By Rishi Khosla, CEO and co-founder of OakNorth Bank, the bank for entrepreneurs and small business owners
There has been a lot of chatter since the banking crisis about new banks launching in the UK. The casual observer might think good progress has been made. Customers, be they consumers or businesses, have more choice than they’ve had in decades and they can now be assured they are getting a good deal. The banking system is once again playing its fundamental role of optimising the allocation of capital in the economy.
The facts tell a different story.
In the US, there are 7,000 banks. In Germany, there are 2,000. In the UK, just five banks control 90 per cent of the market. That’s a lot of faith to place in five banks – five companies that the same casual observer may think didn’t exactly cover themselves in glory in the run-up to 2008.
You’ve got to hope that there’s real diversity in that small group of banks and that all valuable parts of our economy are being properly served by them. One moment spent considering the way they lend to small companies makes you realise that this simply isn’t the case. In the UK, small companies borrow half as much as their counterparts in the US and Germany, which means less capital investment and less growth.
In fact, weak lending to small businesses is the elephant in the room of banking policy. Small companies generate no less than half our GDP and British entrepreneurs have made some of the most significant breakthroughs in business and been responsible for inventions that have changed the world – from the telephone, to the TV, to the worldwide web.
But the major banks have over the course of a couple of decades increasingly focused their relationship managers on large companies, while centralising and automating underwriting processes for smaller loans. Entrepreneurs have typically been required to offer property as collateral – an approach that simply isn’t fit for purpose in this age of falling homeownership and new industries where property assets aren’t required.
A ‘computer says no’ approach to small companies has prevailed, and there’s the rub. Some of the high street lenders have complained that the problem isn’t that they’re not lending, but more that businesses simply aren’t borrowing. Well, if you’re told ‘no’ enough times, you simply stop asking. Banks have supressed the appetite among small businesses for loans and as a result a whole new category of lenders have come into the market – peer to peer platforms, direct lenders and indeed OakNorth Bank.
While the government supports increased banking competition and has, for the most part, taken a pragmatic approach to encouraging it, the decision to replace the Bank Levy, which only applied to large banks, with an 8 per cent surcharge on profits above £25m for all banks, is a retrograde step and sends the wrong signals. In September, a number of new banks met with Charles Roxburgh, a senior Treasury official, to plead for a break from the new tax. However, their appeals were mostly rebuffed which is why a letter from Andrew Tyrie, the Conservative chairman of the Treasury select committee, to Andrew Bailey, deputy governor of the PRA, last month, was a welcome intervention. In his letter, Andrew Tyrie warned that the surcharge might hinder competition and reduce lending at retail banks.
OakNorth has ambitious plans to lend over £1 billion to small business owners and entrepreneurs in the next few years, and ramping up taxation on profits means that we will have less capital to reinvest in our business and less retained capital which would limit our ability to scale our lending book, and therefore makes achieving that goal a lot more challenging.
Still, the government has made significant inroads in the last few years to reduce the barriers to entry for new banks into the market and improve competition in the sector. The launch of the Current Account Switching Service in September 2013 has seen over 1.5m current account holders move from the Big Five to “challenger” banks, and the provisional findings of the Competitions and Markets Authority (CMA) review into the banking services offered to SMEs shine a much-needed spotlight on the UK’s uncompetitive banking sector and the lack of support SMEs receive when it comes to shopping around for a better deal.
It is important that the tight political pressure we’ve seen over the last half decade, is sustained and that initiatives that were introduced to improve the financing options available to small businesses, evolve. The Funding for Lending Scheme (FLS) for example – which reduced competition for savings and allowed new market entrants to re-price their deposits and diversify their deposit products – is due to end in January 2016 and the government has no plans to extend it. The Scheme launched at a time when there was a lack of liquidity in the market and it provided funding for banks to lend. Three years on however, many small businesses are still struggling to find the funding they need. Given the stronger economic situation, coupled with a continued political will to a) increase funding to small business owners and entrepreneurs; and b) increase competition in the banking sector, there is a strong case for extending the scheme but limiting it to small and medium sized lenders who have real appetite to lend to the real economy.
Reasons Why You Should Be Opening an Offshore Savings Account Today
No one has to convince you that savings accounts are a bad idea. As a safe investment, this approach is hard to beat. It also has the benefit of allowing you to set aside funds for all sorts of purposes while you earn a little interest.
While this can be done with a domestic account, there are compelling reasons to consider opening an offshore savings account. How can you eventually use those funds, and why would it be better to house them in an offshore setting? Here are some ideas to consider.
