is a result of the commitment of each of our employees towards every existing or new client. The fulfilment of the requests and meeting the needs of our clients are our obligation! Namely, every individual who accesses as a new client in our Bank with the very act of signing becomes our highly appreciated client who receives highly qualitative and professional services.

Which unique products and services were created as a direct response to the needs and desires of the clients?

In the past period the Bank is recognized as a stable and secure financial institution. The professional working and the good reputation have contributed to the growth of the deposits of the individuals, an increased number of loans and reinforcement of the market position.

Working with clients (individuals) is in the primary focus of Stopanska banka a.d. Bitola. The objective of the Bank is to provide maximum support to the individuals with an acceptable and reliable business idea when adopting the financial decisions referring to providing additional funds with low interests, as well as long-term loans. We offer friendly advice when investing their surplus of funds in specially created deposit products, which are, of course, in line with the prudent risk management.

The unique approach which we as a Bank have created towards our clients contributes for each client to be able to get all necessary information and to meet their needs in one place which is a special advantage, taking into consideration the dynamics of the contemporary living. The professional relations and the qualitative service towards every client are our single obligation.

The Bank is continuously working and investing its funds and resources to improve the quality of the performed services, makes analysis of the client when preparing the offer and works on the engineering of new competitive products and services which will be fully responsive and in accordance with the needs and nature of the population.

In this part I would like to emphasize that this is a permanent and inevitable process. During 2014 as a result of the agility and flexibility, the conditions and prices of the products and services of Stopanska banka Bitola were continuously harmonized with the conditions on the market, the needs of the clients and the competition.

The technology plays an important part in the banking. How did Stopanska banka a.d. Bitola cope with the challenges of the development of information technology?

The continuous progress and application of information technology in the everyday life imposes a need of expanded palette of products and services coming from the banks in electronic form and will be user-friendly for the business people who have less and less free time. The industries which desire to be more competitive and easily available for their clients will need to adjust to these changes. The adjustment includes creation and application of innovative, easily available and automated processes and solutions in the everyday life, with an increased saving of the direct use of human capital.

 Stopanska banka a.d. Bitola during this and in the past year has implemented several activities and projects for development and upgrade of the applicative systems in line of implementation of the regulatory terms, meeting the mandatory standards and regulations of the Bank and the recommendations given by the audit; achieving competitive advantages; rationalization and optimization of the business processes and harmonization within the frames of the Bank; upgrade of the IT infrastructure (system, communication, data base, as well as security information). These changes and improvements of the existing IT systems have enabled conditions for efficient monitoring of the market and the scope of the work and easy adjustment of the Bank to the changes in the organization and regulation.

The bank is permanently expanding its ATMs network, as well as their upgrade with new services. This is one of the two banks in Macedonia which have started the M-payment project. This was initiated towards the end of 2014 and we expect it to be finalized towards the end of this year.

The relations with the clients play an important part in the banking. What are the initiatives you included in order for the clients to continue getting on their disposal the best services?

The clients are always in the focus of the bank. During its existence Stopanska banka Bitola managed to establish close connections to its clients. The maintenance and deepening of these relations is a primary objective of the Bank. This is recorded in its heritage, tradition, culture, as well as in its future working. In order to achieve a higher level of services for the clients, the Bank managed to upgrade its internal educational programmes and the training programmes in cooperation and with the support from external companies specialized for training. In that line, in 2014 the Bank started an intensive realization of the project for talent management by organizing and implementation of unified professional assessment of the leading personnel and preparatory activities of the bank for implementation of a new system for monitoring and assessment of the performances of the employees by defining the objectives.

The more significant internal trainings in the bank include: seminars for the new employees, trainings for the organizational culture and professional behaviour, covering the ongoing changes of the legal regulation and current trends regarding the news in the offer of products and services, improvement of soft-skills of the employees, as well as experts’ training for internal transfer of know-how in different areas in the banking. The relations of the Bank with the clients are based on contemporary approach in the human resources management. The maintenance and reinforcement of the human capacities is done with appropriate engagement of employees, valuation of their performances and results, promotion and upgrade, systematic approach towards accomplishing professional specialization and training of the employees. These are the main tasks and activities in the field of personnel management of the Bank.

At the same time, our employees are always timely acquainted with all aspects and details around the new services and products which the Bank is placing on the market, all in order to provide qualitative and timely service to the clients.

Do you have any ongoing projects which you would like to share with us?

Following the world trends of globalization which are present not only in the finance sector, but also in all other sectors of the economy, we are aware that Macedonia, being a small open economy, will not be bypassed by these processes. In Macedonia and the region there are several banking brands which additionally put pressure on the competition, but also over the fast tempo of the globalization. Being aware of this unstoppable process, and led by the experience of the managing team of the Bank, we are intensively working on being well prepared to tackle these processes. As for myself, in my 17 years of banking experience, gained in international banking trends, I have passed through these processes and I know their importance.

