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Is clarity emerging for UK banks’ Brexit contingency planning?

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Is clarity emerging for UK banks’ Brexit contingency planning?

With an eye on deeply interconnected UK/EU financial services markets, the UK’s post-Brexit landing point is a hybrid of current arrangements (less passporting and mutual recognition) and enhanced equivalence. Is clarity for the banks starting to surface?

The recent White Paper painted broad strokes around how the UK sees the relationship with the EU with regard to financial services post-Brexit.

Some elements of the Paper have been overtaken by subsequent events, but for financial services there is a clear interest in maintaining much of the existing framework for financial services, albeit in the guise of new economic and regulatory arrangements. To operationalise those arrangements, the UK is big on co-operation, collaboration, co-ordination, consultation and compatibility.

Any arrangements will have to do without mutual recognition and passporting. Both are off the table. Since UK banks have been engaged in pragmatic contingency planning around all Brexit outcomes (including no deal), the expected loss of passporting at least brings added clarity.

“The impact on the major UK banks will vary as they rely to different degrees on the arrangement. In general, loss of passporting will have more impact on businesses such as investment banking where the UK is used as a hub for providing services to EU customers,” said Pauline Lambert, executive director in the financial institutions team at Scope Ratings.

Lloyds Banking Group will likely be the least affected of the major UK banks given its business footprint; although recent news reports suggest that as well as an EU hub in Berlin, Lloyds will add a second subsidiary in Frankfurt to handle euro bond trading plus a third for its Scottish Widows closed-book insurance business.

RBS will maintain a hub in Amsterdam for its NatWest Markets businesses; HSBC, which already has a bank in France carrying out euro-denominated market-making activities, has previously stated it could pivot roles to Paris.

Barclays has said that the bulk of its corporate and investment banking activities are not overly dependent on passporting. It is, however, actively adding resources and expanding the capabilities of its Irish subsidiary, Barclays Bank Ireland, to continue serving European clients.

Notwithstanding the loss of passporting, there is an interest from the UK to preserve the mutual benefits of integrated markets and to protect shared interest in achieving the over-arching goal of financial stability. This is a central aim in the financial services context.

The UK wants the flexibility to impose higher than global standards and regulate in a way that reflects differences found in products and business models in the UK that are different to those found in the EU (what those are is not specified).

Maintaining the status of the UK regulator as the principal regulator of UK financial services and in future regulatory discourse with the EU is seen as paramount. “UK regulators do not want to be rule-takers. They want to maintain control of the supervision and regulation of financial services. This is logical considering the size and importance of financial services to the UK economy,” said Lambert.

“The UK has been relatively rigorous and has been at the forefront of setting regulatory standards quickly and clearly. This is positive for supporting the stability of banks. By contrast, it is more difficult to do so within the EU given the complexity of achieving consensus and harmonisation across the bloc.”

Regulatory arbitrage and fragmentation

There are patent concerns about regulatory arbitrage vis-à-vis the EU and the perils of wholesale banking fragmentation – fragmentation not just from UK and non-EU banks having to establish EU subsidiaries but also intermediate holding companies for these EU subsidiaries (as proposed by the European Commission in 2016). The White Paper quoted an Oliver Wyman study that found that if new regulatory barriers forced the fragmentation of bank balance sheets, the wholesale banking industry would need to find GBP 23bn to GBP 38bn in extra capital.

The UK is clear about the need to avoid regulation that produces divergent outcomes in relation to cross-border financial services so speaks of developing common objectives to preserve regulatory compatibility and supporting collaboration to achieve financial stability and to avoid regulatory arbitrage.

UK calls for a tailored equivalence regime go way beyond existing third-country regimes, which the Paper noted lack mechanisms to discuss rule changes as a way of maximising compatibility and minimising regulatory arbitrage and threats to financial stability; lack a mechanism for mediated solutions where equivalence is threatened by a divergence of rules or supervisory practices; have no tools for reciprocal supervisory co-operation, information sharing, crisis procedures, and the supervision of cross-border financial market infrastructure; and no plan for phased adjustments to manage the impacts of change.

