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Financial integration and stability

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Financial integration and stability 3

Financial integration and stability 4

Speech by Gertrude Tumpel-Gugerell, Member of the Executive Board of the ECB,
Closing remarks for the ECB colloquium “European integration and stability” in honour of Gertrude Tumpel-Gugerell,
Frankfurt am Main
It was over 12 hundred years ago here in Frankfurt, where Charlemagne (Charles the Great) introduced a wide reform of the coin system. At the great synod in Frankfurt in 794, he not only harmonized the coins with respect to weight, size and design, he also decided that the new coins would be commonly introduced and accepted, making the “Carolingian Denar” the common currency and means of payment on both sides of the Rhine.
An impressive example of early stage financial and monetary integration, which shows that such integration has been preoccupation throughout history.
This afternoon’s discussion centred around financial integration and stability, the challenges of this relationship and the broader link to overall European integration.
Central banks – also the ECB – have always set out the great benefits of financial integration. For very good reasons – I think:
An integrated financial market is the basis for a smooth and equal transmission of monetary policy, it increases the efficiency and overall welfare of the economy, and enhances the resilience of the financial system from risk diversification.
We have promoted the integration of the euro area’s financial market with concrete action – particularly in the area of payments systems and market infrastructures, in which I had the pleasure to work on for the past 8 years.
For example, we created an integrated real time large value payment system, TARGET, which today is the first market infrastructure to be completely integrated and harmonized at the European level. [This has been instrumental to the integration of money markets and wholesale banking activities in Europe.] We have also supported very much the creation of the Single Euro Payments Area (SEPA) in the area of retail payments and have decided to setup a fully harmonized platform for securities settlements, T2S.
But despite our commitment and our support for financial integration, we also had to learn – with the experience of the past 4 years in mind – that financial integration and financial stability do not always go hand in hand. Indeed we have witnessed that in a financially integrated market risks can spread and spillover to other segments of the financial market, increasing the likelihood of contagion of financial fragilities and systemic risks.
So has this recent experience changed our view about the benefits of financial integration? Not at all!
It is true that the cause of the financial crisis has many dimensions – which we still need to study carefully. But a key issue has been loose regulation and supervision, opaqueness of financial products and practices, massive mispricing of risk and a distorted allocation of resources.
In my view, financial integration remains not only a fact and necessity of today’s financial markets, but an irreversible process, a process that we do not wish to reverse.
Instead, we need a more resilient financial sector!
For this, we need financial integration and sound policies guarding our markets. Only with appropriate policies, the benefits of financial integration can outweigh its potential risks.
First and foremost, we need to strengthen financial market regulation and supervision. And when I say strengthen, I do not only mean stricter rules, greater buffers and better risk management, but also:
•    that regulation and supervision is uniformly applied.
•    that banks’ business models and corporate governance become more sustainable[, internalizing the costs of their risk taking and potential failure]
•    that financial market activities become more transparent with respect to financial innovations, practices and risk assessments
•    and that the soundness of the system as a whole has to be ensured.
The systemic dimension of financial market actors’ – but also governments’ – actions was not sufficiently recognized before the crisis. Traditional banking supervision was designed to look at individual institutions’ risks in isolation. Today, we know better.
And a lot of progress has been made in this regard. In Europe, we have established the European Systemic Risk Board (ESRB) and three pan European supervisory authorities. And similar institutions were setup across the Atlantic in the US.
I often hear and I am often asked: Is it because we have the euro?
We cannot make our common currency responsible for issues caused by market failure, lack of regulation and supervision and undisciplined fiscal expenditure.