It is a fact that in the moment the world economy and the finance sector are still in a global crisis which slows down this process. Here we can see our biggest advantage, to be sufficiently fast and flexible, in order to use this vacuum period for reorganization and consolidation in order to attract a foreign strategic partner who would be interested in presence of the Macedonian market. The most optimistic expectations are that the financial markets, especially the market of capital will start recovering towards the end of 2017. The consolidation process, cleaning out the bad placements and reorganization started in 2013, which resulted in excellent achievements in 2014. We plan to use 2015 and the following two years for more efficient acting on the domestic and foreign markets in order to attract a foreign strategic partner. Knowing the deliberation and reservations which the investors have, this process would be a gradual one: First, by attracting a credit line with a longer repayment period; then, in the form of subordinated debt to make efficient use of the time for them to meet the Bank and its processes. In the end, our primary objective i.e. primary project is our complete consolidation and reorganization which will enable us to function as a modern bank which will be able to compete with the world banking trends in line of attracting foreign financial strategic partners.

In which way is Stopanska banka a.d. Bitola providing support for the socio-economic development in Macedonia?

One of the strategic objectives determined with the business policy and the development plan of the Bank is to take consistent care for the social good. In accordance with this strategic determination, the Bank in 2014 was constantly and actively included in the different projects and activities of public and social nature.

  • In 2014 the Bank continued its long-term tradition with humane character to help the protégés in the Primary School “Gjorgji Sugarev” in Bitola;
  • Stopanska banka a.d. Bitola donated funds for construction of the temple “Ss. Konstantin and Elena” in Skopje;
  • Stopanska banka a.d. Bitola supported the International youth art-festival “Bitola – an open city”;
  • The bank sponsored the equipping of the city pool “Atina Bojadzi” in Ohrid;
  • The bank gave donation to the Association of children with autism and the children with Asperger’s Syndrome.

We are especially proud of the cooperation which the Bank has with the Association of children with autism and Asperger’s syndrome because the constant support which we are providing is promoting and animating their creativity and talents through adaptation of their drawings and other pieces of art into the marketing materials of the Bank.

Unlike the other banks in Macedonia, Stopanska banka a.d. Bitola has its head-quarters beyond the capital. This is a great advantage, but of course, and a big responsibility for the bank to aid the local economic development in the South-West region of Macedonia. With its projects and plans, the Bank is actively included in supporting the small and medium businesses, and of course, the agriculture sector, which is one of the main activities of the population in this region.

The activities of public and social nature have continued in 2015 when the Bank was included in providing help for the flooded areas in the Pelagonija region. Furthermore, the support which the bank is providing to the development of the culture and sports is not lagging behind.

What are your future plans for development?

If I say that we should grow, because we are a medium bank on the level of the banking sector in Macedonia, this will not be the most precise definition of the plan for development of Stopanska banka a.d. Bitola. Our objective is to continue the trend for growth of the crediting scope in healthy and sustainable business projects, which will improve the economic position of Macedonia. Our goal is to gain bigger trust within the clients and to use it, in order to increase the overall capital of the Bank which will be placed into the function of the business. These are the more general goals, but they are presented in details in several business plans and policies of the Bank, which are very ambitious.

In the very end, I would conclude that a given banking and financial system does not recognize small or big, but good or bad, successful or unsuccessful. Therefore, our primary goal is to be good and successful, and of course, to always improve and upgrade in all segments of our work, such as relations with clients, the offer of products and services, relations towards the community, etc. In any case, we must not forget the investments in the employees and managers.

Interviews

Front line strategies for responding to the COVID-19 crisis: Experiences from legal team leaders around the world

Front line strategies for responding to the COVID-19 crisis: Experiences from legal team leaders around the world 1

By Diane Dix – General Counsel, Total Safety, Marc Michael – Chief Counsel, Global Dispute Resolution, AES Corp, Tim Williams – Senior Counsel, Dispute Management, Wärtsilä Corporation, Susan Dunn – Founder and CEO, Harbour Litigation Finance, Tamer Nassar – Managing Director, Eternal Energy, Derrick Dale QC – Fountain Court Chambers

A crisis like Covid-19 has presented a highly unusual set of challenges for global business.  Whilst, for any business, ensuring the immediate health and safety of its workforce is paramount, a coordinated and considered crisis response strategy is also essential.  Any such response strategy should include the in house legal function to mitigate litigation risk, assist in managing the dialogue with counterparties in business-critical contracts and to horizon-scan for legal and compliance risk which may develop from the crisis.

