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A Lloyd’s report urges insurers to ask “what if?”

Thu, 10/19/2017 - 14:57

ON JULY 7th disaster was narrowly averted when an Air Canada passenger plane, trying to land on a full taxiway at San Francisco airport, pulled up just in time. Five seconds longer, and it might have crashed into fully loaded planes and killed over 500 people, in potentially the deadliest aviation disaster ever. Instead, the incident became a non-event—not just in collective memory but also in insurance. With no losses, there was nothing to log. Yet ignoring such near-misses, argues a report published this week by Lloyd’s of London, an insurance market, and RMS, a risk-modeller, is a missed opportunity.

Counterfactual “what if” thinking may be an enjoyable pastime for historians—“What if Hitler had been assassinated?” being one favourite—but is not common among underwriters. They prefer to base estimates of future risk—and hence premiums—on hard data of what happened in the past, eg, the number of aeroplanes that crashed and the total losses incurred. Since actual aviation losses...

Multilateral lenders vow openness about their carbon footprints

Thu, 10/19/2017 - 14:57

THE World Bank gets a lot of flak. Developing countries clamour for a bigger role in its management. President Donald Trump’s administration lambasts it for lending too much to China. Employees are in open rebellion against their boss, Jim Yong Kim. Now the embattled institution faces criticism from a traditionally friendlier quarter: environmentalists. They accuse it and other multilateral development banks (MDBs) of not being upfront about their true carbon footprint.

That must hurt. After all, MDBs pioneered climate-friendly finance. Ten years ago the European Investment Bank issued the world’s first green bond to bolster renewables and energy-efficiency schemes. The World Bank has not backed a coal-fired plant since 2010. In 2011-16 it and the five big regional lenders in the Americas, Asia, Africa and Europe offered developing countries a total of $158bn to help combat climate change and adapt to its effects. They disclose the amount of carbon dioxide emitted by their day-to-day...

On NAFTA, America, Canada and Mexico are miles apart

Thu, 10/19/2017 - 08:48

THESE are troubling times for Roberto Santana Flores, a Mexican maker of charro shirts, a modern take on the Mexican cowboy aesthetic. He recalls life before the North American Free-Trade Agreement (NAFTA), a trade deal linking Mexico with America and Canada. He remembers his shirts incurred a whopping 37.5% tariff if exported to America. Now they cross the border duty-free. But his dream of expanding his factory and his American customer base is under threat. He scours the newspapers daily for news of the NAFTA negotiations. They tell of conflict. Some even warn the deal may collapse. Since it covers trade worth more than $1trn a year, that is alarming for many more than Mr Flores.

On October 17th trade representatives of the three countries gathered to mark the end of the fourth round of talks. A collapse does not seem imminent. Robert Lighthizer, the United States Trade Representative (pictured, centre), denied that abandoning the deal was even being...

In dirt-poor Myanmar, smartphones are transforming finance

Thu, 10/12/2017 - 14:51

For chats and kyats

MYANMAR’S democratic transition sometimes seems marked as much by continuity as by change. Depressingly, the army continues its bloody persecution of Rohingya Muslims in the west, for example (see article). But elsewhere moves to open the country’s markets, started by the preceding military regimes, have gathered pace. New commercial and financial services are springing up.

Take Khin Hlaing, who owns Global Mobile Shop, a small store surrounded by tarpaulin-covered stalls selling fresh fruit in Hlaing Tharyar, an industrial area outside Yangon, the biggest city. He is one of almost 12,000 agents for Wave Money, Myanmar’s largest mobile-money transfer platform. Most days about 20 people use his shop to send funds to friends or family elsewhere in the country. One...

The internationalisation of China’s currency has stalled

Thu, 10/12/2017 - 14:51

ON OCTOBER 18TH, President Xi Jinping will preside in Beijing over the most important political event in five years. At the Communist Party’s 19th congress much will be made of the triumphs achieved in nearly four decades of reform and opening up. So expect a glossing over of one part of that process where progress has largely stalled: the “internationalisation” of China’s currency, the yuan.