I am convinced that maintaining price stability is the best contribution a central bank can make for macroeconomic, but also financial stability. However, we also have seen that price stability may be a necessary condition for financial stability but not a sufficient one.
Moreover, we have seen that the materialization of systemic risk and financial instabilities can lead to deep recessions with great economic costs, carrying risks for medium term price stability as well.
Does this mean that monetary policy should be used to preserve financial stability? Not primarily!
We should not violate the Tinbergen principle: a separate policy instrument for every policy objective.
The first best policy for preserving financial stability and specifically to prevent systemic risks from materializing is macroprudential supervision.
Of course, we cannot judge yet, the success and the effectiveness of the newly established macroprudential supervisors – here in Europe and across the Atlantic in the US. But, I am convinced that if we are wary on financial innovations, potential activities shifting to unregulated markets segments or entities and we are mastering the analytical challenge of measuring systemic risk, this undertaking will be a very successful one.
I have started my central banking career in the 70ies when the fight against inflation and macroeconomic instability was a big challenge. From this period I have kept my conviction that you have to lean against the wind.
So, I believe, that we as monetary policy makers should not shy away from our responsibility to contribute to preserving financial stability.
Having said that, I believe that we at the ECB are well prepared for this task.
First, with our medium term orientation on price stability, we have the framework to take into account in a systematic way more medium term developments and potential imbalances occurring at that horizon.
Second, our two-pillar monetary policy strategy foresees that we not only take into account economic but also money and credit developments when setting interest rates. Such money and credit development can help to identify financial market imbalances and unsustainable credit and asset price developments and can serve as early warning indicator for financial fragilities.
And third, we have a framework to implement monetary policy in a flexible way, allowing that we can react swiftly when fragilities occur.
Still, we should be modest as well. It is true that before the crisis, we have seen signs of imbalances – imbalances at the global level and imbalances in local markets in the euro area and we have warned that correction could take place in an abrupt manner. But it is also true that nobody – also not at the ECB – has seen such a severe and deep crisis coming.
Therefore, we also learned our lessons:
•    that the financial sector is absolutely crucial, for macroeconomic outcomes and monetary policy transmission. This link we still have to better research.
•    that public policies at international, but also national level are all intertwined. National policies – macroeconomic and fiscal policies – can have a systemic effect on the whole euro area. It took this crisis to really understand this. And the euro countries need to prove now that it can work, that we can make policies consistent and can recover trust and confidence.
•    The euro countries took the necessary steps to pave the way put of the crisis. As a central bank we have made our contribution to overcome the deep recession we experienced only 2 years ago, contributing to bring back trust and confidence.
Now it’s time to address new challenges:
First, governments have to work on regaining confidence, putting the necessary reforms in place
Second, the regulatory reform which is on its way has to be fully implemented
And third, the unwinding of our non-standard monetary policy measures has to go forward as financial conditions improve, not least to prevent moral hazard and delay in the needed financial sector restructuring
We should not forget that the European Monetary Union came a long way. The Werner report 40 years ago, the establishment of the European Monetary System 30 years ago, the Delors report 20 years ago and finally the the establishment of the European monetary union a bit more that 10 years ago. We must not undermine this great achievement. The serious currency turmoil and fluctuations in the 50 years preceding the European Monetary Union, notably the exchange rate shocks in the 1980s and the crisis at the beginning of the 90s should be a reminder how precious the current achievement of a monetary union is.
Like with financial integration, I believe that the European Monetary Union and more integration and consistency of public policies on a European level is a fact, a necessity and an irreversible process. What we need to ensure are sound and sustainable policies for an ongoing success.
Copyright © for the entire content : European Central Bank, Frankfurt am Main, Germany.

