EU supervisors set out process for cross-border AML data sharing

By Dan Hardie | News | 16 January 2019

Agreement will allow ECB and national supervisors to share data on suspected money-laundering

The three European Supervisory Authorities (ESAs) have agreed how the European Central Bank and Europe’s national competent authorities should exchange information on suspected money laundering.

The European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority finalised the multilateral agreement on January 10. The agreement sets out protocols for sharing information between the ECB and different countries’ supervisory and regulatory authorities.

The agencies said in a joint statement that the new agreement was necessary under the European Union’s directive on anti-money laundering and countering the financing of terrorism (AML/CFT). The fifth version of the AML/CFT directive was passed in June 2018. It required the three ESAs to “support the conclusion of an agreement on the practical modalities for exchange of information between the ECB and CA”, or competent authorities.  

The three ESAs said the new agreement included provisions on what kind of information should be exchanged and the process for doing so. They said it laid out “confidentiality and data protection provisions” and “situations where the request for information can be refused”, as well as a procedure for settling disputes between agencies.

Sharing information on AML/CFT matters between supervisors could potentially cause a number of problems under different countries’ supervisory and data protection laws. The agreement also spells out the means of communication between agencies.

“The agreement will create a clear framework for exchanging information between the ECB and [national competent authorities] and potentially will enhance the effectiveness of their supervisory practices,” the three agencies said. The agreement has now been sent to the ECB and to national competent authorities for their signature, under a process laid out in the text.

EBA’s lead role

The EBA was given the lead role by the European Commission in improving the bloc’s AML/CFT regime last year. The EC’s new policy calls for the EBA to co-ordinate the actions of national supervisors in preventing money-laundering and terrorist financing.

Some European lawmakers have called instead for the creation of a single European Union AML/CFT agency with powers to intervene across borders. The new policy follows a series of money-laundering scandals in EU countries, which led to political leaders calling for tougher AML/CFT measures.

Some financial crime experts have told Central Banking that the EU needs to pass a regulation on AML/CFT matters. In European law, directives lay out goals that member states must achieve, but give them freedom on transposing the necessary measures into law. Regulations have binding legal force in each member state by a certain date.

PBoC makes record fund injection into financial system

By Central Banking Newsdesk | News | 16 January 2019

Central bank pumps 570 billion yuan into system via open-market operations

The People’s Bank of China

The People’s Bank of China made what is thought to be its largest ever single-day cash injection into the country’s financial system today (January 16), in its latest effort to restock falling liquidity amid a wider economic slowdown.

The central bank injected 570 billion yuan ($84 billion) in a reverse repurchase operation. The move aims to ensure there are enough funds in the financial system, which is facing strains as tax payments are at their highest in January.

“The banking system’s overall liquidity is falling rapidly,” the central bank said in its statement.

The central bank often offers extra cash ahead of the Chinese New Year and in peak tax periods to deal with heightened cash demand from the public, though never to this scale.

The move follows several measures by the Chinese authorities in 2018 and early 2019, including big infrastructure projects and tax and reserve requirement cuts. The PBoC implemented another reserve requirement ratio cut earlier in January, aimed at releasing $116 billion for credit growth.

Today’s open-market operation came a day after a number of Chinese central bank and finance ministry officials spoke on their efforts to support the economy, including increased spending and policies to “speed up the link and improve efficiency” of monetary transmission into certain “last-mile” areas of the economy.

When speaking about the issue of liquidity at a press conference on January 15, Zhu Hexin, deputy governor of the PBoC, said it was important not to engage in “big flood irrigation”, but rather “do a good job of directional regulation and precise drip irrigation”.

Zhu highlighted some key areas where the bank is aiming to establish a “positive incentive mechanism” for banks to increase targeted lending. 

“The first is the issue of liquidity. To maintain a reasonable and sufficient liquidity, we have adopted five targeted policies such as RRR cuts and medium-term loan facilities,” Zhu said. The bank also plans to replenish capital by “promoting permanent debt renewal”, he added.

In a PBoC work conference held in Beijing on January 3–4, the central bank also said: “Work should be done to promote the support instrument for bond financing by private enterprises, encourage local governments to set up funds to support financing by private enterprises, and push for the introduction of the support instrument for equity financing by private enterprises.”

“The abilities and services of payment and credit reference industries, as well as commercial banks, should be further improved to support private enterprises and medium-sized enterprises,” it added.

