Rogue Bankers Join the Welfare Cheats on Osborne Hit List

From The Conversation.

Cracking down on bad behaviour. EPA/Andy Rain

“The age of irresponsibility is over” declared the governor of the Bank of England at the annual Mansion House dinner to the great and the good of the financial world. Along with the chancellor of the exchequer, George Osborne, Mark Carney unveiled a host of new sanctions and procedures designed to clean up financial markets.

Delivering the Fair and Effective Markets Review, an annual assessment of the way financial markets operate, they mentioned 11 recommendations ranging from new regulations against manipulating markets to tightening up hiring and training policy in the financial services industry. But the most eye-catching feature of the review was the demand for enhanced criminal prosecutions of “individuals who fraudulently manipulate markets”.

In Osborne’s words, people “who commit financial crime should be treated like the criminals they are”. The review therefore recommended that criminal sanctions for market abuse should be extended to traders in foreign exchange markets and that the maximum sentences for wrongdoing should be lengthened from seven to ten years.

Mervyn King EPA/Franck Robichon

Osborne and Carney were also critical of the Bank of England for failing to identify risks and abuses in the banking system in the run up to the financial crisis. But there are actually far more parallels between Carney and his predecessor, Mervyn King, than you might assume on the evidence of the Mansion House speech.

King, who experienced the banking crises (bail-outs and scandals) in the last few years of his governorship, was also critical of the failures of the largest banks. Carney has followed in his stead, voicing his criticisms of the industry, and has enjoyed new powers as a result of the Financial Services Act, passed in 2012. Strong criticisms have therefore been accompanied by new regulatory bodies such as the Financial Policy Committee and Prudential Regulatory Authority (replacing the old Financial Services Authority).

Culture change

But the real message behind the Mansion House speeches is that the state’s approach to policing the banking system is indeed toughening – precisely because change has been so slow in forthcoming. Amid the creation of new, formal regulatory bodies (FPC, PRA, FCA), a host of other relatively informal, or advisory bodies have emerged too.

These include the Parliamentary Committee on Banking Standards and the Banking Standards Board. Another one was recommended in this latest review – the Market Standards Board. What all these bodies have in common is that they are trying to remedy irresponsible behaviour on the part of individuals working in financial services, and to improve the “culture” of banking.

Improving banking culture has two faces. It is partly a PR exercise aimed at improving consumer confidence in the banks. But it is also about addressing a more substantive threat posed by bad behaviour.

That change in culture has been slow. The recent forex scandal, for example, revealed that corrupt behaviour in these markets was still occurring in the UK up until 2014, long after the Libor, IRSA and PPI revelations.

The market police state

Many in the room at the Mansion House were expecting the big announcement to focus on concessions on the bank levy. The expectation – with half an eye on HSBC’s announcements (read: veiled threats) earlier in the week – was that the chancellor might cede some ground to the largest banks. Instead though, the ominous silence on the bank levy and the tough-talking approach reinforce an important message: that the state is no longer willing or able to turn a blind eye to irresponsible banking.

Bankers are in need of a PR boost. Dominic Lipinski / PA Wire/Press Association Images

What is most noteworthy in the latest review is that it shows the Conservative government – known for its strong stance on welfare cuts and typically labelled a business-friendly party – is also taking a tough stance on the UK’s biggest industry, financial services. But this is not as surprising as it might appear. The same principles that underpin the Tories’ position on the welfare state also underpin their take on individuals who commit fraud and cheat in the financial services industry.

The Conservatives are fulfilling a role assigned to them by classical, liberal thinkers such as Adam Smith – that of a market police ensuring the “better” functioning of the market mechanism itself and maintaining the legitimacy of commercial society. This is because, in the mind of the Conservative government, it is not simply “free-riding” benefit claimants which threaten the market mechanism, but the collusive behaviour of individual bankers as well.

Ultimately, the Fair and Effective Markets Review is more than just another piece of clever political rhetoric. It is being backed up by genuine changes in the regulatory approach to anti-competitive behaviour in the financial services industry.