The UK envisages maintaining equivalence over the long term via a structured consultative process for regulatory dialogue and supervisory co-operation – especially in relation to firms that pose systemic risk and/or which provide significant cross-border services.

“Despite the political discourse, there is an argument to be made that the UK and EU will continue their co-operation to ensure financial stability. When it comes down to financial supervision and banking regulation, the UK and EU have developed a certain respect for one another, and the Bank of England has built a good reputation with other regulators,” said Lambert.

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Euro zone business activity shrank in January as lockdowns hit services

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Euro zone business activity shrank in January as lockdowns hit services 1

By Jonathan Cable

LONDON (Reuters) – Economic activity in the euro zone shrank markedly in January as lockdown restrictions to contain the coronavirus pandemic hit the bloc’s dominant service industry hard, a survey showed.

With hospitality and entertainment venues forced to remain closed across much of the continent the survey highlighted a sharp contraction in the services industry but also showed manufacturing remained strong as factories largely remained open.

IHS Markit’s flash composite PMI, seen as a good guide to economic health, fell further below the 50 mark separating growth from contraction to 47.5 in January from December’s 49.1. A Reuters poll had predicted a fall to 47.6.

“A double-dip recession for the euro zone economy is looking increasingly inevitable as tighter COVID-19 restrictions took a further toll on businesses in January,” said Chris Williamson, chief business economist at IHS Markit.

“Some encouragement comes from the downturn being less severe than in the spring of last year, reflecting the ongoing relative resilience of manufacturing, rising demand for exported goods and the lockdown measures having been less stringent on average than last year.”

The bloc’s economy was expected to grow 0.6% this quarter, a Reuters poll showed earlier this week, and will return to its pre-COVID-19 level within two years on hopes the rollout of vaccines will allow a return to some form of normality. [ECILT/EU]

A PMI covering the bloc’s dominant service industry dropped to 45.0 from 46.4, exceeding expectations in a Reuters poll that had predicted a steeper fall to 44.5 and still a long way from historic lows at the start of the pandemic.

With activity still in decline and restrictions likely to be in place for some time yet, services firms were forced to chop their charges. The output price index fell to 46.9 from 48.4, its lowest reading since June.

That will be disappointing for policymakers at the European Central Bank – who on Thursday left policy unchanged – as uncomfortably low inflation has been a thorn in the ECB’s side for years.

Factory activity remained strong and the manufacturing PMI held well above breakeven at 54.7, albeit weaker than December’s 55.2. The Reuters poll had predicted a drop to 54.5.

An index measuring output which feeds into the composite PMI fell to 54.5 from 56.3.

But despite strong demand factories again cut headcount, as they have every month since May 2019. The employment index fell to 48.9 from 49.2.

As immunisation programmes are being ramped up after a slow start in Europe optimism about the coming year remained strong. The composite future output index dipped to 63.6 from December’s near three-year high of 64.5.

“The roll out of vaccines has meanwhile helped sustain a strong degree of confidence about prospects for the year ahead, though the recent rise in virus case numbers has caused some pull-back in optimism,” Williamson said.

(Reporting by Jonathan Cable; Editing by Toby Chopra)

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Volkswagen’s profit halves, but deliveries recovering

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Volkswagen's profit halves, but deliveries recovering 2

BERLIN (Reuters) – Volkswagen reported a nearly 50% drop in its 2020 adjusted operating profit on Friday but said car deliveries had recovered strongly in the fourth quarter, lifting its shares.

The world’s largest carmaker said full-year operating profit, excluding costs related to its diesel emissions scandal, came in at 10 billion euros ($12.2 billion), compared with 19.3 billion in 2019.

Net cash flow at its automotive division was around 6 billion euros and car deliveries picked up towards the end of the year, the German group said in a statement.

“The deliveries to customers of the Volkswagen Group continued to recover strongly in the fourth quarter and even exceeded the deliveries of the third quarter 2020,” it said.

Volkswagen’s shares, which had been down as much as 2%, turned positive and were up 1.5% at 164.32 euros by 1158 GMT.

Sales at the automaker rose 1.7% in December, at a time when new car registrations in Europe dropped nearly 4%, data from the European Automobile Manufacturers’ Association showed.