The central bank’s targeted policies seem to be taking effect, with the second month in a row of credit growth reported in December. However, weaker import and export data released this month have stirred speculation over whether more aggressive action is needed.

Hinting that more decisive action may be needed, Zhu said: “Maintaining a sound monetary policy does not mean it will remain the same. The monetary conditions should be matched with the requirements of maintaining stable economic growth and stable prices, and maintain a moderate degree of tightness, neither too loose nor too tight.”

Larry Hu, head of China economics at Macquarie Capital, said in a report released on January 4 that the “level 2” stimulus, or reserve requirement ratio cuts, is not enough turn the economy around. Hu says the Chinese economy could continue to slow for three or four more quarters.

“For the economy to stabilise, we have to wait [for level 3] stimulus such as a significant easing on property or a full reverse of the deleveraging campaign. We expect level 3 stimulus to come in the second half of this year, when corporate earnings growth would stay negative for 2–3 quarters,” he wrote.

CBRT holds main rate steady at 24%

By Central Banking Newsdesk | Official Record | 16 January 2019

Turkish central bank keeps rates high as signs emerge of a “rebalancing trend” in the economy

Central Bank of the Republic of Turkey. Photo: CBRT

The Central Bank of the Republic of Turkey (CBRT) has kept its headline interest rate unchanged, maintaining the high implemented in the wake of 2018’s lira crisis.

Policy-makers chose today (January 16) to keep the one-week repo rate steady at 24%. “Recently released data show that rebalancing trend in the economy has become more noticeable,” the central bank said in its post-meeting statement. “External demand maintains its strength while the slowdown in economic activity continues, partly due to tight financial conditions.”

Turkish inflation has dipped from a peak of 25.2% in October, falling to 21.6% in November and 20.3% in December. Nevertheless, inflation remains high, and the central bank said “risks on price stability continue to prevail”.

“Accordingly, the committee has decided to maintain the tight monetary policy stance until inflation outlook displays a significant improvement,” it said. The statement promised further monetary tightening if it should prove necessary, saying the CBRT would revise its stance on the basis of any changes in the data.

Growth keeping global debt-to-GDP just below all-time high – IIF

By Central Banking Newsdesk | Research | 16 January 2019

Latest monitoring report puts debt at three times global GDP, with some countries especially vulnerable

Global debt as a share of GDP is close to an all-time high, but is being held down somewhat by economic growth, according to figures published on January 15 by the Institute of International Finance.

The Global Debt Monitor shows debt has risen 12% or $27 trillion since 2016, hitting $244 trillion in the third quarter of 2018. That figure is some 318% of global GDP, just short of the record peak of 320% in the third quarter of 2016.

In addition to the large headline numbers, the report highlights a shift away from bank funding and towards non-bank sources including bond markets, mortgage lenders and specialised finance companies. “Emerging markets have seen particularly rapid growth in non-bank financing, with nearly a quarter of total credit to non-financial private sector now originating from non-banks,” the report says.

Some countries look more exposed than others. A particular risk remains the high share of debt denominated in foreign currencies, and several countries are facing large redemptions in the coming year. A strong US dollar may make refinancing harder.

Refinancing needs in US dollars are “relatively high” for Egypt, Nigeria and Colombia, at around 80% of redemptions, while Lebanon, Chile and Argentina also face refinancing challenges, the report says.

BoE’s leveraged loan research draws interest from overseas

By Central Banking Newsdesk | News | 16 January 2019

UK exposures are modest but firms in US and Japan have bigger holdings of CLOs

The Bank of England’s work on the deteriorating quality of the leveraged loans market has prompted interest from its counterparts overseas, whose firms have some of the largest exposures, BoE officials said today (January 16).

There was previously little information on which firms were holding so-called collateralised loan obligations (CLOs) – an echo of the collateralised debt obligations at the heart of the 2008 crisis – according to BoE executive director Alex Brazier. For its latest financial stability report, the BoE conducted a “deep dive” in which it gathered data on the exposures.

“The fact we had to do the deep dive is indicative that no-one else has put the numbers together,” said Brazier. “Interestingly, our counterparts in other jurisdictions are now consumers of that [data].”

“For some people, our conclusions should ring alarm bells,” he said, during a hearing of the Treasury Committee. “For us, they actually allowed us to be moderately reassured.”

The BoE’s “waffle chart”, published on page 45 of the financial stability report, shows UK banks hold roughly 1% of the global CLO market, and UK insurers a further 1%. Japanese banks hold roughly 10%, while US banks hold about 20% and US insurers a further 14%.