The hope is that, gradually, the culture of banking will indeed change and legitimacy and credibility can be restored to the banking system. But, as some commentators have also noted with some concern, the UK’s unhealthy addiction to cheap consumer credit, high levels of mortgage borrowing, and consumption-led recoveries, means that Britain’s financial worries run far deeper than just the behaviour of a few “bad apples” in the banking industry.

Author – Huw Macartney – Lecturer in Political Economy at University of Birmingham

Stamp Duty One Part of a Bigger Problem for Housing – HIA

The residential building industry is being weighed down by excessive and inefficient taxation, beyond just Stamp Duty, says the Housing Industry Association (HIA).

In some states the total tax bill amounts to over 40 per cent of the final price of a new home, taxes on new housing are a brake on economic activity, and represent a constraint on housing affordability and labour productivity.

There is no question that Stamp Duty is one of the key offenders, with research undertaken last year for HIA by Independent Economics identifying it as is the most inefficient tax in Australia’s entire taxation system.  As a tax on moving, it discourages households from relocation when this decision may better suit their needs in terms of size, location or employment opportunities. Unfortunately, the economy and the community do not get the best use out of the available housing stock. “However, there are many other taxes on new homes including developer infrastructure levies, which can be over $70,000 on a new house and land package, and which unfairly require new home buyers to fund community assets upfront.

Equally, GST is levied on new homes but not existing properties. Adding tens of thousands of dollars on a new home, GST creates a price differential between new and existing residential properties, which hits affordability, supply, employment and economic activity. Affordability is further eroded by the cascading effect of ‘taxing taxes’, whereby a tax such as stamp duty is levied on an amount that already includes a range of other costs. GST on infrastructure levies alone can add more than $5,000 to the final cost of a new home, while stamp duty on the total GST adds around $3,000. Infrastructure charges, GST and stamp duty add $140,000 and more to the cost of a new home in Sydney, while a plethora of other taxes, levies, fees, changes, rates and duties take the total tax grab to over 40 per cent of a new house and land package.

Taxes add more than $250,000 to the price of a new home in Sydney, accounting for 40 per cent ($1,350 per month) of repayments for the life of a home mortgage.  Incredibly, in supplying shelter for Australians, residential building contributes 13 per cent of all GST revenue collected by the Commonwealth. Sadly, that taxation revenue drives up the cost of housing.

Perspectives on the Housing Debate

Last week amongst all the noise on housing there were some important segments from the ABC which made some significant contributions to the debate. These are worth viewing.

First Lateline interviewed the Grattan Institute CEO on the social and political impacts of housing policy, and also covered negative gearing.

Second The Business covered foreign investors, restrictions on investment lending and the implications for non-bank lenders who are not caught by the APRA “guidance”.

Third, a segment from Insiders on Sunday, dealing with both the economic arguments and the political backcloth.

Next a segment from Australia Wide which explores the tensions dealing with housing in a major growing city, Brisbane. No-one wants building near their backyard, so how to deal with population growth.


Latest Lending Aggregates All About Property

The ABS released their data for April. The total value of owner occupied housing commitments excluding alterations and additions rose 1.3% in trend terms  whilst the value of total personal finance commitments rose 0.5%.

Total commercial finance commitments rose 2.4%. Fixed lending commitments rose 3.4%, while revolving credit commitments fell 0.4%. The trend series for the value of total lease finance commitments rose 1.6% in April 2015.

Lending-Aggregates-April-2015We continue to see strong investment lending with more than half of residential loans in April going to investors.

Property-Lending-Aggrates-April-2015The proportion of commercial lending aligned to investment property rose and this explains much of the rise in commercial lending overall. Investment property lending is relatively unproductive, and makes little contribution to economic growth.


