Group 8 : – The FED GOVERNANCE –

  • Analysis of the FED’s federal discount rates over the last 10 years

– THE FED GOVERNANCE – 

www.investopedia.com/terms/d/discountrate (great video)

The interest rate charged to commercial banks and other depository institutions for loans received from the Federal Reserve Bank’s discount window.

The discount rate also refers to the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows.

The discount rate in DCF analysis takes into account not just the time value of money, but also the risk or uncertainty of future cash flows; the greater the uncertainty of future cash flows, the higher the discount rate.

A third meaning of the term “discount rate” is the rate used by pension plans and insurance companies for discounting their liabilities.

  • Three discount rate practices by the Federal Reserve Discount Rate:
  • The primary credit rate is the basic interest rate charged to most banks. It’s higher than the Fed Funds rate. Here’s the current discount rate.
  • The secondary credit rate is a higher rate that’s charged to banks that don’t meet the requirements needed to achieve the primary rate. It’s typically a half a point higher than the primary rate. Here’s more on the primary and secondary programs.
  • The seasonal rate is for small community banks that need a temporary boost in funds to meet local borrowing needs. That may include loans for farmers, students, resorts and other seasonal activities. Here’s more on the seasonal discount rate program.

  • How the discount rate affects the Economy:

The discount rate affects all these other interest rates:

  • The interest rate banks charge each other for one-month, three-month, six-month and one-year loans.This is known as LIBOR, and it affects credit card and adjustable rate mortgage rates.
  • The rate banks charge their best customers, known as the prime rate. This then affects all other interest rates.
  • Savings accounts and money market interest rates
  • Fixed rata mortgages and loans are only indirectly influenced by the discount rate. They are mostly affected by the yields on longer-term Treasury notes.

https://www.thebalance.com/fed-funds-rate-definition-impact-and-how-it-works-3306122


http://www.frbsf.org/banking/discount-window/discount-rate/#2015

The crisis in 2008 caused irreparable consequences. Indeed, the intervention rates were deeply low. From 2000 to 2008 it was about 5 percent. Then, in 2008 until now, this rates is about 1%. We can observe those data on the following table :


http://www.lemonde.fr/economie/article/2016/12/15/la-fed-augmente-ses-taux-tout-en-restant-prudente-sur-la-future-politique-de-donald-trump_5049110_3234.html

The last news indicate that the FED is about to rise the intervention rates while remaining cautious to the economic situation due to the Trump governance.

After the end of two days of meetings, the Federal Reserve’s (Fed) central bank’s monetary policy committee (FOMC) not only decided to raise its key interest rates by a quarter of a point on Wednesday (December 14) Which range from 0.50% to 0.75%), but it also anticipates three increases in 2017, instead of two increases initially planned. This increase is the third, after December 2008 and December 2015.

This movement indicates that the FED is now more optimistic about the outlook of the American economy without showing the anticipation of the Trump’s decision.

At her press conference, Janet Yellen, the president of the Fed, tried to show that there was no runaway in her decision. Although it was unanimously adopted by the members of the FOMC, Ms. Yellen used a variety of expressions to temper interpretations.

« Growth is a stronger key, unemployment, a shade lower, » she explained. « We expect employment conditions to strengthen a bit more, » she said, while inflation continues to reach the 2 percent target for the Fed. As for the prospect of raising rates three times instead of two in 2017, Yellen described the change as a « very modest adjustment ».

 

Group 8 – Banks in our Pocket : The new turn of the banks!

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

According to the newspaper “Le Parisien” the Banks compete with new ideas and innovations in order to attract customers whose expectations have changed. (http://www.leparisien.fr/economie/business/banques-toutes-les-innovations-numeriques-16-02-2015-4538197.php).

Indeed, it is a brand new digital turning point that the banks decide to adopt.

There is no longer notion of liquidity. The money is now judged as obsolete.

All the heart of the financial world is now revolutionized and attached to digital.

To attract new customers – customers who are always linked to evolution, innovation, development and, above all, more mobile customers than ever before – banks have a duty to offer exclusive, futuristic and completely revolutionary services.

The bank today, as defined by Phillip Jean, has a digital duty (http://www.jphilippe.com/le-devoir-digital/).

Phillip Jean, for whom « technological evolutions (…) should upset our relationship with money » think that  the end of the reign of the banks will arrive if they delay to revolutionize and perfect their services. There is thus a « strategic interest » for banks to innovate.

(http://www.strategie-aims.com/events/conferences/6-xviieme-conference-de-l-aims/communications/1626-peut-on-parler-dinnovation-dans-le-milieu-bancaire-le-cas-dune-banque-de-detail/download)

Competition between banks and banking services reinforces the fight for innovation more and more harshly.

Furthermore, many services have appeared in recent years for 20 years. A banking activity that was until then mainly focused on a traditional link with its clients, a real relationship between a bank agent and a client, tends to disappear.

In fact, customers no longer go to a bank. Instead of this, they establish all their shares from their cell phones. « The progress of NICTs has revolutionized the functioning of banks »

(http://www.strategie-aims.com/events/conferences/6-xviieme-conference-de-l-aims/communications/1626-peut-on-parler-dinnovation-dans-le-milieu-bancaire-le-cas-dune-banque-de-detail/download)

This digital development can exceed the link that customers maintain with their banks.

Moreover, banks act as intermediaries between customers and digital payment / withdrawal systems such as Visa and MasterCard tend to disappear

According to Les Echos, « MasterCard and Visa announce their digital wallet »

(https://business.lesechos.fr/directions-numeriques/digital/mobile-et-nouveaux-ecrans/0202583583451-mastercard-et-visa-annoncent-leur-portefeuille-digital-5039.php)

Therefore, « Online banks and mutual benefit from this mobility to the detriment of commercial banks« .

The attractiveness of banks is the main reason for the development of this mobility. According to Les echos, the main reasons that a customer decides to move from one bank to another:

  • 29%: the quality of  the service is more advanced, more elaborate (« availability and responsiveness of advisors ») for the prices charged by the bank (value for money)
  • 44%: daily banking fees
  • 15%: the mortgage rate
  • 11%: return on savings products

(http://www.lesechos.fr/21/05/2015/lesechos.fr/02184003740_2-millions-de-clients-changent-de-banque-chaque-annee.htm#Tq2LbUJOxiTxykC3.99)

How do banks adapt to our existing unsatisfied needs? And what are the innovations that reflect, unbeknownst to us, the world to which we belong?

(http://www.leparisien.fr/economie/business/banques-toutes-les-innovations-numeriques-16-02-2015-4538197.php)

A large number of innovations can be identified, undoubtedly the bank by smartphone is the most known of them, this also shows that banks have understood the main issue. ‘Today it is possible to open a bank account from your smartphone’. All the banking services are now gathered behind a mobile banking applications including bank transfers, secure online payments, videoconferencing with your banking advisor, scholarship, documents and contracts, etc. Contactless payment is the best mirror of our generation with a prompt payment that tends to save time to customers.

However, digital development goes with some security issues and the development of cybercrime in the 21st century. To fight effectively and radically against this new threat, banks are taking on their responsibilities by financing for your security and safety, by introducing new methods and techniques that limit the risk of being hacked including dynamic cryptogram and biometric security, the most simplistic and safe authentication solution possible .

Ultimately, competition and new entrants are the main principle that affected banks to invest in innovation, they see it as a way to enter new market with a target market shaped by digitalization.