Category: Economics and Banking

ASIC Investigating Financial Benchmarks

ASIC is investigating a range of financial institutions to determine whether or not there has been benchmark-related misconduct in Australia’s financial markets. Their inquiries are still underway and, given the size and complexity of the relevant markets, will take some time to complete. They are looking at the activity of Australian financial institutions domestically and overseas, as well as foreign financial institutions that are active in Australia.

Benchmarks are of critical importance to a wide range of users in financial markets and throughout the broader economy. Different benchmarks affect the pricing of key financial products such as credit facilities offered by financial institutions, corporate debt securities, exchange-traded funds (ETFs), FX and interest rate derivatives, commodity derivatives, equity and bond index futures and other investments and risk management products.

In Australia, ASIC consider the following benchmarks to be of potential systemic importance:

  • Bank Bill Swap Rate (BBSW)
  • the Interbank Overnight Cash Rate (cash rate)
  • S&P/ASX 200 equity index
  • ASX Clear (Futures) Pty Ltd’s Commonwealth Government Securities (CGS) yields survey for settling bond futures
  • Consumer Price Index (CPI).

Internationally, they consider the IBOR interest rate benchmark family and the WM/Reuters and European Central Bank (ECB) foreign exchange (FX) ‘fix’ rates, among other benchmarks, to be systemically important.

Their investigations are informed by the conduct issues relating to financial benchmarks that have been observed overseas and which have formed the basis of significant settlements by financial institutions with foreign financial regulators. For example:

  • trading designed to move a benchmark rate so that the financial institution derives a benefit (e.g. by increasing the value of a derivative position held by the institution that references the benchmark)
  • inappropriate handling of client orders or positions (e.g. by deliberately triggering ‘stop-loss’ orders)
  • inappropriate disclosure of confidential client information (e.g. by disclosing client orders to traders at competing banks); and
  • inappropriate submitter conduct (e.g. by making submissions in order to reduce the institution’s borrowing costs).

 

IMF on The USA Economy; Still More To Do

The IMF released their report on the United States. They reiterated the need for a credible medium-term fiscal strategy that would anchor ongoing consolidation efforts, underpin debt sustainability, and reduce fiscal uncertainties. Although the U.S. banking system has strengthened its capital position, the search for yield during the prolonged period of low interest rates, rapid growth in assets in the nonbank sector, and signs of stretched valuations across a range of asset markets point to emerging pockets of vulnerabilities. Potential financial sector risks include the migration of intermediation to the nonbanks; the potential for insufficient liquidity in a range of fixed income markets that could lead to abrupt moves in market pricing; and life-insurance companies that have taken on greater market risk.

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

The U.S. economy’s momentum in the first quarter was sapped by unfavorable weather, a sharp contraction in oil sector investment, and the West Coast port strike. But the underpinnings for a continued expansion remain in place. A solid labor market, accommodative financial conditions, and cheaper oil should support a more dynamic path for the remainder of the year. Despite this, the weaker outturn in the first few months of this year will unavoidably pull down 2015 growth, which is now projected at 2.5 percent. Stronger growth over the next few years is expected to return output to potential before it begins steadily declining to 2 percent over the medium term.

Inflation pressures remain muted. In May headline and core personal consumption expenditure (PCE) inflation declined to 0.2 and 1.2 percent year on year, respectively. Long-term unemployment and high levels of part-time work both point to remaining employment slack, and wage indicators on the whole have shown only tepid growth. When combined with the dollar appreciation and cheaper energy costs, inflation is expected to rise slowly staring later in the year, reaching the Federal Reserve’s 2 percent medium-term objective by mid 2017.

An important risk to growth is a further U.S. dollar appreciation. The real appreciation of the currency has been rapid, reflecting cyclical growth divergences, different trajectories for monetary policies among the systemically important economies, and a portfolio shift toward U.S. dollar assets. Lower oil prices and increasing energy independence have contained the U.S. current account deficit, despite the cyclical growth divergence with respect to its main trading partners and the rise in the U.S. dollar. Nevertheless, over the medium term, at current levels of the real exchange rate, the current account deficit is forecast to widen toward 3.5 percent of GDP.

Despite important policy uncertainties, the near term fiscal outlook has improved, and the federal government deficit is likely to move modestly lower in the current fiscal year. Following a temporary improvement, the federal deficit and debt-to-GDP ratios are, however, expected to begin rising again over the medium term as aging-related pressures assert themselves and interest rates normalize. In the near-term, the potential for disruption from either a government shutdown or a stand-off linked to the federal debt ceiling represent important (and avoidable) downside risks to growth and job creation that could move to the forefront, once again, later in 2015.

Much has been done over the past several years to strengthen the U.S. financial system. However, search for yield during the prolonged period of low interest rates, rapid growth in assets in the nonbank sector, and signs of stretched valuations across a range of asset markets point to emerging pockets of vulnerabilities. The more serious risks are likely to be linked to: (1) the migration of intermediation to the nonbanks; (2) the potential for insufficient liquidity in a range of fixed income markets that could lead to abrupt moves in market pricing; and (3) life-insurance companies that have taken on greater market risk. But several factors mitigate these downsides. In particular, the U.S. banking system has strengthened its capital position (Tier 1 capital as a ratio of risk-weighted assets is at about 13 percent) and appears resilient to a range of extreme market and economic shocks. In addition, overall leverage does not appear excessive, household and corporate balance sheets look generally healthy, and credit growth has been modest.

The consultation focused on the prospects for higher policy rates and the outlook for, and policy response to financial stability risks, integrating the findings of the latest IMF Financial Sector Assessment Program for the U.S.

Executive Board Assessment2

Executive Directors agreed with the thrust of the staff appraisal. They noted that the economic recovery continues to be underpinned by strong fundamentals, despite a temporary setback, while risks remain broadly balanced. Directors observed that considerable uncertainties, both domestic and external, weigh on the U.S. economy, with potential repercussions for the global economy and financial markets elsewhere. These include the timing and pace of interest rate increases, prospects for the dollar, and risks of weaker global growth. Directors stressed that managing these challenges, as well as addressing longstanding issues of public finances and structural weaknesses, are important policy priorities in the period ahead.

Directors agreed that decisions on interest rate increases should remain data-dependent, considering a broad range of indicators and carefully weighing the trade-offs involved. Specifically, they saw merit in awaiting clear signs of wage and price inflation, and sufficiently strong economic growth before initiating an interest rate increase. Noting the importance of the entire path of future policy rate changes, including in terms of the implications for outward spillovers and for financial markets, Directors were reassured by the Federal Reserve’s intention to follow a gradual pace of normalization. They welcomed the Federal Reserve’s efforts, and commitment to continue, to communicate its policy intentions clearly and effectively. Directors acknowledged that financial stability risks could arise from a protracted period of low interest rates. In this regard, they underscored the importance of strong regulatory, supervisory, and macroprudential frameworks to mitigate these risks.

