How a ‘regulatory sandbox’ can drive innovation in financial services

Stanley Kubrick’s iconic 1968 movie 2001: A Space Odyssey featured a computer called HAL, which was designed as a labour-saving device. This creation was successful until HAL discovered existentialism and, perceiving itself to be under threat, decided to murder its human crew. While this was, of course, the work of science fiction rather than scientific fact, perhaps we are now on the cusp of science ‘faction’ – where fact meets fiction.

Data-driven regulation and compliance are key to future commercial success, with some regulators acting as public champions for new software in this area. Increasingly, the world’s leading regulators are trying to ensure that innovation is present in all financial sectors, and that the firms they regulate are using technology to offer superior services, manage risks more effectively and create new opportunities.

A regulatory sandbox can help encourage experiments in fintech within a well-defined space and duration. This allows the regulator to provide the requisite support

The sandbox
Do you remember playing in a sandpit as a child, using your imagination to create shapes and make things in a safe and controlled environment? A ‘regulatory sandbox’ is the term used to describe an enclosed environment in which innovation in financial technology can take place. The sandbox aims to promote more effective competition in the interests of consumers by allowing both existing and prospective licensees to test innovative products, services and business models in a live market environment, while also ensuring the appropriate safeguards are in place.

To this end, a regulatory sandbox can help encourage experiments in fintech within a well-defined space and duration. This allows the regulator to provide the requisite support, with the fourfold aim of increasing efficiency, managing risks, creating new opportunities and improving people’s lives.

The sandbox is an experiment for regulators and regulatees alike. It is the first time that many regulators have allowed licensees to test their products on consumers in this way; consequently, interest in sandboxes is growing rapidly.

Here comes the tech
Artificial intelligence (AI), the Internet of Things (IoT), big data, behavioural/predictive analytics and blockchain technology are poised to revolutionise regulation and compliance, and will create a new generation of regulatory technology (regtech) start-ups. Examples of current regtech systems include chatbots and intelligent assistants, robo-advisors, and the real-time management of compliance ecosystems using IoT and blockchain. Regtech systems also refer to automated regulation tools, compliance records that are stored securely in distributed ledger technology (DLT), and online dispute resolution systems. In future, regulations encoded as understandable and executable computer programs may also be possible.

Nowadays, automation is all the rage – but why is it happening and what are the benefits? The answer, in short, is money: cost savings and greater efficiency are both imperative to businesses. People are hoping that automation will reduce costs enormously for financial services firms and remove an intractable barrier for fintech firms as they try to enter financial services markets. Indeed, the UK Government has launched a Fintech Sector Strategy, which it hopes will bolster the country’s position as “the global capital of fintech” well beyond its exit from the EU.

Regulators collect huge volumes of data (increasingly from open sources), and thus have major opportunities for big data analytics. In general, big data allows the user to examine large and varied data sets to uncover hidden patterns, unknown correlations, customer preferences and more. Big data encompasses a mixture of structured, semi-structured and unstructured data that someone has gathered through interactions with individuals, social media content, survey responses and text from emails. Data can also be captured from phone call data and records, data sensors connected to the IoT, and so on. The ‘3Vs’ of big data are volume, variety and velocity, and all three – the volume of data being handled, the variety of that data and the velocity at which it is being created and updated – are increasing rapidly.

AI technologies, meanwhile, power intelligent personal assistants, robo-advisors and autonomous vehicles. There are three main branches of AI: the first is machine learning, which is a type of program that can learn without explicit programming and can adapt when exposed to new data. Natural language understanding refers to the application of computational techniques to the analysis and synthesis of natural language and speech. Finally, sentiment analysis is the computational process of identifying and categorising opinions expressed in a piece of text.

Closely related to big data is behavioural and predictive analytics, which looks at people’s actions. Behavioural analytics tries to understand consumer behaviour and helps software predict future actions. Predictive analytics, meanwhile, is the practice of extracting information from historical and real-time data sets to determine patterns and predict future outcomes and trends.

Finally, there is the much-discussed blockchain technology, the main types of which are DLT and smart contracts. Within the decentralised database of DLT, transactions are kept in a shared, replicated, synchronised and distributed bookkeeping record that is secured by cryptographic sealing. DLT’s proponents claim it has integrity, resilience, transparency and consistency. Smart contracts, on the other hand, are computer programs that codify transactions and contracts, which in turn legally manage the records on a distributed ledger.

It is conceivable that algorithms will begin to
make decisions that have
far-reaching consequences
for humans

Automating regulation
Of late, regulators have been looking at digital regulatory reporting (DRR), which promises to help firms comply with regulatory reporting requirements more quickly and efficiently. Further, it will make the information that firms send to regulators more consistent, and will also boost the amount of information that firms share with each other, particularly for the purposes of offsetting internal risks.

To this end, regulatory experts have been weighing up the pros and cons of removing ambiguity from reporting requirements and seeking a common data approach across regulatory reporting. In addition to considering mapping requirements for firms’ internal systems and a mechanism by which firms can submit data to regulators, standards are being used to help the regulator implement DRR. As such, application programming interfaces, DLT networks, a common data model and the removal of ambiguity from regulatory text are all now being explored.

Legal redress for algorithm failure seems straightforward: if something goes wrong with an algorithm, the firm ought simply to sue the humans who deployed it. However, it may not be that simple – for example, if an autonomous vehicle were to cause death, would the plaintiff pursue the dealership, the manufacturer, the third party who developed the algorithm, the driver, or the other person’s illegal behaviour? This paradox is part of a wider debate about whether or not algorithms ought to have legal personalities in the same way as companies.

Another important principle of law is that of agency, where a relationship is created when a principal gives legal authority to an agent to act on the principal’s behalf when dealing with a third party. An agency relationship is a fiduciary relationship; it is a complex area of law with concepts such as apparent authority, where a reasonable third party would understand that the agent had authority to act.

As the combination of software and hardware is producing intelligent algorithms that learn from their environment and may become unpredictable, it is conceivable that, with the growth of multi-algorithm systems, algorithms will begin to make decisions that have far-reaching consequences for humans. It is this potential for unpredictability that supports the argument that algorithms should have a separate legal identity so the due process of law can take its course in cases where unfairness occurs. The alternative to this approach would be a regime of strict liability for anyone who designs or places dangerous algorithms on the market – but this may well be a case of locking the stable door after the horse has bolted.

Beneficial owners
Another pioneering innovation in the use of IT solutions for practical compliance has been the British Virgin Islands’ formidable Beneficial Ownership Secure Search System. The jurisdiction established this in accordance with the Exchange of Notes agreement it signed with the UK in April 2016. This secure government search system satisfies global standards regarding beneficial ownership. It also balances the need for both disclosures of information about companies to the government and appropriate levels of privacy, thus ensuring companies share information rapidly and efficiently with law enforcement bodies.

The situation at present remains fluid. There are more and more signs of coordination between regulators of different nations; these are most welcome. For example, 11 financial regulators and related organisations have collaborated to create the Global Financial Innovation Network, building on earlier proposals to create a ‘global sandbox’ – a network for collaboration and shared innovation. This is a brave new world, and some regulators are taking the lead.

Before his victory at the Battle of Waterloo in 1815, the Duke of Wellington stated: “Time spent in reconnaissance is never wasted.” With this modus operandi guiding them, innovative financial centres such as the UK and British Virgin Islands deserve to achieve a victory of their own.

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The tide is turning on wave energy

The fight to reduce the pressure we place on the environment grows all the more urgent with every hour. Certainly, strides have been made when it comes to social awareness and the variety of ways in which we can reduce our heavy carbon footprint. But the road ahead still stretches far into the distance; the damage we have inflicted on our planet has already reached dire straits.

There is some hope to be found, though: for example, the field of clean power offers huge potential for progress. Investment in renewable energy continues to increase (see Fig 1), with solar, wind and geothermal power rightfully receiving a great deal of attention in recent years. However, there are other sources that also deserve their seat at the table, one being ocean wave energy, also known simply as wave energy. Not to be mistaken with tidal energy, wave energy is still a young market – but this lesser-known clean power is now turning heads.

The nascent sector brings many benefits, as explained by Adamos Zakheos, Inventor and CEO at Sea Wave Energy (SWEL): “Wave energy, when harnessed correctly, can produce an abundance of environmentally friendly, cheap, renewable energy, significantly reducing the dependence on fossil fuels. We all see the effects of global warming; by exploiting blue energy, nations can take a responsible step towards securing a brighter future for their citizens – and their heirs.”

The nature of wave energy means that equipment working on the surface of the ocean must be robust enough to withstand the roughness of the sea day in, day out

Working with the waves
While tidal energy harnesses the ebb and flow of tides, wave energy works with the vertical movements that occur along the surface of the ocean. Specialised equipment then captures the mechanical energy produced by this up-down movement and converts it into electricity.

Interestingly, wave energy is actually a form of solar power: when the Sun’s rays hit the Earth’s atmosphere, they heat it up. Around the globe, a difference in temperature naturally occurs, causing air to move from hotter regions to cooler ones, resulting in wind. As winds move across the seas, some of their kinetic energy is transferred to the water, creating waves. Essentially, wave power is generated by the action of the wind blowing across the ocean surface, which means it’s also an indirect form of wind energy.

“Devices called wave energy converters (WECs) capture and convert the wave energy to mechanical energy. The mechanical power can then be used to fuel a conversion process to other forms such as electricity, hydrogen or even pressure for desalinating sea water,” Zakheos told World Finance.

Fossil fuels are finite. Aside from the obvious issues that result from their limited supply, the energy source is also damaging to the environment: there’s the amount of land the infrastructure requires, the issue of waste disposal, toxic emissions, water pollution and the carbon footprint of the industry as a whole. Wave energy, on the other hand, is clean, abundant and renewable. And, as waves can be forecast several days in advance, the energy they produce is also predictable and consistent. The infrastructure itself comes with a host of positive features: WECs are modular, making them easy to set up, and expandable. They also help protect shorelines from erosion, as WECs disperse the power of waves as they crash into the coast.

Persistent obstacles
While the advantages of wave energy are plentiful, until recently, there have been several obstacles standing in the way of the sector’s growth. Zakheos explained: “The biggest challenge facing the wave energy arena is developing a WEC that can withstand harsh environmental conditions and can produce low-cost energy in vast amounts.” The nature of wave energy means that equipment working on the surface of the ocean must be robust enough to endure the roughness of the sea day in, day out, as well as any number of raging tempests. This requirement in particular has eluded those working in the field for decades.

The complexity of exploiting wave power has led to a host of different designs over the years: buoys that sit on the surface; meandering attenuators; and converters that are mounted onto the seafloor. “The effects of extreme weather conditions are directly relative to any device that is in conflict with the wave; floating and buoyancy devices tend to have a disruptive relationship with the wave,” said Zakheos. “In fact, in extreme weather conditions, some wave energy converters are temporarily decommissioned to avoid catastrophic damage.”

Experts argue that wave energy is where wind power was some 30 years ago: at the time, an optimum design had not yet been agreed upon. Decades of research and development, however, have resulted in the sophisticated turbines that are dotted across various landscapes today. When it comes to wave power, feet have been dragging for years now. While there was some initial investment into the field in the 1970s, since then, governmental and commercial research has been lacklustre, especially in comparison with wind energy.

As Zakheos explained, a failure to produce better results has led to this pattern of persistently weak investment, which was desperately needed in order to improve the technology. “The WECs produced over the years have failed to deliver time and time again. These failures, combined with the billions of private and public funds that were invested, have dampened investment appetite, resulting in a slower development curve for this type of technology.”

Just swell
Zakheos believes that an essential misunderstanding about the movement of waves is at the root of such defeats. “Current [WECs] fail on so many levels, one being their conflicting nature with the sea wave. If you work in harmony and in cooperation with your partner, you will have a long and fruitful relationship. That’s exactly what we have achieved. We have managed to interact with the wave in such a way that we avoid conflict and work in harmony with the deployed area, even in the harshest of conditions,” he said, in reference to his design, the Waveline Magnet, which has been 12 years in the making.

He continued: “The Waveline Magnet is not a floating device as may be assumed, but is a near-zero displacement system, without the inertia-related disadvantages that are being faced by other WECs.” As such, the device does not come into conflict with waves, but interacts with them in a manner that is natural and fluid. Essentially, it adopts the movement and momentum of the waves, allowing the Waveline Magnet to work in even the bleakest sea conditions. In fact, the technology can take advantage of such states and increase energy production without impacting the durability of the device.

The Waveline Magnet is able to work in this manner thanks to its innovative design, which comprises a series of flexible assemblies, all linked by a malleable spine power system. “Our research and development has created a device that enclaves the surface of the sea, or the wave line, as we like to call it, becoming one moving dense mass with the contour of the wave,” said Zakheos. “This allows us to work in harmony and in synchronisation with the deployed sea area, regulating the loads imposed on a wave to achieve optimum energy extraction in a controlled and non-disruptive manner.”

