Tag: US Federal reserve

ECB inches closer to ‘digital euro’, BFSI News, ET BFSI

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Frankfurt, July 14, 2021 -The European Central Bank is expected to take the next step towards a “digital euro” Wednesday by launching the project’s exploration phase, but questions remain about potential pitfalls and benefits for eurozone citizens.

The move comes as the coronavirus pandemic has hastened a shift away from cash, and as central bankers around the world nervously track the rise of private cryptocurrencies like bitcoin.

Here’s a look at what a digital euro would mean for the 19-nation club.

– What is a digital euro? – A digital euro, sometimes dubbed “e-euro”, would be an electronic version of euro notes and coins.

It would for the first time allow individuals (and companies) to have deposits directly with the ECB. This could be safer than with commercial banks, which could go bust, or than holding cash that could be stolen or lost.

The ECB has promised that any future digital euro would be “a fast, easy and secure way” to make payments. The service would be free and payments could be made by card or smartphone.

This would allow the Frankfurt-based institution to compete with foreign card companies such as Visa and Mastercard or digital payment services like PayPal, sectors where no strong European players have emerged.

A digital euro would “complement cash, not replace it”, the ECB has stressed.

The ECB is still studying which technology is best suited to develop the digital currency.

– Why now? – The Covid-19 pandemic has accelerated a decline in the use of cash as customers try to avoid contact.

The ECB is also wary of falling behind virtual money issued by private actors like bitcoin and Facebook’s yet-to-be-launched diem, formerly known as libra.

And there’s pressure to keep up with digital currency pilot projects launched by other central banks, before the ECB misses the boat and consumers end up putting their money elsewhere.

If people in the eurozone were to switch en masse to virtual currencies that operate outside the ECB’s reach it could hamper the effectiveness of its monetary policy measures.

– What are the risks? – Citizens might avoid traditional accounts in favour of going digital, weakening retail banks in the euro area.

The risk would be higher in times of crisis, when savers might be tempted to flee to the safety of a digital euro and trigger a run on banks.

To avoid this, the ECB will likely cap the number of e-euros people could hold in digital wallets, with executive board member Fabio Panetta suggesting a threshold of around 3,000 euros ($3,500).

Concerns about privacy and ensuring the digital euro can’t be used for money laundering will also be part of the ECB’s thinking as it weighs the pros and cons in the months ahead.

A key challenge that might emerge is that users “would have to be convinced to switch to a new payment method that is hardly different from existing ones”, said Deutsche Bank analyst Heike Mai.

– Who else is doing it? – Privately issued digital currencies have been around for years and tend to be highly volatile. They are also under growing scrutiny from regulators.

Bitcoin hit a record high of nearly $65,000 in April but has since plummeted by around 50 percent, largely because of a Chinese crackdown on cryptocurrency trading.

So-called stablecoins are seen as less volatile because they are pegged to traditional currencies like the US dollar or the euro. This is the route Facebook has chosen for its highly anticipated diem project.

Many central banks are looking into offering their own virtual money — known as Central Bank Digital Currency (CBDC) — as a stable and risk-free alternative.

The Chinese central bank has started trials with a digital renminbi, while the Bank of England has created a task force to research a possible “britcoin”.

The US Federal Reserve and the Bank of Japan are also exploring CBDCs.

– When can I spend mine? – Having completed the preliminary research and a public consultation, the ECB is expected to move to a formal investigation phase focused on the design of a digital euro next, set to take around two years.

Panetta told the Financial Times that if the project is then given the go-ahead, it would take another three years to get the digital currency ready for use — meaning the rollout is not expected before 2026.



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RBI report, BFSI News, ET BFSI

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MUMBAI: The gross non-performing assets (GNPAs) ratio of banks may rise to 9.8 per cent by March 2022, under a baseline scenario, from 7.48 per cent in March 2021, according to the Financial Stability Report (FSR) released by the Reserve Bank of India (RBI).

Under a severe stress scenario, GNPA of banks may increase to 11.22 per cent, the report released on Thursday showed.

