Group 17 :The FED’s federal discount rates over the last 10 year.

Federal Reserve System (FED)

 

The central bank of the United States is the FED. FED stands for Federal Reserve System but this is also referred to as the Federal Reserve for short. Although the FED is an independent government institution, the American central bank is owned by a number of large banks and therefore not by the state. The main governing body of the FED is the Board of Governors which consists of 7 members who are appointed by the President of the United States. In addition to the national FED there are 12 regional Reserve Banks. 5 representatives of these regional reserve banks together with the 7 members of the board of governors make up the FOMC (Federal Open Market Committee). The primary responsibility of the FOMC is to supervise open market operations through monetary policy. One important responsibility of the Federal Reserve is to safeguard the stability of the United States’ financial system. The FED also has various other functions, including:

  • ‘managing’ the national money supply by means of monetary policy with the aim of:
  • supervision and regulation of the private banks;
  • preventing or resolving banking panics.

 

What is discount rate ?

The interest rate at which an eligible financial institution may borrow funds directly from a Federal Reserve bank. Banks whose reserves dip below the reserve requirement set by the Federal Reserve’s board of governors use that money to correct their shortage. The board of directors of each reserve bank sets the discount rate every 14 days. It’s considered the last resort for banks, which usually borrow from each other.

How it’s used: The Fed uses the discount rate to control the supply of available funds, which in turn influences inflation and overall interest rates. The more money available, the more likely inflation will occur. Raising the rate makes it more expensive to borrow from the Fed. That lowers the supply of available money, which increases the short-term interest rates. Lowering the rate has the opposite effect, bringing short-term interest rates down

Discount rate over the last 10 years

The Federal Reserve raised the Fed funds rate 1/4 point at the December 14, 2016, FOMC meeting. Most FOMC members think conditions are robust enough to warrant it. Members are pleased with recent strong jobs reports. The Fed funds rate is now 0.75 percent.  For details, see Current Fed Funds Rate.

Fed Chair Janet Yellen explained at the November 17, 2016, Congressional meeting why the Fed isn’t affected by the election outcome.

Fed Board Members look at economic data, which won’t register the effects of a Donald Trump Presidency until he implements policies in 2017.  Since he has promised expansionary fiscal policies, the Fed will probably follow contractionary monetary policy to prevent inflation. That’s because the economy is growing at a healthy rate. Tax cuts and increased spending in 2017 will overheat the economy, causing inflation. For more, see Which Phase of the Business Cycle Are We Currently In?

The Fed last raised its benchmark rate to 0.5 percent at its December 2015 meeting. That was the first rate increase since June 29, 2006. The rate had been at virtually zero (between 0 to 0.25 percent) since December 16, 2008. The Fed lowered it to combat the Great Recession.

The Fed funds rate directly affects short-term interest rates. These include the prime rate, credit card interest rates, and savings account rates.

It indirectly affects long-term rates, such as mortgages, corporate bonds, and ten-year Treasury notes. The Fed will raise those rates when it sells its holdings of Treasury notes and bonds. The Fed acquired $4 trillion of those through its Quantitative Easing program. Find out When Will Interest Rates Be Raised?

and What Is the Relationship Between Treasury Notes and Mortgage Interest Rates?

Why the Fed Is Raising Rates Now

The Fed is anxious to return rates to the healthy 2 percent level. It wants to get the economy out of a possible liquidity trap. That’s when families and businesses hoard cash instead of spending it. Low interest rates don’t give them much incentive to invest. The only way out of a liquidity trap is to raise interest rates.

The Fed also wants to raise rates because it’s been talking about it for more than a year. In response, forex traders expected the dollar’s value to rise. To take advantage of that, they shorted the euro. That strengthened the dollar 25 percent in 2014 and 2015. The strong dollar hurt exports and slowed economic growth. It also created lower import prices. That reduced the chance of inflation. If people expect prices to stay the same or drop, they have less incentive to spend now. They know their purchase might cost less in the future.

How It Affects You

Once the Fed raises the Fed funds rate, how high will it go?

Probably another .25 percent at first, as the Fed likes to take gradual steps whenever possible. The Fed expects to raise it to 1.5 percent in 2017. It will increase it to 2 percent in 2018 and 3 percent in 2019. The Fed forecasts inflation to remain around 2 percent until 2022. That’s because it will make sure that inflation is no worse than that. Here are 5 Steps to Take Now to Protect Yourself from Fed Rate Hikes.