1. Setting Aside Funding for a Short-Term Goal
You have a specific financial goal that you want to reach in five or ten years. It could be saving the money for a down payment on a home or possibly buying real estate. Any such goal requires dedicating a part of your income to reach it. Placing funds in an interest-bearing account in the interim is a good option. That’s where an offshore savings account comes in handy.
The temptation to withdraw money from an offshore account is less likely. While doing so would be easy, it’s not unusual for people to turn toward the balances in their domestic accounts before pulling money from offshore ones. The result is that you’re more likely to consistently make progress toward building the funds needed to reach your goals successfully.
2. Creating a Contingency Fund
No matter what your life circumstances happen to be, it’s a safe bet that you’ll need emergency funds at some point. Think of what it would mean to have six months to a year’s worth of cash to carry you over if your company went out of business or if you lost your job. Even if it took some time to find another full-time position, the money in a contingency fund allows you to maintain a reasonable standard of living while you’re in search of opportunities.
Using an offshore account to house your contingency fund works well because you are less likely to withdraw funds until the need is significant. By opting to set up recurring funds transfers from a domestic account to your offshore account, you can add to those emergency funds without having to give the process much thought. When the day comes when you need the money, it will be easy to transfer the funds back to a domestic account or use the debit card supplied by your offshore bank.
3. Building Assets for Retirement
As many people learned during the last recession, employer-provided pension funds may or may not be around by the time you retire. If the investments made with the retirement contributions tank, there goes all or at least most of the money you planned on using to live after leaving the workforce. Establishing your resources for retirement, and diversifying them, protect your financial future.
An offshore savings account can be one of those solutions. A time deposit account lets you build more reserves for retirement. Since the account is not tied to your employment status or to the investments used to shore up your pension fund, it will be there when you need it.
4. Growing an Education Fund for the Kids
Perhaps the plan is not so much about investing in your financial future. Education for your children may be what’s driving you right now. Knowing how much a college education costs these days, you realize that now is the time to start saving. Even if the kids can secure scholarships that cover much of the expense, there will still be costs that need attention.
An offshore savings account provides an excellent means of setting aside funds for education. Let the balances roll over from year to year and earn more interest. Take advantage of offshore accounts that provide higher rates of interest when the balances exceed specific amounts. This strategy will make funding college a lot simpler.
5. Building Reserves for Purchasing a Vacation Property
You’re reaching a point in your life when having a second property to use for vacations sounds appealing. Now is the time to start setting aside funds that will aid in the purchase. An offshore account can be the means of growing the balance a little faster. The result is that when you’re ready to buy that second property, there will be considerably less that needs financing.
This solution also makes the process of transferring funds for purchasing international real estate easier. For example, you decide to buy a vacation home in the same country where your offshore account is based. Your bank can make withdrawing the funds and remitting the money to the seller much simpler.
6. Protecting Some Assets Just in Case
You don’t have to work in a high-profile field to be sued. What would you do if things didn’t go your way? The court could order most of your domestic assets seized to settle the judgment. How would you get by then?
Here’s something that you may not know about the money in offshore accounts – domestic courts can’t order a seizure of the account balances. Even if a lawsuit means every asset you have at home is taken away, there is still the money in your offshore savings account to help you rebuild. It may also be the way that you keep a roof over your head and food on the table while you decide how to go about rebuilding.
7. Taking Advantage of Higher Interest Rates
If you compare the interest rates offered in many international settings with what you can command at home, the difference is immediately evident. It’s possible to open an offshore savings account with a relatively low balance and gradually add to the balance. Over time, you reach a balance level that allows you to earn some of the best rates found around the globe.
When the plan is to place money in an account to accrue interest for over many years, an offshore savings account is the way to go. Once the day arrives when you want to use those funds, the balance will be noticeably more than if you had invested the same proportion in a domestic account. Think of how good you’ll feel knowing that your money was able to grow simply because you chose the right offshore location for the account.
8. Enjoying Peace of Mind
At times, it seems increasingly difficult to find peace of mind in today’s tumultuous world. With money placed in an offshore savings account, it’s possible to secure a little bit of tranquility even when everything else is upside down.
By establishing an account in a politically stable country, offers excellent returns in the form of interest, and is protected from any domestic court action, you know there will be assets to draw on no matter what. That’s a good feeling.
Get Help Setting Up an Offshore Savings Account
These are just a few reasons why opening an offshore savings account is a smart financial move. There is no better time to start than now, and an excellent offshore location to choose is Belize.