“Macro stress tests indicate that the gross non-performing asset (GNPA) ratio of banks may increase from 7.48 per cent in March 2021 to 9.80 per cent by March 2022 under the baseline scenario,” the report said.

It, however, added that banks have sufficient capital, both at the aggregate and individual level, even under stress.

The FSR released in January this year had said banks’ GNPAs may rise to 13.5 per cent by September 2021, under the baseline scenario, which would be the highest in over 22 years.

The latest report said within the bank groups, public sector banks’ (PSBs’) GNPA ratio of 9.54 per cent in March 2021 edging up to 12.52 per cent by March 2022 under the baseline scenario is an improvement over earlier expectations and indicative of pandemic proofing by regulatory support.

For private sector banks (PVBs) and foreign banks (FBs), the transition of the GNPA ratio from baseline to medium to severe stress is from 5.82 per cent to 6.04 per cent to 6.46 per cent, and from 4.90 per cent to 5.35 per cent to 5.97 per cent, respectively.

Under the baseline and the two stress scenarios, the system level CRAR (capital to risk assets ratio) holds up well, moderating by 30 basis points (bps) between March 2021 and March 2022 under the baseline scenario and by 130 bps and 256 bps, respectively, under the two stress scenarios.

All 46 banks would be able to maintain CRAR well above the regulatory minimum of 9 per cent as of March 2022 even in the worst-case scenario, it said.

The report said the common equity Tier I (CET-1) capital ratio of banks may decline from 12.78 per cent in March 2021 to 12.58 per cent in March 2022, under the baseline scenario.

It would further fall to 11.76 per cent and 10.73 per cent, respectively, under the medium and severe stress scenarios by March 2022.

The report said Covid-19 has increased the risks to financial stability, especially when the unprecedented measures taken to mitigate the pandemic’s destruction are normalised and rolled back.

“Central banks across the world are bracing up to deal with the expected deterioration in asset quality of banks in view of the impairment to loan servicing capacity among individuals and businesses,” the report said.

The initial assessment of major central banks is that while banks’ financial positions have been shored up, there has been no significant rise in non-performing loans (NPLs) and policy support packages helped in maintaining solvency and liquidity.

The economic recovery, however, remains fragmented and overcast with high uncertainty, it said.

The report also highlighted the stress test results of the pandemic by various central banks.

Bank of England (BoE’s) ‘Desktop’ stress test in the interim FSR (May 2020) had projected that under appropriately prudent assumptions, aggregate CET-1 capital ratio of banks would decrease from 14.8 per cent at end-2019 to 11 per cent by the second year of test scenario (2021) and banks would remain well above their minimum regulatory capital requirements.

As per the latest position, the CET-1 capital ratio increased to 15.8 per cent over the course of 2020, the report showed.

The report further said in its June 2020 stress test and additional analysis in the light of Covid-19, the US Fed found that banks generally had strong levels of capital, but considerable economic uncertainty remained.

It projected that under severely adverse scenario, the CET-1 ratio of large banks would decline from an average starting point of 12 per cent in the fourth quarter of 2019 to 10.3 per cent in first quarter of 2022.

However, CET-1 ratio for large banks increased to 13 per cent as at end-2020, as per the latest position of stress test of the US Federal Reserve.

Similarly, in its Covid-19 vulnerability analysis results (June 2020) for 86 banks comprising about 80 per cent of total assets in the Euro area, the European Central Bank (ECB) estimated that banks’ aggregate CET-1 ratio would deplete by 1.9 percentage points to 12.6 per cent under the central scenario, and by 5.7 percentage points to 8.8 per cent under the severe scenario by end-2022.

As per the latest position, the CET-1 ratio of Euro area banks on aggregate improved to 15.4 per cent in 2020.

The FSR also conducted the stress tests on banks’ credit concentration — considering top individual borrowers according to their standard exposures.

The test showed that in the extreme scenario of the top three individual borrowers of the banks under consideration failing to repay, no bank will face a situation of fall in CRAR below the regulatory requirement of 9 per cent.

