Ashton Wenborn | World Finance

Farazad Investments on the role of structured finance in boosting the global economy

Posted on September 16, 2014October 17, 2014 by Ashton Wenborn

Farazad Investments provides global access to capital and assistance in obtaining loans for industrial and commercial projects. World Finance speaks to company founder and CEO, Korosh Farazad, to find out about how these activities promote the growth of the global economy.

World Finance: Well Korosh, what role does structured finance play in the current economic climate, and what is Farazad Investments’ approach to this?

Korosh Farazad: Well structured financing basically is a key element of raising capital for various types of sectors and/or arenas in the funding world, and Farazad’s interest in these type of scenarios is basically to make sure that all the components in terms of a transaction is well prepared by the potential entity that wants to borrow, and we put those all into one package and present it to our institutional investors and/or private equity financiers.

World Finance: Well what services do you offer, and how do you tailor these products to your clients’ needs?

Korosh Farazad: Well in terms of tailoring, it’s case by case. There’s various types of scenarios or components that go into one deal that allows the transaction to be successfully funded. There is structured financing, there is conventional debts, and then you have your bonds funding in terms of rating bonds and then selling it into the market through the institutions which they will then go ahead and sell to their investors within their institution. It’s quite straightforward if you take the deals and understand what the client’s requirements are, and then implement a structure that would be tailor-made for the purpose of that transaction.

[W]e’ve managed to maintain a structure that complies with the regulations of whatever country we may be financing

World Finance: Well Farazad Investments is very well situated across five continents, so what advantage is this in terms of investment knowledge?

Korosh Farazad: You have to definitely have the knowledge in order to proceed into maintaining different cultures, different criteria, different compliances, regulations, etc, and having the know-how to adapt to those various cultures in terms of the regulations, compliance procedures, the knowledge within the ground and having the local sponsors to assist on those scenarios, it provides us with the comfort, and it provides the other side the comfort that we have the ability to finance the transactions in a successful manner. There is no transaction that is a perfect transaction, and it has to go through procedures in order for us to get to the end goal, which is to finance the deal and have our institutional investors and our private equity partners to feel comfortable that their capital will be preserved and they would make a return on their investment.

World Finance: Well obviously a lot of companies like Farazad Investments were hit quite hard by the global financial crisis. However, you’ve seen progressive growth, so what do you think your key to success would be?

Korosh Farazad: There has been a lot of problems. Throughout the financial crisis a lot of entities, both the private equity funds and the institutional front were hit hard, and the banks have now recently unstitched their pockets in terms of lending. The criteria are still the same, the capacity is still the same. In terms of compliance regulations, they’re making sure that all the components are in place. We’ve been fortunate to have the right partners in place, and that means we have our own preferred institutional lenders, and the private equity partners that we work with do know us. They know that we follow very strict criteria in terms of doing a provisional underwriting, if you wish to call it, and gathering the material, making sure that the information makes sense before we present it to the institution and/or the private equity investors. Even during the economic crisis, there was still an appetite to finance transactions, whether it was a combination of private equity and/or debts, or one or the other, but if there was not enough components in the transaction and if the borrower did not provide sufficient contribution to the deal, it would make it challenging. So we implemented a structure that we wanted to make sure that the borrower has some form of contribution, whether it’s 10, 20, 30 percent of the deal as a contribution in terms of either first charges on the assets, or in terms of cash. Once that was confirmed, then it made it easier for us to find the right partner to finance the deal.

We are seeing a lot of interest in terms of bond financing, whether they’re Sukuk bonds, which are the Islamic way of doing Sharia compliant bonds

World Finance: Well looking at regulatory compliance, and what impact has this had on your business?

Korosh Farazad: It definitely has impacted the business, and that’s because of the fact that there has been so many new reforms made in the financing world, especially again after the 2008/9 crisis. In some cases the new regulations have caused transactions to fail, but we’ve managed to maintain a structure that complies with the regulations of whatever country we may be financing, or that particular jurisdiction, and at the same time it allows comfort for again the institution and/or private equity financiers, lenders, to accelerate their interest in financing the deal.

World Finance: Well looking to the future now finally, and what major tends or developments do you think are going to influence investments over the next 12 months?

Korosh Farazad: We are seeing a lot of interest in terms of bond financing, whether they’re Sukuk bonds, which are the Islamic way of doing Sharia compliant bonds, we are beginning to see a lot of interest in that arena. We are also seeing more interest in rated bonds. The company is obviously a revenue-generating entity, and they get one of the top majors, like your Standard & Poors, your Moodys, your Fitches, to come in and rate or grade their company in order to attract more investments, and we are seeing that happen. On the other hand we are also seeing a lot of conventional funding taking place, but the conventional funding is a two part structure. One, in order for us to finance a deal, we want to make sure that the client does have enough capacity in terms of cash reserves, so then we can do an entire package of two parts, one part being providing project financing for that particular transaction, and establishing private banking and relationships.

World Finance: Korosh, thank you.

An introduction to the World Finance Banking Awards 2014

Posted on September 15, 2014November 12, 2014 by Ashton Wenborn

When Lehman Brothers crashed in October 2008 and precipitated the financial crisis, some of the world’s biggest banks were put on life support as the contagion spread around the world. In America, Britain, Switzerland, Germany, Greece, Spain and even Iceland, institutions considered to be impregnable suffered near-death experiences.

But you would never think so now. Nearly everywhere you look, banks that were once terminally ill have made rapid and in some cases pretty miraculous recoveries. Albeit with the benefit of taxpayer-funded rescues, most of Wall Street’s giants were very much back in business within two or three years and are now returning handsome profits.

However, the crisis left its mark, even among that vast population of banks that flew through it. It has to be remembered that most firms in Asia, Australia, New Zealand, Canada and Latin America weathered the storm well. After all, it affected not so much individual banks, barring a relative handful of famous names, but the financial system as a whole.

A new breed of banking
Despite that, the banking landscape has changed as a result, especially in Wall Street. Bear Stearns, the first to fail, was absorbed by JP Morgan Chase. Merrill Lynch merged with Bank of America – and it wasn’t a merger of equals. Morgan Stanley and Goldman Sachs converted themselves into commercial banks. And Citigroup used its time in bail-out to raise cash and shed assets at a furious rate. So they’re not the banks they were.

World Finance Banking Awards 2014

And although it’s not something that the public notices, behind the scenes the biggest banks, collectively known as Sifis (systemically important financial institutions), have undergone a dramatic spring clean of their capital, admittedly under pressure from governments and regulators. Take just the one issue of leverage – the amount banks raise in various forms of debt for every dollar they hold in deposits. Some were leveraged as high as 50 to one – hedge fund-style levels – while 30 to one was relatively common. As for Lehman Brothers, it had no deposits at all, precariously funding itself on the overnight market. But not any more. According to recent figures from the US Federal Reserve, financial sector debt has shrunk over each of the last four years and had fallen to $13.9trn last year compared with $17.1trn at the onset of the crisis.

“We may still hate the [American] banking system,” observes trenchant US columnist Daniel Russo, “but the reality is that it is much better capitalised than it has been in years”. Russo says that fewer banks are failing – in the years immediately after the crisis regional institutions were toppling almost on a weekly basis in the US. In fact, federal supervisors had got so adept at shutting down ailing local banks that they were arriving on a Friday and leaving on Monday morning after merging the mismanaged firm with a stable rival and changing the nameplate. Outside the US, few appreciate the rate of consolidation in its banking sector. According to the Federal Deposit Insurance Corporation, there are now some 1,600 banks less than there were at the end of 2007, down about 20 percent.

Although the scale is different, much the same phenomenon has occurred around the world as banks hastily repaired their balance sheets. Take the issue of leverage again, if only because it’s a major focus of regulators who are working on an easily explicable format for measuring just how indebted banks really are. Banks now take it for granted that they will no longer be able to design their own leverage ratios under proprietary models, as they did before the crisis. As the Bank of England’s Deputy Governor for Financial Stability Sir John Cunliffe pointed out recently, the whole concept of firms coming up with their own ratios is full of “inescapable weaknesses”. And so it proved.

The global banking sector, however, has actually changed its ways. It has collectively adopted more responsible lending policies and the quality of loan books has improved as a result (see Fig. 1). Bit by bit, low-quality assets have been sold off to shadow institutions that specialise in the management of higher-risk debt. Vitally, the investment banking divisions whose reckless accumulation of suspect debt instruments wrought most of the havoc, have been split – or are in the process of being split – from the deposit-taking divisions.

Shocked by what happened and by what they subsequently discovered about the habits of some of the systemically important firms, in the intervening years regulators have subjected them to a blizzard of reforms designed to make them more stable. Although some institutions lobbied hard against certain aspects of the regulations, all are moving quickly to meet much higher standards of, for instance, capital buffers. Indeed, bowing to the inevitable, most banks are ahead of the official timetable.

In a complete turnaround of the laissez-faire style of regulation that prevailed before the crisis, the authorities are coordinating their efforts through global bodies such as the Financial Stability Board. The goal is to subject banks to common, cross-border standards that, as far as is possible, allow authorities to make internationally transparent assessments of their soundness. Also, they are determined to prevent firms exploiting opportunities in “regulatory arbitrage” by setting up operations in a jurisdiction with softer rules than elsewhere.

Of course it’s not possible to entirely repair such a heavily damaged sector within a few short years. After all, globally, banks lost $1.5trn in just two years, between 2007 and 2009. Ever since, liquidation experts have had a field day – in Germany, for instance, Lehman Brothers Bankhaus collapsed owing the Bundesbank €8.5bn, and it has taken years to sort out the mess. Now, however, the global tidy-up operation is nearing its end.

Work to be done
If they haven’t read it yet, most senior bankers could do worse than obtain a copy of a book that has greatly influenced regulators: The Bankers New Clothes: What’s Wrong with Banking and What to Do About it. Written by Anat Admati of Stanford’s Graduate School of Business and Martin Hellwig of the Max Planck Institute, its premise is that higher capital ratios were the starting point for reform.

According to the authors, banks had rendered themselves unsafe because they made money out of their fragility – their self-designed ratios for capital and liquidity were daringly low, mainly because they permitted sky-high leverage ratios. As it happens, the influential Financial Times economist Martin Wolf, a member of UK’s Independent Commission on Banking, agrees wholeheartedly with the main proposition of The Banker’s New Clothes. He wrote last year: “It makes no sense to build either bridges or banks that collapse in the next storm. One makes banks stronger by forcing them to fund themselves with more equity and less debt.” Although not many banks are moving towards an equity ratio of 20-30 percent, which the authors suggest is the more appropriate number, they are rapidly heading in the right general direction.

So how much safer are the banks? The main reform is that the minimum tier one capital ratio has been raised for most banks from a lowly four percent to a more robust six percent of risk-weighted assets. Also, the actual composition of tier one capital has been revised to make banks safer in the event of a crisis. Further, there is now a countercyclical capital buffer that can be raised or lowered according to the growth of credit. If regulators judge that too much credit is being handed out, they will insist on a compensating increase in the buffer.

