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BIS cautions on higher interest rate fallout – Industry roundup: 28 June

BIS warns that inflation busting could impact shadow banking

The Bank for International Settlements (BIS), which at the weekend announced an agreement with the People’s Bank of China (PBOC) and other central banks to establish a Renminbi Liquidity Arrangement (RMBLA) is warning that aggressive interest rate rises from the world’s central banks could trigger a financial crisis in the unregulated shadow banking sector.

Claudio Borio, head of the BIS’s monetary and economic department, told The Times of London that shadow banks – including hedge funds, private equity firms and pension funds – face a liquidity crunch that could trigger a chain of corporate bankruptcies as central bank’s ramp up borrowing costs to fight resurgent inflation.

“There is a hidden liquidity mismatch which erupted in March 2020 and we cannot rule out further possibilities of strain in the shadow banking sector,” said Borio. “That could put central banks in a position of tightening monetary policy on the one hand, and if stress emerges, to handle a [shadow banking] crisis with more liquidity, on the other.”

The Times’ report notes that the shadow banking industry has doubled in size over the past decade and manages over US$60 trillion in assets. While China is home to the world’s largest shadow banking market, non-bank lending is also growing in the US and Europe after tougher bank regulation forced debtors to tap non-conventional loan markets. Shadow banks lend to the private sector but are not subject to traditional regulation that governs the banking system.

Borio said global central banks, which are raising interest rates at the fastest pace since the 1990s, might have to provide emergency support to the sector if the failure of a lender spills over to the financial system.

He noted that central banks have basic tools to prevent a crisis. “One is providing additional liquidity through lending to banks to provide the additional liquidity where it is needed and calm markets down. The second is to intervene directly and buy the securities that are being sold off in fire sales,” Borio said.

“This [central bank] intervention could create a tension with monetary policy when you are tightening financial conditions. This is why it is so important to strengthen regulation in the non-bank sector.”

In its just-published annual report, the BIS highlights last year’s collapse of shadow lender Archegos Capital Management as an example of the “risks posed by hidden leverage in loosely regulated corners of the financial system”. The family run US$10 billion hedge fund went bust in April 2021 when it failed a margin call triggering sell offs in shares of US media and Chinese tech companies and forcing losses on Wall Street banks. Its founder was arrested on fraud charges.

Despite concern over the speed and scale of rate rises, the annual report calls for decisive action by central banks to limit inflation and prevent the global economy entering a new period of high prices and low growth.

“Stagflation dangers loom large, as a combination of lingering disruptions from the pandemic, the war in Ukraine, soaring commodity prices and financial vulnerabilities cloud the outlook,” the BIS writes. “The priority for central banks is to restore low and stable inflation,” although the authors concede that “engineering such a ‘soft landing’ has historically been difficult, and the starting conditions today make it challenging,”

KPMG launches metaverse platform for employees

KPMG is spending US$30 million to train employees in the new environments of the metaverse and Web3, according to reports. The Big Four accounting giant has already introduced a 3D platform that it calls the metaverse collaboration hub for its North American employees, enabling them to collaborate virtually from anywhere.

“We believe this initiative enables teams and the way that we engage with clients to meet and feel as though they are in the same room together,” says Katie Bolla, partner in management consulting for the Greater Toronto Area (GTA), Canada and consumer and retail industry lead at KPMG. It’s a different, richer experience than being in the two-dimensional box on a screen.

“The metaverse offers that new opportunity and platform for KPMG employees, our partners, our clients to collaborate, learn, share ideas at work together, without those limitations or boundaries or physical borders. Frankly, we believe that this is an example of what the future of work looks like.”

Replicating a typical office space, the metaverse includes whiteboards, conference tables, and can include video and chat capabilities. The platform is expected to become a valuable tool for the group’s HR team, says Bolla, as it will be employed to conduct job interviews, assist in onboarding of new employees and become a vehicle for both training and performance management.

“The metaverse opens up new opportunities for recruiting, retention, performance management, development and education and it also provides an opportunity for organisations and HR, for example, to access and develop new skill sets and capabilities,” says Bolla.

“It can create a more organic and immersive coaching and mentorship environment that supports high-performing teams and the management of teams in a hybrid work environment and also it injects some fun; a sense of exploration and some of those unique experiences that employees and teams have been eager for and asking for over the last 18 months to two years.”

Saudi Arabia provides US$13bn for liquidity-starved banks

The Saudi Central Bank – formerly the Saudi Arabian Monetary Authority (SAMA) – has placed about 50 billion riyals (SAR), or around US$13 billion as time deposits with commercial lenders to ease the region’s worst liquidity crunch in more than a decade, according to local reports based on interviews with those familiar with the matter.

The intervention began just before the US Federal Reserve’s latest interest rate hike was announced on 15 June, and included money provided to banks at a discount to the three-month Saudi interbank offering rate, aka Saibor, that could be used to pay a loan for value. It was used as a benchmark, the unnamed insiders said.

