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OXFORD ACADEMICS REINFORCE CALLS FOR BANKERS TO BE LICENSED

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OXFORD ACADEMICS REINFORCE CALLS FOR BANKERS TO BE LICENSED

Analysis of banking culture shows how it became dysfunctional and why senior managers could not control it

Academics from Saïd Business School, University of Oxford, have reinforced calls for the creation of a professional licensing body for bankers in order to maintain high standards of conduct and guard against the development of dysfunctional cultures within the sector. They also come down in favour of the adoption of a system of ‘performance bonds’, which deduct bank fines from a deferred compensation pool rather than from shareholder funds.

‘Policy-makers and regulators have devoted most of their reforming energy since the financial crisis to improving formal rules in areas such as bank capitalisation and liquidity levels,’ said Alan Morrison, Professor of Law and Finance at Oxford Saïd. ‘But, especially in the light of the LIBOR and Forex fixing scandals, it is increasingly clear that more has to be done to address the problems of culture, informal rules, and tacit norms of behaviour. The recent emphasis on “Tone from the top” is important, but that alone will not be sufficient. Cultures are notoriously resistant to change, and we need to find ways of addressing problems at their root.’

In their paper, Governance and Culture in the Banking Sector, Professor Morrison and his co-author Joel Shapiro, Associate Professor of Finance at Oxford Saïd, argue that cultures in banking evolve in response to social and economic challenges. But, once a culture exists, it can outlive the problems that catalysed its creation. ‘Shared values and common language that were originally legitimised by the pursuit of an accepted end can then be turned to other purposes’ said Morrison. ‘For example, the arcane language of foreign exchange dealers developed in order that they could deal quickly and exchange nuanced information about the trustworthiness of their peers. However, more recently, foreign exchange dealers used their coded language and cultural networks to pursue collusive market-distorting practices.’

The analysis revealed a number of challenges involved in addressing cultural problems:

Cultures cross organisational boundaries. ‘The LIBOR and Forex scandals were perpetrated by close-knit communities of traders who carried cultural values that extended across corporate boundaries, and that frequently contradicted any behavioural norms to which their “host” organisations might conceivably have paid lip service,’ said Morrison. Evidence suggests that the traders involved in the LIBOR fix viewed other members of their own organisations as rivals, and the fixing networks deliberately excluded senior corporate officers.

The introduction of technology-enabled processes distorted values. Technological developments over the past 20 years mean that almost every financial activity has become more codified and arm’s length. Success is more dependent upon transaction-by-transaction profit, rather than upon the long-term viability of a relationship, making reliability and reputation less important than they used to be.

Senior managers do not understand technical or cultural practices in trading networks. For example, Bob Diamond, the former chief executive of Barclays, stated after the scandal broke that he did not know the mechanics of the LIBOR fix, and that he believed that no bank chief executive would know these mechanics. The research argues that bank directors were comfortable in their technical ignorance: they may have believed that their firm’s culture would guarantee good behaviour; but they may equally have chosen consciously to risk their firm’s reputational capital in order to make short-run profits from rate manipulation.

Economic incentives can encourage abuses of culture. For example, an investigation by the New York Department of Financial Services revealed that sales people in currency trading operations were deliberately incentivised to arrange terms of trade that created opportunities for profitable market manipulation.

Morrison and Shapiro make a number of recommendations:

Improve governance by identifying the cultural groups supporting critical tasks within the bank and ensuring that senior managers participate in those networks. ‘Several commentators have stressed the importance in this context of influencing culture by setting the “tone from the top”, but an approach based solely upon board- or executive-level pronouncements is unlikely to be effective,’ said Morrison. ‘Tone can only be set from the top if it is effectively transmitted into the cultural networks that matter… A network of powerful actors that is disconnected from the senior managers of the firm is prima facie evidence of weak governance.’

Devise appropriate compensation and performance measurement. Performance bonds, which deduct bank fines from a deferred compensation pool rather than from shareholder funds, would help to incentivise socially acceptable behaviour by traders; if designed correctly, they should also encourage senior managers to monitor trader actions.

Create a professional licensing body for bankers to establish and police behavioural norms. This would ensure that high levels of labour market mobility did not allow actors to switch firms and so escape the consequences of their actions. Each banker would have a permanent record at the licensing body, which would be updated with any violations of professional standards.

‘Technological changes in the last two decades altered the economic incentives of bankers and, hence, the use to which they put their cultural networks. The consequence in some cases was the emergence of dysfunctional cultures, which reduced social welfare,’ conclude Morrison and Shapiro. ‘We cannot turn back the technological clock, but we can map and influence cultures. This knowledge can be used to design compensation schemes based upon critical cultural groupings, and serve as the basis for formal professional banker certification.’