The truly giant institutions will be required to build a risk-based capital surcharge that reflects the degree of their systemic risk. In short, the big boys must take a hit for the heightened danger they are judged to be running. Boardrooms have raised their game, also under pressure from regulators following another avalanche of research about directors’ responsibility for the crisis. “During the financial crisis it came to light that many of these risks [in bank governance] had been neglected, underestimated or – particularly in the case of systemic risks – not understood and taken into consideration,” pointed out Klaus Hopt of the Max Planck Institute, a German research institute, in a recent paper.

Unless they stumble onto the road of reform, the big institutions are very much in the eye of relentless regulators. In August, Standard Chartered took a $300m hit from probably the world’s most aggressive agency, the New York Department for Financial Services. Its heinous crime? Alleged deficiencies in its information technology systems. No overt damage was caused, no money-laundering rules breached, and no Libor was rigged. As one analyst wrote: “there appears to be no suggestion by the NYDFS of any wrongdoing or breach of regulations by Standard Chartered”. So in this new environment, banks can be punished merely for being fallible.

In the World Finance Banking Awards 2014, we highlight the banks and leaders who have helped to rebuild an industry. There is also a selection of expert commentary, making the supplement the ideal companion for those in the industry, and for those who need to know who is defining the markets, and where.

Ackman announces plans for Pershing Square Holdings IPO

Posted on September 15, 2014 by Ashton Wenborn

The move will enable the fund, established in 2012, to raise permanent capital, opening the doors for bigger investments by reducing investor redemptions.

The IPO will offer shares at $25 each. $13bn firm PSCM, which manages but remains separate from PSH, is set to invest $100m. The $2bn investments would add to the $1.5bn already secured from 30 cornerstone investors – including European pension funds, private bank clients and other US hedge funds – making the fund’s market capitalisation a minimum of $5bn.

Pershing Square Holdings has seen a successful year with returns in excess of 30 percent for its investors

The announcement fulfils expectations set out earlier in the year. In August Ackman sent a letter to investors confirming rumours of a future IPO. “Because we are an active, control and influence-oriented investor, we have avoided being fully invested because of the risk of investor redemptions”, he wrote. “We will hopefully begin to address this issue with the initial public offering of Pershing Square Holdings, Ltd.”

Pershing Square Holdings has seen a successful year with returns in excess of 30 percent for its investors. Ackman hopes to increase that further by raising public money through a closed-end fund and following similar recent moves by other key hedge fund players such as Alan Howard and Daniel Loeb. He said in a statement: “We expect that the public listing of PSH will substantially enhance the stability of our capital base enabling us to invest a greater percentage of our assets in activist commitments on a long‐term basis, and improving our ability to take advantage of market dislocations when they arise”.

Earlier in the year Ackman joined forces with Canadian pharmaceutical firm Valeant in a bid to purchase Botox-maker Allergan for $53bn, adding to its current 9.7 percent stake in the company, but its efforts have so far proved unsuccessful.

Harbour Asset Management: New Zealand’s economy is unshakeable

Posted on September 14, 2014September 5, 2014 by Ashton Wenborn

As sports lovers watched the 2014 FIFA Football World Cup, the famous New Zealand All Blacks became focussed on the defence of their Rugby World Cup in 2015. With an unbeaten record in 2013 and a home series win against England in 2014, the defending champions deserve their status as strong favourites.

At the same time, New Zealand’s economy and financial markets have been world-beaters, with conditions set for further success (see Fig. 1). The New Zealand economy has been growing at three to four percent with future growth underpinned by the post earthquake rebuild for the second largest city, the strong dairy prices lifted by demand from the growing Chinese middle class and record net migration. The depth and breadth of the New Zealand’s financial market has also expanded, with government asset sales and new listings in the agricultural and technology sectors.

In this environment, it has been Harbour Asset Management (Harbour) that has emerged as the premier New Zealand investment manager. Named Morningstar Fund Manager of the Year, New Zealand in 2014, Harbour has received World Finance’s Best Investment Manager, New Zealand award in both 2013 and 2014. An independent specialist, Harbour is focused on providing an expanding client base with New Zealand growth and income investment solutions.

New Zealand key facts — Source: Statistics NZ

Repeating history
New Zealand had already learnt the lesson of its own financial crisis in the mid 1980s, which had prompted widespread reforms to create a world-leading framework for monetary policy and fiscal responsibility. As a result, New Zealand entered the global financial crisis with a strong banking system, low inflation, and low levels of government debt. This provided ample scope for the authorities to respond with large-scale policy support, even though the eye of the crisis was in the northern hemisphere. Now that the rest of the world has emerged from the financial crisis, New Zealand’s economy has also benefited from three additional drivers of growth.

Following the devastating February 2011 earthquake in Christchurch, New Zealand’s second largest city, there has been a surge in residential and commercial construction, funded by insurance cover from global reinsurers, which is set to continue for many years to come. The country has benefited from very strong dairy prices and a quickly growing trade relationship with China. There is a structural change occurring across Asia, and New Zealand has the agricultural land, technology, sunshine and water to feed the growing middle classes in Asia. It is experiencing record net migration, equivalent to around one percent of the population, as foreigners are drawn to the economic prospects in New Zealand, and fewer locals are departing to foreign shores as they see better opportunities at home. These drivers of growth have not only put New Zealand at the top of the league table for GDP growth in 2013, but it is forecast to remain at the top over 2014 and 2015.

Combined with this macroeconomic backdrop, New Zealand has a vibrant capital market that is seeing new equity listings across a number of sectors. Government stability, strong growth of the local savings industry and the proximity to growing Asian markets are factors that have helped contribute to around an 18 percent growth in the equity market in the past year. Moreover, its equity market continues to provide a cash yield to global investors around 4.5 percent while local investment grade bonds also yield around 4.5 percent. These yields look good in the context of local inflation, which is hovering below two percent.

New Zealand’s Harbour Asset Management has embraced these market conditions, harnessing the experience of a team of proven investment professionals, many who have worked together for over 14 years. The company’s experience and consistent approach has delivered stellar investment outcomes for clients.

Made to measure funds
Harbour’s high growth Australasian equity strategy has delivered annualised returns of 13 percent per annum for over 14 years with an impressive 4.8 percent per annum alpha (see Fig. 2). This fund brings a core exposure to New Zealand, but also invests about 25 percent of the funds in Australia in higher growth sectors. It has a bias to faster growing sectors such as healthcare and technology, and in the 12 months to May 2014 it provided gross returns of 21 percent.

Australasian equities' cumulative performance — Source: Harbour, NZX, Goldman Sachs

Harbour invests in its staff and business to ensure that it meets the needs of its growing support base of around 60 wholesale clients and 250 independent financial advisors. The company’s client focus has also prompted the launch on new products in 2014. In March this year, it launched the Harbour Australasian Equity Focus Fund, which combines the talents of our individual in-house analysts and portfolio managers. The fund will generally only invest in stocks that are ‘buy rated’ by the Harbour analysts with final portfolio construction having no regard to their weighting in the index. These in-house ratings reflect the analysts’ assessment of the growth investment opportunity relative to current market expectations and prices.

In June this year, following client demand, Harbour launched a new income fund. It combines the New Zealand Corporate Bond Fund, which acts as ballast and provides a high quality stable income stream, and the Australasian Equity Income Fund, which provides diversification benefits that over time should provide the capital appreciation required to offset the impacts of inflation.

It has been a busy and successful time for Harbour, but like the famous All Blacks, the team is resolutely looking forward and focused on delivering future success for its clients investing in New Zealand for income and growth.

Banca March’s prudent approach sees it become Europe’s most solvent bank

Posted on September 13, 2014September 5, 2014 by Ashton Wenborn

Banca March, founded in 1926 in Spain’s Balearic Isles, is the only completely family-owned Spanish bank and the only one that specialises in asset management. It is also the most solvent bank in Europe (see Fig. 1) as shown by the stress tests carried out by the European Banking Authority.

These qualities and the idiosyncrasy, history and experience of Banca March make it the perfect bank specialising in private banking. Being a 100 percent family-owned bank means it adopts a prudent approach to asset management – a feature of only those who risk and manage their own money. This conservative management policy has been particularly notable during the years of the financial crisis, steering clear of risks and adventures, and allowing the bank to emerge significantly strengthened – as shown by the growth ratios in the strategic business areas.

Maintaining and strengthening
Our goal is to become leaders and references in three financial activity sectors: wealth and asset management, where we already occupy a prominent position; private banking, where we are already implementing a very ambitious growth project; and corporate consultancy, where we are starting to see the first results of establishing the bases, staff and resources.

Group strength

The Banca March Group has two main activities:

Banking, through Banca March and its associated companies: March Gestión de Fondos, March Gestión de Pensiones, March Vida de Seguros y Reaseguros and March JLT Correduría de Seguros.

Investment, through Corporación Financiera Alba, a stock market listed company of which Banca March is the major shareholder. Through this company, the Banca March Group participates in ACS, Spain’s leading services and construction company and one of the top such companies in Europe. ACS is in turn the largest shareholder in the German company Hochtief and Australian outfit Leighton, Acerinox (one of the world’s leading manufacturers of stainless steel with plants in Spain, the US, South Africa and Malaysia), Indra, Ebro Foods, Clínica Baviera and Antevenio. Corporación Financiera Alba is also the leading shareholder of the venture capital company Deyá Capital, focusing on investment in non-listed companies such as Ocibar, Ros Roca, Mecalux, Pepe Jeans, Panasa and Flex.

What’s more, rather than abandoning commercial banking, we are maintaining and strengthening it in our traditional area for four reasons: because it is profitable, because it adds value to our company, because we know our customers and because we hardly have any delinquency. We know we are very competitive in private banking. We can offer services the major Spanish and foreign banks cannot adequately provide. The reorganisation of the finance sector in Spain is enabling us to consolidate that unique model.

Being a bank specialised in private banking is a plus that other banks in the sector cannot offer. In Spain, there are major global, general and international financial institutions offering specialist asset management as one of their services to customers. At Banca March, asset management is not just another one of the company’s services but rather its core business. In its almost 100 years of existence, Banca March has specialised in managing the assets of family business owners, and providing services and financing to family businesses, covering a twofold objective that is the basis for the company’s success.

Finally, only one family bank can offer and implement a true co-investment proposal with its customers: the possibility of participating in the same opportunities and businesses as the family that own Banca March. A clear philosophy: same risks, same profit opportunities.

Consolidation in times of crisis
Banca March has been perfectly placed to take full advantage of the economic turbulence of recent years, attracting customers who are seeking peace of mind and security for their investments. Our bank has known how to continue to grow and consolidate its position. In this respect, the bank’s new project is focused on increasing the specialisation of its own offices to transform them into advisory and business centres that can serve the customer as appropriately and conveniently as possible. The daily financial transactions of customers will become collateral services that will be offered through all the channels provided by new technologies.

We are proud to have received the Best Private Bank Spain 2014 award from World Finance for the fifth year running. The strength of the bank has also been shown in the investment funds and SICAV sector, through the March Gestión de Fondos subsidiary. Torrenova, one of Banca March’s three institutional SICAVs, has become the leading Spanish SICAV in terms of managed asset volume. There is an identical product in Luxembourg, with more than €1bn assets under management.