This seems odd. Just a year ago, the yuan became the fifth currency in the basket that forms the IMF’s Special Drawing Right (SDR). This marked, in the words of Zhou Xiaochuan, China’s central-bank governor, in a recent interview with Caijing, a financial magazine, “historic progress”. Symbolically, China’s monetary system had been awarded the IMF’s seal of approval. A further boost to prestige was the announcement in June this year that some Chinese shares would be included in two stockmarket benchmarks from MSCI.

Yet the yuan’s international reach has in fact fallen in the past two years. It has regained its ranking as the world’s fifth most active for international payments, after slipping to sixth in 2016. But its share of this market has slipped from 2.8% in August 2015 to 1.9% now (see chart). Use of the yuan in global bond markets over this period has fallen by half, as companies have instead raised funds within China. In Hong Kong,...

Technology is revolutionising supply-chain finance

Thu, 10/12/2017 - 14:50

IN 2015 Kiddyum, a small company from Manchester that provides frozen ready-meals for children, won a contract from Sainsbury’s, a big British supermarket chain. Jayne Hynes, the founder, was delighted. But sudden success might have choked Kiddyum’s cashflow. Sainsbury’s pays its suppliers in 60 days; Ms Hynes must pay hers in only 30.

In fact Kiddyum gets its cash within a few days. Once approved by Sainsbury’s, its invoices are loaded onto the supermarket’s supply-chain finance platform, run by PrimeRevenue, an American company. The Royal Bank of Scotland (RBS) picks up the bills, paying Kiddyum early. Kiddyum pays a fee which, Ms Hynes says, is a small fraction of the cost of a normal loan. Sainsbury’s pays RBS when the invoice falls due.

Suppliers, of course, have always needed finance for the gap between production and payment. Traditionally, they could borrow on their own account, or sell their receivables—unpaid invoices—at a discount to businesses known as...

The finance industry ten years after the crisis

Thu, 10/12/2017 - 14:50

MANY people complain that the finance industry has barely suffered any adverse consequences from the crisis that it created, which began around ten years ago. But a report from New Financial, a think-tank, shows that is not completely true.

The additional capital that regulators demanded banks should take on to their balance-sheets has had an effect. Between 2006 and 2016, the return on capital of the world’s biggest banks has fallen by a third (by more in Britain and Europe). The balance of power has shifted away from the developed world and towards China, which had four of the largest five banks by assets in 2016; that compares with just one of the biggest 20 in 2006.

The swaggering beasts of the investment-banking industry have also been tamed. The industry’s revenues have dropped by 34% in real terms, with profits falling by 46%. Return on equity has declined by two-thirds. Staff are still lavishly remunerated, but pay is down by 52% in real terms. (Perhaps it is time for a charity single: “Buddy, can you spare a Daimler?”) The relative importance of different divisions has also shifted, with the revenues of the sales, trading and equity-raising departments shrinking more than the merger-advice or debt-raising divisions.

This last change reflects market developments. In 2016 stockmarkets were smaller, as a proportion of GDP, than they were...

Brexit will give the derivatives market a nasty headache

Thu, 10/12/2017 - 14:50

FOR all the talk of banks deserting London as Britain’s departure from the EU looms, relatively little attention has been paid to the derivatives market. Yet this is a crucial area of business for British-based banks. The City handles a big chunk of the market, including 39% of the market in interest-rate derivatives alone, where global daily turnover averages $3trn. The rest of the EU accounts for just 9%. Brexit seems sure to cause significant disruption. Mark Carney, the governor of the Bank of England, recently warned that the very “legal validity” of pre-existing derivatives contracts could be put into question.

Brexit-related discussion of derivatives has tended to focus on the role of clearing-houses, which ensure that a contract can be honoured even if one side goes bust. Since the financial crisis, most countries have made it mandatory to clear derivatives trades. LCH, a clearing-house in London, clears over 50% of interest-rate swaps across all currencies; London houses...

