With global debt at an all-time high, some commentators are voicing concern over the increased risk of banks’ corporate lending. Nina Brumma, Head of Research and Analytics at Global Credit Data, discusses what happens to corporate debt in the event of default
Following a slow but steady emergence from the global economic crisis at the end of the last decade, alarm bells were raised by the International Monetary Fund (IMF) last month at the news that global debt reached a record-breaking high at the start of 2018. With the total now standing at $237 trillion, the question has been raised as to whether bank lending is becoming an increasingly risky business.
In its latest Global Financial Stability Report, the IMF signalled that “the prolonged period of loose financial conditions in recent years has raised concerns that financial intermediaries and investors in search of yield may have extended too much credit to risky borrowers.”
A warning to both banks and corporates, it raises a vital question – what will happen if corporates start defaulting on this debt? An answer to this question can found by analysing banks’ Loss Given Default (LGD) – a risk metric that measures the percentage of non-recovered funds in the instance of borrower default. With defaulted loans representing just 1% of a given bank’s total loan book, however, data on LGD has historically been in short supply – making it difficult to identify meaningful trends.
The release of Global Credit Data’s recent LGD report – combining statistics from over 50 member banks since 2000– is therefore a timely one. Indeed, it offers some reassuring perspective on the real risks of corporate default – revealing that, on average, banks recover 75% of defaulted corporate debt. And if we factor in that only 1% of corporate debt is actually defaulted on in the first place, this means banks recover a total of 99.75% of all corporate debt – while also generating profit through coupons and interest payments. These considerations should be clear in minds of banks and their detractors when weighing up the risks of continued corporate investment.
Breaking down the figures a little further, we can see that banks recoup almost 100% from the majority of individual defaulted facilities – with only 10% resulting in a loss of 80% or more.
If we consider these figures on a global scale, the statistics are consistent across the regions: Europe and North America sit in the middle of the regional averages – registering very similar figures. Outside this, Africa and the Middle East boast lower levels of LGD, while Asia and South America have slightly higher levels. These slight variations, however, are likely the result of variations in the make-up of data and we cannot be sure whether they represent significant statistical diversity.
For instance, in Africa and the Middle East, data is compiled from a much smaller data set than other regions – a disproportionate amount of which originates from South Africa, where the LGD on average tends to be lower than other countries in the region. Consequently, there is no hard evidence to suggest that African and Middle Eastern debt carry significantly less risk with regard to LGD.
In Asia – which encompasses the Oceania region in its data – it’s a similar story, only it is made up of a much larger and more diverse list of countries. With each country shaped by its own unique legal and economic frameworks, disparities in LGD are inevitable. Australia, New Zealand, South Korea and Japan, for instance, have LGD levels which are more or less in line with Europe and North America’s, but other countries – with higher LGDs – inevitably push up the region’s average.
While regionally, LGD levels do not vary too significantly, the data collected does vary over time – suggesting a relationship between LGD and the state of the global economy. Another Global Credit Data report – the LGD Downturn Report – found, somewhat unsurprisingly, that default rates are proportional to a decline in GDP growth, but the relationship between GDP and LGD is a little more complicated. If we look at data from the period leading up to and inclusive of the global financial crisis, LGD rose well ahead of time, peaking in 2008 and dropping off in the midst of the crisis – before default rates themselves had normalised.
It’s hard to find a specific systemic factor to which we can attribute this correlation, but it appears that there is a link between macroeconomic decline and a rise in LGD. Of course, while we do have LGD data for recent years – which could potentially corroborate the IMF’s fears and indicate another downturn – these records are not yet complete due to the time it takes to resolve defaults (two years on average).
Mitigating risk with seniority and security
The report does, however, provide us with clear evidence as to the factors that determine the costs for banks, and the likelihood of repayment, in the event of a corporate default.
Unsurprisingly, taking collateral has a significant impact on LGD – with an average of 23% LGD for secured debt, versus 28% for all unsecured debt, falling down to 40% for debt that is subordinated and unsecured. Given the concern surrounding the growing levels of global corporate debt, banks with high levels of secured debt can point to these figures as reassurance and vindication for their investment policies.
As we have briefly seen already, seniority also plays a role in determining LGD – with the percentage of senior unsecured debt recovered standing at 73%, compared with just 60% of subordinated unsecured debt.
So despite the climate of concern surrounding rising global debt levels, the industry must keep a level head. Public opinion is easily swayed – “debt” a somewhat loaded term, after all – but these investments ultimately drive the economy forwards. And with both seniority and collateral in place, the evidence suggests banks can continue to invest with confidence.