Realising feasibility
As with other sources of renewable energy in the initial phases of their development, cost has been a major roadblock for the technology. In a bid to offset this challenge, the sector is now filled with small, nimble players making innovative strides – with occasional input from their respective governments.

SWEL, for example, hopes its design will alleviate the high development and upkeep costs that have been the main pitfalls of previous WECs. First, the materials and components used for the device can be supplied without the need for specialised production lines or vast supporting infrastructure. Tony Antoniou, Finance Director at SWEL, said: “This keeps the cost of production very low and, due to its modular, lightweight design, the cost of deployment and retrieval are also drastically reduced.”

Meanwhile, the robustness of the device, which is a consequence of its ability to move in conjunction with the sea rather than in conflict with it, means maintenance and repair costs are drastically reduced. And thanks to the modular design of the Waveline Magnet, repairs can be completed with ease. Further, general maintenance, as well as production and transportation, are logistically easier too. The latter allows the possibility of mass production with turnaround times that are remarkably short – ranging in weeks rather than months.

As waves can be forecast several days in advance, the energy they produce is also predictable and consistent

The components themselves are also environmentally friendly; the device is made from recycled materials that are themselves 100 percent recyclable, while seawater is used in the hydraulic system instead of oil. Despite this green approach, the materials are still marine grade, meaning the Waveline Magnet can be deployed in even the most active and extreme seas, alleviating another hurdle that has stunted the growth of the wave energy market until now.

In terms of output, the Waveline Magnet is able to harness the power of the sea at a far more efficient rate than WECs of the past. “Achieving power extraction from renewable sources at a cost lower than [that] of fossil fuels is a long-term dream for the renewable energy industry. Our testing results indicate that this can now be achieved using the power of the wave, producing mechanical energy at a cost of less than [one penny ($0.013) per kWh],” said Antoniou. “In regions with an average annual wave height of just one metre and five-second wave intervals, the Waveline Magnet is estimated to produce on average 1.5MWh or 500 tonnes of desalinated water per hour, using a device 20m wide [and] 200m long.”

He added: “We will now proceed to independently confirm and verify our scaled-up output calculations and values, establishing SWEL as the pioneer of wave energy, setting new frontiers and ultimately facilitating the replacement of fossil fuels with renewable sources of energy.”

The market still has a long way to go. At present, big-ticket investments continue to focus on tidal energy and offshore wind farms, such as the €6bn ($6.79bn) that’s set to be ploughed into the Irish Sea over the coming five years. This is largely thanks to the decades spent enhancing the technology. The end result is a design in which efficiency has been maximised and costs have been reduced, thus providing a clean energy power source that is both practical and feasible.

But that tide is now coming for wave power too. It’s taken a long time to get to this point, but the technology is finally at a stage that will allow the market to be taken more seriously. Investors are standing up and taking notice, and for very good reason: the potential of the sea is vast. It provides us with an abundant source of clean energy and, thanks to new advances in the field, WECs now come without the pesky problems of the not-too-distant past. Yes, we can expect great things in the years to come from our oceans’ waves – possibly, even, a solution to one of the greatest environmental quandaries we face today.

How the Bank of Cyprus recovered from the economic crisis

Just six years ago, the Bank of Cyprus looked to be on the brink of collapse. The Mediterranean island’s largest lender was badly affected by the economic crisis that hit Cyprus in 2013 and led to the collapse of several of its competitors. The island’s economy was eventually bailed out to the tune of €10bn ($11.14bn) by the European troika (the European Commission, the European Central Bank and the International Monetary Fund), which imposed a series of austerity measures in return.

As part of the programme, Cyprus’ second-largest bank, Cyprus Popular Bank, shut down, while the biggest, the Bank of Cyprus, was forced to seize deposits from savers in a bid to stay afloat – a move that drew strong criticism from Cypriots. Although it managed to avoid collapse itself, the crisis left the lender’s reputation in tatters.

Compliance is now the key function in any corporation that values the quality of its culture

How times have changed. Like a phoenix rising from the ashes, the Bank of Cyprus has not only succeeded in regaining its customers’ trust, but has also been able to repay the full €11.5bn ($12.81bn) emergency liquidity assistance it had inherited from the closure of Cyprus Popular Bank. In light of this extraordinary recovery, World Finance spoke to Marios Skandalis, Director of the Bank of Cyprus’ Group Compliance Division, to discuss how the bank’s comprehensive new compliance function has helped it regain its market-leading position.

Why, in your view, is compliance important for banks, both from a regulatory and customer perspective?
From a regulatory perspective, it is the function that provides pre-emptive assurances of the effective implementation of all relevant regulatory frameworks, thus adding value to the credibility of the organisation. From a customer perspective, an effective compliance function provides the relevant reliability, reassuring them that their affairs are dealt with in a professional manner by a credible institution and that any services received are of the highest possible standard.

Compliance is now the key function in any corporation that values the quality of its culture. It is also a reflection of the organisation’s outlook and a key concern for all stakeholders.

How has the Bank of Cyprus reformed and updated its compliance function?
The Bank of Cyprus is the undisputed trailblazer of Cyprus’ banking sector, and our approach to reforming, reshaping and remediating our compliance framework has only cemented our market-leading position. We have not followed the traditional approach like most institutions, many of which simply enhance their existing policy frameworks and promote this as an entirely new product. On the contrary, we have made sure to enhance the real effectiveness of our compliance programme and have combined it with an enhanced policy framework.

In this way, we have built a robust and fully independent compliance function and ensured that we have effective monitoring measures in place by utilising state-of-the-art financial crime monitoring systems. We have also built relevant awareness about compliance into all levels of the institution, and provided assurances to all internal stakeholders as to the robustness and effectiveness of our remediated compliance function through regular and ongoing anti-money-laundering visits to all branches. Above all, we have infused transparency and integrity into all forms of our operation, as well as into our communications with all stakeholders and regulators.

In terms of compliance, what marks the Bank of Cyprus out from its competitors?
As well as adhering to local laws and regulations, we have engaged in this spectacular transformation by adopting the best international standards and practices. We consciously elected to transform our culture rather than just our compliance framework – this is what marks us out from our competitors not only in Cyprus, but also in South-East Europe. We have adopted policy provisions from robust international frameworks, such as the USA Patriot Act, and have put in place restrictions only found in highly governed jurisdictions.

In promoting our new transparent outlook, we are the only institution in the region that has made our corporate governance framework and all of our compliance policies available to the public. We have also made the values that shaped our strategic direction publicly available.

What’s more, the Bank of Cyprus is the only institution in the country that has performed a gap analysis and has adopted all provisions of ISO 19600 (compliance) and ISO 37001 (anti-bribery). Today, we are the only institution in the region that is concurrently governed by three different corporate governance frameworks (the UK Corporate Governance Code, the Corporate Governance Code of the Cyprus Stock Exchange, and the Central Bank of Cyprus’ Governance Management Arrangements Directive) in four different European jurisdictions (Cyprus, Ireland, the UK and the EU).

What impact has this transformation had on the Bank of Cyprus’ reputation?
Banking is an industry based on trust and, as such, reputation and credibility are core objectives that should always be met. For this reason, the basis of our remediation since 2013 has been to re-establish our good reputation. The only way to achieve such an objective is to pursue a values-based strategy that aims for a cultural transformation. Culture is what reflects the reputation of any organisation.

What are Cypriots looking for when choosing a bank? What factors must they take into account?
Since the events of 2013, Cypriots’ preferences when choosing a bank to carry out their financial affairs have shifted. Prior to that time, almost all citizens selected the banks with the most aggressive investment strategies and highest returns.

After the harsh and unfair measures applied in 2013 – which included the bail-in of the Bank of Cyprus – Cypriots gradually realised that credibility adds more value to a financial institution than unsubstantiated and unreasonably high deposit and investment returns. We have learned the lessons of that difficult period and built transparency into every aspect of our business as part of our remediation strategy. This has allowed us to regain the trust of our stakeholders and re-establish our reputation by delivering on what we believe Cypriot customers now want from their bank.


Value of the European troika’s bailout agreement with Cyprus


Value of the emergency liquidity assistance repaid by the Bank of Cyprus

To what extent has Cyprus’ economy recovered since the 2013 financial crisis? Is there still progress to be made?
Following the bailout by the European troika and the bail-in of the banking sector in 2013, Cyprus’ economy has proven once more its resilience in challenging conditions. In just three years, the country managed to take the necessary structural and fiscal measures to successfully exit the memorandum of understanding signed with the European troika. What’s more, the banking sector has significantly and effectively deleveraged itself, with debts now equating to the level of three times the country’s GDP, compared with around eight times in 2012. The one thing that remains to be rationalised is the level of non-performing exposures, although significant improvements have been recorded since 2013.

The short-to-medium-term strategy of the country’s economy needs to effectively address the following issues. First, significant structural and cultural reforms must take place in the government system (primarily within the judiciary) to make its governance more robust and its operation more efficient in the area of issuing title deeds. The country must also demonstrate a solid commitment to effectively combatting financial crime. Cyprus has to keep ahead of all regulatory developments in this area, with all relevant authorities needing to commit to the best international standards and practices if past perceptions are to be overcome.

The corporate governance of state-owned and semi-governmental organisations must improve significantly to enhance the credibility, as well as the quality, of the services offered by various governmental bodies. On a wider scale, beneficial exploitation of the hydrocarbon reserves must be safeguarded – both on a financial and political level – given the continual hostile, provocative and illegal actions of Turkey in the region. The government should also work to digitally transform the country’s economy, as this will provide Cyprus with a competitive advantage.

Finally, the infusion of business ethics at all levels of the corporate world is the only way to facilitate its necessary cultural transformation. All of these changes should be implemented as a matter of urgency to facilitate further recovery and ensure that an economic crisis, such as the one that took hold in 2013, does not come to pass once more.

How is the Bank of Cyprus preparing for any economic challenges the future may hold?
The Bank of Cyprus has always been, and will continue to be, a pioneer in South-East Europe, successfully addressing all of the challenges previously described. Our position today as the leading organisation in terms of model corporate governance is testament to the strength of our business and our robust economic position – no matter what the future holds.

Moreover, we are the only institution in the country that has actively engaged in a multimillion-dollar project to fully digitalise our operations, and we hope to continue to pave the way for other financial institutions to follow in our footsteps.

Why banking is often a balancing act

Modern-day customers have more factors to consider than ever before when choosing their financial services provider, ranging from technology and security to customer service and strategy. The industry’s service offering continues to grow and develop at a rate of knots, bolstered by powerful new tools such as robotics, big data, artificial intelligence, blockchain and cloud technology, which will continue to be disruptive for years to come.

Meanwhile, online banking is becoming increasingly sophisticated and, along with mobile banking, has radically transformed the way clients manage their finances. A push for technological innovation, however, must be counterbalanced by the development of creative and holistic strategies in order to safeguard clients’ money in the face of cybersecurity risks.

Privacy and excellence in customer service are the two pillars that support all of Compagnie Monégasque de Banque’s initiatives
and projects

At Compagnie Monégasque de Banque (CMB), we aim to strike the perfect balance between technical developments and security advances by investing in improving our customers’ experience while ensuring their funds are protected. We have actively embraced major technological changes and have recently undertaken concrete steps to be more digitally mature through the implementation of innovation-led solutions throughout our administrative and IT departments. For instance, we have expanded our service range with the acquisition of a new client portfolio from a bank in Monaco’s financial centre, which was successfully integrated into our processing systems and procedures. The deal increased our assets under management by 10 percent.

Safeguarding security
CMB recently completed the migration of its central IT system to an integrated information system dedicated to private banking. This new platform is at the forefront of the market with regards to its technological capabilities. As well as providing access to services in a manner that meets the high demands of our business, the platform offers full traceability in terms of compliance and the scalability required to meet the challenges faced by private banks.

Additionally, we have entered into a new partnership in the field of electronic payment systems, following a change of lead manager for our representatives at the Visa-Carte Bleue consortium. This deal leaves us better placed to keep our finger on the pulse of technological developments in payment methods. Today, we are proud to offer one of the most secure platforms currently available, which is supported not only by cutting-edge technological tools but also by our illustrious employees.

Privacy and excellence in customer service are the two pillars that support all of our initiatives and projects. Our exceptionally low staff turnover rate enables us to develop long-term relationships based on trust and respect with our clients. These relationships can only last if we provide our clients with the highest level of confidentiality and security, leading us to constantly seek out tailored and innovative solutions to mitigate risks.

With this in mind, we recently created a new position – chief information security officer (CISO) – to monitor our security policies, ensure that CMB protects its information capital and reduce conduct risk within the organisation. While all our employees, no matter what their position within CMB is, are offered courses on cyber risk management, we felt it was important to introduce a new managerial figure who can ensure best practice is continually adhered to with regards to cybersecurity.

