Capital crosses borders more today than ever before. While a small number of large firms issue bonds in foreign currency and borrow from foreigners to finance their operations, the vast majority of firms issue only in local currency and do not directly access foreign capital. That is, with the exception of U.S. firms. Since the 2008 financial crisis, according to new research from Columbia Business School, global portfolios have shifted dramatically away from the euro and toward the dollar – essentially cementing the dollar as the only international currency.
“Generally, investors everywhere only want to lend in their currencies,” said Jesse Schreger, Assistant Professor and Faculty Fellow at the Jerome A. Chazen Institute for Global Business at Columbia Business School.
“If a firm wants to borrow from foreign investors, this means they need to issue debt denominated in the investor’s currency, which exposes them to exchange rate risk or the need to use currency derivatives – a costly proposition for many companies.”
Schreger documents that American companies are currently tapping into international markets in ways that companies in other countries cannot because of the dollar’s predominant status as an international currency. This bias implies that when foreigners buy U.S. securities, they predominantly buy dollar-denominated securities, thus behaving similarly to U.S. domestic investors.
In a newly-released NBER paper, Schreger and his co-authors, Matteo Maggiori of Harvard University and Brent Neiman of The University of Chicago Booth School of Business, establish that global portfolios are driven by an often neglected aspect: the currency of denomination of assets.
Using a dataset of $27 trillion in security-level investment positions, provided by Morningstar, one of the world’s largest providers of investment research to the asset management industry, the researchers find that, by and large, investor holdings are biased toward their own currencies. Indeed, each country holds the bulk of all securities denominated in domestic currencies, even those issued by foreign borrowers in developed countries. These patterns hold true across countries with the exception of international currency issuers, such as the United States.
Other than international currencies, such as the dollar, investors are much more reluctant than was previously thought to take on currency risk when buying the debt of foreign countries, even when those countries are developed countries like Canada or Great Britain. Companies can borrow from abroad by issuing in foreign currency, but the study suggests that it is costly to do so. Therefore, unless a country issues an international currency, many companies have to do without the security of foreign capital.
How the Dollar Pays Off for American Companies
The global willingness to hold the dollar, resulting in an international-currency bias, means that U.S. companies that borrow exclusively in dollars have little difficulty securing financing from abroad.
“This is not true for any other country in the dataset,” said Schreger. “Our work offers a novel perspective on the potential benefits that accrue to countries that issue an international currency like the dollar.”
Therefore, American companies should find it easier to finance their expanding operations and grow than companies from anywhere else in the world.
To learn more about the cutting-edge research being conducted at Columbia Business School, please visit www.gsb.columbia.edu.
Britain sets out blueprint to keep fintech ‘crown’ after Brexit
By Huw Jones
LONDON (Reuters) – Brexit, COVID-19 and overseas competition are challenging fintech’s future, and Britain should act to stay competitive for the sector, a government-backed review said on Friday.
Britain’s departure from the European Union has cut the sector’s access to the world’s biggest single market, making the UK less attractive for fintechs wanting to expand cross-border.
The review headed by Ron Kalifa, former CEO of payments fintech Worldpay, sets out a “strategy and delivery model” that includes a new billion pound start-up fund and fast-tracking work visas for hiring the best talent globally.
“It’s about underpinning financial services and our place in the world, and bringing innovation into mainstream banking,” Kalifa told Reuters.
Britain has a 10% share of the global fintech market, generating 11 billion pounds ($15.6 billion) in revenue.
“This review will make an important contribution to our plan to retain the UK’s fintech crown,” finance minister Rishi Sunak said, adding the government will respond in due course.
The review said Brexit, heavy investment in fintech by Australia, Canada and Singapore, and the need to be nimbler as COVID-19 accelerates digitalisation of finance all mean the sector’s future in Britain is not assured.
Britain increasingly needs to represent itself as a strong fintech scale-up destination as well as one for start-ups, it added.
The review recommends more flexible listing rules for fintechs to catch up with New York.
“Leaving the EU and access to the single market going away is a big deal, so the UK has to do something significant to make fintechs stay here,” said Kay Swinburne, vice chair of financial services at consultants KPMG and a contributor to the review.