Banking

Hackers can now empty out ATMs remotely – what can banks do to stop this?

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Hackers can now empty out ATMs remotely – what can banks do to stop this? 1

By Elida Policastro, Regional Vice President for Cybersecurity, Auriga

In 2010, the late Barnaby Jack famously exploited an ATM into dispensing dollar bills, without withdrawing it from a bank account using a debit card. Fast forward to the present day, and this technique that is now known as jackpotting, is emerging as a threat and is growing as an attack on financial services. Recently, a hacking group called BeagleBoyz in North Korea have caught the attention of several U.S. agencies, as they have been allegedly stealing money from international banks by using remote hacking methods such as jackpotting.

The reality behind jackpotting

Jackpotting is when cybercriminals will use malware to trick their targeted ATM machine into distributing cash. As this criminal method is relatively easy to commit, it is becoming a popular tool for cybercriminals, and this trend will sure continue in 2021, unless financial organisations implement policies to prevent this and protect consumers.

During this difficult time, when access to cash has never been more important to banking customers, it is imperative that banks give their customers reliable ATMs that work, 24/7, 365 days a year. However, due to the sensitive data that ATMs possess, such as credit card or PIN numbers, they have now become a profitable object for cybercriminals to manipulate. As cybercriminals have been evolving in their efforts of attacking the IP in ATM machines, we will definitely see more jackpotting stories emerge in the coming months, especially with the large return on investment.

How criminals exploit the vulnerabilities found in ATMs

Since ATMs are both physically accessible and found in remote locations with little to no surveillance, this gives an opportunity for criminals to carry out jackpotting, especially with the software vulnerabilities that may exist in many ATMs.

ATM machines have been easily manipulated due to the outdated and unpatched operating systems that they run on. If banks wanted to resolve this issue and update these systems, it would take large amounts of time and money to do so. However, some banks do not have such resource and because of this, cybercriminals take advantage by penetrating the software layers in ATMs and exploiting the hardware to dispense cash.

How can banks tackle this?

As the sector has a complex technical architecture, banking organisations will have to make sure that they have control over the transactions that take place, and this includes the management of security when it comes to communication between various actors. When financial organisations are reviewing their ATM infrastructure, they will also need to protect their most vulnerable capabilities within their cybersecurity. Banks, for example, can encrypt the channels on the message authentication, in the event bad actors try to tamper with their communications.

Because ATM networks need to be available 24/7, banks not only, need to implement greater protection over their systems, but they need to do so with a holistic approach. One action that banks can take is to implement a centralised security solution that protects, monitors and controls their various ATM networks. This way banks can control their entire infrastructure from one location, stopping fraudulent activities or malware attempts on vulnerable ATMs.

Another way for banks to reduce the risk of jackpotting attacks is to update their ATM hardware and software. To do this, they will need to closely monitor and regularly review their machines in order to spot any emerging risks.

What the future holds for the banking industry

As confirmed by the warnings from the U.S. agencies, jackpotting remains a very serious threat for financial organisations. Evidence has also emerged, which shows hackers are becoming more innovative in their tactics. It was reported last year, for example, that hackers stole details of propriety operating systems for ATMs that can be used to form new jackpotting methods.

The emergence of jackpotting highlights the need for banks to actively work to protect their customers’ personal information and critical systems now and for the foreseeable future. In order to stay secure and reduce the risk of attacks, they will need to put in place the aforementioned solutions, which include updating their ATM hardware and software as well as closely monitoring and regularly reviewing their ATMs. As cybercriminals continue to become more innovative in their ways of attacking the machines, the issues mentioned will only continue to rise if they are not addressed. Although the method of jackpotting requires little action from cybercriminals, if financial organisations can implement a layered defence to their ATM security, they can stop themselves from becoming another victim to this type of attack in the future.

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Banking

SoftBank Vision Fund set for new portfolio champion with Coupang IPO

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SoftBank Vision Fund set for new portfolio champion with Coupang IPO 2

By Sam Nussey and Joyce Lee

TOKYO/SEOUL (Reuters) – SoftBank’s $100 billion Vision Fund is poised to have a new number-one asset in its portfolio with the upcoming floatation of top South Korean e-tailer Coupang, furthering a turnaround that has seen the fund yo-yo from huge losses to record profit.

The $50 billion target valuation that Reuters reported this month would likely see the decade-old firm surpass recently listed U.S. food deliverer DoorDash Inc on a roster of assets that also includes stakes in TikTok parent ByteDance and ride-hailers Grab and Didi.

The Vision Fund built up its 37% stake in Coupang for $2.7 billion, mostly at an $8.7 billion post-money valuation, a person familiar with the matter said. The fund is not expected to sell shares in the initial public offering (IPO) that Coupang filed for in New York, the person said, declining to be identified as the information was not public.