Part of our new CISO’s role will also include staying up to date with legislative developments and making the necessary IT changes to ensure we are compliant. For example, Monaco recently issued a law requiring strategic players to adopt best-in-class measures to protect their clients and data against cybersecurity threats. A specific authority, AMSN, has been created for that purpose. We fully support this legislation and will work diligently to ensure all of our responsibilities are met.

Heart of the business
Our technological developments are underpinned by a commitment to operational excellence within every aspect of CMB’s business. This is evident both in our day-to-day operations and our long-term strategy, and is achieved through a focused approach by our staff. They work diligently to support our clients through direct personal contact and behind the scenes; always with the spirit of teamwork and collaboration that we value greatly.

At CMB, we strongly believe our back-office functions have a strategic role to play in supporting our everyday activities and can make a decisive contribution to our overall quality of service and delivery. For this reason, we ensure that we recognise, support and reward these team members alongside our front-of-house staff.

For example, in 2017 we created a ‘change management’ unit to provide internal training and guidance for the personnel involved in conducting major transformational projects. We view this as a long-term investment in empowering our staff with knowledge and maintaining operational excellence.

Illustrious clientele
As a private bank, we recognise that ultra-high-net-worth (UHNW) clients have needs and expectations that extend above and beyond those of the average customer. That is why we are committed to surpassing the traditional definition of customer service. Commitment, innovation, integrity and discretion are some of the core values that define CMB and are expected by our UHNW clientele.

This segment of people may also require specific products, such as dedicated funds. For this reason, we have built on our product offering and are now the main player in Monaco’s mutual funds market. We have launched and continue to manage a large proportion of the 60 Monaco funds authorised to date. Moreover, CMB is able to offer easy access to financial markets, with opportunities to trade, for example, non-deliverable forward currencies.

Monaco’s marketplace is highly competitive, boasting more than 30 banks and 60 asset and wealth management companies on a territory of two square kilometres

Catering for UHNW clients leads us to work closely with many family offices. Our unique positioning and product offering enable us to be a partner of choice for single and multi-family offices in Monaco, allowing us to accompany wealthy families and independent wealth managers at every step of their investment journey.

We understand that these consumers often pursue a globally nomadic lifestyle. As such, it is imperative that we provide our clients with top-of-the-range mobile and online banking solutions, enabling them to easily edit detailed portfolio statements available in several languages via our e-banking platform. Additionally, they are able to manage their portfolios and make transfers on the go via the CMB Mobile Banking app for smartphones.

With regards to meeting UHNW clients’ expectations, we recognise that Monaco’s marketplace is highly competitive, boasting more than 30 banks and 60 asset and wealth management companies on a territory of two square kilometres. For this reason, it is all the more important that we maintain extremely high standards in order to retain our position as one of the leading private banks in the principality.

We have garnered this reputation thanks to our excellent capital ratios and emphasis on personal relationships. CMB’s balance sheet is second to none with regards to its exceptional solidity. Furthermore, the fact that CMB has governance and decision-making bodies based in the heart of Monaco is a distinctive strength: this enables the highest degree of responsiveness and the ability to adapt to clients’ expectations in a rapid and efficient manner.

Looking ahead
As we look to the future for both our business and the banking sector, we remain vigilant of the many risk factors that continue to threaten the latter in the aftermath of the 2008 financial crisis. Low – even negative – interest rates are an obvious threat, as well as cyberthreats, due to the ever-evolving nature of technology.

In the next few years, we believe digital disruption and competition will intensify. In this new environment, those industry players with a traditional banking culture may struggle to adopt a digital mindset. Developing and retaining the right talent to not only face these major risks but turn them into opportunities will be absolutely necessary. CMB believes it is of the utmost importance for private banks to embrace major technological developments as opportunities to further develop and innovate.

In the midst of an onslaught of innovation, however, operational excellence should not be forgotten. It is vital to remember that the responsiveness of the back office and the ability to process complex investment requests and keep error rates to a minimum are crucial for the continued functionality of the business. By balancing these aspects, as CMB does, private banks will ensure that they remain stable and profitable in the years to come.

A brief history of the international gold standard

One enduring theory, known as ‘metallism’ or ‘bullionism’ (from the Latin ‘to melt’), holds that only the metal in a coin is real money. Money should consist of scarce, precious metal, or at least be backed by it. As US banker J P Morgan put it in 1912: “Money is gold, and nothing else.” In this picture, dollar bills aren’t ultimately worth the paper they are printed on, and cyber currencies are presumably right out.

Perhaps the exemplar of this approach was Isaac Newton. Although most famous for discovering the law of gravity, he was also a practising alchemist. He never managed to turn lead into gold, but he did find a way to transmute silver into gold – and in doing so, launched the world economy onto what became the international gold standard.

Following some kind of nervous breakdown during middle age (possibly brought on by mercury poisoning from his alchemical experiments), Newton had career-shifted into a position as warden (and later master) of the Royal Mint. England at the time operated under a bimetallic regime, with both low-denomination silver and high-denomination gold coins, which could be exchanged at a set rate. This meant the mint in the Tower of London had to maintain a tricky balance between the market rates of the two metals and the formal exchange rate, since otherwise it would open up arbitrage opportunities.

The international gold standard, which Newton inadvertently initiated, was one of the longest-running financial institutions in history

The machine-produced gold guinea coin, for example, weighed about a quarter of an ounce and was worth one pound sterling, or 20 silver shillings. In 1717, however, Newton announced in a report that, based on his studies, the correct number was 21 shillings. The number 21 was like a fundamental constant of nature, which related value to a mass of metal as surely as the law of gravity related mass and gravitational force through the gravitational constant. However, the economy had a trick up its sleeve.

In the eyes of merchants and traders around the world, Newton’s ratio slightly favoured gold over silver. Gold coins were therefore sold to buy silver coins, and these were melted and exported. In theory, the market price of gold would fall as it became relatively abundant compared with silver; Newton predicted that any discrepancy would be erased over time. Instead, what happened was that the market price of silver adjusted but remained volatile, and the price of gold stayed the same (perhaps because the attractive, machine-produced gold coins were seen as superior to the shopworn silver currency).

Gold standard
Guineas therefore retained their face value of 21 shillings, even though the unit referred to a weight of silver. Newton had transmuted silver into gold (or is it the other way round?) by accident. Thanks to his intervention, the pound sterling (named for a pound of silver) switched de facto from a bimetallic standard to a gold standard – which made everything much simpler – and remained there, with wartime interruptions, for the next 200 years. In 1821, a new coin – the sovereign – was introduced, containing 95 percent of the gold in a guinea, thus making it worth exactly one pound sterling.

The international gold standard, which Newton inadvertently initiated, was one of the longest-running financial institutions in history. It was successful because, being based on an equation between value and mass like an economic law of gravity, it was global and easily shared, so everyone knew where they stood.

The sense of stability granted by the gold standard was captured by the Austrian writer Stefan Zweig in his autobiography, The World of Yesterday, in which he wrote how “the Austrian crown circulated in bright gold pieces, an assurance of its immutability. Everything had its norm, its definite measure and weight”.

It is therefore ironic that the mass of this standard actually referred to the wrong metal – silver rather than gold – and hints at the arbitrary, socially constructed and fragile nature of the system. What gave the apparently secure, risk-free asset its stability was not the metal, but the belief – supported where necessary by military force – in a theory of money and value.

Nixon shock
While the gold standard helped protect the currency from the vagaries of politicians, linking the quantity of money to a finite commodity meant the money supply did not adjust appropriately to the size of the economy and left it vulnerable to changes in gold supply. After a large find or improvement in mining technology, the money supply might become too large, causing inflation. Alternatively, it might not keep up with the pace of economic growth or spending, causing gold to become too expensive and resulting in deflation and recession.

The gold standard was finally abandoned on August 15, 1971, when – in need of funds to finance expenses like the war in Vietnam – President Richard Nixon unilaterally imposed wage and price controls, an import surcharge, and halted the dollar’s direct convertibility to gold, in an event that became known as the Nixon Shock.

Today, gold and other precious metals play a peripheral role in global finance, and yet our attitudes towards money seem shaped by the gold standard era. The desire for an inflexible standard lives on, for example, in the form of German ordoliberalism, a rule-based approach to economics emphasising things like monetary stability, low inflation and balanced budgets, which has influenced the EU and the European Central Bank.

Finance still lives in a world of alchemy, but the alchemists now toil in banks rather than laboratories. Vitas Vasiliauskas, the head of Lithuania’s central bank, put it in 2016: “We are magic people. Each time we take something and give to the markets – a rabbit out of the hat.” Newton might have agreed.

Sri Lanka’s slow but steady economic recovery

In terms of the national economy, 2018 was a year to forget for Sri Lanka. During this time, the country missed a prime opportunity to take advantage of favourable economic conditions in order to establish long-term gains. Alongside internal political challenges, the country also received scrutiny from international creditors. Subsequently, its banking sector was greeted with a grim economic outlook for 2019.

While there are several issues that still need to be addressed, Sampath Bank has identified some glimmers of hope. With these opportunities as our focus, the bank plans to push through the current challenges and focus on the immediate horizon and a brighter future. Our priority is still our customers, and our emphasis on sustainable growth has allowed us to make the best of a challenging situation.

Sampath Bank leverages disruptive technology to meet Sri Lanka’s growing demand for faster, simpler and more responsive banking solutions

A tumultuous year
Two years ago, the situation for Sri Lanka looked far better. Despite the strong growth momentum that was apparent at the start of 2018, the country failed to capitalise on a positive economic environment in order to lock in permanent gains. Meanwhile, over the course of the past year, the global economy gradually ran out of steam. With unexpected shifts in trade and investment patterns triggering a general slowdown across both advanced and emerging economies, Sri Lanka missed the brief window of opportunity for economic recovery.

Against this backdrop, the expected recovery of Sri Lanka’s agriculture sector did not materialise. Instead, the woes of the industry deepened amid a sizeable decline in output caused by bad weather for the second consecutive year (see Fig 1). What’s more, contributions from the country’s other key sectors either declined or remained flat. To add to these challenges, Sri Lanka’s mounting debt burden, widening trade gap and currency pressure from the weakening rupee meant that only modest GDP growth of just above three percent was possible in 2018.

Inflationary pressures continued amid upward adjustments to domestic petroleum prices, alongside increased pressure on domestic food supplies. Meanwhile, following the deterioration of the internal political climate during mid-October 2018, the country’s sovereign rating was downgraded by all three major agencies. Each one issued several concerns over external financing risks.

But despite these challenges, it is worth commending the government of Sri Lanka. The state remained firm in its commitment to maintaining macroeconomic stability under an IMF programme. What’s more, several positives could be seen in the ongoing fiscal consolidation agenda, the most notable being the new Inland Revenue bill enacted earlier in the year. The bill aims to broaden the direct tax base and rationalise the existing income tax structure.

Firming up the foundations
In 2018, having witnessed an extended period of robust growth, the local banking sector hit the mid-point of the country’s economic cycle. All across the sector, asset growth continued – albeit at a slower pace amid a gradual tapering-off of demand for credit. Meanwhile, macroeconomic pressure grew due to sector-wide impairment charges.

With non-performing loans rising sharply compared with the previous year, the industry-wide gross non-performing asset ratio increased to 3.4 percent as of December 2018, up from the 2.5 percent reported at the end of December 2017. This significant deterioration in asset quality led Moody’s to renew its negative outlook for the Sri Lankan banking sector.

Nonetheless, the banking sector continued to operate with liquidity buffers that were either at or above the minimum level required. The statutory liquid assets ratio (SLAR) also remained above the required level, while all currency liquidity coverage ratios were maintained well above the minimum requirement of 90 percent. It is clear that we are now operating in a completely different environment to the one we experienced just a few short years ago, with 2018 undoubtedly being one of the most testing periods in recent history for the Sri Lankan banking industry.

Responding with a comprehensive set of tactical strategies, Sampath Bank not only adapted remarkably well, but also continued to thrive in this evolving macroeconomic landscape. The bank recorded a solid performance amid tough conditions, with all key indicators for 2018 showing growth that outpaced the industry average by a significant margin.

The bank’s total asset base reached a historic landmark, crossing the LKR 900bn ($5.1bn) mark to end up at LKR 914.2bn ($5.2bn) by the year’s end. This was thanks to a selective lending strategy aimed at deepening the bank’s penetration into high-growth sectors of the economy. This growth reflects a 15 percent year-on-year increase, compared with the industry-wide average asset growth of 14.6 percent for the same period.

Fuelled by this above-average performance, the bank’s market share in terms of total assets improved from 7.73 percent in 2017 to 7.75 percent by the year-end, while gross income for 2018 hit an all-time high of LKR 115bn ($650m). Despite an increase in impairment costs, the bank also tabled strong profit growth, as evinced by the impressive 10.5 percent increase in profit before tax, from LKR 16.6bn ($94m) in 2017 to LKR 18.3bn ($104m) in 2018. Bolstered by strong earnings, we also maintained our long-standing track record of returning capital to our shareholders by keeping the bank’s dividend payout ratio above 36 percent for the ninth consecutive year.