In addition, March Gestión is now ranked third in SICAV management behind two major Spanish banks: a sign of Banca March’s recognition and the guarantee it can give its customers. March Gestión stands out for the originality and uniqueness of its investment funds, looking for profitable and safe alternatives for its customers. One of the elements that sets Banca March apart is its commitment to family businesses. The Family Businesses Fund is a global equities markets investment fund that invests in a selection of the leading listed family-owned companies. More than 25 percent of the shareholders belong to a single family, at least one member of the family is involved in its management and there is an interest in transferring ownership to the next generation.

Banca March is also particularly active in the corporate banking business, helping to finance companies and providing general advice, as well as helping customers with their long-term needs and projects. Furthermore, Banca March is very active in the parabanking financing business in order to take advantage of the growing opportunities of corporate debt.

Another of Banca March’s strengths is the development of its insurance business through March JLT, the group’s insurance broker and the first mainly Spanish-owned brokerage. March JLT offers its brokerage services to large multinational companies and medium-sized businesses in key sectors such as finance, tourism, distribution, civil construction, shipbuilding and social welfare, as well as to public administrations both in Spain and abroad. With over 100 employees throughout Spain, March JLT offers its services, through Jardine Lloyd Thompson (JLT), to companies in over 130 countries. About to celebrate its centenary, Banca March is today a successful project that helps family businesses and business families: always with the objective of being a great, but family-orientated, bank.

Nordea Bank keeps its cool in rough economic waters

Posted on September 13, 2014September 5, 2014 by Ashton Wenborn

Nordic banks avoided the worst of the global economic downturn and bounced back much more quickly than their southern European counterparts. There are several reasons for this impressive resilience – the Scandinavian economy was less exposed to Europe, for one. But part of the reason Nordic banks fared so well during such a tumultuous time for the industry is that they responded quickly and effectively in order to remain appealing to investors and safe for customers.

Sweden has some of the most progressive regulation in Europe, slowly brought in after a local banking crisis in the 1990s. Even before the most recent crisis, Sweden had one of the highest capital ratio mandates in the developed world, demanding that, from 2015, a minimum of 12 percent of assets should be core tier-1 – under Basel III guidelines that figure is only seven percent by 2019. There are plans afoot to boost up capital ratios even further as counter-cycle measures designed to buffer the local economy from further shocks. Though these measures may seem excessively stringent, Nordic banks are much better off for it, and as a result, Sweden’s banks have been generating some of the highest returns on equity in the region. In 2013, the Swedish government sold its remaining stake in Nordea, at the time of the sale shares were up 28 percent that year.

The Nordic banking industry has undergone tremendous – if perfectly calculated – change over the past half a decade. But these changes have ensured unparalleled capital adequacy and asset quality, ensuring that macro-economic trends continue ticking up in the region. Nordea has been leading the industry in terms of adapting to the new industry environment without sacrificing the quality of its services.

Stabilising the economy
The bank is a shining beacon of hope in the European industry’s horizon. Its strong performance, adaptability, and resilience in the face of a crisis can be emulated across Europe. Nordea is an even more vital role model since the financial crisis of 2007-08, as it has since been completely denationalised. When the European banking industry almost collapsed six years ago, a number of banks across the region were taken under governmental control; now many of these authorities have been left with no coherent strategy about how to return banks to the public domain. Sweden’s phasing out of Nordea took over two decades, but it was done in a meticulous way. It proved that banks can be safe and profitable in equal measures.

Nordea, the largest financial institution in the Nordics, is constantly striving for greater customer experiences by fine-tuning the organisation and its services to adapt to changes in customer behaviour, regulations and tough competition. As the only global Systemically Important Financial Institution in the Nordics, Nordea continues to deliver stable results and has been awarded Best Banking Group, Nordics by World Finance for the fourth year in a row. Christian Clausen, President and CEO of Nordea, says: “We are proud to receive this award. We see it as a recognition that we are able to manoeuvre to become the relationship bank of the future: 2013 was yet another year of low growth and interest rates declined to record-low levels. In this environment we have delivered a stable income level and seen a continued inflow of customers.”

With operations in seven countries including the Nordics, the Baltic countries and Russia, more than 10.5m retail customers, more than 500 corporate and institutional relationships and more than 1,000 branch offices, Nordea is the most diversified bank in the region. Clausen says: “As the last five years of recession and mediocre growth have proven, strong banks are vital not only for financial markets but for society at large. Throughout the crisis, Nordea has been a stabilising force in society, serving more customers and doing more business.

The bank is a shining beacon of hope in the European industry’s horizon

Adapting to changing behaviour
Nordea is continuing to adapt to customers change in behaviour by building a solid platform for future business. While branch offices are handling advisory services, Nordea is increasing its call centre capacity and is now offering twenty-four-seven services in the Nordic countries and increasing other ways of meeting and advising the customers.

Net meetings and secure chat functionality are other ways of meeting the customer on their terms, making it all the more convenient to be a customer of the bank. In addition, there has been a rapid increase in the use of mobile solutions for everyday banking. Nordea’s mobile offerings are looking at an increase of more than 1,000 new users per day in 2013. Clausen says: “We pursue a multichannel distribution strategy. The aim is to improve customer satisfaction while reducing the cost of service. Proactive contact with our customers is conducted through local branches, supplemented by contact centres, video meetings, online services and the mobile bank – the latter of which is becoming increasingly important.

“Our strong financial platform is fundamental to the ability to deliver on our relationship strategy and our most important value – creating great customer experiences. Everything everyone does at Nordea has one purpose only – to create great customer experiences. At every level of our organisation, this message is the most important guide for every action and decision taken. We strive to understand our customers’ needs and help them realise their aspirations. This is the core of our relationship strategy – ensuring financial stability for our customers, leading to high satisfaction and closer, long-lasting relationships. In turn, these closer relationships lead to reduced risk for the bank.

A market-leading position
Nordea is fulfilling its ambition to be the preferred speaking partner for the large corporates in the region, leveraging on a multi-local presence in the Nordic markets combined with size and competence that matches international competition. Clausen says: “In our wholesale banking operation, our size, scale and financial strength enables us to meet any financial need of our customers.

With €233bn of AUM, Nordea is by far the largest asset manager in the Nordics. A steady growth in the Nordic market has been complemented by a strong inflow from their global fund distribution. In May 2014, Nordea was awarded third place in Mackay Williams’ ‘Fund Brand 50’ report; the report measured which asset managers European customers wanted to do business with over the next 12 months.

An increased fund management operation leads to an increased focus on how customers’ money is invested. Nordea was the first bank in the Nordics to sign the Principles for Responsible Investment (PRI) back in 2007 and has developed a systematic approach to ensure responsibility. Nordea’s asset management team identify companies breaching international norms and engage with them to encourage positive change. This approach has then broadened to include positive screening, actively searching for companies that have ESG aspects as part of their actual business. Clausen says: “We recognise that we are an integral part of society, and as such, we want to do our share in creating a sustainable future. Our values, together with our code of conduct and sustainability policy serve to guide our people in their behaviour towards customers and our work to act ethically throughout Nordea.”

On the financial side, Nordea has delivered stable income, and has recorded flat costs for 13 consecutive quarters (by the end of 2013). With loan losses continuing downwards, the strong, stable capital generation has continued. In 2013, the core tier-1 ratio was up by 180 basis points to 14.9 percent. The capital base was increased and has doubled since 2006. Clausen says: “Looking ahead we do not foresee any substantial easing of the challenging environment of subdued consumption and low investment needs among both households and corporates. We are adapting to this environment and maintaining our strong position by becoming more efficient and reducing our costs further. Also, by pursuing high operational efficiency and better agility in our solutions and services, we will ensure great customer experiences – and fulfil our mission of ‘Making it Possible.”

Banplus Banco Universal’s fighting spirit

Posted on September 5, 2014September 15, 2014 by Ashton Wenborn

Venezuela’s economy has been through a turbulent time over the past decade, with national growth remaining unstable. However, recently the economy has maintained solid expansion and financial services are doing particularly well. The last four years have seen the money supply grow exponentially, with a 77 percent rise in the first quarter of 2014 alone.

This has largely improved capital for Venezuelan financial firms, which as a sector contribute unprecedented growth rates to national GDP (see Fig. 1), and has taken to supporting the local economy. In particular, Banplus Banco Universal has found its strength and capital in local small and medium enterprises, which have seen positive growth in recent years.

As a result, Banplus Banco Universal has maintained a constant growth rate in its turnover during the last five years, resulting in higher market shares in loans and deposits, reaching 0.67 percent and 0.75 percent respectively at the end of the first half of 2014. This good progression resulted in the firm last year receiving approval to increase capital and conclude its transformation into Banco Universal from the Venezuelan watchdog, the Superintendency of Banking Sector Institutions. In part, this comes down to the firm showing sustained and significant growth in the segment of small banks in the past five years, thanks to strong financial balances and a diversification of its offerings of products and services to target customers.

Branch expansion
The firm currently serves its 112,600 account holders through 47 agencies, 38 ATMs and a work force over 800 employees. “The sheer size of Banplus has grown in recent years, and this has paid off in terms of customer satisfaction,” says Diego Ricol, Executive President at Banplus Banco Universal.

“The opening of new branches in strategic locations and the growth of the sales force have sustained the level of trust and increment of funds deposited by customers and administered by Banplus Banco Universal. This strategy was responsible for Banplus Banco Universal climbing positions in the Venezuelan market, increasing the market share from 0.14 percent in June 2007 to 0.75 percent in June 2014, which represents $1,929m,” explains Ricol.

To this end, the firm has performed particularly well when it comes to financial intermediation loans for the first half of 2014, recording an annualised increase of 101 percent to $884m. This allocation effort helped the bank climb two places, to the 12th spot in the national rankings of private banks as it continues to hold a prudently low rate of arrears among customers, significantly below that of the general sector.

According to Ricol, this performance has been maintained by the continuity of three strategies, including credit placement in sectors with economic growth and controlled risk levels; efficient processes for admission and approval of credits; and efficient collection processes.

Product innovation
In particular, SMEs have proved to be a sector with massive growth prospects, in addition to Banplus focusing on and investing in significant technological advancements that could increase its transactions and clients based on numbers.

“A winning strategy for Banplus Banco Universal was to increase the involvement in the market share of electronic payments, focusing efforts on expanding attention to segments formed by individuals and small and medium business establishments, which complement each other. Flagship products for these market segments are Points of Electronic Sales and Credit Cards respectively, and in both segments Banplus reached a better position than other banks in the small segment,” says Ricol.

More importantly, the bank has developed product and transaction services that enable customers to manage their daily finances through electronic channels, like home banking, which is gaining ground in markets such as Venezuela where distance to branches often leaves many unbanked. With technological advances allowing for electronic and mobile banking, firms such as Banplus are quickly gaining an upper hand by tapping into a new and broad customer base.

As a result, the firm saw its cumulative net profit reach $39m by the end of the first half of 2014, leading to a 59.9 percent return on equity, making it the fifth most profitable private bank in Venezuela. Hopefully this growth trend will continue as Banplus Banco Universal pursues nationwide expansion in 2014, as well as a strengthening of the processes and internal control required. By investing and believing in Venezuela’s development, Ricol maintains that Banplus will see a year of growth benefiting employees, customers and shareholders.