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Deloitte: Middle East organizations need to rethink their workforce in the wake of COVID-19

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Deloitte: Middle East organizations need to rethink their workforce in the wake of COVID-19 5

Organizations in the Middle East have had to take immediate actions in reaction to the COVID-19 pandemic, such as shifting to remote and virtual work, implementing new ways of working and redirecting the workforce on critical activities. According to Deloitte’s 10th annual 2020 Middle East Human Capital Trends report, “The social enterprise at work: Paradox as a path forward,” organizations now need to think about how to sustain these actions by embedding them into their organizational culture.

“COVID-19 has created a clarifying moment for work and the workforce. Organizations that expand their focus on worker well-being, from programs adjacent to work to designing well-being into the work itself, will help their workers not only feel their best but perform at their best. Doing so will strengthen the tie between well-being and organizational outcomes, drive meaningful work, and foster a greater sense of belonging overall,” said Ghassan Turqieh, Consulting Partner, Human Capital, Deloitte Middle East.

According to the Deloitte report, many organizations in the Middle East made quick arrangements to engage with employees in the wake of the pandemic through frequent communications, multiple webinars where senior leaders addressed employee concerns, virtual employee events, manager check-ins, periodic calls and other targeted interactions with the workforce.

The report also discussed how UAE and KSA governments have reexamined work policies and practices, amended regulations and introduced COVID-19 initiatives to support companies and the workforce in the public and private sectors. Flexible and remote working, team-building and engagement activities, well-ness programs, recognition awards and modern workspaces are among the many things that are now adding to the employee experience.

Key findings from the Deloitte global report include:

  • Only 17% of respondents are making significant investments in reskilling to support their AI strategy with only 12% using AI primarily to replace workers;
  • 27% of respondents have clear policies and practices to manage the ethical challenges resulting from the future of work despite 85% of respondents saying the future of work raises ethical challenges;
  • Three-quarters of leaders are expecting to source new skills and capabilities through reskilling, but only 45% are rewarding workers for the development of new skills; and
  • Only 45% of respondents are prepared or very prepared to take advantage of the alternative workforce to access key capabilities despite gig workers being likely to comprise 43% of the U.S. workforce this year according to the Bureau of Labor Statistics.

“Worker well-being is a top priority today, and similarly to the rest of the world, companies in the Middle East are focusing their efforts to redesign work around well-being by understanding workforce well-being needs,” said Rania Abu Shukur, Director, Human Capital, Consulting, Deloitte Middle East.

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One in five insurance customers saw an improvement in customer service over lockdown, research shows

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One in five insurance customers saw an improvement in customer service over lockdown, research shows 6

SAS research reveals that insurers improved their customer experience during lockdown

One in five insurance customers noted an improvement in their customer experience over lockdown, according to research conducted by SAS, the leader in analytics. This far outweighed the 11% of customers who felt it had deteriorated over the same period.

This is positive news for insurers during such challenging times, with 59% of customers also saying that they would pay more to buy or use products and services from any company that provided them with a good customer experience over lockdown.

The improvement in customer experience also coincides with a rise in the number of digital customers. Since the pandemic started, the number of insurance customers using a digital service or app has grown by 10%. Three-fifths (60%) of new users plan to continue using these digital services moving forward.

However, while the number of digital users grew over lockdown, half of the insurance customer base has not yet chosen to move to digital insurance apps or services.

Paul Ridge, Head of Insurance at SAS UK & Ireland, said:

“It’s impressive that there was a net improvement in customer experience during lockdown, despite the challenges the industry was facing with a transition to remote working and increased claims for things like cancelled holidays. While many were forced to wait on customer help lines for long periods, part of the improvement may be explained by even a small (10%) increase in the number of digital users.

“However, it’s clear that a huge number of customers are still yet to make the move online. It’s vital that insurers provide the most accurate, timely and relevant offerings to customers, and this is best achieved by having additional insight into online customer journeys so they can understand them better. Using analytics and AI, insurers can seize this opportunity to digitalise their customer experience and offer a more personalised approach.”

Meanwhile, for insurers that fail to offer a consistently satisfactory customer experience, the price could be severe. A third (33%) of customers claimed that they would ditch a company after just one poor experience. This number jumps to 90% for between one and five poor examples of customer service.

For more insight into how other industries across EMEA performed during lockdown, download the full report: Experience 2030: Has COVID-19 created a new kind of customer? 

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The power of superstar firms amid the pandemic: should regulators intervene?

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The power of superstar firms amid the pandemic: should regulators intervene? 7

By Professor Anton Korinek, Darden School of Business and Research Associate at the Oxford Future of Humanity Institute. Gosia Glinska, associate director of research impact, Batten Institute for Entrepreneurship and Innovation, Darden School of Business

Recent news that Apple hit a market cap of USD2 trillion highlights an extraordinary success story: A once struggling computer-maker on the verge of bankruptcy innovates its way to becoming the most valuable publicly traded company in the United States.

Apple’s 13-figure valuation is indicative of a larger trend that is not entirely benign — the rise of a handful of superstar firms that dominate the economy. Over the past three decades, advances in information technology, mainly the Internet, have supercharged the superstar phenomenon, allowing a small number of entrepreneurs and firms to serve a large market and reap outsize rewards. And COVID-19 has greatly accelerated the phenomenon by pushing us all into a more virtual world.