In this article, London-based Winston & Strawn litigation partner, Ben Bruton, speaks to 4 senior in house leaders, a leading Queen’s Counsel and the founder of a prominent third party funder to draw on their experience of managing their teams through previous crises and to share their perspectives on the legal challenges which businesses are encountering arising out of COVID-19.

BB: First of all, thank you to all of you for agreeing to share your experiences from managing your teams through the pandemic.  As we all worked through the global financial crisis in 2008 onwards, I thought we could start by comparing the consequences of the current pandemic with consequences of the financial crisis.  Do you see similarities?

DD:  When lockdowns commenced around the world, we were better prepared than we were in 2008, in part because this crisis came on gradually so we had time to consider the possible scenarios and plan for them. We spent several weeks ensuring we had business continuity and crisis response plans in place, developing a communications plan and reviewing contracts for force majeure and other relevant provisions. We did not have that luxury in the 2008 financial crisis. What makes this crisis different is that it has significant health and economic impacts, and it is truly global, both of which create a very different dynamic from prior crises. And our response strategies have been much more employee focused.

SD: The main difference between 2020 and 2008 we have seen (as a litigation funder), is that we did not see litigation emerge seeking funding until a very long time after 2008.  It seems people were assessing their position and knew they had, typically, 6 years to bring a claim, and therefore focused on re-building, not litigation, initially.  This time round we have already seen people contacting us for funding of claims because they have to act right now to save their businesses.  This is the big difference.

The other big difference is that litigation funding was less widely used and understood in 2008.  In 2020, it is used by every type of client including those who might well have used funding in 2008 but were not being advised by their external lawyers that it was an option.

TW: The global financial response to COVID-19 was, I think, significantly influenced by the lessons learned from the previous financial crisis: governments moved quickly to signal and implement stimulus and offer support (including direct action on evictions and so on), which I think can only help.

MM: Unlike with the 2008/9 financial crisis, our first priority has been health and safety.  Everyone is concerned about maintaining the safety of our workforce and customers. This has forced us to change the way we work at the plants and corporate offices.  We really did not have to change our methods of working during the previous crisis, although we did worry about the financial wherewithal of certain counterparties.

TN: Whilst the 2008 crisis was financial in nature and the 2020 crisis heath related, the risks to business brought about are surprising similar.  Once again we have been looking at developing strategies to save businesses, save jobs and adjust to what appears to be a new normal.  Now, as then, we are looking at various strategies to reduce costs such as remote working, cutting travel and other related expenses, shedding value-add services such as consultants and the like and renegotiating pricing with vendors.

BB: The circumstances have obviously put supply chains and contractual relationships under significant pressure.  What strategies have you deployed for engagement with contractual counterparties?

MM: The workload in the legal team increased dramatically.  We received literally hundreds of notices claiming force majeure and/or change in law relating to the pandemic or the governmental response to it.  Construction contractors have sought relief in meeting milestones given the disruption to travel and the difficulty in procuring supplies, for example.  Fuel suppliers warned that stay-at-home orders and possible social unrest could impair their ability to deliver fuel to our facilities.  We made an effort to compile and analyze these notices so that we could provide consistent guidance to all of our affected businesses.

SD: From the litigation funding perspective, a key issue is of course the solvency of claimant counterparties and defendants alike.  We always pay close attention to that factor, regardless of these current circumstances. The number one question we always ask of any new matter is how do we and the claimant get paid if the case is successful.  Inevitably there may be some impact on the businesses of particular defendants so we are paying even closer attention to this factor.  And if claimants need putting into administration in order to protect and preserve their claim we will look to protect them in this way.

TN: On the whole, we sought to accommodate our clients’ requests to suspend contracts or otherwise terminate them outside of the scope of the actual terms of the agreement (e.g. notice periods, etc.).  in many cases, we also advised our clients to do the same, such that they are not perceived as being opportunistic in their dealings with clients and vendors.  Suffice to say, we have not been running straight to the contract in these trying times, but taking a rather pragmatic view of things.

DD:  We reviewed all of our key contracts to ensure we understood our contractual rights and obligations so that we were prepared to act swiftly where necessary. We were also very proactive in engaging with our largest customers and suppliers to anticipate any disruption in services. And where projects have been delayed, we have been in regular communication about scheduling to ensure that work could resume as soon as possible. In some cases we have been asked for price concessions and we have asked our suppliers for price concessions. Our experience has been that our contractual counterparties generally are acting in good faith and trying to work together to get through this crisis.

TW: We have been working hard to keep customers, suppliers and stakeholders informed and involved, and to offer both short-term alternatives (such as remote monitoring of the equipment) and medium- to long term business continuity (how long will your safety spares last?). We have found that there have been fewer shutdowns in the supply chain than slowdowns, and we have been humbled by the responses of our individual employees who were prepared to keep going to work to keep the lights on.

BB: What are the key legal issues you have been contending with as a consequence of the pandemic and the government response?