Tamer Group on Saudi Arabia’s healthcare market

Posted on September 5, 2014October 17, 2014 by Ashton Wenborn

Social development has been in focus over the past decade in Saudi Arabia, with healthcare at the forefront. Over the years, Tamer Group has become a leader in healthcare, bringing out a range of innovative pharmaceutical products. World Finance speaks to its Managing Partner, Mohammed Tamer, to find out about developments in the kingdom, its initiatives for promoting women, and strategy for future growth.

World Finance: Well Mohammed, maybe you can start by telling me, how has healthcare developed in Saudi Arabia over the past few years?

Mohammed Tamer: It has been developed positively in terms of expanding new hospitals. The Ministry of Health is really working hard at expanding hospitals in a very quick period of time. They’re also encouraging more hospitals for the private and the government sector. Today the healthcare in Saudi Arabia is a challenge. E-health is an issue. There, of course, the hospitals are automated, but there is no interlink between them. So, like everywhere else, infrastructure solutions, IT solutions are challenges, and human capital or human workforce is a challenge, to obtain further growth to cope with the population.

World Finance: How much is the healthcare industry worth, and how do you see it developing with government incentives?

We are number one in pharmaceutical in Saudi Arabia today, in value and in quantity

Mohammed Tamer: They are building over 138 hospitals, they’re reaching 44,000 beds. This is a ratio of 3.5 beds per 1000 of the population. Currently we’re at one bed per 1000, so it’s quite a considerable increase. The total healthcare budget is expected for 2014 to close around $27.4 bn. If the expenditure continues the same, it will reach around $47 bn in the next two years.

World Finance: Well as a leading Saudi conglomerate, how is Tamer Group structured, and how involved are you in driving the country’s healthcare sector forward?

Mohammed Tamer: My grandfather was a pharmacist, and moved into Saudi Arabia in 1922, specifically Jeddah, and at that time he was the first pharmacist, and opened the first pharmacy. Later on, my late father and my uncle decided to expand the pharmaceutical distribution network of the Tamer family business, and we have opened all over the kingdom and the GCC. Today we are a company structured of three divisions. Healthcare, which is pharmaceutical and medical devices. Consumer, which is fast-moving products, beauty care, and hair colourants. And the third category is the prestige perfumery and luxury items. We are number one in pharmaceutical in Saudi Arabia today, in value and in quantity. We bring the latest products that are available for the local market, and we also manufacture locally, for the Saudi and the GCC Levant area, and North Africa.

World Finance: What are the health trends in the country, and how are you responding to these?

Mohammed Tamer: Well the health trends, unfortunately, are the same as most developed countries, where you have the issue of NCD, non-communicable diseases. This is in Saudi Arabia. The society has become an affluent society, and unfortunately obesity, lack of activity, has contributed to the increase of NCD, especially diabetes. Today in Saudi Arabia, about 25 percent of the population are diabetic. This trend is going on worldwide, but in Saudi Arabia it is a major part, and everybody is tracking it. In addition, also heart disease. We are the number one importer of products that treat diabetics and heart diseases in Saudi Arabia. In addition, the ageing population, and that requires a specific treatment for elderly people.

World Finance: You have a strong CSR programme. How are you aiding the development of Saudi Arabia?

Mohammed Tamer: In 2011, we made a CSR department, extending an arm’s help to society. We are contributing a different arm for art and culture, where we invite Saudi artists to come to London, to the UK and the United States to represent their artists, to get more exposure. We also have an arm for education and training, where we teach and educate Saudi women and men the vocational work that they need to join organisations. In addition, we are a member of a ministry of labour organisation, a non-profit organisation, helping to recruit disabled employees.

World Finance: You’re also dedicated to the empowerment of women. What initiatives do you have in place?

[W]e have recruited many women over the past five years in our organisation, and we will continue to do so

Mohammed Tamer: In Saudi Arabia, women are still at home, because they are not allowed to drive and so on. But we have strengthened our human resources department to cater for the specific needs in hiring ladies in the offices at work, and the operation. The issue today is that we have to meet what they need. For instance, in Saudi Arabia women are not allowed to drive to work, so you have to give them a transportation allowance. We are trying to get them to be more independent, so we give them housing allowance, benefits such as daycare for their children while they’re at work, so their mind is free to be at work and working, rather than being worried about their children. So yes, we have recruited many women over the past five years in our organisation, and we will continue to do so, and try to give them the best benefits, that we will be the number one employer in Saudi Arabia for women and male subjects.

World Finance: And finally, what’s your strategy for future growth?

Mohammed Tamer: More joint venture, investment in our operation. However, we would like to also increase, expand our manufacturing, and one of the strategies is to develop and improve our research and development, and manufacturing pharmaceutical products. In addition to that, we are investing in our operations facilities and our IT solutions.

World Finance: Mohammed, thank you.

Mohammed Tamer: Thank you very much.

Solvency II hangs over Europe’s head

Posted on September 5, 2014September 3, 2014 by Ashton Wenborn

Now 18 months from implementation, the EU’s Solvency II Directive has put the heat on Europe’s insurance sector, which is begrudgingly preparing for this massive game-changer. It will alter the way firms assess their own risk, heighten transparency requirements and enforce a minimum threshold for capital. After numerous delays and an arduous period of consultation, the regulation will enter into force on January 1, 2016, despite the final text not yet being made public. Essentially, Solvency II updates the approach taken to determine the capital insurers should hold against their risk profiles. It will introduce a common approach to prudential regulation based on economic principles for the measurement of assets and liabilities.

Key to the regulation are three pillars, each governing an aspect of the Solvency II requirements and approach, including: quantitative requirements; supervisor review; and market discipline. Pillar 1 sets a valuation standard for liabilities to policyholders and the capital requirements firms must meet. This includes two solvency requirements, the Minimum Capital Requirements (MCR) and the Solvency Capital Requirements (SCR). If the available capital lies between the SCR and the MCR, it is an early indicator to the supervisor and the insurance company that action needs to be taken. An insurance company can choose whether to calculate the SCR using a standard formula or whether to develop its own internal model to reflect specific risks. If an insurer’s resources fall below the MCR, the European Commission has stated that ‘ultimate supervisory action’ will be triggered. This means transferring an insurer’s liabilities to another insurer and withdrawing the firm’s licence or closing and liquidating the business.

Preparing for Solvency II

October 2013
Guidelines on preparing for Solvency II announced

April 2014
Technical specifications made public

January 2015
ORSA report 2014 must be completed and Pillar 1 model must be pre-approved by regulators

Mid-2015
Companies should do a dry-run of their Pillar 1 model

Throughout 2015
Continuous assessment of capital requirements and TPs. Annual report YE December 2014 must be produced

End 2015
Quarterly report must be produced

January 1 2016
Solvency II implementation

Pillar 2 deals with qualitative aspects of a company’s internal controls, risk management process and supervisory reviews. It includes the Own Risk Solvency Assessment (ORSA) and the Supervisory Review Process (SRP), which all firms have to produce. Crucially, the directive stipulates that if supervisors are dissatisfied with a company’s assessment of the risk-based capital or the quality of the risk management arrangements under the SRP they will have the power to impose higher capital requirements.

The last pillar is concerned with enhancing disclosure requirements to increase market transparency. The onus is on firms to interpret disclosure requirements, develop a strategy for disclosure, and educate key stakeholders on the potential impact of such reports.

Together, the pillars force the insurance industry to make forward planning for capital adequacy and risk management a key part of new strategic ventures. The embedding requirements mean all the above practices must become part of business as usual. This will affect hedging and reinsurance strategies, product development and pricing, underwriting and investment management, bridging the gap between current standards and those required for January 2016.

“There’s still a lot of work for firms preparing for Solvency II,” said David Kells, the head of KPMG’s Solvency II activities in an exclusive interview with World Finance.

“Preparations for Pillar 1 have settled down as most firms have set out standards for their capital requirements, are submitting dry-runs to regulators, and only a small list of uncertainties remain. Pillar 2 is slightly less progressed, but we know that everyone is frantically focusing on Pillar 3, where there is still a lot to do in order to get all the reporting requirements in place,” said Kells. He added that, because there is continuing uncertainty about the final wording of the regulation and how firms are interpreting it, “there is a degree of nervousness across the industry”.

Implementing the directive
Solvency II has been underway since before the financial crisis; the insurance industry should have come to terms with the requirements. Nevertheless, a prolonged approval process of the final directive, as well as lack of clarity on when the regulation would be implemented and how firms should proceed, has made Solvency II incredibly unpopular within the insurance industry. A recent survey from Grant Thornton showed only one third of respondents consider the directive an appropriate way to run their business. The aim of Solvency II is to align Europe’s insurance regimes, which is considered one of the most complicated sectors to understand. Essentially, it is supposed to be a move towards better regulatory management and risk oversight, with the overarching benefit being the increased transparency Pillar 3 will provide. And despite a majority of the industry being cynical towards the directive, 44 percent believe Solvency II is a ‘necessary evil’.

Potential issues
One of the key contention points is the capital requirement stipulated in Pillar 1. Because Solvency II is a risk-based system, capital requirements are aligned with the underlying risks of the company. This has created uncertainty as to how much capital insurers need to hold to meet long-term promises to policyholders, particularly because many insurers invest their assets. However, in November 2013, EU politicians agreed Solvency II requirements must reflect the fact insurers’ liabilities tend to be illiquid and long-term, meaning they should not need to sell assets before they mature, to comply with the new rules. Politicians also agreed to a 16-year phasing-in period.

Another key component is the firms’ own risk and solvency assessment (ORSA) in Pillar 2, which is basically a set of processes and procedures used to identify, assess, monitor, control and report internal and external long-term and short-term risks that an insurer faces or could face. These risks are used to determine the company’s capital requirement to ensure its solvency at all times.

“Basically, Pillar 2 is about formalising the risk processes that they already have in their head,” said Kells. “Assessing the firm’s tolerance for risk and reporting on this is something that most good firms have already had in place. This is just about locking it into the day-to-day work.”

To this end, almost two thirds of the industry has already begun implementation of its ORSA process, according to a recent Solvency II study by SunGard and insurance forum Leipzig. What is more concerning though is the fact that 30 percent of respondents have only begun preliminary considerations when it comes to ORSA. Given the sheer magnitude of the risk assessment process and that EU regulators expect firms to complete a full ORSA report in 2015, insurers should worry about their implementation schedules.

Pillar Three
There is an entire pillar of the directive that the majority of the industry seems to have forgotten. With most insurers focusing on the first two pillars, many have ignored the large-scale reporting requirements stipulated in Pillar 3, which includes public and private reporting components such as a massive solvency and financial condition report outlining a financial assessment of the insurer.

“With uncertainty about the implementation date, many insurers took their foot off the pedal and put Pillar 3 last in the queue. Now we’re seeing a rush to the end. But it’s important that firms be confident in their data, so they can do at least one dry-run before submission in 2015,” explained Kells.

