tag:theconversation.com,2011:/id/topics/banks-816/articlesBanks – The Conversation2024-02-29T17:37:33Ztag:theconversation.com,2011:article/2240952024-02-29T17:37:33Z2024-02-29T17:37:33ZUK banks are reporting huge profits – but there are many reasons why this may not last<figure><img src="https://images.theconversation.com/files/578315/original/file-20240227-16-c7gcf.jpg?ixlib=rb-1.1.0&rect=108%2C58%2C5482%2C3629&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/businessman-modern-office-looking-city-falling-226014652">ImageFlow/Shutterstock</a></span></figcaption></figure><p>Ever since the <a href="https://www.britannica.com/money/financial-crisis-of-2007-2008">financial crisis of 2007-08</a>, British banks have <a href="https://www.mckinsey.com/industries/financial-services/our-insights/global-banking-annual-review">often struggled</a> to make as much money as they used to. Profits have generally been at a <a href="https://www.mckinsey.com/industries/financial-services/our-insights/a-decade-after-the-global-financial-crisis-what-has-and-hasnt-changed#part3">much lower level</a> than in the pre-crisis period.</p>
<p>But in recent weeks, some of the best-known banks in the UK have reported big jumps. Europe’s biggest bank, HSBC, posted close to an <a href="https://www.bbc.co.uk/news/business-68355809">80% rise</a> in pre-tax profits of £24 billion for 2023. Lloyds said it was <a href="https://www.mirror.co.uk/money/lloyds-profits-surge-57-bank-32184442">up 57%</a> to £7.5 billion.</p>
<p>So, are British banks finally heading back to their glory days? </p>
<p>Certainly, these increases seem to be well timed for many bankers, as they coincide with the <a href="https://www.bbc.co.uk/news/business-67206997">axeing of the cap on bankers’ bonuses</a>. That <a href="https://www.theguardian.com/business/2014/nov/20/eu-lawyer-bonus-cap-george-osborne">cap was introduced</a> after the financial crisis as part of efforts to <a href="https://theconversation.com/bankers-bonus-cap-why-scrapping-it-could-hurt-the-uk-economy-190811">curb reckless</a> and risky behaviour by bankers, who were often focused on maximising short-term profits. <a href="https://www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis/article/abs/executive-compensation-and-business-policy-choices-at-us-commercial-banks/AE40559214A82BF61517BDFD1F7A9C83">And research has shown</a> a direct link between executive pay and excessive risk-taking by banks. </p>
<p>But the recent surge in profits does not mean they will necessarily continue. One of the main reasons banks made so much money last year was the steady rise in the Bank of England base rate <a href="https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp">since the end of 2021</a>. That rate went from 0.25% to its current level of 5.25%. </p>
<p>And it was these rates hikes which allowed banks to boost their “net interest” margins – the difference between the interest a bank receives on loans and the rate it pays for deposits. This is the big banks’ main source of income.</p>
<p>Swift adjustments to the interest rates charged on all types of loan meant the average rate for a two-year fixed mortgage (with a 10% deposit) increased from 1.95% in December 2021 <a href="https://www.bankofengland.co.uk/statistics/visual-summaries/quoted-household-interest-rates">to 5.45% now</a>. In contrast, the banks <a href="https://www.ft.com/content/5fac24ff-e9b9-4b03-aede-3dd2507e7f43">had to be nudged</a> into passing on those rate increases to savers, who are still not fully benefiting from them – despite borrowers paying more.</p>
<p>But higher profits may be a temporary thing if, as is widely expected, the Bank on England <a href="https://www.ft.com/content/96fd7e8c-1940-4d41-94b8-d557efa5ea51">starts cutting rates</a> later this year. A fall in lending rates, coupled with the pressure to increase the interest paid on savings, will negatively affect higher net interest margins. </p>
<p>In fact, banks including <a href="https://www.wsj.com/business/earnings/natwest-expects-income-to-slip-after-4q-beat-bc129881">NatWest</a> and <a href="https://www.ft.com/content/05177d82-ac3b-4108-a958-e49bd482adcd">HSBC</a> are already adjusting their future profit expectations to take into account falling interest rates.</p>
<h2>Investments may fall</h2>
<p>Another factor is that since the financial crisis, there has been a significant increase in the amount of capital that <a href="https://www.bis.org/bcbs/basel3/b3_trans_arr_1728.pdf">banks must hold</a> on to (calculated as a varying percentage of assets). These rules were enforced after the financial crisis as <a href="https://www.bis.org/bcbs/basel3/b3_bank_sup_reforms.pdf">a major regulatory change</a> to make banks – and the overall financial system – safer. But higher capital requirements reduce profitability because of the amount of money that needs to be put aside.</p>
<p>It seems unlikely that these stringent requirements will be relaxed, despite the <a href="https://www.ft.com/content/3f6fb7f0-7e69-48f2-be36-5105e8f50727">protests of some bank CEOs</a>. </p>
<p>There are other factors too that may reduce bank profits. A recent <a href="https://www.ft.com/content/96559959-0931-43d9-ad71-e0f14149af44">Financial Conduct Authority probe</a> related to banks’ car financing – when it is alleged consumers were <a href="https://www.moneysavingexpert.com/news/2024/01/car-finance-misselling-claims-complaints-paused-regulator-concer/">charged higher interest rates</a> on loans than they should have been – may also affect profits soon, if lenders are forced to pay billions in compensation. </p>
<p>Banks may also make losses, and need to put aside even more capital, for loans that may not be paid back due to the effects of the economic slowdown and cost of living crisis. </p>
<p>Banks with large Asian operations, such as <a href="https://www.theguardian.com/business/2024/feb/21/hsbc-ceo-pay-fall-q4-profits-staff-bonus-pool-china-real-estate">HSBC</a> and <a href="https://www.ft.com/content/225b3b31-9264-412a-bad4-011b5a4ed7a4">Standard Chartered</a>, are also suffering from their exposure to China’s collapsing property market, which is expected to stifle profits. <a href="https://www.theguardian.com/business/2024/jan/15/geopolitical-tensions-and-ai-dominate-start-of-world-economic-forum?ref=biztoc.com">Heightened geopolitical tension</a> in Ukraine, the Middle East and Taiwan, and Donald Trump’s potential <a href="https://foreignpolicy.com/2024/01/03/us-elections-2024-trump-biden-policy-diplomacy-china-europe/">return to the White House</a>, are not helping either as they fuel an uncertain global economic outlook.</p>
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Read more:
<a href="https://theconversation.com/bankers-bonus-cap-why-scrapping-it-could-hurt-the-uk-economy-190811">Bankers bonus cap: why scrapping it could hurt the UK economy</a>
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<p>So, the profits we have seen in recent weeks do not seem to be cause for much celebration in the City. And perhaps sensibly, banks appear to be viewing them as a temporary lift and appear more focused on reducing costs. </p>
<p>For example, they have been cutting back on expensive elements of their business. Since 2015, 5,835 bank branches – more than half the total number that used to exist – <a href="https://www.which.co.uk/money/banking/switching-your-bank/bank-branch-closures-is-your-local-bank-closing-ayYyu4i9RdHy">have closed</a>.</p>
<p>And cost reductions look set to continue in 2024. Lloyds recently announced more than <a href="https://www.reuters.com/business/finance/more-than-2500-jobs-risk-lloyds-shakeup-guardian-2023-11-24/">2,500 job cuts to restructure</a> its business with a focus on digital services. <a href="https://www.theguardian.com/business/2024/feb/20/barclays-cut-costs-job-losses-profits?ref=biztoc.com">Barclays</a> and <a href="https://www.efinancialcareers.co.uk/news/2023/12/santander-cutting-technology-staff-uk">Santander</a> may end up doing the same, while similar levels of redundancies have <a href="https://www.cnbc.com/2023/10/19/big-banks-cut-thousands-of-jobs-more-layoffs-coming.html#:%7E:text=Big%20banks%20are%20quietly%20cutting%20thousands%20of%20employees%2C,this%20year%2C%20according%20to%20company%20filings.%20More%20items">been seen in the US</a> and <a href="https://www.reuters.com/markets/europe/job-cuts-lean-bonuses-loom-over-europes-bankers-2024-2023-12-01/">the EU</a>.</p>
<p>Overall, despite the increasing profits in the last two years, 2024 will be a challenging one for banks. Apart from the predicted impact of rate cuts on banks’ interest margins, economic growth <a href="https://www.britishchambers.org.uk/news/2023/12/bcc-economic-forecast-economic-growth-stuck-in-a-rut/#:%7E:text=UK%20Economic%20Outlook&text=A%20growth%20rate%20of%200.6,into%20a%20low%20growth%20climate.">in the UK</a> and <a href="https://www.reuters.com/markets/global-growth-slow-avoid-hard-landing-oecd-2023-11-29/">globally</a> is expected to be very slow. That means less money moving around, which means less business for the banks and, ultimately, less profit.</p><img src="https://counter.theconversation.com/content/224095/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alper Kara does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>High interest rates have been a big earner for the last couple of years.Alper Kara, Professor of Banking and Finance, Brunel University LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2240922024-02-26T17:19:21Z2024-02-26T17:19:21ZWhy economists are warning of another US banking crisis<p>March 2024 is <a href="https://www.barrons.com/articles/nycb-bank-failures-fed-btfp-0798fa18">making investors nervous</a>. A major scheme to prop up the US banking system is ending, while a second may be winding down. <a href="https://tavexbullion.co.uk/finnish-economist-who-predicted-the-spring-banking-crisisnew-bank-runs-are-coming/">Some economic commentators fear</a> another banking crisis. So how worried should we be?</p>
<p>The red letter day is March 11, when US central bank the Federal Reserve will end the <a href="https://www.investopedia.com/bank-term-funding-project-7367897">bank term funding program (BTFP)</a>, a year after it began in response to the failures of regional banks Signature, Silvergate and Silicon Valley. These banks were brought down by customers withdrawing deposits en masse, both because many were tech or crypto businesses that needed money to cover losses, and because there were better savings rates available elsewhere. </p>
<p>This damaged the banks’ profitability at a time when raised interest rates had already weakened their balance sheets by reducing the value of their holdings in government bonds. Silvergate failed first but Silicon Valley Bank’s collapse on March 10 was particularly memorable. It triggered a bank run <a href="https://www.reuters.com/business/finance/silicon-valley-bank-sell-stock-cope-with-cash-burn-2023-03-09/">by announcing</a> it needed to raise capital after being forced to sell bonds at a loss. </p>
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<a href="https://images.theconversation.com/files/577942/original/file-20240226-28-jfojgh.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Screenshot of WSJ's front cover when Silicon Valley collapsed" src="https://images.theconversation.com/files/577942/original/file-20240226-28-jfojgh.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/577942/original/file-20240226-28-jfojgh.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=442&fit=crop&dpr=1 600w, https://images.theconversation.com/files/577942/original/file-20240226-28-jfojgh.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=442&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/577942/original/file-20240226-28-jfojgh.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=442&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/577942/original/file-20240226-28-jfojgh.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=556&fit=crop&dpr=1 754w, https://images.theconversation.com/files/577942/original/file-20240226-28-jfojgh.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=556&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/577942/original/file-20240226-28-jfojgh.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=556&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Silicon Valley Bank’s demise put investors on high alert.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/march-10-2023-silicon-valley-bank-2274268829">Domenico Fornas</a></span>
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<p>There soon followed the failures <a href="https://www.forbes.com/sites/brianbushard/2023/03/13/what-happened-to-signature-bank-the-latest-bank-failure-marks-third-largest-in-history/">of Signature</a> and also Swiss bank <a href="https://edition.cnn.com/2023/04/24/investing/credit-suisse-bank-withdrawals-total/index.html">Credit Suisse</a>, which had to be taken over by <a href="https://www.ubs.com/global/en/media/display-page-ndp/en-20230612-ubs-credit-suisse-acquisition.html">neighbouring giant UBS</a>. There had been longstanding problems at Credit Suisse, but heightened anxieties on the back of the US upheaval delivered the final blow. </p>
<h2>How the BTFP works</h2>
<p>Investors then feared that other banks would fail. Most US banks were similarly exposed to customer withdrawals and underwater bond portfolios, while the Credit Suisse collapse demonstrated the potential for contagion. The Fed’s BTFP stopped the panic by allowing US banks to borrow from the central bank using their bonds as collateral. </p>
<p>Not only did this let them quietly access more funding, the scheme also priced the bonds at their original face value and not market value. This effectively negated the interest rate rises and reinflated banks’ balance sheets. Only one more bank, San Francisco’s <a href="https://www.forbes.com/sites/dereksaul/2023/05/01/first-republic-bank-failure-a-timeline-of-what-led-to-the-second-largest-bank-collapse-in-us-history/">First Republic Bank</a>, has since gone under. </p>
<p>So what will happen as the BTFP closes? I suspect it won’t lead to more bank collapses. Banks have had another year to adjust to higher interest rates, plus they can still borrow from the Fed through another facility called the <a href="https://www.investopedia.com/terms/d/discountwindow.asp">discount window</a>. </p>
<p>Nonetheless, the BTFP’s closure is <a href="https://www.bloomberg.com/news/articles/2023-12-21/demand-for-fed-s-bank-term-funding-facility-grows-to-record-high">likely to increase</a> banks’ borrowing costs, meaning their profit margins will fall. They might react with higher lending rates or by making less credit available to customers, potentially weakening the economy. This could combine with a second foreseeable change to create new dangers for the sector. </p>
<h2>Quantitative tightening</h2>
<p>That second change relates to the <a href="https://theconversation.com/why-central-banks-are-too-powerful-and-have-created-our-inflation-crisis-by-the-banking-expert-who-pioneered-quantitative-easing-201158">quantitative easing (QE) programme</a> by the Fed and other central banks, which broadly dates from the global financial crisis of 2007-09. It saw central banks essentially creating new money and using it to buy government bonds and other financial assets. They added more reserves to high-street banks as part of this process, enabling these institutions to lend more money as a result. </p>
<p>The most recent leg of QE <a href="https://www.brookings.edu/articles/fed-response-to-covid19/">began in March 2020</a> in response to the pandemic, then ended in 2022, when central banks began a reverse programme called quantitative tightening (QT). This involves selling bonds and other assets and removing the proceeds from the financial system. </p>
<p>It should be a drag on the economy, yet the effects have been tempered by a facility known as the overnight reverse repurchase agreement or “overnight reverse repo”. This essentially enables financial institutions to deposit their excess cash overnight with their central bank in exchange for government bonds. They earn extra money at very low risk, injecting more liquidity into the system. </p>
<p>The facility was extremely popular during the period of QE and ultra-low interest rates because these injected so much cash into the system. Its use <a href="https://www.reuters.com/markets/rates-bonds/new-york-fed-inflows-reverse-repo-facility-surge-hitting-1018-trillion-2023-12-29/#:%7E:text=The%20facility%20has%20seen%20big,30%2C%202022.">has been falling</a> since late 2022, since central banks have fewer bonds to lend while institutions have less money to park overnight. </p>
<p>Daily balances at the Fed’s overnight reverse repo <a href="https://www.reuters.com/markets/us/focus-sharpens-feds-disappearing-reverse-repo-mcgeever-2024-01-17/">have fallen</a> from over US$2.2 trillion (£1.7 trillion) in mid-2023 to below US$600 billion in January. However, while the positive balance continues, it offsets the need for the Fed to remove bank reserves as part of QT, since the bonds flowing out under that scheme are being partially replaced by bonds flowing in through the overnight reverse repo. </p>
<p>Only when the reverse repo balance reaches very low levels will the system feel the full effect of QT. At this stage, the Fed <a href="https://www.fitchratings.com/research/sovereigns/federal-reserve-to-continue-running-down-assets-until-end-2024-15-02-2024">has indicated</a> it will slow and then end that programme. </p>
<p>Nonetheless, the transition could be bumpy, with banks potentially raising lending rates and becoming less willing to lend. Many analysts expect the buffer to disappear in 2024, with a range of predictions from <a href="https://www.fitchratings.com/research/sovereigns/federal-reserve-to-continue-running-down-assets-until-end-2024-15-02-2024">late in the year</a> to as <a href="https://cryptohayes.medium.com/signposts-693ba565cd3e">soon as March</a>. </p>
<h2>Risky times</h2>
<p>Heightened interest rates <a href="https://www.federalreserve.gov/data/sloos/sloos-202401.htm">have already led</a> to the most stringent credit standards and weakest loan demand from consumers and businesses in a long time in the US. Meanwhile, banks are dealing with other major challenges such as the plunge in demand for office space as a result of home working. This has brought the medium-sized <a href="https://www.reuters.com/markets/us/real-estate-pain-us-regional-banks-is-piling-up-say-investors-2024-02-12/">New York Community Bank</a> to the brink in recent weeks, for instance. </p>
<p>The closure of the BTFP and the end of the reverse repo buffer, particularly if they coincide, could clearly make banks even more risk averse and profit-hungry. The danger is that this all damages the economy to the point that bad debts pile up and we hit another 2008-style liquidity crisis where banks become wary of lending to one another and the weaker ones become unviable. </p>
<p>The recent geopolitical tensions are an additional danger. If cross-border credit and investments dried up, it might further increase the risks of bad debts and could again hit bond prices, further reducing the value of banks’ assets and making their borrowing more expensive. </p>
<p>The Fed and other central banks need to be alert to these rising risks and get ready to end QT in the near future. The end of the BTFP is unlikely to put banks out of business, but it could be one of a series of blows that kicks off a new crisis in the months ahead.</p><img src="https://counter.theconversation.com/content/224092/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ru Xie does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Ides of March will coincide with one or two changes to the financial system that could cause problems for banks and the economy.Ru Xie, Associate Professor in Finance, University of BathLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2213932024-01-22T13:29:16Z2024-01-22T13:29:16Z‘No cash accepted’ signs are bad news for millions of unbanked Americans<p>How many people don’t have a bank account? And just how difficult has it become to live without one?</p>
<p>These questions are becoming increasingly important as <a href="https://www.chicagotribune.com/business/ct-biz-cashless-backlash-20180710-story.html">more businesses refuse to take cash</a> <a href="https://www.wmtw.com/article/cashless-businesses-south-portland-come-under-fire/40450267">in cities across the U.S.</a> People without bank accounts are shut out from stores and restaurants that refuse to accept cash.</p>
<p>As it happens, a lot of people are still “unbanked”: <a href="https://www.fdic.gov/analysis/household-survey/2021report.pdf">roughly 6 million</a> in the U.S., the latest data shows, which is about the population of Wisconsin. And outside of the U.S., <a href="https://www.worldbank.org/en/publication/globalfindex/Data">more than a billion people</a> don’t have a bank account.</p>
<p><a href="https://www.bu.edu/questrom/profile/jay-zagorsky/">I am a business school professor</a> <a href="https://blogs.bu.edu/zagorsky/">who researches society’s transition</a> from cash to electronic payments. I <a href="https://www.govtech.com/workforce/data-seattle-area-becoming-increasingly-cashless">recently visited Seattle and was amazed</a> by the mixed signals I saw in many storefronts. Numerous shops had one sign proudly proclaiming how welcoming and inclusive they were — next to another sign saying “No cash accepted.” This tells people without bank accounts that they aren’t welcome.</p>
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<figcaption><span class="caption">Not far from Seattle, Mount Rainier National Park stopped accepting cash in May 2023.</span></figcaption>
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<h2>Why not have a bank account?</h2>
<p>Why would someone want to avoid using banks? Every two years, the Federal Deposit Insurance Corporation surveys households about their connections to the banking system and asks people without bank accounts <a href="https://www.fdic.gov/analysis/household-survey/2021execsum.pdf">why they don’t have one</a>. People can respond with multiple answers. In 2021, the top reason — with over 40% of respondents choosing it — was that they didn’t have enough money to meet the minimum balance.</p>
<p>This is consistent with data showing that poorer households are less likely to have bank accounts. About one-quarter of those earning less than $15,000 a year are unbanked, the FDIC found. Among those earning more than $75,000 a year, almost every person surveyed had some type of bank account.</p>
<p>The second- and third-most common answers show that some people are skeptical of banks. Roughly one-third of survey respondents agreed that “Avoiding a bank gives more privacy,” while another one-third said they simply “don’t trust banks.”</p>
<p>Rounding out the top five reasons were costs of dealing with a bank. More than one-quarter of respondents felt bank account fees were too high, and about the same proportion felt fees were too unpredictable.</p>
<p>While many middle-class and wealthy people don’t pay directly for their bank accounts, fees can be costly for those who can’t maintain a minimum balance. A recent Bankrate survey <a href="https://www.bankrate.com/banking/checking/checking-account-survey/">shows basic monthly service fees</a> range between $5 and $15. Beyond these steady fees, <a href="https://www.fdic.gov/resources/consumers/consumer-news/2021-12.html">banks earn $4 to $5</a> each time people withdraw cash from an ATM or need services <a href="https://www.bankrate.com/banking/checking/what-is-a-cashiers-check/#fees-for-a-cashier-s-check">like getting cashier’s checks</a>. Unexpected bills can result in <a href="https://www.bankrate.com/banking/checking/checking-account-survey/#overdraft-fees">overdraft fees of about $25</a> each time an account is overdrawn.</p>
<h2>Being unbanked in America</h2>
<p>The FDIC calls people without a bank account “<a href="https://www.pbs.org/newshour/show/millions-of-unbanked-americans-lack-adequate-access-to-financial-services">the unbanked</a>.” People with a bank account but who primarily rely on alternative services such as check cashing outlets are called “<a href="https://guides.loc.gov/fintech/21st-century/unbanked-underbanked">the underbanked</a>.”</p>
<p>The latest FDIC data shows almost 6 million unbanked and 19 million underbanked U.S. households. Given that <a href="https://www.census.gov/content/dam/Census/library/visualizations/time-series/demo/families-and-households/hh-6.pdf">2.5 people live in the average household</a>, this means there are over 15 million people living in a home with no connection to banks, and 48 million more in homes with only a tenuous connection to banks.</p>
<p>Combining the two figures means roughly one out of every five people in the U.S. has little or no connection to banks or other financial institutions. That can leave them shut out from stores, restaurants, transportation and medical providers that don’t take cash.</p>
<p>The true number of unbanked people is likely higher than the FDIC estimates. The questions on being banked or unbanked are supplemental questions <a href="https://www.census.gov/programs-surveys/cps/about.html">added to a survey</a> given to people at their homes. This means it misses homeless people, transients without a permanent address and <a href="https://www.dhs.gov/immigration-statistics/population-estimates/unauthorized-resident">undocumented immigrants</a>. </p>