The bank’s capital position was maintained in line with Basel III requirements, with LKR 12.5bn ($71m) raised by way of a rights issue, and a further LKR 7.5bn ($42.6m) by way of a debenture issue to firm up Tier 1 and Tier 2 capital respectively. Moreover, the bank’s SLAR remained well above the required level throughout the year.

Sampath Bank also achieved several other milestones, the most notable being its appointment to the MSCI Frontier Market 100 Index in November 2018 as part of its semi-annual review. What makes this event particularly significant is that Sampath Bank has now become the first local bank – and only the second Sri Lankan entity – to be appointed to the index.

Eyes on the prize
The bank’s earnings growth and strong capital position have allowed us to maintain our momentum. In order to differentiate Sampath Bank in the market as being truly consumer-centric, we went beyond our conventional role and placed a special emphasis on supporting customers who were affected by the prevailing economic conditions. Our aim is to allow these customers to meet their commitments in a sustainable manner. What we have found most rewarding about these efforts is the increased trust our customers have shown in the Sampath brand, which in turn has enhanced their loyalty to the bank.

We have also made steady progress towards achieving our ambition to become Sri Lanka’s number one digital bank. To do so, we continue to leverage disruptive technology in order to meet the country’s growing demand for faster, simpler and more responsive banking solutions. True to our reputation as one of the early adopters of new technology, last year we increased our investment in new software, including blockchain technology, which will allow us to develop dynamic front-end applications and create a unified banking experience across all our channels.

The launch of the Slip-less Banking App, the iGift platform and the Virtual Teller Machine are all industry firsts and a testament to Sampath Bank’s leading digital capabilities. These applications have also raised the profile of Sri Lanka’s financial services sector and demonstrate that the country is on par with international standards.

As further affirmation of our digital prowess, Sampath Bank has won several awards. These include the coveted title of the most innovative bank of the year at the LankaPay Technnovation Awards 2018 and the best digitally enabled product/service in the financial sector at the SLT 01Awards.

The bank’s digital platforms, together with its network of 229 branches and 421 ATMs, have enabled it to widen its reach across Sri Lanka. Our actions have always been motivated by the core belief that it is Sampath Bank’s duty to assume a strategic role in satisfying the funding requirements of the Sri Lankan people, and to help them fulfil their financial goals. Today, the bank serves more than three million customers via our portfolio of financial products and services.

Going forward, we will intensify our focus on supporting the nation’s journey towards becoming a middle-income economy by 2020. We will reinforce this commitment through a bold and proactive approach aimed at sharpening the alignment between our business model and the needs of our customers. Our client-centric focus and industry-leading innovation will continue to underpin our efforts to create an even more agile and responsive bank.

Furthermore, we will continue to be led by a multi-pronged business strategy in order to better target our strategic investments across a larger base while delivering an unparalleled customer experience in a timely, efficient and economical manner. Through all the ups and downs of the Sri Lankan economy, Sampath Bank is committed to supporting customers through every challenge they face, and will be ready to capitalise on the economic opportunities of the future when they emerge.

Eastern Europe’s emergence onto the global financial stage

Back in the 1980s, Bulgaria’s economy was based exclusively on the state owning all means of production. By the early 1990s, however, the government began an all-important shift to a market-based economy. To do so, it introduced a programme for privatised ownership and restructured credit, banking and monetary institutions.

A decade later, the large-scale privatisation of numerous industries had successfully taken place and annual inflation had been lowered. During those 10 years, Bulgaria’s restructured economy made remarkable progress – a development that was aided by its acceptance into the EU in 2007.

In the years since the global financial crisis, Bulgaria has enjoyed further economic growth – an impressive feat, given the precariousness of the global landscape. One key factor has been a vital increase in wages, which has driven up domestic consumption as citizens splash out on new cars and household goods. Against this backdrop, Bulgaria’s banking sector continues to go from strength to strength, and shows signs of positive growth for the year ahead too. World Finance spoke with Petia Dimitrova, CEO and Chairperson of the Management Board at Postbank, to find out more about the sector’s ongoing success.

How did Bulgaria’s banking sector fare overall in 2018?
We can say with certainty that 2018 was a strong year for the banking sector in Bulgaria. The country’s banks’ profits increased at a double-digit rate, all business segments are developing positively, and the quality of the loan portfolio continues to improve. We interpret this as positive news, not only for the sector but also for the economy more generally. It is the result of increased consumer and business economic activity, and shows promise for the implementation of new projects.

In the years since the global financial crisis, Bulgaria has enjoyed further economic growth – an impressive feat, given the precariousness of the global landscape

Last year was the most successful in Postbank’s history – we continued our organic development, and we registered record-high financial results and growth above the market average. We owe it all to our customers and employees, as well as the strong support of our shareholders, to whom I am especially thankful for their professionalism and motivation.

What are your expectations for the Bulgarian economy in the year ahead?
We expect 2019 to be another good year for the Bulgarian economy. The Q1 2019 data supports our optimism: the GDP growth rate increased to 3.4 percent on an annual basis and to 1.1 percent on a quarterly basis. The main driver of this was consumption and investments, while some major infrastructural projects have been launched, too. The financial sector is also contributing by lending to viable business projects, a move that supports all other areas of the economy in turn.

What can we expect from Postbank in 2019?
Postbank’s main priorities in 2019 will be to continue growing and to offer increasingly innovative products and services in order to meet changing consumer expectations. We are confidently following the road to digitalisation in order to provide the optimal level of customer satisfaction – this is the main focus of our long-term strategy.

We are actively developing all our digital channels as part of our digitalisation mission in order to encourage further impressive growth. We are also working on several interesting projects that will be launched this year. Lastly, we expect our bank to be recognised again as the market leader in innovation.

How does Postbank hope to continue driving the Bulgarian economy forward?
As a socially responsible company, another priority for us is investing in the development of value-added social projects. We are implementing one of them in partnership with Endeavor Bulgaria – one of Europe’s most renowned entrepreneurial networks. This programme provides comprehensive support – including know-how, mentorship and financing – for companies attempting to scale up. By supporting projects such as these, we are investing in the development of Bulgaria’s business environment.

We believe this is the right path to allow us to grow with other Bulgarian companies and to make our economy more competitive globally. We will also continue implementing another strategic educational project with SoftUni, one of the most innovative academies in Bulgaria. In this partnership, we encourage the education of future digital experts in Bulgaria and reach out to them to help them realise their ideas with us.

At Postbank, we always set ambitious goals; being able to achieve them and even go beyond them is an extremely positive thing. This is possible because we have a vision, a strong team, extensive experience and – most importantly – many customers who see us as a trusted and preferred partner in the realisation of their life plans.

The battle to sustain the Mexican economy

In last year’s presidential election, Andrés Manuel López Obrador campaigned on the back of an ambitious, values-driven platform that promised to transform Mexican society, take action on impunity and improve citizens’ quality of life. It certainly convinced the country’s electorate to vote in his favour, with the leftist politician receiving 53 percent of the vote – a historic landslide victory.

Several months on, however, and Obrador is facing huge problems in sustaining the Mexican economy, with his desire to deliver on some of his campaign promises coming at a substantial cost to the country’s tight budget. In order to afford them, the government has been forced to make cuts to the education and health sectors, as well as to many other planned and necessary expenses, weakening areas that are already in dire need of investment.

A costly approach
The national budget has been further stretched by Obrador’s decision to cancel the construction of a new airport outside Mexico City – a project he claimed was plagued by corruption. The president has instead elected to build an entirely new airport in a different location, providing another heavy blow to the country’s finances.

The Obrador administration’s controversial policies have fostered distrust in some international markets, prompting a reduction in foreign direct investment

Rather than focusing on traditional industrial sectors, the new administration has chosen to centre its attention on petrol and gasoline production. This is unwise, as Mexican oil production has been decreasing for years due to poor-quality research into reserve locations and crumbling infrastructure. Obrador has stated that he plans to develop a new refinery, Dos Bocas, in the state of Tabasco – which would be the seventh in the country – instead of improving infrastructure and strengthening the finances of Pemex, the state oil company. While this policy has been judged to be unviable and unprofitable by several internal and external entities, the president insists on its construction for political reasons. The cost of this project will increase pressure on both the national budget and on Pemex, which has funding challenges of its own.

Similarly, Obrador has chosen to break with many of the reforms put forward by his predecessor, Enrique Peña Nieto – most notably, Peña Nieto’s decision to introduce the continual evaluation of teachers. While this policy would ultimately have led to promotions and salary increases, Obrador quickly repealed the reform, at a considerable cost to the education sector. Funding cuts to universities, research projects and scholarships have only exacerbated the situation.

Moreover, in a bid to reduce public spending and improve efficiency, the new president has cut thousands of jobs in the third sector. Unfortunately, these savings have created pinch points and inefficiencies in many agencies. Even Obrador’s Tren Maya railway project – the flagship infrastructure proposal designed to boost underdeveloped areas of the country – presents a series of ecological, social and financial issues.

Persisting problems
Government ‘incentives’ – otherwise known as bribes or corrupt payments to officials – have been a fixture of Mexico’s political landscape for many years. In his presidential campaign, Obrador promised to eliminate all corruption, much to the approval of the electorate.

After almost six months in power, though, he has not revealed a plan for this. To make matters worse, there is no feeling among the population that corruption is decreasing. Meanwhile, the country’s low security and high crime rate persists, despite pledges from all candidates to tackle the issue. This is admittedly a very demanding and difficult task to deal with, but time continues to pass and the problem has only worsened, with most sectors complaining about the government’s current approach.

With regards to business impact, the Obrador administration’s controversial policies have fostered distrust in some international markets, prompting a reduction in foreign direct investment. As a result, the Mexican economy contracted 0.2 percent in Q1 2019. While the foreign exchange rate has remained stable, the stock market experienced a setback that it has yet to recover from. It’s true that periods of financial pressure and crisis usually present investment opportunities, but given the circumstances, it may be an appropriate moment for companies to hedge their positions.

Any administration would have faced great challenges in improving public finances, reducing insecurity and tackling corruption in Mexico. However, Obrador’s government has consistently failed to act in the national interest, as demonstrated by the president’s decreasing popularity in opinion polls. His reputation will suffer further if he continues to govern in this way and make such detrimental decisions.

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Tackling the global water shortage

In fewer than six years, 1.8 billion people will live in countries that cannot meet the rising demand for water, according to the United Nations. Two thirds of the world’s population, meanwhile, will live in areas with stressed supplies of freshwater. Moreover, a third of the world’s biggest groundwater systems are already in distress, a 2015 study by the University of California, Irvine, and NASA found.

As the global population rises and industries use up more and more of the world’s water, the gap between available supplies and growing demand continues to widen. By 2030, the World Economic Forum expects the shortfall to reach 40 percent.

Water, of course, is fundamental to life. But it is also key to economic stability

These figures are worrying on many levels: water, of course, is fundamental to life, but it is also key to economic stability. For numerous industries – including agriculture, energy, apparel and manufacturing – water is a critical resource. Without finding ways to boost efficiency and reduce usage, the economic cost of the water crisis will be devastating.

Innovation on tap
The World Economic Forum regularly lists water security as one of the top threats in its annual Global Risks Report. “Globally, water-resource management and improved water supplies are critical elements in growing economies and reducing poverty,” Jade Huang, a portfolio manager at the Calvert Global Water Fund, told World Finance. In fact, the World Bank found that countries across the Middle East, North and Central Africa, and East Asia could each lose up to six percent of their GDP by 2050 as water scarcity negatively impacts agriculture, health and income.

From clothing makers to drinks brands, nearly every industry is impacted by the risks associated with declining water reserves. In 2018 alone, water-related financial losses reached $36bn at companies involved in an analysis by CDP, a non-profit that encourages companies to disclose their environmental impact.

Emerging technologies are beginning to address the issues that communities and businesses face regarding water, including by improving quality, boosting efficiency and reducing consumption levels. For instance, innovation in nanotechnology, filtration membranes and anaerobic treatment technology aims to enhance water quality in areas that struggle to source enough clean water. In wastewater treatment, the process of ‘zero liquid discharge’ seeks to remove all liquid waste from systems in industries such as oil and gas, petrochemicals and mining by using a range of technologies.

Breakthroughs are also occurring in older technologies, such as desalination. For instance, research has shown that graphene, a versatile carbon-based material discovered in 2004, can be used to transform salty ocean water into freshwater. Smart-metering technology and irrigation management can also help businesses and farms to better understand and control their water usage.

The agriculture industry is the largest consumer of water globally, accounting for 70 percent of all usage. Johannes Cullmann, Director of Climate and Water at the World Meteorological Organisation, told World Finance the industry is using technology to better manage irrigation solutions. “There is a whole industry that is trying to optimise technology and management systems for irrigation for an improved crop production,” Cullmann said.

The infrastructure gap
While technological innovation is boosting industry efficiency and increasing water supply, many issues still exist at the level of city planning and infrastructure management. In developed nations, this is evidenced by the burst pipes and high leakage rates that come with ageing infrastructure networks.