According to a recent European Solvency II survey by Ernst & Young, three quarters of the industry are yet to meet most or all of the reporting requirements. Critically, only a quarter of insurers said they had already selected a system to meet these requirements, while two thirds said their existing data and systems were not designed to support longer-term ORSA assessments, forcing many firms to meet next year’s transitional reporting requirements manually.

“As companies become more realistic about their implementation readiness, it is clear that some are less prepared than they had expected. They have a long way to go in terms of reporting, data and IT readiness,” said Martin Bradley, Head of Global Risk and Regulation for Ernst & Young.

Insurers have blamed regulators for not providing sufficient support in the run-up to implementation of the new regime. The industry has found it hard to interpret regulatory requirements, and been unsatisfied with feedback from regulators on company-specific implementation. A lot of this comes down to regulators having insufficient staff to handle the significant supervision requirements, said Bradley. This is a common problem among European regulators, as the slew of financial regulation has made compliance heads a hot and hard-to-find commodity in recent years.

Volatility concerns
The lack of clarity aside, another concern looms over implementation of Solvency II, as the insurance industry becomes more transparent. The greatest change will be the requirement to provide markets with robust information on the entire firm and its financial condition. This annual report will give the public and regulators a unique insight into all aspects of insurers’ business and is aimed at assuring shareholders of the firm’s solvency.

Essentially, the onus is placed on the firm to design the information, which through public disclosure, will be available to regulators, analysts, rating agencies and shareholders. However, industry analysts have said the sheer amount of data may cause volatility in the insurance market and tackling this therefore needs to be a priority for complying firms.

“This new regime means that there’s a new machinery producing numbers and firms need to prepare themselves in order to manage this disclosure so they can give market analysts a heads up on what these numbers mean and have confidence in their own reporting. It’s important to have a robust explanation for this financial report in case numbers have changed significantly, so firms can gage against volatility,” explained Kells.

What’s more, the costs of Solvency II are mounting as more firms move through Pillar 3 and can see the end result of their efforts. With insurers on average using six departments in preparations for the directive, the costs of resource allocation have been extensive. According to the Grant Thornton survey, only six percent of respondents believe the costs are reasonable, while more than three quarters consider them disproportionate, arguing that the value added does not justify the expense.

According to Kells, estimates of final costs are hard to gauge, but tens, and even hundreds, of millions of pounds spent at the end of line would not be a surprising outcome for major insurance firms, he said. It is therefore unsurprising that a majority of the industry finds Solvency II a bitter pill to swallow. The process has not been made easier by a growing majority of firms suggesting the founding principles of the directive have been ruined by the implementation. Compounded by the uncertainty surrounding the interpretation of Solvency II, the industry is begrudgingly doing as they’ve been told – albeit at a snail’s pace.

A history of the Vatican Bank

Posted on September 5, 2014April 12, 2017 by Ashton Wenborn

Perhaps more than any other, the Vatican Bank should be expected to maintain the highest of moral standards in the way it conducts its business. However, despite its saintly links, the bank that acts on behalf of the Catholic Church has developed a reputation for corruption, scandal and mismanagement over the last few decades.

Murder, bribery, suspicious deaths, money laundering, and many other nefarious acts have been linked to the bank that is officially known as the Institute for Works of Religion (IOR).

However, when Pope Francis began his term as leader of the Catholic Church in early 2013, he made it clear that one of his goals was to reform the way the Vatican Bank is run, bringing about a series of reforms that would restore confidence and trust in the financial arm of the church. But seeing through the changes to such a secretive institution was always going to prove a difficult task, and one that has been unsuccessfully attempted previously.

Past scandals
Like the Catholic Church, the Vatican Bank has been steeped in mystery for much of the time it has been in operation. Founded in 1942 as a means to manage money on behalf of the Catholic Church, its main purpose was to ‘provide for the safekeeping and administration of movable and immovable property transferred or entrusted to it by physical or juridical persons and intended for works of religion or charity.’ It was plunged into disrepute in the late 1970s after many years of rumours about money laundering on behalf of the mafia.

When Pope John Paul I died in 1978 in apparently mysterious circumstances, many conspiracy theories suggested it might have had something to do with his desire to clean up the affairs of the Vatican Bank. The scandal intensified a few years later, when in the early 1980s a bank that it had a majority stake in called Banco Ambrosiano hit the news for all the wrong reasons.

Its leaders were accused of transferring money out of the country into shady overseas banks, as well as being linked to an illegal masonic loge known as Propaganda Due (P2), which had ties to the mafia. Banco Ambrosiano was investigated and its Chairman, Roberto Calvi, was arrested, trialled, and sentenced to four years in prison. After being released on appeal, Calvi fled Italy, before being discovered hanging under London’s Blackfriars Bridge shortly after. It marked a dark period in the history of the Catholic Church, leading to the scandal forming the basis for the plot of the third instalment of the Godfather trilogy.

Pope Francis

After the shocking resignation of Pope Benedict XVI in February 2013, the Catholic Church set about a frantic search for a new leader after what had been a deeply troubling few years. Child abuse scandals had been in the headlines for all of Benedict’s reign, but there had also been plenty of trouble with the Vatican’s financial affairs. Argentinian Cardinal Jorge Mario Bergoglio was selected as the church’s first non-European leader in 1,272 years, becoming Pope Francis I. Born in Buenos Aires in 1936, he has been praised for his dedication to modernising the church and attempts to restore
its reputation.

Ettore Gotti Tedeschi

As the Vatican Bank sought to draw a line under the corruption scandals of the past, it installed a series of directors to oversee reform. Italian economist and banker Ettore Gotti Tedeschi was installed in 2009 as the head of the IOR, alongside other directors that included banker Paolo Cipriani. It was hoped that they would install a series of reforms at the bank, but they were both soon embroiled in scandals themselves. Tedeschi was investigated in 2010 or money laundering, although no charges were brought. In May 2012 he was replaced after a vote of no confidence, while Cipriani followed in July 2013.

Ernst von Freyberg

The Vatican Bank replaced Tedeschi in June 2012 with Ernst von Freyberg, initially to serve as an interim leader, before appointing him as President of the Board of Superintendents in February 2013. Born in Geneva in 1958, the German banker founded the finance house Von Freyberg in 1991, before a series of senior management roles at German firms. He quickly set about opening up the Vatican Bank and making it more transparent, as well as adopting a zero tolerance approach to suspicious activities. However, by July Jean-Baptiste de Franssu had replaced him, with little explanation as to why.

Jean-Baptiste de Franssu

The most recent person appointed to take the Vatican Bank forward is Frenchmanand former Invesco CEO Jean-Baptiste de Franssu. The sudden and unexpected announcement that von Freyberg would be replaced with Franssu in July has merely added to the sense that the job is a poisoned chalice that few are capable of seeing through. Whether Franssu has what it takes to steady the ship and restore faith in the Vatican Bank remains to be seen, but it is certainly a concern that concerns have already been raised over the fact that his son currently works for the organisation charged with investigating the IOR’s affairs.

The aftermath of the scandal rumbled on long after Calvi was found dead. Repeated attempts to prosecute individuals supposedly responsible proved unsuccessful. Bishop Paul Marcinkus, who led the Vatican Bank between 1971 and 1989, avoided prosecution, despite overseeing the darkest period in its history. Others included businessman Flavio Carboni, who was linked to the P2 lodge and mafia boss Pippo Calò. Both Carboni and Calò have been tried a number of times for the murder of Calvi, each time being cleared. They remain prominent figures in Italian business and politics, despite the controversies that have surrounded them.

History repeating itself
While the scandals of 30 years ago are yet to be fully put to bed, new ones have emerged in recent years that have sent the Vatican Bank back into the murky spotlight of before. In 2009 the bank was being investigated by authorities over money-laundering worth €180m. More allegations followed against then IOR President Ettore Gotti Tedeschi, leading to a police investigation, although charges were never brought.

Further allegations then emerged over money laundering – which led to US investment bank JP Morgan closing one of the Vatican Bank’s accounts – after it failed to provide sufficient information about the sources of the €1.8bn deposits. In response, Pope Francis established a new Pontifical Commission to study potential reforms for the bank, which later led to four senior cardinals being sacked.

Shortly before the shocking and unprecedented resignation of Pope Benedict XVI in February 2013, the Vatican Bank appointed a new President in Ernst von Freyberg as Tedeschi’s replacement. Tedeschi had been in the role just three years, but it was a period beset with scandal. He was eventually forced to step down in 2012 when a no-confidence vote among the board of directors was held, due to him failing “to fulfil the primary functions of his office.” However, after his departure, Tedeschi claimed that it was his push for greater transparency at the bank that led to his ousting, and specifically his looking into the accounts that were ‘non-religious’.

Von Freyberg, on the other hand, joined the IOR as a representative of an untainted new leadership that would help to transform its reputation. He called for a “zero tolerance” attitude to any transactions that were deemed suspicious, investigating all cases of potential tax evasion and money laundering. He also aimed to make the IOR much more transparent than it had ever been, opening it up to international regulatory standards.

Giuseppe Calo (right on screen) appears by video link from a prison in central Italy during the trial of the alleged murderer of Roberto Calvi, 23 years after his body was found in London

Out with the old, in with the new
After Pope Francis took the reins of the Catholic Church there were many rumours that he would look to shake up the way it managed its finances. Rumours coming from the church hinted that changes were afoot for much of his first year in charge. They became true when Pope Francis made his first change in February, appointing Australian Cardinal George Pell as the Prefect for the Secretariat for the Economy, a newly created department that would oversee the annual budget of the Holy See and the Vatican.

Shortly after his appointment, Cardinal Pell told reporters there needed to be considerable work on reforming the Vatican’s financial arm. “There needs to be changes in the economic area – not just with the so-called Vatican Bank – but more generally there is work there to be done [and] a need to ensure that things are being properly done.” Other, bigger changes took a few more months to be announced. In somewhat dramatic fashion in June, Pope Francis began by sacking all five members of the board of the Financial Intelligence Authority, which regulates the Vatican’s finances. The entirely Italian board had been due to head up the regulator until 2016, but Pope Francis decided that a new batch of board members, from across the globe, would help to give it new impetus. New members included Juan Zarate, a former national security adviser to President George Bush, and Singaporean civil servant Joseph Pillay.

Vatican Bank in figures

Loans and receivables securities:

€250.9m

Debt securities

Available for sale securities:

€13.9m

Equity securities

Held to maturity securities:

€574.8m

Debt securities

Other assets held by IOR:

€86.5m

Other assets

However, despite von Freyberg’s best efforts, his time in charge came to an abrupt – and surprising – end in July, with the news that he was being replaced by Frenchman Jean-Baptiste Franssu as IOR president. The 51-year old de Franssu immediately claimed that “Catholic, ethical investment” would be the focus of the bank in the future. However, Franssu was quickly accused of having a conflict of interest, when it emerged that the Promontory Financial Group had hired his son a few months before, which was in the midst of conducting an investigation into the bank’s operations and its relationships with clients.

Obstacles to change
How successful the new leadership of the IOR is in restoring the reputation of the bank remains to be seen. Certainly the words emanating from Pope Francis and his new appointees are encouraging, but it has proven difficult in the past to translate well-meaning words into meaningful actions. Author Philip Willan, whose book The Last Supper looked into the murder of Calvi and the scandals surrounding the IOR, told our sister publication European CEO magazine earlier this year that the bank needed to undergo some serious reforms, and that Pope Francis was serious about ensuring they were carried out. “I think Pope Francis has a sincere desire to turn the page on an embarrassing past and reform the way in which the Catholic Church handles money.”