Directors commended the authorities for the progress in reinforcing the architecture for financial sector oversight. They concurred with the main findings and recommendations of the Financial Sector Assessment Program assessment. Directors highlighted the need to complete the regulatory reforms under the Dodd-Frank Act and to address emerging pockets of vulnerability in the nonbank financial sector. They encouraged continued efforts to monitor and manage risks in the insurance sector, close data gaps, and improve the effectiveness of the Financial Stability Oversight Council while simplifying the broader institutional structure over time. Directors looked forward to further progress in enhancing cross-border cooperation among national regulators, and the framework for the resolution of cross-jurisdiction financial institutions.

Directors noted that there remain a range of challenges linked to fiscal health, lackluster business investment and productivity growth, and growing inequality. They agreed that reforms to the tax, pension, and health care systems will help create space for supporting near-term growth, including through infrastructure investment. Directors reiterated the need for a credible medium-term fiscal strategy that would anchor ongoing consolidation efforts, underpin debt sustainability, and reduce fiscal uncertainties. They called for renewed efforts to implement structural reforms to boost productivity and labor force participation, tackle poverty, address remaining weaknesses in the housing market, and advance the multilateral trade agenda.

 

 

Greece: Sliding from Periphery to Exit

According to FitchRatings, Greece’s predicament gives new meaning to the phrase “peripheral eurozone”. Eventual exit is now the probable outcome.

Critical deadlines in the Greek crisis have frequently come and gone without progress or consequence, but the referendum was a defining moment in determining the country’s economic position in Europe.

The resounding “no” vote provides a substantial boost to the position of the Syriza-led government in its negotiations with creditors. The Greek authorities clearly consider the referendum result to provide a sufficiently strong public mandate to insist on less austerity and a meaningful reduction of the government’s debt burden. From the Greek perspective, if creditors want to ensure the country’s continued membership of the eurozone to avoid a serious – perhaps irrecoverable – setback to broader European integration, they must recognise there are limits to the terms Greece can accept.

Has Greece Miscalculated?

Greece’s strong argument in favour of greater accommodation on the part of creditors faces several hurdles that are likely to prove collectively insurmountable. Most obviously, debt relief would be politically difficult for a number of eurozone governments. Countries that have gone through their own painful economic adjustments in recent years will be loath to write down credit extended to a country seen – rightly or wrongly – as not willing to do the same. The prospect is equally unappealing in countries that have largely avoided the crisis but have provided big financial contributions to the various Greek support packages.

Even if public opinion could be swayed, creditors may take the view that there is still the need for significant policy change in Greece, and that debt relief would simply address the consequences of previous shortcomings, not the root causes. Greece still needs to undertake major reforms to deliver sustainable public finances and more robust economic growth, and creditors may be reluctant to surrender the ongoing conditionality provided by support programmes that could be discontinued if there were wholesale debt forgiveness. The risk would be that Greek imbalances re-emerge, eventually threatening the viability of the eurozone again.

The state of Greece’s banks seriously undermines the government’s negotiating position. Capital controls, bank closures and the cap on European Central Bank (ECB) liquidity mean the economy is steadily being asphyxiated, the consequences of which will be faced primarily by the government rather than its creditors. This adds considerable urgency to the need for the Greek authorities to reach an agreement that would ease the pressure on withdrawals and allow the ECB to reconsider the cap. In the absence of an agreement, it becomes increasingly likely that the government will need to introduce a secondary means of payment, commonly referred to as scrip. An officially sanctioned parallel currency could only be interpreted as an important step towards exit from the eurozone.

A final point, which may only become clear once the history is written, is that the referendum might have tipped the balance of how other eurozone countries weigh the risks of Greece’s continued membership in the common currency area versus its exit. Greece may come to be viewed as a small and uniquely recalcitrant eurozone member that either can be effectively ring-fenced, or cannot be sufficiently altered to fit the eurozone mould, – or both. It could therefore spend some time on the outer edges of the eurozone periphery before membership becomes untenable.

The Rise of FinTech

The Keynote address by Mr Ravi Menon, Managing Director of the Monetary Authority of Singapore, at the Global Technology Law Conference 2015, Singapore, 29 June 2015 provides an great summary of the rise of FinTech.

Technology is changing the way we live, work, and play. A sector where I believe technology is going to be fundamentally transformative is financial services. In fact, there is a new buzzword: “FinTech” – financial technologies or the integration of finance and technology. Two things are happening.

First, non-financial players are using technology to offer innovative solutions that mirror the services traditionally offered by financial institutions (“FIs”).

  • Payments – Apple, Google, Paypal, Amazon, and Alibaba have payment solutions that replace physical wallets and credit cards.
  • Lending – Zopa, Lending Club, and Funding Circle offer peer-to-peer lending solutions that match lenders and borrowers on their online platforms.
  • Investment – “robo-advisers” like WealthFront use data analytics to dispense online personal financial advice and investment management services.

Indeed, these non-financial firms look set to disrupt the financial industry.

  •  As a senior banker in the US puts it: “People need banking, not banks”.

The second thing that is happening is that FIs are fighting back.

  •  As disintermediation threatens FIs, they are being pushed into a rethink of their business models.
  •  Rising costs, shrinking margins, and the weight of new regulatory requirements are pressing FIs to look into more cost-efficient ways of running their businesses.
  •  They are increasingly turning towards innovation and technology for solutions.
  •  In an ironic way, the FinTech insurgency is forcing change among the incumbent FIs.

Leveraging on their size and networks, FIs are using technology much more intensely to enhance their product offerings and service delivery.

  •  Example: US insurance companies, Progressive and Allstate, are using telematics to develop usage-based motor insurance, also known as Pay-As-You-Drive (or Pay-How-You-Drive).
  •  Instead of rewarding past good driving behaviour, these insurers are able to price premiums contemporaneously with current driving habits.

What does all this mean? As a powerpoint slide used by a FinTech company in Silicon Valley rather immodestly proclaims: “the geeks shall inherit the earth!”. It is no doubt an exaggeration. But the message is clear:

  •  In the years ahead, countries, businesses, and people who know how to use technology and innovate will have a keen competitive advantage.

Why this time is different

Now, have we not heard this story before – that technology will transform banking and then nothing changed fundamentally? Indeed there have been false starts in the past.

  •  In the 1990s, we thought that electronic money would replace cash and cheques. That has not happened.

– In most parts of the world, including the US, Japan, Europe, and Singapore, notes and coins in circulation outside banks has been increasing steadily every year.

  •  In 2000, some of us were quite sure that Internet-only banks would eventually replace brick-and-mortar branches. This too has not happened.

The most obvious evidence that both beliefs were manifestly wrong occurs year after year, when lines of Singaporeans form at bank branches to obtain new notes for “angpows”, to be given out during the Chinese New Year celebrations.

  •  But this year, however, we saw “e-angpows” being given out for the first time.
  •  Could this be a sign of things to come?

Technology takes time to proliferate. More importantly, it is the interaction among related technologies that often creates transformation – and that takes time.

There is reason to believe that this time is different: that technology will indeed transform financial services in a way that has not happened before. It has much to do with the concept of mobility.

First, mobility of technology.

  •  Mobile devices, such as smartphones and tablets, have become common-place.
  •  People do not just connect and surf from their home computers anymore – they also do so from their mobile devices, while on the go. This has profound implications for how financial services are offered and consumed.

Second, mobility of ideas.