TN: We have had to consider contract terminations and suspensions, generally predicated on force majeure; non- and late payments; employment terminations and furloughs; unilateral price revisions from clients; and disruption to the supply chain in terms of non- and late delivery.

DD: The legal issues have been numerous. We reviewed the various government aid packages in North America, Europe and the Middle East to determine which of them apply to our business; we monitored the state and local shelter in place ordinances to determine whether we are an essential business and can continue operating; we reviewed privacy laws globally in connection with actions to take concerning the health of our own employees as well as evaluating new commercial offerings such as coronavirus screening; and we reviewed contractual recourse, among many other issues.

TW:  Along with everyone else, a priority has been to balance our duties as an employer to provide a safe workplace with compliance with applicable law, changes of law, the practical challenges of restrictions on movement (we have a significant field service offering) with the flurry of force majeure notices, and of course the follow up contract notices that address events of delay. We have not sought to rely on frustration and impossibility to end contracts as we are in long term relationship businesses. We expect to see the impact of hardship to come in terms of insolvency events and possibly even foolish calls on performance bonds, and we have worked hard on alternative sources of supply, logistics and transportation.  The key words have been continuity and cash flow. We need to keep getting paid, and paying our bills.

DDQC: In terms of commercial contracts the main focus has been analysing force majeure, frustration and termination rights under contracts. In terms of insurance claims, analysing the scope of the cover for business interruption claims has been centre stage and I suspect that in addition to coverage, issues of causation and loss will all be highly contested.

MM: In addition to force majeure and change of law issues, we’ve had to consider whether official governmental action in response to the virus may require us to provide to relief to utility customers or may even impair our rights.

BB: You are all responsible for managing teams.  As a final question, based on your experience of the last few months, what guidance would you give in relation to how to manage a team remotely in an effective manner?

TW: If you are not already used to managing teams remotely, get used to the technology, use it, and use it often to stay in touch. Make sure your networks and infrastructure are robust. It also helps to use video where your network supports it to improve the quality of communication. No one wants to spend all day talking to their own screen. Virtual coffee breaks or even lunch breaks can help bring us together, especially if you have ‘lone wolves’ in your team.

MM: We’re a very collaborative organization, with frequent scheduled and impromptu in-person meetings throughout the day.  Over the last few months, that has not been possible, because many of us have been working remotely, so we’ve had to rely heavily on technology to keep us connected.  Videoconferencing has been very helpful with this, and in the Legal group we established guidelines to ensure that people are able to work productively at home and keep in touch with their colleagues.  We also established a weekly call for the global Legal group, and a weekly virtual “happy hour” for the corporate Legal group so that we can connect with our colleagues more socially.

TN:  We found that an effective method of remote team management has been to schedule weekly individual calls to set weekly objectives and review the prior week’s accomplishments.  Communication in between those calls ought to be sparse and generally initiated by the team member, rather than the manager.

DDQC: Ensuring good levels of communication and teamwork within any litigation team is always essential and during the lockdown period we had to double up on this as solicitors and barristers navigated our way through gearing up for remote hearings, which seem to be the new norm for the foreseeable future. In our world ensuring that we have the requisite IT support to do this at all times has been essential. At Fountain Court, we have set up our large conference rooms so we can use them to dial into remote hearings and have leaders and juniors in the same room whilst the hearing is going on as well as having the IT support on hand.

DD: I have led a global team based across various jurisdictions for many years, so I’m very comfortable managing a team remotely. It has been a bigger challenge for colleagues who are accustomed to in-person engagement. They have learned to take advantage of video tools and grown more patient with background noise (children, dogs). As a leadership team, we have focused on frequent communication with our employees, being as transparent as possible about the state of the business and actions we are taking to address the challenges, and we have taken time to joke with one another and have a little fun. I find that when a team is working remotely, especially during a crisis, maintaining camaraderie and a positive outlook is very important.

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How mortgage regulations are changing globally

How mortgage regulations are changing globally 2

By Globalaw members Oliver Foerster, Partner @ Huth Dietrich Hahn, Roberto Sparano, Partner @ Quorum Legal ,Paul Tully, Managing Director and Partner @ (McInnes Wilson) ,Tim Meng, Managing Partner @ Golden Gate ,Rory Campbell, Partner @ Hanson Bridgett ,Jose Gutierrez Partner @ Ramírez Gutiérrez-Azpe, Rodríguez Rivero & Hurtado, Andrew Chalmers, Managing Partner @ DCS Legal, Bryan Birkeland, Partner @ Jackson Walker  

What is the most significant change we’ve seen in regulation in the past year?