However, he added that getting any meaningful reforms passed was likely to be difficult, with many people opposed to much change. “I don’t doubt, though, that there are powerful forces ranged against the reformists. The recent scandals show how a habit of flouting the law had become deeply ingrained among senior Vatican bureaucrats and their friends, something I examine in the last two chapters of the latest version of my book on the Calvi case.”

The scandals of the past reflect how corruption had infiltrated all aspects of Italy’s political and business class, and that meant a reluctance to pursue proper reforms. “The scandals show how even without the excuse of an ideological war against communism, Vatican officials continued to exchange favours with members of Italy’s political and business elite, simple greed supplanting ideology. It is remarkable how defendants from the Calvi murder trial, Flavio Carboni and Ernesto Diotallevi, have continued to have business contacts with people associated with the Vatican,” says Willan. “Paolo Oliverio, a financial consultant to the Camilliani, a religious order dedicated to the service of the sick, was arrested last year on suspicion of laundering money for the Calabrian mafia – Europe’s biggest cocaine traffickers. He is reported to have been in contact with both Carboni and Diotallevi, as well as their offspring. Carboni has also been shown to have cultivated contacts with members of Silvio Berlusconi’s inner circle in recent years, despite having been on trial for murder. A thorough reform of the church’s business culture will not be either easy or quick, but I think Pope Francis and his team are serious about pursuing it.”

Silvano Vittor, Roberto Calvi’s former driver and bodyguard, who was charged with his murder

As populations multiply, governments must tackle urbanisation

Posted on September 5, 2014September 3, 2014 by Ashton Wenborn

Global demographics are shifting rapidly. As populations continue to multiply on every continent, people are turning to the supposed prosperity of their nation’s super cities. These migratory patterns are pushing some urban areas beyond breaking point. Today, 54 percent of the world’s population lives in an urbanised area (see Fig. 1). By 2050, that number is expected to leap another 12 percent, accounting for some six billion people. Projections indicate another 2.5 billion people would join the globe’s megacities as a result of that expansion – with close to 90 percent of that increase in developing nations across Africa and Southeast Asia.

Fresh research conducted by the United Nations’ Department of Economic and Social Affairs indicates at least a third of population growth in the next thirty years will be in India, China and Nigeria. Many areas within these nations are already starting to buckle under infrastructural demands that have become nigh impossible to meet. Much-needed transportation links, energy development, healthcare provisions and local schools are all operating under capacity, fuelling urban deprivation.

Yet the single greatest issue facing the world’s impending urbanisation relates to housing. Because governments are failing to adequately plan for rampant urban growth, hundreds of millions of people are being relegated to lives of penury. At present, some 1.6 billion people have been forced to take refuge in substandard urban housing; worse still, over 100 million people are now homeless. Without adequate housing, cities are swiftly transforming from thriving economic hubs into sprawling capitals of deprivation. With those underserved populations set to expand in coming decades, both municipal and federal governments are racing to upgrade their housing stocks before up-and-coming megacities burst at the seams. Some answers to the problem are more viable than others.

Where the Pyramids at Giza once stood alone in the open desert, shoddy high-rise housing and an unauthorised cemetery now encroach

Planning is vital
One perceived solution is to relax planning standards. However, that practice may be a self-inflicted shot in the foot for many developing countries. Indian megacity New Delhi is an apt example. Home to 25 million people – more than the entire population of nearby Australia – Delhi has long struggled to meet the needs of its burgeoning population. Much like the city of London, Delhi boasts a thriving real estate sector. Yet evidence suggests the homes trading hands across the city don’t meet the financial limitations of those who need them most.

Meanwhile, affordable housing initiatives are floundering as a result of divisive party politics. In 2009, for example, Delhi’s municipal government sanctioned the immediate construction of 65,000 new affordable houses. Five years on, less than a third of those homes have been built. Critics have slated the municipal government for refusing to utilise federal subsidies and imposing bureaucratic policies on land acquisition. Despite the government’s paralysis, Delhi’s population continues to swell; city officials have recently started to overlook illegal construction projects.

Over the last decade, a combination of relaxed and unenforced planning policies has deteriorated the structural quality of Delhi’s architecture. Shoddy tenement blocks litter the city’s outskirts – without stringent regulatory oversight these poorly planned towers are endangering the city’s low-income households. In June, five children and five adults died in the suburb of Inderlok after a four-story building buckled under the weight of its tenants. In other developing urban areas, poorly regulated building plans are causing even bigger problems.

Construction taking place around the Opera House in Oslo

Boasting a population of 18.5 million, the Egyptian capital of Cairo is one of the globe’s top 10 biggest metropolitan areas. It’s also one of the developing world’s most dangerous urban environments. In the last 20 years, collapsed housing has been responsible for nearly 30,000 injuries and 1,500 deaths. Last year alone, 468 real estate developments collapsed. With affordable housing options disappearing, the Ministry of Housing has responded by giving the thumbs up to virtually every building project that crosses its desk. As a result, the cultural legacy of one of the globe’s oldest civilisations is rapidly dissipating. Where the Pyramids at Giza once stood alone in the open desert, shoddy high-rise housing and an unauthorised cemetery now encroach. Lax planning rules are causing both loss of life and loss of heritage; municipalities must find new housing solutions. The simplest option may be to discourage people from moving to the big city in the first place.

Reduce, reuse, recycle
Developed nations are struggling to come to terms with increasing levels of urbanisation, too. Within the next 15 years, London’s population is anticipated to reach 10 million – and with the city’s high real estate prices soaring by more than 20 percent every year, fears of an impending housing shortage are well-founded. To meet demand, the city needs an annual 63,000 new homes. At present, just a third of those homes are materialising. Yet municipalities and the UK government are already exploring creative incentives to make up for that shortfall. One proposal being lobbied is the construction of tens of thousands of new suburban properties specially designed for pensioners. By introducing tax breaks for downsizing, the government hopes to free up to 100,000 under-occupied homes for young families across London.

Last year, local councils were given the power to charge a 50 percent tax on the city’s 80,000 empty properties to encourage owners to use the buildings. Likewise, in June the UK Treasury announced it was streamlining the rollout of some 50,000 new London homes by building on unused brown land sites. Without compromising building standards, this drive to redevelop underused property is slowly tackling population growth; however, a government’s greatest weapon in the war on agglomeration is regional investment.

Source: CIA World Factbook. Notes: 2013 figures

Controversy surrounds the £16bn HS2 project. Designed to link eight of the UK’s largest cities, the high-speed rail line is supposed to prevent the need for businesses and their workers to migrate down to the nation’s commercial capital, rebalancing the UK’s economy between north and south.

Yet the perceived benefits may not fulfil their promise if similar investment is not made to maintain the regional industry of those cities. For lessons on how to do so, Westminster would do well to look to the Nordic states. Over the last decade, Norway has been particularly active in discouraging the further urbanisation of Oslo, which already houses over a quarter of the country’s population. Each year, the government now invests hundreds of millions to subsidise 12 ‘centres of expertise’ in less populated areas of the country.

These have allowed rural communities to attract aspiring workers away from Oslo with high-yield, world-class enterprises such as micro and nanotechnology, deep-sea engineering, aquaculture and cancer research. Consequently, not only does Norway now boast one of the highest employment rates in Europe, but it also maintains a manageable rate of urbanisation.

Constructing a solution
The world is becoming smaller every day. Twenty years ago, there were only ten megacities in the world that housed no more than 10 million inhabitants apiece. By 2030, forecasts indicate the number of global megacities will have shot up to 41. Yet without the implementation of adequate urban planning measures, these rampantly expanding agglomeration zones will only serve to widen the global poverty divide. A severe lack of local amenities and affordable housing are letting cities down and slowing the economic development of would-be global leaders – and if municipal governments should ever hope to validate growth with prosperity, they have got to facilitate some form of long-term strategy.

Relaxed building standards are not a viable option. Up-and-coming megacities have little choice but to pursue the recovery of unused or under-occupied space in the name of affordable housing. Long-term sustainable growth, on the other hand, can only be secured by encouraging regional development outside urban hubs. The world is changing, and urbanisation cannot be stifled. Yet if municipalities care for the welfare of their citizens, investment must be made to discourage further agglomeration and promote regional growth. The clock is ticking.

Investors flock to Ireland’s infrastructure projects

Posted on September 5, 2014September 3, 2014 by Ashton Wenborn

‘Cautious’ is a word often used to describe investor behaviour in the years immediately following the 2008 global financial crisis, as uncertainty over proposed regulation, as well as high public sector debt, rippled through the financial markets – all while banks tried to repair their balance sheets. As the project finance world underwent a sea change in active players, the financial industry has adapted to new market conditions, and is now in good shape to help meet the purported ‘funding gap’ in the long-term infrastructure finance sector.

With institutional investors beginning to play a more significant role in the funding of projects, as they look for stable returns to match their long-term liabilities, the challenge now lies in marrying the capabilities of the banks, public sector and other investors – a task that many market players have taken on with vigour.

Meeting infrastructure needs
Infrastructure – a key catalyst for growth, triggering further investment and job creation – is a policy direction particularly suitable for those countries facing weak GDP prospects, low interest rates, and burgeoning infrastructure needs.

The OECD forecasts that development in transportation will grow twice as fast as global GDP between now and 2030, and the European Commission estimates that infrastructure requirements in Europe will reach €1.5trn over the next eight years. As such, it is encouraging to see the emergence of institutional investor interest.

As well as being the first eurozone country to exit its bailout programme last December, [Ireland] has made a full return to the sovereign debt markets

The private sector – not long ago fragmented by the repercussions of the financial crisis – is now in rallying mode. Project finance banks are making a comeback with higher levels of activity. With their expertise in advisory, origination, structuring and servicing, they remain core to raising funding but increased collaboration with institutional investors can be now be seen.

We can see this dynamic taking place in Ireland. Following severe setbacks to the country’s economy – including lowered sovereign credit ratings and a number of project cancellations – Ireland has received a significantly improved outlook from leading ratings agency Moody’s. As well as being the first eurozone country to exit its bailout programme last December, the country has made a full return to the sovereign debt markets with a successful – and oversubscribed – issuance of government bonds in January.

Although economic indicators suggest that the country remains some way from pre-crisis levels of activity, the fiscal constraints from its bank bailout are now abating and the government has given infrastructure development renewed focus, with PPPs being a key delivery tool. Concrete government measures are encouraging investors. As part of a €2.25bn stimulus package announced in June 2012, the Irish Government introduced a €1.4bn PPP programme, with the first phase supported by the European Investment Bank (EIB), the National Pensions Reserve Fund (NPRF) and local Irish banks.

Connection in key
Furthermore, the most recent project to reach financial close has seen the renewed presence of international banks in the Republic. This was the N17/N18 motorway project – a 57km standard dual-carriageway route between Gort and Tuam – under a PPP contract with the Irish National Roads Authority, won by the Direct Route consortium comprising Marguerite Fund, InfraRed, Strabag, Sisk, Lagan, and Roadbridge.