  •  Today, online platforms provide a variety of social networking and peer-to-peer services. And people are increasingly comfortable using these services.
  •  These services have compressed time and space: interaction is real-time and information exchange transcends physical boundaries.
  •  They allow information, knowledge and ideas to be shared widely across communities and geographies.

Third, mobility of payments.

  •  In the past, it used to take several days and cost quite a bit to pay someone in another country or currency.
  •  Today, online payment services have made it possible for people and businesses to transfer funds safely at very low cost.
  •  This has not only allowed e-commerce to flourish, but also enabled faster and more efficient cross-border financial services, like lending and borrowing.

We are looking at a financial services industry that will be increasingly driven and powered by technology.

The big trends in technology affecting finance

What are the big trends in technology affecting the financial industry? Let me cite six technologies that appear potentially transformative:

  •  digital and mobile payments
  •  authentication and biometrics
  •  block chains and distributed ledgers
  •  cloud computing
  •  big data
  •  learning machines

First, mobile and digital payments.

Payment services are increasingly being enabled by mobile applications and near-field communications (NFC).

  •  Gone are the days of the clunky cash register.
  •  Today, accepting payments can be as simple as attaching a small dongle, no bigger than a matchbox, to a tablet or smartphone.

This is only the beginning.

  •  Payments at stores and restaurants may increasingly not even require physical touch points, and could take place entirely over the Internet, using the customer’s smart device to effect payments.
  •  Further out, we can look to a future of seamless payments, where technology automatically recognises the customer, checks out the goods, and charges to the customer’s account as he walks out of the store.

Second, authentication and biometrics.

Authenticating one’s identity is critical to gaining access to a variety of financial services and performing many financial transactions. As authentication technology progresses, we can look forward to more secure and efficient solutions to authenticate identity.

Biometric authentication is making good advances.

  •  In the future, we may not have to remember complex passwords or worry about password compromise.
  •  Fingerprint, iris, facial and voice recognition, and even palm vein and heartbeat recognition systems are being explored for authentication purposes.
  •  Biometric ATMs have been deployed in several parts of the world, including the UK, Japan, China, Brazil, and Poland.
  •  Banks in Singapore have launched mobile applications that utilise the TouchID function of the iPhone for fingerprint authentication.
  •  Some have also been exploring the use of voice biometrics in their phone banking and call centre services.

For users who are concerned about their privacy or have physical challenges, token-based authentication offers an alternative means of security:

  •  Tokens embedded within mobile devices, or perhaps on wearable technology, are viable options.
  •  And where stronger security is required, these could be used together with biometrics to provide multi-factor authentication.

Third, block chains and distributed ledgers.

Digital currencies – like Bitcoins – have attracted much interest.

  •  Payments using Bitcoins are much faster and potentially cheaper than conventional bank transfers and, its advocates argue, just as safe.
  •  Whether digital currencies will take off in a big way remains to be seen.
  •  But it is a phenomenon that many central banks are watching closely, including MAS.
  •  And if they do take off, one cannot rule out central banks themselves issuing digital currencies some day!

But the bigger impact on financial services, and the broader economy, is likely to come from the technology behind Bitcoins – namely the block-chain or, more generally, the distributed ledger system.

  •  A block chain is essentially a decentralised ownership record.
  •  It allows a document or asset to be codified into a digital record that is irrevocable once it has been committed into the system.
  •  The digital record can be accessed and verified by other parties in the system without going through a central authority.
  •  The potential benefits of such a distributed ledger system include:

– faster and more efficient processing;

– lower cost of operation; and

– greater resilience against system failure.

There are many potential applications of distributed ledger systems in the financial sector:

  •  Ripple in the US offers a solution, based on distributed ledgers, for real-time gross settlement, currency exchange, and remittance.
  •  The same solution could potentially allow regulators to plug into the network to conduct surveillance of risks and to track transactions to detect money laundering or terrorist financing.

In fact – and this would be of interest to the lawyers gathered here – distributed ledger systems could potentially be applied in any area which involves contracts or transactions that currently rely on trusted third parties for verification.

  •  Honduras is developing a land title registry system based on distributed ledgers
  •  Other potential applications talked about include registry of intellectual property rights, supply chain management, electronic voting systems, medical records, etc.

Fourth, cloud computing.

Cloud computing is an innovative service and delivery model that enables on-demand access to a shared pool of computing resources. It provides economies of scale, potential cost-savings, as well as the flexibility to scale up or down computing resources as requirements change.

There is a view among some quarters that “MAS does not like the cloud”. This is an urban myth, not true.

  •  Well, MAS did have concerns about cloud computing previously.
  •  This was because cloud services were at the time not sufficiently secure to safeguard the sensitive information that FIs held.
  •  But cloud technology has evolved considerably and there are now solutions available to address these concerns.

– For example, FIs can now implement strong authentication and data encryption to protect their data in the cloud.

– MAS has been in dialogue with both FIs and cloud service providers

– Providers have now become more aware of our security considerations while we have gained a deeper understanding of the safeguards they have put in place.

  •  I am pleased to say that several FIs in Singapore have successfully rolled out cloud solutions in the past two years.

Fifth, big data.

The world is exploding with information.

  •  Data generated by online social networking and sensor networks, and data collected by governments and businesses amount to a universe of digital information that is growing at about 60% each year.
  •  There is also a global trend – including in Singapore – towards “open data” in which data are freely shared beyond their originating organisations
  •  At the same time, the cost of storing and processing data has been falling dramatically.
  •  These trends have created the opportunity to use data to understand the world around us with a clarity and depth that was not possible before.

Some FIs are investing in and using this big data to derive useful and actionable insights.

  •  JP Morgan Chase and MasterCard, to cite two examples, are using big data techniques to derive insights from consumer spending patterns.
  •  Visa is using big data techniques to detect fraud in financial transactions.

Sixth, learning machines.

This might well be the most impactful technological change of the future – computers that can think.

  •  Traditional computing machines and algorithms are programmed to carry out specific tasks in response to defined circumstances according to the software programme that is written into them.
  •  We are now moving into the age of cognitive machines which are designed to learn from the data that they hold and be able to, in a sense, programme themselves to perform new tasks.
  •  They continuously adapt to new data as well as feedback and inputs gathered from their experiences, including interactions with humans.

We are already beginning to see examples in the financial industry:

  •  In equity, commodity, and FX markets, some traders are using self-learning algorithms

– they not only analyse historical data, predict price movements and make trading decisions, but continually upgrade and adjust their trading strategies in the light of new evidence and market reactions.

  •  In lending, learning machines have been used to construct models for consumer credit risk and improve the prediction of loan defaults.

The legal minds assembled here might want to reflect on where the legal liabilities arising from the actions – or inactions – of such learning machines lie.

The six technologies that I have outlined have the potential to transform the financial industry globally. There could well be others that I have not mentioned.

The important thing for our FIs is to be alert to these and other technology trends, understand their possible implications, and seize the opportunity to apply relevant technologies safely and efficiently – to boost productivity, gain competitive advantage, and serve consumers better.

Smart nation needs a smart financial centre

At the national level, Singapore has set its sights on becoming a Smart Nation – one that embraces innovation and harnesses info-comm technology to increase productivity and improve the welfare of Singaporeans. The Smart Nation Programme under the Prime Minister’s Office has brought together stakeholders from the government and the industry to identify issues and develop solutions with this objective in mind.

