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Policy discipline and spillovers in an interconnected global economy

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Speech by Gertrude Tumpel-Gugerell, Member of the Executive Board of the ECB  at the SNB-IMF High-Level Conference on The International Monetary System
Zurich

In May 1351 – so from today almost exactly 660 years ago – Zurich became the fifth member of the Swiss Confederacy, which at the time was a loose confederation of de facto independent states to better coordinate policies and lawmaking among these states within the confederacy.
This example links nicely to the current need of better policy coordination and collaboration in today’s world of growing global integration and interconnectedness through trade and financial links than ever.
The topic of today’s session “policy discipline and spillovers in an interconnected global economy” is therefore extremely timely both from a global and European perspective.

In my intervention, let me, therefore, briefly touch upon four questions:

  1. Under what circumstances can a lack of policy discipline lead to macroeconomic imbalances with destabilizing effects for the economy?
  2. How can such imbalances spill over to other countries and the global economy?
  3. What are recipes to prevent imbalances and their spillovers?
  4. What can we learn from all this for the current situation in Europe?

So let me turn to the first question:

1. Under what circumstances can a lack of policy discipline lead to macroeconomic imbalances with destabilizing effects for the economy?

Prior to the crisis, the deficiencies of macroeconomic policies and the lack of sufficient international cooperation led to the build-up of unsustainable external imbalances among key deficit and surplus economies. Such global imbalances paved the way and contributed to the financial crisis to unfold. This has not only revealed insufficient policy discipline and cooperation, but also the lack of an effective mechanism to influence macroeconomic and structural policies in key countries where those appeared unsustainable from the standpoint of global economic and financial stability.

The global economy has become increasingly interconnected and its degree of integration will most likely continue to increase in the future. [Foreign trade is projected to exceed the pre-crisis levels next year, reaching a new historical high of about 64% of the world’s GDP. Financial openness, defined as the amount of foreign assets and liabilities, is estimated to be more than 300% of the world’s GDP in 2009 ]. This interconnectedness brings externalities and policy challenges. And the recent global financial crisis has been a reminder that this can have dramatic consequences on the stability of the international financial system and that national policies do not suffice in preventing such imbalances from occurring.

The growing integration of the world economy has contributed to create another dimension of loose policies: the failure to recognise the impact of domestic policies on other countries or the global economy, where the policies’ externalities can be detrimental to global growth and the stability of the global economic system. This lack of policy discipline is often an outcome of an excessive focus on short-term objectives as opposed to long-run sustainability.

The exit from monetary policy easing and fiscal accommodation after a recession is a case in point. A delayed exit from accommodative monetary policy after a recessionary period may contribute to excessive risk taking and large international capital flows. As you know the ECB Governing Council decided to raise by 25bp its official rates in April. Similarly, exiting too late from stimulative fiscal policy may run the risk of triggering an adverse adjustment in global asset prices and global exchange rate configurations. In this respect, the commitment taken by the G20 countries to reduce their deficit by half by 2013 is of utmost importance.

2. How can such imbalances or policy failures can spill over to other countries and the global economy?

There are a number of historical examples, in which loose policies and the neglect of negative spillovers – led to imbalances and disorderly adjustments in international markets. In the late 1970s, the US was criticised by some observers for conducting an overly loose monetary policy, which allegedly led to a decline of the US dollar to historical lows. External imbalances widened (to about 2 per cent of GDP in aggregate terms at that time only!), and many countries, especially Japan and Germany, accused the US to seek gaining competitive advantages. It was the Fed’s decisive policy action under Paul Volcker, raising the Fed’s policy rate to a peak of around 20 per cent in 1981, which ended this “Great Inflation” experience.

Another – more recent – example for a lack of policy discipline comes from the euro area. Fiscal indiscipline in some – but not all! – euro area Member States had widespread financial markets implications. It is clear that there is a need to strengthen fiscal discipline significantly.

The ECB has called repeatedly for a “quantum leap” in this respect that would go beyond current proposals made by EU Heads of States and Governments, though the package proposed by the European Parliament is already an improvement in some respect. This “quantum leap” would include quasi-automatic applications of sanctions on the basis of clearly pre-defined criteria and without scope of discretion or waivers. I will come back to that later.