The Rise, and Rise, and Rise of Investor First Time Buyers

DFA has just released the latest analysis of survey results which shows that nationally 35% of all First Time Buyers are going direct to the Investment sector. However there are significant state differences, with more than fifty percent of transactions from first time buyers in NSW, and upticks in other states as the behaviour spreads. You can watch our latest video blog on this important subject.

Here is the data we used in the video. The first chart shows the national average picture, using data from the ABS to track owner occupied first time buyers (the blue area), data from DFA surveys to display the number of FTB investment loans (the yellow area), both to be read from the left hand scale, and the relative proportion of loans using the yellow line on the right had scale. About 35% of loans are going to investment first time buyers.

ALL-FTB-June-2015In NSW, the rise of investors has been running for some time, and as a result, more than  50% of loans are First Time Buyer investors. Note the growth thorough 2013.

NSW-FTB-June2015In QLD, until recently there was little FTB investor activity, but we are seeing a rise in 2014, to a peak of 12%

QLD-FTB-June-2015The rise of FTB investors in VIC started in 2013, but is now growing quite fast, to about one quarter of all FTB activity.

VIC-FTB-June-2015Finally, in WA, where OO FTB activity is quite strong, we are now seeing the rise of FTB investors too. Currently about five percent are in this category.

WA-FTB-June-2015 There is a clear logic in households minds. They see property values appreciating in most states, yet cannot afford to buy a property for owner occupation in a place where they would want to live. So they choose the investment route. This enables them to purchase a cheaper property elsewhere by grabbing an investment loan, often interest only and serviced by the rental income. In addition they get the benefits of negative gearing and potential capital appreciation. Meantime they live in rented accommodation, or with families or friends. About ten percent of recent purchasers have received some help from “The Bank of Mum and Dad“. Finally, some see the investment route as a means to build capital for the purchase of an owner occupied property later, though others are now thinking more in terms of building an investment property portfolio. They are on the property escalator, with the expectation that prices will continue to rise.

There are some significant social impacts from this change, and there are probably more systemic risks in an investment loan portfolio, which should be considered. We are of the view that the recent APRA “guidelines” will only have impact at the margin, so we expect to see continued growth in FTB investment property purchases for as long as interest rates stay low and property values rise.

Real Wages Show US Economy is Stronger Than You Think

From The Conversation. Last month’s US employment report, released on Friday, contained a lot of good news.

First, monthly jobs growth exceeded expectations, as employers hired 280,000 people. Second, the labor force participation rate ticked up, indicating that people who had stopped looking for work were becoming more optimistic about finding a job and thus had resumed their search for one.

Finally, average hourly earnings for all production and non-supervisory workers in the private sector grew by 2%, compared with May 2014.

Some people may question why wage growth of 2% would be considered good news. The reason is there was no rise in prices over that period, so the average real wage also grew by about 2%. And it is the real wage, rather than nominal pay without accounting for inflation, that ultimately determines the living standards of the American worker.

While the first two highlights from the jobs report are indeed good news, this last one might be its most important takeaway – though it’s been true for a few months now. We’ve been reading articles for years about how stagnant wages have been without focusing on the impact of the lack of inflation. In other words, while we’re not making a lot more money, it should feel like more because consumer prices have barely budged since the financial crisis – by that measure, wages for most workers are the highest they’ve been in decades.

This matters because it suggests the economy is in better shape than we think and may be what the Federal Reserve has in mind as it considers raising rates this year, with many (including the International Monetary Fund) urging the central bank to wait until 2016.

One of the biggest risks, however, concerns productivity, which is truly stagnant. That and take-home pay are highly correlated, so if productivity doesn’t pick up, the rise in real wages may well evaporate.

The real wage story

The consumer price inflation data for May will not be released until later this month, so the balance of this essay will focus on the real wage rate in the private sector through April – although I would not expect the story to change once we can evaluate the latest data. (Hourly wage data for government workers are not available.)

I would also like to focus on the economic prospects of middle- and lower-income workers, so I will be looking at the earnings of those in production and non-supervisory roles. This group accounts for 82% of all private sector workers, who on average earned US$20.91 an hour in April.