For instance, in England and Wales, Victorian-era plumbing results in leaks of more than three billion litres of water every day. In London, this, along with the growing population and pressures caused by climate change, means that new sources of water will be needed to meet the city’s demand from 2025, The Telegraph reported.

“All over Europe, piping supply and also… drinking water and sewage systems are [ageing],” Cullmann said. Although this problem is nothing new, it needs constant investment and must be addressed in the coming years. “It’s a big financial impact,” he said. Emerging economies, meanwhile, have a pressing need for new water infrastructure systems as their populations grow. Together, Huang said, these structural needs create a “long tailwind” for spending on water infrastructure. “As developed and emerging economies continue to expand, corporations’ investment and upgrades to their water equipment should also continue to meet increased demand,” Huang said.

Furthermore, there is a mounting need for wastewater treatment infrastructure. Jean-Louis Chaussade, the CEO of French utility firm Suez, told the Financial Times that companies will have to begin relying on wastewater recycling or desalination plants as governments restrict their ability to take water from the ground. “Governments are saying to industries: ‘You can operate here but you can’t take water from underground’,” he said. The market for industrial water services, which was valued at €95bn ($107bn) in 2017, is expected to grow at a rate of five percent per year, Chaussade said.

According to Cullmann, the current rate at which wastewater goes directly into the ocean is a “scandal”. He added: “There is a really big need for investment in sewage treatment, and I think there’s going to be a big market [for wastewater treatment] in the next 20 [to] 50 years.”

Taking responsibility
Responsible investing is no longer a niche market, Huang said: “Investors see that sustainability issues can also be financially material issues that impact shareholder value.” As attitudes towards environmental, social and corporate governance (ESG) issues shift, a number of companies in water-intensive industries are working to clean up their act: drinks brands including PepsiCo and Diageo have set targets to reduce water usage, monitor wastewater and improve efficiencies throughout the supply chain, while beauty brand L’Oréal reduced the group’s total water consumption by 28 percent between 2005 and 2017.

Elsewhere, jeans-maker Levi Strauss has developed a process that reduces water usage in denim finishing by 96 percent, while cement-maker LafargeHolcim has reduced freshwater use by 19 percent in the last four years. Lastly, Brazilian petrochemical company Braskem is working to incentivise executives to improve water usage by providing awards when the company achieves targets.

And yet, it is clear that more work must be done: despite the steps taken by a handful of companies, CDP found there was an almost 50 percent rise in the number of corporate firms reporting higher water withdrawals in 2018. Moreover, less than half had set water targets (see Fig 1).

Globally, ESG issues are becoming an increasingly important consideration. “We view this as an opportunity for global corporations to demonstrate leadership in water efficiency and re-use, as they realise first hand the importance of a resilient supply chain and resource efficiency in the face of longer, and more severe, droughts and floods,” Huang said.

As well as providing long-term shareholder value, addressing water quality and scarcity through investments has measurable outcomes. According to the World Health Organisation, every $1 invested in water and sanitation provides an economic return of $4.30 through lower medical costs, greater productivity and fewer premature deaths. “Water investment continues to be a promising long-term global opportunity as the need for technologies and infrastructure to clean and deliver potable water is increasing worldwide,” said Huang.

Muddying the waters
Although the water industry requires big investments in the coming years, the economics of water is complex. While the UN has declared the commodity a human right, in some places the price of a bottle of water technically exceeds the price of oil.

Adam Smith, often described as the father of modern economics, struggled to understand why the value of water wasn’t higher than it is. The diamond-water paradox, as it became known, describes the price differential between diamonds, which are scarce but not necessary, and water, which is more plentiful but vital to life.

Water is also political, and as reserves become increasingly scarce, this aspect will only be heightened. “The questions around who has water and who doesn’t – or who controls access to clean water and what it costs – raise issues with deep economic, political and social implications,” Huang explained.

Almost every major river system on the planet is shared by two or more nations, and groundwater reserves also stretch across borders. This makes water a source of potential international conflict, and a matter of national security going forward, Huang added.

What’s more, water is highly personal. Cullmann described seeing pushback from communities who would rather pay a higher price for water and rely on local resources than connect to a bigger supply that provides water at a cheaper rate. “It’s an emotional thing, where you get your water from,” he said, as water is weaved into traditions and belief systems. Huang added: “Water is clearly not a standalone issue, but must be considered in relation to commerce, land use, human rights, environmental protection and climate change.”

Despite the complexities involved in the water industry, investments will be critical in driving innovation and closing the gap between available supplies and demand.

Water is the source of life, and without it, just about everything humans have built would fade away. Gold and diamonds may be more expensive than a bottle of water, but without water, they’re worth nothing.

Financing the world’s refugee camps

The collapse of the Somali Government displaced hundreds of thousands of people, sending them fleeing to safety across the border. Many ended up in neighbouring Kenya, at one of three newly constructed refugee camps (Dagahaley, Hagadera and Ifo) in Dadaab, towards the east of the country. That was in 1991; many have still not left (see Fig 1).

While refugee camps are intended to be temporary settlements, just how temporary they end up being is difficult to foresee. In Somalia, the ongoing civil war, combined with a series of natural disasters, has prevented many citizens from returning home. The situation has meant that a settlement originally occupied by just a few nomadic Somali farmers has become a permanent abode for more than 210,000 refugees.

Despite its huge growth, Dadaab is only the third-largest refugee camp in the world – both Bidibidi in North-West Uganda and Kutupalong in Bangladesh have since overtaken it. As camps expand and become more established, their roles also shift somewhat. More than just shelters, they become homes – whether wanted or not.

When refugees are excluded from formally contributing to the national economy, inefficiencies emerge that prevent them from achieving their potential

When camps are stuck in a state of semi-permanence, it can be difficult to develop them sufficiently to meet residents’ needs. In terms of infrastructure, many settlements lack even the most basic facilities and, particularly for longer-term refugees, transport and employment opportunities remain wanting. And with the camps left in limbo, often too are their inhabitants.

Growing pains
The expansion of some refugee camps around the world has been staggering. In 2011, the Dadaab camp was estimated to have a population of around 500,000 people. Although this number has now decreased, other refugee camps continue to grow: in Cox’s Bazar, Bangladesh, the ongoing humanitarian crisis involving the Rohingya people of Myanmar has seen the Kutupalong camp expand rapidly.

Such growth should come as no surprise. The UN High Commissioner for Refugees (UNHCR) estimates that there are 68.5 million forcibly displaced people worldwide, with 44,400 individuals having to flee their homes every day as a result of conflict or persecution. Well-established urban areas would struggle to manage this kind of population growth, let alone makeshift camps with limited infrastructure.

“Substandard shelters are one [of] the major issues in all camps,” Sami Mshasha, Director of Communications at the UN Relief and Works Agency, told World Finance. “The percentage of vulnerable refugees living in substandard shelters is growing. More than 40,000 shelters, comprising over 200,000 inhabitants, are estimated to be in need of rehabilitation. Some of these shelters have temporary roofing and damp walls lacking ventilation that constitute a health threat.”

In addition, issues relating to poor hygiene are commonplace. Kitchens, toilets and washing facilities are often substandard, and overcrowding (often without gender separation) can lead to poor health and psychosocial dysfunction. While many officially recognised refugee camps are now connected to public water supply networks, in others, like those in Palestine, this remains challenging.

“In Gaza, the availability of potable water is a key issue, which is primarily [dependent] on aquifers that are affected by seawater intrusion due to over-extraction of groundwater,” Mshasha said. “In 2016, only 3.8 percent (11 of 283 wells) supplying domestic groundwater met World Health Organisation drinking-water standards in terms of chloride and nitrate content. Waterborne diseases are common in the Gaza Strip.”

That isn’t to say that the operators in charge of such camps aren’t trying their best to provide better facilities for residents. Shah Alam, Director of the Humanitarian Crisis Management Programme at BRAC, told World Finance that the infrastructure at the Kutupalong camp has had to grow quickly and provide more than just the basic necessities: “In addition to the infrastructure provided for individual refugees, it is also important to provide community facilities. Shelters are important, of course, but so too are community centres, classrooms and offices for camp officials. Each of the 34 camps – up from 30 last year – that make up the refugee complex in the Cox’s Bazar area contain the main infrastructure pertaining to food and shelter. But having dedicated areas for education and socialising are just as important.”

The logistics of building the infrastructure that refugee camps need is understandably difficult. In Bidibidi, huge areas of forest have had to be cleared and 250 miles of road constructed in order to accommodate the thousands of people arriving from war-torn South Sudan each day. And of course, this was just the start of the building process: schools, hospitals, sanitation and much more had to be set up as a matter of urgency.

The host with the most
As with more formalised settlements, the infrastructure in refugee camps provides the means to carry out daily activities. It supports personal mobility, energy supply and the transfer of information. Put simply, it is key to improving the lives of displaced people.

“With more developed camps, refugees can expect better health conditions, a more comfortable living environment and higher-quality education for their children,” Mshasha noted. “Improvements to their socioeconomic conditions and self-esteem are other likely benefits.”

As Mshasha said, camp improvements should also focus on boosting refugees’ sense of self-worth. Creating economic opportunities is a great way of achieving this, particularly by giving camp inhabitants the chance to take part in the construction of new infrastructure projects. “When we are developing new infrastructure at the camp, we try to use local people where possible and, if necessary, we provide training with outside experts,” Alam said. “Some of our refugees are now working at [a] skilled or semi-skilled level, and even those [who] are volunteers – such as those helping with the family space or learning centres – still gain new skills and knowledge.”

In fact, unlocking the economic potential of refugee camps not only promises to deliver benefits to refugees: it can boost the prospects of their host countries, too. Unfortunately, in the vast majority of cases, refugees are not permitted to find employment, forcing them to rely on charity or informal work.

This tendency to view each refugee crisis as a purely humanitarian matter, rather than an economic one, is hugely restrictive. Thankfully, the tide of opinion is shifting. In Uganda, refugees are allowed to work, and research by the Refugee Studies Centre in Oxford has shown the advantages of such an approach: in the national capital, Kampala, 21 percent of refugees run a business that employs at least one other individual. Further, 40 percent of those they employ are Ugandan citizens.

Creating the right physical framework within camps to allow for the development of entrepreneurial activity is vital. When refugees are excluded from formally contributing to the national economy, inefficiencies emerge that prevent them from achieving their potential, and the opportunity for exploitation increases. The creation of business-friendly areas within camps, therefore, should be made a priority alongside other more obvious infrastructural developments.

“The implementation of special economic zones is crucial to [ensuring] sustainable development within refugee camps,” Mshasha said. “Therefore, it is imperative that plans are put in place to include the development of market areas within camps. The plans should be innovative to create new shops or vendor stalls around open and green spaces to create opportunities to reduce the overwhelming levels of unemployment. In the camps that are near the coast, the development of the beachfront is necessary to create safe recreation and socioeconomic improvements.”

Refugee camps are often seen as an economic burden, but that doesn’t necessarily have to be the case. In the vast majority of instances, the inhabitants of these settlements simply want a safe place to live and, if given the opportunity to do so, are happy to work for it. Some are highly educated professionals with great ideas that are going unutilised due to circumstance. Putting the right infrastructure in place enables these people to feel valued once again, while providing economic value to their host country at the same time.

Building for the future
The decision to turn camps into more permanent structures is a difficult one, both politically and economically. The long-term goal of refugee settlements should be to provide a temporary haven until individuals can go back home; as time goes on, though, the prospect of returning starts to look slimmer.

“The main objective of implementing camp improvements is to boost the miserable living conditions of the refugees living at the camps,” Mshasha said. “In the past, refugees may have considered any camp improvement as the final settlement. However, in the absence of any political solution on the horizon, and the fact that refugees cannot continue to bear their current living conditions, they are more than ever awaiting sustainable camp improvement solutions.”

In February 2019, the Kenyan Government wrote to the UNHCR announcing its plans to close the Dadaab refugee settlement within six months and asking the agency to help resettle the more than 210,000 refugees living in the camp, which had been set up more than 25 years previous. The decision has been criticised by human rights groups, but it reflects the feeling among some host countries that camps cannot be allowed to exist indefinitely.

The reality is that the average refugee will remain in exile from their home for 10.3 years, according to the World Bank. Whether this is spent in the same camp or not, they cannot be expected to endure makeshift lives for longer than necessary. But even when states want to provide better facilities for those they are hosting, finding the means to do so is not always easy. “The resource requirements are huge and agencies need to improve camps within a limited number of years,” Mshasha said. “I think the only practical approach is to acquire outside help. We need support from national governments, private enterprises and others.”