UK: There are two key bodies that handle mortgage regulation in the UK. The first is the Financial Conduct Authority (FCA) and the second is the Prudential Regulation Authority (PRA). The FCA regulates all home-owner mortgages and lifetime mortgages such as equity release lending. Meanwhile, the PRA determines the amount of money that lenders, such as bank and building societies, need to hold, and the risk controls that they need to maintain. In October 2019, the FCA issued responsible lending rules and guidance covering borrowers who wanted to switch mortgage and were up to date with payments but did not wish to borrow any more money, by reducing barriers to such switches.

On 31 January 2020 the FCA announced a new mortgage advice and selling standards rules with immediate effect and a transition period running to 30 July 2020. These rules are intended to give consumers more choice in how they buy a mortgage and remove barriers created by earlier legislation. The rules centre around ensuring that consumers only pay for specific mortgage advice and ensuring that advisers must explain why they are not recommending cheaper mortgage options.

Germany: There were no significant changes in regulation regarding non-commercial mortgages.

US: The significant regulatory developments in the U.S. residential mortgage industry are:

  • Federal Developments:
    • Mortgage Underwriting: The Consumer Finance Protection Bureau (CFPB) has indicated that the “GSE Patch” (a temporary category under which loans eligible for purchase or guarantee by Government Sponsored Enterprises) will be extended beyond its pending expiration in January 2021. It will permit federally backed lenders continued underwriting leeway in addressing the 43% debt-to-income underwriting standard and is expected to preserve over $250 billion in loan originations.
    • Flood Insurance Reauthorization: The National Flood Insurance Program has been extended until September 30, 2020. It preserves flood insurance for approximately 5 million insurance policies, 22,000 communities, and provides $1.3 trillion in coverage.
    • CMBS Markets: The Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac’s regulator and conservator, has implemented its goal of creating a common mortgage-backed security (MBS) protocol via the “Single Security Initiative.” It is being done via a common securitization platform (CSP) which will now underpin the operations of the $4.6 trillion MBS market.
  • COVID-19 Regulation: The COVID-19 Aid, Relief, and Economic Security Act (CARES ACT) applies to federally backed mortgages, which account for approximately 70% of all residential mortgages in the U.S. For borrowers under financial distress due to COVID, the CARES ACT provides for forbearance (payment delays) on mortgages for up to 12 months. Late charges, extra fees and penalties are prohibited. Limited documentation is required to prove eligibility. Multifamily loans under HUD programs also have forbearance, but under shorter forbearance periods (up to 90 days). Loan servicers on federally backed mortgages are prohibited from starting foreclosures before May 18, 2020.
  • State COVID Response
  • Beyond federal limitations, state and local authorities in many U.S. states have issued COVID-19 focused temporary orders restricting remedies on residential mortgages. These vary state-by-state. Examples include:
  • California’s suspension of residential foreclosures state-wide through May 31, 2020;
  • New York’s 90-day moratorium on the enforcement of foreclosures and prohibitions “until further order” against filing foreclosure actions and other non-essential cases; and
  • Florida’s suspension of residential mortgage foreclosures through May 18, 2020.

Mexico: There were no significant changes in regulation regarding non-commercial mortgages.

China: Since August 2019, China’s central bank (PBOC) has changed the way commercial lenders set interest rates for loans. The mortgage rates will be based on Loan Prime Rate, or LPR, the new benchmark rate system, which will be linked to the PBOC’s medium-term lending facility (MLF) interest rate.

New mortgage loan rates for first-home buyers shouldn’t be lower than related LPRs. It has also been reported that the rate for second-home buyers must be at least 60 basis points higher than LPRs. Also, the loan prime rate is set on the 20th of every month, instead of daily.

Borrowers could negotiate with lenders on how to adjust their interests of mortgage loans each year based on changes of the LPR.

What impact will COVID-19 have in shaping regulations in the future if any?

UK: The FCA issued guidance on 20 March to mortgage lenders specifically dealing with COVID-19. This guidance is to be reviewed in the next 3 months. It is based and builds on two important principles binding mortgage lenders, namely, to treat the interests of its customers fairly, and to act honestly, fairly and professionally in accordance with the best interests of the customer.

The main principles of the guidance are that:

  1. A borrower experiencing difficulties or who reasonably expects to do so, may ask for a payment holiday and if that request is made, a 3 months’ payment holiday is to be offered, unless the mortgage lender can demonstrate that it is reasonable to do otherwise. More favourable arrangements can also be offered such as reducing or waiving interest.
  2. A payment holiday should be offered to anyone that indicates that they are or may be in difficulty making their mortgage payments.
  3. No fee or charges can be applied to any request.
  4. Any request for or any payment holiday agreed must have no impact on the credit rating of any person concerned as this is due to circumstances entirely outside of their control.
  5. No repossession should be commenced or continued at this time. This applies irrespective of the stage which any repossession proceedings have reached.

