Group 21.- Analysis of the Federal Discount Rates over the last 10 years

The federal discount rate is the interest rate at which a financial institution borrows funds directly from the Federal Reserve Bank. In the US, the discount rate, which acts as a reference for commercial banks, is one of the rates that the FED manipulates to control money supply, the second one being the Federal Funds Rate.

 

There are three types of discount rates: The primary credit rate, which is the interest rate charged to most banks, the secondary credit rate, a rate that is charged to small or regional banks and is usually a half point higher than the primary rate, and the seasonal rate which is debited to small community banks that need a temporary boost in funds to  meet the local borrowing needs.

 

The Federal discount rate is set through a democratic process in which the Federal Open Market Committee meets eight times a year to decide whether banks will be able to lend out less or more money. For instance, if the discount rate is high, it is more expensive for banks to borrow funds. Thus, they have less cash to lend out. On the contrary, if the discount rate is low, banks can borrow more funds as they have more cash to lend out, making cheaper to obtain loans from the FED.

 

The FED raises the discount rate when it wants rates to increment, its main goal being to control inflation. This process is called contractionary monetary policy. As the Fed is supposed to regulate money supply, this policy helps to reduce the amount of funds available by limiting lendings. The expansionary monetary policy, on the other hand, is used to stimulate economic growth.

 

 

This article will analyze the Federal Reserve’s discount rates over the last 10 years. It will first examine the resolution of the year 2006 to the end of the crisis in 2009, then it will evaluate years 2010 to 2013, and finally it will explore recent years, from 2014 to this current year.

 

At the end of the year 2006, the discount rate was at the highest it has been during the last 10 years. Even if the real estate market was becoming weaker, many sectors continued to be strong. As a result, the board of directors decided to maintain the discount rate high, at 6.25%. Some directors believed that the economic growth was constant, and that inflation would continue to decrease. During the next six months the discount rate was maintained given the healthy overall look of the economy, however, many borrowers start having financial difficulties. Interest rates started rising, and they were no longer able to pay their mortgages back. Hence, many banks went bankrupt because of the high number of customers defaulting.  These were the first signs of the worst financial crisis since 1929.

 

On September 17, 2007, the Federal Reserve decided to decrease the discount rate to 5.75%, but this measure was not sufficient to stop the financial crisis. The employment report acknowledged a shortage in labor supply, which was a sign of a weaker economy. The discount rate continued decreasing during the last six months of 2007, but the economy kept deteriorating as well as financial markets. Some directors believed that continuing to decrease the discount rate could help the economy’s recovery. Thus, by the end of the year 2007, the discount rate decreased to 4.75%.

 

The year 2008 started with a low discount rate of 3.50%, and continue diminishing throughout the year until it accounted for 0.50%. The reason is that many indicators of economic growth were performing poorly. The unemployment rate was high, whereas the manufacturing, housing and spending rates were very low. This year is known to have suffered the worst economic crisis since the Great Depression. The Federal Reserve resolved to lower the discount rate in order to increase liquidity, and improve the economic performance. As the prices for energy and basic commodities started falling, the board of directors decided to stimulate aggregate demand by increasing the amount of available cash.

 

At the beginning of the year 2009, the board of directors realized that the economy was weaker. As there was a lot of uncertainty about the economy’s future, the asset prices were high, and the efforts made by the government to improve liquidity were minimal. Financial markets continued to be affected whereas households, and corporations  refrain from spending. A lack of credits also inhibited the economy’s recovery. For these reasons, the FED’s board of directors decided to maintain the discount rate small so that banks could lend more money, and strengthen the economic situation. By the end of the year 2009, the FED decided to establish an interest rate of 0.50%. The economy began to recover albeit unhurried. They previewed an unrushed economic recovery for the next coming years. According to the FED’s report of December 23rd, 2009, financial markets were performing better during the last months of this year, nevertheless, financial intermediaries were still having trouble equilibrating their balance sheets. The housing industry showed a recovery, however, this was only possible because of the money lent to first-time buyers. The employment rate continued to be low, but it was improving. At the end of the year 2009 the board of directors decided to maintain the discount rate small.