Outside investment is something that has been mooted with regard to Bangladesh’s refugee camps, particularly from neighbouring states. Projects connected to China’s Belt and Road Initiative could also be ramped up, especially in relation to helping the communities most affected by the Rohingya crisis – for example, the $15bn Payra deep-sea port, which is due for completion in 2023, could look to support communities in Cox’s Bazar through new employment opportunities. Similarly, India’s investment proposals would be well served in underdeveloped areas of Bangladesh. European partners should not neglect their responsibilities, either: as Bangladesh’s biggest export destination after the US, Germany could back up the recently announced private sector investment by Siemens with a commitment to fund transportation and accommodation for workers based near refugee settlements.

Money will not be all that is required to better develop refugee camps – a fair deal of expertise will be required too, particularly as many settlements are located in geographically challenging areas. With little time to spare, urban planners will have to work quickly, but also carefully, to ensure that camps are built up in a way that considers both social and economic factors. If they can achieve this, then refugees all over the world will gain access to a better quality of life, and host countries will gain new urban areas that can remain long-term economic assets, even when their inhabitants are finally allowed to return home.

Europe’s growing risk of Japanification

Japan’s economy is one that has been studied extensively in recent decades. For those with a positive mindset, things are going well: the country boasts the third-largest economy in the world and plays host to some of its finest hi-tech manufacturing firms. On the other hand, trouble has been brewing for a while now. For almost three decades, Japan has been trapped in a cycle of low growth and low inflation, with its ageing population making it difficult to escape.

Now there are concerns that Europe’s economy could be heading for a similar fate. After the financial crisis struck, investors, bankers and corporate executives understood that economic expansion would have to wait – but 10 years have passed since then, and the eurozone remains stuck in second gear. Growth predictions are repeatedly revised downwards and a culture of risk aversion continues to stifle innovation. The continent is undergoing its own period of ‘Japanification’.

How long Europe will remain stuck in this situation is difficult to say, as Japan has suffered low growth since the 1990s, but it will certainly present challenges for the European Central Bank (ECB) and pose a quandary for investors looking to find value.

The policies pursued by Japan’s government created a sizeable asset bubble, with stock valuations and urban land prices trebling between 1985 and 1989

When the bubble bursts
The 1990s in Japan are today referred to as the Lost Decade. More pessimistic commentators even include the following 10 years – a period dubbed the Lost Score. Between 1995 and 2007, the country’s GDP fell from $5.45trn to $4.52trn and average wages declined by around five percent.

“Since the 1990s, some of the main characteristics of the Japanese economy have been a low-growth, low-inflation environment coupled with extremely high debt rates,” Inga Fechner, an economist at ING, told World Finance. “Japan has the highest debt-to-GDP ratio worldwide and has been struggling with low inflation rates for 25 years. The economy never really recovered from its homemade financial crisis in the 1990s and three major crises (the 1997 Asian crisis, the dotcom bubble and the global financial crisis) in the years that followed.”

As Fechner mentioned, the causes behind Japan’s Lost Decade were largely of the country’s own doing. The 1985 Plaza Accord resulted in a significant appreciation of the yen, bringing exports to a standstill and abruptly halting growth. As a result, the government in Tokyo launched a series of expansionary monetary policies: interest rates were slashed, and fiscal stimulus was introduced.
Unfortunately, the policies pursued by Japan’s government created a sizeable asset bubble, with stock valuations and urban land prices trebling between 1985 and 1989. In 1990, the bubble burst and equity values plummeted. Subsequent economic policies only served to prolong the pain and, today, Japan is still feeling the effects.

However, it’s important to look back on the macroeconomic fallout with as much nuance as possible. While it is true that Japan’s stock market remains depressed and consumer sentiment is poor, its low levels of growth are sometimes exaggerated. In fact, since the financial crash, Japan’s GDP per capita has seen strong growth (see Fig 1), actually growing faster than that of the eurozone.

Measure for measure
To understand whether Europe is undergoing Japanification itself, economists have begun to analyse a number of different metrics, including growth, inflation, short-term interest rates and demographic changes.

“At ING, we have created a ‘Japanification model’ based on research by Takatoshi Ito of Columbia University, taking economic growth, inflation, short-term interest rates and demographic change into account,” Fechner said. “The model shows that the eurozone economy has left its ‘normal’ growth path following the global financial crisis and has dipped into Japanification territory, which Japan has not left for a quarter of a century.”

The similarities between 1990s Japan and present-day Europe are striking. Assuming that the Japanese crisis started in 1992 and the eurozone’s troubles began in 2009, the progression curves of the two states look remarkably similar. Far from representing dark clouds on the horizon, Fechner believes “we are already in the middle of a Japanese scenario in the eurozone”.

Nevertheless, there are notable differences between the economic landscape in Europe today and that of Japan in the 1990s. While the eurozone may not have managed to generate its desired level of core inflation (around two percent), it has avoided deflationary years – something that has occurred 12 times in Japan since 1991. The ECB has also managed to curtail government debt, which has fallen from 91.8 percent of GDP in 2014 to 86 percent today. In Japan, it stands at 240 percent.

However, that is still unlikely to be enough to stave off fears of Japanification. Certainly, Europe’s ageing population – something that has contributed to Japan’s long-term stagnation – is a concern. In the EU, the population is set to reach 520 million by 2070, but the number of people of working age is predicted to fall to 292 million. Europe’s relatively liberal attitude to immigration – compared with Japan, at least – may help delay a demographic time bomb, but only for so long.

If, as many fear, Japanification represents the new normal for European economies, a number of challenges will emerge. In particular, the meagre growth that is achieved is likely to be less inclusive, leading to rising levels of inequality and the many issues that accompany them.

Fail to prepare
The example of Japan serves as a worrying lesson for Europe. During the country’s Lost Decade, the Bank of Japan (BOJ) tried to stimulate growth through rock-bottom interest rates and fiscal stimulus – both to little effect. This created zombie firms, propped up by banks and absorbing resources that would be better served elsewhere in the economy. Despite being a drain on growth, they staggered on, unable to service their debts. They are now more prevalent than ever: across Western Europe, the US, Australia and, of course, Japan, the number of zombie firms increased from two to 10 percent between 1987 and 2018.

Should governments and banks let these failed businesses go to the wall? It would free up resources, but it would also mean significant job losses. It would be a brave decision to make, and a largely unpopular one. However, a look at Japan in the 1980s demonstrates that the BOJ’s failure to act quickly enough exacerbated the country’s economic woes.

“The banking sector in Japan accumulated a huge pile of non-performing loans that led to the instability of the financial system at the same time as the corporate sector was suffering from excess debt and overcapacity,” Fechner said. “The authorities waited too long before taking decisive action. Only in 1998 was a framework for the resolution of failed financial institutions put in place.”

Even though European banking officials have also been criticised for being too slow to act, the low-growth conundrum is difficult to crack. Potentially, the eurozone could boost public spending or reduce taxes – it has the fiscal room to do both when the bloc is looked at in aggregate, but on a country-by-country basis, such a move looks more precarious, with some states already carrying huge public debt burdens.

“Getting stuck in the low-growth, low-inflation environment with central banks being out of ammunition is a significant challenge for Europe,” Fechner noted. “In the heterogeneous eurozone, political tensions within and between countries might rise given differing interests, economic developments and the use of fiscal policies among members. Whenever it looked as if the Japanese economy had finally bottomed out, the next external shock came along. This is an important lesson for the eurozone: the next crisis is just around the corner. Without a strong recovery, it is difficult to escape the low-growth, low-inflation environment.”

While Europe manages to plod on for now, another economic shock would leave policymakers with little room to manoeuvre, pushing it into deflationary territory. And when viewing the next economic shock, it is always a question of when, not if.

Finding value
One thing that is certain is that the Japanification of the eurozone will have a major impact on investment. The stock markets in Japan have still not recovered – they remain below their 1989 peak – and so investors will need to think extra carefully about where to place their money if Europe ends up going the same way.

Volatility will remain present in Europe even if full-blown Japanification emerges

Bank stocks are to be avoided – since 1990, the value of the Tokyo Stock Price Index has fallen by six percent, while the corresponding benchmarks in Europe and the US have rocketed by 300 and 800 percent respectively. Financial institutions require high interest rates and levels of spending (which drive up demand for loans) to post sizeable profits – both of which are out of the question in a Japanification scenario. However, that doesn’t mean there is no value to be found for investors. Europe is more fragmented than Japan – each country has its own economic dynamics to consider – and so investors shouldn’t write off the entire continent, even if lower growth does look as though it is here to stay.

Volatility – bad news for some, but good for those able to ride out the storm – will also remain present in Europe even if full-blown Japanification emerges. Japan’s stock markets may have suffered on the whole, but they still experienced rallies of at least 20 percent in every year between 1990 and 2003. When times are gloomy, the smallest piece of optimism can result in big gains for share prices – something that investors in a Japanified Europe will need to keep an eye on.

In addition, there are industries across the continent that investors would still be wise to consider. The automotive sector remains strong and will receive a boost if concerns relating to global trade dissipate. What’s more, Europe still boasts world-leading pharmaceutical firms and consumer brands.

“When you look at quality of businesses, the openness of the economy, the linkage of the economy towards the growing parts of the world, [Europe’s] more exposed to that,” Andreas Wosol, a portfolio manager at Amundi Funds II, told Bloomberg. “Clearly in some periods it can also be a drag, but long term, it’s a positive, which Japan didn’t have.”

There’s also a chance that the Japanification fears surrounding Europe have been overblown. If the eurozone economy picks up, and inflation along with it, then the low-growth situation that European countries find themselves in could simply turn out to be a blip. That doesn’t look like the case at the moment, but things can change quickly: oil price rises, a less hostile global trade outlook and favourable political outcomes in certain member states could all boost demand and consumption.

Even if eurozone investors are concerned, perhaps the general public does not have much reason to be worried. After all, look at what Japan has achieved despite the ‘disease’ its economy is suffering from. The country has low levels of unemployment, ranks above the OECD average in terms of income, wealth, education and skills, and scores better than any other nation regarding personal security. Economic growth clearly isn’t everything.

What does the future hold for Indonesia during Jokowi’s second term?

In the spring of this year, Joko Widodo faced the biggest challenge to his presidency yet. On April 17, Indonesia’s electorate – an astounding 193 million people – considered the credentials of more than 245,000 candidates for 20,000 local and national seats. According to the Lowy Institute, an Australian think tank, it was “one of the most complicated single-day elections in global history”.

But even for a nation as heterogeneous as Indonesia – the country comprises some 18,000 islands and spans 1.9 million square kilometres – the day wasn’t really about the sprawling array of candidates. In reality, it came down to a choice between two individuals: incumbent president Widodo (or Jokowi, as he is commonly known) and former military general Prabowo Subianto, Jokowi’s rival from the 2014 election.

Despite the hype surrounding Jokowi when he first entered office, his presidency has been shrouded in doubt and riddled with missteps. And while he has made some progress in terms of economic development, he has by no means achieved everything he set out – and promised – to achieve. Prior to the election, the race between Jokowi and his old adversary looked set to be a tight one.

The polarity of Jokowi’s administration was at odds with the economic liberalisation he was
trying to achieve with his sweeping reforms

Broken promises
One of the most notable aspects of Jokowi’s 2014 presidential campaign was his pledge to achieve an annual GDP growth rate of seven percent – a figure that simply did not transpire (see Fig 1). Of course, the five percent growth he did register between 2014 and 2019 was respectable, but to many, the two percent gap signified both a failure and a broken promise. To make matters worse, the president remained silent on numerous human rights issues despite vowing to tackle such violations in his manifesto. As a result, many of those who voted for Jokowi in 2014 became disenchanted with the president and started to question his ability to make good on his promises.

Undoubtedly, in trying to achieve a seven percent growth rate, Jokowi faced a number of obstacles that were largely out of his control. “This [failure] is partly due to [a] global economic slowdown [and] uncertainty, [the] trade war between the US and China (and Asia), and the end of [the] commodity boom,” explained Dr Zulfan Tadjoeddin, a senior lecturer in development studies at the University of Western Sydney.

Current mainstream analyses of Jokowi’s economic policies suggest that global headwinds and soft commodity prices are to blame for his failure to attract foreign direct investment (FDI). As such, disappointing levels of FDI have persisted (see Fig 2) despite the introduction of a sizeable tax amnesty and the appointment of former World Bank managing director Sri Mulyani Indrawati as the country’s finance minister.

In a bid to attract greater levels of FDI, Jokowi introduced a series of ‘big bang’ reforms in 2015 and 2016 – notably, the cutting of red tape across 50 sectors, including infrastructure, tourism and the restaurant industry. Some of the reforms were quite radical, especially with regards to home ownership and the real estate sector.

But despite this progress, underlying concerns remained. According to a source from a prominent Australian university, who spoke to World Finance under the pseudonym Jean Smith, foreign investors had little faith in the Indonesian Government. “Jokowi was a political newbie in a coalition with really old regime types – [General] Wiranto, [Abdullah Mahmud] Hendropriyono – who represented the vested interests of the old regime.”

In other words, the polarity of Jokowi’s administration was at odds with the economic liberalisation he was trying to achieve with his sweeping reforms. This was highlighted by a number of questionable moves, including the appointment of a head of police who had previously been accused of corruption. It soon became clear to everyone that Jokowi was feeling the pressure to appease the conservative members of his cabinet.