Apple — along with Amazon, Facebook, Google, Microsoft and Netflix — is a case in point. The combined market value of those six companies exceeds USD7 trillion, which accounts for more than a quarter of the entire S&P 500 index. Even amid the pandemic’s economic wreckage, these megacompanies continue to prosper. The combined share price for Apple and its five peers was up more than 43 percent this year, while the rest of the companies in the S&P 500 collectively lost about 4 percent.[1]

Superstar firms can be found in almost every sector of the economy, including tech, management, finance, sports and the music industry. They command increasing market power, which has consequences for technological, social and economic progress. It is, therefore, critical to understand how their advantages arose in the first place.

THE FORCES BEHIND THE SUPERSTAR PHENOMENON

The “economics of superstars” was first studied by the late University of Chicago economist Sherwin Rosen. Forty years ago, Rosen argued that certain new technologies would significantly enhance the productivity of talented workers, enabling superstars in any industry to greatly expand the scope of their market, while reducing market opportunities for everyone else.[2] Digital innovations, including advances in the collection, processing and transmission of information, is what Rosen envisioned would lead to the superstar phenomenon.

Digital technologies are information goods, which are different from the traditional, physical goods in the economy. What it means is that fundamentally different economic considerations apply. Unlike physical goods — a loaf of bread or a car — information goods have two key properties: They are non-rival and excludable. Non-rival means that something can be used without being used up. Excludability means that an owner of digital innovation can prevent others from using it, by protecting it with patents, for example. These two fundamental properties of information goods are what give rise to the superstar phenomenon.

In a working paper I co-authored with Professor Ding Xuan Ng at Johns Hopkins University[3], we described superstars as arising from digital innovations that require upfront fixed costs that allow firms to reduce the marginal costs of serving additional customers.[4] For example, once an online travel agency has programmed its website at a fixed cost, it can easily displace thousands of traditional travel agents without much additional effort, scaling at near-zero cost.

Because a firm can exclude others from using its digital innovation, it automatically gains market power. The innovator then uses that power to charge a mark-up and earn a monopoly rent — basically, a price superstars charge in excess of what it costs them to provide the good — which we call the ‘superstar profit share’.

THE POLICYMAKER’S DILEMMA

In a vibrant free market economy, businesses compete for customers by innovating and improving their offerings while keeping prices low; otherwise, they are displaced by more innovative rivals entering the market. Unfortunately, the increasing monopolization of the economy by technology superstars is weakening the competitive environment around the world.

Monopoly power is the main inefficiency from the emergence of superstar firms, because superstars can exclude others from using the innovation that they have developed.

So, what policy measures can be employed to mitigate the inefficiencies arising from the superstar phenomenon?

We do have antitrust policies designed to promote competition and hence economic efficiency. Authorities could take a drastic measure and break up monopolies. Or they could tax all those excess profits megacompanies make.

Another policy to consider involves giving consumers control rights over their data. Right now, only companies have that data, and they are selling it. If you free it up and don’t allow them to sell it anymore, it reduces their monopoly profits. And if you give consumers more freedom over their data, they could, for example, share it with the latest start-up and create a more competitive landscape.

However, such policy remedies can be a double-edged sword. On the one hand, they reduce monopoly rents. On the other hand, they can also reduce innovation.

Innovation requires investments in R&D, which represent a significant sunk cost that only large firms can afford. Government regulations can easily backfire, discouraging large firms from making long-term R&D investments.

What, then, is the best policy intervention? Professor Ding Xuan Ng and I believe that basic research should be public. Digital innovations should be financed by public investments and should be provided as free public goods to all. This would make the superstar phenomenon disappear, and the effects of digital innovation would simply show up as productivity increases.[5]

We live in a brave new world that is increasingly based on information. Because the information economy is different from the traditional economy, antitrust policy should be revamped to reflect that. Instead of worrying about the economy being eaten up by these gigantic monopolies, policymakers need to focus on the question ‘What specific actions can we pursue to make the economy more competitive and efficient?’

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