Historically, the Fed funds rate remains between 2-5 percent. The highest it’s ever been was 20 percent in 1981 to combat stagflation and an inflation rate of 12.9 percent. That was an unusual circumstance caused by wage-price controls, stop-go monetary policy, and taking the dollar off of the gold standard. For more, see U.S. Inflation Rate: Current Rate, History, and Forecast

Former Federal Reserve Chairman Ben Bernanke has said that the most important role of the Fed is to maintain consumer and investor confidence in the Fed’s ability to control inflation. That means the Fed is more likely to raise rates than lower them.

Find out what Wall Street traders think the Fed will do with the Fed Funds Futures as a Predictive Tool.

 

 

DATE Fed Funds Rate  EVENT
2005: GDP = 3.3%, Unemployment = 6%, Inflation = 3.4%
Feb 2 2.5% Subprime borrowers could not afford mortgages when rates reset, typically in 3rd year.
Mar 22 2.75%
May 3 3.0%
Jun 30 3.25%
Aug 9 3.5%  
Sep 20 3.75%  
Nov 1 4.0%  
Dec 13 4.25%  
Fed Chair Ben Bernanke (February 2006 – January 2014)
2006: GDP = 2.7%, Unemployment = 6%, Inflation = 2.5% 
Jan 31 4.5% Raised to cool housing market bubble. More homeowners default.
Mar 28 4.75%
May 10 5.0%
Jun 29 5.25%
2007: GDP = 1.8%, Unemployment = 6%, Inflation = 4.1%
Sep 18 4.75%  
Oct 31 4.5%  
Dec 11 4.25%  
2008: GDP = -0.3%, Unemployment = 6%, Inflation = 0.1%
Jan 22 3.5%  
Jan 30  3.0%  
Mar 18 2.25%  
Apr 30 2.0% LIBOR began rising.
Oct 8 1.5%  
Oct 29 1.0%  
Dec 16 0.25% Effectively zero. The lowest fed funds rate possible.
Fed Chair Janet Yellen (February 2014 – January 2018).
2015: GDP = 2.6%, Unemployment = 6%, Inflation = 0.7% 
Dec 17 0.5%  
2016: GDP = 3.2%, Unemployment = 4.6%, Inflation = 0.4% (as of December, 19 2016.)
Dec 14 0.75%  

 Discount rate over the last 10 years

 

http://www.bankrate.com/rates/interest-rates/federal-discount-rate.aspx#ixzz4ZyhqPhBC

http://www.global-rates.com/interest-rates/central-banks/central-bank-america/fed-interest-rate.aspx

https://www.thebalance.com/fed-funds-rate-history-highs-lows-3306135

Group 17- Analyze the strategy of prudential ad HSBC after the brexit . »

« UK, the most out of favour Region »

About HSBC

As an international bank, its main objective is to be the world’s leading bank and to gain the respect of its customers.  

 

The overall strategy

Our purpose is to be where the growth is, connecting customers to opportunities. We enable businesses to thrive and economies to prosper, helping people fulfil their hopes and dreams and realize their ambitions.

We have developed a long-term strategy that reflects our purpose and distinctive advantages:

  • A network of businesses connecting the world: HSBC is well positioned to capture international trade and capital flows. Our global reach and range of services place us in a strong position to serve clients as they grow from small enterprises into large multinationals
  • Wealth management and retail with local scale: we aim to make the most of opportunities arising from social mobility, wealth creation and long-term demographic changes in our priority growth markets. We will invest in full-scale retail businesses in markets where we can achieve profitable scale

 

After Brexit, Is there any changes in HSBC’s strategies?

Voting for leaving the EU, was with heavy consequences on UK’s economy and especially its banking and financial systems, In a way affecting Institutional equity investors’ choices, they  do not trust anymore the British markets and identify it at a region out of favour in which they won’t put their money.

 

HSBC strategists Robert Parkes and Amit Shrivastava note that globally managed funds have substantially reduced the weightings of their investments in the UK since the June referendum outcome, and are increasingly favouring continental Europe as a place to put their money because of the uncertainty caused by Brexit.

[Source: http://www.businessinsider.fr/us/hsbc-on-brexit-investor-outflows-capital-flight-2016-10/]

 

Post-Brexit: How HSBC managed Risk and Regulations for maintaining the health of its market?

The result of ‘Brexit’ referendum was a shock affecting different markets worldwide, despite polls predicting a knife-edge result. Actually it is quite interesting to look at the steps HSBC provided to manage risks that corporate treasurers can consider.

 

HSBC has experience in following the world’s most significant risk events, and a wealth of expertise, HSBC is proactive in working with customers to define and implement hedging programmes which combine stability and dynamism to reflect changing market conditions.