These examples show that many policy makers – even today – believe that the “put your own house in order” approach is a sufficient recipe for international cooperation. International cooperation is solely an exercise in which the national authorities have the main responsibility for identifying and solving problems, albeit in a process which is monitored by other parties. Advocates of such a form of cooperation tend say that national authorities ‘know best’, or that full sovereignty and the absence of finger-pointing increase the chances of achieving cooperative outcomes. Moreover, if each party managed to keep its own house in order – the theory goes – policy failures would not occur, negative spillovers would be contained, and crises would not happen.

I strongly believe that the ‘putting-your-house-in-order’ concept is not sufficient in today’s globalised economy. Raghuram Rajan wrote in his book “fault lines”: “in an integrated economy and in an integrated world, what is best for the individual actor or institution is not always best for the system.” Therefore, just as micro-prudential regulation has failed to identify key systemic risks in international financial markets, a narrow focus on national policies alone is unlikely to deliver the global public good of a stable global monetary system and sustainable growth. Failing to properly recognise the impact of domestic policies on others, and the second round feedbacks on the domestic economy can be detrimental to growth and stability.

An excessive focus on the domestic economy may exacerbate global economic and financial imbalances, ultimately making future global crises more likely and more severe. This is all the more true for systemically relevant countries, which have a special obligation for international cooperation.

3. What are recipes to prevent imbalances and their spillovers?

Sound macroeconomic policies at the national level can – of course – help to address external shocks and spillovers. But – as mentioned – there are clear limits of national policies with regard to fully prevent spillovers from systemic shocks or economic imbalances in an increasingly integrated world economy.
Moreover, a global economy requires global policies.

The G20 Framework for Strong, Sustainable and Balanced Growth, which is the first systematic multilateral assessment of global imbalances, is therefore welcome. It is a constructive approach to ensure that macroeconomic and structural policies of key countries take into consideration their external spillovers, and in particular the risks they entail for the global financial system. The recently agreed set of indicative guidelines for global imbalances is an important milestone in that respect. By using structural approaches, the G20 Framework will help us in benchmarking acceptable levels of global imbalances, and provide guidance on how to deal with unsustainable imbalances in an orderly manner. It is now of foremost importance to implement the Framework effectively, and to fully live up to the expectations that the G20 process raised internationally.

Multilateral surveillance on domestic policies of systemic countries to ensure their orientation towards medium term stability and sustainability should be strengthened on other fronts as well. The ECB has always been supportive of the IMF’s Multilateral Surveillance Decision in this respect, and the recently conducted first round of IMF spillover reports can be seen as a step towards a broader and more comprehensive framework. Moreover, today’s multilateral surveillance framework is probably insufficient with respect to disciplining mechanisms, and what is needed is a mechanism that ensures that IMF members look beyond their short-term policy goals and internalize their impact on the global system. What is needed more than ever, is a mechanism to ensure that the concept of external stability becomes a cornerstone of multilateral surveillance. This means that it needs to be taken into account whether a country’s exchange rate, monetary, fiscal and financial sector policies are destabilising for other countries or regions. This would be a considerable strengthening of international cooperation to achieve our common goal of economic and financial stability.

4. What can we learn from all this for the current situation in Europe?

Also Europe had to learn the hard way that loose policies and large imbalances also in the private sector, rather than only the public sector, may have severe implications for public sector budgets and risk systemic crises. Especially in the banking sector, our regulatory framework and surveillance turned out to be insufficient. While finance was getting increasingly regional or global, regulation remained mainly in the national realm, and discipline was delegated too much to the markets itself.

But in less than two years, the institutional structure of the EU and the euro area has changed significantly to take some of these lessons into account. These changes were driven by the insight that both mutual solidarity and policy discipline are needed to restore confidence, and to prevent further divergences. With this in mind, the EU Heads of State have created a new financial supervisory architecture, increased macroprudential supervision, and introduced new measures for macroeconomic surveillance. All the more, it was recognized that even with the highest degree of regulation and surveillance, crises may occur, and a speedy, transparent and predictable emergency response mechanism is needed to secure financial stability. The creation of the EFSF and the ESM are important milestones towards this end.
Can similar results be achieved at the global economic governance level? What are the “common goals” that we are sharing at the international level? Our previous quid-pro-quo multilateralism has left us with high risks for economic and financial stability, and ultimately growth and prosperity. It is therefore in a country’s own interest to better internalize externalities of domestic policy making for the greater public good of global economic and financial stability. International policy coordination like this may provide us with Pareto-superior solutions, and the recent commitmens made at the IMF and the G20 level – which are means towards this end – are good starting points to deliver such progress if implemented effectively.

