Category Archives: Banking

Updates from Chicago Booth

How central bankers misjudge forward guidance
By Rose Jacobs – One of the best ways to spur an economy is to get people spending, and policy makers have a number of tools to do that. Yet growing evidence suggests a favored approach of late—forward guidance by central banks—doesn’t work. Such guidance, usually focusing on the outlook for interest rates, is meant to make clear to consumers that prices are likely to rise soon, so buying big items now would be smart.

While people may agree with the buy-now logic, they still may not react as economists and policy makers expect, according to Boston College’s Francesco D’Acunto, Karlsruhe Institute of Technology’s Daniel Hoang, and Chicago Booth’s Michael Weber. That’s because they don’t understand the signal, the researchers find.

“If you’re an economist too much stuck in your model world, this is very surprising to you,” Weber says. On the other hand, he acknowledges that not everyone can follow the logic chain that leads from a central banker predicting depressed interest rates, to lower borrowing costs, to higher inflation, to the urgency of buying now. “If you’re not too detached from reality, it’s not surprising,” Weber says.

The researchers analyzed two events in which governments or central banks signaled that prices were set to rise. One was a 2005 announcement by the German government that the country’s value-added tax (similar to the US sales tax) would increase from 16 percent to 19 percent in 2007. The second was a 2013 statement by then European Central Bank president Mario Draghi that interest rates would stay low or decline further for some time. To economists, this statement was a clear signal that price inflation would soon follow. more>

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Updates from ITU

Banking for all: Can AI improve financial inclusion?
ITU – In a world where an estimated 1.7 billion people do not have a bank account, can artificial intelligence help make financial inclusion a reality for everyone?

This was the topic under discussion at a webinar during the year-round AI for Good Global Summit 2020.

Inclusive financial access directly helps enable seven of the 17 United Nations Sustainable Development Goals. It requires people and businesses in underserved areas to have affordable and easy access to secure financial services and products.

This means being able to build credit, receive funds, deposit money, buy insurance, invest in education and health and withstand economic shocks.

With the rise of mobile phone use and information and communication technologies (ICTs) penetration in developing countries, financial service providers are now turning to artificial intelligence to make financial inclusion happen.

‘Superpowers’ for digital services

Typically, to lend money, providers use documents to verify the identity of a person, evaluate their credit score and offer a collateral loan. But AI tries to fix this for people who cannot meet these requirements, said panelist Rory Macmillan, Founding Partner at Macmillan Keck, Attorneys & Solicitors. more>

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Updates from McKinsey

The future of payments is frictionless—now more than ever
Amrita Ahuja, the CFO of Square, explains how the company’s payment platform and services have helped small enterprises stay afloat during the COVID-19 crisis.
By Amrita Ahuja – Cash is king when it comes to maintaining corporate liquidity. It is in a somewhat less prestigious position when it comes to fulfilling consumer-to-business transactions. The onset of the COVID-19 crisis and ongoing fears of infection have prompted consumers and businesses to rely more on digital and contactless payment options when buying and selling goods and services.

How have the past few months been, and what’s changed for Square as a result of the crisis?

We’re taking it a day at a time. We serve merchants, who we call sellers, and individual consumers. And we know that this has been an incredibly trying time for everyone, where a lot of people’s livelihoods have been in question. The first thing we did was focus on our employees and their health. We shut down our offices on March 2. We wanted to do right by our communities and do our part to halt the spread of the virus. We took an all-hands-on-deck approach to understand what was happening in our customers’ businesses and what was happening in our own business. Every single day in March and April felt like a year, frankly, in terms of our understanding and how fast things were moving. We ran through scenarios, and asked ourselves, “OK, if the situation resembles a V, or if things look like an L, or if it looks like a U, what does that mean for us and our ability to serve our various stakeholders, employees, customers, and investors?”