<p>These people are likely unbanked because you need a verified address and a government-issued tax-identification number <a href="https://www.federalreserve.gov/boarddocs/supmanual/bsa/bsa_p5.pdf">to get a bank account</a>. Given roughly <a href="https://www.npr.org/2023/12/22/1221006083/immigration-border-election-presidential">2.5 million migrants crossed the U.S.-Mexico border</a> in 2023 alone, there are millions more people in the cash-only economy than the FDIC estimates. </p>
<h2>How many people globally are unbanked?</h2>
<p>While the U.S. has relatively high rates of people with bank accounts, the picture is different in other parts of the world. The <a href="https://www.worldbank.org/en/topic/financialinclusion/overview">World Bank has created a database</a> that shows the percentage of each country’s population that has access to financial services. The World Bank’s definition of being banked is broader than the FDIC’s, since it includes anyone who uses a cellphone to send and receive money as having a bank account.</p>
<p>Overall, the World Bank estimates about <a href="https://www.worldbank.org/en/publication/globalfindex">one-quarter of the world’s adults</a> don’t have access to a bank or mobile-phone account. But that varies dramatically by region. In countries that use the Euro, almost everyone has a bank account, while in the Middle East and North Africa, only about half the population does.</p>
<p><iframe id="Yzxpv" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/Yzxpv/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>A more inclusive economy</h2>
<p>Many of us swipe our credit cards, tap our phones or insert a debit card to pay without thinking. However, there are at least 6 million people in the U.S. and almost <a href="https://ufa.worldbank.org/en/ufa">1.5 billion worldwide who are unbanked</a>.</p>
<p>When businesses stop accepting cash, the unbanked are forced to use payment methods like prepaid debit cards. However, these <a href="https://www.consumerfinance.gov/ask-cfpb/what-types-of-fees-do-prepaid-cards-typically-charge-en-2053/">prepaid cards are costly</a>. For example, Walmart, one of the largest U.S. retailers, <a href="https://www.walmartmoneycard.com/">offers a reloadable basic debit card</a>. The card <a href="https://www.investopedia.com/articles/personal-finance/112315/6-ways-load-your-walmart-money-card.asp">costs $1 to buy</a> and charges <a href="https://www.walmartmoneycard.com/helpcenter/getting-started/why-walmart-moneycard/how-can-i-waive-my-monthly-fee-for-walmart-moneycard">$6 per month in fees</a>, in addition to <a href="https://www.walmartmoneycard.com/helpcenter/adding-money/how-much-does-it-cost-to-use-walmart-rapid-reload">$3 each time someone wants to load the card with cash</a> at Walmart’s registers. Paying a minimum of $10 just to set up a debit card for a few purchases is a steep price.</p>
<p>The next time you see a sign in a shop or restaurant window stating “No cash accepted,” you’re really looking at a business excluding many unbanked and underbanked people. Insisting that all businesses accept cash is a simple way to ensure everyone is financially included in the modern economy.</p><img src="https://counter.theconversation.com/content/221393/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jay L. Zagorsky does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A cashless economy is a less inclusive economy.Jay L. Zagorsky, Clinical Associate Professor of Markets, Public Policy and Law, Boston UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2173842023-12-11T10:21:53Z2023-12-11T10:21:53ZNeeding to borrow money? Four tips on what’s okay and what’s not<p>It’s a financially challenging time for most households. With interest rates rising, many are spending even more money on debt repayments or taking out loans to help make ends meet. </p>
<p>A <a href="https://api.moneyedge.co.za/uploads/JOB_027311_Nedbank_NEDFIN_Health_Monitor_Report_V5i_Interactive_ae1185bd97.pdf">report</a> released recently in South Africa, compiled by one of the country’s biggest banks, found that <a href="https://api.moneyedge.co.za/uploads/JOB_027311_Nedbank_NEDFIN_Health_Monitor_Report_V5i_Interactive_ae1185bd97.pdf#page=12">42% of South Africans</a>, across various income levels, cannot manage their debt. This indebtedness has caused 67% of the respondents to worry about their debt to the point that it negatively affects their mental health.</p>
<p>As a new year gets underway, it’s a good time to reflect on your financial portfolio.</p>
<p>My research as a finance and financial planning <a href="https://researchprofiles.canberra.edu.au/en/persons/bomikazi-zeka/publications/">academic</a> seeks to understand the pathways that lead to economic empowerment and improve financial security, including the role of debt and other financial products. </p>
<p>There may be instances where the use of a credit card might be absolutely necessary (for example if you are making travel bookings). But for the most part if you are borrowing to pay regular expenses, increasing your credit limit, or using a credit card (or borrowing money from family) to pay off existing debt, then it may be worthwhile to consider these four tips on borrowing money.</p>
<h2>Four tips</h2>
<p><strong>Firstly</strong>, it’s good to know what amount of debt is okay to hold.</p>
<p>There is no easy answer to this because everyone’s financial situation is unique – and this will determine how much debt each person should draw on. Making this assessment requires knowing your ability to service debt. In other words, the amount of debt you take on should be guided by your ability to comfortably repay it. </p>
<p>The debt service ratio is a useful tool to determine this. It’s calculated by dividing your monthly debt by your monthly income. Say for example your monthly debt repayment is R6,000 and you earn a monthly salary of R30,000. You’d have a debt service ratio of 20%. As a general rule of thumb, a debt service ratio of 25% or less is considered acceptable. </p>
<p>Calculating this ratio will help you set a limit for how much income you are prepared to commit to your debt repayments. </p>
<p><strong>Secondly</strong>, be picky about who you borrow money from. </p>
<p>Financial institutions, such as banks or other formal money lenders, are the most popular sources for borrowing because the terms of borrowing, fees and interest rates can be determined in advance. More than that, borrowing from a regulated and recognised financial institution helps build a credit score, and, as counter-intuitive as it may seem, you need debt to take out debt. If you need to take out a more substantial loan in future, such as a mortgage or vehicle financing, then having a loan from a regulated financial institution helps to determine your credit score. Your payment history, account information, amounts owed and how long the account has been active are on record. This can give a good indication of your ability to service a future debt commitment.</p>
<p><strong>Thirdly</strong>, there are sources of borrowing you should avoid.</p>
<p>There are many ways and places to borrow money from – but not all of them are advisable.</p>
<p>It is common (and sometimes culturally accepted) to borrow from friends or family. But almost everyone who has gone down the route of borrowing from loved ones knows that it has the potential to ruin relationships when the terms of the repayment have not been honoured. Friends and family may not charge interest and tend to be more flexible than formal financial institutions. But borrowing from those close to you can cause a significant strain on a relationship – and even end it. </p>
<p>Then there are the loan sharks who charge exorbitant interest rates on their loans and get away with it because they are unregistered and unregulated. They also prey on the vulnerability of consumers who need a loan and resort to unscrupulous tactics when the loans aren’t repaid on time. Being in debt is stressful enough and borrowing from an informal moneylender can only do more harm than good. </p>
<p><strong>Fourthly</strong>, be scrupulous about what you’re borrowing money for.</p>
<p>Debt can be used to buy almost anything, from a cup of coffee to big ticket items such as a car or a house. However, anything that does not have a significant monetary value or is consumption-driven – clothing accounts, entertainment, or appliances – should not be financed through debt. That’s because the interest or fees of the credit used to buy consumable goods is often greater than the value of the consumable itself. </p>
<p>When you buy anything through debt, it’s worthwhile to ask yourself whether the purchase is worth the interest that is attached to it, and the future income you will need to commit to repaying the debt. </p>
<p>Knowing how much debt you should have, where to acquire it and what to use it for can make a huge difference to your financial wellbeing. Even though it has its uses, debt can quickly become a slippery slope when it’s not properly and consistently managed. If you are unsure about how to use debt, it’s always better to seek the help of a professional financial adviser.</p><img src="https://counter.theconversation.com/content/217384/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bomikazi Zeka does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Avoid borrowing to pay regular expenses or to pay off existing debtBomikazi Zeka, Assistant Professor in Finance and Financial Planning, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2145542023-11-01T19:24:51Z2023-11-01T19:24:51ZWhat makes an ideal main street? This is what shoppers told us<figure><img src="https://images.theconversation.com/files/551115/original/file-20230929-19-vfuzaw.jpg?ixlib=rb-1.1.0&rect=8%2C0%2C5639%2C3759&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Irina Grotkjaer/Unsplash</span></span></figcaption></figure><p>A lot of dedication and effort goes into making main streets attractive. Local governments, planners, place makers, economic development managers, trade associations and retailers work hard to design, improve and revitalise main streets. The goal is to make them attractive places to increase shopper numbers, provide pleasant places for communities, and boost local economies.</p>
<p>Despite the efforts that go into planning, maintaining and marketing local shopping areas, the people who use these places are often not consulted about what they actually want and need on their main street. <a href="https://www.shopology.com.au/resources">Our research</a> is the only-known Australian study to ask shoppers about the key elements, and shops and services, they regard as contributing to the ideal main street. </p>
<p>So what types of stores and services do they want?</p>
<p>Pharmacies are the top choice. Intriguingly, four types of stores/services that are disappearing from main streets around Australia – the post office, bank, department store and newsagent – are in the top ten (out of 45 choices in our survey). </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1715480716900012399"}"></div></p>
<h2>What are the key shops and services?</h2>
<p>We wanted to find out what consumers see as their ideal local shopping street. What kinds of shops and services matter most for them? Which other elements of local shopping places do they want?</p>
<p>Curiously, users are often not asked these questions. Yet their answers are essential if we are to design new towns, suburbs and regional centres, and improve existing ones, so more people want to work, shop and visit them.</p>
<p>We surveyed a representative sample of 655 shoppers from around Australia about their local shopping preferences. </p>
<p>We provided a list of 45 different stores and services. Participants were asked to rank them in order of importance from one to 45.</p>
<p>Overwhelmingly, participants considered the <a href="https://drugstorenews.com/study-consumers-shop-drug-stores-grocery-household-items-much-pharmacy">pharmacy the most important store or service</a> for an ideal main street. Across gender, age and location, pharmacies were consistently number one.</p>
<p>Similarly, four types of stores and services – the <a href="https://www.afr.com/policy/economy/australia-post-risks-death-spiral-without-urgent-change-ceo-20230427-p5d3nh">post office</a>, <a href="https://www.abc.net.au/news/2023-10-06/regional-bank-branches-at-risk-of-closing-population-analysis/102937120">bank</a>, <a href="https://www.abc.net.au/news/2023-03-16/qld-myer-to-close-brisbanes-queen-street-mall/102106162">department store</a> and <a href="https://thewest.com.au/politics/state-politics/wa-government-to-provide-39m-to-aid-500-newsagents-as-industry-battles-the-internet-c-10085316">newsagent</a> – appeared in the top ten most important, regardless of demographics. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/551133/original/file-20230929-29-q50xs9.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/551133/original/file-20230929-29-q50xs9.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=849&fit=crop&dpr=1 600w, https://images.theconversation.com/files/551133/original/file-20230929-29-q50xs9.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=849&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/551133/original/file-20230929-29-q50xs9.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=849&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/551133/original/file-20230929-29-q50xs9.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1066&fit=crop&dpr=1 754w, https://images.theconversation.com/files/551133/original/file-20230929-29-q50xs9.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1066&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/551133/original/file-20230929-29-q50xs9.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1066&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The top ten stores and services in an ideal main street.</span>
<span class="attribution"><span class="source">Louise Grimmer</span></span>
</figcaption>
</figure>
<h2>What other key elements are important?</h2>
<p>We then asked participants about the importance of different elements of main streets. We provided 21 elements and participants were asked to rate each on a <a href="https://www.simplypsychology.org/likert-scale.html">Likert scale</a> from 1, “not at all important”, to 7, “extremely important”. </p>
<p>Shoppers rated “cleanliness” as the most important element for their ideal shopping area. It was followed by “safety and security” and “parking”. </p>
<p>Aside from the “retail mix”, in most areas local councils have control over nine of the ten top elements. “Safety and security” also involves police and individual security services that centres and some stores employ.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/552684/original/file-20231009-31-adta9o.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/552684/original/file-20231009-31-adta9o.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/552684/original/file-20231009-31-adta9o.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=849&fit=crop&dpr=1 600w, https://images.theconversation.com/files/552684/original/file-20231009-31-adta9o.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=849&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/552684/original/file-20231009-31-adta9o.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=849&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/552684/original/file-20231009-31-adta9o.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1066&fit=crop&dpr=1 754w, https://images.theconversation.com/files/552684/original/file-20231009-31-adta9o.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1066&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/552684/original/file-20231009-31-adta9o.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1066&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The top ten elements of an ideal main street.</span>
<span class="attribution"><span class="source">Louise Grimmer</span></span>
</figcaption>
</figure>
<h2>Motivation for shopping affects choices</h2>
<p>We also tested for shoppers’ levels of hedonic and utilitarian orientation. <a href="https://www.sciencedirect.com/science/article/pii/S0022435903000071">Hedonic</a> shoppers really enjoy the act of shopping. They experience euphoria and pleasure and they buy so they can go shopping, rather than shopping so they can buy.</p>
<p><a href="https://www.jstor.org/stable/2489765">Utilitarian shoppers</a>, on the other hand, are rational and cognitive and they view shopping as a task or chore. Buying products they need is simply a “means to an end”. They get no great satisfaction from the activity. </p>
<p>Hedonic shoppers are more often <a href="https://www.tandfonline.com/doi/full/10.1080/09593960802113877">women</a>. Men tend to be more utilitarian. We tend to become more utilitarian as we get older.</p>
<p>We were interested to find out if people’s responses to our questions were different depending on whether they were hedonic (shop for pleasure) or utlilitarian (shop for practical needs) shoppers. </p>
<p>For the most important store or service, hedonic and utilitarian shoppers both rated a pharmacy as number one. And they ranked similar stores and services in their top ten. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/552679/original/file-20231009-20-n4119g.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/552679/original/file-20231009-20-n4119g.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/552679/original/file-20231009-20-n4119g.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=849&fit=crop&dpr=1 600w, https://images.theconversation.com/files/552679/original/file-20231009-20-n4119g.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=849&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/552679/original/file-20231009-20-n4119g.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=849&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/552679/original/file-20231009-20-n4119g.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1066&fit=crop&dpr=1 754w, https://images.theconversation.com/files/552679/original/file-20231009-20-n4119g.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1066&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/552679/original/file-20231009-20-n4119g.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1066&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Top ten stores and services for hedonic shoppers.</span>
<span class="attribution"><span class="source">Louise Grimmer</span></span>
</figcaption>
</figure>
<p>But there were some differences. Hedonic shoppers included a lifestyle/gift store and department store in their top ten. Utilitarian shoppers did not. Instead they rated the post office and the newsagent as important. </p>
<p>This finding makes sense. Lifestyle stores, gift shops and department stores offer the hedonic shopper the chance to browse and enjoy quality surroundings and service. The post office and newsagent allow the utilitarian shopper to complete tasks quickly and easily – no browsing required.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/552681/original/file-20231009-31-k7gykf.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/552681/original/file-20231009-31-k7gykf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/552681/original/file-20231009-31-k7gykf.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=849&fit=crop&dpr=1 600w, https://images.theconversation.com/files/552681/original/file-20231009-31-k7gykf.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=849&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/552681/original/file-20231009-31-k7gykf.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=849&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/552681/original/file-20231009-31-k7gykf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1066&fit=crop&dpr=1 754w, https://images.theconversation.com/files/552681/original/file-20231009-31-k7gykf.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1066&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/552681/original/file-20231009-31-k7gykf.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1066&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Top ten stores and services for utilitarian shoppers.</span>
<span class="attribution"><span class="source">Louise Grimmer</span></span>
</figcaption>
</figure>
<p>Despite similarities in their top-ranked shops and services, hedonic and utilitarian shoppers’ rankings of the most important elements of local shopping areas were starkly different.</p>
<p>For hedonic shoppers, the complete visitor experience, including the surroundings and atmosphere, is an important aspect of their ideal shopping area. Their top ten elements reflected this. They selected a combination of tangible elements, including public art, aesthetics, greenery and lighting, to complement the more ephemeral such as events and activities, night-time economy, sustainability and history and culture. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/552682/original/file-20231009-17-5u8syd.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/552682/original/file-20231009-17-5u8syd.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/552682/original/file-20231009-17-5u8syd.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=849&fit=crop&dpr=1 600w, https://images.theconversation.com/files/552682/original/file-20231009-17-5u8syd.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=849&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/552682/original/file-20231009-17-5u8syd.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=849&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/552682/original/file-20231009-17-5u8syd.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1066&fit=crop&dpr=1 754w, https://images.theconversation.com/files/552682/original/file-20231009-17-5u8syd.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1066&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/552682/original/file-20231009-17-5u8syd.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1066&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The top ten elements for hedonic shoppers.</span>
<span class="attribution"><span class="source">Louise Grimmer</span></span>
</figcaption>
</figure>
<p>Utilitarian shoppers rated elements that help make a task-oriented shopping trip easier. <a href="https://wayfoundvictoria.vic.gov.au/what-is-wayfinding/">Wayfinding</a> (all the ways to help people navigate a space), signage and information, walkability, retail mix, and services and amenities were important for them. </p>
<p>The only two elements both groups agreed should be in the top ten were lighting, and seating and tables.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/552686/original/file-20231009-24-2cbsrx.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/552686/original/file-20231009-24-2cbsrx.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/552686/original/file-20231009-24-2cbsrx.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=849&fit=crop&dpr=1 600w, https://images.theconversation.com/files/552686/original/file-20231009-24-2cbsrx.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=849&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/552686/original/file-20231009-24-2cbsrx.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=849&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/552686/original/file-20231009-24-2cbsrx.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1066&fit=crop&dpr=1 754w, https://images.theconversation.com/files/552686/original/file-20231009-24-2cbsrx.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1066&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/552686/original/file-20231009-24-2cbsrx.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1066&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The top ten elements for utilitarian shoppers.</span>
<span class="attribution"><span class="source">Louise Grimmer</span></span>
</figcaption>
</figure>
<h2>Making main streets the best they can be</h2>
<p>There is an increasing understanding that retailing will not continue to be the main or sole reason people visit town centres. While still important, retail will more often complement services, attractions and “experiences” as the major factors that entice visitors. </p>
<p>This requires local councils, chambers of commerce and marketing organisations to perform a juggling act. They need to market shopping precincts as being attractive for shoppers while showcasing a range of services and attractions in these areas that appeal to other types of visitors.</p>
<p>Making shopping areas the best they can be is challenging work. Different people want different things from main streets. </p>
<p>Our findings provides insights for local councils, which have a primary policy responsibility for main streets, as well as developers, investors and individual store owners. This knowledge can help them better plan and improve the retail and service mix for everyone.</p><img src="https://counter.theconversation.com/content/214554/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Different shoppers have different priorities, but some shops and services are ranked as important across the board.Louise Grimmer, Retail Scholar, University of TasmaniaMartin Grimmer, Pro Vice-Chancellor and Professor of Marketing, University of TasmaniaPaul J. Maginn, Interim Director, UWA Public Policy Institute; Associate Professor & Programme co-ordinator (Masters of Public Policy), The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2153102023-10-12T14:48:26Z2023-10-12T14:48:26ZBank CEOs set the tone from the top when it comes to risky behaviour — new research<figure><img src="https://images.theconversation.com/files/553295/original/file-20231011-21-2myd73.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C3840%2C2160&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/happy-young-charismatic-coach-business-woman-1636779892">KeyStock/Shutterstock</a></span></figcaption></figure><p>Metro Bank positioned itself as “<a href="https://www.metrobankonline.co.uk/about-us/">a fresh start to banking</a>” when it launched in the wake of the 2008 global financial crisis. It was set up in 2010 as a challenger to the “big five” banks dominating the UK market post-crisis: HSBC, NatWest, Lloyds, Barclays and Santander.</p>
