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UK Consumers Open to Pure Digital Banks, According to Accenture Survey

July 16, 2014 Comments off

UK Consumers Open to Pure Digital Banks, According to Accenture Survey (PDF)
Source: Accenture

One-quarter (25 percent) of UK consumers would consider using a pure digital bank – a bank with no branches or call centres that is only accessible via laptops and mobile devices, according to the latest survey of UK current account customers conducted by Accenture (NYSE: ACN).

Customers aged 25 to 34 are most keen on the idea of a pure digital, branchless bank; 33 percent would consider using one, while the youngest group of bank customers – those aged 18 to 24 – are the least receptive, with only 22 percent saying they would consider it.

Based on interviews with more than 3,600 UK current account holders, the survey points to continuing growth in the use of digital banking channels. It shows that 80 percent of customers went online at least once a month to interact with their banks, while monthly mobile banking usage has risen to 27 percent of customers compared with 21 percent in 2012 and 10 percent in 2011.

However, the survey also points to a rise in customers using branches. According to the survey, the number of customers going into a branch at least once a month has risen from 45 percent in 2012 to 52 percent this year, with the most pronounced increase among customers aged 18 to 24. Fifty-four percent of the youngest group, say they visit their bank branch each month compared to 39 percent of the same group in 2012.

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CRS — Foreign Holdings of Federal Debt

July 7, 2014 Comments off

Foreign Holdings of Federal Debt (PDF)
Source: Congressional Research Service (via Federation of American Scientists)

Federal debt represents, in large measure, the accumulated balance of federal borrowing of the U.S. government. The portion of gross federal debt held by the public consists primarily of investment in marketable U.S. Treasury securities. Investors in the United States and abroad include official institutions, such as the U.S. Federal Reserve; financial institutions, such as public banks; and private individual investors.

Operational Excellence in Retail Banking 2014 — No Compromise: Advocating for Customers, Insisting on Efficiency

June 23, 2014 Comments off

Operational Excellence in Retail Banking 2014 — No Compromise: Advocating for Customers, Insisting on Efficiency
Source: Boston Consulting Group

A plodding recovery, weak macroeconomic conditions, and dim growth prospects continue to challenge the world’s leading retail banks. In response, these banks are taking action to improve their operational effectiveness and productivity.

The most efficient and profitable among them are going a step further. While continuing to achieve gains in efficiency, they are also becoming more customer-centric than their competitors. Often they are developing digital capabilities to address both challenges.

Free registration required to access report.

Bank Failure, Relationship Lending, and Local Economic Performance

June 10, 2014 Comments off

Bank Failure, Relationship Lending, and Local Economic Performance
Source: Federal Reserve Board

Whether bank failures have adverse effects on local economies is an important question for which there is conflicting and relatively scarce evidence. In this study, I use county-level data to examine the effect of bank failures and resolutions on local economies. Using quasi-experimental techniques as well as cross-sectional variation in bank failures, I show that recent bank failures lead to lower income and compensation growth, higher poverty rates, and lower employment. Additionally, I find that the structure of bank resolution appears to be important. Resolutions that include loss-sharing agreements tend to be less deleterious to local economies, supporting the notion that the importance of bank failure to local economies stems from banking and credit relationships. Finally, I show that markets with more inter-bank competition are more strongly affected by bank failure.

Younger Generations Far More Open to Branchless and Alternative Banks, Accenture Survey Finds

June 2, 2014 Comments off

Younger Generations Far More Open to Branchless and Alternative Banks, Accenture Survey Finds
Source: Accenture

Younger bank customers are nearly twice as likely as older customers to consider switching to a branchless bank and to consider banking with major technology players if those companies offered banking services, according to findings of a survey of nearly 4,000 retail bank customers in the United States and Canada appearing in two new reports by Accenture.

The survey found that 39 percent of customers 18 to 34 years old would consider switching to a branchless bank, compared with 29 percent of customers 35 to 55 and 16 percent of customers over 55.

The survey also found that significant percentages of consumers — particularly younger ones — would be open to banking with technology players such as Google, Amazon and Apple if the companies offered such services. Among consumers ages 18 to 34, 40 percent said they would consider banking with Google, 37 percent would consider banking with Amazon, and 34 percent would consider banking with Apple. Those percentages were 23 percent, 23 percent and 20 percent, respectively, for respondents age 35 to 54 and dropped to 5 percent, 7 percent and 6 percent, respectively, for respondents over 55.