 

At the beginning of the year 2010, American Federal Reserve Banks changed their attitudes towards the monetary policy. As they were optimistic about the recovery of the American Economy, the FED established an increase on the primary credit rate of ¾. This discount rate remained until the end of 2015.

 

According to the Federal Open Market Committee, there was a moderate resurgence in the American Economy during this period. The Federal Reserve website states that “although the unemployment rate declined somewhat since” the summer of 2015, “it remained elevated. Households spending continued to advance, and the housing sector showed further signs of improvement, but growth in business fixed investments slowed down. Inflation had been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations remained stable.” From this, to ensure price stability and generate a stronger economic recovery, the FED decided to maintain the discount rate.

 

Throughout the beginning of 2013, there was a debate over the discount rate and whether there is a need to change it. Such participants as the directors of the Federal Reserve Bank of Boston wanted to decrease the current rate to ½ percent, whereas the Bank of Kansas City was willing to increase that rate to 1 percent. Although having these debates, the discount rate stayed the same. Overall, during the first half of 2013,  Federal Reserve Bank directors viewed actions in the economy as to be increasing at a moderate pace. The housing and auto sectors were strengthening their positions, employment was improving, though such departments as unemployment and manufacturing made directors left with opposite opinions.

 

By the end of 2013, almost all directors were delighted with the economy growth and there was no change in the discount rate in the end. Problems considering fiscal policy were gone, the labor environment was positive, the commercial and residential building department faced improvements. That all led most directors to vote for the discount rate to stay as it was.

 

Although the discount rate haD stagnated at 0.75% during 5 years, the FED decided to FINALLY increase it to 1 % on December 2015.  Then it was set to 1.25% on December 2016. This WAS the second time in 10 years that the FED increaseD the discount rate, and the first time after the Donald Trump’s election. Moreover, it will rise gradually in the coming months to a level that is still unCERTAIN TO the financial world.

 

Because of the conditions on the current market, and inflation, the FED decided to increase the discount rate. Therefore, many improvements in the economy, MULTIPLIED consumer spending and a growth in the manufacturing industry have been noticed after THE AUGMENTATION OF this rate. In fact, the economy recovered, and the unemployment rate HAS BEEN decreasING during this current year. As a consequence, the GDP incremented in the USA. Consumers spend more money, and they are able to borrow despite the high interest rateS thanks to their greater income. These are the reasons why, the board of directors voted to INCREMENT the discount rate in November 2016.

 

as THE inflation is still rising, the Federal Open Market Committee forecast that the interest rate will reach 1.4% in 2017, and 2.1% in 2018. Thus, the Fed haS to establish the discount rate according to the economic situation IN the USA.

 

ONE can also consider the political aspects THAT INFLUENCED the establishment of the the discount rate. In fact, Donald Trump has a divergent manner of leading the country. AS A RESULT, the national debt is becoming riskier causing the discount rate to increase. Besides, the augmentation of the discount rate reflects FED’s reaction to the president’s plan of cutting taxes and multiply spending. IN THE MEANWHILE, ONE CAN ONLY HOPE THAT THE US ECONOMY WILL CONTINUE TO BE IMPROVED.

Sources:
https://www.thebalance.com/federal-reserve-discount-rate-3305922
http://www.bankrate.com/rates/interest-rates/prime-rate.aspx
https://fred.stlouisfed.org/series/INTDSRUSM193N
https://www.federalreserve.gov/econresdata/ifdp/2006/index.htm
https://www.federalreserve.gov/newsevents/press/monetary/monetary20070109a1.pdf
https://www.federalreserve.gov/newsevents/press/monetary/bcreg20070904b1.pdf
https://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm
http://www.investopedia.com/articles/economics/09/financial-crisis-review.asp
https://www.federalreserve.gov/newsevents/press/monetary/monetary20100112a1.pdf

Group 21- Brexit, Changing HSBC’s and Prudential’s Paths

The year 2016 will certainly be remembered because of its many catastrophes all around the globe, its polemical presidential campaigns, and the decision taken by the UK’s population. The Brexit truly impacted the entire world, especially because of its uncertainty. Many companies were forced to take measures to ensure their survival, particularly when some of their operations were located in the United Kingdom. HSBC and Prudential insurance are some of these organizations.