We’ve had to be fast and clear with our communications during a time in which there are still so many unknowns. It was important to own up to this uncertainty and yet not downplay the severity of the situation. We met far more frequently with the board than the typical quarterly cadence. We held an update call with [investment bankers and analysts] outside the typical earnings cadence. We suspended our formal guidance to Wall Street, but we actually shared more information about the real-time views that we were seeing in our business across a number of different metrics and geographies. And with employees, we had a far more frequent and transparent mode of communication. We were sending weekly email updates, we built comprehensive and regularly updated FAQs, we set up a Slack channel for questions, and we held biweekly virtual all-hands meetings. We didn’t know everything, but we had a process for learning things over time and communicating them transparently. Ultimately, that has served us well, in terms of motivating our employees, serving our customers, and giving stakeholders a clear understanding of where we are as a business and how we are proceeding. more>

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5 Ways Joe Biden’s Presidency Will Affect Your Money – and How to Act Now

By Farnoosh Torabi – As with any new President, Joe Biden will have his work cut out for him when he takes the oath of office in January. And while his “build back better” plans are already laid out, it’s yet to be seen how much of an impact his administration can actually make on your finances.

The COVID-19 pandemic’s not behind us, so the recovery will be slow, which Biden has been clear about. Not to mention, with a very possible Republican Senate majority, many of the new administration’s initiatives could face serious pushback, if not a total squashing. The outcome will be determined in a couple months when Georgia’s two Senate run-off races happen.

In short, we can’t read far into what Biden is proposing and use it as a playbook for our personal finances today. “I’m not a big fan of people overhauling their finances or making moves on a presumption of something passing, simply because there are just too many unknowns,” Greg McBride, Chief Financial Analyst at Bankrate.com, told me on my podcast.

Here’s a breakdown of some of the major economic initiatives proposed by President-elect Joe Biden and Vice President-elect Kamala Harris, and how to interpret them for the sake of our financial well-being. As always, personal accountability will be just as — if not more — important than matters of policy. more>

Updates from Chicago Booth

There will be more innovation post-COVID. Here’s why.
By Harry L. Davis – Since the COVID-19 pandemic threw our lives into disarray, we’ve had to change how we do anything involving other people. Rather than counting on bumping into colleagues in the hall, we now have to schedule Zoom calls around the competing demands (childcare, a broken water heater) that everyone is dealing with. There isn’t time for the kind of small talk that often, unpredictably, leads to big ideas.

There are unquestionably benefits to handling some tasks over video conference. Last spring, I taught a class in which groups of students take on consulting projects with the guidance of Chicago-based Kearney. Consultants spend countless hours on airplanes to make face-to-face meetings with their clients possible, and it’s a big part of their culture. In past years, regular in-person meetings and schmoozing were built into the syllabus.

Of course, none of that was possible this year. Our students were thrust into a new world where even senior executives were caught off-guard and without webcams. Whiteboard brainstorming sessions became Zoom calls.

Curious about their experiences, we surveyed the students about the impact of remote work throughout the quarter. While pessimistic at first, by the end of the nine-week course, they later felt that their remote situation was actually helping them be more efficient and helped them do do a better job responding to their clients’ needs. I had a similar experience with teaching remotely—although daunted at first, I found that I was able to deliver my classes effectively, even if I was tethered to my desk chair.

Once the pandemic is behind us, we’ll have to choose what to return to and what to keep from our remote way of working. I think Zoom and its ilk will continue to have an important place for those situations where teams are geographically dispersed or there’s some urgent decision that needs to be made. But the type of work that delivers innovation—creative work—will still best be done in person. more>

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Staying Focused on the Big Picture

U.S. election-related uncertainty may persist a while longer, but the relatively optimistic longer-term economic outlook hasn’t changed.
By Lisa Shalet – Now that former Vice President Joseph Biden is President-Elect, much of the election uncertainty has dissipated. Markets have factored in Biden’s win as well as the apparent lack of a Congressional Democratic sweep, but headlines concerning the transition of power could contribute to volatility.