The average hourly real wage for this group since 2007 is shown below (converted to April 2015 dollars). The shape of this graph undoubtedly will surprise many readers given the widely held believe that the middle class has been falling behind economically.

Real wages are now the highest since 1979. Bureau of Labor Statistics

The average hourly real wage did decline during the “Great Recession” and again in 2011 and 2012, but since falling to its recent low of $20.17 in October 2012 it has increased, first at a modest pace and then more rapidly since September as price inflation disappeared.

Perhaps even more surprising for most people is that the average real wage for these employees is now at the highest level since March 1979, although it is still 8.2% below the all-time peak ($22.27) reached in January 1973.

The average real wage for middle-class workers declined during the second half of the 1970s, the 1980s and the first half of the 1990s, reaching a low of $17.97 in April 1995 (data go back to 1964). Since then, wages have tended to slowly increase, with the largest gains when price inflation disappears and the greatest losses occurring when it spikes upward.

Widespread gains

That brings us back to the most recent figures. During the 12 months through April, average hourly real earnings for production and non-supervisory workers increased by 2%. These wage gains are fairly widespread among industries, as is shown in this table.

Real wages are up across the board over the past year through April. Bureau of Labor Statistics

Moreover, the greatest wage gains occurred in some of the lowest-wage industries: in retail trade (up 2.3%), accommodations (4.6%), full-service restaurants (4.7%) and fast food restaurants (3.7%). Clearly some of the lowest-paid workers in America have enjoyed some very substantial real wage gains during the past year.

Real wage gains have also far outstripped productivity gains. From the first quarter of 2014 to the first quarter of this year (most recent data), labor productivity in the non-farm business sector increased by only 0.3%, compared with real wage growth of 1.9% for private sector production and non-supervisory workers over the same period.

The poor rate of productivity growth has been a feature of the current economic recovery. Over the past five years, from the first quarter of 2010 to the first quarter of 2015, output per labor hour has increased by only 2.8%, or 0.6% per year. Over the long run, productivity growth puts a cap on the maximum rate of growth in the real hourly wage rate – meaning if productivity doesn’t start rising, neither will wages.

Why real wage growth is poorly understood

So why are people so convinced that middle- and low-wage workers have been losing ground?

Many people point to the fact that the real hourly wage is less than it was in 1973, but that reflects the decline that occurred between 1973 and 1995. Since then, the average hourly wages have been on a slow upward trend, averaging 0.76% per year – not much, but positive all the same. And as I’ve shown, those gains accelerated in the past year year, with even larger ones in lower-wage industries.

Perhaps the recent wage gains have yet to sink into people’s consciousness, and thus their assessment of the economy will shortly improve. Also, millions of people are still unemployed or have dropped out of the labor force, and their income has not benefited from the increase in average wages.

Or perhaps people are unhappy because they are comparing their financial situation with higher-income households, who have done even better, although income inequality is only slightly worse than it was in 2000, when the middle class seemed much happier (see the excellent work of Berkeley’s Emmanuel Saez).

Or maybe it’s something as simple as our spending desires outpacing the growth in the real wage rate. People clearly were spending a lot of borrowed money through 2007, when the financial crisis sharply curtailed many people’s ability to borrow and spend.

What I do know, however, is that unless productivity growth improves, the real wage gains that the data show will prove fleeting. And then we really will be in a world of hurt.

Author – Donald R Grimes, Senior Research Associate, Institute for Research on Labor, Employment and the Economy at University of Michigan

Greece Must Accept Reform Proposals Before Time Runs Out

From The Conversation. The Greek government and its international creditors remain at an impasse over the reforms Greece must accept to receive the bail-out it needs to sustain itself in the coming months. The decision to postpone its June 5 IMF debt repayment and reject a set of reforms put forward by the EU Commission president, Jean-Claude Juncker has sparked debate about Greece’s ability to honour its commitments to international creditors.