However, 37 banks would experience a decline of more than one percentage point in their CRARs.

Under the extreme scenario of the top three group borrowers in the standard category failing to repay, the worst impacted four banks would have CRARs in the range of 10 to 11 per cent and 39 banks would experience a decline in CRAR of more than one percentage point, the report said.

In the extreme scenario of the top three individual stressed borrowers of these banks failing to repay, a majority of the banks would experience a reduction of 10 to 20 bps only in their CRARs, the report said, adding this will be on account of low level of stressed assets in March 2021.

The report further said despite the pandemic conditions during 2020-21, the GNPA ratio for the non-banking financial companies (NBFCs) sector declined with a more than commensurate fall in the net NPA ratio attesting to higher provisioning, and capital adequacy improved marginally.

The GNPAs of NBFCs stood at 6.4 per cent and net NPAs at 2.7 per cent as of March 2021.



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Global banks announce bumper dividends, but Indian peers face a cap, BFSI News, ET BFSI

Banking & Finance

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Global wall street banks are hiking dividend payouts after US Federal Reserve gave them go-ahead last week after annual stress test results. However, the Indian bank shareholders have to wait has curbed banks’ dividend-paying ability in the financial year 2020-21 citing the impact of an ongoing second wave of coronavirus.

Morgan Stanley, JPMorgan, Bank of America, Goldman Sachs and Wells Fargo said on Monday they were hiking their capital payouts after the US Federal Reserve gave them a clean bill of health following their annual “stress tests”.

Analysts and investors had expected the country’s largest lenders to start issuing as much as $130 billion in dividends and stock buybacks from next month after the Fed last week ended emergency pandemic-era restrictions on how much capital they could give back to investors.

Morgan Stanley

Morgan Stanley delivered the biggest surprise to investors, saying it would double its dividend to 70 cents a share in the third quarter of 2021.

The Wall Street giant also said it would increase spending on share repurchases.

Morgan Stanley CEO James Gorman said in the announcement that the bank could return so much capital because of the excess it has accumulated over several years. The action, he said, “reflects a decision to reset our capital base consistent with the needs we have for our transformed business model.”

Bank of America

Bank of America Corp said it will hike its dividend by 17% to 21 cents a share beginning in the third quarter of 2021, and JPMorgan Chase & Co said it will go to $1.00 a share from 90 cents for the third quarter.

Goldman Sachs Group said it planned to increase its common stock dividend to $2 per share from $1.25.

Wells Fargo

Wells Fargo & Co, which has built up capital more rapidly than rivals due in part to a Fed-imposed cap on its balance sheet, said it plans to repurchase $18 billion of stock over the four quarters beginning in September.

The repurchase target amounts to nearly 10% of its stock market value and is line with expectations from analysts.

Wells Fargo, which for years has been trying to move past a series of costly mis-selling scandals, said it was doubling its quarterly dividend to 20 cents a share, consistent with analyst expectations.

“Since the COVID-19 pandemic began, we have built our financial strength … as well as continuing to remediate our legacy issues,” CEO Charlie Scharf said in a statement.

“We will continue to do so as we return a significant amount of capital to our shareholders,” Scharf added.

Citigroup

Citigroup, meanwhile, confirmed analysts’ estimates that a key part of its required capital ratios had increased under the stress test results to 3.0% from 2.5%.

A hike of that size will limit Citigroup’s share buybacks, versus its peers, a report from analyst Vivek Juneja of JPMorgan shows. Juneja expects Citigroup will have the lowest capital return of big banks he covers.

Citigroup CEO Jane Fraser said the bank will continue its “planned capital actions, including common dividends of at least $0.51 per share” and buying back shares in the market.

In India

The Reserve Bank of India has curbed banks’ dividend-paying ability in the financial year 2020-21 citing an ongoing second wave of coronavirus that comes with an economic cost.

“In view of the continuing uncertainty caused by the ongoing second wave of Covid-19 in the country, it is crucial that banks remain resilient and proactively raise and conserve capital as a bulwark against unexpected losses, the Reserve Bank of India said in April.