Germany: The impact of COVID-19 will most likely depend on how fast the country’s economy will recover. If the recovery materializes at a slower than expected pace, it is fair to assume that stimuluses will be introduced to promote the recovery of the economy. Instruments that reduce interest rates and an easier access to lending might be one of those stimuluses. This can lead to higher prices for real estate which – in turn – can change the ratio of equity and debt in relation to the financing of the acquisition prices. Loans are likely to be backed by mortgages. In consequence, the level of indebtedness will increase, and the solvency of the debtors will decrease, thereby also decreasing the value a mortgage can provide to secure the lender.

Another possible instrument could be a regulation differentiating the access to lending by the level of the borrower’s exposure to the COVID-19. For instance, a borrower who is more exposed to other individuals or is employed in an industry which largely depends on the contact of individuals (i.e. the hotel or catering industry) could possibly be treated differently from a borrower who has no such exposure.

Background for this differentiation would be that the more exposed borrower is more likely to be infected and therefore might be considered to present a higher risk to default on a debt. On the other hand, depending on the impact of COVID-19 on the economy, it is also a possibility that the government will guarantee to the lender to a certain extent that a mortgage-backed loan will be repaid. In this scenario, it is likely that the regulation on mortgages would be relaxed.

US: COVID-19 is disrupting every aspect of the U.S. economy and social life. It will continue to effect massive political, legal and social changes. Stop-gap regulatory responses will continue to attempt to “flatten the curve” of this disruption, but it is hard to see how the industry and the legal infrastructure can manage the fallout (it is still hobbled by lockdown in many places). With over 33 million people filing for unemployment and an unlikely V-shaped recovery, lenders will be facing a tsunami of distressed borrowers, mortgage defaults, impaired collateral, and deteriorating credit quality.

While the residential real estate market has been particularly hard hit, in recent weeks effective short-term solutions have been created for both homeowners and mortgage servicers. Depending on the length and severity of the economic impact created by COVID-19, it has yet to be seen if these temporary adaptations will result in longer-term changes for the residential mortgage market.

Lenders are likely to seek relief (and receive it) in adjusting underwriting standards and recalibrating debt-to-income and credit quality standards. It is also likely that banks may propose that the Federal Reserve and Treasury establish a credit facility for mortgage servicers, who are being hit hard by the relief provided to borrowers.

For borrowers, we expect continued stopgap measures to spread out payment regimes in the short-term. Despite major efforts to provide liquidity for the market via monetary policy and stimulus programs, borrowers are faced with a highly damaged economy, rent strikes and impaired income prospects. They will enhance bottlenecks in having loans underwritten, as lenders attempt to respond to an evolving regulatory and economic environment. However, federal, state and local temporary mortgage forbearance measures as well as moratoriums or restrictions on foreclosures and evictions, in particular, seem unlikely to continue for the long-term after the economic impact of the COVID-19 situation stabilizes.

Mexico: COVID-19 is more likely to have an impact on business practices and not so much on legislative matters, since the consequences and results of an event such as this one is already regulated. However, when drafting an agreement, the will of the parties mainly dictates the rules, and for this reason, the impact would be reflected in the clauses of the agreements when dealing with acts of God and force majeure events. For this reason, it is likely that moving forward, these types of clauses will play a greater role in all kind of agreements, including the insertion of rules and exceptions for the enforcement of a mortgage guarantee under a scenario like the one we are currently facing.

China: Since January 2020, the China Banking Regulatory Commission and other governmental agencies released a number of measures to outline the special circumstances being implemented as a result of COVID-19. Under these measures, generally, financial institutions should flexibly adjust personal repayment arrangements such as housing mortgages and reasonably postpone the repayment period. Also, financial institutions are encouraged to negotiate with borrowers and appropriately reduce the interest on individual housing loans for those who temporarily lose their sources of income due to the pandemic.

In practice, most banks should grant an extension for instalment repayments for borrowers = affected by COVID-19. For example, for those who have lost their income temporarily due to the pandemic, the Bank of China (BOC) can offer 3-6 months’ delayed repayment arrangements dependent on individual circumstance. Another example of this is if confirmed or suspected cases or their spouses are overdue in making repayment during the pandemic period, the China Industry and Commerce Bank will not consider this a breach of contract or include them in the list of defaulting customers.

During the COVID-19 outbreak, banks and other financial institutions have been encouraged to actively use online technical means to handle banking services. In the event that borrowers could not apply for the extension of the banking agreement and sign the extension agreement through traditional face to face meetings, the banks could take the form through a non-contact approach, primarily through online financial services tools such as WeChat to solve the problem.

What regulations can we expect in the future?

UK: COVID-19 is likely to have a long-term impact on the economy and so it may well be that the guidance issued and referred to above will be extended beyond its initial three-month term. If the economy returns to normal, it is unlikely that COVID-19 will result in any specific new regulations in what is already a heavily regulated sector.