Government agencies have been rolling out a steady pipeline of Smart Nation initiatives.

  •  The Housing Development Board has trialled a new system that utilises home sensors to monitor elderly folks who are staying alone and alert caregivers should an emergency arise.
  •  The Land Transport Authority is studying the use of autonomous vehicles that can self-drive with the help of environmental sensors and navigation systems.
  •  The Urban Redevelopment Authority has been utilising geospatial information and data analytics for urban design and land-use planning.

A Smart Nation needs a Smart Financial Centre. Indeed, the financial sector is well placed to play a leading role given that financial services offer fertile ground for innovation and the application of technology.

MAS will partner the industry to work towards the vision of a Smart Financial Centre, where innovation is pervasive and technology is used widely to:

  •  increase efficiency,
  •  create new opportunities,
  •  manage risks better, and
  •  improve people’s lives.

MAS will seek to achieve this vision together with the industry through two broad thrusts:

  •  a regulatory approach conducive to innovation while fostering safety and security; and
  •  development initiatives to create a vibrant ecosystem for innovation and the adoption of new technologies.

Smart regulation for a smart financial centre

First and foremost, a smart financial centre must be a safe financial centre. Technology can be a double-edged sword. If not managed well, it can potentially lead to a variety of risks in the financial industry:

  •  financial crime and illicit transactions;
  •  loss of data or compromise of confidentiality;
  •  glitches that damage reputation, disrupt business, or worse, cause systemic crisis.

The first priority on our journey towards a Smart Financial Centre is therefore to continually strengthen the industry’s cyber security.

As more financial services are delivered over the Internet, the frequency, scale, and complexity of cyber attacks on FIs have increased globally. Hackers and cyber criminals are constantly probing IT systems for weaknesses to exploit.

There are two reasons for concern:

  •  First, the connectedness among FIs mean that a serious cyber breach in one institution can potentially escalate into a more systemic problem.
  •  Second, repeated cyber breaches could diminish public confidence in online financial services and reduce people’s willingness to use FinTech in general.

MAS and the financial industry in Singapore take cyber security seriously.

  •  FIs are expected to:

– implement controls and measures to preserve the confidentiality of sensitive data

– maintain the integrity and availability of their systems

– conduct regular vulnerability assessments and penetration tests to evaluate the robustness of their cyber defences

  •  MAS conducts regular onsite inspections of key FIs’ technology risk management processes and controls to check that they meet these requirements.
  •  FIs have also established Cyber Security Operations Centres to enhance their cyber surveillance and gather cyber intelligence.

But cyber threats will not go away. Like a cat and mouse game, both hackers and cyber defenders have been enhancing their tools and techniques along with advances in technology as well as in response to one another.

  •  As part of this evolution, a new wave of next-generation cyber security solutions is emerging, in areas such as trusted computing, security analytics, threat intelligence, active breach detection, and intrusion deception.
  •  The financial industry needs to keep abreast of these developments.

While seeking to ensure cyber security, MAS’s regulatory approach towards fostering innovation and the adoption of new technologies will take three forms.

First, innovation owned by FIs.

In matters of innovation, time to market is critical. FIs are free to launch new ideas without first seeking MAS’ endorsement, as long as they are satisfied with their own due diligence.

  •  A recent case that went on this approach was a mobile banking application that utilised fingerprint authentication for balance enquiries.
  •  The bank went ahead, did not need MAS approval.

What does this approach entail?

  •  FIs’ board and management should take the responsibility to ensure that the risks of new innovative offerings are well identified and managed.
  •  The compliance people should ideally be involved early in the innovation process. However, they should avoid second-guessing MAS by taking an overly conservative stance that might nip innovation in the bud.
  •  If the FI encounters a specific issue on which it needs MAS’ guidance, we will be happy to help.
  •  But the FI must offer its own assessment of the risks in what it proposes to do and take ownership for its decisions.
  •  It cannot rely on MAS to do its due diligence.

Second, innovation in a “sandbox”.

Sometimes, it is less clear whether a particular innovation complies with regulatory requirements. In such cases, FIs could adopt a “sandbox” approach to launch their innovative products or services within controlled boundaries.

  •  The intention is to create a safe space for innovation, within which the consequences of failure can be contained.
  •  FIs can seek MAS’ guidance and concurrence on the boundary conditions – for example, the time period, customer protection requirements, etc.

Third, innovation through co-creation.

MAS has a long tradition of active consultation with industry on proposed new rules or initiatives. More recently, we have engaged industry players more directly to co-create rules and guidance – in other words, to jointly come up with proposals.

  •  An example is the Private Banking Industry Code – developed by industry practitioners but in close consultation with MAS.
  •  Such co-creation is particularly relevant for developing rules or guidance on new technologies whose benefits and risks are not fully known and where a more flexible approach may be desired.

A further possibility in co-creation might be MAS and the industry working together to develop common technology infrastructure that meets regulatory requirements. The aim is to clarify and address issues and uncertainties upfront during the course of development.

MAS is not seeking a zero-risk regime. And we understand that failure is part of the learning process.

  •  If things do go wrong with an innovative product or service, and there will no doubt be some failures, the FI will need to review its implementation and draw lessons.
  •  MAS will examine the facts to assess if there is any systemic or deeper issue that needs to be addressed, and determine if any action needs to be taken.

Development initiatives for a smart financial centre

Besides providing a conducive regulatory environment, MAS will work closely with the industry to chart strategies for a Smart Financial Centre. Let me sketch some of the initiatives we have embarked on:

  •  a Financial Sector Technology & Innovation scheme to provide financial support;
  •  a multi-agency effort to guide the development of efficient digital payments systems;
  •  a technology-enabled regulatory reporting system and smart surveillance;
  •  supporting a FinTech ecosystem; and
  •  building skills and competencies in technology.

First, the Financial Sector Technology & Innovation or “FSTI” scheme.

I am happy to announce that MAS will commit $225 million over the next five years under the “FSTI” scheme to provide support for the creation of a vibrant ecosystem for innovation.

FSTI funds can be used for three purposes:

  •  innovation centres: to attract FIs to set up their R&D and innovation labs in Singapore.
  •  institution-level projects: to catalyse the development by FIs of innovative solutions that have the potential to promote growth, efficiency, or competitiveness.
  •  industry-wide projects: to support the building of industry-wide technology infrastructure that is required for the delivery of new, integrated services.

Several FIs have already set up their innovation centres or labs in Singapore, some under the FSTI:

  •  DBS, Citibank, Credit Suisse, Metlife, UBS,
  •  as well as a couple of others that are in the pipeline.

Some examples of FSTI-supported institution-level projects that are ongoing include:

  •  a decentralised record-keeping system based on block chain technology to prevent duplicate invoicing in trade finance;
  •  a shared infrastructure for a know-your-client utility;
  •  a cyber risk test-bed; and
  •  a natural catastrophe data analytics exchange.

We look forward to see more such innovation projects coming on-board.

Second, digital payments.