<p>But more recently, Metro Bank has <a href="https://otp.tools.investis.com/clients/uk/metro_bank_plc/rns/regulatory-story.aspx?cid=1352&newsid=1720003">caused concern</a> among its investors for not meeting regulatory requirements on its capital levels. These rules dictate the amount of capital the bank must hold based on the riskiness of its assets, so that it can still operate but also meet any customer withdrawal requests. The riskier the bank’s activities, the more capital it must have on hand. </p>
<p>Regulators use such rules to ensure that banks are keeping people’s money safe. Banks can also help by creating a culture that doesn’t value excessive risk-taking. Our <a href="https://www.sciencedirect.com/science/article/pii/S0165176523003981?via%3Dihub#bib0018">new research</a> shows the extent to which top executives at banks set the tone on risk-taking. The way CEOs and even CFOs talk about risk can offer insights into a bank’s likely financial stability. A more relaxed attitude could be a valuable early warning sign of potential bank distress for regulators.</p>
<p>Metro Bank is currently operating normally and there is no reason to think its customer deposits are in danger. It has secured new financing, and plans to open 11 more branches. But <a href="https://www.fca.org.uk/news/press-releases/fca-fines-metro-bank-plc-decision-notices-two-former-executives">ongoing struggles</a> with regulatory capital levels means its <a href="https://www.fitchratings.com/research/banks/fitch-places-metro-bank-holdings-on-rwn-due-to-capital-constraints-04-10-2023">business model is still being questioned</a> by analysts. </p>
<p><a href="https://en.wikipedia.org/wiki/Challenger_bank">Challenger banks</a> like Metro are often <a href="https://www.ft.com/content/a45d50de-f6a1-11e9-9ef3-eca8fc8f2d65">viewed as disadvantaged</a> because they need to keep more money on hand, compared with the UK’s big five. This adds to their costs.</p>
<p>The UK regulator recently rejected Metro Bank’s request to reduce its capital levels, triggering the latest concerns about its stability and causing it to seek more investor funding. The bank subsequently secured this funding, <a href="https://twitter.com/Metro_Bank/status/1711279104308199710">calling it</a> “a new chapter … facilitating the delivery of continued profitable growth over the coming years”.</p>
<h2>Why the regulator won’t relax requirements</h2>
<p>Regulators must maintain a <a href="https://www.bankofengland.co.uk/explainers/what-is-financial-stability">stable financial system</a> that can provide essential services to households and businesses in both good and bad times. Banks are at the heart of this financial system. In the 1980s and 1990s, <a href="https://www.theguardian.com/business/2011/oct/09/big-bang-1986-city-deregulation-boom-bust">deregulation</a> destabilised the industry and led to the 2008 global financial crisis. Many people <a href="https://www.theguardian.com/business/2008/oct/15/unemploymentdata-recession">lost their jobs</a> and homes as a result, while <a href="https://www.bankofengland.co.uk/explainers/is-the-global-financial-system-any-safer-than-before">US$15 trillion (£12.2 trillion) of taxpayers’ money</a> was spent globally to prop up the banking sector.</p>
<p>Banks were largely blamed for the <a href="https://www.aeaweb.org/articles?id=10.1257/aer.99.2.606">reckless risk-taking and careless lending</a> that caused the crisis. But regulators also failed to detect it. </p>
<p>Policymakers around the world introduced extensive reforms to banking and financial regulation after 2008, to protect financial stability and avoid a repeat of this economic catastrophe. This explains the current tough stance by regulators towards relaxing rules for organisations such as Metro Bank.</p>
<p>UK financial authorities have even recently <a href="https://www.telegraph.co.uk/business/2022/12/18/bank-england-hits-back-rishi-sunaks-plan-liberate-city-london/">called out</a> UK government plans to ease financial regulations under the <a href="https://www.aeaweb.org/articles?id=10.1257/aer.99.2.606">Edinburgh Reforms</a> and to remove the bankers’ bonus cap, in case it encourages more risk-taking by banks.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/bankers-bonus-cap-why-scrapping-it-could-hurt-the-uk-economy-190811">Bankers bonus cap: why scrapping it could hurt the UK economy</a>
</strong>
</em>
</p>
<hr>
<h2>Recent bank failures: a stark reminder</h2>
<p>Regulators, as well as financial market participants, also remain vigilant after the <a href="https://www.theguardian.com/world/2023/mar/17/credit-suisse-silicon-valley-bank">unexpected failure of a number of banks</a> earlier this year. In particular, the collapse of Silicon Valley Bank (SVB) in the US was <a href="https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/svb-credit-suisse-turmoil-poses-bank-run-challenge-for-european-regulators-75024480">attributed to poor risk management</a>. It fuelled fears about global financial stability and the possibility of yet another devastating crisis.</p>
<p>However, regulation alone is not enough to mitigate excessively risky behaviour. The attitude to risk that runs through a bank – its risk culture – also matters.</p>
<p>A company’s <a href="https://www.bankingsupervision.europa.eu/press/publications/newsletter/2023/html/ssm.nl230215_3.en.html#:%7E:text=Risk%20culture%20is%20a%20set,on%20the%20risks%20they%20take.">risk culture</a> comprises a set of values, attitudes and behaviour related to the awareness, management and control of risks. It shapes decisions about things like who to lend to, what to invest in, and how to manage the risks that arise as a result. </p>
<p>Most banks’ business models rely on balancing risk management with profit maximisation in this way. But it needs to be done responsibly: signs of poor risk culture, such as <a href="https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2021/organisational-culture-and-bank-risk.pdf?la=en&hash=81DD3E865BC0159475FD10A78AA2293F0379FB8E">excessive risk taking</a> or misconduct, are red flags to regulators and investors. </p>
<figure class="align-center ">
<img alt="Image of Wall Street Journal homepage with headline about SVB failure and image of US treasury secretary Janet Yellen." src="https://images.theconversation.com/files/553296/original/file-20231011-25-2qw88u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/553296/original/file-20231011-25-2qw88u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/553296/original/file-20231011-25-2qw88u.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/553296/original/file-20231011-25-2qw88u.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/553296/original/file-20231011-25-2qw88u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/553296/original/file-20231011-25-2qw88u.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/553296/original/file-20231011-25-2qw88u.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Silicon Valley Bank collapsed in March 2023, the second-largest bank failure in US history.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/march-10-2023-silicon-valley-bank-2274268829">Domenico Fornas/Shutterstock</a></span>
</figcaption>
</figure>
<p>But it’s difficult for outsiders, even regulators, to observe and measure a bank’s risk culture. So, our <a href="https://www.sciencedirect.com/science/article/pii/S0165176523003981?via%3Dihub#bib0018">recent study</a> aimed to quantify the risk culture of 160 US banks, including some of the country’s largest. We did this by analysing the text of conference calls on which their CEOs answered questions about the business from analysts, investors and the media. This allowed us to capture their unscripted views and behaviour when these bank CEOs were put on the spot.</p>
<p>We used a machine learning algorithm to construct a dictionary of words and phrases associated with <a href="https://www.sciencedirect.com/science/article/pii/S0377221719301936#sec0002">seven different risk culture dimensions</a>, including “risk strategy” and “regulatory requirements”. We used another algorithm to assess whether these phrases were being used in a positive or negative way. </p>
<p>Our analysis showed that words and phrases associated with the “regulatory requirements” risk culture dimension, for example, were mentioned the least by CEOs prior to and during the global financial crisis. Unsurprisingly, use of the term picked up in its aftermath, as CEOs had to explain how tightening banking regulations were affecting their businesses. </p>
<p>By calculating the number of positive and negative occurrences of each phrase, we were able to create a measure of CEO attitudes for each risk culture dimension. We found that a weaker risk culture – characterised by more negative mentions of these phrases – indicated a greater probability of bank insolvency as a result of not having enough capital.</p>
<p>More worryingly, we found similarities in attitudes to risk between collapsed US banks SVB and <a href="https://finance.yahoo.com/news/latest-banking-crisis-failures-silicon-133525079.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuYmluZy5jb20v&guce_referrer_sig=AQAAADejPCXiax-rs9nNOkrxJsrN71CJ7V381zRYjTDy9eYNcPJ8Mq9HnyyU0jjZKlFddz7olRknKwKo7GWAPh6LeLUFdxmWrNkEElEVs-Qz42kYJvuXNTr4u-sy0cXQsGxjHHQnEgn4N8MWDjKIV9un7wBDx29mkaksHbhsfN-3nuvH">First Republic</a>, and other US banks that are still operating today. </p>
<p>Our research indicates that a strong risk culture in banking starts with the right tone from the top. Executives should be aware of their role model status when making decisions and talking about risk, both within their companies and to the public. Their attitudes cascade down to every other level and, if they are serious about managing risk, this could help maintain financial stability not only of their own bank, but the financial sector as a whole.</p><img src="https://counter.theconversation.com/content/215310/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Our study shows the way bank bosses talk about risk can negatively affect financial stability.Alper Kara, Professor of Banking and Finance, Brunel University LondonArtur Semeyutin, Senior Lecturer in Economics, University of HuddersfieldSaid Kaawach, Lecturer in Economics and Finance, University of HuddersfieldLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2139662023-09-20T14:06:19Z2023-09-20T14:06:19ZCity watchdog finds no evidence for recent political ‘debanking’ – but private banks have been picky for centuries<figure><img src="https://images.theconversation.com/files/549303/original/file-20230920-25-h5u8vx.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C4724%2C3154&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Ex-politician Nigel Farage accused his bank of refusing his business because of his political views.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/london-uk-november-1-2019-brexit-1547668835">Frank 2012/Shutterstock</a></span></figcaption></figure><p>After a row over the closure of his bank account earlier this year, former politician Nigel Farage has hit out at the UK financial regulator for saying it has found <a href="https://www.fca.org.uk/news/press-releases/fca-sets-out-initial-findings-bank-account-access-and-closures#:%7E:text=The%20FCA%20has%20published%20the,of%20a%20customer's%20political%20views.">no recent evidence</a> of customers being “de-banked” over their personal views.</p>
<p>Farage believes private bank Coutts <a href="https://news.sky.com/story/nigel-farages-bank-accounts-whats-it-all-about-and-whats-the-coutts-threshold-12915155">closed his account</a> because his political views didn’t align with the company’s values. Coutts and its parent company NatWest Group denied his accusations, saying <a href="https://news.sky.com/story/nigel-farage-doesnt-deny-he-fell-below-wealth-cap-at-coutts-bank-used-by-royals-12914753">he didn’t have enough funds</a> to be a customer of the private bank. Farage was offered an account with NatWest’s high street arm <a href="https://news.sky.com/story/nigel-farages-bank-accounts-whats-it-all-about-and-whats-the-coutts-threshold-12915155">but reportedly turned it down</a> as unsuitable.</p>
<p>UK chancellor Jeremy Hunt asked banking regulator the Financial Conduct Authority (FCA) to <a href="https://www.fca.org.uk/news/news-stories/we-request-data-banks-account-closures">gather data</a> from all UK banks about the reasons for any account closures, suspensions and services denied between July 2022 and June 2023. Farage’s account was closed during this period.</p>
<p>Admitting the data was gathered very quickly, FCA chief executive Nikhil Rathi, said: “While no bank, building society or payment firm reported to us that they had closed accounts primarily due to someone’s political views, further work is needed for us to be sure.”</p>
<p>Indeed, banks being choosy about which customers they accept is nothing new. Farage’s furore has simply highlighted private bank behaviour that has persisted without much comment over centuries.</p>
<h2>The origins of private banks</h2>
<p>When Coutts was set up <a href="https://www.coutts.com/about/history.html">in London in 1692</a>, banks generally acted as an intermediary to encourage trade and the free flow of goods and services – but only for the rich. Banks facilitated the greater flow of capital among this exclusive group by lending them money, discounting their bills of exchange (like an IOU note) and providing them with deposit accounts.</p>
<p>In the 18th and 19th centuries, <a href="https://www.worldcat.org/title/country-banking-in-the-industrial-revolution/oclc/249850">banks proliferated outside London</a>, throughout England’s provinces. <a href="https://global.oup.com/academic/product/private-banking-in-europe-9780198735755?cc=gb&lang=en&#">London banks</a> were typically larger and often funded international as well as national trade. Otherwise, there were few differences between London banks such as Coutts and these new country banks. They were both generally single units (no branches) and founded by a similar social group – the gentry – who initially offered financial services to their peers. </p>
<figure class="align-center ">
<img alt="Window with Coutts sign and three crowns." src="https://images.theconversation.com/files/549308/original/file-20230920-23-jymd2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/549308/original/file-20230920-23-jymd2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=451&fit=crop&dpr=1 600w, https://images.theconversation.com/files/549308/original/file-20230920-23-jymd2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=451&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/549308/original/file-20230920-23-jymd2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=451&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/549308/original/file-20230920-23-jymd2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/549308/original/file-20230920-23-jymd2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/549308/original/file-20230920-23-jymd2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Coutts was founded in 1692 and has counted the British royal family among its customers since the late 18th century.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/london-uk-october-15th-2022-main-2214749407">Alex Yeung/Shutterstock</a></span>
</figcaption>
</figure>
<p>Things started to change in the early 19th century with the introduction of joint stock banking. Joint stock banks tended to have much larger ownership structures comprising a local community of shareholders. Some even <a href="https://www.tandfonline.com/doi/abs/10.1080/00076791.2017.1323883">opened branches</a> and offered their services regionally, rather than just to a small number of local customers. But still, these bankers only expanded their financial services to the <a href="https://www.tandfonline.com/doi/abs/10.1080/00076799600000095">mercantile classes</a> – business owners, who had lacked access to banking previously.</p>
<p>Even then, customers of joint stock banks were carefully restricted by the commercial communities that owned them and the managers that ran them. They used self-regulation to protect their industries <a href="https://doi.org/10.1111/j.1468-0289.2004.00287.x">from “bad” traders</a> – people who ran up debts, made poor business decisions or engaged in unethical business behaviour that didn’t align with bank owners’ values, aims and goals. </p>
<p>In the 1850s, for example, Sheffield steelmaker Naylor Vickers & Co. ran up high levels of debt with the Sheffield Union Bank. The bank was only saved from failure by <a href="https://www.tandfonline.com/doi/abs/10.1080/00076799600000095">a Bank of England intervention</a>. Such behaviour, when it occurred, was usually not worth litigating because the courts were busy and so commercial lawsuits were often <a href="https://doi.org/10.1080/01440365.2017.1289671">discouraged by leading judges</a>. This meant these matters were usually dealt with by “debanking” or refusing service to offending business owners.</p>
<p>Joint stock banks were more inclusive than the private banks, but still didn’t serve the working classes. They applied a strict process of scrutinisation for all depositors, loan applicants and shareholders. Bank staff gathered information <a href="https://www.cambridge.org/core/journals/enterprise-and-society/article/abs/constructing-corporate-identity-before-the-corporation-fashioning-the-face-of-the-first-english-joint-stock-banking-companies-through-portraiture/DE8AB45BFEB81F97E3BB93C8C24A1FA1">from the local community</a> through their economic, social, religious and political networks. </p>
<p>This was an important process because these banks didn’t have limited liability – shareholders were responsible for all of their banks’ debts. </p>
<h2>Building high street banking behemoths</h2>
<p>Another shift occurred in the late 19th and early 20th centuries. As joint stock banks grew they became limited liability companies to protect shareholders by ensuring that they were no longer liable for all of their bank’s debts, only for an amount corresponding to the shares they held. </p>
<p>These banks also became national as opposed to regional. It was then that they transformed into the high street behemoths with large branch networks that we know today. In fact, <a href="https://www.natwestgroup.com/who-we-are/about-natwest-group/our-history.html">the origins of NatWest</a>, the high street banking arm of Coutts, can be traced back to joint stock banks. </p>
<p>Alongside this growth, bank managers could no longer use local information to assess customers. Head offices had to <a href="https://www.tandfonline.com/doi/abs/10.1080/00076799900000201">undertake more standard checks</a> on those applying for accounts or credit instead, losing some lending flexibility along the way. </p>
<p>As British banks <a href="https://www.taxjustice.net/wp-content/uploads/2015/06/Linda-Arch-Competition-and-the-London-Clearing-Banks-1946-1979-for-Should-Nation-States-Compete.pdf">became more competitive</a> in the latter half of the 20th century, they wanted more deposits so they could offer more loans. So high street banks began to <a href="https://doi.org/10.1080/00076791.2020.1791823">target the previously “unbanked”</a> – largely working-class people paid cash in hand. But private banks didn’t change their business models or services at this time; to this day they remain concerned with serving the wealthiest people.</p>
<h2>What about today’s ‘unbanked’?</h2>
<p>British banks have long excluded customers based on their membership of a certain social class or group, making Farage’s experience rather conventional when it comes to private banks. But there are <a href="https://publications.parliament.uk/pa/cm201719/cmselect/cmtreasy/1642/164205.htm#:%7E:text=The%20FCA%20has%20published%20research,not%20have%20a%20bank%20account.">over a million people</a> in the UK without a bank account – private or high street. It remains to be seen if this lack of access can be solved by new rules, such as those <a href="https://www.gov.uk/government/news/government-clamps-down-on-unfair-bank-account-closures">recently announced by the government</a>.</p>
<p>Like many other businesses, banks have long been using <a href="https://www.sciencedirect.com/science/article/abs/pii/0305048377901037">market segmentation</a> to design the kinds of products, services and advertising that will <a href="https://www.investopedia.com/terms/m/market-segment.asp#toc-how-are-market-segments-used:%7E:text=value%20business%20customers.-,How%20Are%20Market%20Segments%20Used%3F,-Commonly%20used%20in">attract customers</a> they want to serve. As a result, British banking, and in particular private banking, will probably remain exclusive rather than inclusive.</p><img src="https://counter.theconversation.com/content/213966/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Research shows banks – especially private banks – have always been concerned about their customers’ social status and respectability.Lucy Newton, Professor in Business History, Henley Business School, University of ReadingFrancesco De Pascalis, Senior Lecturer in Financial Law, Brunel University LondonVictoria Barnes, Reader of Commercial Law, Queen's University BelfastLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2090242023-08-06T20:00:01Z2023-08-06T20:00:01ZHunting for a ‘golden unicorn’: how NZ charities find banks constantly get in the way of them helping people<p>Aotearoa New Zealand is home to 28,560 registered charities and some 90,000 not-for-profits without charitable registration. From disability advocacy groups and local theatres to sporting clubs, all do vital work in our communities. </p>
<p>Around 89,000 of these are “small” not-for-profits, which means they have under NZ$2 million operating expenses.</p>
<p>My <a href="https://www.communitynetworksaotearoa.org.nz/banking-issues-in-the-community-sector8b737fea">new research</a> found these smaller groups are finding it difficult to open bank accounts, change signatories, get onto online banking, access bank cards, or deposit and withdraw cash, among other issues. </p>
<p>As people from 130 small charities and not-for-profits made clear, accessing effective banking services is too often a matter of luck – but they occasionally stumble across a “golden unicorn” within a bank. Here’s what they said needs to change.</p>
<h2>A lack of specialists</h2>
<p>Not-for-profits are generally charitable trusts, incorporated societies, or other types of non-profit legal structures. Think your local sports club with a roster of volunteer leaders and support staff that can change each year.</p>
<p>My research included survey data from 120 of those organisations, in-depth interviews with people from 37 different not-for-profits, and 14 stakeholder interviews. </p>
<p>Almost all reported lengthy, unpredictable “runarounds” to get any type of necessary banking process done.</p>
<p>With fewer branches and more basic tasks pushed online, many New Zealanders are finding it <a href="https://www.consumer.org.nz/articles/bank-branch-closures-are-banking-hubs-the-answer">harder to do their banking</a>. </p>
<p>But the very nature of small not-for-profits runs counter to normal commercial banking practice. This, combined with a lack of specialised staff at bank branches who understand not-for-profits, means banking is too often really difficult for these organisations. </p>
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Read more:
<a href="https://theconversation.com/what-if-we-expected-financial-services-to-be-more-like-health-services-101453">What if we expected financial services to be more like health services?</a>
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<p>Research participants reported the majority of front line banking staff weren’t familiar with the banking processes required by small organisations. At the same time, many of the volunteers weren’t familiar with what they needed to do themselves. But they found the rules keep changing and information from banks to guide the process was incredibly difficult to find. </p>
<p>Those interviewed also said banks made it difficult for not-for-profits to comply with <a href="https://www.dia.govt.nz/AML-CFT-Legislation">anti-money laundering and countering of financing of terrorism legislation</a>. The identification process required by these laws, which should be straightforward, is too often a nightmare. </p>
<p>Interviewees also found bank staff misinterpreted the rules. Bank errors, like missing or misplaced paperwork, were repeated over and over again. This created a number of issues which required repeated visits to the bank branches to sort out. </p>
<h2>Banking ‘shouldn’t be the hardest part of saving the world’</h2>
<p>One organisation, a small sports club, needed to add a signatory to its accounts.
