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BANKING OVERHAUL SHAKES UP THE MARKET

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Banking

By John Lunn, Executive Director, transformation consultancy Moorhouse

The news that the Bank of England is seeing a big increase in institutions applying for lending licenses could lead to an industry shake up. Until now it looked as if banks had emerged from the financial crisis relatively unscathed, carrying on in similar ways to before, despite having to comply with much stricter regulation. However, regulators have been making changes to try and open the market up and give consumers choices, and it looks like this is starting to take effect. As more financial institutions are granted licenses, banks will have a new challenge as they face increased competition for their customers. There is potential for this to be a real catalyst for change in the industry. Financial organisations must focus on putting the customers at the heart of the business if they want to keep their current customers and win new ones.

There has been an unprecedented demand for lending licences, with three expected to be approved this year. At least six more will be permitted by early 2015. The number of submissions has been so high; the Bank of England may have to employ more staff to deal with these applications. Previously, new lenders needed more capital than the established banks, putting them at a competitive disadvantage. They were also required by the regulator to confirm that the capital had been committed when their backers were often unable to release the funds until the licence was granted. These obstacles have been removed and the process speeded up under the Bank of England’s new approval regime. This was instigated to increase competition in the industry for the benefit of the customer.

JohnLunn Moorhouse

JohnLunn Moorhouse

By opening the market up to new entrants, regulators are creating the conditions for true competition and giving consumers genuine alternatives to the established operators. This really is a wake-up call for the traditional financial institutions. They have a long way to go to win the confidence of customers; innovation and transformation in their businesses is going to be crucial to remaining competitive with new entrants snapping at their heels. Whichever organisation truly succeeds at putting customers and their experience at the heart of what they do could reap big rewards.

Financial services organisations have also been hampered by the ever increasing regulatory pressures. Moorhouse research undertaken in the UK FS sector in 2012 showed that 85 per cent of senior executives believe regulatory change was preventing their organisation from addressing other urgent business priorities; over half (61 per cent) stating significantly. The need to implement regulatory change is impacting on all ‘business as usual’ activities as businesses are unable to focus on anything other than compliance. However, with the sheer volume of regulation unlikely to slow down, organisations must adapt to ensure that their regulatory change programmes provide more benefits than simply compliance, or they will not have a balanced portfolio of change activity to help them remain competitive and effective.

The key to overcoming these regulatory demands and the threat of new entrants is to see this change as an opportunity to build a culture that puts customers at the heart of the business. Traditional financial service organisations can no longer use the increase in sweeping regulatory reforms as an excuse for not focusing on customer service. Previously, newer banks have struggled with gaining significant momentum and attracting customers from traditional financial organisations.

However, this is not the barrier to new entrants that it once was and this shift is evident in other industries. Changing mobile providers used to be much less attractive as customers would have to change phone numbers if they wanted to change suppliers. For many, this was considered to be too much trouble. Once this barrier was removed – and people were able to swap providers easily and keep the same number – telecommunications companies have had to focus much more on customer service to ensure they retain and win new customers.

This is a taste of what financial organisations are now facing. It is now much easier to change banks as customers’ can simply use a current account switching service. This is a much simpler process as it only takes seven days to happen. As the obstacles in switching banks reduce, customers are going to be much more open to taking their business elsewhere. This, combined with new market entrants, heralds a transformation in the sector.

Since the financial crash, confidence in the banks has fallen and there has been a legacy of negative assumptions about financial organisations. Banks have recognised the need to change their culture to rebuild the public’s trust in them. Barclays, for example, have pledged to publish their complaints data every three months, twice as often as required by the Financial Conduct Authority, as they try to drive down complaints.

However, if FS organisations are serious about winning the confidence of customers, they must examine their portfolios of change activity through the lens of enhancing customer experience and make the necessary changes. The overall aim of legislation is to protect customers and yet too many organisations are more focused on just achieving compliance and avoiding fines. Organisations need to define and maintain a single strategically aligned portfolio of projects that tackle total business strategy, instead of creating separate programmes to tackle regulatory changes.

Financial organisations have been making inroads to improving trust and consumer confidence levels have increased as the economy improves. However, the flood of new entrants into the marketplace is likely to pose a threat to established institutions that are hampered by legacy issues. Improving customer experience is the only way to remain competitive. Financial organisations must ensure they are not hindered by regulation or delay transforming their change programmes to reflect the customers’ needs and wishes.

Banking

ECB stays put but warns about surge in infections

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ECB stays put but warns about surge in infections 1

By Balazs Koranyi and Francesco Canepa

FRANKFURT (Reuters) – The European Central Bank warned on Thursday that a new surge in COVID-19 infections poses risks to the euro zone’s recovery and reaffirmed its pledge to keep borrowing costs low to help the economy through the pandemic.

Having extended stimulus well into next year with a massive support package in December, ECB policymakers kept policy unchanged on Thursday, keen to let governments take over the task of keeping the euro zone economy afloat until normal business activity can resume.

But they warned about a new rise in infections and the ensuing restrictions to economic activity, saying they were prepared to provide even more support to the economy if needed.

“The renewed surge in coronavirus (COVID-19) infections and the restrictive and prolonged containment measures imposed in many euro area countries are disrupting economic activity,” ECB President Christine Lagarde said in her opening statement.

Fresh lockdowns, a slow start to vaccinations across the 19 countries that use the euro, and the currency’s strength will increase headwinds for exporters, challenging the ECB’s forecasts of a robust recovery starting in the second quarter.