U.S. inauguration turns poet Amanda Gorman into best seller
WASHINGTON (Thomson Reuters Foundation) – The president’s poet woke up a superstar on Thursday, after a powerful reading at the U.S. inauguration catapulted 22-year-old Amanda Gorman to the top of Amazon’s best-seller list.
Hours after Gorman’s electric performance at the swearing-in of President Joe Biden and Vice President Kamala Harris, her two books – neither out yet – topped Amazon.com’s sales list.
“I AM ON THE FLOOR MY BOOKS ARE #1 & #2 ON AMAZON AFTER 1 DAY!” Gorman, a Los Angeles resident, wrote on Twitter.
Gorman’s debut poetry collection ‘The Hill We Climb’ won top spot in the online retail giant’s sale charts, closely followed by her upcoming ‘Change Sings: A Children’s Anthem’.
While poetry’s popularity is on the up, it remains a niche market and the overnight adulation clearly caught Gorman short.
“Thank you so much to everyone for supporting me and my words. As Yeats put it: ‘For words alone are certain good: Sing, then’.”
Gorman, the youngest poet in U.S. history to mark the transition of presidential power, offered a hopeful vision for a deeply divided country in Wednesday’s rendition.
“Being American is more than a pride we inherit. It’s the past we step into and how we repair it,” Gorman said on the steps of the U.S. Capitol two weeks after a mob laid siege and following a year of global protests for racial justice.
“We will not march back to what was. We move to what shall be, a country that is bruised, but whole. Benevolent, but bold. Fierce and free.”
The performance stirred instant acclaim, with praise from across the country and political spectrum, from the Republican-backing Lincoln Project to former President Barack Obama.
“Wasn’t @TheAmandaGorman’s poem just stunning? She’s promised to run for president in 2036 and I for one can’t wait,” tweeted former presidential candidate Hillary Clinton.
A graduate of Harvard University, Gorman says she overcame a speech impediment in her youth and became the first U.S. National Youth Poet Laureate in 2017.
She has now joined the ranks of august inaugural poets such as Robert Frost and Maya Angelou.
Her social media reach boomed, with her tens of thousands of followers ballooning into a Twitter fan base of a million-plus.
“I have never been prouder to see another young woman rise! Brava Brava, @TheAmandaGorman! Maya Angelou is cheering—and so am I,” tweeted TV host Oprah Winfrey.
Gorman’s books are both due out in September.
Third on Amazon’s best selling list was another picture book linked to politics and projecting hope: ‘Ambitious Girl’ by Vice-President Kamala Harris’ niece, Meena Harris.
(Reporting by Umberto Bacchi @UmbertoBacchi, Editing by Lyndsay Griffiths. Please credit the Thomson Reuters Foundation, the charitable arm of Thomson Reuters, that covers the lives of people around the world who struggle to live freely or fairly. Visit http://news.trust.org)
Why brands harnessing the power of digital are winning in this evolving business landscape
By Justin Pike, Founder and Chairman, MYPINPAD
Delivery of intuitive, secure, personalised, and frictionless user experiences has long been table stakes in digital commerce, well before the era of COVID-19. As businesses harness the revolutionary power of digital technologies, they have pursued large-scale change to adapt to evolving consumer preferences (some more successfully than others, but that’s a blog for another day). Digital transformation is a term we hear repeatedly, and it looks different for each organisation, but essentially, it’s about utilising technology and data to digitise, automate, innovate and improve processes and the customer experience across the entire business.
As I said, this was already well underway but then came 2020 and no industry escaped the disruption of the coronavirus outbreak, which has had an indelible impact on businesses performance, operations, and revenue. Regardless of whether the impact of COVID has been very positive or very challenging, it has forced organisations globally to re-evaluate and re-orient strategies to adapt.
As lockdowns and pandemic-related restrictions continue to change daily life, this raises the question of how we can balance a dramatic shift to digital and the benefits it brings, while ensuring business continuity and innovation both during and post-COVID, and protecting everyone against fraud?
Digital is an essential survival tool, and even more so in a COVID world
No one could have predicted the dramatic digital pivot that has taken place over this year. Indeed, within weeks of the COVID outbreak cash usage in the UK dropped by around 50%. Digital solutions including delivery applications, contactless payments, mobile commerce, online and mobile banking have become essential components of a touchless customer experience in the era of social distancing. It’s no longer just about an enhanced and superior customer experience, it’s also about health, safety and survival.