 

 

According to Nasdaq, Prudential stocks fell by 7% after the Brexit referendum, the main reason being low interest rates. As yields and interest rates were below average, Prudential revenues were also expected to be low. The reason is that 67% of its income was represented by the fixed maturities bought during the last two years.

 

For the first time since 2012, the yield on the 10-year U.S. treasury note fell below 1.5%, whereas the yield of U.K’s bonds diminished to less than 1%. According to Nasdaq, because Prudential’s investments were evaluated at 20%, the drop in investment yields impacted its value. As the Brexit affected interest rates, and thus Prudential’s investments, Nasdaq argued that “yields on the U.S. retirement assets” would also decrease. In fact, they were likely to decline to 0.8%. Hence, Prudential decided to temporarily close its fund located in the United Kingdom, when the final decision of the Brexit was announced.

 

Since Prudential management division is placed in England, Brexit could definitely affect its annual fees. This is why Prudential was planning to relocate its fund known as M&G, to Berlin or Luxembourg, as it already had operations in these countries. Even if most of Prudential customers were outside of the European Union, a tenth of its assets, representing £255.4 billion pounds, were from clients belonging to european market. Subsequently, it became vital to relocate as the Brexit could definitely rise the cost of transactions if remaining in London.

 

  

 

Those graphs show the price of Prudential shares between March 2014 and January 2017. However, we noticed that the price fell down when the Brexit has been announced.

 

 

In contrast with Prudential’s strategy, the first reaction that HSBC holdings had after the Brexit announcement was to keep its headquarters in London, according to the Guardian. Stuart Gulliver, HSBC’s chief executive, “Having HSBC’s headquarters in the UK, and  significant business in Asia Pacific delivers the best of both worlds to HSBC’s stakeholders.” HSBC believes that London, with its internationally respected regulatory and legal framework, is an important and world leading financial center. It has abundant experience in solving complex international affairs, and offers platforms to thousands of highly skilled international people. Thus, it remained to be the ideal position, and home base for HSBC. According to The Treasury, HSBC’s decision to keep headquarters in the UK could also boost their goal of making the UK a great place to do more business with China and the rest of Asia.

 

On the other hand, recent news stated that HSBC warned that it would shift 1,000  banking jobs from London to Paris if UK decided to leave the EU, as it already had operations in this city. Chief Executive Stuart Gulliver confirmed that HSBC was going to move staffs which were responsible for generating around a fifth of its trading revenue to Paris. This indicates that even if HSBC was willing to do more business in the United Kingdom with Asian countries, european markets are still highly important for this company’s welfare.

 

The strategies implemented by HSBC and Prudential insurance were almost the same, as both companies’ first option was to relocate to their subsidiaries already settled in Europe. Even if HSBC hesitated at first about leaving its headquarters in London, it finally decided to relocate 1,000 jobs to Paris because France is still part of the European Union.  As the outcomes of the Brexit are still uncertain, these organizations decided to prevent losses, and take action. Many are the speculations of how the Brexit is going to affect multinational businesses located in the United Kingdom, however, only time will dictate the real outcomes.

 

Sources:

Davos. “HSBC, UBS to shift 1,000 jobs each from UK in Brexit blow to London”. Reuters. January 18th, 2017. Web. February 6th, 2017.

http://uk.reuters.com/article/us-davos-meeting-hsbc-idUKKBN1520SO

Graph substracted from Prudential’s website on February 6th, 2017.

http://www.prudential.co.uk/investors/share-price-information/london-share-price/chart  

 

Rodionova, Zlata. “Brexit: Prudential could relocate M&G funds due to Britain leaving the EU”. The Independent. August 10th, 2016. Web. February 6th, 2017.

 http://www.independent.co.uk/news/business/news/brexit-latest-news-eu-referendum-prudential-mg-insurance-fund-management-assets-a7183021.html

Trefis. “How can Brexit impact Prudential?”. Nasdaq. July 1st, 2016. Web. February 6th, 2017. http://www.nasdaq.com/article/how-can-brexit-impact-prudential-cm643996

Treanor, Jill. “HSBC to keep its headquarters in London”. The Guardian. February 15th, 2016. Web. February 6th, 2017.