BBVA, a Spanish bank, reinvents itself as a digital business

Thu, 10/12/2017 - 14:50

OUTSIDE, a patch of grass affording a spectacular view of the Sierra de Guadarrama is littered with cartridge casings. Inside the Club de Tiro de Madrid (Madrid Shooting Club), on the city’s northern edge, over 400 people are fixing their sights for the next three months. Their business is not shooting but banking. Teams sit at 27 tables working on specific projects—to improve the global mobile platform, say, or to share information about job applicants. At another 12 tables are data specialists, in-house lawyers and others whose expertise the teams will need. The targets are on the walls: white boards that are soon covered in yellow and pink Post-it notes, listing tasks for the weeks ahead.

BBVA, Spain’s second-largest bank, began quarterly planning sessions like this three years ago, in its Mexican subsidiary. This is the fourth global gathering. The idea, explains Derek White, head of global customer solutions, is to replicate the nimbleness of financial-technology startups (“fintechs”) at large scale. When a project is conceived, a small group is assembled to work on it within three days. A prototype is created in six weeks. The finished article should be “en las manos de los clientes”—in customers’ hands—within nine months. The quarterly cycle starts with a planning session to thrash out priorities. It ends with a demo day, startup-style...

Richard Thaler wins the Nobel prize for economic sciences

Tue, 10/10/2017 - 14:50

THE credit-card bill arrives. You have enough money in a savings account to pay it off—the sensible thing to do, arithmetically speaking, since the interest rate on the credit-card balance far exceeds that earned on the savings. Yet you leave the savings untouched, and pay only as much of the bill as your current-account balance allows. What looks a daft choice to most economists makes perfect sense to Richard Thaler, who on October 9th was awarded the Nobel prize for economics for his work in behavioural economics. Mr Thaler helped demonstrate how human reasoning diverges from that of the perfectly rational homo economicus used in most economic modelling. The world, and the field of economics, is better for his contributions.

Economists mostly recognise that normal people fall short of perfect rationality in day-to-day decision-making. Economic modelling requires simplification, however, and economists generally suppose that theories assuming people are well-informed and rational offer the best available account of economic activity. Over time, however, scholars have built up an imposing list of the ways in which humans systematically refuse to behave as the models predict. Economists such as Herb Simon (who won the Nobel in 1978), Daniel Kahneman (2002) and Robert Shiller (2013) are celebrated for...

Richard Thaler wins the Nobel prize for economic sciences

Tue, 10/10/2017 - 14:50

THE credit-card bill arrives. You have enough money in a savings account to pay it off—the sensible thing to do, arithmetically speaking, since the interest rate on the credit-card balance far exceeds that earned on the savings. Yet you leave the savings untouched, and pay only as much of the bill as your current-account balance allows. What looks a daft choice to most economists makes perfect sense to Richard Thaler, who on October 9th was awarded the Nobel prize for economics for his work in behavioural economics. Mr Thaler helped demonstrate how human reasoning diverges from that of the perfectly rational homo economicus used in most economic modelling. The world, and the field of economics, is better for his contributions.

Economists mostly recognise that normal people fall short of perfect rationality in day-to-day decision-making. Economic modelling requires simplification, however, and economists generally suppose that theories...

Mergers and acquisitions often disappoint

Thu, 10/05/2017 - 14:54

WHEN you are the chief executive of a public company, the temptation to opt for a merger or acquisition is great indeed. Many such bosses may get a call every week or so from an investment banker eager to offer the kind of deal that is sure to boost profits.

Plenty of those calls are proving fruitful. In the first three quarters of 2017, just over $2.5trn-worth of transactions were agreed globally, according to Dealogic, a data provider. The total was virtually unchanged from the same period in 2016, but the number in Europe, the Middle East and Africa was up by 21%.

It is easy to understand why an executive opts for a deal. Buying another business looks like decisive action, and is a lot easier than coming up with a new, best-selling product. Furthermore, being the acquirer is far more appealing than being the prey; better to be the butcher than the cattle. A takeover may keep activist hedge funds off the management’s back for a while longer. And being in charge of a much bigger company is a more demanding task that will surely justify (ahem) a larger salary for the executives in charge.