Achieving this required multiple visits to three different branches of the bank, multiple emails, and long wait-times on calls to the bank’s helpline. </p>
<p>Each interaction was with a different bank representative and resulted in inconsistent information about how to change or add signatories. </p>
<p>Around 60% of survey respondents and organisations we interviewed reported similar frustrations when they wanted to change the signatories on their account. </p>
<p>Another arts and performance organisation lost access to its bank accounts after issues around updating the trustee list were not resolved in the time frames imposed by the bank. </p>
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<strong>
Read more:
<a href="https://theconversation.com/say-goodbye-to-the-branch-the-future-for-banking-is-upwardly-mobile-10191">Say goodbye to the branch — the future for banking is upwardly mobile</a>
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<p>While the not-for-profit was trying to sort out the issue, there appeared to be a lack of communication between the different divisions within the bank. Those who had authority to close the accounts at the bank were not aware of the frantic efforts by the organisation to find a bank person who knew what to do. The arts group was forced to stop operating for a time. </p>
<p>In another case, a new advocacy organisation set up by people with disabilities took months to get its new bank account working. </p>
<p>This group had a basic account after five months. But trouble finding someone to oversee the account setup, along with unclear communications from the bank, meant it took much longer to organise online banking and to have credit and debit cards issued. </p>
<p>This organisation said doing banking “shouldn’t be the hardest part of saving the world”.</p>
<p>But this is how it can feel for smaller not-for-profits. </p>
<h2>Relying on a ‘golden unicorn’</h2>
<p>My research found most organisations got their banking issues sorted – eventually. This was achieved through sheer determination and perseverance by not-for-profit personnel - and the emergence of a “golden unicorn”. </p>
<p>Golden unicorns are bank staff who understand the inner workings of not-for-profits and their banking needs. They know how to move through the bank’s different silos and are a point of contact for organisations – and other bank staff – who need help solving issues. </p>
<p>Golden unicorns are rare, but all the banks have them. The problem is, banks may not know which of their staff have this capability. As more bank branches close, it is critical banks identify the “unicorns” in their midst and create digital pathways linking them with not-for-profits and other staff. </p>
<p>Once the not-for-profits found their golden unicorn, issues which had already consumed hundreds of hours were quickly resolved. Harnessing these specialists’ capacity gives hours and hours back to the not-for-profit sector. This is also more efficient for banks – freeing up resources to serve other customers.</p>
<p>One research participant said he would love his bank to have this attitude to his and other organisations. “You didn’t create a not-for-profit to spend all this time in the bank; let’s work together to get this done.”</p><img src="https://counter.theconversation.com/content/209024/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>This research was commissioned by Community Networks Aotearoa (CNA) and was funded by grants from J R McKenzie Trust and the Todd Foundation. </span></em></p>People from NZ charities and not-for-profits told me volunteers and paid staff can spend months on basic banking processes. But just one ‘golden unicorn’ bank employee can make all the difference.Jane Horan, Economic Anthropologist, and contract lecturer, University of Auckland, Waipapa Taumata RauLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2088532023-08-04T11:59:41Z2023-08-04T11:59:41ZFive ways to take advantage of rising interest rates to boost your savings<figure><img src="https://images.theconversation.com/files/539289/original/file-20230725-12812-rqkfwb.jpg?ixlib=rb-1.1.0&rect=186%2C28%2C6043%2C4072&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">It's always a good time to save more, if you can.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/smiling-black-woman-saving-goal-future-2253367631">tommaso79/Shutterstock</a></span></figcaption></figure><p>With the Bank of England base rate <a href="https://theconversation.com/how-the-bank-of-englands-interest-rate-hikes-are-filtering-through-to-your-finances-210344">currently the highest</a> it has been since early 2008, you may have a valuable opportunity to increase your earnings on pensions, investments and savings accounts. After all, when the central bank raises its main rate – the base rate, which is typically used as a benchmark for loans as well as savings accounts – it is trying to encourage people to spend less and save more.</p>
<p>But UK banks and building societies have <a href="https://www.independent.co.uk/money/martin-lewis-savings-rates-mortgage-crisis-b2362955.html">recently been accused</a> of letting their savings rates lag the recent rapid rise in the base rate. UK regulator the Financial Conduct Authority has urged these financial firms to offer “<a href="https://www.fca.org.uk/news/press-releases/action-plan-cash-savings">fair and competitive</a>” savings rates in response to the increasing interest rates. </p>
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Read more:
<a href="https://theconversation.com/interest-rates-why-your-mortgage-payments-are-going-up-but-your-savings-arent-and-how-better-monetary-policy-could-help-196528">Interest rates: why your mortgage payments are going up but your savings aren't – and how better monetary policy could help</a>
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<p>Many financial institutions do offer accounts with <a href="https://www.theguardian.com/money/2023/jul/15/uk-savings-accounts-interest-nsi-building-societies-banks-deals">rates of 6% or more</a>. This is good news for avid savers – but only if you keep an eye on the market so you can switch from less competitive products. This is why it’s important to establish a regular savings habit, but many people are unsure about what that should involve.</p>
<p>My colleagues and I have studied the <a href="https://dspace.stir.ac.uk/handle/1893/32240">correlation between people’s savings goals</a> (if they have any) and how they invest their money. We also looked at how seeking financial information advice, and being “good with numbers”, both influence this correlation. </p>
<p>We analysed data from more than 40,000 individuals in 21,000 UK households from five waves of the Office for National Statistics Wealth and Assets Survey (WAS), conducted between 2006 and 2016. This data captures comprehensive economic wellbeing information and attitudes to financial planning. </p>
<p>Our research shows the importance to your finances of setting multiple savings goals, keeping up with financial news, and seeking professional advice. Based on this, here are five research-based ways to make the most of your money.</p>
<h2>1. Set specific savings goals</h2>
<p>Establishing personal savings goals is one of the first steps most financial institutions and advisers will recommend to their customers, because it’s a good idea to <a href="https://www.investopedia.com/terms/c/compoundinterest.asp">save regularly</a>. Plus, our study shows that total financial assets increase in line with the number of savings goals you have, and that setting specific, rather than vague, goals leads to higher performance.</p>
<p>Specific savings goals should have an end date, target figure, and even a meaningful name – for example, “£1,000 for 2024 trip to Asia” or “£250 for 2023 Christmas present fund”. This will create tangible reference points that encourage self-control and increase the pain you feel if you fail to meet your goal.</p>
<figure class="align-center ">
<img alt="Three glass jars of coins with labels that say: insurance, retirement, travel plan." src="https://images.theconversation.com/files/539288/original/file-20230725-21-wi4q3k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/539288/original/file-20230725-21-wi4q3k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/539288/original/file-20230725-21-wi4q3k.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/539288/original/file-20230725-21-wi4q3k.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/539288/original/file-20230725-21-wi4q3k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=425&fit=crop&dpr=1 754w, https://images.theconversation.com/files/539288/original/file-20230725-21-wi4q3k.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=425&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/539288/original/file-20230725-21-wi4q3k.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=425&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Savings goals – but try an interest-bearing account, rather than a jar.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/money-coins-jars-insurance-savings-retirement-1036970458">simon jhuan/Shutterstock</a></span>
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<h2>2. Seek professional financial advice</h2>
<p>Rather than relying on friends, family and social media for financial advice, speak to an expert.</p>
<p>Our research shows households that access professional financial advice were more likely to allocate a higher share of their wealth to stock portfolios than those that rely on friends, family and social media for financial advice. This result was consistent even across different wealth and income levels, with lower earners possibly using products like ISAs to make investments in stocks and shares. Other <a href="https://academic.oup.com/qje/article/134/3/1225/5435538">research shows</a> stock portfolios outperform most other types of investment in the long term.</p>
<p>We also found that access to professional financial advice can substitute for setting goals, because your adviser should help you to determine the kinds of products to invest in (which is called asset allocation) for specific timelines and aims.</p>
<h2>3. Brush up on your maths</h2>
<p><a href="https://doi.org/10.1111/j.1475-5890.2007.00052.x">Several studies</a> show numerical skills affect how households gather and process information, <a href="https://psycnet.apa.org/doi/10.1037/a0013114">set goals</a>, perceive risks, and <a href="https://heinonline.org/HOL/P?h=hein.journals/fedred89&i=791">decide to invest</a> in various financial assets. So, by brushing up on your basic numeracy and financial literacy skills – even with free online videos – you could boost your savings for the long term. </p>
<p>Our study shows that individuals with high confidence in their numerical skills tend to have better financial planning habits – such as investing more in stocks and bonds than cash, which carries more risk but also the potential for greater returns. This trend is particularly evident among households with no savings goals, suggesting that numerical ability could compensate for failing to set such goals.</p>
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<img alt="Overhead shot of person at desk with papers, pen & notebook, watching video on laptop of woman at a whiteboard." src="https://images.theconversation.com/files/539294/original/file-20230725-20-nsyh2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/539294/original/file-20230725-20-nsyh2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/539294/original/file-20230725-20-nsyh2z.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/539294/original/file-20230725-20-nsyh2z.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/539294/original/file-20230725-20-nsyh2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/539294/original/file-20230725-20-nsyh2z.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/539294/original/file-20230725-20-nsyh2z.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Brush up on your maths skills.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/high-angle-view-video-conference-teacher-1676998303">Ground Picture/Shutterstock</a></span>
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<h2>4. Adopt appropriate savings strategies</h2>
<p>Diversified stock market portfolios generally outperform bonds and cash savings <a href="https://doi.org/10.1093/qje/qjz012">over longer periods</a>. However, stock markets can be volatile, so putting savings into less risky assets like bonds and cash is wise for savings goals of less than five years.</p>
<p>In the longer term, investing across different global stock markets for more than five years can help counteract inflation. And you can access low-cost, diversified investment portfolios via financial products based on indices of stocks or other assets, such as exchange traded funds.</p>
<h2>5. Set, monitor and adjust your plan</h2>
<p>Free financial planning and budgeting apps can help you save money by tracking your spending and savings goals, and encouraging you to adhere to a budget.</p>
<p>Most importantly, once you set savings goals and create a budget, don’t forget about them. Check regularly to see how your savings are building up and to monitor for any spending changes. A growing array of fintech tools can prompt and encourage this kind of long-term planning.</p>
<p>Keeping an eye on savings rates is also important. As banks change rates or create new accounts, consider switching to get a better deal if you can do so without falling foul of account closure fees.</p>
<p>It’s important to make sure your savings are working for you at any time, but its crucial in the current economy, when finances are tight but interest rates are rising.</p><img src="https://counter.theconversation.com/content/208853/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Fredrick Kibon Changwony does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Specific savings goals can help increase your pot – but so can advice and confidence with numbers.Fredrick Kibon Changwony, Lecturer in Accounting & Finance, University of StirlingLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2018672023-08-04T01:52:43Z2023-08-04T01:52:43ZAustralia will soon have its first Islamic bank. What does this mean, and what are the challenges?<p>Islamic banks have become an integral part of the financial system in many Muslim-majority countries, as well as in nations with sizeable Muslim minorities such as the United Kingdom, South Africa, Sri Lanka and Thailand.</p>
<p>Australia is poised to join them. From mid-2024,
<a href="https://islamicbank.au/">Islamic Bank Australia</a> is set to offer Australia’s 813,000 Muslims a banking service aligned with their religion’s strictures against profiting from interest or investing in harmful industries such as alcohol or gambling.</p>
<p>The fundamental distinguishing feature of an Islamic bank is its adherence to Islamic, or Sharia, law. As such, Islamic banks differ from their counterparts in four main ways: they do not charge or pay interest; they don’t engage in property speculation or activities such as derivatives trading; they do not invest in businesses that are deemed unlawful by Islam; and they typically appoint a second board specifically to oversee their compliance with these rules.</p>
<p>Why do these rules and conventions exist, and how do they work in practice?</p>
<h2>1. No interest</h2>
<p>For devout Muslims, conventional banking services are problematic because of the main way most banks make profit – by charging interest on loans.</p>
<p>Islam’s holy book, the Quran, prohibits all transactions associated with interest. The third chapter (the <a href="https://www.al-islam.org/enlightening-commentary-light-holy-quran-vol-3/section-11-usury-forbidden-means-achieving-success">Surah Al-Imran, verse 130</a>) says:</p>
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<p>O’ you who have Faith! Do not devour usury, doubled and multiplied, and be in awe of Allah; that you may be prosperous.</p>
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<p>Usury refers to lending money at unreasonable interest rates, but the term is <a href="https://www.merriam-webster.com/dictionary/usury">sometimes used</a> to mean any charging of interest at all. Judaism and Catholicism have also traditionally outlawed usury, although historically they have allowed more wiggle room in how this is applied. </p>
<p>Sharia law prohibits banks from charging any interest on loans at all. But that doesn’t mean Islamic banks are opposed to earning profit.</p>
<p>To comply with Sharia law, an Islamic bank enters into a joint venture or partnership agreement with depositors and borrowers, which allows sharing of profit and loss between bank and customers.</p>
<p>Islamic banks provide loans under a profit-and-loss contract rather than one involving interest-based repayments. In this arrangement, borrowers pay an agreed share of their profits to the bank.</p>
<p>Similarly, deposits with the bank don’t earn interest, but instead they earn a return that will rise or fall in line with the bank’s overall profits.</p>
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Read more:
<a href="https://theconversation.com/islamic-finance-provides-an-alternative-to-debt-based-systems-191168">Islamic finance provides an alternative to debt-based systems</a>
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<p>One potential pitfall of this model is it might encourage borrowers to take unnecessary business risks, knowing their bank will share the losses. This, in turn, would potentially reduce the returns to those who have deposited funds with the bank and also increase the credit risk for banks.</p>
<p>To help guard against this risk, borrowers typically agree to allow the bank to act as a partner in the business, rather than simply as a creditor. This lets the bank monitor the business’s performance more closely, and share directly in its profits and losses.</p>
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<img alt="Hands using laptop showing blurred spreadsheet and graphs" src="https://images.theconversation.com/files/541149/original/file-20230804-27-htvbrx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/541149/original/file-20230804-27-htvbrx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/541149/original/file-20230804-27-htvbrx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/541149/original/file-20230804-27-htvbrx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/541149/original/file-20230804-27-htvbrx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/541149/original/file-20230804-27-htvbrx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/541149/original/file-20230804-27-htvbrx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Rather than paying interest, business borrowers typically share a portion of their profits with the bank.</span>
<span class="attribution"><span class="source">Campaign Creators/Unsplash</span>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
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<h2>2. No speculative assets</h2>
<p>The Quran (<a href="https://www.al-islam.org/enlightening-commentary-light-holy-quran-vol-3/section-36">Surah Al-Baqarah, verse 275</a>) says: </p>
<blockquote>
<p>…Allah has permitted trading and forbidden usury.</p>
</blockquote>
<p>From this, Islamic scholars infer that purchasing land or property purely for speculation is not permissible, but buying it to undertake economic activities is allowed. This means Islamic banks cannot engage in the kind of debt-based financing that underpins the home or business loans offered by many Australian banks.</p>
<p>Instead, an Islamic bank can finance a home purchase by taking part-ownership of the property, according to the proportion of the purchase price that was provided by bank finance rather the buyer’s own funds. </p>
<p>Similarly, Islamic banks can provide loans to buy land that will be used for economic activities, but cannot profit purely from land price appreciation.</p>
<p>Shariah law also prohibits Islamic banks from engaging in derivatives trading (trading in financial products such as futures contracts, options or swaps) because this involves speculating on an asset’s market performance, rather than on economic activity itself. </p>
<h2>3. No ‘socially harmful’ business</h2>
<p>Sharia law does not allow an Islamic bank to finance economic sectors that are deemed harmful to people’s wellbeing, such as alcohol, tobacco, gambling, adult entertainment, pork products, or arms production.</p>
<h2>4. Islamic corporate governance</h2>
<p>Islamic banks typically appoint two boards: a regular board of directors similar to those that govern most banks, and a Sharia supervisory board to oversee compliance with Islamic laws. </p>
<h2>What are Islamic Bank Australia’s prospects?</h2>
<p>The main challenge for Islamic Bank Australia will be to gain accreditation from the Australian Prudential Regulatory Authority (<a href="https://www.apra.gov.au/">APRA</a>), which regulates Australia’s commercial banking industry. The bank says it is planning to apply for this in mid-2024, after which it can open to the public.</p>
<p>Next, it will need to attract a significant client base. As of October 2022 it reportedly had <a href="https://www.abc.net.au/news/2022-10-12/australia-first-islamic-bank-granted-lending-licence-from-apra/101458162">almost 8,000 prospective customers</a> on its waiting list.</p>
<p>The arrival of Sharia-compliant banking will bring some new issues for Australia’s banking sector more broadly. </p>
<p>Australia does not yet have any supervisory body for monitoring Sharia-compliant banking, meaning all responsibility in this area would fall to the bank’s own supervisory board. In many Muslim-majority countries, such as Malaysia for example, a separate Sharia Advisory Council, typically appointed by the country’s central bank, oversees the Islamic finance industry. </p>
<p>Islamic Bank Australia’s Sharia committee has <a href="https://islamicbank.au/shariah-committee/">three members</a>: Malaysia-based Ashraf Md Hashim, who also sits on that country’s Sharia Advisory Council; Mohamed Ali Elgari, an Islamic economics academic in Saudi Arabia; and Australia-based Islamic banking scholar Rashid Raashed.</p>
<p>Many other Islamic banks worldwide also have overseas Sharia scholars sitting on their boards. But given the complexity of the role, these appointees will need to be familiar with current practices in Australia’s financial landscape too.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/is-islamic-banking-more-risky-compared-to-conventional-banking-62993">Is Islamic banking more risky compared to conventional banking?</a>
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</em>
</p>
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<p>A related issue is the question of how Islamic Bank Australia will interact with Australia’s existing banks. Besides adhering to Sharia law, it will also need to comply with all of Australia’s banking regulatory requirements. In doing so, it will inevitably come across interest-based transactions. </p>
<p>For example, Islamic Bank Australia must maintain an account for settling any transactions with the Reserve Bank, and will have to refer to existing benchmarks, such as the underlying interest rate, as references for the dividends and charges applied to customers under its profit-and-loss contracts. </p>
<p>Islamic Bank Australia and existing banks will have to get used to adapting to the rules and customs, but it has been done successfully in other Western countries and so Australia should be no exception.</p><img src="https://counter.theconversation.com/content/201867/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Islamic banks must follow Sharia law, and as such take a different approach to traditional Australian banks. They don’t charge interest, and are much more selective about which activities they fund.Md Safiullah (Safi), Senior Lecturer in Finance, RMIT UniversityAbul Shamsuddin, Professor of Finance, University of NewcastleLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2101692023-07-28T12:52:46Z2023-07-28T12:52:46ZHow new ‘consumer duty’ rules for financial products could reduce debt-related stress<figure><img src="https://images.theconversation.com/files/539741/original/file-20230727-29-u1qts5.jpg?ixlib=rb-1.1.0&rect=49%2C55%2C4072%2C2688&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/sad-woman-holding-her-head-over-2140114687">Grusho Anna/Shutterstock</a></span></figcaption></figure><p>New “<a href="https://www.fca.org.uk/publications/policy-statements/ps22-9-new-consumer-duty">consumer duty</a>” rules introduced by the Financial Conduct Authority (FCA) aim to set clear standards for the protection of financial consumers. Banks, building societies, investment and insurance firms, as well as many other types of business, are being told to “<a href="https://www.fca.org.uk/firms/consumer-duty">put their customers’ needs first</a>”. </p>
<p>The timing couldn’t be better. Amid a cost of living crisis, the UK regulator’s new rules should hopefully address the <a href="https://wearecitizensadvice.org.uk/living-on-empty-245f4b9acbe3">increasing recognition</a> by consumer groups that people cannot always solve the financial problems they face. Consumers are under pressure and need more support. Yet, trust in financial services is low: the FCA recently found that <a href="https://www.fca.org.uk/publications/financial-lives/financial-lives-survey-2022-key-findings">just 36% of UK adults</a> see most financial providers as honest and transparent in how they treat customers.</p>
<p>The new rules cover not only direct customers of products such as bank accounts, credit cards and loans, but also anyone that ultimately makes use of a product or service, including family members of a borrower who may benefit from the loan. Even if the provider does not have a direct relationship with the user, <a href="https://www.fca.org.uk/publication/policy/ps22-9.pdf">the rules still apply</a>.</p>
<p>In future, companies will have to demonstrate to the regulator that they are proactively putting consumer needs first and preventing any harm. They will be expected to continuously review their operations to identify and resolve areas where they could be going against these needs – from product design and delivery to customer services and communications.</p>
<p>The new regime should lead to a step-change in how consumers are treated. And this may improve financial wellbeing in the UK, especially for those in vulnerable financial situations. The FCA has suggested financial service organisations will need to make <a href="https://www.fca.org.uk/news/speeches/countdown-consumer-duty">fundamental cultural changes</a> to be more aware of and responsive to consumer needs across their operations.</p>
<p>A major part of this responsiveness will involve listening to and understanding the real-life experiences of financial consumers. Research shows the ways in which financial service companies could improve how they deal with their consumers.</p>
<h2>Preventing problems from escalating</h2>
<p>Our recent <a href="https://www.fincap.org.uk/en/reviews/money-and-mental-health-rapid-evidence-review">evidence review</a> on the connections between financial and mental health challenges highlights the negative effects of being behind on payments or in debt. Overly punitive approaches to dealing with these situations, such as the use of debt collection agencies, exacerbates financial stress. It also reinforces the stigma people can experience when dealing with both financial and mental health challenges. </p>
<p>An <a href="https://www.aston.ac.uk/research/bss/abs/centres-hubs/cpfw/our-projects">ongoing project</a> by Aston University and Birmingham City Council explores gambling and housing security. It shows problem gamblers often turn to debt, including payday loans, to fund their betting activity. This limits their ability to pay rent and can result in tenancy loss, which negatively affects long-term wellbeing. </p>
<p>The stigma associated with problem gambling has encouraged most of those surveyed to try to control their habit or stop gambling altogether. But they had not received any support from their financial providers or from other agencies they were engaged with, such as their housing association. </p>
<p>Preventing negative escalations should be a priority when consumers in tough financial situations are unable to pay their bills and debt starts to mount. They also need appropriate support to help overcome the stigma of experiencing financial problems. </p>
