Euro area financial stability vulnerabilities remain elevated in a volatile environment

The European Central Bank (ECB) sees elevated financial stability vulnerabilities in a volatile environment, according to its November 2024 Financial Stability Review, which was published today. Risks to euro area economic growth have shifted to the downside as inflation has moved closer to 2%, while financial markets have experienced several pronounced but short-lived spikes in volatility in recent months. 

“The outlook for financial stability is clouded by heightened macro-financial and geopolitical uncertainty together with rising trade policy uncertainty,” said ECB Vice-President Luis de Guindos.

While financial markets have proved resilient so far, there is no room for complacency. Underlying vulnerabilities make equity and corporate credit markets prone to further volatility. High valuations and risk concentration, especially in equity markets, increase the odds of sharp adjustments. Should adverse dynamics materialise, non-banks could amplify market stress given their liquidity fragilities, in some cases coupled with high leverage and concentrated exposures.

Despite the decline in sovereign debt-to-GDP ratios after the surge during the pandemic, fiscal fundamentals remain weak in some euro area countries. Sovereign debt service costs are expected to continue rising as maturing debt is rolled over at interest rates that are higher than those on outstanding debt. Elevated debt levels and high budget deficits, coupled with weak long-term growth potential and policy uncertainty, increase the risk that fiscal slippage will reignite market concerns over sovereign debt sustainability.

High borrowing costs and weak growth prospects continue to weigh on corporate balance sheets, with euro area firms reporting a decline in profits due to high interest payments. The outlook for real estate markets is mixed, with residential real estate prices stabilising, while commercial real estate markets are still stressed because of challenges posed by remote working and e-commerce. Households, by contrast, are benefiting from a strong labour market and have bolstered their resilience by increasing savings and reducing debt.

While the overall increase in credit risks has so far been gradual, small and medium-sized companies and lower-income households could face strains if growth slows by more than is currently expected, which could, in turn, adversely affect the asset quality of euro area financial intermediaries. Losses on commercial real estate exposures are at risk of rising further and could be significant for individual banks and investment funds. In aggregate, however, banks’ ability to absorb further asset quality deterioration continues to be supported by high levels of profitability and by strong capital and liquidity buffers.

To preserve and strengthen financial system resilience in the current uncertain macro-financial environment, the report notes it is advisable for macroprudential authorities to maintain existing capital buffer requirements together with borrower-based measures that ensure sound lending standards. 

In addition, the growing market footprint and interconnectedness of non-bank financial intermediaries calls for a comprehensive set of policy measures to increase the sector’s resilience. Such resilience across the NBFI sector would also help to foster more integrated capital markets. This should enhance financial stability and complement the objectives of the capital markets union, which is aimed at supporting Europe’s productivity and economic growth.

 

UK inflation jumps back above 2%

The UK’s Consumer Prices Index (CPI) inflation measure rose by 2.3% in the 12 months to October, up from 1.7% in September. On a monthly basis, CPI rose by 0.6% in October 2024, up from being little changed in October 2023.

Core CPI (excluding energy, food, alcohol and tobacco) rose by 3.3% in the 12 months to October, up from 3.2% in September; the CPI goods annual rate rose from negative 1.4% to negative 0.3%, while the CPI services annual rate rose from 4.9% to 5.0%.

The largest upward contribution to the monthly change came from housing and household services, mainly because of electricity and gas prices; the largest offsetting downward contribution came from recreation and culture.

Monthly housing and household services prices rose by 1.3% in October 2024, having fallen by 0.3% last year. The annual rate rose to 5.5%, up from 3.8% in the year to September. The rise in the divisional annual rate is mainly because of electricity prices, with a sizeable contribution from gas too. This reflects the rise of the Office of Gas and Electricity Markets (Ofgem) energy price cap in October 2024. Ofgem estimates that for an average household paying by direct debit for dual fuel, this equates to £1,717, a rise of £149 on an annual bill.

Electricity prices rose by 7.7% in October 2024, having fallen by 7.5% between the same two months last year. Gas prices rose by 11.7% in October 2024, having fallen by 7.0% between the same two months last year.

“Today's rise in UK inflation, coupled with wider anticipated global inflationary pressures from President Trump’s trade tariffs and tax policies and compounded by the Chancellor’s Autumn Budget fiscal measures, are likely to result in higher interest rates for longer,” said Douglas Grant, Group CEO of Manx Financial Group. “This scenario exerts significant pressure on businesses, amplifying investment hesitancy and underscoring the critical need for businesses to adapt their lending strategies to withstand ongoing market uncertainty.”

 

Surecomp commits to reducing trade finance processing time by 30%

Surecomp has announced it commits to reducing bank guarantee processing time by 30% with the help of AI. Through the integration of AI-powered email-to-text conversion technology, the development of its collaborative trade finance RIVO platform aims to address the inefficient, manual guarantee text checks, which are a key source of issuance delays impacting trade volumes and supply chains. 

By leveraging advanced AI capabilities, RIVO should elevate the accuracy and operational efficiency of bank guarantee processing. By automatically converting key clauses of a request such as legal terms, conditions, expiry and transferability into structured text, Surecomp customers can now reduce the time it takes to process emails applications, expediting guarantee issuance from days to hours. 