An In-depth Look at Large and Complex Banks

May 29, 2014 Comments off

An In-depth Look at Large and Complex Banks
Source: Federal Reserve Bank of New York

The Federal Reserve Bank of New York today released a special Economic Policy Review series on large and complex banks. The 11 research papers that make up this series provide analysis in several key areas, including bank size, complexity and resolution. The papers, which are written by New York Fed economists, aim to further study and debate of these topics and to help inform policymakers.

Among the papers’ key findings:
Bank size has benefits and costs: the upside is the potential for economies of scale and lower operating costs; the downside is the “too-big-to-fail” problem and associated funding advantages and moral hazard.
Banks have become less bank-centric and more organizationally complex. Furthermore, the increase in bank complexity may be a natural response to an evolving intermediation technology.
Bail-in regimes, where the claims of creditors of the parent company are converted to equity in resolution, are an efficient and superior process for resolving the failure of a large financial firm. Requiring systemically important bank holding companies to issue “bail-inable” long-term debt that converts to equity in resolution would make large bank failures more orderly.

How Millennials Could Upend Wall Street and Corporate America

May 28, 2014 Comments off

How Millennials Could Upend Wall Street and Corporate America
Source: Brookings Institution

By 2020, Millennials will comprise more than one of three adult Americans. It is estimated that by 2025 they will make up as much as 75 percent of the workforce. Millennials’ desire for pragmatic action that drives results will overtake today’s emphasis on ideology and polarization as Boomers finally fade from the scene. Thus, understanding the generation’s values offers a window into the future of corporate America.

Morley Winograd and Michael Hais outline the cultural force of the Millennial generation on the economy as Millennials increasingly dominate the nation’s workplaces and permeate its corporate culture. Winograd and Hais argue that the current culture on Wall Street is becoming increasingly isolated from the beliefs and values of America’s largest adult generation. The authors also include data on Millennials’ ideal employers, their financial behaviors, and their levels of institutional trust in order to provide further insight into this important demographic.

Key Millennial values shaping the future of the American economy include:

  • Interest in daily work being a reflection of and part of larger societal concerns.
  • Emphasis on corporate social responsibility, ethical causes, and stronger brand loyalty for companies offering solutions to specific social problems.
  • A greater reverence for the environment, even in the absence of major environmental disaster.
  • Higher worth placed on experiences over acquisition of material things.
  • Ability to build communities around shared interests rather than geographical proximity, bridging otherwise disparate groups.

Operational Excellence in Retail Banking 2014

May 15, 2014 Comments off

Operational Excellence in Retail Banking 2014
Source: Boston Consulting Group

A plodding recovery, weak macroeconomic conditions, and dim growth prospects continue to challenge the world’s leading retail banks. In response, these banks are taking action to improve their operational effectiveness and productivity.

The most efficient and profitable among them are going a step further. While continuing to achieve gains in efficiency, they are also becoming more customer-centric than their competitors. Often they are developing digital capabilities to address both challenges.

These top-performing banks are rejecting traditional tradeoffs and compromises between boosting efficiency and advocating for customers. At the same time, they are mitigating conduct risk. In short, they are showing that it is possible to achieve excellence on all three dimensions, which they now see as a necessity rather than a choice. In order to achieve this advantage, they are optimizing their operating models in three ways: by boosting organizational and process efficiency, increasing employee productivity, and enhancing the customer experience.

These conclusions, and the report that follows, reflect the latest perspective from The Boston Consulting Group’s client work, supplemented by the findings of BCG’s fourth annual Retail-Banking Operational Excellence benchmarking.

Free registration required to access full report.

CRS — Financial Condition of Depository Banks (updated)

May 12, 2014 Comments off

Financial Condition of Depository Banks (PDF)
Source: Congressional Research Service (via University of North Texas Digital Library)

A bank is an institution that obtains either a federal or state charter that allows it to accept federally insured deposits and pay interest to depositors. In addition, the charter allows banks to make residential and commercial mortgage loans; provide check cashing and clearing services; underwrite securities that include U.S. Treasuries, municipal bonds, commercial paper, and Fannie Mae and Freddie Mac issuances; and other activities as defined by statute.

Congressional interest in the financial conditions of depository banks or the commercial banking industry has increased in the wake of the financial crisis that unfolded in 2007-2009, which resulted in a large increase in the number of distressed institutions. A financially strained banking system would have difficulty making credit available to facilitate macroeconomic recovery.