Other regulation that looks likely is facilitating the ability of borrowers to switch mortgage providers more easily. Research published in March 2019 shows that borrowers are reluctant to switch even if they could get far better deals elsewhere. The FCA is looking to intervene to help borrowers who do not switch and is issuing a consultation paper on potential remedies later in 2020, which may lead to new regulations.

The PRA is expected to introduce new mortgage reporting requirements for regulated home lenders and home finance administrators effective 1 October 2020.

Germany: We’re likely to see legislation geared towards breaking the vicious circle of cheap money, high real estate prices, increase of indebtedness of the acquirer, decrease of acquirer’s solvency, and decrease of the value of a mortgage for the lender; regulation might be introduced to limit the ratio of the acquisition price allowed to be financed by loans and backed up by mortgages.

US: If a new administration is elected, especially if the majority of the Senate shifts, significant “New Deal” restructuring can be expected.

On a more pragmatic level, the need to improve logistics surrounding closings has become quite evident as a result of state and local orders that have closed businesses, including title companies, and imposed social distancing requirements that often make in-person closings difficult or impractical. While virtual closings would seem to present an answer, current laws pertaining to electronic signatures, recordings, and notarizations make closings in an online world more difficult. The SECURE Notarization Act, proposed in March—permitting remote online notarization nationally—may, if passed, be a first step in the path to a digital transformation of the mortgage industry.

Mexico: There are a number of financial institutions which have been granted grace periods and subsequently restructured under certain conditions the repayment of loans, as otherwise a high volume of lenders would default, pushing lenders to foreclose a large sum of mortgage guarantees; a situation similar to what we saw during the 2008 financial crisis, which is not a desirable outcome for lenders or providers.

As a result, the Bank of Mexico and the Mexican Bank Association have issued policies to considerably reduce the inter-bank interest rate  as well as to negotiate its payments terms for four months in order to support the real estate market, which has been paralyzed to date as a result of COVID-19.

However, these conditions have developed through the will of the parties concerned and not through a binding decree or regulation. Therefore, in order to protect the interests of the parties involved, we could see future regulations of a public nature that bind financial institutions to behave similarly in the treatment of delinquency interest and in the terms of loan payments.

China: There is currently a high level of financial pressure and an increased risk of defaults. As a result of this, debt restructuring volumes will increase. It is also likely that the interest rate will be reduced for a prolonged period. Other measures such as debt relief and tax cuts may also be adopted to promote business activities.

Online technology and big data related technology will also be encouraged to use to make lending process more quickly and efficient.

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Interviews

Delivering Innovative Wealth Management Solutions

Odetta Morton

For more than half a century Deltec Bank & Trust has been providing global private banking services to high net worth clients. Deltec Bank & Trust has delivered comprehensive financial solutions and exceptional client support to meet the international wealth management needs of successful individuals, families, and businesses.Since becoming CEO in 2019, Odetta Morton has focused on leveraging Deltec’s unique global network to serve its private and corporate banking clients with an emphasis on efficiency, innovation, and the highest ethical standards.

In the process, Mrs. Morton has made Deltec Bank & Trust an agile, innovative and solutions-driven institution. Deltec has consistently built on its client service, and Mrs. Morton is committed to growing shareholder value by building the bank of the future with access to the most unique network of opportunities for its clients. On the occasion of winning Best Private Bank in the Caribbean 2020

Global Banking & Finance Review interviewed Mrs. Morton, CEO of Deltec Bank & Trust to find out more about the bank and their plans for the future.

Congratulations on your award- winning success. What initiatives do you feel have led to your success?

Thank you.

I attribute our success to the extraordinary talent that extends across our organization. Our success has always been because of the people who work tirelessly to ensure that we give exceptional service to our clients.

As a team, we’re focused on the future, trusting disruption and investing in technology that delivers 24/7 financial solutions. This audacious approach drives our team to offer award-winning wealth management and financial services.

What are the biggest challenges you see taking place right now and how is Deltec Bank & Trust prepared to help clients navigate this difficult time?

Within the last few years, Deltec’s main focus has been to ensure we have a business model that can withstand the pressure of an ever changing financial environment, which is faced with major disruption due to new regulations, a changing customer base, and emerging digital technologies.

These preparations have helped us tremendously to transition to the COVID-19 dilemma we see today. We have been focused on resilience, having developed a robust and tested business continuity plan as part of our enterprise risk management framework as an essential of component of the Bank’s business model.

With our headquarters positioned in a hurricane belt, we are no stranger to facing crises and our enterprise risk management framework has served us well in this unique environment.