In store, businesses have benefited from contactless payments enabling faster throughput and reduced need for consumers to touch payment terminals (therefore requiring greater cleaning, which degrades the hardware much faster). Mastercard reported a 40% increase in contactless payments – including tap-to-pay and mobile pay – during the first quarter of the year as the global pandemic worsened. Digital has also become an essential sales channel for many B2C brands. Where brick and mortar stores have been required to close, digital commerce enables continuity of customer relationships and revenue. This channel also provides brands with rich customer data, which can be used to enhance and personalise the customer experience and typically results in greater levels of engagement and uplifts in revenue.
Industry forecasts estimate that worldwide spending on the technologies and services enabling digital transformation will reach GBP 1.8 trillion in 2023 – a clear indication that the process represents a long-term investment and a global commitment to digital-first strategy. The key point here is that digital brings significant benefits, and regardless of COVID, is here to stay.
The challenges that rapid digital transformation brings to businesses
Regardless of whether businesses are operating in developed or less-developed economies, these times of crisis have levelled the playing field in the sense that all businesses are facing similar issues. Access to products and supplies, maintaining customer relationships, accelerating sales for some and declining sales for others, health and hygiene are just a few of the unique challenges brought about by COVID.
Many businesses in physical environments have had to swiftly implement changes to significantly reduce safety risks for staff and customers, such as contactless payments, mobile ordering and delivery options. But with these changes come a host of other benefits of digitisation, such as faster transactions, and reduced human error at the point-of-sale.
The reliance on technology, however, can also expose organisations and consumers to certain vulnerabilities. In particular, the risks of fraud and cybercrime have dramatically increased since the onset of the pandemic as scammers have taken advantage of digital technologies to target both businesses and individuals.
As a McKinsey report illustrates, new levels of sophistication in the activities of fraudsters have placed more pressure on companies that have been previously slow to go digital, bringing “into sharp relief how vulnerable companies really are”, and damaging the financial health of small and large businesses. In fact, the Bottomline 2020 Business Payments Barometer reveals that only one in 10 small businesses across the UK report recovering more than 50% of losses due to fraud.
But take these stats with a grain of salt. While it is important to be aware of the risks and challenges this new business landscape brings, it’s equally as important to have a lens firmly across your own business, industry and audience, and to identify the changes you can make internally to mitigate risk as well as improve your customer experience. Where can you make some quick wins? Do you have the right skillsets internally to achieve what you need to achieve? What technology is out there that will enable your business goals? There are tech companies like MYPINPAD that are making huge strides in software development, which will transform businesses globally.
A digital world post-COVID
Almost a year in, the line between business success and failure remains fragile. However, an ongoing transition towards greater digitisation will be the difference between survival and the alternative.
There is a wide range of initiatives businesses can implement to weather this storm. If we look at the space MYPINPAD operates within, secure digital consumer authentication is crucial to the ongoing success and security of not only financial products but also identification and verification across a range of different industry verticals. Shifting the authentication of consumers securely onto mobile devices enables businesses to completely reshape their customer experiences. By bringing together a more seamless, frictionless customer experience, accessibility, privacy, security and access to consumer data, businesses are able to drive digital transformation across day-to-day activities.
Against this backdrop, software with stronger security standards continue to play an ever more vital role in supporting society, protecting consumers and businesses from the increase in risks that rapid digitisation brings. Already, merchants can deploy PIN on Mobile technology from companies like MYPINPAD, onto their smart devices to speed up the digitisation process many are now tackling.
Essentially, opening up universal payments and authentication methods that feel familiar, for both online and face-to-face transactions, will be key to opening up a world of possibilities when it comes to redefining how businesses engage with consumers.
Brexit responsible for food supply problems in Northern Ireland, Ireland says
LONDON (Reuters) – Food supply problems in Northern Ireland are due to Brexit because there are now a certain amount of checks on goods going between Britain and Northern Ireland, Irish Foreign Minister Simon Coveney said.
British ministers have sought to play down the disruption of Brexit in recent days.
“The supermarket shelves were full before Christmas and there are some issues now in terms of supply chains and so that’s clearly a Brexit issue,” Coveney told ITV.
The Northern Irish protocol means there are “a certain amount of checks on goods coming from GB into Northern Ireland and that involves some disruption,” he said.
(Reporting by Guy Faulconbridge; Editing by Tom Hogue)
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