Let me say in conclusion:

The economy is global. So policies cannot remain local. Having experienced the worst financial and economic crisis since WWII, we know that policies and policy coordination at a global level are needed. The most important areas on the global policy agenda are the reform of financial regulation and policies to address macroeconomic imbalances. On both fronts we have already made a lot of progress. But continued efforts are needed. Equal regulatory treatment of financial institutions, regulating the shadow banking sector and structural reforms to improve competitiveness will be needed for a sustainable and stable economic and financial system for the future.

Copyright © for the entire content of this website: European Central Bank, Frankfurt am Main, Germany.

Going branchless: How banks can keep customers coming through the virtual doors 

Going branchless: How banks can keep customers coming through the virtual doors  1

By Richard Kelsey, Head of Software Sales at Backbase

Though you might be familiar with the popular seaside town of Newquay, you may not be familiar with its historic financial district aptly named, Bank Street. Dozens of banks and building societies have dominated this area since the late 1800s. However, the street hit the headlines recently as, 120 years after the first bank opened its doors, the last bank closed them.

This is not new. Bank closures have been part of the news agenda for years, and now, COVID-19 has further accelerated the physical turning into the digital. Across the globe, banks have had to close or limit the operating hours of their in-person locations, forcing banks to digitise at speed. Keeping the pipeline of digital sales flowing for new clients, increasing digital product origination and facilitating those cross-sell journeys to customers is key to survival.

Digital take up

Delivering seamless digital customer journeys was already a fast-growing priority for banking and wealth management organizations pre-pandemic. Research shows that 38% of customers stated UX as the most important factor when choosing a digital bank. In response, banks have been investing in digital technology and collaborating with third-party providers as they strive to offer a superior customer experience and stay competitive. But the global lockdowns – which have restricted people to banking digitally – have turbocharged these trends. Growing demand for digital onboarding, and digitized services to support the ongoing customer journey, must be matched by effective capabilities though.

Plugging the leaks

Conversion leakage is a particular problem during the digital client acquisition process. With branches shuttered during the coronavirus lockdowns, and subsequent openings and customer footfall likely to be severely limited for the foreseeable future, this leakage presents a major, and costly, challenge as institutions seek to convert digital sales and boost their return on investment.

The key is understanding why leakage happens in the first place and time and time again, there are three main trends that cause the most problems:

  1. Switching from a customer’s current provider is too difficult (for example, in transferring bill payments and direct debits).
  2. The digital process is too cumbersome (particularly where existing offline processes are simply put online).
  3. Customers lack human touchpoints and advice when they need it (especially for more complex products).

Combating these levels of leakage requires firms to take an outside-in approach, to see the process from the customer’s perspective. From this viewpoint, they can design a more customer-friendly experience that streamlines the job at hand.

One way to simplify the acquisition journey is to incorporate human/AI advisor interventions at points of friction, where customers may become stuck. Another is to adopt retargeting strategies that address customers who abandon the application process partway – for example, by storing their details in a CRM system and sending them notifications to complete the application, or referring them to an outbound call centre employee who can pick up the process by phone. Such approaches can boost completion rates by 40%, delivering substantial benefits to the bank.

Stronger digital growth

Banks’ return on tangible equity has plateaued globally at approximately 10.5% over the past decade, and the lower-for-longer interest rate environment will add to the pressure. Addressing cost-income ratios has become a matter of urgency.

Firms now face a strategic inflection point. Continuing with old business-as-usual practices will leave institutions struggling to attract new (especially younger) clients, while grappling with an exodus of existing customers and an overburdened cost base. But by digitising processes to enhance the client experience, banks and other financial institutions can increase their revenues and reduce costs, and have a loyal customer base who don’t feel the impact of the branchless bank.