We encourage investors to ignore short-term price swings based on the headlines and stay focused on the bigger picture. We still believe that investors should emphasize global stocks over bonds. Morgan Stanley & Co. strategists forecast that the S&P 500 Index, a broad measure of the U.S. market that is now trading around 3500, may reach 3700 by the middle of next year.

Several key points in our economic outlook are unlikely to change due to election results. Here are three reasons why:

The V-shaped economic recovery is on solid ground. October’s nonfarm payroll data was a solid upside surprise, with the unemployment rate falling and the labor participation rate rising. Consumer sentiment is holding up, and manufacturing and services indicators continue to show expansion. Housing and durable goods orders support the capital spending narrative of the new business cycle. In 2021, U.S. GDP could grow at an annualized pace of 5% to 6%—in part because the recession this year enhances the year-over-year comparison, but also given the midyear return to growth. Such economic expansion could power double-digit increases in corporate profits.

The Federal Reserve remains ultra-dovish. The central bank has stayed firm on holding its key short-term fed funds rate near zero through December, 2023. Low interest rates can stimulate growth by facilitating more borrowing, allowing consumers and businesses to spend more. The Fed has yet to define metrics or time frames for “average inflation targeting,” which will likely allow inflation to trend higher without rate intervention to check its rise. Under a policy known as quantitative easing, the Fed also continues to buy government bonds at a significant pace, a direct injection of liquidity across fixed-income markets that can also contribute to economic growth.

The COVID-19 trajectory is unlikely to lead to national lockdowns. The recent surge in new infections is unfortunate and concerning, however, as was the case in the summer, the U.S. economy remains resilient in the face of localized shutdowns. We believe that public health measures and vaccine availability will drive the pandemic’s economic impact. Hopefully by January, we could be past the peak of new cases and closer to available vaccines. Drug development pipelines remain on track to deliver some scaled vaccine distribution by summer, 2021. more>

Updates from Chicago Booth

When giving feedback, focus on the future
By Sarah Kuta -When managers give performance-improvement feedback to employees, they presumably want the conversations to result in positive changes—not to inspire defensiveness, excuses for poor performance, or skepticism of the managers’ point of view.

Offering forward-looking feedback can help keep such conversations productive, suggests research by Humanly Possible’s Jackie Gnepp, Chicago Booth’s Joshua Klayman, Victoria University of Wellington’s Ian O. Williamson, and University of Chicago’s Sema Barlas.

Performance-improvement feedback often fails when managers spend too much time diagnosing or analyzing what went wrong in the past, according to the researchers. When managers and employees talk about possible next steps and solutions, however, employees tend to be more receptive to the feedback and more likely to intend to act on it, the researchers find.

Recipients respond just as well to predominately negative feedback as they do to positive feedback, so long as the conversation focuses primarily on how the recipient can best move forward, the research suggests. more>

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Why Modi’s government is not up to the task

By Prabhat Patnaik – A striking aspect of the 24 percent decline in India’s GDP in the first quarter of 2020-21 compared to the previous year’s first quarter is the decline by 10.3 percent in public administration, defense, and other public services. This is a sector where the GDP is estimated not by the “output” of the sector but by the government expenditure incurred under these heads. The decline in the GDP originating in this sector therefore means a decline in public expenditure. This is surprising for two reasons: first, it shows that government expenditure, instead of being “counter-contractionary” has been “pro-contractionary”; second, during the lockdown caused by the pandemic, one would expect government spending on health care to go up, and thereby raise the overall government expenditure, instead of the fall we are actually observing.

When there is a lockdown, and output contracts, it is incumbent on the government to increase its expenditure. The rise in expenditure reduces the degree of contraction; and it puts purchasing power in the hands of the people so that many of them can maintain their consumption without getting into debt. Even if the government is timid enough not to increase its expenditure, at least it must maintain its expenditure to limit the contraction in GDP; but a fall in government expenditure during the period of a lockdown, which accentuates the overall contraction, is just the opposite of what the government should have done.