<p>The government’s “<a href="https://www.gov.uk/government/publications/debt-respite-scheme-breathing-space-guidance/debt-respite-scheme-breathing-space-guidance-for-creditors">breathing space</a>” scheme gives people experiencing debt problems time to receive advice and find a solution without penalties. This is a positive step. Similar interventions could help relieve the financial stress of other experiences – for example, <a href="https://www.tandfonline.com/doi/abs/10.1080/19424620.2013.819680">after a bereavement</a>, when the burden of dealing with complicated financial matters can have a detrimental impact on relatives’ wellbeing.</p>
<figure class="align-center ">
<img alt="Man and woman in front of a laptop with another woman speaking to them." src="https://images.theconversation.com/files/539744/original/file-20230727-15-uyr3qk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/539744/original/file-20230727-15-uyr3qk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/539744/original/file-20230727-15-uyr3qk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/539744/original/file-20230727-15-uyr3qk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/539744/original/file-20230727-15-uyr3qk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/539744/original/file-20230727-15-uyr3qk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/539744/original/file-20230727-15-uyr3qk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The FCA’s consumer duty rules should encourage financial firms to listen to and support their customers.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/close-female-realtor-manager-real-estate-1926167858">fizkes/Shutterstock</a></span>
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<h2>Listening to feedback</h2>
<p>Another strand of our research highlights the need to examine the impact of financial stress and debt across different groups of consumers. Disparities in income and wealth between men and women, for example, relate to different work and employment experiences and opportunities.</p>
<p>Financial products such as pensions and investment accounts often appear to be gender neutral, but do not actually align with different life experiences. A woman working part-time due to caring responsibilities may struggle to save in a traditional pension, for example. This can <a href="https://doi.org/10.1080/09692290.2022.2113114">ultimately discourage women</a> from using these products.</p>
<p>This is one of the reasons why it is important for consumers to give feedback directly to the firms they deal with, so they can create different products. The FCA’s consumer duty aims to encourage this interaction. Again, this is crucial because <a href="https://www.fca.org.uk/publications/financial-lives/financial-lives-survey-2022-key-findings">7.4 million UK adults</a> have struggled to contact their financial providers in the last year.</p>
<p>The consumer duty rules should help to facilitate this kind of feedback, resulting in financial products with a more diverse appeal and better outcomes. Support for those experiencing repayment problems and dealing with stress about their finances should also be more accessible.</p>
<p>In time, if followed correctly, these new standards should lead to a more equitable and trustworthy financial system. If so, this will improve financial wellbeing by reducing undue stress for many people.</p><img src="https://counter.theconversation.com/content/210169/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Hayley James has received funding from the Economic and Social Research Council, the New Opportunities for Research Funding Agency Cooperation in Europe (NORFACE) consortium, and is currently working on a project funded by the Aviva Foundation (realaccounts.org.uk).</span></em></p><p class="fine-print"><em><span>Andy Lymer has recently received funding for his work from the UK’s Money and Pension Service, Vivid (a UK housing association) and via the Gambling Commission amongst others. He is currently engaged in a project funded by the Aviva Foundation. </span></em></p>Making financial firms more aware of their consumers’ needs could provide much-needed support during the cost of living crisis – and beyond.Hayley Louise James, Senior research fellow, Aston UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2102352023-07-28T12:52:42Z2023-07-28T12:52:42ZBank account closures don’t just affect ‘politically exposed persons’ – sex workers have struggled with financial exclusion for years<figure><img src="https://images.theconversation.com/files/539559/original/file-20230726-29-q9sqyp.jpg?ixlib=rb-1.1.0&rect=208%2C126%2C5830%2C3884&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/stressed-broke-young-asian-woman-having-2237736495">BongkarnGraphic/Shutterstock</a></span></figcaption></figure><p>The fallout over the closure of Nigel Farage’s bank account has shed light on how financial institutions handle “politically exposed persons”, whom they may view as high-risk clients. </p>
<p>Farage, the former Ukip leader, who held a bank account at the NatWest-owned private bank <a href="https://www.coutts.com/">Coutts</a>, obtained and published a <a href="https://www.telegraph.co.uk/news/2023/07/19/coutts-full-dossier-on-nigel-farage-closed-bank-account/">dossier</a> showing that the bank closed his account after identifying him as a reputational risk. The internal report stated that Farage’s views “do not align with our values”. Two executives at NatWest banking group – CEO Alison Rose and Peter Flavel, head of the bank’s Coutts division – have <a href="https://www.bbc.co.uk/news/business-66328666">since resigned</a>.</p>
<p>But people who occupy prominent public functions are not the only ones to be affected by loss of access to financial products.</p>
<p>For people working in commercial sex, the often unexplained closure or denial of bank accounts is an all too frequent occurrence. And their experiences hardly attract the same quick <a href="https://news.sky.com/story/city-minister-summons-bank-bosses-to-protect-customers-from-being-de-banked-after-farage-account-closure-12926362">government intervention</a> and response from banks as Farage.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/what-is-a-politically-exposed-person-and-why-do-the-likes-of-jeremy-hunt-and-nigel-farage-claim-the-status-prevents-them-getting-bank-accounts-209658">What is a 'politically exposed person' and why do the likes of Jeremy Hunt and Nigel Farage claim the status prevents them getting bank accounts?</a>
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</p>
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<p>Escorts, in-person sex workers, cam and pornography performers, sexual products business owners and others operating in adult entertainment have discussed their financial exclusion ordeals on <a href="https://www.news.com.au/finance/business/banking/appalling-australian-sex-worker-samantha-x-reveals-huge-banking-blow/news-story/e0d1676aa12c1472ea8c039897ef892c">social media</a> and in various <a href="https://www.theguardian.com/business/2021/oct/16/sex-discrimination-why-banks-shun-workers-in-adult-entertainment">news outlets</a> around the world for years. More recently, <a href="https://www.nswp.org/sites/nswp.org/files/Summary%20Regional%20Reports%20Economic%20Empowerment%2C%20NSWP%20-%20November%202015.pdf">sex worker organisations</a> and <a href="https://academicworks.cuny.edu/clr/vol26/iss1/4/">researchers</a> have begun collecting evidence of the extent and impact of this discrimination.</p>
<p>What is evident from the <a href="https://www.northumbriajournals.co.uk/index.php/IJGSL/article/view/1258">expanding research</a> is that, even though their commercial sex practices are legal and earnings legitimate, sex workers and adult entertainers are frequently denied or revoked access from financial products. This can include <a href="https://www.nzherald.co.nz/business/banks-refusing-services-to-sex-workers-were-easy-picking/N7N74KJGK2SH6TSJQDVQOBLDPY/">business</a> and <a href="https://columbianewsservice.com/2023/02/01/sex-workers-say-they-face-hurdles-to-banking-access/">personal bank accounts</a>, <a href="https://nationaluglymugs.org/wp-content/uploads/2022/01/BDSW_final.pdf">overdrafts</a>, <a href="https://www.9news.com.au/national/banks-blamed-for-sex-worker-slut-shaming/2f4e11bf-e7d8-4719-9237-259a0a8f3bf5">mortgages</a>, <a href="https://www.bbc.co.uk/news/uk-england-south-yorkshire-56758745">loans</a>, <a href="https://www.investordaily.com.au/markets/46043-nab-treated-me-like-garbage-sex-worker-says">merchant banking services</a>, <a href="https://www.bbc.co.uk/news/technology-55551300">credit card services</a>, <a href="https://survivorsagainstsesta.org/platforms-discriminate-against-sex-workers/">e-wallets, e-payments and more</a>.</p>
<p>A <a href="https://nationaluglymugs.org/wp-content/uploads/2022/01/BDSW_final.pdf">2021 report</a> from <a href="https://nationaluglymugs.org">National Ugly Mugs</a>, a UK charity fighting to end violence against sex workers, shows evidence of financial discrimination by various UK-based financial institutions. </p>
<p>The report highlights the experiences of sex workers who were explicitly told by banks that the decision to withhold their services was based on their involvement in the adult industry. Others received no justification for the closure or denial of bank accounts, but did not inquire further about the reasons of their exclusion, for fear of being denied accounts elsewhere.</p>
<h2>‘They do not want you at all’</h2>
<p>My ongoing research on sex work and financial exclusion with colleagues from the University of Nevada shows that people working in the legal adult entertainment industry in the US experience similar exclusions. As a sex worker operating in a legal Nevada brothel told us: </p>
<blockquote>
<p>Once the bank figures out you’re a sex worker, they don’t want to offer you any services at all whatsoever. They do not want you at all. </p>
</blockquote>
<p>Another participant told us that such exclusions can persist even after leaving sex work. She spoke of a friend who had been out of the legal brothel industry for more than a year, but was still unable to open a bank account. </p>
<p>Financial services are indispensable for carrying out most professional and personal activities. But our respondents felt they were not in any position to challenge the exclusions they faced. One told us that the fear of being permanently denied access to financial products stops them from speaking up:</p>
<blockquote>
<p>Generally banks don’t exactly say why, [and] we don’t exactly say why either because it’s so dangerous.</p>
</blockquote>
<p>She also described being “thankful that it’s not worse than that”, after having a bank account closed – but not having her funds seized.</p>
<p>Most of our respondents reported long-term freezing or loss of funds, specifically when dealing with online payment services. As most adult entertainment services are now <a href="https://onlinelibrary.wiley.com/doi/epdf/10.1111/1468-4446.12493">facilitated online</a>, access to digital financial infrastructure and e-payments is ever more important. </p>
<p>But many online payment platforms have a <a href="https://www.paypal.com/us/cshelp/article/what-is-paypal%E2%80%99s-policy-on-transactions-that-involve-sexually-oriented-goods-and-services-help384#:%7E:text=We%20don%27t%20permit%20PayPal,or%20appear%20to%20involve%2C%20minors.">ban on “sexually oriented goods or services”</a>. As Natasha Tusikov, an expert on crime, technology and regulation describes, this is a form of <a href="https://www.emerald.com/insight/content/doi/10.1108/S1521-613620210000026005/full/pdf">sexual censorship</a> that leaves people with limited digital payment options, many of which charge high fees. </p>
<figure class="align-center ">
<img alt="Photo of Nigel Farage speaking at an event, against a dark background" src="https://images.theconversation.com/files/539763/original/file-20230727-17-ltpufz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/539763/original/file-20230727-17-ltpufz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/539763/original/file-20230727-17-ltpufz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/539763/original/file-20230727-17-ltpufz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/539763/original/file-20230727-17-ltpufz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/539763/original/file-20230727-17-ltpufz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/539763/original/file-20230727-17-ltpufz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Not everyone has the political or media power to speak up about their bank account closure.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/newport-wales-uk-september-21st-2019-1551047501">ComposedPix/Shutterstock</a></span>
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<h2>The toll of financial exclusion</h2>
<p>Having to hide their occupation, living in a constant state of fear of being “debanked” (losing access to bank accounts) has a heavy toll on sex workers’ lives. This even more so for undocumented migrants, or others who face discrimination on the basis of their race, class, gender and sexuality. </p>
<p>Financial exclusion is not only a source of anxiety and depression, but has harmful <a href="https://action.freespeechcoalition.com/files/FinancialDiscriminationandtheAdultIndustry.pdf">ripple effects</a>. It prevents people from accessing loans and mortgages, it reduces opportunities to save, plan finances for the future or change occupation. It can lead to homelessness and loss of financial autonomy. </p>
<p>As one of our respondents told us, missing a rent payment and getting evicted can lead to suicide: </p>
<blockquote>
<p>When someone is debanked, people die, and I want to say this bluntly. This is a deadly issue.</p>
</blockquote>
<p>Sex workers and organisations who advocate for their rights are challenging these practices. In 2021, a group of UK-based sex worker-led organisations <a href="https://drive.google.com/file/d/1GQCV62TnDfq8Pibn9GaRKghIOYCP3u90/view">wrote an open letter</a> demanding the end of financial exclusion by financial institutions. In the US, <a href="https://www.acceptancematters.org">sex workers</a> and civil rights organisations have been campaigning to stop payment platforms from <a href="https://www.aclu.org/news/lgbtq-rights/paypal-and-venmo-are-shutting-out-sex-workers-putting-lives-and-livelihoods-at-risk">shutting down sex workers’ accounts</a> without due process, and to challenge the <a href="https://www.aclu.org/news/lgbtq-rights/how-mastercards-new-policy-violates-sex-workers-rights">exclusionary adult content policies</a> of credit card networks.</p>
<p>But as our participants pointed out, the stigma that surrounds the adult entertainment industry prevents many from coming forward. Some are concerned that publicly challenging financial institutions might result in being permanently banished from them. Unlike well-known political figures, vulnerable people in a stigmatised industry have limited expectations of redress after being excluded from financial services.</p><img src="https://counter.theconversation.com/content/210235/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Isabel Crowhurst received funding from the ESRC Impact Acceleration Account for research mentioned in the article.</span></em></p>Escorts, sex workers and other adult entertainers often do not feel they have the power to challenge debanking.Isabel Crowhurst, Reader in Sociology, University of EssexLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2093692023-07-12T14:54:43Z2023-07-12T14:54:43ZHere’s how the Bank of Canada’s interest rate hike to 5% will impact Canadian households<p>The Bank of Canada has just <a href="https://www.cbc.ca/news/business/bank-of-canada-july-meeting-1.6904330">hiked its interest rate by another 25 points to five per cent</a> — the second quarter-point hike since <a href="https://financialpost.com/news/economy/bank-of-canada-hikes-interest-rate">June’s interest rate increase to 4.75 per cent</a>. The central bank has been steadily increasing interest rates over the past three years in an effort to tame inflation. </p>
<p>While inflation is finally levelling out — <a href="https://www.cbc.ca/news/business/inflation-rate-may-1.6889725">June’s inflation rate was 3.4 per cent</a>, the lowest since it <a href="https://www.bankofcanada.ca/rates/indicators/key-variables/key-inflation-indicators-and-the-target-range">peaked at 8.1 per cent in June 2022</a> — it still remains higher than the central bank’s two per cent target. </p>
<p>One of the reasons prices are now falling is because the economic impact of the Russian invasion on Ukraine <a href="https://obj.ca/canada-inflation-falls-to-3-4-lowest-since-june-2021/">has been fading over the past few months</a>. <a href="https://thoughtleadership.rbc.com/rbc-inflation-watch">Downward trends in the price of raw materials and industrial prices</a> are also playing a role.</p>
<p>The <a href="https://www.reuters.com/markets/canadas-economy-up-31-q1-april-gdp-likely-up-02-2023-05-31/">Canadian economy grew at 3.1 per cent</a> in the first quarter of 2023, fuelled by strong growth in household spending on services. Healthy economic growth goes hand-in-hand with job creation, leading to tighter labour markets where job openings are plentiful but available workers are scarce.</p>
<p>The labour market has remained tight despite the unemployment rate increasing by two points to 5.4 in June. However, the unemployment rate is still <a href="https://www150.statcan.gc.ca/n1/daily-quotidien/230707/dq230707a-eng.htm">below the pre-pandemic average</a> of 5.7 per cent.</p>
<h2>Mortgage owners beware</h2>
<p>For businesses and households, the latest interest rate increase means an increase to the prime rate, which is the interest rate banks charge their customers with. <a href="https://www.ratehub.ca/prime-rate">The current prime rate is 6.95 per cent</a>, up from 3.70 per cent in June 2022.</p>
<p>Homeowners with variable mortgage rates and terms about to expire will feel the most pain from the rate hike. At higher interest rates, borrowers need to allocate a <a href="https://www.cmhc-ithschl.gc.ca/professionals/housing-markets-data-and-research/housing-research/research-reports/housing-finance/residential-mortgage-industry-report">larger share of their disposable income to debt</a>, leaving less for spending on food and other household necessities. </p>
<p>While the mortgage interest rates have been a significant contributor to the rise in the cost of living, <a href="https://www150.statcan.gc.ca/n1/daily-quotidien/230627/dq230627a-eng.htm?HPA=1&indid=3665-1&indgeo=0">grocery prices have remained high</a>, rising by nine per cent year-over-year this past May. </p>
<figure class="align-center ">
<img alt="A pair of keys and a fountain pen sitting on top of mortgage papers" src="https://images.theconversation.com/files/536936/original/file-20230711-23-z2bc5t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/536936/original/file-20230711-23-z2bc5t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/536936/original/file-20230711-23-z2bc5t.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/536936/original/file-20230711-23-z2bc5t.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/536936/original/file-20230711-23-z2bc5t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/536936/original/file-20230711-23-z2bc5t.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/536936/original/file-20230711-23-z2bc5t.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Homeowners with variable mortgage rates and terms about to expire will feel the most pain from the rate hike.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
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</figure>
<p>Fortunately, price growth has slowed for some categories, such as durable goods which includes automobiles and furniture. And the price of cellular services has decreased by 8.2 per cent over the past year. </p>
<p>On a more positive note, Canadian households, and the <a href="https://economics.td.com/ca-provincial-housing-outlook">housing market</a>, have remained resilient despite some fluctuations over the past year.</p>
<p>According to a <a href="https://www.cmhc-schl.gc.ca/professionals/housing-markets-data-and-research/housing-research/research-reports/housing-finance/residential-mortgage-industry-report">recent Canada Mortgage and Housing Corporation (CMHC) report</a>, the number of mortgages in arrears has remained low despite more households <a href="https://angusreid.org/canada-mortgage-housing-variable-fixed-interest-rate-bank-of-canada/">being worried about making mortgage payments on time</a>. The relatively low number of mortgages in arrears is reflective of the financial stability and resiliency of Canadian households. </p>
<h2>Coping with higher mortgage rates</h2>
<p>One way Canadians have been coping with higher mortgage rates is with choosing shorter-term fixed-rate mortgages. Fixed-rate terms between one and five years have become the preferred choice, reflecting borrower expectations that the interest rates will fall within the next few years. </p>
<p>In fact, <a href="https://www.cmhc-schl.gc.ca/professionals/housing-markets-data-and-research/housing-research/research-reports/housing-finance/residential-mortgage-industry-report">less than 15 per cent of new mortgages</a> are locked in for fixed-rate five year terms, and less than 20 per cent are variable rate. Prior to August 2022, fixed-rate terms of five years or longer were the preferred choice for mortgage borrowers.</p>
<p>Another way households are coping with higher interest rates is by increasing amortization periods — the length of time people have to pay back a loan — to reduce monthly debt servicing costs. Extending amortization periods can prevent homeowners from missing mortage payments.</p>
<p>Over the past year, <a href="https://www.thestar.com/business/2023/04/25/one-third-of-canadian-homeowners-now-have-mortgage-periods-of-more-than-30-years.html">amortization periods greater than 25 years have become increasingly common</a>. In the fourth quarter of 2022, for example, <a href="https://www.cmhc-ithschl.gc.ca/professionals/housing-markets-data-and-research/housing-research/research-reports/housing-finance/residential-mortgage-industry-report">60 per cent of mortgages were amortized over more than 25 years</a>, compared to 50 per cent three years prior. </p>
<p>With the interest rate hike, this trend is expected to continue as households facing higher mortgage payments look for ways to reduce their monthly expenditures. When the interest rates fall, the trend is expected to reverse.</p>
<h2>Credit and loans</h2>
<p>Those with secured or unsecured <a href="https://loanscanada.ca/news/how-will-the-bank-of-canadas-interest-rate-hike-affect-you/">lines of credit</a> will also be impacted by the rate increase, since the interest rates for those products are directly related to the prime rate.</p>
<p><a href="https://www.finder.com/ca/personal-loans/line-of-credit">Finder</a>, a financial comparison website, reports an average interest rate of 6.37 per cent for secured personal line of credit and 9.83 per cent for unsecured line of credit, with precise rates varying with credit scores and personal characteristics. </p>
<p><a href="https://loanscanada.ca/news/how-will-the-bank-of-canadas-interest-rate-hike-affect-you/">Credit card interest rates</a> that average close to 19.99 per cent are not typically affected by changes in the Bank of Canada’s overnight rate. </p>
<p>Those taking out a new automobile loan will also face higher interest rates. Most automobile loans are fixed rate, so those in need of refinancing or renegotiating their loans are likely to be impacted.</p>
<h2>Smoother roads ahead?</h2>
<p>While the downward trend in inflation suggests the Bank of Canada’s interest rate hikes may be soon coming to an end, we can expect the current interest rate to remain constant at least for the rest of the year. </p>
<p>The next <a href="https://www150.statcan.gc.ca/n1/release-diffusion/2023-eng.pdf">inflation update will be announced on July 18</a>. </p>
<p>At this point, it appears that the Canadian economy has picked up enough momentum this year to dodge a recession. We can expect both inflation and interest rates to soften in 2024.</p><img src="https://counter.theconversation.com/content/209369/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Laura Lamb does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>An economist explains what the Bank of Canada’s interest rate hike to five per cent means for Canadians.Laura Lamb, Professor of Economics, Thompson Rivers UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2095852023-07-12T07:25:14Z2023-07-12T07:25:14ZAustralia can learn from the UK’s experience by making banks pay for scam losses<figure><img src="https://images.theconversation.com/files/536982/original/file-20230712-17-4d2fj4.jpg?ixlib=rb-1.1.0&rect=0%2C454%2C4888%2C2462&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>British banks will soon be required to reimburse customers who fall victim to authorised push payment fraud – where a scammer convinces you to authorise a payment, generally by masquerading as a legitimate business or person.</p>
<p>The new rules from the UK’s <a href="https://www.psr.org.uk/">Payment Systems Regulator</a> are intended to incentivise all businesses involved in payments to take more action against scam activity, with reimbursement costs split 50:50 between the bank that sends and the bank that receives the payment.</p>
<p>There is a strong case that banks and other payment providers in Australia (and New Zealand) should be made to do the same. Scam-related losses are soaring, and banks are falling short of detecting, stopping and recovering losses.</p>
<p>In 2022 Australians <a href="https://www.accc.gov.au/system/files/Targeting%20scams%202022.pdf">lost at least $3.1 billion</a> to scams – an 80% increase on 2021. The Australian Competition and Consumer Commission says the actual losses were far higher, because about 30% of victims don’t report their loss to anyone.</p>
<p>While the biggest losses came from investment scams (totalling $1.5 billion), payment redirection scams – where a scammer impersonates a business or individual asking for payment – amounted to A$224 million. </p>
<p>Among the most vulnerable groups are older people (25% of losses were reported by those aged 65+), people with a disability (6% of reported losses), and people from culturally and linguistically diverse communities (almost 10% of reported losses).</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/australians-lost-more-than-3bn-to-scammers-in-2022-here-are-5-emerging-scams-to-look-out-for-204018">Australians lost more than $3bn to scammers in 2022. Here are 5 emerging scams to look out for</a>
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<h2>What are Australian banks doing?</h2>
<p>No regulations oblige Australian banks to reimburse scam victims, though some banks
have self-governed reimbursement policies. </p>
<p>While banks have dedicated fraud teams to prevent scams and support victims, the most recent review of the four major banks’ processes by the Australian Investments and Securities Commission, <a href="https://download.asic.gov.au/media/mbhoz0pc/rep761-published-20-april-2023.pdf">published in April</a>, says they detected and stopped just 13% of scam payments.</p>
<p>Reimbursement policies and practices varied from bank to bank but the overall rate was low – ranging from 2% to 5%.</p>
<p>The review described the banks’ approaches to liability, reimbursement and compensation as “inconsistent and generally very narrow”.</p>
<h2>Why the UK has made banks responsible</h2>
<p>The greater obligations being imposed on British banks follows attempts by the UK’s <a href="https://www.psr.org.uk/">Payment Systems Regulator</a> to improve consumer protections through a voluntary code of conduct. </p>
<p>Introduced in May 2019, this voluntary code was intended, under certain conditions, to ensure the reimbursement of victims of “authorised push payment” scams. These conditions included the customer taking reasonable care and notifying any scam incident to the bank.</p>
<p>It had modest success, with <a href="https://www.psr.org.uk/news-and-updates/latest-news/news/psr-sets-out-proposals-to-give-greater-protection-against-app-scams/">46% of reported scam losses</a> being reimbursed between 2020 and 2022.</p>
<p>But the Payment Systems Regulator wants 95%. So it has pressed for a mandatory reimbursement scheme. Under the new provisions money must be reimbursed within 48 hours of a fraud being reported. </p>
<p>The idea is to get banks to put more effort into detecting and preventing scams.</p>
<p>Overall, the UK has accepted the need for a more regimented regulatory approach over a market-based one.</p>
<h2>A more pragmatic approach needed</h2>