But these temptations, good and bad, should generally be resisted. S&P Global Market Intelligence, a research arm of the ratings agency, has updated a study on the impact of deals on the acquiring company’s share price. The study looked at M&A deals...

American public pensions suffer from a gaping hole

Thu, 10/05/2017 - 14:54

SCHOOLS in Pennsylvania ought to be celebrating. The state gave them a $125m budget increase for 2017-18—enough for plenty of extra books and equipment. But John Callahan of the Pennsylvania School Boards Association says all the increase and more will be eaten up by pension costs, which will rise by $164m this year. The same happened in each of the previous five years; cumulatively the shortfall adds up to $586m. The pupil-teacher ratio is higher than in 2010. Nearly 85% of the state’s school boards said pensions were their biggest source of budget pressure.

A similar squeeze is happening all over America. Sarah Anzia, at the University of California, Berkeley, examined 219 cities between 2005 and 2014 and found that the mean increase in their real pension costs was 69%; higher pension costs in those cities were associated with falls in public-sector employment and capital spending.

The problem is likely to get worse. Moody’s, a rating agency, puts the total...

Unequal at work, men and women are even more so in retirement

Thu, 10/05/2017 - 14:54

“THE retirement-savings crisis is a women’s crisis,” says Sallie Krawcheck, co-founder of Ellevest, a financial-advice firm for women in America. When it comes to retirement income, women are far worse-off than men. The gender pension-gap may be less well-known than the gender pay-gap, but it is in fact far larger.

Among those retired in the EU, women on average receive 39% less in pension income—from state and workplace pensions—than men do (see chart). This puts women at greater risk of old-age poverty. The European Institute for Gender Equality, a think-tank, warned in a study in 2015 that it also makes them more likely to stay with abusive partners. Reforms to European pensions, tying benefits even closer to individual contributions and thus income, mean the gap may widen further.

...

Taxing fat and subsidising healthy eating widens inequality

Thu, 10/05/2017 - 14:54

IN RICH countries, people’s diets are getting worse and they are getting fatter. Hence the increasing popularity of a “fat tax”, to make unhealthy food cost more. Since Hungary led the charge in 2011 with a “chip tax” on fatty and sugary foods, other countries have followed. Britain is to join a long list next year.

Since the poor both spend a higher proportion of their income on food and tend to eat less healthily, they are the main targets of such taxes. In France, for instance, adult obesity is seen in over 20% of households with monthly incomes under €1,500 ($1,765) compared with less than 10% of those who earn over €3,000.

Punishing consumers, however, is politically painful. So “thin subsidies” have been gaining ground. But data on the impact of such policies are scarce. A recent study on the distributional impacts of fat taxes and thin subsidies from researchers at the universities of Oklahoma and Grenoble suggests policymakers should be wary. It...

How protectionism sank America’s entire merchant fleet

Thu, 10/05/2017 - 14:54

IN APRIL 1956 the world’s first container ship—the Ideal X—set sail from New Jersey. A year later in Seattle the world’s first commercially successful airliner, Boeing’s 707, made its maiden flight. Both developments slashed the cost of moving cargo and people. Boeing still makes half the world’s airliners. But America’s shipping fleet, 17% of the global total in 1960, accounts for just 0.4% today.

Blame a 1920 law known as the Jones Act, which decrees that trade between domestic ports be carried by American-flagged and -built ships, at least 75% owned and crewed by American citizens. After Hurricane Irma, a shortage of Jones-Act ships led President Donald Trump on September 28th to waive the rules for ten days to resupply Puerto Rico. This fuelled calls to repeal the law completely.

Like most forms of protectionism, the Jones Act hits consumers hard. A lack of foreign competition drives up the cost of coastal transport. Building a...

A new study details the wealth hidden in tax havens

Thu, 10/05/2017 - 14:54

SWITZERLAND, which developed cross-border wealth-management in the 1920s, was once in a league of its own as a tax haven. Since the 1980s, however, tax-dodgers have been spoilt for choice: they can hide assets anywhere from the Bahamas to Hong Kong. The percentage of global wealth held offshore has increased dramatically. But it has been hard to say how much that is, and who owns it.