The riskiest tranches of CLOs tend to be held by more specialised vehicles, including hedge funds, open-ended funds, structured credit funds and CLO managers.

Governor Mark Carney told the committee the BoE was nonetheless “concerned” about the deteriorating underwriting standards in the market for leveraged loans. Aspects of the market are showing the sorts of late-cycle dynamics that appeared in the subprime mortgage market before the 2008 crash, he said. The scale of lending is growing rapidly, while the quality of contracts is weakening.

Other aspects of the situation differ from 2008, however. Leveraged lending is not supported nearly as much by shadow banks as it was before the crisis, and funding sources are more stable, officials said.

“The odds of getting stuck with something where your funding is running away is another difference vis-a-vis subprime,” said Anil Kashyap, an external member of the BoE’s financial policy committee.

Furthermore, the UK benefits from European regulations that require originators of securitisations such as CLOs to maintain some “skin in the game”, Carney noted, and those protections will be retained post-Brexit. In the US, a legal challenge blocked similar regulations, so the protections are more minimal.

The BoE has stress-tested UK banks’ exposures to leveraged lending and found them to be resilient. The tests assumed a higher loss rate than that experienced in 2008, said Carney.

Richard Sharp, another external member of the FPC, told the Treasury Committee the central bank did view the leveraged lending market as valuable. It can be a “source of major employment and profitability here, it lowers the cost of capital for investment; the issue is it should be well managed,” he said.

Sarb’s mandate will not change, president Ramaphosa says

By Central Banking Newsdesk | News | 16 January 2019

Officials move to clarify manifesto claim following backlash

Cyril Ramaphosa

The president of South Africa has reiterated his support for the independence of the country’s central bank, clarifying statements made in the leading party’s latest manifesto.

On January 12, the African National Congress published its manifesto for 2019, in which it said the South African Reserve Bank (Sarb) “must pursue a flexible policy regime aligned with the objectives of the second phase of the transition”.

“Without sacrificing price stability, monetary policy must take into account other objectives such as employment creation and economic growth,” the manifesto said.

Following the publication of the document, there was a backlash against the party, with some claiming the ANC was threatening the independence of Sarb. 

Enoch Godongwana, chairperson of the ANC’s economic transformation sub-committee, was forced to clarify the wording of the statement, stressing the party was not proposing to change Sarb’s mandate.

But the backlash continued in both the international and local press, forcing the country’s president to comment on the matter on January 15.

“The manifesto had a paragraph on a wish and an aspiration, acknowledging the Reserve Bank is independent and that there is no intention to tamper or tinker with the independence of the central bank,” Cyril Ramaphosa reportedly said to a delegation ahead of the World Economic Forum.

The manifesto had a paragraph on a wish and an aspiration, acknowledging… there is no intention to tamper or tinker with the independence of the central bank

Cyril Ramaphosa, president of South Africa

“The wish that is expressed is that, as it goes ahead with monetary policy machinations, it will keep an eye on employment,” the president added.

Finance minister Tito Mboweni also came to the support of the Sarb at the same meeting, noting countries with independent central banks tend to have better macroeconomic outcomes. He is a former Sarb governor himself.

Justified fears?

The backlash against ANC in the media may be justified.

Over the past two years, the central bank has came under pressure from South Africa’s public protector and other officials within the ANC, who sought to alter Sarb’s mandate and structure.

At the end of 2017, the ANC proposed acquiring Sarb’s shares. It has been 100% privately owned since 1921, unlike most central banks.

In March 2018, the party decided to withdraw its proposals to allow more time for consultation with stakeholders. No further update on the issue has been provided.

A month earlier, South Africa’s high court ruled against the nation’s public protector, Busisiwe Mkhwebane, concluding a lengthy stand-off that began after she tried to have the central bank’s mandate changed.

Mkhwebane claimed Sarb’s mandate should be altered to strip it of the requirement “to protect the value of the currency”, in favour of a broader message to protect the “socioeconomic wellbeing” of South Africans.

Private mints to help with £1 overseas distribution

By Rachael King | News | 16 January 2019

Royal Mint will provide blanks but design and distribution is responsibility of individual territories

The UK’s new 12-sided £1 coin will soon be available to overseas territories for the first time since it entered circulation in 2017.

“This decision taken by ministers to roll out the coin underpins the UK’s commitment to its territories and dependencies, and will ensure they can benefit from the increased security that the 12-sided coin offers,” a statement from the UK’s Treasury says.