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Shawbrook Bank “cautiously optimistic” as it Publishes Half Year Report for 2020

Shawbrook Bank “cautiously optimistic” as it Publishes Half Year Report for 2020 2
  • Financial performance impacted by the pandemic
    • Expected credit loss (ECL) charges of £45.8 million recognised on loans and advances to customers
    • Profit before tax (PBT) was impacted by the adverse effects of COVID-19 and the subsequent provisions set aside, reducing by 89% to £5.9 million
    • Customer deposits rose by 25% to £7.6 billion while capital remained strong with a CET1 ratio of 12.3%
    • A total of 15.9k payment holidays granted across the Group
  • The specialist bank continued to operate effectively through COVID-19
    • 98% of employees moved to remote working within days and no staff furloughed
    • Successfully achieved accreditation under UK Government’s CBILS
    • Continued investment in technology to digitalise the business
  • Shawbrook “cautiously optimistic” as momentum begins to return to certain specialist sectors

Shawbrook Bank has today (Monday 10 August 2020) published its half year financial results for the period ending 30 June 2020.

The specialist bank confirmed it had set aside £45.8 million of provisions to provide for potential future loan impairments caused by COVID-19. The bank reported it had also granted a total of 15.9k payment holidays to support its customers through the pandemic, of which 10.8k remained in force at 30 July 2020.

As a result of such provisions, the bank’s profitability was impacted with a reduction in PBT by 89% to £5.9 million.

Despite the challenging market conditions, the bank retained its active position in the UK savings market, increasing its retail savings deposit base by 25% to £7.6 billion. During the period, Shawbrook also successfully completed a £75 million Tier 2 re-financing to further optimise its capital structure.

Ian Cowie, Shawbrook Bank’s Chief Executive Officer, said that COVID-19 has had a clear impact on the bank’s financial performance, but Shawbrook remained in a position of strength.

He commented: “Prior to COVID-19, the Group had continued to make good financial progress, starting 2020 with a strong balance sheet and prudently positioned capital and liquidity base.

“To further optimise the Group’s capital structure, during H1 2020 we initiated a Tier 2 refinancing and, despite the challenging market conditions, successfully completed the £75 million issuance in July.

“We have also maintained our active position in the UK savings market. However, the longer-term economic impacts of the pandemic remain hard to predict and as a result we have recognised expected credit loss charges in the period on loans and advances to customers of £45.8 million and on loan commitments of £1.5 million.

“While this has clearly had an impact on profitability, our capital strength positions us well to support our customers and grow our business in line with appetite as we enter the second half of the year.”

Throughout COVID-19, Shawbrook maintained full operational functionality, with no staff furloughed and 98% of employees transferred to remote working within days of the UK lockdown being announced.

The bank adopted a series of concession opportunities across its product range to help alleviate the financial impacts of COVID-19 on its customers. During this time, Shawbrook also successfully achieved accreditation to the UK Government’s Coronavirus Business Interruption Loan Scheme (CBILS) to provide further funding support to its SME clients.

Mr Cowie added: “Since the outbreak of COVID-19, our focus has remained on supporting our staff, customers and partners while at the same time safeguarding the long-term sustainability of our business.

“When the UK lockdown was announced in March 2020, we acted with speed and agility, moving to an almost entirely remote operation within days. Led by a stable and experienced management team and with the support of new and existing technology, we have continued to operate effectively throughout this period.”

Throughout the first half of the year, the bank also continued to identify investment opportunities to further digitalise its proposition, with a core focus on its SME offering.

Mr. Cowie added: “Notwithstanding the pandemic, we have continued to invest in our business to help drive our strategic ambition to become the UK’s Specialist SME Lender of Choice. As well as the ongoing deployment of targeted digital solutions across the Property, Consumer lending and Savings businesses, our investment in the development of a new growth platform in our Business Finance franchise will serve to further modernise our offering, delivering an enhanced customer journey as well as significant operational efficiencies.”

Looking to the future he continued: “Although significant uncertainties regarding the broader macroeconomic impact and pace of recovery remain, we are cautiously optimistic in our outlook as we start to see signs of momentum returning to certain of our specialist sectors.

“Our management expertise and prudent approach to credit decisioning, combined with investment in our digital propositions, means we are well positioned to adapt and respond to opportunities as they arise throughout the second half of the year.”

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Banking

Better banking—everyday in everyway

Better banking—everyday in everyway 3

By Bruno Pešec president at Pesec Global.

Some of the most innovative companies are also great at continuous and incremental improvement. I want to talk about three key points when it comes to succeeding with implementation of continuous improvement.