The liquidity situation as measured by Saibor is the toughest since late 2008, when the price of crude fell below US$40 a barrel. However, in 2022 Saudi Arabia is likely to run its first budget surplus in nearly a decade, as oil prices remain above US$100 and increased revenues spur production.

Funds from the central bank have so far come in three or more different phases, including three months of deposits in the first and second injections, totalling about SAR15 billion, sources suggest. The Bank has done at least one more placement in the recent past involving both short and long maturities.

The action reflects increasing concerns over costly liquidity for Saudi Arabia’s banks and its impact on the economy as officials raise capital to power the kingdom’s mega projects. Seeking to reduce immediate funding constraints, the central bank recently increased the tenure on its repo facility from four to a maximum of 13 weeks.

Saudi Arabia’s finance minister Mohammed Al-Jadaan said recently that the government will keep excess oil revenue in its current account until at least early next year, as it looks to break an oil-linked boom-bust cycle that has plagued the economy in the past. Bankers hope that higher oil prices will quickly translate into government deposits, easing the liquidity crunch.

Growth in bank deposits has lagged Saudi credit expansion driven largely by a boom in mortgages. It has squeezed the money market while the government curtails its oil inflows as part of a more conservative approach to fiscal spending.

However, Saudi Arabia is expected to experience another year of double-digit growth in consumer credit, while deposits are down 4% so far in 2022. In 2020, the central bank extended more than SAR100 billion to local banks in liquidity injections and deferred loans for small businesses hit by the pandemic to cover costs.

South Korea’s insurers hit by forex hedging costs

Increased financial and geopolitical risk factors such as the US’s quantitative tightening and Russia’s invasion of Ukraine are likely to impact on South Korean life insurers' hedging costs of their assets, which are held in foreign currencies, suggests a research report published by the Korea Deposit Insurance Corporation (KDIC).

The report notes that periods of rising interest rates have normally benefited insurers, but this currently is not the case. Increased market volatility, in addition to soaring foreign exchange (forex) rates, have undermined Korean insurers’ efforts to hedge their assets, which are held in foreign currencies, projecting their declining profitability in the months ahead.

At the end of 2021, Korean life insurance companies’ foreign assets stood at 129 trillion won (KRW) or U$99.3 billion, a rise of more than KRW 100 trillion from 2013. The amount accounts for about 13.3% percent of the sector’s entire asset size. KRW127.5 trillion worth of foreign assets are marketable securities denominated in foreign currencies, along with loan bonds and deposits. More than 70% of Korean life insurers’ foreign assets are denominated in US dollars, with 12% in euros and 4% in Australian dollars.

With so much of their assets in foreign currencies, companies have hedged to reduce the risks of exposure to volatile foreign exchange markets. While 81% of foreign assets are proactively managed with hedging, such as cross-currency interest rate swaps (CIRS) and foreign exchange swaps (FX Swap), the rest are exposed to foreign exchange risks.

However, as recent global macroeconomic conditions have become unfavourable to Korean insurers’ foreign exchange hedging strategies the report advises companies to take flexible approaches so as to reduce risks related to hedging and foreign currency assets.

“Foreign exchange hedging is a tool to minimise risks from foreign exchange market volatility, yet the cost of it is highly variable, depending on market environment changes,” said Cha Ho-sung, senior researcher at the KDIC. “Thus, the cost of forex hedging could sometimes offset the reduced foreign exchange risk efforts.

“The costs borne by local life insurers due to forex hedging is already considerable, but discussions about the optimal level of forex hedging strategies are rather lacking,” Cha added, advising  firms to develop proper hedging scenarios considering their thorough cost-profit analysis, debt portfolios and asset sizes.

With Korea’s biggest life insurers posting year-on-year declines in their first quarter this year, due to the combination of increased capital costs and rising interest rates, their forex hedging strategies have now become much more significant in maintaining their revenues.

In Q1 2022 the sector recorded a loss of KRW5 trillion on their insurance sales alone although quarterly revenues offset the loss, as firms generated KRW5.8 trillion of profits from their investments and KRW944 billion of other profits.

In the first quarter, Samsung Life’s reported revenue showed a 75% fall from the same period last year, followed by Hanwha Life’s year-on-year 74% fall and Kyobo Life's 46% decline.

Australia's Suncorp may sell or spin-off banking arm

Australia’s Suncorp Group has begun a strategic review of its banking operations, which could lead to a potential sale or spin-off of the unit, allowing it to focus on its top revenue generating insurance business.

The country's second-largest insurer by market value said it reviews its strategic alternatives in relation to all of its businesses from time to time and is currently doing so in respect of its banking operations."

The news follows a report in the Australian Financial Review (AFR), citing sources involved in talks, which said the insurer was vying a possible spin-off or sale of its banking arm to focus on its more valuable insurance business, which contributed to 71% of the total revenue in fiscal 2021.

Suncorp’s banking and wealth unit posted a profit after tax of A$419 million (US$291.12 million) in fiscal 2021, contributing 40% of total profit, and had loans worth A$58.39 billion at the end of lasyt year, mostly comprising home loans.