SoftBank Group Corp and Coupang declined to comment.

Achieving a $50 billion valuation would add to good news for the fund which is bouncing back from an annual loss in March. This month, it announced record quarterly profit, driven by the listings of DoorDash and home seller Opendoor Technologies Inc and share price rise of ride-hailer Uber Technologies Inc.

HIT PARADE

The fund has written big cheques for late-stage startups to fuel rapid growth, with two-thirds of the value of its portfolio concentrated in 10 assets including Coupang.

The 10 include 25% of British chip designer Arm – to be sold to Nvidia Corp pending regulatory approval – but not stakes in high-profile stumbles like office-sharing firm WeWork.

The fund’s largest assets include its 22% stake in DoorDash, whose share price has doubled since the firm’s December IPO, sending its market capitalisation to $65 billion.

FACTBOX: Vision Fund’s investment hit parade

SoftBank initially invested in Coupang in 2015, adding it to a stable of e-commerce hits that included 25% of China’s Alibaba Group Holding Ltd, before placing it under the fund.

The e-tailer has grown rapidly during stay-home policies while the COVID-19 pandemic has forced other portfolio firms like Indian hotel chain Oyo to scramble to preserve cash.

Analysts see Coupang’s $50 billion valuation as feasible given its first-mover status and as it expands beyond replacing brick-and-mortar retail with a rising number of online channels.

It is the biggest e-tailer in South Korea that directly handles inventory, with 2020 purchases at about 21.7 trillion won ($19.62 billion), showed data from WiseApp.

“The market’s assessment isn’t exaggerated,” said analyst Park Eun-kyung at Samsung Securities. “Coupang’s market leadership is a premium factor.”

($1 = 1,106.1800 won)

(Reporting by Sam Nussey in Tokyo and Joyce Lee in Seoul; Editing by Christopher Cushing)

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Banking

Five things to look out for in HSBC strategy update

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Five things to look out for in HSBC strategy update 3

By Alun John

HONG KONG (Reuters) – HSBC Holdings PLC will update its “transformation” plan announced a year ago on Tuesday, when the Asia-focussed lender also reports annual results.

As part of its latest strategy, the bank said in February last year it would shrink its investment banking operations and revamp its businesses in the United States and Europe resulting in 35,000 jobs being cut.

HSBC’s pretax profits for 2020 is expected to fall 38% to $8.3 billion, according to analysts’ estimates compiled by the bank, because of the impact of the COVID-19 pandemic.

Here are five key things to look out for in the new plan to revive its growth —

1. How will HSBC boost fee income?

The bank has promised details of its plans to make more money from the fees it earns from selling products to customers than it does by pocketing the difference between the interest rates it offers savers and charges borrowers.

This could involve selling more products to wealth management clients, charging corporate clients in different ways, and maybe even charging retail clients for basic banking services.

2. What do the plans to double down on China and Asia mean?

HSBC intends to refocus resources from elsewhere on what it calls its “high returning Asia business”, but investors want to know what this means in practice for markets and business lines.

Politics could make this harder. HSBC has been attacked by British lawmakers for assisting Hong Kong police with investigations into pro-democracy activists, including freezing some bank accounts.

CEO Noel Quinn said last month the bank had to comply with police requests and he could not “cherry-pick which laws to follow”.

3. Will HSBC resume paying a dividend?

HSBC has not announced a dividend since the third quarter of 2019, on instructions from the Bank of England. This angered retail investors in Hong Kong who tried unsuccessfully to have the policy changed.

The regulator has since lifted the ban, and British rival Barclays said Thursday it would pay a dividend of one pence a share. However, despite beating analyst expectations with its 2020 results, Barclays shares fell as a vague outlook without profit targets left investors underwhelmed.

HSBC investors will be looking beyond the day’s numbers for concrete commitments towards improved returns and a more positive outlook for key economies.

4. How will HSBC shrink its U.S. and European footprint?

HSBC’s French high street banking operations are up for sale, but it has had trouble finding a buyer.

The market is due an update on whether HSBC has managed to find a buyer on terms it will accept, or whether it will seek to wind the business down more gradually.

HSBC will also give details of how it will accelerate its existing efforts to shrink assets, staff and branches in the U.S., which accounted for 0.5% of the group’s pre-tax profit in the first half of last year.

5. More job cuts on the way?

HSBC employed 307,000 people at the end of 2010. The bank’s management said last year it was aiming to reduce the headcount of 235,000 closer to 200,000 by 2023. Investors want to know whether the new plan will mean deeper cuts. Nearly every new strategy launched by HSBC in the past decade has resulted in fewer people being employed by the bank.

(Reporting by Alun John; Editing by Sumeet Chatterjee & Shri Navaratnam)

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