A combination of bank lenders provided the senior debt – including Natixis, Bank of Ireland, Société Générale and the EIB. Natixis was the largest international commercial lender on the deal, bringing a €118m contribution to the total €331m financing. This funding was underpinned by the infrastructure debt partnership between Natixis and Ageas, a Belgium insurer – an innovative collaboration that will provide for the deployment of some €2bn investment into the infrastructure debt space through Natixis’ banking platform. The French banks also introduced other institutional investors to the deal, notably Aviva and ING Insurance.

Indeed, the interest received from international investors marks a significant milestone demonstrating the viability of hybrid bank and institutional investor funding solutions. Attracting international financing support is all the more crucial given Ireland’s banking sector remains one of the most concentrated in the world.

Much of this institutional interest is motivated by the low interest rate environment, which is driving investors to take more risk in their portfolios. Peripheral eurozone countries such as Ireland now represent key investment opportunities, offering better yield prospects while the economic recovery reinforces investment grade ratings.

The successful closing of this deal should aid investor confidence in other projects currently in procurement. Ireland’s healthy pipeline currently includes the Grange Gorman campus development, Primary Care centres and Courts buildings, Schools Bundles 4 and 5, as well as the N25 and M11 roads. Further cementing the sector’s buoyancy are the anticipated projects due to form part of the stimulus package’s second phase, expected later this year.

Although Ireland has struggled in the post-crisis environment – ratings agencies have said they will continue to monitor the country’s fiscal consolidation efforts related to its debt ratio, GDP growth and export levels – it has managed to meet each of its bailout conditions and been held up as a poster-country for recovery by institutions such as the EU.

Moody’s restored Ireland to investment grade in January – a move that was well overdue, according to many investors – and in May, Ireland’s long-term borrowing costs fell below the UK’s for the first time in six years. With such rapid progress – including Standard and Poor’s raising its sovereign credit rating for Ireland (from BBB+ to A-) in June – it makes sense that investors should be drawn to its infrastructure sector, especially while yields remain attractive, which is further encouraging international contractors and financial sponsors.

Banco Penta on the Chilean banking sector

Posted on September 4, 2014October 17, 2014 by Ashton Wenborn

The Chilean banking sector has played a key role in shoring up economic development in the country, but is there room for growth? World Finance speaks to Daniel Subelman and Marco Comparini to talk about progress in the region.

World Finance: Now Daniel, your bank was one of the first to focus on investments, not just acting as a financial middleman. Can you tell me why that decision was so important to your company’s success?

Daniel Subelman: Most banks in Chile, after an intense period of MNA activity, became major corporations, highly efficient, serving all types of clients across all products nationwide. But that scale came at a cost. They had to develop policies and processes to make them more standardised and rigid. Inevitably, that made them more slow and more bureaucratic. In 2004 Banco Penta was founded as a bank focused exclusively on high net-worth individuals, corporate clients and financial institutions, serving only brokerage, asset management, corporate finance, season trading and financing. What are the numbers after that? Well, the last three years, revenues have grown at the CAGR of 25 percent, that surprised even us, and a third of those revenues are fees, which for a bank is pretty unique. Most international banks would envy that. Profits have doubled every single year since then, our credit rating has increased two notches, we have issued four series of bonds and an impressive low spread. Finally but not last, we are here. That is another good sign. We received an award of Best Investment Bank Chile, 2014, as well as last year we received an award for the best MNA deal of the year in Chile also.

Profits have doubled every single year since then, our credit rating has increased two notches, we have issued four series of bonds and an impressive low spread

World Finance: Very interesting. Now Marco, the FUT financial mechanism that allows companies to defer their taxes has been removed. Can you tell me, how has the decision affected a company’s ability, or corporate’s, to really do their business?

Marco Comparini: Well first of all the Chilean tax reform has already been discussed in the congress. As far as we know, the FUT won’t be eliminated, but modified. It cannot be eliminated because it has been a very important financing source for Chilean companies. From a corporate side, the big change is in the corporate tax rate, because it will increase from 20 to s7 percent, which is a big change. Of course, that will have an impact, it’s obvious. Nevertheless, this information has already been in the market for at least two or three months, so I would say that it is already in place, it’s priced in. At the same time, I would say that the Chilean companies are in a very healthy situation. Therefore, they can cope with the increase in corporate tax rate.

World Finance: So we just heard about some of the opportunities that the banking sector offers, but of course we’ve had some more financial players, Marco, enter into the market, including Banco Santander. Can you tell me, the proliferation of competition, has the been good or bad for people like your self?

Marco Comparini: The competitiveness of the market has been pretty good for everybody, for the country. If you want to be a developed market, you have to have a developed financial system, and this is something that we believe that we have. A sign of that is the banking penetration in Chile, which is 80 percent, which is quite high if you compare it with some neighbours, like Peru and Colombia, they are in the 20s plus. Therefore, you can say that it’s a deep financial market, and very competitive. Nevertheless, when you analyse all the banks, you realise that you have to have a different strategy if you want to start with a new bank in Chile. So that’s the reason why in 2004 when we set up Banco Penta, we decided to do something unique, and we have had pretty good returns out of that, we’re very happy with the strategy, and we’re very proud of being the first investment bank in Chile.

World Finance: Now we just heard about how competition helps the marketplace, can you tell me Daniel about how the higher than expected inflation rate has impacted your ability, and others’ ability to operate in the current financial market that exists in Chile?

Daniel Subelman: Even though that’s completely true in most countries, in Chile we’re moving in the opposite direction. We’re coming from a relatively high inflation context, but we’re moving the other way. Inflation is going down, the economy is cooling down. However, in any case, in Chile we have the UF. The UF is an index that is pegged to the CBI. Every single month, it readjusts from the previous month’s CBI, and most fixed income securities in Chile are traded in real rates back to this index, which is the UF, similar to the TIPS in the US. So, banks when they build budgets can hedge the inflation risk having in the balance sheets in the assets’ UF. That’s the Chilean reality today, and that’s why we’re also pretty unique as a country, because it’s not very common in other countries to have this deep inflation real rates that can help you cover and hedge that risk.

World Finance: Now Marco, we just heard about how the financial community is on the up and up, but of course there’s always room to grow. How can the government improve the financial regulatory environment that you operate in to make it even easier?

Marco Comparini: Always there is room for improvements from a regulatory perspective. Nevertheless, according to what we have seen in the last five years in the international financial system, where we have seen the US and European banks in very difficult situations, during the same period of time we haven’t seen any single problem in any bank. That reinforces their authority, the way they are controlling the market. So I don’t see them doing any significant change, and I agree with them. The Chilean banking system is quite healthy, even though there was a big international crisis, we really coped with it.

The Chilean banking system is quite healthy, even though there was a big international crisis, we really coped with it

World Finance: Fascinating. Now, Daniel of course the Chilean economy has had some sluggish times of late. Can you tell me, does that make you worried at all about the future of the financial sector?

Daniel Subelman: We saw, in the second semester of last year, investment stop and decrease a lot, and I would say the second quarter of this year you started to see consumers reducing consumption. One clear sign of that, in May of this year the outstanding stock of commercial loans was reduced for the first month since February 2010, so more than four years. So yes, that’s a warning. However, there are some good things happening also. We have a huge lack of infrastructure and energy investment, and I can see political consensus to approve some of those projects, and the pipeline is big because of the lack I mentioned, and you will see investment there in the short term future. In addition to that, the slow economy in Chile and lower commodities prices in the market have made a weaker peso. We have a very open economy, so we have exporters who have been suffering, and a lot of pressure to make profits in a very strong currency, all exporters who sell in international markets. That part of the economy will benefit from a weaker peso. So the ones that survived a long period of strong Chilean peso became very strong, and very efficient. So now the margins will improve, and those sectors will benefit from that.

World Finance: Very interesting. Daniel, Marco, thank you so much for joining me today.

Both: Thank you.

Compliance overload: finance regulations are damaging free markets

Posted on September 4, 2014September 3, 2014 by Ashton Wenborn

It is no surprise that the move towards more onerous anti-money laundering and information exchange procedures has significantly increased transaction costs for everyone in the finance industry. The concerning new development is that the costs are beginning to outweigh the benefits and that regulation is hurting legitimate as well as illegitimate users of the financial system indiscriminately.

This is putting increasing pressure on financial centres that are struggling to comply and remain competitive in the current economic environment, which presents challenges to our perception of competition and free markets. In this respect, our liberal market economy is under pressure like never before and regulation is to blame.

For some time, the financial industry and the surrounding world has accepted the influx of regulation as a necessary consequence post-crisis, in order to ensure stable, transparent and sustainable financial markets that won’t crash and burn at the expense of tax payers. The primary focus has been to uncover illicit activities such as money laundering, tax evasion and fraud, by enforcing stricter reporting criteria, banning certain types of financial activity and boosting client protections.

Regulatory landscape
Regulators argue that this can provide enough insight and oversight to ensure that we never see a repeat of the magnitude of the financial crisis, which to a great extent was caused by irresponsible loan and product practices in the US and within other major international banks. The goal is also to bring in billions of dollars from untaxed money that is being hidden around the world and can seriously boost the high deficits seen in countries like the US.

£139.9bn

Bank deposits in Jersey, December 2013

However, very few people have dared voice that regulation can go too far and that not all the rules may be beneficial in the long run. Not to discount that regulation does an important job at keeping our markets safe and stable, research has now proven that the costs of compliance are seriously outweighing the benefits of financial regulation. At least that is the argument of Professors Richard Gordon and Andrew P Morris, who recently wrote the paper Moving Money: International Flows, Taxes, and Money Laundering, which offers a series of critical insight into the consequences of our current regulatory regime.

In a recent interview with World Finance, Geoff Cook, CEO of Jersey Finance, described the recent years regulatory developments, as “a tsunami of regulation, particularly for the banking and asset management sectors,” which have been hardest hit. Legislation such as the AML, FATCA and AIFMD all require a slew of resources and as part of compliance, billions of pieces of data are now floating around the world, at a staggering cost.

“Regulation has increased in recent years in order to ward off future problems and we have been an early adopter of these policies, because it is really in our best interest to comply. That said, we must consider the costs of regulation. Does it actually have the intended effect?” said Cook, adding that so far, regulation has had “no significance on crime prevention” and that such laws tend to impact clients most, as costs eventually end up on them, reducing gains from investments.

According to Gordon and Morris, this increase in regulation could have significant implications for economic growth, while providing little evidence of any real benefit from the new measures in terms of improved tax revenues or reduced illegitimate funds flows. Recently, US authorities rejoiced when estimates showed that FATCA would generate $880m in revenues a year, as a result of lost income from tax evasion.

Ironically, this is a drop in the ocean compared to the billions spent on FATCA compliance, and as the professors point out, this begs the question whether such regulation actually benefits the public and states enough, to warrant the implementation of such far-reaching regulation. Only a few people have dared question the regime, but surprisingly, the cost dynamic is now being reviewed by the G8 and G20, while the OECD has put out recommendations for the streamlining of data collection on a global basis, in order to limit the costs of transparency.