A demerger could have Suncorp hand investors shares in a new ASX-listed bank, probably worth about A$5 billion (US$3.48 billion), based on trading in the country's big four and regional banks, according to the AFR report.

The potential sale comes amid a wave of demergers among Australia’s top-tier companies, as boards streamline business models to create value for shareholders.

Kenya stakes fintech credentials with Nairobi financial centre

Kenya is seeking to strengthen its credentials as a major African financial service and fintech hub with the launch of the International Financial Centre in the capital of Nairobi.

The government backed NIFC describes itself as “a new business environment established to make it easier and more attractive to invest and conduct financial services and related activities in Kenya” and is modelled in existing IFCs in cities such as Tokyo, Johannesburg, New York and London.

As part of the government’s Kenya Vision 2030 initiative, the NIFC aims to attract greater local and foreign investment to Kenya with foreign investors in the financial sector offered special deals—including taxes and immigration incentives—and space in the new building.

Firms seeking to join the Centre are required to pay a certification fee of Shillings (Ksh) 1 million (around US$8,620) and an annual fee of Ksh 500,000 according to regulations published by the country’s national treasury.

According to press releases UK financial group Prudential has announced plans to set up its Africa headquarters in Nairobi, while TheCityUK, which offers financial and related services, has signed a Memorandum of Understanding (MoU).

DBS and GS1 HK partner for SME digital trade finance

DBS Bank Hong Kong (HK) and GS1 barcode issuer GS1 HK have jointly launched an “innovative digital post-shipment trade financing solution powered by alternative data.”

According to their press release, small and medium-sized enterprises (SMEs) can now access same-day trade financing in a simple and digital manner by leveraging alternative data. SMEs on GS1 Hong Kong’s ezTRADE platform can now utilise their trade data to access financing in a digital and straight-through manner instead of manually submitting hundreds of invoices every month.

The innovation uses trade transaction data to provide SMEs in the fast-moving consumer goods (FMCG) and food & beverage (F&B) sectors with a digital post-shipment trade solution. The digital offering makes it easy for SMEs to access working capital with just one click via the bank’s corporate banking platform, DBS IDEAL.

DBS HK Managing Director and Head of Institutional Banking Group, Alex Cheung said that the bank was proud to partner with GS1 Hong Kong to support companies with timely working capital in this challenging business environment. By enabling the use of their trade data for enhanced access to financial services, SMEs can further fortify their business resilience. This is an optimised solution that is available to all GS1 Hong Kong members using the ezTRADE platform for transactions. SMEs can enjoy a fast turnaround time and draw down on their facility to meet the needs of their business.”

GS1 HK CEO, Anna Lin added that the partnership “capitalises on our platform’s rich datasets to enhance SMEs’ cash flow, bringing great value to our members in their continued digitalisation journey. As one of the early participants of the Hong Kong Monetary Authority’s Commercial Data Interchange (CDI) pilot initiative, we aim to nurture a collaborative digital trade finance ecosystem – building on our close collaboration with more financial institutions and delivering innovative solutions for the Hong Kong business community.”

Standard Chartered launches API in Saudi Arabia

Standard Chartered Bank Saudi Arabia has announced the launch of application programming interface (API) in the country, enabling and partners will be able to share and integrate data securely in real time, helping create new financial services, and boosting the Bank’s ability to increase value for its customers.

“In line with the Kingdom’s Vision 2030 and the country’s aim to be a regional digital hub by expanding digitalisation and innovation across the country’s banking and financial sectors, businesses across any industry in the country will now be able to connect into a host of new capabilities,” a release stated. “This includes digitising treasury, integration of banking capabilities into ERP operations, implementing digital business models, process automation, automated reconciliation and enabling point-to-point integration.

“In a country where 60% of the population is below the age of 30, and whose population are digitally savvy, the launch of the Bank’s API platform comes at a time of increased demand for digital transformation, innovation and customer-centric approaches. The launch also supports Saudi Arabia’s recent open banking policy which is set to take effect this year. The policy aims to create an ecosystem with the Kingdom’s financial institutions to support the development of an optimal open banking framework.”

Standard Chartered Bank Branch in Saudi Arabia commenced banking operations in June 2021 after receiving approval from Saudi Central Bank and was among the banks hired to lead energy giant Saudi Aramco's inaugural dollar sukuk issue that raised US$6 billion.

Google backs India working capital start-up Progcap

Google has invested in Indian start-up Progcap, which provides working capital to the country’s small and medium-sized businesses.

The investment is part of a US$40 million fresh funding that Progcap has raised, it said. Creation Investments and Tiger Global led the five-year-old start-up’s Series C financing round, which nearly tripled its valuation to US$600 million since last September. Existing backer Sequoia India and Southeast Asia also participated in the round, Progcap said.

The new investment extends to US$70 million, Progcap’s Series C, the first tranche of which it closed in September. With the fresh funding, the Delhi-headquartered company’s total fundraising has moved above $100 million.

Progcap serves more than 700,000 small retailers across Indian cities and towns. The start-up extends a revolving credit line of $10,000 to $12,500 to retailers, providing them with capital to buy new inventories and grow their businesses.

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