Treasurers need to have a hedging programme consistent with their internal treasury policy and such policy in turn has to match the underlying business requirement, this varies from sector to sector or from company to company depending on global exposure.

Step one: Hedge ratios and time horizon

Having defined the hedging objectives, the next step treasurers need to decide is the proportion of exposures appropriate for their industry, shareholders’ risk appetite, and the risk management horizon. For instance, a heavy engineering company typically hedges over one to ten years, while a retailer may have a risk management horizon extending from one to six months. Inevitably, the time ‘buckets’ will be quite different in each case, as will the hedge ratio in each ‘bucket’, with most companies choosing to decrease the level of hedging over time depending on the reliability of forecast exposures. For example, a company may choose to hedge 100 per cent of exposures during the following month or quarter, but only 10 or 20 per cent in the sixth month or quarter.

Step two: Hedging approaches

Once the hedge ratio and appropriate time horizon have been determined, treasurers can decide what style of hedging will allow them to meet their risk management needs most precisely. As figure 1 shows, this can be:

 

  • Static (eg hedging for a whole quarter at the start of that quarter)
  • Rolling (eg hedging every month for the corresponding month in the following quarter)
  • Layered (eg hedge one third of each month for the following rolling quarter)
  • Or a combination of all three

 

These strategies tend to produce a significantly smoother outcome compared with hedging on a spot basis, as they are based on the concept of moving averages but this is not guaranteed. In the example given in figure 2, a static approach results in the greatest volatility, with a layered approach resulting in the least volatility.

Figure 1. Static, rolling and layered hedging with impact of different hedging approaches

Figure 2. Impact of different hedge approaches

Source: HSBC Global Markets, August 2016 Bloomberg

Step three: A balanced portfolio

Once the second step has been agreed, the next step is to determine the most appropriate hedging instruments to use for balanced portfolio. When a spot is trading at the middle of its range in a mean reverting currency, there is great uncertainty about the future direction, whereas when it’s at the higher or lower end, it’s more likely to move towards the average. This can influence a treasurer’s choice over the ratio of each instrument to employ, and the tenor of hedging transactions. For example, if spot is trading at unfavourable levels, the treasurer may not want to hedge so much volume or for long term so as to avoid  locking in potentially unfavourable rates. Consequently, they may favour the use of options rather than forwards for a shorter time period.

HSBC works with clients to model different approaches and outcomes, and then  benchmark each strategy with hindsight to determine how successful it was, or would have been.

Figure 3. Analysing hedge scenarios

Scenario 3 (in figure 3 above) is more appropriate when the currency is trading at a long term mean. Dynamically however it can be split on the basis of a multi-year average (30 years in this example) with tenors increasing or decreasing depending on the risk profile.

For instance, assuming a GBP-USD rate of 1.3200, if a client was a buyer of GBP, their fixed hedges are likely to be higher compared with flexible and unhedged positions.

As currency moves in a client’s favour, they would typically increase the hedging tenors to longer dates to enjoy the favourable rate and vice versa (figure 4).

Figure 4. Flexible hedging in practice and balancing flow certainty with currency volatility

HSBC analytics, Bloomberg

Forms of uncertainty

An event-type or one-time exposure needs a different set of solutions compared with the regular hedging that requires a lot of forethought in terms of analysis, prior to engaging into any hedging activities. Using the Brexit referendum as an example, institutions exposed to the affected currency pair risk found themselves balanced on a precipice from which they could be pushed in either direction, resulting in a major gain or significant loss. Hedging such a risk using fixed mechanisms, like forward contracts, removes the opportunity to derive advantage compared with leaving the risk fully open: a simple case of heads or tails, where only one of the said two strategies are likely to win. A flexible option-linked solution on the other hand came at an inflated price compared with times of normal volatility. The only factor potentially providing respite on pricing was the short duration trade, as the time value element post-referendum more or less reflected the uncertainty falling way beyond the result date.

There is no single, right or wrong mechanism to hedge FX, it depends on factors such as the cost of hedging, margins in the underlying business, currency volatility, flow certainty, budgets etc. Regular disciplined hedging, with a mix of different solutions could offer an outcome that provides reduced volatility over a longer time frame.

HSBC has discussed this approach with its clients who have greeted this dynamic, blended approach to hedging very favourably, and in many cases, it is relatively new to some treasurers. Many have upper and lower hedging bands, but they don’t necessarily use a mix of instruments, even though these may be authorised as part of the treasury policy. Witnessing the effect of the Brexit referendum on GBP exchange rates should be a catalyst to test existing policies and approaches, and refine them accordingly. There have rarely been such significant event-risk instances of a liquid currency of a developed country. For many companies, the political, economic and market volatility that is likely to ensue, not only in the UK but more widely, has effectively removed their ability to predict future cash flow, so adopting a flexible, balanced method for managing currency risk has never been so important.