<p>While the Australian Investments and Securities Commission’s own reports have revealed the sorry state of scam prevention, management, and reimbursement practices at major banks, the regulatory body is still not walking in the footsteps of the UK. It is instead advising banks to improve their governance and scam management practices. </p>
<p>The Australian Banking Association, which represents the banking sector, has strongly argued against regulation supporting mandatory reimbursement. It has even suggested this <a href="https://www.smh.com.au/business/banking-and-finance/big-banks-fight-push-for-billions-of-dollars-in-scam-refunds-20220131-p59sp3.html">could increase scamming losses</a> because of the risk customers will take less care if they know any losses will be covered by their bank. It has called for greater personal responsibility in preventing scam losses. </p>
<p>But such an argument ignores the effects of the digitisation push by financial service providers, which has made scamming so much easier. Scammers are also becoming more sophisticated. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/scams-deepfake-porn-and-romance-bots-advanced-ai-is-exciting-but-incredibly-dangerous-in-criminals-hands-199004">Scams, deepfake porn and romance bots: advanced AI is exciting, but incredibly dangerous in criminals' hands</a>
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</p>
<hr>
<p>The statistics speak for themselves. Scamming losses are increasing. Recovery rates are meagre. A more pragmatic approach based on this reality and banks’ fiduciary responsibilities is needed.</p><img src="https://counter.theconversation.com/content/209585/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Muhammad Al Mamun does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The UK tried a voluntary code before making banks accountable for scam losses. Australia can learn from that lesson.Muhammad Al Mamun, Senior Lecturer in Finance, La Trobe UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2088882023-07-05T15:45:23Z2023-07-05T15:45:23ZWhy banks once flocked to Canary Wharf’s high-tech superstructures, but are now starting to return to the City<figure><img src="https://images.theconversation.com/files/535727/original/file-20230705-25-m26a2j.jpg?ixlib=rb-1.1.0&rect=29%2C5%2C3951%2C2757&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Canary Wharf, London.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/canary-wharf-business-banking-area-sunset-1498895684">IR Stone/Shutterstock</a></span></figcaption></figure><p>HSBC is moving its UK headquarters <a href="https://www.theguardian.com/business/2023/jun/26/hsbc-to-move-to-smaller-city-of-london-headquarters-due-to-hybrid-working">from Canary Wharf back into the City of London</a> as it adjusts to the impact of hybrid work on its office space needs. </p>
<p>This could signal the reverse of the 1990s trend of banks moving out of the City in search of buildings more suited to modern banking. The City’s “Square Mile” financial district is considered the historical centre of British banking. But space and planning restrictions on building expansions made a move to Canary Wharf very appealing as <a href="https://www.jstor.org/stable/23286646">banks navigated the new world of electronic trading</a>, starting in the 1980s.</p>
<p>HSBC’s predecessor, Midland Bank, opened grand offices at 27 Poultry, next to the Bank of England, in 1924. But after its takeover by HSBC in 1992, this office was vacated for more modern premises on Lower Thames Street. </p>
<p>A subsequent move by HSBC to Canary Wharf in 2002 came more than a decade after the first tenants moved to this new site – Morgan Stanley, Credit Suisse, First Boston and Citigroup. Barclays was the last major UK retail bank to leave the City’s Lombard Street for Canary Wharf in 2005. </p>
<p>HSBC is now heading back to the City 21 years later, possibly at the forefront of another wave of migration, as UK-based banks adjust to the world of hybrid working practices. If bank staff are working from home for two or three days in a week, space is less crucial. Indeed, <a href="https://uk.finance.yahoo.com/news/uk-office-occupancy-hits-highest-150826953.html">office vacancies in London are rising</a>, particularly in <a href="https://www.theguardian.com/business/2023/jul/05/it-has-lost-its-appeal-canary-wharf-faces-an-uncertain-future">Canary Wharf</a>. The City of London, although never down and out, appears to be in ascendance again. </p>
<p>Our <a href="https://www.cambridge.org/core/journals/enterprise-and-society/article/quiet-victory-national-provincial-gibson-hall-and-the-switch-from-comprehensive-redevelopment-to-urban-preservation-in-1960s-london/DA166BDF81D6AE1B2C5433543281DCE7">previous research</a> into the flight of banks to Canary Wharf showed it was driven by conservation movements that aimed to preserve the City’s historical buildings. In particular, National Provincial Bank (later NatWest) wanted to transform its headquarters in the 1960s from a prestigious Victorian building into a skyscraper fit for modern banking.</p>
<h2>Fighting to modernise</h2>
<p><a href="https://www.researchgate.net/figure/Exterior-view-of-Gibson-Hall-Illustrated-London-News-1866_fig4_337788669">Gibson Hall</a>, National Provincial Bank’s original home in the City of London, was built in 1865 and served as the bank’s headquarters for over a century. Victorian banks preferred large, grand, highly-decorated buildings in prime locations for their head offices. They wanted to project wealth, reliability, stability and success. In 1894, the German travel writer <a href="https://www.britannica.com/biography/Karl-Baedeker">Karl Baedeker</a>, wrote in his <a href="https://books.google.co.uk/books/about/London_und_Umgebungen.html?id=3itwcES-3UMC&redir_esc=y">guidebook to London</a> that Gibson Hall was a “beautiful, in Byzantine-Roman style, richly decorated hall with polished granite columns and polychromatic decoration”.</p>
<figure class="align-left ">
<img alt="An ornate stone building with arched door and window, topped by statues. Skyscrapers in the background." src="https://images.theconversation.com/files/535779/original/file-20230705-9468-m26a2j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/535779/original/file-20230705-9468-m26a2j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/535779/original/file-20230705-9468-m26a2j.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/535779/original/file-20230705-9468-m26a2j.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/535779/original/file-20230705-9468-m26a2j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/535779/original/file-20230705-9468-m26a2j.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/535779/original/file-20230705-9468-m26a2j.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Gibson Hall, Threadneedle Street, London.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/gibson-hall-sunset-1862-directors-national-169006781">Kiev.Victor/Shutterstock</a></span>
</figcaption>
</figure>
<p>However, by the 1960s, the Victorian style of Gibson Hall appeared old-fashioned, while the building itself had become ill-suited to modern banking methods. Telephones and computers required wiring and cables that the building had not been built to accommodate. Also, when Gibson Hall was first constructed, just 100 employees worked in the London office. By 1964, this figure had grown to 1,866, excluding non-clerical staff, according to information we found in the NatWest Group archives.</p>
<p>So, National Provincial’s leaders thought replacing Gibson Hall with a new skyscraper would better reflect the needs, size and status of a large and growing modern bank. It could also escape the constraints of an historic building that was no longer fit for purpose.</p>
<p>Unfortunately for National Provincial, <a href="https://eprints.bbk.ac.uk/id/eprint/18794/">a tide of preservation sentiment</a> was building throughout Britain by the 1960s. In 1964, when a public enquiry was held into the demolition of Gibson Hall, our archival research shows attitudes were firmly in favour of preservation of historic buildings.</p>
<p>The preservation movement was fuelled by the demolitions of several London landmarks in the early 1960s, including <a href="https://www.londonremembers.com/subjects/city-of-london-coal-exchange">the Coal Exchange</a> in Lower Thames Street and the “<a href="https://www.theguardian.com/artanddesign/2017/nov/07/euston-arch-rail-london-demolished-1961">Euston Arch</a>” entrance to Euston station, both Grade II listed. This <a href="https://books.google.co.uk/books/about/A_Broken_Wave.html?id=24uwAAAAIAAJ&redir_esc=y">provoked public outcry</a>. A preservation order placed on Gibson Hall in 1964 blocked National Provincial from demolishing its Victorian home to replace it with a modern tower block.</p>
<h2>Out with the old</h2>
<p>Many banks had offices and branches in Victorian or Edwardian buildings at this time. The preservation order placed on Gibson Hall gave a clear signal that such buildings should stand. By the 1980s there was still a powerful conservation lobby. </p>
<p>But City firms’ need to expand and update their office space took on a new urgency following financial deregulation, known as the “Big Bang”, in 1986. As well as replacing face-to-face share dealing with <a href="https://www.bbc.co.uk/news/business-37751599">electronic trading</a>, the reforms allowed more banks to start trading, not just advise investors.</p>
<p>In addition to computers, banks now wanted large floor spaces for their traders. They needed more equipment and connections for computers and air conditioning to stop the tech overheating. It was more cost-efficient to house this activity in an open-plan environment where cables could be run through the space more easily. Ventilation systems would also operate better in open areas versus small, individual offices.</p>
<p>The Canary Wharf development on London’s Isle of Dogs seemed to offer everything the banks needed at this time. It had been <a href="https://www.taylorfrancis.com/books/mono/10.4324/9780203036464/property-masters-scott">designated as an Enterprise Zone</a>, which removed virtually all planning constraints. This allowed for the construction of a new financial hub unencumbered by the delays inherent in planning enquiries.</p>
<figure class="align-center ">
<img alt="Skyscraper with HSBC sign and logo, amid other skyscrapers, blue sky." src="https://images.theconversation.com/files/535731/original/file-20230705-28-p5ks5m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/535731/original/file-20230705-28-p5ks5m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/535731/original/file-20230705-28-p5ks5m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/535731/original/file-20230705-28-p5ks5m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/535731/original/file-20230705-28-p5ks5m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/535731/original/file-20230705-28-p5ks5m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/535731/original/file-20230705-28-p5ks5m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">HSBC head office, Canary Wharf, London.</span>
<span class="attribution"><span class="source">Chrispictures/Shutterstock</span></span>
</figcaption>
</figure>
<p>Of course there were teething problems during the construction Canary Wharf – not least the impact of the 1989-92 property crash on <a href="https://realestate.wharton.upenn.edu/working-papers/the-crash-and-rebound-of-canary-wharf/">financing for the build</a>. But it eventually gave UK banks what they had wanted for so long: a free hand to build huge skyscrapers. These superstructures not only housed much-needed modern technology, they also served as a monument to their inhabitants’ economic power and prestige. </p>
<p>The movement of HSBC’s headquarters signals another potential shift for banks, but this time to smaller offices to accommodate changing working practices once again. While HSBC was not the first bank to move to Canary Wharf 30 years ago, other banks could follow its lead this time to head bank to the City as hybrid working affects these companies and their employees.</p><img src="https://counter.theconversation.com/content/208888/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>British banks moved to Canary Wharf in search of space and modern facilities but hybrid working needs could drive banks back to the City of London’s smaller spaces.Lucy Newton, Professor in Business History, Henley Business School, University of ReadingPeter Scott, Professor of International Business History, University of ReadingVictoria Barnes, Reader in Commercial Law, Brunel University LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2080452023-07-03T16:02:50Z2023-07-03T16:02:50ZHow the UK’s mortgage rescue deal could help or hurt you – in part depending on where you live<figure><img src="https://images.theconversation.com/files/535288/original/file-20230703-272664-aa70gw.jpg?ixlib=rb-1.1.0&rect=39%2C55%2C5268%2C3469&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Many mortgage borrowers are expecting their repayments to rise rapidly.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/tired-stressed-young-woman-entrepreneur-office-2234106907">KucherAV/Shutterstock</a></span></figcaption></figure><p>Millions of UK mortgage borrowers could experience <a href="https://www.telegraph.co.uk/personal-banking/mortgages/mortgage-rates-rise-after-inflation-shock-nationwide/">significant payment shocks</a> this year. This is happening due to a steep rise in the Bank of England’s base rate over the past year to the highest level since 2008. This rate feeds through to many of the mortgage deals taken out by homeowners around the UK. </p>
<p>To attempt to alleviate some of the pain for homeowners that will see large spikes in their payments this year and next, major UK lenders agreed <a href="https://www.reuters.com/business/finance/uks-hunt-agreed-measures-with-banks-ease-mortgage-payments-strain-2023-06-23/">to provide limited help</a> to those struggling with the mortgage repayments. </p>
<p><a href="https://www.gov.uk/government/news/chancellor-agrees-new-support-measures-for-mortgage-holders">Among other measures</a>, lenders that participate will agree to allow borrowers to switch to interest-only payment terms or to extend the duration of their mortgage. Borrowers will be able to return to their original deal within six months without any impact on their credit rating. Lenders have also been asked to sign up to a 12-month repossession break to provide a grace period to people at risk losing their homes due to arrears.</p>
<p>But while these measures will help some borrowers, they could cause unintended consequences and create further mortgage payment issues. First of all, the Bank of England’s base rate is already <a href="https://www.theguardian.com/business/2023/jun/22/markets-predict-uk-interest-rate-bank-of-england#:%7E:text=The%20financial%20markets%20are%20predicting,by%20half%20a%20percentage%20point.">expected to rise to 6%</a> by the end of 2023 and could go higher next year. </p>
<p>Interest-only borrowers’ repayments only include the interest charged on the loan and nothing towards the principal amount. So, after six months (and at the same level of income), they could face much higher payment shocks. If rates are still relatively high after 12 months, many households could still be at risk of losing their homes. </p>
<p>There is also the question of which lenders will participate in mortgage rescue plan – it is a voluntary scheme. According to the FCA, <a href="https://www.gov.uk/government/news/chancellor-agrees-new-support-measures-for-mortgage-holders">around 75% of lenders</a> will join. Those borrowers with nonparticipating lenders would not be able to use the grace period or other measures. </p>
<h2>How mortgages differ by region</h2>
<p>Another overlooked issue in the rescue plan is that, <a href="https://www.tandfonline.com/doi/full/10.1080/00343404.2012.750426?casa_token=QTqWW5oKqEQAAAAA%3Al3ct0-6LoeiDXEXei78C1AdARczKDEa1AOKil7xYvsrQoHXPdsSPxuBqV20Zs_9Jenk2lwOPqYIYsw">according to my research</a>, households across the various regions of the UK will be affected differently by the mortgage crisis. Payment shocks will be amplified for those in the areas with higher house prices and higher average loan amounts. </p>
<p>The table below shows the difference in the increase in repayments for an average loan amount across the UK, based on different types of mortgage product. These figures show what repayments would have been in June 2022 versus June 2023, when the Bank of England had increased rates from 1.25% (for June 2022) to 5.00% (for June 2023) – repayments will be even higher if it goes to 6%, as expected by financial markets.</p>
<p><strong>Repayment increases by region, June 2022 vs. June 2023:</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/535330/original/file-20230703-269585-sackvp.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/535330/original/file-20230703-269585-sackvp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/535330/original/file-20230703-269585-sackvp.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=261&fit=crop&dpr=1 600w, https://images.theconversation.com/files/535330/original/file-20230703-269585-sackvp.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=261&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/535330/original/file-20230703-269585-sackvp.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=261&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/535330/original/file-20230703-269585-sackvp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=328&fit=crop&dpr=1 754w, https://images.theconversation.com/files/535330/original/file-20230703-269585-sackvp.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=328&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/535330/original/file-20230703-269585-sackvp.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=328&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Borrowers’ exposure to an increase in average monthly mortgage payments for an average loan amount, by region and mortgage type (SVR, 3-year fixed rate).</span>
<span class="attribution"><a class="source" href="https://www.gov.uk/government/statistics/quality-assurance-of-administrative-data-in-the-uk-house-price-index/regulated-mortgage-survey-data-provided-by-the-council-of-mortgage-lenders">ONS Regulated Mortgage Survey, BSA Statistics (2023)</a>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>The monthly mortgage repayments of households in London on <a href="https://www.nerdwallet.com/uk/mortgages/what-is-standard-variable-rate/">standard variable rates</a> (SVRs – the rate borrowers tend to automatically switch to after a fixed or tracker deal period ends) increased by £1,398 and by £1,142 for those on three-year fixed rate mortgages, for example. In the East Midlands, in comparison, average SVR repayments have increased by £587 and by £429 for three-year fixed rates since last year.</p>
<p>Taking current base rate changes into account, borrowers making interest-only mortgage payments will be even more exposed to future payment shocks when only repaying the interest on their principal loan amount. These borrowers will not have been chipping away at the equity part of their loans, like those on repayment mortgages, keeping their loan larger than it would have been if they hadn’t taken advantage of the rescue measure.</p>
<p>For the average principal loan amount of £250,000, for example, monthly interest-only repayments on the average UK SVR would be £587, compared to a total interest payment of £323 for a repayment mortgage (plus an additional amount towards paying off the borrowed amount, called the equity). </p>
<p>This is because when repayment borrowers pay interest plus equity, the total interest charged on a mortgage falls as the remaining debt decreases. So while repayment borrowers pay less interest as their equity builds and the principal debt falls, they still have to make higher payments overall.</p>
<p>So, for a three-year fixed rate deal, average total interest payments would be £497 per month for the six months for interest-only borrowers, compared to a similar repayment deal for which total interest payments would be £226. This means the exposure to overpayment when choosing to pay interest-only for the six-month rescue period would be:</p>
<ul>
<li><p>Three-year fixed rate 6x(£587-£323) = £1,584</p></li>
<li><p>SVR: 6x(£497-£226) = £1,626</p></li>
</ul>
<p>That is, choosing to pay interest only for six months could add at least £1,500 to a borrower’s bill over the life of the average home loan versus what they would pay if they remained on a repayment mortgage.</p>
<p>Regional differences will also come into play here when considering exposure to payment shocks and excessive mortgage payments. This is because households in regions with higher house prices borrow larger loans and so repay more over the life of the loan. </p>
<p>So, both base rate changes, but also the negative impacts of the mortgage rescue initiative will disproportionally affect households in areas with higher houses prices, such as London or East Anglia.</p>
<figure class="align-center ">
<img alt="Hand slotting piece with text mortgage into wooden model of a house." src="https://images.theconversation.com/files/535291/original/file-20230703-215550-wvds62.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/535291/original/file-20230703-215550-wvds62.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=234&fit=crop&dpr=1 600w, https://images.theconversation.com/files/535291/original/file-20230703-215550-wvds62.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=234&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/535291/original/file-20230703-215550-wvds62.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=234&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/535291/original/file-20230703-215550-wvds62.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=294&fit=crop&dpr=1 754w, https://images.theconversation.com/files/535291/original/file-20230703-215550-wvds62.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=294&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/535291/original/file-20230703-215550-wvds62.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=294&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Solving the mortgage repayment shock problem will not be this easy.</span>
<span class="attribution"><span class="source">Jirsak/Shutterstock</span></span>
</figcaption>
</figure>
<h2>Searching for a solution</h2>
<p>There is no straightforward solution to this situation, particularly since mortgage rates operate at the national level. A light-touch intervention, such as temporary caps on lenders’ profit margins could help. For example, if lenders were not allowed to make more than 2 percentage points above the bank base rate for certain mortgage products. </p>
<p>But the government also needs to consider the significant differences in payment shock levels across the country, particularly as it is likely to face a general election by January 2025, <a href="https://uk.news.yahoo.com/next-uk-general-election-why-172826087.html">if not before</a>. This is important when evaluating the robustness of the economy to recession, which already has <a href="https://theconversation.com/three-charts-that-explain-why-falling-living-standards-could-deepen-the-uks-north-south-divide-196088">an uneven effect</a> on different locations and households.</p><img src="https://counter.theconversation.com/content/208045/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alla Koblyakova works as the Property Investment and Finance Course Leader at the Nottingham Trent University</span></em></p>Recent measures introduced to help struggling UK homeowners aren’t as helpful as they seem at first.Alla Koblyakova, Senior Lecturer in Property Finance, Nottingham Trent UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2077772023-06-27T14:47:16Z2023-06-27T14:47:16ZNigeria’s mobile money system has a dark side even though it’s convenient - new study explores the risks<figure><img src="https://images.theconversation.com/files/533690/original/file-20230623-6861-orzj24.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Mobile money operators using point of sale machines are increasingly popular in Nigeria.</span> <span class="attribution"><span class="source">Getty Images </span></span></figcaption></figure><p>Financial services play <a href="https://www.emerald.com/insight/content/doi/10.1108/IJBM-07-2020-0379/full/html">vital roles</a> in supporting economic activities. In Nigeria, though, a significant number of people <a href="https://www.emerald.com/insight/content/doi/10.1108/JSM-07-2020-0280/full/html">don’t have access</a> to essential banking services.</p>
<p>A 2021 World Bank report shows that only <a href="https://www.worldbank.org/en/publication/globalfindex/interactive-executive-summary-visualization">45% of Nigerian adults</a> have bank accounts. Another <a href="https://efina.org.ng/wp-content/uploads/2021/10/A2F-2020-Final-Report.pdf#page=43">2021 study</a> shows that nearly one in two adults don’t use any formal financial services. And more than one in three Nigerian adults are completely financially excluded. To be financially excluded means that such adults do not have or use any financial products or services – whether formal or
informal.</p>
<p>They can’t enjoy all the advantages that come with being part of the formal financial system – like keeping their money safe and using credit. </p>
<p>Some turn to alternative systems such as mobile money to meet their financial needs.</p>
<p>Mobile money can simply be described as a mobile human ATM. This is where an individual operates a point of sales machine on a street or in a shop and people go to them to deposit money or withdraw money. The operators charge customers for this informal banking service. This service will often appeal to those without access to internet banking, those who do not have ATM or bank branches around them. It is not just about having bank accounts, but about accessing the money in the account. While withdrawing from an ATM may be free, mobile money operators may charge N100 (14 US cents) for withdrawing N5000 (US$6.79).</p>
<p>By November 2022, <a href="https://nairametrics.com/2022/12/28/deployed-pos-terminals-across-nigeria-hit-1-6-million-in-november-2022/">1.6 million point of sales machines</a> were in use across Nigeria. There were <a href="https://www.statista.com/statistics/1178109/number-of-pos-terminals-in-nigeria/#:%7E:text=Between%202017%20and%202022%2C%20the,Nigeria%20experienced%20a%20great%20increase.">155,000 in 2017</a>. Mobile money operators also have an <a href="https://ammban.org/">association</a>, the Association of Mobile Money and Bank Agents in Nigeria. <a href="https://nibss-plc.com.ng/mobile-money-transactions-volume-rose-by-70-in-feb/">At the end of February 2023</a>, a total of 113.53 million transactions valued at N883.45 billion (US$1.076 billion) was done via point of sale machines, as against the 96.35 million transactions valued at N807.16 billion (US$984 million) recorded in January this year.</p>
<p>Mobile money has its benefits, but it’s also important to be aware of the potential risks. The point is to make sure that financial transactions are safe and consumers are protected from fraud. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/nigeria-and-digital-banking-a-revolution-still-waiting-to-happen-203435">Nigeria and digital banking: a revolution still waiting to happen</a>
</strong>
</em>
</p>
<hr>
<p>In <a href="https://www.sciencedirect.com/science/article/pii/S0040162522005662">our research</a>, we examined the “dark side” of mobile money in Nigeria. We got valuable insights from customers, agents and financial technology (fintech) developers. We found that the mobile money system presents challenges of fraud, insecurity, high costs and poor infrastructure. </p>
<h2>Mobile money risks and challenges</h2>
<p>Our objective was to uncover any risks and challenges associated with these business operations, as well as the implications for stakeholders. We interviewed 41 financially vulnerable consumers ranging from 20 to 70 years old, 19 point of sale operators aged 20 to 49, and 11 fintech developers. </p>
<p>The study revealed several key issues associated with mobile money operations.</p>
<p><strong>Fraudulent activities</strong></p>
<p>Consumers who use point of sales machines acknowledge they are vulnerable when interacting with operators. They know that their card details may be compromised since they are not engaging with traditional banks. But they weigh this against the benefits and convenience, and they exercise caution.</p>
<p>Developers also acknowledge that individuals might fraudulently try to register as operators. They would submit fake documents, thinking the developers would not do a thorough check. This highlights the need for robust security measures. </p>
<p><strong>Lack of security</strong></p>