The review seeks to join the dots on fintech policy across government departments and regulators, and marshal private sector efforts under a new Centre for Finance, Innovation and Technology (CFIT).
“There is no framework but bits of individual policies, and nowhere does it come together,” said Rachel Kent, a lawyer at Hogan Lovells and contributor to the review.
Britain pioneered “sandboxes” to allow fintechs to test products on real consumers under supervision, and the review says regulators should move to the next stage and set up “scale-boxes” to help fintechs navigate red tape to grow.
“It’s a question of knowing who to call when there’s a problem,” Swinburne said.
($1 = 0.7064 pounds)
(Reporting by Huw Jones; editing by Hugh Lawson and Jason Neely)
Enhancing efficiency in international trade – the time is now
By Carl Wegner, CEO of Contour
Despite significant advances in digital enterprise technology in recent years, international trade remains overwhelmingly manual and fraught with inefficiency.
Financial market participants spend millions of dollars to save fractions of seconds. Central banks are rushing to offer “fast” domestic payments in under three seconds. But cross-border trade relies on payments involving more than one country and bank, with no common central bank to provide cover and currency conversion. It takes at least a day or, in most cases, two – and that’s not even the most inefficient part of cross-border trade.
These processes are lightning quick compared to trade-related finance and risk mitigation products such as Letters of Credit (LCs), which can take over a week to settle. These involve more parties, more complexity, more paper and less trust.
In global trade finance, a bank will agree to pay an overseas seller after receiving proof that the seller has met their obligations. There is no common network for the seller to provide this proof, and no global database of shipments. Sellers rely on the gold standard of banking communication: wet ink-signed paper documents. Collecting, presenting and checking these documents can take days, if not weeks, stalling payments and leaving goods sitting on the dock rather than working through the economy.
The perceived credibility of “wet ink” signatures on documents is holding the industry back even as other areas are embracing new technologies. Unfortunately, it is all the industry has and the highest common denominator of communication. Bringing trade finance into the twenty-first century will need the development of a new gold standard – a common and trusted digital infrastructure. Luckily, the technology to ease this change and inject massive efficiency gains into the industry is now available.
More than a few small tweaks
Banks, buyers, sellers, shipping companies, ports, customs, and so on; the number of parties involved in international trade and the relative lack of trust among them makes any change a significant challenge.
Even before paper documents are involved for proof of shipment, there are trust challenges in communication for trade finance. While banks have a trusted form of communication among themselves, this does not extend to corporates or other parties. These groups are left with paper communication, email and fax – hardly efficient methods of communication. The industry needs a network, a common identity, and a way to share data securely and privately with all participants. This is the first step and can lead to significant increases in efficiency, especially if communication between participants can be synced in real-time.
Building the network
The future of global trade communication is decentralised. With today’s technologies, it is no longer feasible to have the world’s sensitive trade data sitting in one place susceptible to attack or commercial manipulation.
Every bank and corporate must own their own data and share it only with their trading partners where necessary. Decentralised technologies go further than this, allowing data to be synchronised with trading partners, enabling a new level of trust between parties through the deceptively complicated concept of ”what I see, you see”.
The practicalities of title transfer
The problem of paper and wet-ink signatures seems simple to solve once the network is in place. Remove the couriers, upload PDFs of all that paper onto the decentralised and synchronised network built to authenticate the sender, and trade is digitised. However, while this process is easy in theory, the variety of documents involved in a single transaction complicates matters – especially when it comes to the transfer of title.
The bill of lading is a key example of this – issued in triplicate on original letterhead and signed by an authorised party on behalf of the ship’s captain. They represent title to the documents and can be used as a negotiable document much like a bank cheque.
Digitising these documents has come a long way in the last few years, with specialised platforms and digital registries created and new legal standards drafted to allow electronic bills of lading (eBLs) to be used instead. But adoption still lags behind, and for their efficiency to be realised across the majority of global trade, the concept of digital documents such as eBLs needs to be married to decentralised networks for trade finance.
The security issue
For documents not related to title transfer, the long-held argument that an original signed document is more secure than a digital version is extremely outdated. With the right protocols in place, a digital document can present a more private and secure option than its physical counterpart.