“Banks may pay dividend on equity shares from the profits for the financial year ended March 31, 2021, subject to the quantum of dividend being not more than fifty percent of the amount determined as per the dividend payout ratio prescribed,” it said.

Private lender HDFC Bank has announced that the board has declared a dividend of Rs 6.50 per share for the year ended 31 March 2021.



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FPIs turn net buyers in Jun; invest Rs 12,714 cr in Indian markets, BFSI News, ET BFSI

Personal Finance

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New Delhi: After remaining net sellers for two months in a row, foreign portfolio investors (FPIs) in June turned net buyers by pumping in a net Rs 12,714 crore into Indian markets. Prior to this, overseas investors had pulled out Rs 2,666 crore in May and Rs 9,435 crore in April.

According to depositories data, FPIs invested Rs 15,282 crore in equities between June 1 and 25.

At the same time, FPIs withdrew Rs 2,568 crore from the debt segment.

The total net inflow stood at Rs 12,714 crore during the period under review.

Bajaj Capital Joint Chairman and MD Sanjiv Bajaj said the inflow in June is on account of “favourable global cues and improving outlook for the Indian economy amidst a sharp fall in the number of COVID-19 cases easing of lockdown restrictions in some parts and a pick-up in vaccination.”

India can witness ‘V’-shaped growth revival amid forecast of a normal monsoon, supportive monetary policy, a deleverage balance sheet of the corporate sector and a well-capitalised banking system, he added.

Geojit Financial Services Chief Investment Strategist V K Vijayakumar said, “High delivery volumes in IT (information technology) and metal stocks indicate strong institutional buying.”

Kotak Securities Executive Vice-President (Equity Technical Research) Shrikant Chouhan said that overall, the MSCI Emerging Markets Index gained nearly 1.49 per cent this week.

Except for India and Indonesia, all key emerging and Asian markets have seen FPI outflows this month to date, he further noted.

Indonesia saw month-to-date FPI inflows of USD 363 million. On the flip side, Taiwan, South Korea, Thailand and Philippines saw month-to-date FPI outflows of USD 2,426 million, USD 1,218 million, USD 124 million and USD 64 million, respectively, he said.

Morningstar India Associate Director (Manager Research) Himanshu Srivastava said, “From the long-term perspective, India would attract foreign investments as the macroeconomic environment improves and the domestic economy starts treading on the recovery path.”

So far, the ultra-loose monetary policy stance by central banks globally to support the economy in the aftermath of the coronavirus pandemic had opened flood gates of foreign money into emerging markets like India, he added.

However, the US Federal Reserve‘s hawkish statement dented sentiments and prompted foreign investors to turn cautious, he said.



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Dollar fights for footing as Fed minutes eyed

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The US dollar found pockets of support in Asia on Monday, but struggled to post gains, as investors are heavily positioned for it to fall further while the US Federal Reserve holds interest rates low and US trade and current account deficits grow.

Easing commodity prices and virus outbreaks in Singapore and Taiwan — where Covid-19 had been contained — helped modest dollar gains of 0.2 per cent against the Australian and New Zealand dollars in the early part of the Asia session. The greenback also rose 0.1 per cent against the euro and the yen. But it remains close to testing major support levels, which if broken could see a return to a downtrend that pressed it lower through April.

Also read: Rupee rises 13 paise to settle at 73.29 against US dollar

A dollar bounce that followed higher-than-expected inflation data last week has also faded as traders figure the Fed will keep rates low. The dollar last traded at $1.2134 per euro and has support around $1.2179. The dollar index is likewise, at 90.389, just above key supports at 89.677 and 89.206. It bought 109.45 yen and traded at $0.7758 per Aussie and $0.7228 per kiwi.

Fed minutes, from an April meeting that predated the data surprise on inflation last week, are due on Wednesday and are the next market focus for clues on the Fed’s thinking.