Changes in the payments scene in Singapore have picked up pace in recent years:

  •  Our retail banks have released their own flavours of mobile wallets or mobile payment applications:

– DBS PayLah!, UOB Mobile Cash, OCBC Pay Anyone, StanChart Dash, Maybank Mobile Money

  •  With the launch of Fast And Secure Transfers or “FAST” in March 2014, we now have a ready infrastructure that allows customers of the participating banks to make domestic fund transfers to one another almost instantaneously from their computers or mobile devices.

But there is a lot more we need to do on the digital payments front.

First, payments at stores and restaurants.

  •  This is almost a Uniquely Singapore phenomenon

– Many of our stores and restaurants have multiple Points-of-Sale (“POS”) at their payment counters.

– This not only clutters valuable real estate but also makes life difficult for customers and merchants.

  •  As more stores and restaurants introduce self-checkout facilities to improve productivity, we need a unified POS – a single terminal, preferably mobile – that will:

– allow merchants to enhance efficiency by simplifying front-to-back integration; and

– enhance the shopping or dining experience of customers.

Second, reduce the use of cash and cheques.

  •  It costs as much as $1.50 to process each cheque.
  •  The cost of cash is less obvious but just as real: in transportation, collection, delivery and protection.
  •  We need to promote greater adoption of new payments technologies, including:

– electronic Direct Debit Authorisation; and

– fund transfers using mobile numbers or social networks

MAS and the Ministry of Finance have been co-leading a multi-agency effort to address these issues and guide the development of efficient digital and mobile payment systems.

  •  The aim is to make payments swift, simple and secure.
  •  The vision is less cash, less cheques, fewer cards.

Third, regulatory reporting and surveillance.

As the financial system becomes increasingly complex and inter-connected, MAS needs to sharpen its surveillance of the system with more timely, comprehensive and accurate information to identify and mitigate emerging risks.

The vision is an interactive, technology-enabled regulatory reporting framework which will:

  •  reduce ongoing reporting costs through the use of common data standards and automation;
  •  enable the dissemination of anonymised information to industry analysts and academics for deeper analysis of the financial system and its risks.

We are still in early days on this initiative and will work with the industry on how best to take this forward.

Fourth, supporting a FinTech ecosystem.

The effort to grow a Smart Financial Centre must go beyond the financial industry, to help nurture a wider FinTech ecosystem. We need a strong FinTech community that can:

  •  generate ideas and innovations that FIs could adapt and adopt; and
  •  provide a platform for collaborations with the industry to produce innovative solutions for defined problems and needs.

For those of you who are not aware, we have a pretty vibrant FinTech start-up community that is growing over at the “Launchpad” in Ayer Rajah Industrial Estate. MAS looks forward to engaging FinTech start-ups more actively – to better understand emerging innovations as well to help them design their solutions bearing in mind the regulations and risk considerations that apply to the financial industry.

Fifth, building skills and competencies in technology.

Technology will disintermediate and make obsolete many jobs in the financial sector, but it will also create new ones. Finance professionals will need new capabilities. And the industry will need skills and expertise from other disciplines traditionally not associated with finance.

MAS and the financial industry must work together to prepare for the changes ahead on the jobs and skills front. Building capabilities and opportunities in FinTech will be a key area of focus in the financial sector’s SkillsFuture drive.

  •  MAS will work with the financial industry, the Institute of Banking and Finance, training providers, and the universities and polytechnics to provide learning pathways relevant for a Smart Financial Centre.
  •  We will also provide FIs funding and other support for training opportunities, to help our people acquire specialist capabilities in the relevant areas of FinTech.

Conclusion

Let me conclude. I have said much about technology and FinTech. The larger picture is really about promoting a culture of innovation in our financial industry.

  •  Such innovation is not always about high-tech.

  •  It is about designing better work processes and creating new business models that will deliver higher growth, more enriching jobs, and better services for the consumer.

  •  Technology is very likely to be a key enabler for all this, and we must make a concerted effort to understand it and use it effectively.

Why the No vote was a triumph of democracy over austerity

From The Conversation.

The resounding rejection of the unworkable polices demanded by Greece’s lenders in a national referendum held on July 5 is truly momentous for Greece.

Beyond the economic issues at stake in this vote, the democratic processes on display offer new hope not only to the Greek people, but for other countries too. The result is a powerful message to the political establishment that has mismanaged Greece for the last four decades, bringing the country to the brink of catastrophe.

These people, who ruled using corrupt practices and nepotism, all united for the Yes vote in the build-up to the plebiscite. They included no fewer than four former prime ministers, all of whom bear a direct responsibility for Greece’s debt. These men have spoken with one voice in their attempt to absolve themselves of responsibility.

Among these discredited leaders are the socialist Kostas Simitis, who introduced Greece to the eurozone on doctored data, and another socialist, George Papandreou, an inept scion of a political dynasty who negotiated the biggest bailout in history. They also include the conservative Kostas Karamanlis, a beneficiary of nepotism under whose watch the debt spiralled from 98.9% to 129.7% of GDP in less than five years, and the unelected technocrat Loukas Papademos, a former banker who “bailed in” tens of thousands of small depositors in Greece while letting off German and French banks holding Greek bonds.

The referendum result is equally bad news for the oligarch-owned media, which deployed scare tactics to promote its own agenda (including a desire to avoid paying taxes and competitive tendering for the airways that the Syriza government is likely to enforce). This plan clearly backfired, since 61.3% of voters weren’t buying what they were selling.

The resounding No vote has all but obliterated the power held by the handful of political families and oligarchs who have dominated Greek politics for years. It is a vote of confidence in the Syriza-led government, which has no ties to this toxic nexus of corruption and dependency.

Bringing democracy back to Brussels

But the referendum also dealt a heavy blow to European technocrats. The lenders of the European Union, the European Central Bank and the International Monetary Fund, who imposed savage and unworkable austerity measures on the Greek society in the past five years in exchange for bailout funds that the country badly needed, were of course hoping for a Yes.

A vote for No is a vote for Greece. EPA/Yannis Kolesidis

Most economists agree that an extension or a further intensification of the disastrous policies forced on Greece would have led to a further contraction of the Greek economy, which has already caused massive unemployment (currently at 26% in the general population and more than 50% among young people).

The Greek government was first to reject the take-it-or-leave-it ultimatum from the lenders and now the electorate has followed. The No vote is therefore a triumph of democracy over diktats dreamed up by unelected officials. It is an opportunity to redefine Greece’s place in the European Union and its future identity for the years to come.

A wider change

While the battle between the Yes and No camps was largely fought between the “haves” and the growing number of the “have nots”, it also brought the demands of younger Greeks to the fore. They crave change that has not been on offer from mainstream parties. Beyond economic stability, many younger voters want citizenship for the children of immigrants and the legalisation of same-sex marriage, for example.

Since Greece’s problems did not begin with Syriza, the current government has the best chance in years of addressing the country’s intractable problems. There is hope that corruption can be stamped out and reforms introduced to improve governance and modernise Greek society.

The tremors will be felt beyond Greece’s borders. The promise of a better tomorrow that never seems to arrive on the condition of more impoverishment today is a familiar concept to many. If Greece is successful, it will offer an alternative to the misanthropy driving eurozone austerity policies. It will enable citizens to have a bigger say in the future of the European project.