The financial condition of the banking industry can be examined in terms of profitability, lending activity, and capitalization levels (to buffer against the financial risks). This report focuses primarily on profitability and lending activity levels. Issues related to higher bank capitalization requirements are discussed in CRS Report R42744, U.S. Implementation of the Basel Capital Regulatory Framework, by Darryl E. Getter.

The banking industry continues consolidating, with more total assets held by a smaller total number of institutions. There are fewer problem banks since the peak in 2011, as well as fewer bank failures in 2013 in comparison to the peak amount of failures in 2010. Non-current loans still exceed the capacity of the banking industry to absorb potential losses (should they become uncollectible), meaning that news of industry profitability should be tempered by the news that aggregate loan loss provisions are currently insufficient. Consequently, the rate of bank lending growth may not return to pre-crisis levels until loan-loss capacity exhibits even more improvement.

CRS — Multilateral Development Banks: How the United States Makes and Implements Policy (updated)

May 8, 2014 Comments off

Multilateral Development Banks: How the United States Makes and Implements Policy (PDF)
Source: Congressional Research Service (via Federation of American Scientists)

This report analyzes how the United States makes policy towards the multilateral development banks (MDBs) and identifies ways by which Congress can shape U.S. policy and influence the activities of the banks themselves.

How We Pay: Results from the Federal Reserve’s Latest Payments Study

May 8, 2014 Comments off

How We Pay: Results from the Federal Reserve’s Latest Payments Study
Source: Federal Reserve Bank of Atlanta

Every three years, the Federal Reserve payments study presents a snapshot of the rapidly evolving U.S. payments system. The latest issue of the Atlanta Fed’s EconSouth magazine highlights the preliminary results of the 2013 study.

Since 2003, when Congress passed the Check Clearing for the 21st Century Act (commonly known as Check 21), the U.S. payments system has shifted dramatically. For instance, paper checks, which once comprised nearly half of noncash payments, accounted for only 15 percent in 2012. Checks are down, but not out, however. Although they made up a smaller share of the payments pie, they are declining from a dominant position. “As check writing continued to decline, the number of checks that could be converted declined as well,” the story notes. As a result, automated clearinghouse (ACH) transactions—many of which originate from the conversion of paper checks to ACH— decelerated, growing just 5.1 percent from 2009 to 2012, compared to 10.9 percent growth during the 2003 to 2012 period.

Meanwhile, payment cards continued to grow, accounting for two-thirds of consumer and business noncash payments in 2012. With annual growth of 15.8 percent, prepaid card payments grew the fastest of all noncash payments. The 2013 study the Fed’s fifth in a series of triennial studies.

Mortgages: What you don’t know about “Know Before You Owe”

May 5, 2014 Comments off

Mortgages: What you don’t know about “Know Before You Owe”
Source: PricewaterhouseCoopers

The Consumer Financial Protection Bureau issued its final “Know Before You Owe” rules late last year. The rules create new mortgage disclosure forms and procedural requirements to help consumers better understand the key terms of mortgage loans, and to make loan offers more easily comparable. The rules will apply to mortgage applications starting August 1, 2015.

The new rules consolidate the four disclosures that lenders have been providing consumers under the Truth in Lending Act and the Real Estate Settlement Practices Act into two new forms. Although the information necessary to populate the new forms will be largely the same, mapping the data to new forms will require significant changes to lenders’ Loan Origination Systems. Banks will also have to change their operational processes around originations.

Lessons learned from similar efforts, including the implementation of last year’s mortgage origination and servicing rules, suggest that successful implementation not only calls for changes to operations, but will also require integrating the new rules into the firm’s compliance management system and adjusting the firm’s management of third-party risk. Checking the box on operational implementation alone will not suffice.

The new rules also present an opportunity for strategic change. The most successful and resilient companies treat disruptions such as these as opportunities to make other beneficial process changes – and to reassess their business models and underlying assumptions.

This Regulatory Brief provides (a) background of the new mortgage disclosure rules, (b) an analysis of the rules’ challenges and opportunities, and (c) our view on what firms should be doing now.