True, in such a period, there is a fall in government revenue; but to reduce government spending because of this, so that the fiscal deficit does not increase, is the height of folly. It worsens the contraction of the economy and greatly increases the sufferings of the people. This, however, is exactly what the Indian Prime Minister Narendra Modi’s government has done.

What is more, the Modi government is persisting with this folly. Some may find this accusation strange since on the very first day of parliament the government has come with a supplementary demand of around $32 billion, which, it may be thought, represents substantial additional expenditure. But this impression is wrong. These supplementary demands are meant to cover the expenditure that the government had already announced earlier to cope with the pandemic, which was over and above the budgetary provisions. This already announced expenditure, we know, was quite trivial, amounting altogether to no more than about 1 percent of GDP. True, these supplementary demands will revive India’s flagship program for rural employment scheme under the Mahatma Gandhi National Rural Employment Guarantee Act 2005. This program had come to a virtual standstill because of lack of funds, but such revival will only entail what has already been promised, not any further expansion. more>

Updates from McKinsey

How executives can help sustain value creation for the long term
Companies create more shareholder value when executives and directors concentrate on long-term results. A new report highlights behaviors that allow them to maintain a long-term orientation.
By Kevin Sneader, Sarah Keohane Williamson, Victoria Potter, Tim Koller, and Ariel Babcock – Ample evidence shows that when executives consistently make decisions and investments with long-term objectives in mind, their companies generate more shareholder value, create more jobs, and contribute more to economic growth than do peer companies that focus on the short term. Addressing the interests of employees, customers, and other stakeholders also brings about better long-term performance. The future, it seems, should belong to leaders who have a long-term orientation and accept the importance of treating various stakeholders fairly

Nevertheless, our research shows that behavior geared toward short-term benefits has risen in recent years. In a recent survey conducted by FCLTGlobal and McKinsey, executives say they continue to feel pressure from shareholders and directors to meet their near-term earnings targets at the expense of strategies designed for the long term. Managers say they believe their CEOs would redirect capital and other resources, such as talent, away from strategic initiatives just to meet short-term financial goals.

Executives may continue to focus on short-term results because adopting a long-term orientation can be challenging. While previous studies have established that long-term companies perform better than others in the long run, they haven’t identified the management behaviors that enable that success. A new report, Corporate long-term behaviors: How CEOs and boards drive sustained value creation, represents our attempt to fill that gap. In it, we show that long-term companies adhere to certain management behaviors, and we recommend actions that CEOs and boards can take to institute those behaviors at their companies. more>

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Updates from Chicago Booth

How can banks create safe money? Balance competition
By Áine Doris – A conundrum underscores the banking system: banks issue liquid deposits but at the same time supply loans to finance illiquid projects, such as startups. In doing this, they expose themselves to liquidity risk—the kind that can lead to bank runs. It’s a precarious way to build a banking system.

Chicago Booth PhD candidate Douglas Xu tackles this liquidity paradox in a model that identifies two market failures or “inefficiencies” that regulators and policy makers need to keep in balance to reduce systematic risks.

Banks have long occupied a critical role in the creation of money. In today’s global economy, governments create only 3 percent of the money exchanged for goods, products, and services: the paper money and coins issued by central banks or monetary authorities whose trustworthiness or integrity underscore their value. Banks create the rest of the world’s cash—a staggering 97 percent.

From early record-keeping tokens to today’s deposit taking and loan making, banks have long been in the business of issuing money-like assets in one form or another. These assets function as credible payment media and thereby facilitate the kinds of activities and transactions that drive economic fluidity and growth.

But these assets bring inherent risk. Xu created a framework that captures the way that banks create money in the economy and integrates two key concepts: banks’ intrinsic vulnerability to illiquidity, and the so-called money-multiplier effect—the chain of transactions created when a bank makes a loan that generates a concomitant deposit elsewhere in the system. Put simply, loans generate a fresh supply of deposits. more>

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