This is potentially the most important contribution being made by the democratic processes taking place in Greece. The No vote should give pause to politicians and media all over the world. They should note that they couldn’t tell the Greeks what to do and they can’t stop people holding unelected institutions to account.

Author Marianna Fotaki: Network Fellow, Edmond J Safra Center for Ethics, Harvard University and Professor of Business Ethics at University of Warwick

RBA leaves the cash rate unchanged at 2.0 per cent

At its meeting today, the Board decided to leave the cash rate unchanged at 2.0 per cent.

The global economy is expanding at a moderate pace, but some key commodity prices are much lower than a year ago. This trend appears largely to reflect increased supply, including from Australia. Australia’s terms of trade are falling nonetheless.

The Federal Reserve is expected to start increasing its policy rate later this year, but some other major central banks are continuing to ease policy. Hence, global financial conditions remain very accommodative. Despite fluctuations in markets associated with the respective developments in China and Greece, long-term borrowing rates for most sovereigns and creditworthy private borrowers remain remarkably low.

In Australia, the available information suggests that the economy has continued to grow over the past year, but at a rate somewhat below its longer-term average. The rate of unemployment, though elevated, has been little changed recently. Overall, the economy is likely to be operating with a degree of spare capacity for some time yet. With very slow growth in labour costs, inflation is forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate.

In such circumstances, monetary policy needs to be accommodative. Low interest rates are acting to support borrowing and spending. Credit is recording moderate growth overall, with stronger borrowing by businesses and growth in lending to the housing market broadly steady over recent months. Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities. The Bank is working with other regulators to assess and contain risks that may arise from the housing market. In other asset markets, prices for equities and commercial property have been supported by lower long-term interest rates.

The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies. Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.

The Board today judged that leaving the cash rate unchanged was appropriate at this meeting. Information on economic and financial conditions to be received over the period ahead will inform the Board’s assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.

CGU Insurance and Accident and Health International to refund $2 million in ‘useless’ payday insurance premiums

Following concerns raised by ASIC, CGU Insurance Limited (CGU), together with Accident and Health International Underwriting Pty Ltd (AHI) have agreed to refund consumers over $2,000,000 in payday loan consumer credit insurance (CCI) premiums and fees. The insurance was sold by The Cash Store Pty Ltd (in liquidation) (The Cash Store) alongside payday loans to consumers.

The agreement follows earlier court action by ASIC against The Cash Store, in which the Federal Court found that The Cash Store had acted unconscionably in selling a payday loan CCI product (CCI product). The CCI product covered consumers against the risk of becoming unemployed, sick or dying during the period of the payday loans, which could be as short as one day, and was usually around two weeks.

ASIC’s court action against The Cash Store was in respect of its conduct between August 2010 and March 2012. In this period:

  • The Cash Store sold the CCI product to 182,838 customers
  • these customers paid $2,278,404 in premiums for cover
  • only 43 claims were paid to consumers, totaling only $25,118.

‘ASIC took action because we were concerned about the unfair sale of the payday insurance when it was highly unlikely that consumers would be able to make a claim. We therefore welcome CGU and AHI’s agreement to refund more than $2 million to these consumers,’ ASIC Deputy Chair Peter Kell said.

To address ASIC’s concerns and minimise the risk of this type of conduct occurring again, CGU and AHI have agreed to:

  • refund total amounts paid by consumers, together with interest, for all sales of the CCI product for which CGU was on risk for the product (including sales in 2013 when a modified version of the policy was reintroduced)
  • review claims it denied where the consumer did not meet the eligibility requirements for a claim at the point of sale under both the initial and modified versions of the policy
  • appoint an independent external firm to review its supervision of third parties
  • appoint an independent external firm to review AHI, a wholly owned subsidiary of CGU, who was responsible for underwriting the payday loan insurance product.

ASIC’s inquiries into the sale of the CCI product by The Cash Store and the role of other entities is ongoing.

Background

The Federal Court imposed the maximum penalty of $1.1 million on The Cash Store for engaging in unconscionable conduct in breach of section 12CB of the ASIC Act. The total penalty on The Cash Store and the loan funder, Assistive Finance Australia Pty Ltd (AFA) was $18.975 million, which included penalties for systemic breaches of the responsible lending requirements under the National Credit Act.

The Federal Court action related to the conduct of The Cash Store during the period from August 2010 to March 2012 when it sold the CCI product in connection with 182,838 of the total 268,903 credit contracts entered into in this period (or 68% of these contracts). The CCI product was developed and distributed by a number of entities, including AHI via an underwriting agency agreement with Allianz (up until March 2011), and later through an underwriting agency agreement with CGU (from March 2011).

CGU was the insurer for the CCI productfor two periods; between 1 March 2011 and 31 March 2012 and 1 April 2013 and 31 October 2013. AHI temporarily stopped issuing the CCI product between April 2012 and April 2013. While off the market, AHI modified some of the terms on which cover was offered and subsequently recommenced sales of the modified CCI product through The Cash Store from April 2013 until October 2013. ASIC was concerned that the modified CCI product, despite some improvements, continued to offer very limited benefit overall.

On 3 March 2015, ASIC announced that Allianz had agreed to refund approximately $400,000 in CCI product premiums. The total amount of refunds agreed to by Allianz, CGU and AHI is just under $2.5 million, covering all sales of the CCI product.

The Cash Store generally charged its customers a premium of about 3.38% of the loan amount for the CCI product. From August 2010 to October 2013, consumers paid approximately $2.5 million for the CCI product, with The Cash Store retaining approximately $1.34 million as income.

The court also found that The Cash Store and AFA each breached seven separate provisions of the National Credit Act on multiple occasions. On 19 February 2015 the Federal Court imposed record penalties of $18.975 million against The Cash Store and AFA.

Greece votes No: experts respond

From The Conversation:

The Greek people have voted, saying a resounding No to the terms of the bailout deal offered by their international creditors. What will this mean for Greece, the euro and the future of the EU? Our experts explain what happens next.

Costas Milas, Professor of Finance, University of Liverpool

Greek voters have confirmed their support for their prime minister, Alexis Tsipras, who now has the extremely challenging task of renegotiating a “better” deal for his country.

Nevertheless, time is very short. Greece’s economic situation is critical. On July 2, Greek banks reportedly had only €500m in cash reserves. This buffer is not even 0.5% of the €120 billion deposits that Greek citizens have to their names. It is only capital controls preventing Greek banks from collapsing under the strain of withdrawal.

Basic mathematical calculations reveal how desperate the situation is. There are roughly 9.9m registered Greek voters. Assume that – irrespective of whether they voted Yes or No – some 2.8m voters (that is, a very modest 28.2% of the total number of registered voters) decide to withdraw their daily limit of €60 from cash machines on Monday morning. Following this pattern, banks will run out of cash in three days and therefore collapse (note: 3 x 2.8m x 60 ≈ 500m).

There is therefore very little time for the Greek government to strike the deal with their creditors that will instantaneously give the ECB the “green light” to inject additional Emergency Liquidity Assistance (ELA) to Greek banks to support their cash buffer and save them from collapse. In other words, Greece does not have the luxury of playing “hard ball” with its creditors. An agreement has to be imminent.