 

About Prudential

 

The United Kingdom’s Brexit vote has major implications for the insurance and financial sectors, considering their investment yields and income are likely to fall due to the pressure on interest rates. Prudential ‘s ( PRU ) stock fell over 7% following the Brexit vote on June 23 amid increased economic uncertainty and fears of falling investment income owing to subdued interest rates and falling yields. However, it has since recovered on expectations of additional stimulus measures by central banks around the world to tide over the Brexit-related decline in trade and money supply.

 

Impact Of Lower Interest Rates

Prudential is expected to generate about 20% of its revenues from investments in the global markets in 2016, totaling about $11 billion.

The risk of persistent lower interest rates will definitely impact this metric, considering fixed maturity securities contributed almost 67% of Prudential’s net investment income in the last two years.

  • Prudential has considerable exposure to fixed maturity securities in the U.S., U.K as well as the rest of Europe. Post-Brexit, the yield on the 10-year U.S. treasury note fell below 1.5% for the first time since 2012, yields on U.K. benchmark government bonds fell below 1% for the first time on record and 10-year government bond yields in Germany ended below 0%. Other developed economies such as France, Sweden, Switzerland and Japan all touched all-time lows.

The fall in investment yields is likely to have a considerable impact on Prudential’s valuation, considering that investments contribute over 20% of the company’s valuation, per our estimates. We expect Prudential’s yield on U.S. retirement assets to decline to around 0.8% by the end of our forecast period. Owing to persistent low interest rates and falling government bond yields, there could be a downside of about 10% to the company’s valuation if its yield on U.S. retirement assets declines to about 0.7%.

Group 17 Banking innovation, services and new technology: how are modern banks attracting new customers?

                KEEPING CUSTOMERS AWAY, BUT TOO CLOSE.

    The world evolves each day and in order to keep customers or to attract another customer, banks have to innovate and create advantages which will be good not only for the new customers who uses the new technology but also for the other type of people. The banks try to “keep customers away, but too close“. This means that the banks are doing their maximum in order to avoid a displacement of their customers. (In other words, banks are trying to avoid any kind of trips to their customers regarding an issue or to get an important information. In fact, a trip is considered as a cost). So, their customers can have access to their account by being at home thanks to the internet and the applications. It is the case of Boursorama bank, which is the leader of the online bank in France. By seeing the evolution of technologies with time, these banks decides to put several accessibilities and possibilities on the internet, so customers can manage their accounts as they want without leaving their house. The different strategies that banks use are:

  • The online services ( virtual world )

With the creation of many applications, customers can easily have access to their accounts at any time. It allows customers to be in contact with their account at any time. In fact, they can do transactions like transferring money from their account to another. It allows the transactions to be faster and easier. The application like the google wallet allows also to do purchase to the shop very quickly.

Through the online applications, a calling system, customers benefit from banking services at different locations: home, office, and even while traveling; So this is a way to make them feel closer and more comfortable even though they are physically far. Nowadays, people are always seeking for such online services in which they do not have to make any physical effort. It is really different from the traditional methods.

Banks also use the social networks in order to make the promotion of their banks. It allows the customers to have much information regarding banks’ offer, and also issues of some customers with the bank. The social network that banks use can be the Facebook page.

Also through the application, customers can now deposit their check by taking a picture of it and put it in the mobile application.

Those services are very simple and useful.

 

  • Limitation of risk fraud ( security of transactions)

 

With the technology of nowadays, transactions are more secured. In fact, Banks use a high level of security for all transactions. For the smartphones’ apps, banks ask for many passwords and put a limitation on payment per day for the credit card in order to prevent any kind of unwanted issues. Also with the contactless card, there is a limitation of payment per day with it. Then, when people lose their credit card, they just need to give a call on a free charge number to the bank and they will automatically block the card and delete all transactions not made by the client.  With this in mind, it reassures the customers and helps to attract new customers. Then, the online payment is also secured by the banks because after putting the number of the credit card, the banks ask for a confirmation in the application or by a code sent to your phone number.

 

  • Partnership with many other companies

 

Many banks do the partnership with other companies like targeting schools in order to attract students and also to give them internship or scholarship to some students. Moreover, banks do the partnership with the hospital in order to provide health insurance to the customers in need to make them feel better. Another partnership, banks target also car’s users in order also to give them an insurance. Those partnerships reduce the cost of some services and this attracts many new customers because nowadays many people are looking for the less expensive possibilities.