“Investors looking at the Indonesian economy saw a situation that was one step forwards and one step back,” Smith said. “Jokowi is a neoliberal and he speaks the language of global finance, but if you just looked at his governing coalition, there was a sense that he didn’t have full control. I think that FDI reflected that.”

Jokowi hasn’t just faced opposition from the more liberal-minded individuals within Indonesia’s sprawling populace, though: despite often giving in to the pressure exerted on him by his administration’s old guard, Jokowi has also come under fire from the more conservative members of the population. Such critics have accused him of working against the national interest – notably, by seeking FDI from China – and not being ‘Muslim enough’.

And yet, in spite of the many qualms and accusations thrown at him from both ends of the sociopolitical spectrum, Jokowi managed to secure victory in the 2019 general election with 55.5 percent of the vote. Now, with another five-year term on his hands, he has more time to make the many changes that Indonesia desperately needs.

Long road ahead
One of Jokowi’s first acts upon being re-elected was to set out a number of new, but equally ambitious, promises for the country. For example, he vowed to improve education and the quality of Indonesia’s workforce, both of which would be key to furthering economic growth. He also pledged to invest over $400bn in infrastructure projects over the coming years.

The latter is unsurprising, as infrastructure spending is an area for which Jokowi has received particular praise in the past – a wave he duly rode during his second election campaign. In fact, Tadjoeddin believes the president’s biggest achievement to date has been “boosting infrastructure development… across the country in the forms of, among other things, highways, ports, airports, dams, border-crossing points [and] energy”. He added: “This was amid the fact that national investment in infrastructure in Indonesia [had] lagged badly since at least 2000. Jokowi’s administration has simply reversed the trend [see Fig 3].”

Indonesia’s infrastructure is notoriously bad: an unreliable electricity supply and an inadequate transportation network have hampered economic growth for decades. “Neglected infrastructure has created significant bottlenecks in the Indonesian economy,” Tadjoeddin told World Finance. “[The] unsmoothness in the distribution of goods and services [has resulted] in high logistical costs, [as well as] high and inefficient fuel consumptions… affecting Indonesian competitiveness in the global economy.”

When he first came to power, Jokowi revealed an ambitious $355bn plan to address the shortfall that had put so many manufacturers off investing in the country. The plan included the construction of 1,000km of toll roads, 3,000km of railway lines, 24 seaports and a number of new power plants that would boast a combined capacity of 35,000MW. As Tadjoeddin explained, such developments – particularly those focusing on transportation infrastructure – are needed to “create stronger economic integration across Indonesian regions, [as] this will foster internal dynamism in the Indonesian economy”. He added that it would also improve “efficiency in logistical costs”.

Funding these large-scale projects, however, has been a massive problem. While Jokowi continues to roll out ambitious – albeit necessary – plans, he has failed to secure a significant amount of funding from either the government or the private sector.

Indeed, according to the Indonesian Ministry of Public Works and Housing, just one fifth of infrastructure investment comes from the private sector. This, in turn, leaves Indonesia’s state-owned enterprises (SOEs) to bear the brunt of the cost.

SOE the seeds
According to a recent report by the OECD, the presence of SOEs in Indonesia is more extensive than in any other country in the world, with the exception of China. This presents a major problem for Indonesia, as these entities wield a great deal of power. In fact, their close connection with the political sphere means SOEs are almost untouchable, despite inherent corruption and the financial risks they pose to the government.

The problem is closely linked to the distribution of wealth in Indonesia. “Wealth is largely [placed] within the hands of some very familiar characters,” Smith said, in reference to Indonesia’s ethnic Chinese, who, despite making up less than five percent of the population, own most of the country’s largest conglomerates. “The Chinese bourgeoisie was a capitalist class created by the state under [General] Suharto, and was always kept quite dependent on the state by Suharto. So you have this very select group of capitalists who were brought up and nurtured through the monopoly that was created by the New Order.”

As the years have passed, the companies belonging to these individuals have diversified and grown into the giant conglomerates that now characterise Indonesia’s business landscape. “The economy is still controlled by a very small number of hands, and economic development often works in their favour,” Smith explained. “And that’s not just the private sector, but also the SOEs that have really come into their own under the Jokowi administration. I think their combined assets [are] equivalent to the annual national budget.”

In addition to their vast financial influence, SOEs are known for their opaque operations. “Politically, they’re a no-go zone,” Smith added. While foreign companies are invited to work with SOEs on large infrastructure projects, few financial guarantees are given, which, unsurprisingly, discourages many would-be investors. As such, SOEs have become counterintuitive to Indonesia’s mammoth infrastructure challenge and, as a result, to its socioeconomic development, too.

Hitting a wall
Given the pervasiveness of vested interests in the country’s political sphere, it perhaps comes as little surprise that environmental concerns in Indonesia – of which there are many – often fall by the wayside. Smith gave the example of Jakarta’s highly controversial Giant Sea Wall project, which is also known as the Great Garuda or, more formally, the National Capital Integrated Coastal Development. In 2014, Jokowi, together with the governor of Jakarta, unveiled a $40bn project to stop the capital’s continued land subsidence. It’s a pressing problem: in addition to causing an increasing number of floods in Jakarta, it has caused the city to sink at an alarming speed. In fact, Jakarta has become the world’s fastest-sinking city, recording an annual rate of between 7.5 and 14cm. In some ‘hot spots’, this figure is as high as 20cm. Although construction on the project was supposed to start in 2018, delays relating to the wall’s design and permitting issues have since pushed it back to 2020. Some have even suggested the project could be cancelled altogether.

State-owned enterprises have become counterintuitive to Indonesia’s mammoth infrastructure challenge and, as a result, to its socioeconomic development

The intention of the Giant Sea Wall project is to protect Jakarta from flooding, but it has since been appropriated by various types of property developer, including multinational companies, SOEs and Indonesian private firms that wish to build luxury apartments along the wall. “The outcome was that poor people were evicted en masse from that area,” Smith said. “Luxury apartments were protected and then expanded into historic slum neighbourhoods. So it’s really [telling] that attempts to mitigate climate change get hijacked by the kinds of vested interests that dominate the Indonesian economy.”

There were claims that clearing these areas was necessary to stop flooding, but as Smith explained to World Finance, rising sea levels are not actually the problem: “Jakarta sits on a giant water aquifer, which is being drained to bits, so that’s actually what’s making the city sink. It’s being drained because the government hasn’t invested in proper water infrastructure, like piped water. Instead, people stick pipes in the ground and drain the aquifer, including luxury developers.”

As illustrated by this example, the interests of the people, the environment and, by extension, the economy are often neglected in favour of Indonesia’s relentless inclination to cater to the wealthy. Rather than investing in basic infrastructure, such as sustainable water systems, the country’s authorities pursue projects that are both socially and environmentally irresponsible in a bid to keep money flowing to certain groups and individuals.

This sort of myopic decision-making can also be found in the country’s energy mix. At present, Indonesia is heavily reliant upon coal for its electricity needs, with its plans for renewable energy projects having stalled repeatedly. Indeed, according to estimates published by, Indonesia’s consumption of domestic coal is set to surge from 84 million tonnes in 2018 to 157 million tonnes in 2027. Many, including the country’s Minister of Energy and Mineral Resources, Ignasius Jonan, remain pessimistic about Indonesia’s chances of meeting the clean energy targets it set following the Paris Agreement.

Changing the status quo
Jokowi has done a lot of good for Indonesia. According to Tadjoeddin, the quality of employment has improved during his tenure, while “inequality has been on [a] steady decline since 2015, [with] development [being] felt by Indonesian people in remote locations”. Welfare spending, meanwhile, has increased significantly under Jokowi’s watch, with the president placing a particular emphasis on health and education projects. As a result, poverty has also been steadily declining.

What’s more, doing business in the country has become easier. Tadjoeddin pointed to the World Economic Forum’s Global Competitiveness Report 2018, which showed that Indonesia’s ability to compete on the world stage has significantly improved under Jokowi’s leadership, especially when compared with the two-term presidency of his predecessor, Susilo Bambang Yudhoyono.

Yet, there is still a long way to go for Indonesia. Improving infrastructure is a vital step to entering the next stage of economic development (a fact Jokowi continues to reiterate), but for any real progress to be made, a deeper cultural change will be required. As indicated by the Giant Sea Wall project, funding is often misplaced to the benefit of a small number of influential individuals. This ties back to the unnerving role that SOEs play in Indonesia’s economy: as long as they dominate the business landscape and remain untouchable in the eyes of politicians, SOEs will continue to work for the wealthy rather than the good of the economy.

Changing this sorry state of affairs is up to the administration itself. “[The president] sits in a really diverse cabinet – oligarchs… hardcore nationalisers and neo-liberalisers – you look at that and you think… ‘How does this person cohabit with all these different types of interests?’” Smith said. “Investors will certainly have more confidence when they see an administration that is ideologically coherent. If they could start seeing a more coherent suite of policies across a wider variety of portfolios, [with] the president making strong picks to head up those portfolios, I think he will be well on his way to attracting the FDI that he’s ambitious for.”

The task facing Jokowi is monumental. Following his re-election, commentators have suggested that a new cabinet could be appointed in the coming months. But even if all of the various and necessary cards fall into place, logistically speaking, Jokowi’s plans are simply too grand to achieve within just five years. What he can do during his second term, though, is to make a start on more radical reforms. By ignoring the interests of Indonesia’s conservative elite, Jokowi can make the country more attractive to foreign investors, increasing the likelihood of funding his most ambitious infrastructure projects in the process.

He must also go back to basics, serving those who elected him while placing a greater emphasis on tackling environmental degradation. After all, the former is Jokowi’s duty as president, and the latter will be vital to Indonesia’s long-term economic future. Unfortunately, this is perhaps too much change for any individual to implement alone – even one as well intentioned as Jokowi.

Bankmed’s commitment to reviving Lebanon

As stipulated in its constitution, Lebanon has a free economy that guarantees entrepreneurship and ownership of private property. This framework has enabled the private sector to play an instrumental role across various economic fields, namely within the services and financial sectors, which represent 70 percent of national income. The active participation of the private sector has also played a pivotal role in shielding the economy, which is constantly put to the test amid continued domestic and regional upheavals.

However, private intervention did not seep into all sectors in Lebanon’s post-civil-war era. Financing basic infrastructure, for instance, was carried out in a different manner, with limited participation from the private sector contrasted with a heavy reliance on borrowing. Accordingly, the process placed a hefty burden on the Lebanese Government as it grappled with financing to support the development of roads, electricity, water supply and telecoms networks.

The overall infrastructure in Lebanon continues to lag behind regional and international trends

Today, the enactment of a public-private partnership (PPP) law will create new prospects for the completion of existing projects and the launching of new ones. More importantly, it will create room for banks to take part in these projects and play an instrumental role in the economy.

Lebanese infrastructure
Up until 1975, Lebanon boasted some of the best infrastructure in the region. This status enabled the country to assume a competitive role as a financial services provider. However, the Lebanese Civil War, which extended from 1975 to 1990, reversed the equation as the major connectivity elements within the country were destroyed. Meanwhile, other states – namely in the Persian Gulf – have been developing their infrastructure at a rapid pace.

The end of the Lebanese Civil War marked a new era for reconstruction, as the country embarked on an ambitious social and economic reform programme initiated by the late prime minister, Rafik Hariri. The Horizon 2000 programme aimed to restore Lebanon’s key role as a centre for the region’s commerce and finance. Subsequently, numerous international companies returned to Lebanon with the aim of reconstructing physical infrastructure.

The period from 1990 until 2005 witnessed feverish building activity, with the booming development of roads and rise of apartment blocks. Unfortunately, this boom came to an end with the 2006 Israeli-Lebanese conflict: the conflict resulted in thousands of casualties and the destruction of homes, bridges, fuel stations, dams and roads, in addition to causing significant damage to Beirut’s international airport and the ports of Beirut, Tripoli and Jounieh.

Although 97 percent of the damage has since been repaired, the overall infrastructure in Lebanon continues to lag behind regional and international trends. This is profoundly impacting the development of other sectors and major industries. Key infrastructure has still not been fully reinstated, while the public services that existed prior to 1975 have not been reinstalled, nor developed to cater for the country’s growing population and economy. Basic utilities such as power, water and sewage are not supplied at a national level, nor on a sustainable basis. Moreover, social infrastructure and services are scarcely offered. In turn, public land transport is not organised and rail transport services still do not exist.

Most recently, the Syrian Civil War has had its own toll on Lebanon. The presence of more than 1.5 million Syrian refugees in the country has led to its infrastructure deteriorating more rapidly than ever, specifically in terms of energy supply.

Financing challenges
The energy sector, in particular, has been paying the high price of run-down infrastructure and the prolonged existence of challenging political, technical and managerial conditions. During the Lebanese Civil War, most of the grids were damaged, while illegal links and connections to electricity networks were produced. The manipulation of power meters also became commonplace.