Like its rivals, Volkswagen is facing several challenges due to the coronavirus pandemic as well as a global shortage of chips needed for production.

It also sees tough competition in developing electrified and self-driving cars. The merger of Fiat Chrysler and Peugeot-owner PSA to create the world’s fourth-biggest automaker Stellantis adds to the pressure.

Volkswagen said on Thursday it missed EU targets on carbon dioxide (CO2) emissions from its passenger car fleet last year and faces a fine of more than 100 million euros.

The group is expected to release detailed 2020 figures on March 16.

($1 = 0.8215 euros)

(Reporting by Kirsti Knolle; Editing by Maria Sheahan and Mark Potter)

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Global chip shortage hits China’s bitcoin mining sector

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Global chip shortage hits China's bitcoin mining sector 3

By Samuel Shen and Alun John

SHANGHAI/HONG KONG (Reuters) – A global chip shortage is choking the production of machines used to “mine” bitcoin, a sector dominated by China, sending prices of the computer equipment soaring as a surge in the cryptocurrency drives demand.

The scramble is pricing out smaller miners and accelerating an industry consolidation that could see deep-pocketed players, many outside China, profit from the bitcoin bull run.

Bitcoin mining is closely watched by traders and users of the world’s largest cryptocurrency, as the amount of bitcoin they make and sell into the market affects its supply and price.

Trading around $32,000 on Friday, bitcoin is down 20% from the record highs it struck two weeks ago but still up some 700% from its March low of $3,850.

“There are not enough chips to support the production of mining rigs,” said Alex Ao, vice president of Innosilicon, a chip designer and major provider of mining equipment.

Bitcoin miners use increasingly powerful, specially-designed computer equipment, or rigs, to verify bitcoin transactions in a process which produces newly minted bitcoins.

Taiwan Semiconductor Manufacturing Co and Samsung Electronics Co, the main producers of specially designed chips used in mining rigs, would also prioritise supplies to sectors such as consumer electronics, whose chip demand is seen as more stable, Ao said.

The global chip shortage is disrupting production across a global array of products, including automobiles, laptops and mobile phones. [L1N2JP2MY]

Mining’s profitability depends on bitcoin’s price, the cost of the electricity used to power the rig, the rig’s efficiency, and how much computing power is needed to mine a bitcoin.

Demand for rigs has boomed as bitcoin prices soared, said Gordon Chen, co-founder of cryptocurrency asset manager and miner GMR.

“When gold prices jump, you need more shovels. When milk prices rise, you want more cows.”

CONSOLIDATION

Lei Tong, managing director of financial services at Babel Finance, which lends to miners, said that “almost all major miners are scouring the market for rigs, and they are willing to pay high prices for second-hand machines.”

“Purchase volumes from North America have been huge, squeezing supply in China,” he said, adding that many miners are placing orders for products that can only be delivered in August and September.

Most of the products of Bitmain, one of the biggest rig makers in China, are sold out, according the company’s website.

A sales manager at Jiangsu Haifanxin Technology, a rig merchant, said prices on the second-hand market have jumped 50% to 60% over the past year, while prices of new equipment more than doubled. High-end, second-hand mining machines were quoted around $5,000.

“It’s natural if you look at how much bitcoin has risen,” said the manager, who identified himself on by his surname Li.

The cryptocurrency surge is affecting who is able to mine.

The increasing cost of investment is eliminating smaller players, said Raymond Yuan, founder of Atlas Mining, which owns one of China’s biggest mining business.

“Institutional investors benefit from both large scale and proficiency in management whereas retail investors who couldn’t keep up will be weeded out,” said Yuan, whose company has invested over $500 million in cryptocurrency mining and plans to keep investing heavily.

Many of the larger players growing their mining operations are based outside of China, often in North America and the Middle East, said Wayne Zhao, chief operating officer of crypto research company TokenInsight.

“China used to have low electricity costs as one core advantage, but as the bitcoin price rises now, that has gone,” he said.

Zhao said that while previously bitcoin mining in China used to account for as much as 80% of the world’s total, it now accounted for around 50%.

(Reporting by Samuel Shen and Alun John; Editing by Vidya Ranganathan and William Mallard)

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