Back in 2014, plans for the new £1 coin were unveiled in the government’s budget. However, the coin was only released into circulation three years later. It has been called the “most secure circulating coin in the world” by UK officials.

The coin is produced by the Royal Mint, but the mint will not be charged with producing the coins that will circulate overseas. Instead, the UK government has agreed to allow the overseas territories to design and mint their own versions.

“We produce and supply coins direct to some overseas territories and others are produced by private, UK-based mints, in which case we would provide blanks,” a spokesperson from the Royal Mint tells Central Banking.

“In the event an issuing authority would like to introduce a new coin then we would be happy to assist in forecasting the potential demand,” they say. The Treasury has asked Overseas Territories and Crown Dependencies to inform the Royal Mint of their plans.

The Crown Dependencies – the Channel Islands and Isle of Man – are not part of the UK but are instead self-governed and owned by the British Crown. The Overseas Territories are remnants of the British Empire that fall under the jurisdiction of the UK, without being strictly part of the UK.

The Royal Mint has also said it will assist with the design process of the new coins, but declined to provide any further information on the process. Currently, the circulating £1 coins bear symbols relating to the four home nations: a rose (England), a thistle (Scotland), a leek (Wales) and a shamrock (Ireland).

“These new designs will reflect the rich and varying British communities across the world,” said Robert Jenrick, exchequer secretary to the Treasury.

Though the designs will be new, the coins will be made of the same material and feature the same security features as those circulating in the UK.

One mint which will undoubtedly be co-ordinating with the Royal Mint will be the British Pobjoy Mint, the largest private mint located in Europe.

The mint, located in Surrey, provides coins for the British Virgin Islands, British Antarctic Territory, British Indian Ocean Territory, South Georgia and the South Sandwich Islands, Falkland Islands and the Isle of Man.

It claims its location close to both Heathrow and Gatwick Airport, as well as the Eurotunnel, ensures its coins can be transported “quickly” across the globe.

Distribution and destruction of the current coins circulating in the various territories will also fall under the responsibility of the private mints.

Bhutan strengthens relations with India through payment co-ordination

By Central Banking Newsdesk | Official Record | 16 January 2019

New proposals will limit the number of tourists having to bring cash into the countries

Taktsang Palphug Monastery, Bhutan. Photo: Arian Zwegers

The Royal Monetary Authority of Bhutan will strengthen its relations with neighbouring India in 2019, through co-ordination between the country’s two payment systems.

According to the central bank’s annual report, a new payment switch will allow Indian tourists to access more than 231 ATMs and 759 point-of-sale terminals located within Bhutan.

“This will benefit the country in earning Indian rupees by stimulating digital purchasing power to acquire transactions of the tourists/travellers from India to Bhutan, and reduces the inconveniences and inherent risk associated with carrying large amounts of cash,” the central bank says in the report.

The second phase of the project, due to be implemented later this year, will allow locals to use their bank cards in India. “The cross-border digitisation will enable proper monitoring of currency flows and improved real-time statistical records for informed decision-making and pave the way for policies and strategies for regulating currency flows,” the central bank says.

Moldovan central bank suspends rights of lenders’ shareholders

By Dan Hardie | News | 16 January 2019

Move is latest effort to enforce law in notoriously difficult banking sector

National Bank of Moldova

Moldova’s central bank has ordered large blocks of shareholders in two of the country’s commercial banks to sell their shares and suspended some of their rights.

The move is the latest effort to clean up Moldova’s notoriously difficult banking sector.

The National Bank of Moldova said on January 11 that it had ordered the owners of 52.77% of Energbank’s shares and 36.15% of Banca de Banca de Finanţe şi Comerţ, or Fincombank, to sell their holdings. The NBM also said it had appointed administrators to Energbank “to apply early intervention measures” and supervise the bank’s board.

The order is the first major public move by newly appointed NBM governor Octavian Armașu. He took up the role of governor on November 30, after resigning as the country’s finance minister.

The central bank said that a group of shareholders in each bank had acquired major holdings without obtaining “prior written permission of the National Bank of Moldova”. This broke the banking law, the central bank said.

Both banks are fairly small, with local publication BNE Intellinews saying that Fincombank has 3.7% of the Moldovan banking sector’s assets while Energbank has 3.2%. It is not clear who is the ultimate beneficial owner of the shareholding blocks.