https://www.theguardian.com/business/2016/feb/14/hsbc-to-keep-its-headquarters-in-the-uk

Group 21- Be my customer from the comfort of your home

Banks have never been so far from their clients. While seeking improvement and enhanced customer satisfaction, they found out that customers prefer intimacy and comfort. Nevertheless, they took a long time before changing their approach. Banking is one of the industries which has resisted the most to disruptive technologies. However, no one can inhibit entrepreneurs from looking for opportunities to improve people’s lives. New entrants have developed online-financial services. Although it has been difficult for them to gain people’s trust, many have made their way out of the crowd. These improved services affected the banking industries, and forced them to innovate their businesses by adopting Fintech services to keep their customers, and increase their satisfaction. State of the art technology has allowed them to please customers’ demands and expectations. The internet, smartphones and other types of telecommunications enable long distance interaction between financial advisors and their clients. Fintech allows to make faster transactions, from wherever customers are, at any time they need them.

 

Fintech companies use services which combine both technology and financial transactions. These companies require teams working on different areas. For example, the marketing and finance departments seek to improve banking strategies as well as their performance, whereas those who work in the IT sectors focus on innovating applications along with services. These strategies are used by start-ups to attract customers, and raise funds. According to Mikaal Abdulla, CEO & Co-founder of 8 securities, it is necessary to have experience before setting up a Fintech company, as it is extremely challenging to develop this type of business. He believes that building trust within the market is crucial, and that advertising is the best tool to gain consumers’ credibility.

 

Nowadays, there are many banks that enable people to check their accounts everyday through the use of the internet. An example of this is Hello bank launched by BNP Paribas. It is a 100% digital bank which provides services in Europe. Its aim is to let customers be autonomous while providing online-help when needed. However, Hello Bank is not the only digital bank available in the market, competitors like Boursorama have appeared due to the increasing demand for these services worldwide.

 

Online banking has not always been that successful. Only a few decades ago, it was scary for customers to switch to online services as they felt insecure. Today, security has been improved. In fact, even traditional bankers store information in big data centers that can be easily hacked. However, being hacked is not that much of a problem because insurances such as FDIC, cover any loss. This improvement explains the increasing number of people switching to online banking. According to the Pew Research Center, in 2010 about 55% of the 18 to 29 year-old-american-people said that they banked-online, and in 2013 this number increased to 66%. This data shows the evolution in the online-banking world, as people finally trust it. Since technologies evolve quickly, the number of people opting for online services is increasing.

 

WHAT WAS THE MAIN REASON YOU STARTED USING MOBILE BANKING WHEN YOU DID?

 

Online banking is based on the “AAA” model which stands for “anytime, anywhere, anyhow”. Thus, online banking provides services at any time, no matter where customers are or what they want. Thereby, customers have a twenty-four-hour access to make money transactions which is convenient for those who rarely have time to go to the bank. In addition, it is much easier to meet consultants to update one’s personal information, purchase financial products or apply for a loan. People can even check interest rates or the process of their investments just in a few clicks. What is more, online banking provides a platform to manage different accounts at the same time, making much simpler to save money along with one’s family.

 

Although there are still  improvements to be done, it is essential not to ignore the positive changes that Fintech brings to people’s lives. Fintech not only improves customers’ satisfaction, but also banks’ financial productivity. Fintech is very likely to keep evolving, and it might become a necessity as time goes by. Thanks to the deep relationship between Fintech and the banking industry asking for a loan, paying debts, managing or running a property is going to have an earth-shaking change.

References:
https://letstalkpayments.com/banks-attracting-new-customers-keeping-away-501346/
http://www.pewinternet.org/2013/08/07/51-of-u-s-adults-bank-online/
http://www.mckinsey.com/industries/financial-services/our-insights/cutting-through-the-noise-around-financial-technology
https://www.federalreserve.gov/econresdata/consumers-and-mobile-financial-services-report-201603.pdf
http://www.finweb.com/banking-credit/online-banking-advantages-and-disadvantages.html#axzz4X3uVE3Rthttp://tech.co/future-online-banking-2015-12
Consulted on Friday January 28th, 2017.