Global Liquidity – Issues for Surveillance

April 30, 2014 Comments off

Global Liquidity – Issues for Surveillance
Source: International Monetary Fund

The paper starts by presenting evidence of commonality in global financial conditions. This commonality is then related to specific drivers of global financial conditions through a range of transmission channels, including cross-border banking and portfolio flows. Empirical analysis shows a range of price and quantity factors, including measures of risk, bank leverage, and interest rates in financial centers, to drive in part these flows. Country specific policies, including exchange rate and prudential frameworks, are shown to affect the transmission of global conditions. Much remains unknown though, including how evolving structures of global funding, changing institutions, and ongoing financial innovations affect the mechanics of liquidity creation, the channels of liquidity transmission, and potential risks going forward.

Canada — Who says banks can’t be social? Become a social bank, inside and out

April 25, 2014 Comments off

Who says banks can’t be social? Become a social bank, inside and out
Source: Deloitte

Read this report from Deloitte Canada to see how banks and customers can both profit from shared social value.

The social media revolution has already happened, transforming not only your customers’ daily behaviour but their expectations of you as their financial partner. In today’s social world, customers demand to be heard, understood and valued. If your bank wants to drive stronger, sustainable, profitable and mutually beneficial relationships in this new social reality, you must learn more about your customers – and listen when they speak.

Leading banks around the world are already responding to this trend by evolving into social banks, ones that embrace transparency and two-way interaction through social media to meet and exceed customer expectations. A social bank pursues mission-appropriate engagement with its customers, aligning its social efforts with its core business strategy and brand image. It builds the organizational capabilities needed to process customer insights and adopts change management strategies that let it react to this input in meaningful ways.

Canada is considered one of the world’s most socially connected countries, with over 50% of the population using social media tools. This presents a tremendous opportunity for Canadian banks to learn from leading organizations and industries as they push the envelope by transforming into social banks.

Stress testing: A look into the Fed’s black box

April 24, 2014 Comments off

Stress testing: A look into the Fed’s black box
Source: PricewaterhouseCoopers

On March 26th, the Federal Reserve (Fed) announced the results of its annual Comprehensive Capital Analysis and Review (CCAR). This year the Fed assessed the capital plans of 30 bank holding companies (BHCs) – 12 more than last year – and objected to five plans (four due to deficiencies in the quality of capital planning process, and one for falling below quantitative minimum capital ratios). Two other US BHCs had to “take a mulligan” and quickly resubmit their plans with reduced capital actions to remain above the quantitative floors.

The CCAR 2014 results send two overarching messages: The quality of the capital planning process is now a more prominent aspect of the Fed’s focus (versus just the quantity of capital), and the bar continues to rise, especially for the largest firms. Therefore, BHCs must continue to improve their capital planning processes regardless of whether they meet quantitative capital requirements.

Fed objections this year covered both US and foreign-owned BHCs. Three of the six largest US BHCs were unable to make desired capital distributions, in part due to the Fed using its own forecasting models for the first time (rather than relying on the BHCs’ models). In addition, half of foreign-owned BHCs’ plans (again, three of six) were rejected due to qualitative issues. These outcomes suggest that the Fed will likely continue to use its models to exert downward pressure on stressed capital ratios to keep capital in the system, supplemented by its heightened qualitative assessments.

This A closer look provides our quantitative and qualitative analyses of the CCAR 2014 results and lessons learned, and our view of enhancements needed to meet increasingly heightened regulatory expectations.

CRS — Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issues

April 17, 2014 Comments off

Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issues (PDF)
Source: Congressional Research Service (via National Agricultural Law Center)

As communities face a variety of economic challenges, some are looking to local banks and financial institutions for solutions that address the specific development needs of low-income and distressed communities. Community development financial institutions (CDFIs) provide financial products and services, such as mortgage financing for homebuyers and not-for-profit developers, underwriting and risk capital for community facilities; technical assistance; and commercial loans and investments to small, start-up, or expanding businesses. CDFIs include regulated institutions, such as community development banks and credit unions, and nonregulated institutions, such as loan and venture capital funds.

The Community Development Financial Institutions Fund (the Fund), an agency within the Department of the Treasury, administers several programs that encourage the role of CDFIs, and similar organizations, in community development. Nearly 1,000 financial institutions located throughout all 50 states and the District of Columbia are eligible for the Fund’s programs to provide financial and technical assistance to meet the needs of businesses, homebuyers, community developers, and investors in distressed communities. In addition, the Fund allocates the New Markets Tax Credit to more than 5,000 eligible investment vehicles in low-income communities (LICs).