The Bank of Moldova took similar action under its last governor against shareholders in three other commercial banks, Victoria Bank. Agroindbank, or MAIB, and Moldindconbank, also called MICB.

The central bank confiscated a majority stake in MICB and has yet to sell it on, BNE Intellinews reported. Bulgarian lender Investbank bought 100% of Victoria Bank’s shares in July 2018 following a central bank-mandated sale.

$1 billion theft

Moldova’s banking sector has been affected by a number of major financial crimes, including a massive theft from three commercial banks in November 2014 that wiped out up to $1 billion of deposits. The amount stolen was approximately 12% of the country’s GDP.

The discovery of the theft caused a long-running political and economic crisis in Moldova. To date, no one has been convicted of any crime in connection with the theft.

The former Soviet republic’s banks are notorious for their links to Russian and other regional organised crime groups, several observers of Russia’s financial sector have told Central Banking.

Armașu’s two predecessors as governor, Sergiu Cioclea and Dorin Dragutanu, both faced severe pressure for their efforts to reform the country’s banking sector.

Dragutanu faced death threats, and a grenade attack on his house, after he commissioned a report on the theft from the commercial banks. He resigned in September 2015 but remained in office until April 2016 as Moldova’s government was unable to agree on a successor.

Lebanese central bank orders wire services not to use dollars

By Dan Hardie | News | 15 January 2019

Economy under strain from political division, fiscal shortfall and refugee crisis

Central Bank of Lebanon. Photo: Karan Jain

Lebanon’s central bank has ordered the country’s wire service offices to pay electronic money transfers in domestic currency only and not dollars, local media reported.

The Bank of Lebanon sent a circular to local wire services telling them to pay customers only in Lebanese pounds, local newspaper An-Nahar said. The move is another indication that Lebanon’s currency peg to the US dollar is under severe pressure.

Directors of the International Monetary Fund warned in June 2018 that “the economic situation in Lebanon continues to be difficult”. This was due to “high public debt, twin deficits and tightening financial conditions”, IMF directors said.

The high level of remittances sent to Lebanon by citizens working overseas is a key part of the country’s economy, one Lebanese former senior policy-maker said. Lebanon has largely experienced economic stability over the last three decades despite severe divisions between religious and ethnic divisions, civil strife and conflict with Israel.

It has come under further strain since 2010 from an inflow of refugees from neighbouring Syria. As many as two million Syrian refugees have entered Lebanon, which has an estimated population of 7.75 million. The inflow had “affected growth and strained public infrastructure and services”, the IMF directors said.

The central bank has been able to maintain financial and price stability in large part due to its use of the currency reserves provided by remittances sent by Lebanon’s large diaspora, the former policy-maker said.

Lebanon has consistently recorded very high government debt-to-GDP levels, but the level has begun rising again recently. Total government debt stood at 149% of GDP in 2017, according to official figures, making it the highest level in nine years. The ratio was last higher than this in 2008, when government debt reached 161% of GDP.

IMF figures put the debt-to-GDP ratio at a higher level than Lebanese government statistics. The IMF directors also argued government debt would have been higher without what they called a “one-off” operation by the central bank that increased the taxable profits of banks.

The IMF’s directors noted in June 2018 that GDP had grown slowly in 2017 and 2018, estimating it had increased by between 1% and 1.5% annually.

The IMF directors said in June 2018 they commended the central bank “for its critical role in attracting deposit inflows and effectively managing the difficult situation”. But the IMF board called for the central bank to “take a long‑term view in its policy-making and return to more conventional monetary policy tools”.

The IMF directors also called for the central bank to raise interest rates. The Central Bank of Lebanon has kept the benchmark rate at 10% since December 2010. Deposit rates with Lebanese banks are currently at 6.91% and are described by observers as the highest in the Middle East.

Central bank governor Riad Salameh has held the role since 1993. He was appointed to a fifth six-year term in May 2017 by the country’s president, Michel Aoun.

Fiscal crisis

The IMF board said in June “an immediate and substantial fiscal adjustment is essential to improve debt sustainability, which will require strong and sustained political commitment”. 

But Lebanese political parties, which represent different ethnic and religious groups, have been unable to form a stable government since the election of president Aoun in October 2016.

The country’s prime minister, Saad al Hariri, was appointed in December 2016. He resigned in November 2017 when he was in Saudi Arabia, leading to most leading Lebanese politicians to allege he was being held under duress by the Saudis. Hariri left Saudi Arabia after protests by Lebanese and other politicians and withdrew his resignation.