This has become particularly pertinent as it’s become apparent that developing countries with fledgling financial sectors and small regulators aren’t able to cope with the regulatory burden. “A consequence of all this has been that a lot of firms are pulling out of developing countries because its impossible to gauge the risks associated with doing business there and whether or not they’re actually complying. That could potentially stunt economic development in some parts of the world, which I think is quite problematic,” said Cook.

Research has now proven that the costs of compliance are seriously outweighing the benefits of financial regulation

Financial centres buckling
A key concern in this is that the mounting compliance costs are becoming too much for the world’s financial centres. Offshore entities like Jersey have been able to cope well with regulation, as it was an early adopter that engaged with regulators during the evaluation and consultation processes. Its own legislation already bared down hard on financial crimes and has since 1998, forced anyone with knowledge of tax evasion or illicit criminal activities to report such issues or otherwise find themselves legally liable. According to Cook, “the only sustainable strategy was to adopt regulation” and as such, Jersey Finance has seen a steady growth in compliance heads.

However, for others, compliance is less than easy, says Cook, and while fewer financial hubs might be good news for some, it’s damaging to the free markets and general competition in the financial sector.

“It is an inevitability that there will be fewer offshore jurisdictions in the future. Jersey can cope and absorb the costs of regulation, but smaller jurisdictions with less employees, smaller regulators and with a lacking legislation, will find it difficult to comply. Of course, that’s levelling the playing field for jurisdictions like Jersey, which has seen its costs increase significantly, while others haven’t invested in compliance up until now and therefore had an advantage.

“But this is problematic for overall competition,” said Cook. The professors even go so far as to argue that the regulatory burden being put on small financial hubs is unfair. “There are real issues of respect for sovereignty that must be addressed. Today’s international financial institution regulation is dominated by a few rich or large countries. If we live in a world where international relations require respect for the sovereignty of all jurisdictions, the shifting of costs from large, wealthy jurisdictions to small ones, is illegitimate,” said Gordon and Morriss.

Interestingly, a recent report on shell companies and secret bank accounts, tested the compliance of OECD countries in comparison to offshore hubs, and found that major regulatory issuers such as the US, were among the worst sinners in the world. Professor Sharman from Griffiths University proved that it was incredibly easy to circumvent prohibitions on banking secrecy, forming anonymous shell companies and secret bank accounts in 17 instances, of which 13 occurrences happened in OECD countries.

In the UK, it took a sole 45 minutes to establish a company without providing identification, issued with bearer shares (which have been almost universally outlawed because they confer completely anonymous ownership). Shockingly, the study concluded that G20 countries had much more lax regulation than tax havens did.

“In this respect, it is frustrating that the regulation doesn’t seem to discriminate between financial centres who already have strong measures in place, as opposed to those who have an obvious intake of illicit activities”, said Cook. “It is important to us to inform people about IFC’s because of the mounting concerns about tax evasion and money laundering, which we don’t want to be associated with. Regulation doesn’t discriminate between financial centres, but I think its necessary for it to do so, because we believe that we are better run than others”.

To this end, the professors noted that the best IFC’s already have very effective systems and skill sets in these areas and that they may well be able to adapt to the new regimes more rapidly and with fewer costs than their on-shore counterparts – who also face huge compliance costs. Still, the concern remains that regulation has fundamentally changed the face of financial business and in particular, is making it impossible for small IFCs entirely dependant on their tax haven status to continue attracting financial services.

With many developing countries using special economic zones as a driver for growth, and small Caribbean nations building the majority of their GDP from financial services, it is problematic that these nations could be forced to abandon the sector and thereby, economic development. More importantly, the impact this will have on overall competition should be a prime concern for a world that is largely built on liberal economic principles.

Should green bonds be regulated?

Posted on September 4, 2014September 3, 2014 by Ashton Wenborn

As discussions of mitigating climate change gather pace, so too do studies into the costs of not doing so. Support for the shift to a low-carbon economy has spread to consumers in all corners of the globe, and – predictably – investors have rushed to cash in on what new opportunities have emerged in the environmentally responsible investment space.

One report released earlier this year by the International Energy Agency puts the estimated costs of switching to low-carbon technologies through 2050 at $44trn, whereas another by the IPCC claims stabilising greenhouse gas emissions requires $13trn in investments before 2030. The headline figures at first appear unworkable, especially in an era of austerity and expansionary stimulus. However, with the appropriate mechanisms in place, there exists an opportunity for willing investors to prevent the damage from being done and take part in the turnaround.

“Institutional investors are increasingly concerned about sustainability issues and ESG issues,” says Sean Kidney, CEO and co-founder of the Climate Bonds Initiative (CBI). “An indicator of this is that investors representing some $42trn of assets under management are now members of the Principles for Responsible Investment, and investors representing $22.5trn are members of the Global Investor Coalition on Climate Change.”

The green bonds climate
The staggering costs – financial or otherwise – associated with climate change, and the alleviation thereof, have caused a spike in demand for environmentally responsible investments, not least in the green bonds market, which has grown by extraordinary degrees in recent years. Used to finance environmentally responsible projects, green bonds – or climate bonds – represent a vast share of the $100trn bond market and a significant step on the way to a low-carbon economy.

The consequences of investing in a bond that might not uphold the green end of the bargain serve only to compound exposure to dirty industries

Research from the non-profit CBI also predicts that the market for green bonds will reach $40bn this year, and expand by another $100bn the year after – far and above the $10.9bn issued in 2013, which was then three times the issuance of any year previous. Further estimates show the total value of climate-themed bonds outstanding to be $502.6bn, as of July 2014, again representing a sizeable increase on the $346bn total in March 2013.

Made up of close to 1,900 bonds from approximately 280 issuers, the sub-sector is dominated by investments in transport ($358.4bn), energy ($74.7bn) and finance ($50.1bn), with the rest spread thin across industry, agriculture, waste and water-related projects.

Beginning at a meagre $3bn in 2012, the market for the instrument has since exploded beyond all expectations, and so too has the capital allocated to suitably responsible projects. Beginning as a niche product, the sub sector in its current form, looks capable even of increasing the flow of capital to low-carbon development and shifting the focus away from fossil fuels among the investment community.

However, as demand for green bonds increases, the instrument’s legitimacy could well suffer and the intended environmental benefits wain, without the right measures in place to ensure the capital is correctly allocated. “The Green Bonds era has begun,” says CBI, and many analysts are inclined to agree that the market has migrated from its beginnings as a niche product and into the mainstream; though at what cost to its green credentials remains to be seen.

As is often the case with so-called environmentally responsible investments, there is a danger that the market could be subjected to ‘greenwashing’ as it grows in popularity. The concept – otherwise referred to as ‘green sheen’ – makes specific reference to parties guilty of marketing products or services as ‘green’ when in reality the environmental benefits are exaggerated or in some instances entirely fabricated. And while the market for green bonds is yet to be tarnished in this way, the risks will likely remain for as long as there is no consistent regulatory framework to keep issuers in check.

Guidelines published earlier this year by a consortium of major banking names, including Bank of America, Citigroup, JPMorgan and Crédit Agricole, make clear the properties and principles of green bonds, with a view to arriving at a unified governance framework. The Green Bond Principles (GBP) include guidelines for use of proceeds, process for project evaluation and selection, management of proceeds and reporting, though stop short of setting out concrete rules and punishments for failing to comply with the recommendations.

“The GBP are intended for broad use by the market,” according to the authors. “They provide issuers guidance on the key components involved in launching a credible Green Bond; they aid investors by ensuring availability of information necessary to evaluate the environmental impact of their Green Bond investments; and they assist underwriters by moving the market towards standard disclosures which will facilitate transactions.”

One key area that the GBP fail to address, however, is the much-talked-about issue of environmental targets, and whether issuers need necessarily comply with specific emissions targets before a bond is labeled green. Without clarifying this point, corporate issuers in particular could take it as license to push the parameters of what constitutes green and exploit what is fast emerging as a hot investment trend.

“We think that clear guidelines are needed as to “what is green”, to both make it easier for issuers and to allow investors to compare apples with apples,” says Kidney.

“Our investor board believes that an expert committee approach that brings together key people such as academics and relevant agencies in a sector to determine eligibility criteria is the way to do it – a science-based approach. That reduces the need to have the independent reviewers assess from scratch the environmental qualifications of the bond, and means they just have to confirm it complies with published standards – an important change to allow the market to scale up quickly, as it’ll allow many more reviewer to participate.”

Whereas originally the World Bank’s environmental department decided on green bond criteria and assigned the tag accordingly, the introduction of multiple issuers to the subsector has since given rise to discrepancies, without anything close to a governing authority to answer to. The circumstances here are indicative of a wholesale shift in the green bond market, away from agencies like the World Bank and closer to corporate and banking names, which are growing increasingly eager to join the party.

Corporate overhaul
Until 2013 the green bond space was populated exclusively by AAA-rated development banks, with the World Bank, European investment Bank, European Bank for Reconstruction and Development and the African Development Bank occupying a sizeable share of the market. Once corporate players caught wind of the investment trend, however, many more diverse names rushed to cash in on the green bond rush.

Beginning with EDF, Vasakronan and Bank of America Merrill Lynch, corporate names brought with them a number of changes to the green market, namely increased liquidity and demand. Whereas in 2012 the average bond size was $96m, the introduction of new market entrants pushed the average up to $430m only a year later. The increase in size has continued on since, and some multi-billion dollar issuances are large enough even to appear in general bond indices.

Michael Wilkins, Managing Director at S&P’s Ratings Services told Utility Week that he expects global corporate issuances to reach $20bn this year, double last year’s total and half the projected total for 2014. The figures also fall in line with corporate activity so far this year, in that corporate parties have issued $10.2bn in the first half of 2014, representing 55 percent of the total and comparing favourably with the $3bn equivalent figure last year.

In June, French energy company GDF Suez issued the largest green bond to date, indicating both the rate at which the market has grown and the prominent role European utilities are playing in the subsector’s development. At $3.4bn, the Suez issue dwarfs the previous record of $1.9bn, held by Electricite France, and reveals the appetite for environmentally responsible investment that exists today.

The introduction of new market players has also raised the question of whether voluntary standards are adequate enough a deterrent to protect against the credibility of green bonds, and whether they are in fact ‘green’. One potential solution is to threaten an interest rate spike, should an issuer fail to comply with standards, although most are agreed that the reputational costs of issuing a sub-standard green bond are enough of a deterrent at present to protect against non-compliance.

The vast majority of those investing in green bonds to date are doing so for legitimate reasons – often for the purpose of offsetting exposure to climate risks. As such, the consequences of investing in a bond that might not uphold the green end of the bargain serve only to compound exposure to dirty industries. Greenwashing, therefore, is an unviable strategy for most issuers, that is, until the subsector attracts investors interested only in boosting their surface-level green credentials.

It’s perhaps too much to say right now that the market for green bonds is in need of a regulatory overhaul. However, what is important for the sub sector is that issuers abide by a uniform framework and work together to ensure the legitimacy of green bonds is upheld.

Given that issuers are transparent about their assessment criteria, the emergence of green bonds looks a decisive step on the road to a low-carbon economy.