By eliminating manual guarantee text checking and reducing the operational cost of managing their trade finance requests, RIVO users could experience the following benefits:

• Enhanced efficiency: By automating the conversion of email content into structured text, Surecomp eliminates the need for manual data entry into RIVO. This allows financial institutions to process and issue bank guarantees more quickly and efficiently, promoting enhanced customer satisfaction and loyalty.
• Improved accuracy: The AI-driven solution minimises the risk of human error, ensuring that critical information is accurately captured and processed, thereby enhancing the reliability of the bank guarantee process.
• Seamless integration: The integration with AI technology allows for a smooth user experience, ensuring that customers can benefit from the new capabilities easily.
• Scalability: With RIVO designed to handle varying volumes of bank guarantee requests, making it suitable for companies of every size, the functionality promotes scalability and growth in line with user needs.
• Enhanced compliance and security: The automation process helps maintain regulatory compliance by ensuring accurate and timely processing of bank guarantees, with a complete audit trail for verification purposes and heightened security to mitigate the risk of fraud.

“Having analysed millions of transactions, we have built the solution to significantly improving the quality of any bank’s trade finance operations,” said Enno-Burghard Weitzel, Surecomp’s Chief Solutions Officer. “We take great pride in leveraging cutting-edge technology to pioneer advancements in digital trade finance, delivering solutions that empower our customers. The incorporation of this email-to-text conversion which completes in less than ten seconds, is the latest testament to that.”

 

ESMA proposes to move to T+1 by October 2027

The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, has published its Final Report providing the assessment of the shortening of the settlement cycle in the European Union (EU).

The report highlights that the increased efficiency and resilience of post-trade processes that should be prompted by a move to T+1 would facilitate achieving the objective of further promoting settlement efficiency in the EU, contributing to market integration and to the Savings and Investment Union objectives.  

ESMA recommends that the migration to T+1 occurs simultaneously across all relevant instruments and that it is achieved in Q4 2027. Considering the different elements assessed by ESMA, in particular the difficulties linked to the go-live of such a big project in November and December, and the challenges linked to the first Monday of October (just after the end of a quarter), ESMA recommends 11 October 2027 as the optimal date for the transition to T+1 in the EU. ESMA also suggests following a coordinated approach with other jurisdictions in Europe.    

Regarding the quantification of the costs and benefits, the elements assessed by ESMA suggest that the impact of T+1 in terms of risk reduction, margin savings and the reduction of costs stemming from the misalignment with other major jurisdictions globally, will represent important benefits for the EU capital markets.    

However, this change will also imply some challenges, including amending the Central Securities Depositories Regulation (CSDR) and the settlement discipline framework, in order to have legal certainty and foster the necessary improvements in post-trading processes to move successfully to T+1.  

Additionally, all actors of the financial system will need to work on harmonisation, standardisation, and modernisation to improve settlement efficiency. This will require some level of investment. 

The complexity of a trading and post-trading environment such as the EU capital markets means that this project will require a specific governance to be put in place.   

Following the publication of this report, ESMA will continue its regulatory work related to the revision of rules on settlement efficiency, and addressing the T+1 governance together with the European Commission (EC) and the European Central Bank (ECB).

 

EY launches solution to centralise payroll management

The EY organisation has announced the launch of a next-generation Integrated Global Payroll Solution, a managed service designed to streamline and help payroll management in-house for organisations with a global workforce.

Rapid regulatory compliance changes, new labour and privacy laws, and talent scarcity are significantly increasing the workload for payroll, mobility and labour law functions, and managing the payroll of a growing international workforce has become more complex and time-consuming in recent years. According to a recent EY survey of 400 Chief Human Resource Officers (CHROs) and Heads of Talent across the globe, 92% of employer respondents say that the growing demand for international workforce mobility is further straining these functions, while 87% report that the rising demand for flexible or hybrid work arrangements is putting increased pressure on payroll.

The new solution responds to these trends and helps the HR and payroll function reduce risk by combining domestic, mobile and global payroll solutions into a single centralised, modular platform that connects capabilities across legal, advisory and compliance.

The demand for capabilities that leverage the latest payroll technologies, including artificial intelligence (AI), is also rapidly increasing as organisations recognise their potential to transform administrative tasks into strategic value drivers. The EY Integrated Global Payroll Solution harnesses these technological advancements to harmonise data across the workforce. This shared data approach provides a unified view, reduces duplication, helps enhance controls and helps to ensure consistent decision-making and reporting.

“Traditional payroll models struggle to keep pace with modern business demands and new ways of working, increasing the risks of non-compliance, data privacy issues, high costs and inefficiencies,” said Sheri Sullivan, EY Global and EY Americas Payroll Operate Leader. “This solution is designed to address the evolving complexities and challenges faced by organisations with a global workforce, providing them with the tools needed to take control and drive efficiency in their payroll operations.”

 

Santander’s Openbank debuts in Mexico

Openbank, Grupo Santander’s fully digital bank, has begun operating in Mexico with the launch of its website and app. For its debut in Mexico, Openbank is making the Open Debit Account available to savers, which rewards savings at a 12.5% annual return. Its offer for day-to-day finances also includes debit and credit cards, SPEI transfers and free cash withdrawals at Santander’s 10,000-plus ATMs.

Over the next few weeks, people who signed up for the waiting list will receive instructions on how to become a customer in just minutes on the Openbank Mexico app.

Openbank offers a digital-first experience, which it has tested in recent years in Spain, Germany, Portugal and the Netherlands. It is Europe's largest digital bank by deposit volume, has doubled its customer base in five years, and has been named the most recommended bank (best Net Promoter Score) in its primary market. In recent weeks, it has also begun operating in the US, where it will provide financial services throughout the country.

In Mexico, a series of free features for all customers complement the product proposition. These features enable them to maximise the security of their cards and their use by location or type of transaction and business. Openbank will be adding new products and services for all its customers in Mexico in the coming months and is putting the finishing touches on the value proposition that will launch at the end of the waiting list period.