First is acknowledging that employee empowerment is at the heart of continuous improvement. The second is striving for total involvement by everybody, everywhere, everyday. Final, third point is that improvement is improvement. Cents turn into dollars.

Let’s expand on each.

Employee empowerment is at the heart of continuous improvement

In “Kaizen: The Key To Japan’s Competitive Success” Masaaki Imai divulges following as the core principles of continuous improvement:

  1. Process orientation. “Before results can be improved, processes must be improved, as opposed to result-orientation where outcomes are all that counts.”
  2. Improving and maintaining standards. “Lasting improvements can only be achieved if innovations are combined with an ongoing effort to maintain and improve standard performance levels.”
  3. People orientation. “Improvement is people-oriented and should involve everyone in the organization from top management to workers at the shop floor. Further more, it is based on a belief in people’s inherent desire for quality and worth, and management has to believe that it is going to “pay” in the long run.”

These principles are interlinked and interdependent. Without empowered people there can be no improvement. Micromanaging and overbearing bureaucracy stifle human creativity and desire to do better.

Due to the nature of my work I have residence in two countries, Croatia and Norway. Consequently, I have bank accounts in both as well. On one occasion I was had to make a bank transfer while in Croatia, and went to my local bank office to do so.

To my surprise they requested my debit card. I explained that I’ve forgotten it, but surely that shouldn’t be a problem as I’m here in person, have my national ID as well as passport, and cash required for transfer. The bank teller explained that he can ask branch manager to approve it, but it takes seven days.

Since the manager was right there, I asked why can’t we do it right now, since we are all here. “Sorry, such are the policy and procedures. I know it doesn’t make sense, but we must follow them.”

Banking is a highly regulated industry; fraud detection and anti-money laundering processes must be impeccable; but above is neither.

Everybody, everywhere, everyday

Bottom up is usually brought up when discussing implementations of continuous improvement. While it is true that those closest to work are most suitable to improve it, they often lack decision making power and budget to do so on a scale.

That’s why “everybody, everywhere, everyday” is a better mental model. No one is absolved of improvements. At any given moment there are at least hundred things you can improve right now, right here.

Think deeply about following:

  • Everybody in the organisation should be aware and have an understanding of organization’s strategy and objectives. There’s shouldn’t be multiple interpretations, and it should be unambiguous. Without clarity improvement efforts are going to be scattered and without impact.
  • No elitism, no absolution. Everybody should be actively committed to daily improvement, regardless of their rank or seniority. Leaders should be especially cognizant of leading by example. After all, how can they demand from others what they themselves are not doing. That’s hypocrisy at its finest.

    Bruno Pešec

    Bruno Pešec

  • To improve is to learn, and to learn is to improve. Unlock even more value from your continuous improvement efforts by capturing the learning and sharing it broadly and deeply within the organisation. Ideas spawn ideas, perpetuating a virtuous cycle. Peer learning is also a powerful intrinsic driver.

Improvement is improvement

Director of one European bank invited me to their customer service centre, and we were to discuss how could they innovate better. After the meeting I asked him to take me on the walk around the office so I can observe the processes. He was more than happy to oblige.

The walls were plastered with wallpapers and dashboard, colourful metrics were displayed one the hanging screens, and there was a special area dedicated to the “Hall of fame.” Much to my delight there was a wall dedicated to the improvement ideas.

It was covered with large sticky notes, each with few sentences about the problem and potential solution. I picked a few at random, and noticed that they have dates written in bottom left corner. All of the dates were months ago.

Perplexed, I asked the nearby call operator to illuminate me. What’s going on? She fired her response like she was just waiting for someone to ask her that question:

“After each call we used to write down some improvement ideas. At the end of the week we collated and submitted them to the improvement department. They were constantly rejecting our proposals for either being too small or not innovative enough. After few weeks we stopped sharing and tried to implement what we can. That resulted in one of us being scolded for taking initiative without approval, so we just stopped altogether.”

Director was blushing, but hasn’t said anything. I thanked the operator for her honesty, and told the director that he should find time to fix this. By ignoring small, incremental improvements, they are effectively atrophying their organisational muscles. And not to mention all the savings that are left behind, lost forever. Cents turn into dollars.

Better banking

I’ve talked about three key points in regards to the role of employee empowerment in the implementation of continuous improvement, and what you can do to use them well. Let me remind you that if you really want to engage in this, the first thing to do is take any of them and start today.

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