The back-and-forth exchange of proposals continues, with the Greek prime minister, Alexis Tsipras – now a regular fixture in Brussels – meeting his French and German counterparts today. The need to agree becomes increasingly important for both Greece and the eurozone as the days pass. The current bail-out deal runs out at the end of June and without the further €7.2 billion from the EU and IMF, the Greek government runs the risk of not being able to sustain itself.

Though time is running out, I believe they will eventually strike an agreement. What it will look like, however, is rather opaque. In light of Syriza’s tactics so far and the weakness of Greece’s position, the need to accept what its creditors are offering is increasingly the only solution.

Punching above its weight

When Syriza came to power last January, it promised to deviate from the path of austerity and renegotiate the bail-out programme. It was truly punching above its weight. But in the context of the Greek population having suffered prolonged periods of austerity with no real signs of recovery, it rode the spirit of populism and promised that it could deliver an alternative programme.

A proposition that scrapped austerity, however, has not come to fruition. In fact, the Greek government has not been able to implement large sections of its electoral agenda – mainly due to a lack of funds, but also because the new government needed breathing space as new and inexperienced political actors came to the forefront.

Ultimately, amateur handling of domestic policies and international negotiations by prominent government ministers, such as the finance minister, Yanis Varoufakis, and the foreign minister, Nikolaos Kotzias, internal disagreement over where to focus their precious few resources and an over-reliance on the perceived charisma of Alexis Tsipras have left the government with little to show for its efforts so far.

Charisma can only get you so far. EPA/Yannis Kolesidis

Negotiations with creditors have not managed to turn European partners in favour of the Greek government’s positions. Instead the episode has demonstrated a further demise of the country’s already tarnished image as an unreliable and stubborn partner. Recent statements by high-level EU officials demonstrate well the frustration over the inability of the Greek government to deliver concrete and realistic solutions.

Political game playing

So where does this state of play leave the Greek government? As time is running out and the country’s economic position deteriorates, it is expected that the range of available alternative measures will diminish. Some of the reforms Syriza is proposing on pensions and privatisation require significant time to implement and yield the necessary economic results. Greece does not have that luxury.

There is a strong game of political communication taking place in front of the general public. Not only is Syriza trying to hold together its political mandate and appease a Greek electorate which vested its hopes in the party, but it is also up against internal opposition within the Greek parliament. This has become progressively louder and more visible – arguing for example in favour of a referendum of the proposed agreement with the EU.

Greeks are hoping for a speedy resolution. EPA/Orestis Panagiotou

Nevertheless, the Greek government under Syriza has not received a mandate from its electorate to take the country out of the eurozone. Thus, Syriza is not expected to go head to head with the EU on a full rupture of relations, something it will become extremely difficult to justify domestically.

Meanwhile Europe is trying to hold firm and press Greece to meet its bail-out obligations – to maintain the cohesion of the eurozone and protect the rest of the EU. At the same time, leaders (including Angela Merkel and Francois Hollande) also need to justify their decisions to their own domestic electorates, who are becoming increasingly uneasy.

For all the anxiety, the solution is crystal clear. In order for Greece to move forward, the Greek government needs to take up the opportunity being offered it, accept the political cost domestically and help return the international dignity and standing of the country.

Author Theofanis Exadaktylos Lecturer in European Politics at University of Surrey


Sovereign Bond Volatility, Deterioration in Market Liquidity and Longer Term Challenges – IMF

Senior officials from 42 advanced and emerging market economies, and international financial institutions, together with representatives of the private sector and academia met on June 11–12 at the International Monetary Fund (IMF) IMF Headquarters in Washington D.C. to discuss issues relevant for public debt management. The forum allows debt managers, IMF officials and other participants to connect challenges facing debt markets to broader macroeconomic and financial stability developments. The discussions were insightful, thought-provoking, and enriched by the diversity of participants’ experience from advanced and emerging markets.