Few offshore centres used to disclose such data. But in 2016 many authorised the Bank for International Settlements (BIS) to make banking statistics publicly available. Using these data, a new study by Annette Alstadsaeter, Niels Johannesen and Gabriel Zucman, three economists, concludes that tax havens hoard wealth equivalent to about 10% of global GDP. This average masks big variations. Russian assets worth 50% of GDP are held offshore; countries such as Venezuela, Saudi Arabia and the United Arab Emirates climb into the 60-70% range. Britain and continental Europe come in at 15%, but Scandinavia at only a few per cent.

One conclusion is that high tax rates, like those in Denmark or Sweden, do not drive people offshore. Rather, higher offshore wealth is correlated with factors such as political and economic instability and an abundance of natural resources.

Proximity to Switzerland also remains a good indicator. But assets held there have declined since the...

A Chinese carmaker agrees to buy a Danish investment bank

Thu, 10/05/2017 - 14:54

A COMPANY that moves up the value chain from refrigerator parts to cars is impressive but not that surprising. A car company that buys an investment bank is audacious. But Zhejiang Geely Holding Group, a conglomerate based in Hangzhou, China, did not become big by paring its ambitions. Having successfully made the fridge-parts-to-cars transition at home, it went global in 2010. It acquired Volvo, a Swedish carmaker, from Ford of America. Now Geely is back in Scandinavia for another acquisition. This time it is buying one of Denmark’s biggest banks.

Saxo Bank announced on October 2nd that Geely would acquire 51.5% of its shares. It will spend over $800m on the deal, which still requires regulatory approval. Sampo Group, a Finnish insurance company, will acquire 19.9% of Saxo shares for €265m ($311m), and Kim Fournais, Saxo’s co-founder and chief executive, will retain 25.7%. The sellers are Sinar Mas, an Indonesian conglomerate, and TPG, an American private-equity firm.

Saxo was an early adopter of online securities trading and still invests heavily in financial technology. It makes a substantial portion of its profits from selling trading platforms to other firms. Daniel Donghui Li, Geely’s chief financial officer, says Geely hopes to expand Saxo’s technologies into Asia. Besides facilitating this expansion, Geely does not intend to change how Saxo...

Manias, panics and Initial Coin Offerings

Thu, 10/05/2017 - 08:48

EVERY market mania reaches a point when pitches to would-be investors enter the realm of the surreal. So it goes for “initial coin offerings”, or ICOs. A new one by a firm called POW invites Facebook users to claim tokens for nothing; when they later become convertible into other tokens, the first to take advantage of the offer could “become worth $124bn…making them the richest person on Earth”, the blurb says. Not a bad return for no money invested and no risk borne. However bizarre, bubbles are hard to resist: no one wants to be the only one of their friends left out. They can also be financially ruinous. But gambling on a craze, even a highly dubious one, can be about more than blind greed.

The ICO boom is an outgrowth of the emerging, occasionally inscrutable world of cryptocurrencies. These are a form of money (bitcoin and ether are examples) used in transactions which are recorded on a distributed public ledger called a blockchain. An ICO is a scheme to raise funds for an...

Venture capitalists with daughters are more successful

Thu, 09/28/2017 - 10:03

RICHARD NESBITT, a former chief operating officer at the Canadian Imperial Bank of Commerce, has long been an evangelist for women in business. In “Results at the Top”, a book he wrote with Barbara Annis, he describes his efforts to convince men to promote women. When speaking to bosses, he stresses data showing that companies with more senior women are more successful. But he has noticed that men with daughters tend to be more receptive to his message. At least for venture-capital (VC) firms, recent research confirms this observation, as well as the assertion that gender diversity boosts performance.

Paul Gompers and Sophie Wang at Harvard University wanted to determine whether VC firms with more women managers do better. Answering this question is tricky—firms that hire more women may have other characteristics that lead to success. VC-investing remains a predominantly male activity. In the authors’ sample of 988 VC funds in 301 firms, around 8% of new hires were women. Very few firms...

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