Lagarde saluted the start of vaccinations as “an important milestone” despite “some difficulty” and said the latest data was still in line with the ECB’s forecasts.

She conceded that the strong euro, which hit a 2-1/2 year high against the dollar earlier this month, was putting a dampener on inflation and reaffirmed that the ECB would continue to monitor the exchange rate.

The euro has dropped 1% on a trade-weighted basis since the start of the year, but is up nearly 7% over the last 12 months. Against the U.S. dollar, that number rises to over 10%.

MORE STIMULUS?

Opening the door for more stimulus if needed, Lagarde confirmed the ECB would continue buying bonds until “it judges that the coronavirus crisis phase is over”.

Lagarde also kept a closely watched reference to “downside” risks facing the euro zone economy, which has been a reliable indicator that the ECB saw policy easing as more likely than tightening.

But she signalled those risks were less acute, in part thanks to the recent Brexit deal.

“The news about the prospects for the global economy, the agreement on future EU-UK relations and the start of vaccination campaigns is encouraging,” Lagarde said. “But the ongoing pandemic and its implications for economic and financial conditions continue to be sources of downside risk.”

Lagarde conceded that the immediate future was challenging but argued that should not impact the longer term.

“Once the impact of the pandemic fades, a recovery in demand, supported by accommodative fiscal and monetary policies, will put upward pressure on inflation over the medium term,” Lagarde said.

Benign market indicators support Lagarde’s argument. Stocks are rising, interest rates are steady and government borrowing costs are trending lower, despite some political drama in Italy.

There is also around 1 trillion euros of untapped funds in the Pandemic Emergency Purchase Programme (PEPP) to back up her pledge to keep borrowing costs at record lows.

The ECB has indicated it may not even need it to use it all.

“If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full,” Lagarde said.

Recent economic history also favours the ECB. When most of the economy reopened last summer, activity rebounded more quickly than expected, indicating that firms were more resilient than had been feared.

Uncomfortably low inflation is set to remain a thorn in the ECB’s side for years to come, however, even if surging oil demand helps put upward pressure on prices in 2021.

With Thursday’s decision, the ECB’s benchmark deposit rate remained at minus 0.5% while the overall quota for bond purchases under PEPP was maintained at 1.85 trillion euros.

(Editing by Catherine Evans)

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Bank of Japan lifts next year’s growth forecast, saves ammunition as virus risks linger

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Bank of Japan lifts next year's growth forecast, saves ammunition as virus risks linger 2

By Leika Kihara and Tetsushi Kajimoto

TOKYO (Reuters) – The Bank of Japan kept monetary policy steady on Thursday and upgraded its economic forecast for next fiscal year, but warned of escalating risks to the outlook as new coronavirus emergency measures threatened to derail a fragile recovery.

BOJ Governor Haruhiko Kuroda said the board also discussed the bank’s review of its policy tools due in March, though dropped few hints on what the outcome could be.

“Our review won’t focus just on addressing the side-effects of our policy. We need to make it more effective and agile,” Kuroda told a news conference.

As widely expected, the BOJ maintained its targets under yield curve control (YCC) at -0.1% for short-term interest rates and around 0% for 10-year bond yields.

In fresh quarterly projections, the BOJ upgraded next fiscal year’s growth forecast to a 3.9% expansion from a 3.6% gain seen three months ago based on hopes the government’s huge spending package will soften the blow from the pandemic.

But it offered a bleaker view on consumption, warning that services spending will remain under “strong downward pressure” due to fresh state of emergency measures taken this month.

“Japan’s economy is picking up as a trend,” the BOJ said in the report, offering a slightly more nuanced view than last month when it said growth was “picking up.”

While Kuroda reiterated the BOJ’s readiness to ramp up stimulus further, he voiced hope robust exports and expected roll-outs of vaccines will brighten prospects for a recovery.

“I don’t think the risk of Japan sliding back into deflation is high,” he said, signalling the BOJ has offered sufficient stimulus for now to ease the blow from COVID-19.

NO EXIT EYED

Many analysts had expected the BOJ to hold fire ahead of a policy review in March, which aims to make its tools sustainable as Japan braces for a prolonged battle with COVID-19.

Sources have told Reuters the BOJ will discuss ways to scale back its massive purchases of exchange-traded funds (ETF) and loosen its grip on YCC to breathe life back into markets numbed by years of heavy-handed intervention.

Kuroda said the BOJ may look at such options at the review, but stressed a decision will depend on the findings of its scrutiny into the effects and costs of YCC.

He also made clear any steps the BOJ would take will not lead to a withdrawal of stimulus.

“It’s too early to exit from our massive monetary easing programme at this point,” Kuroda said. “Western economies have been deploying monetary easing steps for a decade, and none of them are mulling an exit now.”

(Reporting by Leika Kihara and Tetsushi Kajimoto; additional reporting by Kaori Kaneko; Editing by Simon Cameron-Moore & Shri Navaratnam)

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World Bank, IMF agree to hold April meetings online due to COVID-19 risks

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World Bank, IMF agree to hold April meetings online due to COVID-19 risks 3

WASHINGTON (Reuters) – The International Monetary Fund and the World Bank have agreed to hold their spring meetings, planned for April 5-11, online instead of in person due to continued concerns about the coronavirus pandemic, they said in joint statement.

The meetings usually bring some 10,000 government officials, journalists, business people and civil society representatives from across the world to a tightly-packed two-block area of Washington that houses their headquarters.

This will be the third of the institutions’ semiannual meetings to be held virtually due to the pandemic.

(Reporting by Andrea Shalal; Editing by Chris Rees

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