Additionally, our conservative strategy serves as one of Deltec’s advantages – with healthy liquidity ratio, no debt, no proprietary trading, zero commercial loans, and no leverage. We remain conservative in our credit policies and commitment to sound capitalization. These prudent practices ensure that there is no threat to the Bank’s sustainability, safety and soundness.

We are well-served by our commitment to and investments in technology to transform the way we work: rapidly responding to this challenge, finding opportunities and quickly scaling effective solutions for our clients.

In our discretionary portfolios, we have ensured that we are in the best possible position to deliver both investment services and ongoing performance in the face of the uncertainty posed by COVID-19.

As the pandemic has unfolded, we have been proactive and agile in our strategic response. Our team has come together with a renewed commitment to confront new challenges to ensure that we thrive in the new normal.

We believe that these times have revealed why Deltec is so special:

  • our team is guided by our mission to serve and protect our clients; and
  • our commitment and flexibility to rise above the challenges of this moment by solving difficult problems in real time.

How has client’s attitudes towards wealth management changed over the past few years?

With new digital technologies and an always-on culture, clients expect wealth management solutions to be available 24/7. It’s important to add that there is a new generation of clientele emerging- the savvy and empowered digital consumer – who is interacting with their bank in completely new ways.

This is why the role of fintech has become so prominent. Clients want to be more involved in the way their wealth is managed and protected.

At Deltec Bank, we have embraced this and invested in a digital transformation designed to not only provide 24/7 financial services but revolutionize how wealth management and financial services are offered today.

Client relations have always been at the core of your banking operations. Why is this and how do you continue to strengthen these relations?

Quite simply, we provide a network of unique opportunities with white-glove service to our clients. Our approach is two-fold. On one hand, we take the time to understand our clients, their unique situations and we build around that. On the other hand, we have embraced that our service must be available in real-time and available across different time zones. Our technology plays a big role in that. Our clients can interact with us based on their preferences and our expert team of professionals are committed to giving our clients world-class solutions and service.

How do you support clients’ in achieving planning for and achieving their financial goals?

We believe that understanding the financial needs and goals of our clients is one of our most important responsibilities. Whether the client already knows what they require, or would like help developing an appropriate investment and wealth plan, we seek first to understand. This allows our team to more accurately leverage Deltec’s in-house financial and investment expertise and match clients with the right solution for them.

From an investment perspective, we simplify the process for our clients by offering a selection of discretionary model investment portfolios to match their risk profiles. From there our experienced team of investment analysts and portfolio managers make clients capital work for them, applying Deltec’s robust investment framework to investment markets.

Moreover, one of the distinct advantages of Deltec is that we’re a true financial partner to our clients. The Deltec International Group offers diversified solutions, ranging from fund administration, corporate advisory, merchant banking, global insurance to digital asset financial services, therefore at Deltec Bank, we’ve been able to create synergies to match our clients with a wide range of financial solutions.

With over half a century of operations, you are now servicing several generations. What are the challenges in multi-generational wealth management?

Every generation has a distinct set of values, thinking patterns and expectations. For example, we know that the new generation of wealth management clients, which include Gen X and Gen Y, even baby boomers who have been influenced by the younger generation expect to have more control over their finances and are less concerned about authority than previous generations – in fact, they lean on their peers for feedback and advice.

One of the ways we’ve been able to successfully service multi-generational wealth is by being a pioneer in the wealth management industry. At Deltec, we always embrace the future and anticipate what’s next. This approach has positioned the Bank to meet and exceed the expectations of the many generations of clients we serve.

What role is technology playing in the development of services for wealth management?

Technology is changing the way our clients interact with us and enhancing how we deliver financial solutions. We see this transformation happening in many other industries and wealth management is no different.

At Deltec, we’re leveraging technology to provide one of the most advanced wealth management platforms, pioneering models and algorithms for real-time financial solutions based on individual client suitability and preferences. As an international bank, we’ve place priority on 24/7 wealth management and financial services, and technology is the engine behind that.

How does Deltec Bank & Trust support the socio-economic development in the Caribbean?

Deltec Bank has long held strong ties within the local community in The Bahamas through our Deltec Initiatives Foundation, which was designed to foster an environment that empowers young Bahamians to drive positive social impact through the power of arts, entrepreneurship and education.

Since 2013, the foundation has discovered, launched and mentored many talented, motivated and driven Bahamian artists, artisans and entrepreneurs. The Deltec Initiatives Foundation comprises three pillars: The Initiative for the Arts, The Initiative for Young Entrepreneurs and The Initiative for Scholarship & Education.

What can we expect to see from Deltec Bank & Trust over the next 3 years?

Over the next 3 years, I expect to see a complete transformation of wealth management and financial services, and Deltec will be at the forefront of the advanced thinking emanating from the industry. Our technology and processes will provide a model for private banks and wealth managers around the world and deliver even more value to our global clients 24/7.

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