These practices, which continue today, have caused further damage to functioning grids and brought about additional maintenance and repair costs. They have also exhausted the financial abilities of the government, which remains incapable of meeting domestic needs while battling with high costs and finding proper means of supply. The situation has been intensified by the energy consumption of refugee populations, with the overall national output increasing by 25 percent. What’s more, the illicit connections made by refugees in need of resources have strained the country’s electricity infrastructure, causing damage to existing electrical poles and cables.

Moreover, the subsidisation of state power provider Electricité du Liban (EDL) poses a serious challenge to the Lebanese Government; transfers to cover EDL’s ongoing financial losses have placed additional stress on the state’s budget. This situation has also meant that government expenditure on other essential matters – such as infrastructure, social security, health and other social and economic projects – has been reduced. Transfers to EDL increased by 14.5 percent (or $450m) from January to November 2018, reaching a total of $1.54trn by the end of the period. This was mainly driven by higher payments to the supplying companies, Kuwait Petroleum Corporation and Sonatrach, given the surge in oil and gas prices.

Subsidising electricity is not the only factor that has been draining the state’s finances. In fact, the country’s growing debt (see Fig 1) and rising personnel costs limit Lebanon’s financial horizons and restrict opportunities for domestic financing. Personnel costs account for the main bulk of current primary expenditures, rising by 18.9 percent ($310m) year-on-year from January to April 2018 to reach $1.94bn, compared with $1.63bn during the same period in 2017. This increase reflects the impact of the new salary scale for public sector employees.

Regarding debt services, gross public debt rose by 152 percent to reach $90.95bn by the end of February 2019, while net public debt increased by 136 percent to reach $72.69bn by the end of the same period.

New opportunities
The enactment of the PPP law will create new prospects for the implementation of existing and future projects within Lebanon. However, the endorsement of this law cannot be dissociated from the international donors conference, CEDRE, which was held in April 2018. Its aim is to back the Lebanese Government’s Capital Investment Plan and support the Lebanese economy, in particular through the financing of infrastructure projects.

The government outlined its vision towards stabilisation and growth at CEDRE. This vision, which rests on four main pillars, calls for increasing public and private investment, ensuring economic and financial stability through fiscal adjustment, implementing essential sectoral reforms and developing a strategy for the reinforcement and diversification of Lebanon’s productive sectors.

CEDRE will provide funding for infrastructure – one of the country’s prominent investment opportunities – without having to further burden the fiscal situation. If reforms are properly implemented and CEDRE is set in motion, investment opportunities will spark. This is expected to reflect positively on real GDP growth, allowing it to reach 4.1 percent within five years of the project’s start date. On the other hand, if these reforms and CEDRE are not put in place, growth is expected to slow over the same period. The implementation will also reflect positively on the budget balance, which is expected to drop to 6.4 percent in the next four years instead of widening to 13 percent within that time frame.

Similarly, global consulting firm McKinsey & Company has set out its vision for Lebanon’s economy, with recommendations ranging from building a wealth management and investment banking hub to becoming a provider of medicinal cannabis. The report has also proposed some “quick wins” to ease the economic slowdown.

Investment breakthrough
The endorsement of the PPP law will enable banks to take part in numerous projects pertaining to infrastructure reconstruction. Needless to say, adopting McKinsey’s proposal and implementing structural reforms as per CEDRE’s requirements will put Lebanon on the right growth path and pave the way for potential investment opportunities. Similarly, the oil and gas sector harbours lots of favourable opportunities that Lebanon’s economy can capitalise on.

With respect to Bankmed, the bank looks forward to capitalising on these opportunities, since it is well positioned to finance infrastructure projects once matters are put on the right track. The bank has the financial capabilities and the qualified team required to handle large infrastructure projects, having played an important role in funding the reconstruction of the country in the 1990s. It is also worth noting that Bankmed was the first bank in Lebanon to host a forum aimed at addressing Lebanon’s oil and gas potential, foreseeing the opportunities that lie within this sector.

The race for JPMorgan Chase leadership has begun

After 13 years of running JPMorgan Chase, the largest bank in the US in terms of assets, Jamie Dimon started the clock ticking on his retirement. In 2018, Dimon announced he would step down in five years, kick-starting endless public speculation over whom the company would name as his successor. The talent pool at JPMorgan’s executive level is brimming and competition for the top job is likely to be fierce, but one name that has ignited a significant amount of interest is Marianne Lake.

Lake has spent nearly two decades working her way up the ranks of JPMorgan. In May 2019, she was named CEO of the bank’s consumer lending business, following a more-than-six-year stint as CFO of the group.

Not only has Lake accumulated an impressive array of qualifications during her 19 years at the company, but she has also fostered strong relationships outside the business with the investor and analyst communities. “In many ways, she has been as much of the face of the franchise as Jamie Dimon,” James Shanahan, a senior analyst at Edward Jones, told World Finance.

The talent pool at JPMorgan’s executive level is brimming and competition for the top job is likely to be fierce

Stiff competition
There is a long way to go before Lake – or any of Dimon’s heirs apparent – take the top job, however. Among the frontrunners for Dimon’s replacement are the bank’s two co-presidents: Daniel Pinto, who serves as CEO of the business’ investment bank, and Gordon Smith, who leads the consumer and community bank. Additional potential contenders include: Mary Callahan Erdoes, CEO of the asset and wealth management division; Doug Petno, the head of commercial banking; and Jennifer Piepszak, who swapped roles with Lake to become CFO in May.

Some industry observers had their qualms about Lake back in 2018 due to a crucial gap in her otherwise impressive CV: she had never led one of the bank’s business segments. The news that she would become CEO of consumer lending bolstered her candidacy considerably, acting as a “very strong signal” about her future at JPMorgan, Shanahan said. “[Over] the next few years, [Lake] will strengthen her experience as a leader of one of [the bank’s] businesses. That would seem to make her more qualified in the eyes of many analysts and investors to be the CEO of the company,” he added.

The rounding out of Lake’s experience appears to have been intentional, with Dimon seeking to cultivate a strong collection of potential successors. In an interview with Fox Business after the appointment, he said it is “part of succession planning” to “move people around, give them different experiences and see what they’re really good at”.

Glenn Schorr, an analyst at Evercore, told the Financial Times that JPMorgan “is about as good as it gets in terms of creating opportunities to develop their people… so that there is a list of people [who] have great experience and great insights and could be next in line if and when”.

Adding to the significance of Lake’s promotion is the fact that consumer lending is a segment of the consumer and community bank, which is JPMorgan’s biggest and most successful division: about half of JPMorgan Chase’s net revenue is typically generated by this segment. In the first quarter of 2019, net income at the division soared 19 percent to $4bn, helped by higher interest rates. This boosted JPMorgan’s quarterly profit to reach the highest amount ever recorded by a US bank in a quarter, with a net income of $9.1bn. Additionally, Dimon told Fox Business that the credit card business, which Lake has also taken control of, is a “critical part of the future” of the company.

Banking on tech
Although Lake’s new role will present fresh opportunities for growth and change, she was a natural fit as the group’s CFO. With a background working as a chartered accountant for PwC, Shanahan said the role was one that she was “especially well suited for”. Lake left PwC at the age of 30 – around the time of the merger between JPMorgan and Chase Bank – and began her career at JPMorgan’s London office as CFO for credit trading. In 2004, Lake moved to a role based in the US amid a merger between JPMorgan and Bank One.

In the early 2000s, huge mergers and acquisitions were commonplace in the banking sector. While the market is still undergoing consolidation today, deals in the years since the financial crisis tended to stick to smaller banks. For lenders like JPMorgan, any recent consolidation has been driven by technology, where big banks are able to significantly out-invest smaller ones. While JPMorgan has leading franchises across its divisions, Shanahan called technology “the backbone of it all”. During 2016 and 2017 alone, the bank spent almost $20bn to scale technology, according to CB Insights.

Lake has been a significant force driving JPMorgan’s digital investments. In fact, at a 2016 investor day, Lake called JPMorgan “a technology company”, according to Business Insider. Shanahan added: “Marianne Lake has been a champion of technology at JPMorgan for years and responsible, I think, for a large part for the significant investment that [it has] made in technology.”

Some of Lake’s achievements have included introducing automation technology in order to boost profits and combining the firm’s data and accounting systems. In 2018, Reuters reported that the company would spend an additional $1.4bn on improving customer interactions through better technology, with Lake saying: “We want to be relevant to our clients, and we want to grow.”

So far, the investment programme has been a success. As of Q2 2018, CB Insights found that JPMorgan had around 48 million active digital customers, up 12 percent from the same period the previous year. Comparatively, its rival Bank of America had just 36 million.

Whale of a time
Lake was appointed to the position of CFO in 2012 amid a massive crisis at the bank: the London Whale scandal involved a single JPMorgan trader losing the company more than $6bn, crippling the bank’s reputation for prudence in the aftermath of the financial crisis. The bank was forced to admit wrongdoing and pay hundreds of millions of dollars in penalties to various regulatory bodies.

Despite starting her job in the wake of the uproar, Lake excelled as CFO. She brought a fresh intensity to the position, and people who worked with her told Reuters that new hires were intimidated by her memory for numbers, her demands for information and her speed. Richard Ramsden, a Goldman Sachs analyst, told Reuters that Lake was “probably one of the most gifted CFOs around”.

In a 2013 interview with Marie Claire, Lake said of her job: “Every day has a bit of everything.” Her time was divided between a multitude of tasks, including managing the thousands of people in the company’s finance organisation, ensuring its processes were working efficiently, and responding to industry news each day.

Lake and Dimon had a close relationship, working side by side in JPMorgan’s Manhattan headquarters and going “in and out of each other’s offices multiple times a day”, according to Lake. The two bonded over their shared passion for the work and its demands. Dimon told Reuters they would challenge each other to remember numbers down to one decimal point. “We have a lot of fun with each other,” he said.

Although none of the six largest US banks has ever appointed a woman as CEO, JPMorgan has begun to address the imbalance of gender diversity in the top ranks of its business

Over the years, Lake’s presence on investor calls, in presentations and at corporate events grew. “Even a few years ago, it became more common for [her] to lead the quarterly earnings calls,” Shanahan said. Dimon, meanwhile, would sit in the background and answer the occasional direct question. In 2018, Lake led the company’s investor conference, giving an overview of the firm as well as updates for each of JPMorgan’s four main business segments – a role traditionally reserved for Dimon and the CEOs of each division.

Not long before the announcement of her latest appointment, an unnamed senior executive at JPMorgan told the Financial Times: “If [Lake] goes to run a business… of all the people there [of the right age], she is the most talented.” Lake has proved her capability as well as her commitment to the company, telling Reuters last year that she was with JPMorgan for the long haul: “I want to be at this company 10 years from now… I have told the board that I want to be here for the long term.”

Key to change
Although none of the six largest US banks has ever appointed a woman as CEO, JPMorgan has begun to address the imbalance of gender diversity in the top ranks of its business. In its 2018 annual report, the firm said women represented 30 percent of JPMorgan’s senior leadership globally. Lake, however, told the Financial Times that a lack of gender diversity “throughout the ranks” of the bank was more concerning than the imbalance at the executive level.

Still, access is the key to advancement, according to Erika Karp, the founder and CEO of Cornerstone Capital, an advisory firm focused on impact and sustainable investing. Appointing a woman to the highest position of one of America’s most successful banks would undeniably be a step forward in terms of gender diversity.

“We’ve had a situation in the financial services industry [where] women have not had access to information, access to promotion, access to power, access to authority, access to influence,” Karp, who spent 25 years on Wall Street prior to founding Cornerstone in 2013, told World Finance. “I think this move that we’re seeing with Lake – putting her in a position where she has access to everything – I think that’s tremendous.”

Lake, too, has spoken about the consequences of opening up access at the top of the company. “Being a senior woman means that we have the obligation, and privilege, to bring more women up with us and create an environment where they can fully be their authentic selves,” she said, according to JPMorgan’s website.

The rate of change in terms of gender diversity is accelerating, Karp added. She told World Finance: “There’s more consciousness and more intentionality and more transparency than there has ever been with regard to diversity. There’s more attention paid to corporate governance.”

While Lake is one of the strongest candidates regardless of her gender, Shanahan commented that, from his experience, “there is something a little different [about appointing a woman as CEO]”. When his own firm recently appointed a female managing partner, Shanahan said the change could be felt throughout the company. “I think it’s energising for a lot of people in the organisation – not just the women here.”

While JPMorgan still has a few years before a new CEO is chosen, the company is currently in the process of another big change: in 2018, the firm announced it would raze its current headquarters and rebuild a new 70-storey skyscraper in its place over the next four to five years. Dimon will likely stick with the company long enough to cut the ribbon on the new HQ, in a move that will signal the end of his prolific leadership. But that moment will also represent the start of a new era for JPMorgan and, possibly, for Marianne Lake.