Caye International Bank, located on Ambergris Caye island in Belize, Central America has helped thousands of people establish offshore financial accounts. We can help you, too, in determining which offshore accounts work best based on your goals. You’ll find that setting up an account is a lot simpler than you anticipated.
Luigi Wewege is the Senior Vice President, and Head of Private Banking of award-winning Belize based Caye International Bank, a FinTech School Instructor and the published author of The Digital Banking Revolution – now in its third edition. You can follow his posts on innovation trends shaping the banking and financial services industry on Twitter: @luigiwewege
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Former BOJ executive calls for ‘genuine’ review of central bank stimulus
By Leika Kihara and Takahiko Wada
TOKYO (Reuters) – The Bank of Japan must abandon the view it can influence public perceptions with monetary policy and conduct a “genuine” review that takes a harder look at the rising cost of prolonged easing, said former central bank deputy governor Hirohide Yamaguchi.
The BOJ will conduct a review next month to make its monetary policy tools more sustainable, nodding to criticism its policy is crushing bond yields, drying up market liquidity and distorting stock prices.
But Yamaguchi, who was deputy governor when the BOJ first began buying exchange-traded funds (ETF) in 2010, said the costs of the bank’s stimulus programme have become too large to mitigate in the review in March.
“It’s unlikely the BOJ can come up with an outcome that has a substantial impact on the economy and markets,” he told Reuters in an interview on Monday.
“The review will probably be just a show of gesture that it’s doing ‘something’ to address the cost,” said Yamaguchi, who retains strong influence on incumbent policymakers.
Under its yield curve control (YCC) framework, the BOJ guides short-term interest rates towards -0.1% and 10-year bond yields to around 0%. It also buys risky assets such as ETFs to fire up inflation.
Ideas floated in the BOJ, which could be discussed at the review, include allowing the 10-year bond yield to deviate more from its 0% target, and making its ETF buying nimble so it can slow buying when stocks are booming.
Tolerating bigger yield swings, however, could undermine the feasibility of YCC by highlighting the limits of the BOJ’s control over the yield curve, Yamaguchi said.
“It’s hard to control long-term interest rates within a tight range for a long period of time,” he said, calling for an overhaul of YCC – something the BOJ rules out as an option.
Yamaguchi also called for halting the BOJ’s ETF purchases, as the bank could “end up using monetary policy to prop up stock prices” if the programme continues.
“At the very least, the BOJ must end as soon as it can the current situation where its ETF holdings keep accumulating.”
When the BOJ began buying ETFs in 2010, it used a pool of funds to ensure purchases remain at a manageable level, said Yamaguchi, who was involved in the decision.
That cautious approach was replaced by Governor Haruhiko Kuroda, Yamaguchi said, after he took over as head of the BOJ in 2013. Kuroda ramped up purchases dramatically with his “bazooka” stimulus deployed that year under a pledge to deploy all available means in a single blow. Eight years on, inflation remains distant from the BOJ’s 2% target.
“It’s impossible for the BOJ to guide public perceptions at its will,” Yamaguchi said. “It’s time now for the BOJ to conduct a ‘genuine’ policy review and use the findings to modify its policy framework.”
(Reporting by Leika Kihara and Takahiko Wada; Editing by Ana Nicolaci da Costa)
Metro Bank expects defaults to rise as COVID-19 support measures fade out
(Reuters) – Metro Bank posted a much bigger annual loss on Wednesday and said it expects defaults to rise through the year in line with its provisions as government support measures set in place due to the COVID-19 crisis are wound down.
The mid-sized company, part of a breed of challenger banks set up to take on the dominance of bigger and more conventional lenders in Britain, said underlying pretax loss was 271.8 million pounds ($385.58 million) for the 12 months ended Dec. 31 compared to 11.7 million pounds a year earlier.
“The pandemic has clearly impacted performance, leading to significant expected credit losses, but our transformation strategy is firmly on track and we have accelerated initiatives to shift our asset mix, bringing higher yield and improving net interest margin, as evidenced in the second half,” Chief Executive Officer Daniel Frumkin said.
Metro, which relieved some of the pressure on its capital levels last year by selling one of its portfolios to NatWest, estimated impact from the coronavirus pandemic to be 124 million pounds.
The bank, whose net interest margin fell to 1.22% from 1.51% in a low interest rate environment, said provisions to cover loan losses amounted to 126.7 million pounds at 2020-end, compared with 11.7 million pounds a year earlier.
The company said the increase in expected credit losses was driven by deteriorating macro-economic scenarios that have increased the probability of defaults.
($1 = 0.7049 pounds)
(Reporting by Muvija M in Bengaluru; Editing by Vinay Dwivedi)
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