<p>Operators are aware of the risks they face because they have less robust security measures than traditional banks. They try to avoid the risks by, for example, operating during daylight hours, working in shops with burglar proofing and installing CCTV systems. </p>
<p><strong>High transaction costs</strong></p>
<p>Developers deduct a fee from each transaction, and operators charge consumers for using their services. Though the Central Bank of Nigeria has <a href="https://www.cbn.gov.ng/cashless/POS_GUIDELINES_August2011_FINAL_FINAL%20(2).pdf#page=11">said</a> that the maximum total fee should be 1.25% of the transaction value, subject to a maximum of N2,000.00 (US$2.44), consumers have reported instances where agents charge more. </p>
<p>For example, during the recent <a href="https://punchng.com/traders-in-agony-as-naira-scarcity-grounds-businesses/">naira scarcity</a>, some operators <a href="https://businessday.ng/business-economy/article/pos-operators-reduce-charges-as-naira-scarcity-eases/">charged 30% fees</a> for transactions. </p>
<p>There is little or no monitoring of the operators, especially in areas where there is little or no competition. </p>
<p><strong>Poor infrastructure</strong></p>
<p>Poor infrastructure remains a major challenge for the financial services system in Nigeria. Internet connections and servers are often inadequate, which can impede the smooth operation of mobile money transactions. It can be difficult to process transactions. In some cases, agents have switched developers due to the lack of a reliable support system, which had a negative impact on their sales and resulted in customer losses.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/nigeria-is-making-progress-with-financial-inclusion-heres-how-160947">Nigeria is making progress with financial inclusion: here's how</a>
</strong>
</em>
</p>
<hr>
<h2>Solutions</h2>
<p>Mobile money has had a positive impact in Nigeria, particularly for individuals and businesses in areas with limited access to traditional banking services. Mobile money systems have effectively replaced cash and traditional bank accounts, enabling financial inclusion and improving the financial well-being of customers. The financial inclusion rate <a href="https://theconversation.com/nigeria-is-making-progress-with-financial-inclusion-heres-how-160947">increased from 56.8% in 2016 to 63.2% in 2018</a>. </p>
<p>But it is important to recognise that these systems are not without challenges.</p>
<p>One aspect that needs attention is security. Customers, especially those who are sceptical about the technology and the agents, prioritise the security of their financial activities. Robust security measures, such as secure encryption, authentication mechanisms and fraud detection systems, are essential to build trust and alleviate concerns. Developers are actively working to implement measures that can detect and prevent fraudulent activities, ensuring a more secure environment for mobile money transactions. </p>
<p>Other steps include increasing transparency, and providing education and awareness programmes to ensure safe and responsible use of mobile money services. </p>
<p>Compliance with regulatory requirements is crucial for maintaining the legality and trustworthiness of these services. Developers must also navigate complex regulatory frameworks to align their operations with <a href="https://www.cbn.gov.ng/cashless/POS_GUIDELINES_August2011_FINAL_FINAL%20(2).pdf">government guidelines and policies</a>. The fintech industry in Nigeria and the increasing point of sale agents, pose challenges in monitoring compliance. Regulators need to catch up with growing trends and provide policies that support and drive financial inclusion. They must also do spotchecks to identify those not complying with the regulations.</p><img src="https://counter.theconversation.com/content/207777/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Emmanuel Mogaji does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>More Nigerians are using mobile money but it is fraught with inherent dangers that must be tackled.Emmanuel Mogaji, Associate Professor in Marketing, Keele UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2080922023-06-22T22:26:56Z2023-06-22T22:26:56ZAs the Bank of Canada prepares for a digital Canadian dollar, democratic concerns loom large<figure><img src="https://images.theconversation.com/files/533037/original/file-20230620-23-x5ntzt.jpg?ixlib=rb-1.1.0&rect=43%2C7%2C4819%2C3361&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Bank of Canada recently concluded public consultations where it sought input from Canadians about the possibility of a national digital currency.</span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><p>The Bank of Canada is preparing for the possibility of the Canadian government requiring it to issue a digital version of the Canadian dollar. Although the central bank is leading the project for the new currency, any future decision to issue it <a href="https://www.cbc.ca/news/business/digital-dollar-central-bank-digital-currency-1.6841693">rests with the Canadian Parliament and government</a>.</p>
<p>As a part of this process, the central bank <a href="https://www.bankofcanada.ca/2023/05/bank-canada-launches-public-consultations-digital-dollar">recently concluded a public consultation on June 19</a> where it sought input from Canadians about the possibility of a national digital currency.</p>
<p>If the Bank of Canada were to issue the digital dollar, it could have significant implications for how Canada tackles future financial challenges.</p>
<p>However, we must not overlook the important democratic concerns associated with this currency. For the sake of our democracy, and to maintain trust in the Bank of Canada and this new digital dollar, these concerns must be addressed before a decision to issue this money is made.</p>
<h2>Mitigating financial risks</h2>
<p>The digital Canadian dollar is important for mitigating two potential future threats: the mass adoption of external currencies and the next financial crisis. </p>
<p>Most of the digital money in our economy is <a href="https://lop.parl.ca/sites/PublicWebsite/default/en_CA/ResearchPublications/201551E">commercial bank money</a> that’s created mainly through loans. This money can be risky during bank runs, which occur when everyone tries to withdraw money at the same time, rendering commercial banks vulnerable to insolvency. </p>
<p>A currency backed by the central bank could provide <a href="https://www.thestar.com/business/opinion/2023/04/29/why-a-bank-of-canada-digital-dollar-would-put-an-end-to-bank-run-crises.html">a more reliable alternative</a> to this commercial bank money. </p>
<p>Introducing the digital Canadian dollar could also <a href="https://www.bankofcanada.ca/2020/02/contingency-planning-central-bank-digital-currency/">lower the likelihood of mass adoption of alternative digital currencies</a>, like cryptocurrencies and privately issued currencies. Such a scenario would undermine the Bank of Canada’s ability to control the country’s monetary policy. Prevention is better than a cure.</p>
<p>In the face of these two scenarios, a digital Canadian dollar would ensure stability and monetary sovereignty.</p>
<h2>A promise for a better future</h2>
<p>The digital Canadian dollar has the potential to pave the way for a more promising future by bridging the present with the infinite digital possibilities of tomorrow.</p>
<p>It would serve as an alternative to existing commercial payment methods while seamlessly integrating with electronic payments and other innovative aspects of the digital economy.</p>
<p>Additionally, the ability to <a href="https://doi.org/10.38105/spr.j0hildxtyi">digitally trace transactions promotes a safer society</a> by assisting in the fight against money laundering, crime and terrorism. </p>
<p>In some visions of central bank digital currencies, it is possible <a href="https://www.bis.org/publ/arpdf/ar2023e3.pdf">to program the money</a> and <a href="https://edps.europa.eu/data-protection/our-work/publications/techdispatch/2023-03-29-techdispatch-12023-central-bank-digital-currency_en#_ftnref8">incorporate social policies</a> directly into it. </p>
<p>This could mean, for example, that specific populations or regions could receive better interest rates to promote economic equity, or automatically subsidize essential goods and services to low-income households or senior citizens. </p>
<figure class="align-center ">
<img alt="A Canadian flag hangs from the front of a glass-fronted office building." src="https://images.theconversation.com/files/533010/original/file-20230620-25-3f3spb.JPG?ixlib=rb-1.1.0&rect=12%2C12%2C8614%2C5729&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/533010/original/file-20230620-25-3f3spb.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/533010/original/file-20230620-25-3f3spb.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/533010/original/file-20230620-25-3f3spb.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/533010/original/file-20230620-25-3f3spb.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/533010/original/file-20230620-25-3f3spb.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/533010/original/file-20230620-25-3f3spb.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">The Bank of Canada building is pictured in Ottawa in December 2022.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Sean Kilpatrick</span></span>
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<p>Since transactions are digital, it is possible to envision a future in which the Canada Revenue Agency could also use the digital currency <a href="https://www.bankofcanada.ca/wp-content/uploads/2019/08/sdp2019-7.pdf">to combat the underground economy</a> and automate tax collecting.</p>
<p>Together with another digital revolution — that of AI — it is easy to imagine insights gained from the enormous amounts of data.</p>
<h2>The dark side of the digital dollar</h2>
<p>Implementing this new digital currency, despite its potential benefits, <a href="https://theconversation.com/central-bank-digital-currencies-could-mean-the-end-of-democracy-187505">could introduce several risks to our democracy</a>. We risk paving the way for a future government taking control of our financial data. </p>
<p>Digital currencies can be programmable by being assigned functions to operate only under certain conditions. This could eventually lead to an economy controlled by the government at an individual level. The government would be able to <a href="https://www.wired.com/story/chinas-digital-yuan-ecny-works-just-like-cash-surveillance/">monitor its citizens</a>, <a href="https://edps.europa.eu/data-protection/our-work/publications/techdispatch/2023-03-29-techdispatch-12023-central-bank-digital-currency_en#_ftnref8">determine how money can be limited and used</a>, identify <a href="https://www.cato.org/cato-journal/spring/summer-2021/financial-freedom-privacy-post-cash-world#">political dissidents</a> and <a href="https://www.cato.org/study/risks-of-cbdcs">take action against them</a>. </p>
<p>The Canadian government has already proved it is willing to use <a href="https://www.cnn.com/2022/02/20/americas/canada-trucker-protest-covid-sunday/index.html">financial tools against protestors</a>. Moreover, centralized digital infrastructures are inherently vulnerable to software updates that could override initial safeguards. Issuing a central bank digital currency may be a point of no return.</p>
<p>While the Bank of Canada’s consultation is <a href="https://www.ctvnews.ca/business/what-a-canadian-digital-currency-could-look-like-expert-on-arguments-for-and-against-it-1.6414630">a step in the right direction</a>, the current information about the digital Canadian dollar fails to address the risk of a future government exercising greater authority in this digital domain.</p>
<h2>Mitigating concerns and building trust</h2>
<p>Democratic concerns <a href="https://www.thestar.com/business/opinion/2023/05/16/the-bank-of-canada-is-exploring-a-digital-currency-heres-why-that-is-terrifying.html">must be a part of the discussion</a> about a national digital currency. Similar worries about privacy, surveillance and national digital currency were also raised in the <a href="https://www.cnil.fr/en/digital-euro-what-stake-privacy-and-personal-data-protection">European Union</a>, the <a href="https://thehill.com/opinion/finance/3897860-fight-chinas-surveillance-coin-with-a-us-freedom-coin/">United States</a> and <a href="https://www.ft.com/content/92fb7d93-8705-44a0-850b-65f2ddef1018">elsewhere</a>.</p>
<p>Launching the digital Canadian dollar is a political decision, not a technological one. Ensuring freedom is the same. For the digital Canadian dollar and the Bank of Canada to be trusted, these worries must be addressed and mitigated. If the decision to issue this digital money is made, it needs to be done in a responsible manner.</p>
<p>It is essential to raise awareness about the potential misuse of the digital Canadian dollar and carefully assess its impact on Canadian democracy and civil liberties. Unlike the current suggested version, safeguards must be part of the digital Canadian dollar package. What these safeguards are is a discussion we should urgently have.</p><img src="https://counter.theconversation.com/content/208092/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ori Freiman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>While a digital national currency does have the potential to mitigate key financial issues, we cannot ignore the democratic risks such a currency could introduce without safeguards.Ori Freiman, Postdoctoral Fellow, Digital Society Lab, McMaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2082152023-06-22T16:04:33Z2023-06-22T16:04:33ZWhy the Bank of England’s interest rate hikes aren’t slowing inflation enough and what that means for mortgages<p>Consumer price inflation <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7g7/mm23">stuck at 8.7%</a> in May, defying expectations of a slowdown and making a further rise in UK interest rates inevitable. </p>
<p>The May figures came out the day before the Bank of England’s Monetary Policy Committee (MPC) was due to meet to discuss changing the UK base rate. This sets the interest rates for borrowing by the government, businesses and banks – who then feed any increases through to borrowers such as people with mortgages.</p>
<p>A 13th consecutive rise in June had been expected for some time, because <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/may2023">the headline rate of inflation</a> has been well above its medium-term 2% target since mid-2021. At the risk of being accused of derailing the UK’s post-COVID economic recovery, MPC members’ main decision at the most recent meeting was not whether or not to hike rates, but by how much. </p>
<p>The latest <a href="https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2023/june-2023">0.5% increase (to 5%)</a> represents a jump from previous 0.25% increments, showing their concern that inflation is becoming embedded in the economy.</p>
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Read more:
<a href="https://theconversation.com/inflation-why-prices-look-likely-to-stay-high-in-the-uk-and-ireland-and-what-that-means-for-mortgages-207625">Inflation: why prices look likely to stay high in the UK and Ireland, and what that means for mortgages</a>
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<p>By increasing rates, the central bank is engaging in “monetary tightening”, which is designed to reduce the level of demand for goods and services in the economy. Households are encouraged to pay down debts and channel more of their incomes into saving. Those who cannot reduce their borrowing must pay more for it, leaving less to spend on other things. </p>
<p>The knock-on effect of rate hikes on people’s mortgage costs could result in a <a href="https://www.theguardian.com/money/2023/jun/21/1-point-4m-uk-households-huge-hit-to-finances-mortgage-timebomb-payments-fifth-disposale-income">20% hit to the disposable incomes</a> of 1.4 million mortgage holders before the next election, according to the Institute of Fiscal Studies. The government also finds its own <a href="https://tradingeconomics.com/united-kingdom/government-bond-yield">debt costs going up</a>, curbing ministerial inclinations to spend more money. </p>
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Read more:
<a href="https://theconversation.com/uk-bonds-are-in-meltdown-again-what-does-that-mean-for-pensions-expert-qanda-206533">UK bonds are in meltdown again – what does that mean for pensions? Expert Q&A</a>
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<p>And so, this policy has obvious social costs. As well as ruling out any government help with this latest cost of living shock, it punishes those who have been <a href="https://www.jrf.org.uk/report/dragged-down-debt-millions-low-income-households-pulled-under-arrears-while-living-costs-rise">forced to borrow due to poverty</a>, as well as the better-off who chose to borrow to accumulate more assets. It also has longer-term economic costs, <a href="https://www.bankofengland.co.uk/quarterly-bulletin/2021/2021-q2/influences-on-investment-by-uk-businesses-evidence-from-the-decision-maker-panel">deterring firms from borrowing for investment</a>. </p>
<p>But the MPC believes it has no alternative. Although volatile items, especially food, can be blamed for some of the current overshoot, core inflation (which removes these fluctuating items) has risen to a <a href="https://tradingeconomics.com/united-kingdom/core-inflation-rate">31-year high of 7.1%</a>. </p>
<p>For monetary policymakers, the fear is that, if they don’t act decisively now, inflation will become built into firms’ expectations when setting prices, as well as those of employees bargaining over wages. Such self-fulfilling expectations are blamed by many for a “<a href="https://ukandeu.ac.uk/stagflation-the-return-of-an-unwelcome-monster/">wage-price spiral</a>” that created a decade-long period of inflation and stagnation in the UK following the <a href="https://obr.uk/box/the-changing-impact-of-fossil-fuel-shocks-on-the-uk-economy/">oil price shocks of 1973</a>. </p>
<p>The number of rate increases since 2021 reflects an unexpected slowness for these hikes to take effect on inflation. Although a painfully blunt instrument in this respect, interest rates are the only one the MPC has. </p>
<h2>A convenient scapegoat</h2>
<p>The government has <a href="https://news.sky.com/story/cost-of-living-on-me-personally-if-inflation-isnt-halved-says-rishi-sunak-12898285">pledged to halve inflation</a> by year-end and is now in danger of breaking this promise. It’s convenient, then, to allow the <a href="https://www.telegraph.co.uk/business/2023/06/21/recession-inevitable-bank-of-england-lost-control-inflation/">blame for overshooting inflation</a> to be placed on the independent central bank. </p>
<p>With hindsight, the Bank of England’s <a href="https://www.bankofengland.co.uk/explainers/what-are-interest-rates#:%7E:text=That%20includes%20the%20lending%20and,Bank%20Rate%20is%20currently%204.5%25.">policy since the 2008 global financial crisis</a> is easy to criticise. It kept interest rates close to zero from February 2009 to March 2020, reducing them further during the COVID pandemic, then lifting them rapidly since December 2021. </p>
<p><strong>Base rate changes: 2006-2023</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/533230/original/file-20230621-27-naqm9v.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Line chart showing the base rate at nearly 6% in 2008 before dropping below 1% until 2021 when it started rising again to reach 4.5% in May 2023." src="https://images.theconversation.com/files/533230/original/file-20230621-27-naqm9v.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/533230/original/file-20230621-27-naqm9v.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=345&fit=crop&dpr=1 600w, https://images.theconversation.com/files/533230/original/file-20230621-27-naqm9v.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=345&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/533230/original/file-20230621-27-naqm9v.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=345&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/533230/original/file-20230621-27-naqm9v.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=433&fit=crop&dpr=1 754w, https://images.theconversation.com/files/533230/original/file-20230621-27-naqm9v.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=433&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/533230/original/file-20230621-27-naqm9v.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=433&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">The Bank of England base rate, 2006-2023.</span>
<span class="attribution"><a class="source" href="https://www.bankofengland.co.uk/explainers/what-are-interest-rates#:~:text=That%20includes%20the%20lending%20and,Bank%20Rate%20is%20currently%204.5%25.">Bank of England</a></span>
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</figure>
<p>The long phase of ultra-low interest rates deterred households and firms from paying down the debts that underlay the 2008 crisis. So the unprecedented jump in interest rates since 2021 has caused a sudden shock to corporate and household cashflows. Even now, many mortgage borrowers are <a href="https://www.mirror.co.uk/money/martin-lewis-says-mortgage-timebomb-30282073">still waiting to feel the full force</a>. </p>
<p>When this does happen, the rise in borrowing costs – on top of the surge in other living costs – could tip an already slow-growing economy back into full-blown recession. That would be compounded if, as in the <a href="https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/1995/the-housing-market-and-the-economy.pdf">early 1990s</a>, falling house prices knock a further hole in the finances of UK homeowners. </p>
<p>But it could also be argued that the post-2008 decade of low interest rates was unavoidable. Governments and business needed to borrow at low cost to haul the economy out of the deep 2009-2010 recession. During this time, inflation was close to zero and any lasting fall in consumer prices could have created a further slump. </p>
<p>The sharp interest-rate rise since 2021 has been equally unavoidable. As well as restraining inflation, it is needed to attract foreign investment to finance the UK’s <a href="https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/bulletins/balanceofpayments/octobertodecember2022">persistent current-account deficits</a>. </p>
<p>These used to be comfortably financed by foreign direct investment (FDI), which offset the UK’s excess of imports over exports. But FDI has <a href="https://commonslibrary.parliament.uk/research-briefings/cbp-8534/">tailed downwards</a> since the 2016 Brexit vote. </p>
<p>So external financing now relies more heavily on foreign financial investors, who are looking for a higher return – as is evident from the rising yield the government must pay on its <a href="https://www.ft.com/content/04b15997-c4a3-4ad1-9244-db0fbb68b537">own borrowing</a>. </p>
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<img alt="A long exposure capturing the traffic trails at a busy junction at night." src="https://images.theconversation.com/files/533245/original/file-20230621-3894-nhy5sj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/533245/original/file-20230621-3894-nhy5sj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/533245/original/file-20230621-3894-nhy5sj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/533245/original/file-20230621-3894-nhy5sj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/533245/original/file-20230621-3894-nhy5sj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/533245/original/file-20230621-3894-nhy5sj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/533245/original/file-20230621-3894-nhy5sj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">The Bank of England building (left) in the City of London.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/long-exposure-capturing-traffic-trails-busy-2186057577">Jason Wells/Shutterstock</a></span>
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<h2>Treatment-resistant inflation</h2>
<p>Although inevitable, the recent succession of interest rate rises has done little to tame the inflation we’re all experiencing at the moment. </p>
<p>Since early 2022, most prices have been pushed up by rising costs, which is known as <a href="https://www.investopedia.com/terms/c/costpushinflation.asp">cost-push inflation</a>. Raw material costs have been fuelled by the global rise in food and energy prices, and last autumn’s steep <a href="https://www.goldmansachs.com/intelligence/pages/why-the-british-pound-fell-to-a-record-low-against-the-us-dollar.html">depreciation of the pound against the US dollar</a>. Rising wage costs are an inevitable result of widespread labour shortages, exacerbated in the UK by a <a href="https://obr.uk/box/the-impact-of-the-pandemic-on-labour-market-participation/">post-COVID fall in workforce numbers</a> and the <a href="https://www.ecb.europa.eu/pub/economic-bulletin/articles/2023/html/ecb.ebart202303_01%7E3af23c5f5a.en.html">loss of EU workers</a> since Brexit.</p>
<p>With the government’s own borrowing costs climbing back towards the level that triggered fiscal meltdown after <a href="https://www.niesr.ac.uk/wp-content/uploads/2022/12/NIESR-Term-Premia-Tracker-Dec-2022.pdf">last September’s Truss budget</a>, it now risks a further <a href="https://www.santander.com/en/stories/what-is-stagflation#:%7E:text=%E2%80%9CStagflation%E2%80%9D%20is%20a%20combination%20of,less%20bang%20for%20your%20buck.">stagflationary spiral</a> – a combination of high inflation and an economy in recession. Rising interest rates are likely to divert more budget spending from growth-promoting projects into servicing public debt.</p>
<p>But if mortgage borrowers get any short-term relief from rising rates, it will only be in the <a href="https://www.reuters.com/world/uk/uks-hunt-says-mortgage-holders-should-not-expect-financial-help-2023-06-20/">unlikely event</a> that the shock from the <a href="https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2023/june-2023">latest rate rise</a> to 5% prompts emergency action to avert a pre-election recession.</p><img src="https://counter.theconversation.com/content/208215/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alan Shipman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Interest rate hikes are the Bank of England’s main monetary policy weapon against inflation, but they aren’t working.Alan Shipman, Senior Lecturer in Economics, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2071582023-06-21T11:58:58Z2023-06-21T11:58:58ZBehind the scenes of the investigation: Heists Worth Billions<figure><img src="https://images.theconversation.com/files/532336/original/file-20230616-17-43c17e.png?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">David Maimon's cybersecurity research group noticed a flood of checks in underground markets, which opened a window into much broader criminal activity.</span> <span class="attribution"><span class="source">Collage by Kimberly Patch</span></span></figcaption></figure><p><em>Professor David Maimon is director of the Evidence-Based Cybersecurity Research Group at Georgia State University.</em></p>
<p><em>He and his group are well familiar with what happens on the dark web, which consists of websites that look like ordinary websites but can be reached only using special browsers or authorization codes and are often used to sell illegal commodities.</em></p>
<p><em>In this behind-the-story video, Maimon shows some of the hundreds of thousands of bank-related images that he and his team have collected from the dark web and text message applications, and the research these discoveries spurred them to do. That research sparked the investigative story <a href="https://theconversation.com/us/investigations/mailbox-robberies-drop-accounts-checkwashing-fraud-gangs-of-fullz">Heists Worth Billions</a>, which Maimon teamed up to write with The Conversation’s senior investigative editor Kurt Eichenwald. Here’s how Maimon and colleagues uncovered the crimes, and his remarks from a follow-up interview.</em></p>
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<p><strong>Maimon’s group was monitoring images posted on the dark web when it found the initial clues that something big was afoot.</strong></p>
<p>My group and I spend a lot of time on underground markets in which criminals sell all kinds of illicit commodities. We see a lot of counterfeit products. We see a lot of identities. And in mid-2021 we started to see a lot of checks flooding the markets. </p>
<p>Those checks led us down a path where we realized that thousands of sham bank accounts were being created to steal and launder money.</p>