The forum took place against the background of the uneven global recovery and recent volatility in global bond markets. Participants remarked that secondary market liquidity had deteriorated, adding to sovereign bond market volatility. This is, in part, the result of banks’ evolving business models as they adapt to the post-crisis market and regulatory environment, and the continued take-up of sovereign bonds by central banks. In addition, a prolonged low yield environment poses challenges for a number of financial institutions which are the traditional investors of sovereign bonds.

In his opening remarks, José Viñals, the IMF’s financial counselor and director of the monetary and capital markets department, reflected on the varied and complex issues debt managers face in both advanced and emerging market economies. “The divergence in monetary policies in advanced economies will continue to influence capital markets including sovereign bonds,” he said, pointing to risks around the Fund’s baseline of a smooth normalization of monetary policy. A delayed path could imply a continued accumulation of financial stability risks. Faster-than-expected tightening could trigger rapid decompression of yields, with heightened volatility and global market spillovers.

In his keynote speech, David Lipton, IMF’s first deputy managing director, focused on the challenges for debt mangers of long-term structural issues such as low potential economic growth, high public debt, and demographic trends. “Debt managers can help ensure through their actions that debt remains sustainable,” he said. They play a pivotal role in the two-way communication between the fiscal authorities and markets, in mitigating the potential consequences of high public debt, and in supporting growth by facilitating the private sector’s access to financing. Debt managers also need to consider and plan for potential risks from contingent liabilities, as they are in the front line in terms of meeting the obligations should such risks materialize, Mr. Lipton added.

The forum also reflected on lessons learnt from the crisis, where participants discussed re-accessing the capital markets after a period of hiatus, contingent liabilities from the bank-sovereign nexus, and addressing collective action problems in sovereign debt restructurings.

Peter Breuer, deputy chief of the IMF’s debt and capital market instruments division, concluded the forum by accentuating a common theme—the need for debt managers to remain vigilant against emerging risks in an environment of diverging monetary policies, structural changes, and reduced market liquidity.

UK Bank Ring-Fence; More Flexible, Group Limits Unclear – Fitch

The implementation of bank ring-fencing in the UK continues a trend of dilution and flexibility by granting additional, albeit minor, concessions to the banks and remaining silent on the important subject of intra-group limits, says Fitch Ratings. The Prudential Regulation Authority’s (PRA) concessions in their end-May statement follow earlier watering-down of proposed rules for ring-fenced banks (RFB) by the UK government, which allowed more activities to be included within the ring-fence.

Fitch believes that only six of the largest UK retail banks will be subject to the ring-fencing rules, and of these only HSBC and Barclays are likely to have significant operations outside the ring-fence. Ultimately, the strength of the ring-fence will have rating implications for the entities within UK banking groups.

The PRA’s statement and near-final rules show that it is staying with the overall approach outlined in the October 2014 consultation. However, by clarifying that certain key aspects will be reviewed on a case-by-case basis and reminding the banks that it is possible to request waivers and modifications, the PRA has introduced additional flexibility. Banks may still have some room for manoeuvre because final rules will not be published until 3Q15 and banks will have until 2019 to comply.

Core issues such as the ‘large exposures limit’ on intra-group exposures between an RFB and the rest of its group and intra-group dividends are still open. UK banks argue that they need clarity to plan for future group treasury management and capital allocation. Under EU rules, the PRA could elect to limit large exposures to 10% of a RFB’s capital. We believe this tight limit would strengthen the ring-fencing and protect RFBs from riskier group activities.

Banks requested clarification about what types of subsidiaries can and cannot be owned by an RFB. A prescriptive list of permitted activities will not be published by the PRA, rather banks will have the opportunity to discuss subsidiary business lines with it on a case-specific basis. This could result in a broader range of permitted activities for RFBs, helping to diversify revenues and simplify operational functions, but also widen the net to include higher-risk business lines.