Financial markets, expected to start very nervously on Monday morning, will probably stay relatively calm as the reality of the economic situation spelled out above is more likely than not to lead to some sort of agreement (provided, of course, that Greece’s creditors will listen to Tsipras). Whether this agreement is good for the Greeks, this is an entirely different story.

Richard Holden, Professor of economics, UNSW Australia

By calling this referendum and shutting off negotiations for nearly a week, the Syriza party has brought the Greek banking system very close to insolvency. Greece can’t print euros so Greek banks will soon need to issue IOUs, or the demand for money will not be met, leading to utter chaos. Who will accept these? How will they be valued? These are big, scary questions to which nobody knows the answer.

By voting No, Greece has tied the hands of European Central Bank president Mario Draghi. As a matter of politics there’s not much he can do in the short-term and with Greek banks insolvent he may not be able to do anything simply as a matter of law.

At least one if not all the major Greek banks are likely to fail early this week. When this happens, the Greek economy will essentially come to a halt. Nobody knows what will happen, but it surely won’t be good.

The other depressing consequence of the No vote is that Greek finance minister Yanis Varoufakis’s promise to resign if his fellow citizens voted Yes will not come about. It has been abundantly clear that Syriza representatives have been miles out of their depth from the time they took office.

Everyone with real knowledge and experience of financial markets and liquidity crises told them to stop playing chicken with the IMF and ECB. They should start listening immediately.

George Kyris, Lecturer in International and European Politics, University of Birmingham

A historic referendum for Greece and Europe tells a very interesting story. While results indicate that a sizeable 61% rejected existing policies towards the Greek crisis, polls have consistently shown that the majority of Greeks want to remain in the eurozone. This exposes the success of Syriza based on its populism, which has allowed Greeks to think that they can stay a credible member of the EU, while at the same time taking unilateral decisions and refusing to recognise the obligations of their eurozone membership.

This not only creates unrealistic expectations but it is also a very sad result for the relationship between the EU and its citizens, which, once again, falls victim to national governments’ short-term strategies. In this climate of unrealistic expectations, the Greek government embarks on a mission impossible to secure a better deal for the country, where economic, political and social peace has been seriously undermined in the past few months and week especially.

The first reactions of Greece’s EU partners to the No vote are far from positive.

In his address after the referendum, Alexis Tsipras indicated the formation of an ad hoc national council with the participation of major political parties to prepare the negotiation strategy. The next few days will show if a more united Greek front is possible and capable of improving things for the crisis-hit country.

Ross Buckley, Professor, Faculty of Law at UNSW Australia

The Greek people have decisively voted No to more austerity imposed from Frankfurt. This is unsurprising. Voters rarely vote for higher taxes and lower pensions. However other polls reveal clearly that the Greek people overwhelmingly also want to retain the Euro. So this is one giant gamble. The Greeks are betting that the potential damage to other countries, especially Spain and Italy, and thus to the very fabric of the Euro, is simply too great for the Eurozone to eject Greece.

When voting on Sunday most Greeks probably felt they were reclaiming control of their own economy. However, paradoxically, the No vote has done the opposite. Greece’s short to medium term economic future is now in the hands of others, particularly Germany and France.

Greek banks today are all but out of Euros. Normally in this situation a nation’s central bank simply prints more currency. Greece can’t do that, as no one country controls production of the Euro. So the options over the next month or so seem to be that either Germany, France and the European Central Bank blink, and extend more credit to Greece, or Greece’s financial system will cease functioning and ultimately it will be forced to print drachma.

Remy Davison, Jean Monnet Chair in Politics and Economics at Monash University

With eyes wide shut, Prime Minister Alexis Tsipras has sent his country to the wall.

The “OXI” voters in Athens last night were in full party mode. But in the cold, harsh light of day, the depressingly-painful hangover begins.

61% of voters will wish they didn’t drink so much of the OXI Kool-Aid. Especially when the realisation hits voters that they can only get €60 out of the ATM. Or €50, as €20 notes are now scarce.

The next hurdle for Athens is ominous. The government has a $3.5 billion repayment due to the ECB in mid-July. Defaulting on the 30 June IMF payment was not as serious as the media made out; the IMF default process is slow and ponderous. Conversely, the ECB controls Greece’s capital lifelines. Its emergency lending assistance (ELA) facility has kept Greek banks liquid up to this point. However, the ECB’s Governing Council and the Eurogroup ministers are unlikely to be sympathetic if Tsipras and Varoufakis attempt to renege on the ECB debt repayments.

A deal will ultimately be struck or Greek banks will not reopen without assistance from the ECB. Europe’s central bank will not refinance Greek banks endlessly, as the absence of capital controls before they were imposed on 29 June saw billions of euro offshored within days.

Tax evasion remains a systemic problem for Greece. A Swiss media source has reported that Athens is quietly offering amnesty from prosecution to Greek tax evaders, who have squirrelled away their euro in Swiss bank accounts, if they pay 21% tax.

A Grexit is still extremely unlikely. If there is one thing that government and opposition parties agree upon, it is that there will be no attempt to depart the eurozone. It is not in Greece’s interest, and there is no legal mechanism with which to do so.

An extra-legal attempt (i.e., outside the EU treaties) by a qualified or absolute majority of EU member governments to vote for Greece’s ejection from the eurozone would result in a Greek application to the European Court of Justice for an injunction. A hearing by the ECJ on an attempt to remove Greece from the eurozone could potentially take two years or more, given the complete absence of precedent and the considerable time and resources required to compile briefs for a case of such complexity. Financial commentators who believe in a high probability of a Grexit are either deluded, or have little comprehension of how the institutional mechanisms and procedures of the EU actually work.

The tragedy is that Tsipras and Varoufakis did not need initiate this crisis, as Greece and the IMF were only $400 million apart in their negotiations before the Greek government walked out. Tspiras and Varoufakis have spun the recent IMF report, which calls for debt restructuring, as somehow supporting their side of the story.

In reality, the IMF has been heavily critical of the Tsipras-Varoufakis government and its unwillingness to undertake the requisite, difficult structural reforms that Greece needs, including further privatisation, industry deregulation and competition policy reform, rigorous taxation restructuring in the Greek merchant shipping industry, and tackling offshore tax evasion. Why a far-left government in Greece wants to help rich Greeks to avoid tax defies logic.

In June, a reasonable compromise may have been reached between Athens and the Eurogroup. But it’s unlikely Euro Area ministers will have much sympathy to spare in the next round of negotiations.

Greeks may have voted with an overwhelming “OXI”, but it’s unlikely they realised they might also be voting for capital controls, insolvent banks and a financial system on the verge of meltdown.

Nikos Papastergiadis, School of Culture and Communication, University of Melbourne

A profound recognition has been given now, not just by economists, but by the people of Greece, that the economic policies pushed by the troika are counter-productive.

The government can now walk into negotiations in a strengthened position. They can honour their promises. They have no intention to leave the eurozone, let alone the EU, but can focus on a debt restructure, tackling tax evasion and modernising the state.

I expect some sort of financial resolution in the next 24-48 hours, because a move back to the drachma would be catastrophic.