Even an uploaded PDF can be a “digital document” with the right controls in place. Using a decentralised network every member will have an immutable audit log for every transaction, with the uploading party taking responsibility for the documents they introduce to the network in the same way a sender can take responsibility through their signature. These security protocols will also enhance the time it takes to manage trade documents, allowing parties to track and match items to real-time data.
There has already been phenomenal success in combining a decentralised network with electronic bill of lading solutions. Rather than seven days, the time from presentation to payment instruction can be reduced to 24 hours. However, for any of this to be achieved at scale, we need coordinated collaboration to ensure a new global digital standard can emerge, rather than a series of disconnected digital islands.
Fortunately, the industry is well on its way. The Asian Development Bank recently reported that 85% of banks are gearing up to serve the trade finance needs of more businesses through technology, addressing concerns such as inefficiencies and KYC, showing a clear demand for more efficient processes to be established in the sector.
While removing a few hours from overseas payments is a worthwhile goal, reducing a week from trade finance processes can have an even greater impact on businesses’ working capital efficiency and accelerating growth in the wider global economy.
How to open up with a current account with bad credit
At times, through no fault of your own, you may find yourself in a difficult financial position – like many people have throughout the pandemic. What’s worse is when you need to create a current account but find yourself being refused due to bad credit.
However, there are options for people out there. To help, Jonny Sabinsky, Head of Communications at budgeting fintech, thinkmoney, has answered the most common questions about opening up a current account whilst having bad credit.
“Can I get a current account with bad credit?”
Many banks may refuse a person with bad credit’s application for a standard current account with an overdraft facility or a rewards scheme. This is because a bank may see you as more of a risk to lend to.
However, they’re still likely to accept you for a basic account as these are designed to help those who have a bad credit rating. They provide a safe place to store your incomings, deposit cash and cheques, withdraw money, and set up direct debits and standing orders. They also allow you to build your credit rating up by showing you can handle money responsibly.
“Am I eligible for a basic account?”
As long as you’re over the age of 18, have a form of ID and can show proof of address, the option of a basic bank account should be available to you. However, this can depend on the bank and the specific account.
Six unexpected tips to boost your credit score
As soon as you have opened your basic bank account, you can begin to improve your credit score. However, there are six other unexpected ways in which you can improve your credit score in the meantime:
1. Ask your landlord to put you on the Rental Exchange Initiative
The Rental Exchange Initiative gives you the credit you deserve for paying your rent on time, whether you rent privately or through the council. It’s really simple to do, too. Just ask your landlord or social housing customer service team to add you to the initiative.
2. Always stay 50% below your credit limit
What does this even mean? Well, it basically means that you shouldn’t be maxing out your credit cards. You may think that as long as you pay off your credit card on time then it doesn’t matter how much is on there, right? Wrong. If you’re constantly reaching your limit, then this can look like you need your credit card to survive and that you’re not financially secure. If you can remain at least 50%, preferably lower, below your limit, then this will help to improve your score.
3. Pay money off your credit card twice a month
So, you pay off your credit card every month – great! But the only problem is that your creditors only report to the credit reference agencies once a month. If you haven’t paid off your bill before that report is sent, and if you run up a big bill, then it can look like you’re overusing your credit. How to tackle this? Just pay twice a month!
4. When applying for credit, add a landline number
When applying for credit, the reference agencies like to see stability. With this in mind, even the smallest of things can make a big difference. Having a landline ties you to a fixed address, so some lenders may be willing to offer you a loan, mortgage or credit card if you have one.
5. Don’t open a new credit account for six months
One of the easiest ways to boost your credit score is by refraining from opening up a new form of credit six months after you last created credit. This shows future lenders that you don’t rely on credit regularly and can strengthen your case. This will also help you refrain from possibly being rejected from credit, and, therefore, damaging your credit score.
6. Know what doesn’t affect your credit score
There are a lot of myths about what does and does not affect your credit score, so it’s important to be able to understand the most common misconceptions. For example, previous occupants at your home address do not affect your credit score. Instead, credit companies are only interested in those that you’re linked to financially, such as a joint bank account.
Another misconception is that your credit history is stored forever. However, the truth is that most of the information in your credit report is only stored for around six years, and in most instances, credit companies are most interested in your most recent history.
Finally, there’s a myth that checking your credit score or credit report impacts your score. This is not true – you can check your report as many times as you like.
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