“We expect the minutes … to reiterate that policymakers consider the pick up in inflation to be transitory,” said Kim Mundy, a currency strategist at the Commonwealth Bank of Australia in Sydney. “The upshot is that we do not expect the (Fed) to consider tapering its asset purchases soon,” she said. “The dollar is expected to resume its downtrend this week after last week’s CPI-inspired boost.”

Speculators increased their bets against the dollar last week, mostly by adding to bets on the euro and to a lesser extent sterling as Britain and Europe head toward recovery. Sterling was perched near a two-and-a-half-month high on Monday, at $1.4085, as Britain reopens its economy after a four-month Covid-19 lockdown.

Things are travelling in the opposite direction in Asia where some early leaders in taming the pandemic are now dealing with new outbreaks. Singapore and Taiwan have both tightened curbs as cases rise and the Taiwan dollar fell to a three-week low on Monday. The dollar crept up 0.1 per cent against the Chinese yuan to trade at 6.4424 ahead of industrial output and retail sales figures due mid-morning on Monday. Elsewhere, cryptocurrencies traded under pressure after another weekend bouncing around following tweets from Tesla boss Elon Musk. Bitcoin hit its lowest since February on Sunday after Musk hinted at Tesla possibly selling its holdings. Bitcoin last traded 2 per cent weaker at $45,302 and ether was 4 per cent lower at $3,421.

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Digital Dollar Project to launch five U.S. central bank digital currency pilots, BFSI News, ET BFSI

Personal Finance

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By Michelle Price

WASHINGTON – The U.S. nonprofit Digital Dollar Project said on Monday it will launch five pilot programs over the next 12 months to test the potential uses of a U.S. central bank digital currency, the first effort of its kind in the United States.

The private-sector pilots initially will be funded by Accenture Plc and involve financial firms, retailers and NGOs, among others. The aim is to generate data that could help U.S. policymakers develop a digital dollar.

A partnership between Accenture and the Digital Dollar Foundation, the Digital Dollar Project was created last year to promote research into a U.S. central bank digital currency (CBDC).

“There are conferences and papers coming out every week around the world on CBDCs based on data from other countries,” said Christopher Giancarlo, former chair of the Commodity Futures Trading Commission and co-founder of the Digital Dollar Foundation.

“What there is not, is any real data and testing from the United States to inform that debate. We’re seeking to generate that real-world data,” Giancarlo added.

CBDCs are the digital equivalent of banknotes and coins, giving holders a direct digital claim on the central bank and allowing them to make instant electronic payments.

While debit cards or payment apps are a form of digital cash, those transactions are created by commercial banks based on money central banks credit to those banks’ accounts. They are not fully government-backed, can take days to settle, and often incur fees. Cryptocurrencies, meanwhile, are controlled by private actors.

Central banks around the world, including in China and Europe, are revving up CBDC projects to fend off threats from cryptocurrencies and improve payment systems.

As guardian of the world’s most widely used currency, the U.S. Federal Reserve is moving more cautiously. It is working with the Massachusetts Institute of Technology (MIT) to build a technology platform for a hypothetical digital dollar, but chair Jerome Powell said last week that it is “far more important” to get a digital dollar right than it is to be fast.

Giancarlo said Powell was correct to be cautious but that as China pushes ahead, the United States must drive a discussion on incorporating U.S. values such as privacy and freedom of commerce and speech into the development of CBDCs.

“It’s vital that the U.S. asserts leadership as it has in previous technological innovations,” Giancarlo added.

A digital dollar could also boost financial inclusion in the United States, where transaction fees impede the access of many Americans to mainstream financial services, Giancarlo said.

The pilot programs, three of which will launch in the next two months, will complement the Fed’s MIT project by generating data on the functional, sociological, business uses, benefits and other facets, of a digital dollar. The data is due to be released publicly.

Accenture has worked on a number of CBDC projects including in Canada, Singapore and France.

David Treat, a senior managing director at Accenture, said CBDCs would exist alongside other forms of physical and electronic money, rather than replace them.

“It’s not a panacea for all money,” Treat said. “We will be using physical cash and coin for some time.”



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