HSBC indicated recently that it intends to widen the scope of activities included in its RFB. The over-riding guideline is that a subsidiary should not expose the RFB to any risk affecting its ability to provide core activities in the UK. The relative size of subsidiaries will also be considered by the PRA under its ‘proportional’ approach, especially if these are undertaking activities largely unrelated to the RFB’s line of business.

RFBs must be able to take decisions independently and guidelines for board membership, risk management and internal audit arrangements aim to achieve this. Banks queried some of the board cross-membership restrictions and the PRA clarified that board membership rules do not apply to RFB sub-groups. This will make it easier for RFBs to fill the boards of their ring-fenced subsidiaries and affiliates.

Under its proportionality approach, the PRA can consider further waivers to governance arrangements, especially if compliance with the rules proves to be overly burdensome. Lloyds Banking Group is seeking a waiver on the requirement for its RFB, which will make up around 90% of the group, to have a different board of directors to that of its group. The PRA also clarified that RFBs are not prevented from relying on group services from other group entities, which is important if RFBs are to contain costs.

In our view, RFBs will still face some governance conflicts. The rules allow for some board members to be group employees, hold director positions in other group companies and independents can have occupied group positions subject to some restrictions. All board members can receive part of their remuneration in the form of listed shares in a group company. The practical implementation of governance rules will be important to ensure that the right balance is struck between achieving synergies between the RFB and the rest of its group and limiting the direct exposure, both financial and otherwise, to improve the resolvability of the group.

Limited Upside, Potential Downside from HSBC’s Pivot – Fitch

HSBC’s plan to redeploy resources to Asia, shrink its investment bank, and cut costs is unlikely to have a positive rating effect while being potentially negative over the long run, says Fitch Ratings. In particular, how HSBC manages its significant planned growth in China and south-east Asia could hurt the ratings if this leads to a higher overall risk profile and concentration.

The plan, announced as part of an Investor Update on 9 June, reinforces an earlier strategic plan from 2011 which was first updated in 2013 and focuses on several key themes. These include a regional focus on Asia and China, and operating a diversified universal banking model with three divisions of equal weight – Retail Banking and Wealth Management, Commercial Banking, and Global Banking and Market. Financial targets remain unchanged, including a return- on- equity target of above 10% based on a CET1 ratio of 12%-13% – both figures were adjusted earlier in the year.

The announced cost and capital reallocations would only provide a positive credit and ratings effect if HSBC outperforms on the execution of its strategy and at the same time boosts capitalisation significantly. In terms of maximising efficiencies, HSBC plans up to 25,000 job cuts – mainly from reducing back-office functions and through the use of digital technologies and automation. The cost savings will be reinvested, with the overall cost base remaining stable at USD32bn.

Positive factors are the plans to reduce a combined USD140bn in risk-weighted assets (RWAs) in the investment banking division through quicker reduction of legacy assets, selling assets that no longer meet their cost of capital, and focusing on transaction banking-type businesses and multi-product and multi-country relationships However, we view this as a natural extension of ongoing efforts to scale back investments that have become overly capital intensive.

HSBC confirmed that it would also exit Turkey and reduce its operations in Brazil to only a small presence, while holding on to its Mexican business. The capital released from the sales in Turkey and Brazil will be used mainly to finance growth in Asia, enhance transaction banking and building key trade hubs for example in places like Germany. HSBC has already retreated from several dozen retail markets since 2011, including India, Russia, Colombia, Thailand and South Korea. The bank is targeting an increase in investments of USD180bn-230bn in RWAs in the Pearl River Delta (PRD) in southern China and ASEAN countries, which will also involve quadrupling the PRD workforce over the medium term.

Extracting more value from its global network and from increasing the share of international client revenues – which it quantified at USD22bn or 40% of revenues in 2014 – would be positive for HSBC, but there are few details as yet as to how this will be measured and accomplished. In this regard, the bank emphasised that maintaining a substantial US presence is most critical for its transaction banking operations which generated revenue of USD16bn in in 2014.