This is actually the strategy used by modern bank and their way of thinking. Thanks to the use of innovative technologies banks are being very successful at maintaining and growing their customers’ satisfaction.

  • Follow-up

After a conversation with customers, banks’ agents should give a call or a kind of email showing his interest in the plan they had done in order to make them feel very important. By giving this interest, customers will keep loyal to the bank because they take care of them and listen to them. For instance, after a meeting with a client, agents can ask by email or phone call if they have received or done what they had talked about.

References :

https://careers.societegenerale.com/business-units/activity/online-banking/boursorama/boursorama-a-booming-business

ftp://ueb.ro/RePEc/eub/wpaper/eub-2013/2013-14.pdf

https://letstalkpayments.com/banks-attracting-new-customers-keeping-away-501346/

https://www.americanexpress.com/us/small-business/openforum/articles/7-excellent-ways-to-attract-new-customers/

GROUP 17:Banking innovation, services and new technology: how are modern banks attracting new customers?

Image

KEEPING CUSTOMERS AWAY, BUT TOO CLOSE.

The world evolves each day and in order to keep customers or to attract another customer, banks have to innovate and create advantages which will be good not only for the new customers who uses the new technology but also for the other type of people. The banks try to “keep customers away, but too close“. This means that the banks are doing their maximum in order to avoid a displacement of their customers. (In other words, banks are trying to avoid any kind of trips to their customers regarding an issue or to get an important information. In fact, a trip is considered as a cost). So, their customers can have access to their account by being at home thanks to the internet and the applications. It is the case of Boursorama bank, which is the leader of online bank in France. By seeing the evolution of technologies with time, these banks decides to put several accessibilities and possibilities on the internet, so customers can manage their accounts as they want without leaving their house. The different strategies that banks use are:

  • The online services ( virtual world )

With the creation of many applications, customers can easily have access to their accounts at any time. It allows customers to be in contact with their account at anytime. In fact, they can do transactions like transferring money from their account to another. It allows the transactions to be faster and easier. The application like the google wallet allows also to do purchase to the shop very quickly.

Through the online applications, a calling system, customers benefit from banking services at different locations: home, office, and even while traveling; So this is a way to make them feel closer and more comfortable even though they are physically far. Nowadays, people are always seeking for such online services in which they do not have to make any physical effort. It is really different from the traditional methods.

Banks also use the social networks in order to make the promotion of their banks. It allows the customers to have much information regarding banks’ offer, and also issues of some customers with the bank. The social network that banks use can be the Facebook page.

Also through the application, customers can now deposit their check by taking a picture of it and put it in the mobile application.

Those services are very simple and useful.

  • Limitation of risk fraud ( security of transactions)

With the technology of nowadays, transactions are more secured. In fact, Banks use a high level of security for all transactions. For the smartphones’ apps, banks ask for many passwords and put a limitation on payment per day for the credit card in order to prevent any kind of unwanted issues. Also with the contactless card, there is a limitation of payment per day with it. Then, when people lose their credit card, they just need to give a call on a free charge number to the bank and they will automatically block the card and delete all transactions not made by the client.  With this in mind, it reassures the customers and helps to attract new customers. Then, the online payment is also secured by the banks because after putting the number of the credit card, the banks ask for a confirmation in the application or by a code sent to your phone number.

  • Partnership with many other companies

Many banks do a partnership with other companies like targeting schools in order to attract students and also to give them internship or scholarship to some students. Moreover, banks do a partnership with the hospital in order to provide health insurance to the customers in need to make them feel better. Another partnership, banks target also car’s users in order also to give them an insurance. Those partnerships reduce the cost of some services and this attracts many new customers because nowadays many people are looking for the less expensive possibilities.

This is actually the strategy used by modern banks and their way of thinking. Thanks to the use of innovative technologies banks are being very successful at maintaining and growing their customers’ satisfaction.

  • Follow-up

After a conversation with customers, banks’ agents should give a call or a kind of email showing his interest in the plan they had done in order to make them feel very important. By giving this interest, customers will keep loyal to the bank because they take care of them and listen to them. For instance, after a meeting with a client, agents can ask by email or phone call if they have received or done what they had talked about.

References :

https://careers.societegenerale.com/business-units/activity/online-banking/boursorama/boursorama-a-booming-business

ftp://ueb.ro/RePEc/eub/wpaper/eub-2013/2013-14.pdf

https://letstalkpayments.com/banks-attracting-new-customers-keeping-away-501346/

https://www.americanexpress.com/us/small-business/openforum/articles/7-excellent-ways-to-attract-new-customers/