This report begins by describing the Fund’s history, current appropriations, and each of its programs. A description of the Fund’s process of certifying certain financial institutions to be eligible for the Fund’s program awards follows. The next section provides an overview of each program’s purpose, use of award proceeds, eligibility criteria, and relevant issues for Congress.

The final section analyzes four policy considerations of congressional interest, regarding the Fund and the effective use of federal resources to promote economic development.

See also: Community Development Block Grants: Funding Issues in the 113th Congress (PDF)

Competition in lending and credit ratings

April 14, 2014 Comments off

Competition in lending and credit ratings
Source: Federal Reserve Board

This article relates corporate credit rating quality to competition in lending between the public bond market and banks. In the model, the monopolistic rating agency’s choice of price and quality leads to an endogenous threshold separating low-quality bank-dependent issuers from higher-quality issuers with access to public debt. In a baseline equilibrium with expensive bank lending, this separation across debt market segments provides information, but equilibrium ratings are uninformative. A positive shock to private (bank) relative to public lending supply allows banks to compete with public lenders for high-quality issuers, which threatens rating agency profits, and informative ratings result to prevent defection of high-quality borrowers to banks. This prediction is tested by analyzing two events that increased the relative supply of private vs. public lending sharply: legislation in 1994 that reduced barriers to interstate bank lending and the temporary shutdown of the high-yield bond market in 1989. After each event, the quality of ratings (based on their impact on bond yield spreads) increased for affected issuers. The analysis suggests that strategic behavior by the rating agency in an issuer-pays setting dampens the influence of macroeconomic shocks, and explains the use of informative unsolicited credit ratings to prevent unrated bond issues, particularly during good times. Additionally, the controversial issuer-pays model of ratings leads to more efficient outcomes than investor-pays alternatives.

Monetary Policy in the New Normal

April 11, 2014 Comments off

Monetary Policy in the New Normal
Source: International Monetary Fund

The proposed SDN would take stock of the current debate on the shape that monetary policy should take after the crisis. It revisits the pros and cons of expanding the objectives of monetary policy, the merits of turning unconventional policies into conventional ones, how to make monetary policy frameworks more resilient to the risk of being constrained by the zero-lower bound going forward, and the institutional challenges to preserve central bank independence with regards to monetary policy, while allowing adequate government oversight over central banks’ new responsibilities. It will draw policy conclusions where consensus has been reached, and highlight the areas where more work is needed to get more granular policy advice.

Community Bank Performance: How Important are Managers?

April 10, 2014 Comments off

Community Bank Performance: How Important are Managers?
Source: Federal Reserve Board

Community banks have long played an important role in the U.S. economy, providing loans and other financial services to households and small businesses within their local markets. In recent years, technological and legal developments, as well as changes in the business strategies of larger banks and non-bank financial service providers, have purportedly made it more difficult for community banks to attract and retain customers, and hence to survive. Indeed, the number of community banks and the shares of bank branches, deposits, banking assets, and small business loans held by community banks in the U.S. have all declined substantially over the past two decades. Nonetheless, many community banks have successfully adapted to their changing environment and have continued to thrive. This paper uses data from 1992 through 2011 to examine the relationships between community bank profitability and various characteristics of the banks and the local markets in which they operate. Bank characteristics examined include size, age, ownership structure, management quality, and portfolio composition; market characteristics include population, per capita income, unemployment rate, and banking market structure. We find that community bank profitability is strongly positively related to bank size; that local economic conditions have significant effects on bank profitability; that the quality of bank management matters a great deal to profitability, especially during times of economic stress; and that small banks that make major shifts to their lending portfolios tend to be less profitable than other small banks. Variables within managers’ control account for between 70 percent and 96 percent of the total explanatory power of equations explaining variations in performance across community banks.

CFPB Orders Bank Of America To Pay $727 Million In Consumer Relief For Illegal Credit Card Practices

April 9, 2014 Comments off

CFPB Orders Bank Of America To Pay $727 Million In Consumer Relief For Illegal Credit Card Practices
Source: Consumer Financial Protection Bureau

The Consumer Financial Protection Bureau (CFPB) has ordered Bank of America, N.A. and FIA Card Services, N.A. to provide an estimated $727 million in relief to consumers harmed by practices related to credit card add-on products. Roughly 1.4 million consumers were affected by Bank of America’s deceptive marketing of their add-on products. Bank of America also illegally charged approximately 1.9 million consumer accounts for credit monitoring and credit reporting services that they were not receiving. Bank of America will pay a $20 million civil money penalty to the CFPB.

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