When politicians in Europe say things like ‘It’s not a problem for us there is no risk of economic contagion,’ that is a profoundly immoral comment given there’s a real risk Europeans will die this winter as a result of their policies. Their sense of solidarity with the union is profoundly blinkered. The risk is not just economic contagion, it’s political contagion. They don’t want Syriza to be the example for other European governments. They wanted Greece to be humbled and crippled by these austerity measures. This divide and conquer attitude means there will be long-term political consequences.

I am so proud of the courage demonstrated by Greeks who have stood up in the face of their own oligarchs, who launched a smear campaign against the government, and said ‘enough is enough’.

James Arvanitakis, Professor in Cultural and Social Analysis at University of Western Sydney

The Greek people have shown overwhelming support for the Greek government and their stance against the so-called troika.

While most commentators may claim they suspected the outcome, I think those who are honest would say the decision was too close to call. The 61% vote in favour of the government does not indicate this, but the reality is the vast majority of Greeks did not know themselves what their vote would be.

In the end, the existential crisis of potentially leaving the Euro and even the European Union was usurped by the fact that they have had enough: enough of austerity that has driven the economy into the ground, enough of 25% unemployment and a lost generation of productivity with 50% youth unemployment, and enough of the troika and the bankers holding them to ransom. As one academic said to me when I was recently there:

“Who created the crisis and who pays for it? Like the GFC, it was those that lent the money, those that fudged the figures and those who have moved their money into offshore accounts. We lose our houses, they sip Retsina and watch sunsets on the islands.”

So what is next for the Greek people?

The obvious answer is uncertainty. But the uncertainty and potential for financial meltdown seems to have usurped the absolute hopelessness that is associated with ‘more of the same’.

Over the last five years we have seen the Greek government meet most of the austerity requests put forward by the troika. Economic theory tells us that in the “long run”, the austerity would work. For the Greek population however, the long run is too far away, unrealistic and a party trick they are no longer willing to fall for.

Greeks have said enough. They have decided it is better to reboot the economy and suffer the potential consequences than continue to see deeply flawed measures bring nothing but financial misery.

Over the next few days we will see continued celebrations. These will quickly disappear depending on the outcome of the negotiations. As I have written elsewhere, Greek society is fraying, how the negotiations go including a potential “Grexit” would determine just how far this unravelling goes.

The heartbreaking image of an elderly man, 77-year-old retiree Giorgos Chatzifotiadis, collapsed on the ground openly crying in despair outside a Greek bank, captured the attention of the world. It is a manifestation of what happens when economic policy and ideology is separated from the impacts on real people.

The “No” vote will restore the pride that has evaporated. But whether this pride turns into something productive or something that is a chauvinistic nationalism, no-one knows.

Many Challenges If Resolution Needed On Greek Banks – Fitch

The four largest Greek banks have failed and would also have defaulted had capital controls not been imposed at the outset of the week, due to deposit withdrawals and the ECB’s decision not to raise the Bank of Greece’s (BG) Emergency Liquidity Assistance (ELA) ceiling, says Fitch Ratings.

The Greek banking system’s liquidity and solvency positions are very weak and some banks may be nearing a point where resolution becomes a real possibility. The ECB is responsible for supervising and authorising the four major Greek banks, and the BG is resolution authority for the others.

Resolution of Greek banks, if required, is unlikely to be straightforward. We believe it would be politically unacceptable to impose losses on Greek creditors and that efforts would be made to find a solution which avoids this but still complies with EU legislation. Existing bank resolution laws in Greece are relatively mature, sharing many similarities with the EU’s Bank Recovery and Resolution Directive, although they exclude explicit bail-in of senior unsecured creditors.

In April, Panellinia Bank was liquidated under this framework, with selected assets and liabilities sold to Piraeus Bank. Panellinia’s small size may have facilitated speedy resolution. Potential resolution of any more systemically important banks would be far more complex.

Recapitalisation of Greek banks using domestic resources would be impossible due to the sovereign’s weak financial condition. The remaining EUR10.9bn European Financial Stability Facility notes available to cover potential bank recapitalisation or resolution in Greece were cancelled by the European Stability Mechanism (ESM) when Greece’s bailout programme expired on 30 June.

The Greek deposit insurance fund, which could be used to recapitalise banks contained only around EUR3bn at end-2013. No pan-EU deposit insurance fund yet exists but under the recast Deposit Guarantee Schemes Directive, EU banks can access other countries’ deposit insurance funds. Other EU member states would be highly unlikely to agree to share due to a lack of confidence in Greece and its banking system.

The ESM could still inject funds directly into the banks, but a precondition would be the bail-in of 8% of liabilities and own funds. This would most likely wipe out much or all equity in a failed bank. The equity/assets ratios of the four largest Greek banks were 8%-10% at end-1Q15, but losses incurred since are likely to have reduced this figure. Greek banks have issued limited debt, so ESM rules would theoretically make uninsured deposits vulnerable to bail-in if a bank were to suffer material erosion of own funds before any resolution action.

But any bail-in of uninsured deposits would be politically unacceptable for a Greek government and would also be unlikely to be palatable for Greece’s international creditors, as they overwhelmingly relate to “real economy” SMEs and retail customers. An alternative, more creative, solution would therefore probably be needed to resolve and/or recapitalise Greek banks. This would depend on political goodwill and the outcome of negotiations with creditors, which are still highly uncertain.

The liquidity position of Greek banks is much deteriorated without access to incremental ELA. The ECB only extends ELA to solvent banks and against acceptable collateral. The credit quality of Greek banks’ domestic loan books is exceptionally weak. We calculate that for the country’s four largest banks an aggregated total regulatory capital erosion equivalent to around 4.8% of risk-weighted assets (5% of domestic gross loans) would probably render them non-compliant with the EU minimum total capital requirement of 8%, assuming static risk-weighted assets.

At end-March, these banks reported 90-days-past-due loans equivalent to around 36% of total domestic loans, and arrears may since have risen significantly.

A swift lifting of capital controls is highly unlikely even if there is successful resumption of negotiations with the ECB, IMF and European Commission. Controls on Cypriot banks, lifted in May, lasted two years.

How a ‘Grexit’ Could Strengthen the Eurozone

Interesting perspective on the Greece situation from Knowledge@Wharton.

The debt crisis in Greece is quickly turning into a Greek tragedy. Banks have closed for a time, ATMs have cash limits and the stock market has not opened. Greece’s bailout expires on June 30, the same day its $1.8 billion debt payment is due to the International Monetary Fund. Greece reportedly will not pay it. Prime Minister Alex Tsipras has called for a July 5 referendum on the latest bailout terms by the IMF, the European Central Bank and the European Commission.

While the situation is dire for the Greeks, Wharton finance professor Jeremy Siegel says the crisis will likely be contained because of freer lending to banks in other countries. And if Greece does exit the European Union, he believes it will strengthen the eurozone. Siegel points to the euro gaining ground even as news of Greek bank closings led to expected declines in the European capital markets — which were to a lesser extent reflected in the U.S. markets as a result of a flight to quality.

As for the impact of the crisis on the Fed’s intention to raise the federal funds rate later this year, Siegel says the U.S. central bank will take the situation in Greece into account if it continues to be a problem months from now. But he does not believe the debt crisis will present enough anxiety for the Fed to derail an increase in the overnight bank lending rate. Siegel expects the rate hike to come in September.