<p><strong>The group’s first realization was about the volume of deposits.</strong></p>
<p>Folks were using multiple accounts simultaneously to deposit the high volume of checks. They were simply purchasing from the markets and depositing on different accounts.</p>
<p>For example, three checks would be deposited into three different bank accounts by a single criminal.</p>
<p><strong>Group members connected another clue that showed them how the criminals were getting access to multiple accounts.</strong></p>
<p>We saw numerous debit cards and realized that the criminals were using those debit cards to deposit all the checks they stole or purchased.</p>
<p><strong>Then, in June 2022, the group made a key observation.</strong></p>
<p>Criminals were posting screenshots from bank accounts with balances showing zero. </p>
<p>We realized that these screenshots of zero-balance bank accounts were advertisements – they were selling bank accounts that had zero balances.</p>
<p><strong>This led the group to an investigation.</strong></p>
<p>Over six months we tracked a single criminal, counting the number of images of credit cards and the number of screenshots of bank accounts showing zero balances that he posted. </p>
<p>We’re seeing this increasing trend from one single actor and, of course, being out there in the ecosystem, we are able to see more and more copycats: more and more folks like the individual we’re monitoring, offering their services. </p>
<p><strong>And a conclusion about what allowed this to happen.</strong></p>
<p>If a criminal opens a credit card under someone else’s name, when the person realizes something is wrong and freezes the credit card, the criminal can’t use that identity anymore.</p>
<p>But with bank accounts, it’s a different story, because the credit freeze does not affect your ability to establish a new bank account under someone else’s name.</p>
<p><strong>Maimon gives some advice on how to protect your identity.</strong></p>
<p>Make sure you freeze your credit. Make sure you purchase some kind of identity theft protection plan, which will alert you every time someone is using your identity. And simply monitor your bank account on a daily basis, monitor your credit card.</p>
<p>Freezing your credit ensures that no one can access your credit report unless you actively lift the freeze.</p>
<p><strong>He talks about what’s next for his research group.</strong></p>
<p>We’re trying to understand how all those identities are actually being used in the context of money laundering and, more specifically, sports betting.</p>
<p><strong>And he sounds the alarm.</strong></p>
<p>This is a serious problem that is largely being ignored. It’s our hope that exposing the magnitude of this will help spur action, because far too many people are losing far too much money to this type of crime.</p>
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<p></p><div style="float:right;width:205px;">
<a href="https://theconversation.com/us/investigations/mailbox-robberies-drop-accounts-checkwashing-fraud-gangs-of-fullz"><img alt="Graphic showing a masked criminal on a stamp and saying 'Heists worth billions'" class="ls-is-cached lazyloaded" data-src="https://images.theconversation.com/files/532510/original/file-20230618-28-hh0pox.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=200&fit=clip" src="https://images.theconversation.com/files/532510/original/file-20230618-28-hh0pox.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=200&fit=clip"></a></div>
<em>This article accompanies <strong><a href="https://theconversation.com/us/investigations/mailbox-robberies-drop-accounts-checkwashing-fraud-gangs-of-fullz">Heists Worth Billions</a></strong>, an investigation from The Conversation that found criminal gangs using sham bank accounts and secret online marketplaces to steal from almost anyone – and uncovered just how little being done to combat the fraud.</em><p></p>
<p>• <strong><a href="https://theconversation.com/how-to-protect-yourself-from-drop-account-fraud-tips-from-our-investigative-unit-206840">How to protect yourself from drop account fraud – tips from our investigative unit</a>.</strong></p>
<p>• <strong><a href="https://theconversation.com/announcing-the-conversations-new-investigative-unit-were-looking-for-collaborators-in-academia-207394">Announcing The Conversation’s new investigative unit</a></strong></p><img src="https://counter.theconversation.com/content/207158/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David Maimon receives funding from the National Science Foundation, the Criminal Investigations and Network Analysis Center at George Mason University, and other private grants which support the Evidence Based Cybersecurity research group.</span></em></p>Professor David Maimon describes how his team investigated criminal enterprises on the dark web.David Maimon, Professor of Criminal Justice and Criminology, Georgia State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2049572023-05-18T16:49:26Z2023-05-18T16:49:26ZCanadian financial institutions are fuelling the climate change crisis<figure><img src="https://images.theconversation.com/files/526818/original/file-20230517-11772-oau96k.JPG?ixlib=rb-1.1.0&rect=0%2C0%2C3840%2C2552&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Wearing a protective mask, a dog walker ventures out as heavy smoke from northern Alberta forest fires blankets downtown Calgary on May 16, 2023. </span> <span class="attribution"><span class="source">THE CANADIAN PRESS/Larry MacDougal</span></span></figcaption></figure><iframe style="width: 100%; height: 100px; border: none; position: relative; z-index: 1;" allowtransparency="" allow="clipboard-read; clipboard-write" src="https://narrations.ad-auris.com/widget/the-conversation-canada/canadian-financial-institutions-are-fuelling-the-climate-change-crisis" width="100%" height="400"></iframe>
<p>Once again, Canada will almost certainly fail to meet its target to <a href="https://www.canada.ca/en/services/environment/weather/climatechange/climate-plan/climate-plan-overview.html">reduce greenhouse gas emissions by 40 to 45 per cent by 2030</a> in accordance with the most recent <a href="https://www.ipcc.ch/report/ar6/syr/">Intergovernmental Panel on Climate Change (IPCC)</a> recommendations.</p>
<p>This is despite the <a href="https://www.canada.ca/en/environment-climate-change/news/2023/04/minister-guilbeault-marks-climate-progress-with-the-release-of-canadas-2023-national-inventory-report.html">government’s optimistic</a> spin on the release of its latest <a href="https://unfccc.int/documents/627833">emissions inventory report</a>. Jerry DeMarco, <a href="https://www.oag-bvg.gc.ca/internet/English/parl_cesd_202304_e_44238.html">the environment commissioner in the Auditor General’s office</a>, <a href="https://www.lakelandtoday.ca/national-news/the-federal-government-promised-to-plant-2-billion-trees-by-2030-its-nowhere-close-6881921">has criticized the government’s record</a> as a litany of broken promises: </p>
<blockquote>
<p>“We have been repeatedly ringing the alarm bells. Now, these bells are almost deafening.”</p>
</blockquote>
<p>Canada is the only G7 nation with 2022 <a href="https://www.nationalobserver.com/2023/05/12/analysis/are-canada-emissions-finally-heading-down?nih=1efe3f93c5946a59edbdb0444bc4a463&utm_source=National+Observer&utm_campaign=c7596e081e-EMAIL_CAMPAIGN_2023_05_12_01_54&utm_medium=email&utm_term=0_cacd0f141f-c7596e081e-%5BLIST_EMAIL_ID%5D">carbon emissions levels that are above its 1990 levels.</a><a href="https://www.cbc.ca/news/science/how-canadians-can-cut-carbon-footprints-1.6202194"> It has among the highest greenhouse gas emissions per capita in the world</a>, and its <a href="https://www.cer-rec.gc.ca/en/about/publications-reports/annual-report/2018/energy-in-canada.html#:%7E:text=Canada%20is%20currently%20ranked%20the,gas%20producer%20in%20the%20world.">fossil fuel industry is also among the world’s largest.</a></p>
<p>And its financial institutions — banks, pension funds and private equity firms — fund the industry and are therefore helping fuel the climate crisis. </p>
<p>As a result, financial institutions’ assets are at risk. So too are the economy, people’s lives and ultimately the survival of the planet due to catastrophic fires, floods and droughts.</p>
<p>The federal government has so far been unable to effectively regulate financial institutions’ investments in the fossil fuels industry in accordance with its climate commitments.</p>
<figure class="align-center ">
<img alt="A man carries an orange sign that reads BMC what about your $100 billion in fossil fuels in front of a man standing behind a podium." src="https://images.theconversation.com/files/526322/original/file-20230515-29595-cy6vhx.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/526322/original/file-20230515-29595-cy6vhx.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=408&fit=crop&dpr=1 600w, https://images.theconversation.com/files/526322/original/file-20230515-29595-cy6vhx.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=408&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/526322/original/file-20230515-29595-cy6vhx.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=408&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/526322/original/file-20230515-29595-cy6vhx.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=513&fit=crop&dpr=1 754w, https://images.theconversation.com/files/526322/original/file-20230515-29595-cy6vhx.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=513&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/526322/original/file-20230515-29595-cy6vhx.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=513&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Protesters from Greenpeace interrupt as a Québec BMO executive addresses the Montréal Chamber of Commerce in Montréal in May 2023.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Christinne Muschi</span></span>
</figcaption>
</figure>
<h2>Regulatory agency</h2>
<p>DeMarco recently examined reports by the federal bank regulator, the <a href="https://www.osfi-bsif.gc.ca/Documents/WET5/ARO/eng/2023/aro.html#climate-risk">Office of the Superintendent of Financial Institutions (OSFI)</a> that oversees climate risks and sets risk guidance priorities for financial institutions. </p>
<p>The environment commissioner noted that while OSFI has belatedly designated climate change as a top priority, full implementation is years away. OSFI’s plan to improve banks’ resilience to climate change also fails to specifically encourage their transition to net-zero carbon emissions.</p>
<p>Sen. Rosa Galvez <a href="https://www.ipolitics.ca/news/senate-environment-committee-chair-hopes-her-bill-will-make-financial-sector-more-climate-conscious">recently argued</a> that OSFI should ensure financial institutions have <a href="https://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/CAR22_index.aspx">capital adequacy requirements</a> to protect against the eventuality of <a href="https://www.pembina.org/blog/climate-change-and-financial-risk-of-stranded-assets">climate-related stranded assets.</a> </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1655893815255785472"}"></div></p>
<p>Financial institutions need to adopt the standard of putting aside <a href="https://doi.org/10.1038/s41558-022-01356-y">one dollar for every dollar of their fossil fuels assets so that if they can’t sell them due to shrinking demand</a>, they’ll have enough money to compensate depositors, workers and shareholders and avoid declaring bankruptcy. </p>
<p>In April 2023, the Bank of Canada released its <a href="https://www.bankofcanada.ca/2023/04/bank-of-canada-disclosure-of-climate-related-risks-2022/">first annual climate risk disclosure report</a> to provide guidance on the climate change risks facing the Canadian economy and financial system.</p>
<p>Like OSFI, the Bank of Canada report is a start but has a long way to go to make up for lost ground. And ironically, any positive effects could be offset by the bank’s high interest rate monetary policy. Critics of these central bank policies credibly argue that they hinder the transition away from fossil fuels.</p>
<p>Economic experts argue that <a href="https://www.theguardian.com/commentisfree/2023/may/06/central-banks-interest-rate-hike-climate-crisis">high interest rates discourage investments in renewables, keep economies locked into fossil-fuel dependence and slow down decarbonization</a>.</p>
<figure class="align-center ">
<img alt="A grey-haired man is seen from behind as he looks at the burnt remains of a house." src="https://images.theconversation.com/files/526334/original/file-20230515-24710-8v1xwo.JPG?ixlib=rb-1.1.0&rect=0%2C0%2C6000%2C4041&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/526334/original/file-20230515-24710-8v1xwo.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=408&fit=crop&dpr=1 600w, https://images.theconversation.com/files/526334/original/file-20230515-24710-8v1xwo.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=408&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/526334/original/file-20230515-24710-8v1xwo.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=408&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/526334/original/file-20230515-24710-8v1xwo.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=512&fit=crop&dpr=1 754w, https://images.theconversation.com/files/526334/original/file-20230515-24710-8v1xwo.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=512&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/526334/original/file-20230515-24710-8v1xwo.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=512&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A man looks over the remains of his onetime house after it was destroyed by the White Rock Lake wildfire in Monte Lake, east of Kamloops, B.C., in August 2021. He sold the house a few years earlier and its new occupants escaped the fire.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Darryl Dyck</span></span>
</figcaption>
</figure>
<h2>Current reality</h2>
<p>The latest fossil fuels report by the non-governmental organization <a href="https://www.bankingonclimatechaos.org/">Banking on Climate Chaos</a> found that the world’s 60 largest banks invested more than US$5.5 trillion into the fossil fuel industry since the <a href="https://unfccc.int/process-and-meetings/the-paris-agreement">2015 Paris agreement was signed</a>.</p>
<p>The Big Five Canadian banks all made the list of Top 20 funders globally after investing more than $1 trillion in fossil fuel companies since 2016.</p>
<p>The Royal Bank of Canada ranked as the world’s largest financier of fossil fuels in 2022, providing fossil fuel companies with US$42.1 billion with a total investment of US$253 billion since 2016 — the fourth highest on the globe.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1639617196753035266"}"></div></p>
<p>An article in the journal <a href="https://www.nature.com/articles/s41558-022-01356-y"><em>Nature Climate Change</em></a>
estimated that global stranded investor assets — namely, the present value of future lost profits in exploration, production and related services in the fossil fuel sector — exceeds US$1 trillion. The Canadian loss risk is more than US$100 billion, disproportionately in employee savings locked up in Canadian pension funds.</p>
<p>Canada’s largest banks have committed to voluntarily align their investments and lending with the United Nations target of net zero emissions by 2050 as part of the <a href="https://www.unepfi.org/net-zero-banking/">Net-Zero Banking Alliance</a>. They have also committed to cut emissions financing in half by 2030. </p>
<p>However, these banks haven’t made any commitments to jettison their fossil fuel clients. That makes their net-zero pledges highly suspect, bordering <a href="https://www.theglobeandmail.com/business/commentary/article-companies-need-to-stop-greenwashing-and-get-serious-with-net-zero/">on greenwashing</a>.</p>
<figure class="align-center ">
<img alt="A bearded man in a suit sits next to a sign that reads Net-Zero Leadership Summit." src="https://images.theconversation.com/files/526333/original/file-20230515-20488-2cm6t6.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/526333/original/file-20230515-20488-2cm6t6.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=447&fit=crop&dpr=1 600w, https://images.theconversation.com/files/526333/original/file-20230515-20488-2cm6t6.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=447&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/526333/original/file-20230515-20488-2cm6t6.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=447&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/526333/original/file-20230515-20488-2cm6t6.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=562&fit=crop&dpr=1 754w, https://images.theconversation.com/files/526333/original/file-20230515-20488-2cm6t6.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=562&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/526333/original/file-20230515-20488-2cm6t6.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=562&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Steven Guilbeault, Canada’s environment and climate change minister, speaks during the Canada 2020 Net-Zero Leadership Summit in Ottawa in April 2023.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Sean Kilpatrick</span></span>
</figcaption>
</figure>
<h2>Conflicts of interest</h2>
<p>None of their publicly available plans measure up, according to Matt Price, co-founder of <a href="https://www.corporateknights.com/climate-and-carbon/are-canadas-banks-serious-about-reaching-net-zero/">Investors for Paris Compliance</a>, a shareholder advocacy organization.</p>
<p>Although the International Energy Agency has stated that there’s no need for additional fossil fuel infrastructure, Canadian banks continue to fund expansion activities. Multiple proposals put forward by <a href="https://www.theglobeandmail.com/business/article-shareholders-rebuff-climate-proposals-at-canadian-energy-giants-but/">shareholder activists at 2023 bank meetings</a> to give them a say on climate plans have been rejected. </p>
<p>A study by the organization <a href="https://www.shiftaction.ca/climateconflicted">Shift: Action for Pension Wealth and Planet Health</a> has concluded that Canadian pension funds have generally failed to align their investment strategies with the Paris Agreement goals and neglected to develop a credible pathway to transition out of fossil fuels. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1658126592315465730"}"></div></p>
<p>Pension funds are also rife with conflicts of interest. The report found that seven of Canada’s 10 largest public pension funds have at least one director who also sits on the board of a fossil fuel company. </p>
<p>Overall, 80 different directors, trustees, executives and senior staff currently hold or previously held 124 different roles with 76 different fossil fuel companies.</p>
<p><a href="https://www.theguardian.com/business/2022/sep/14/private-equity-dirty-energy-carlyle-warburg-pincus-kkr-climate-risks-scorecard">Private equity firms,</a> which manage funds beneath the radar for wealthy individuals and institutional investors, have invested an estimated US$1 trillion in the energy sector since 2010 — the vast majority in fossil fuels.</p>
<figure class="align-center ">
<img alt="Destroyed buildings in the water in a seaside village." src="https://images.theconversation.com/files/526856/original/file-20230517-17-snz3n9.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/526856/original/file-20230517-17-snz3n9.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=403&fit=crop&dpr=1 600w, https://images.theconversation.com/files/526856/original/file-20230517-17-snz3n9.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=403&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/526856/original/file-20230517-17-snz3n9.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=403&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/526856/original/file-20230517-17-snz3n9.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=507&fit=crop&dpr=1 754w, https://images.theconversation.com/files/526856/original/file-20230517-17-snz3n9.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=507&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/526856/original/file-20230517-17-snz3n9.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=507&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Buildings sit in the water along the shore following hurricane Fiona in Rose Blanche-Harbour le Cou, N.L. in September 2022.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Frank Gunn</span></span>
</figcaption>
</figure>
<h2>Where to go from here</h2>
<p>Introduced more than a year ago, Galvez’s <a href="https://www.parl.ca/legisinfo/en/bill/44-1/s-243">Climate Aligned Finance Act</a> — which seeks to hold financial institutions accountable for investments that increase climate risk — has passed second reading but is still waiting to go to committee and hear from witnesses.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/a-canadian-senator-aims-to-end-the-widespread-financial-backing-of-fossil-fuels-192827">A Canadian senator aims to end the widespread financial backing of fossil fuels</a>
</strong>
</em>
</p>
<hr>
<p>Calling it the gold standard in legislation, 58 academics, myself included, have written a letter urging senators to move the bill forward by referring it to committee for testimony.</p>
<p>The close ties between the federal government and corporations largely explain Ottawa’s failure to effectively regulate banks and pension fund investments. </p>
<p>The corporate government power relationship — known as <a href="https://doi.org/10.1007/s12115-009-9228-3">regulatory capture</a> — largely explains the government’s failure to effectively regulate banks and pension fund investments. </p>
<p>Regulations benefit the industry at the expense of the public interest. In this case, the fossil fuel industry and financial institution enablers are able to shape the regulations governing their operations, block or delay new regulations and remove or dilute existing regulations deemed a threat to their interests.</p>
<p>Countervailing measures must be urgently implemented to <a href="https://lorimer.ca/adults/product/corporate-rules-the-real-world-of-business-regulation-in-canada/">combat regulatory capture</a> and ensure the public interest takes precedence over profit.</p><img src="https://counter.theconversation.com/content/204957/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bruce Campbell is affiliated with the Canadian Centre for Policy Alternatives, Group of 78, Rideau Institute for International Affairs, Polaris institute</span></em></p>Canadian financial institutions — banks, pension funds and private equity firms — fund the fossil fuel industry and are therefore helping fuel the climate crisis. Why won’t Ottawa hold them to account?Bruce Campbell, Adjunct Professor, Faculty of Environmental and Urban Change, York University, CanadaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2017662023-05-09T12:24:08Z2023-05-09T12:24:08ZPeople of color get so used to discrimination in stores they don’t always notice bad customer service<figure><img src="https://images.theconversation.com/files/524915/original/file-20230508-251777-14ycmf.jpg?ixlib=rb-1.1.0&rect=61%2C76%2C5042%2C3672&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Discrimination can be hard to pick up.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/business-meeting-royalty-free-image/898393140?phrase=bank+loan+people+business">aluxum/iStock via Getty Images</a></span></figcaption></figure><p><em>The <a href="https://theconversation.com/us/topics/research-brief-83231">Research Brief</a> is a short take about interesting academic work.</em> </p>
<h2>The big idea</h2>
<p>People from underrepresented ethnic and racial groups tend to rate poor customer service less negatively than white people do, according to <a href="https://doi.org/10.1086/722689">new peer-reviewed research</a> we co-authored.</p>
<p>Many companies in the service sector, such as banks and airlines, use customer satisfaction surveys so they can figure out how to improve their operations. There’s an implicit assumption that the feedback given will accurately reflect the actual quality of the service provided. </p>
<p>Companies <a href="https://doi.org/10.1509/jmkg.71.3.194">may also assume</a> that customers, regardless of their socioeconomic background, will give similar evaluations for good service – and that <a href="https://doi.org/10.1007/s11002-021-09581-9">people will recognize</a> poor or discriminatory service when they experience it. </p>
<p>Our research team wanted to see if that’s really the case.</p>
<p>In our first study, we recruited nine male small-business owners in Los Angeles to act as “mystery shoppers” to help us compare the treatment of different racial groups. They had similar ages, heights, builds and education; three were Black, three were Hispanic and three were white. </p>
<p>We then sent the men, who wore identical shirts and pants, to a total of 69 banks to ask for a loan based on identical customer profiles. They also secretly recorded the meetings using a camera embedded in their shirt – a method approved by the state’s attorney general’s office. After each meeting ended, participants filled out a questionnaire describing the experience, including their level of satisfaction. </p>
<p>Overall, we found that participants, regardless of race or ethnicity, reported similar levels of satisfaction during the bank encounters. <a href="https://doi.org/10.1086/676689">Since past research</a> has found that Black and Hispanic customers experience objectively worse treatment, we wanted to dig deeper to understand why satisfaction levels were similar. </p>
<p>We analyzed 26 of the videos to see if there were objective disparities in how our mystery shoppers were treated. We found that Black and Hispanic participants were given significantly less time than white participants, waited longer to see a bank employee, and experienced other subtle forms of discrimination. </p>
<p>We wanted to see how pervasive these differing perceptions of good and bad customer service were for people from underrepresented groups. In two additional studies, we recruited over 300 people from a variety of backgrounds to watch clips from these videos that show positive and negative interactions and evaluate the encounters. We found that while all groups rated positive scenarios similarly, Black and Hispanic viewers tended to perceive negative experiences in a better light than white viewers. </p>
<h2>Why it matters</h2>
<p>Research has shown that discrimination in customer-worker interactions in the service sector is often <a href="https://doi.org/10.1007/s11002-021-09581-9">difficult to detect and fix</a>. This is particularly challenging when the biases are subtle and less obvious in slights <a href="https://doi.org/10.1111/hypa.12390">often referred to as microaggressions</a>.</p>
<p>Unfortunately, customers from underrepresented ethnic or racial groups may become indifferent, desensitized or even accepting of repeated discriminatory service over time. In one-on-one exchanges in places like bank branches, customers may be less aware of discriminatory service because they are unable to directly compare the service they receive with that of other customers. So relying on customer feedback to detect service failures may be a poor way to fix discriminatory behavior.</p>
<p><a href="https://doi.org/10.1086/676689">Research has shown</a> that discrimination in financial services has far-reaching implications for underrepresented consumers. These include the inability to get a loan or mortgage, accumulate savings and build wealth. Financial service institutions’ <a href="http://thearf-org-unified-admin.s3.amazonaws.com/MSI/2020/06/MSI_Report_18-121-1.pdf">reputation for discrimination</a> also makes it difficult for these companies to attract employees and customers.</p>
<p>To avoid these problems, we believe managers should find more objective ways to evaluate the discriminatory treatment of underrepresented customers and find ways to improve. </p>
<h2>What’s next</h2>
<p>We believe more research is needed on the underlying assumptions managers make in tracking, evaluating and eliminating discriminatory behavior – which, in our view, is the ultimate service failure.</p><img src="https://counter.theconversation.com/content/201766/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>New research found that Black and Hispanic people tended to give banks a pass for poor customer service.Samantha N. N. Cross, Associate Professor of Marketing, Iowa State UniversityStephanie Dellande, Professor Emerita of Marketing, Menlo CollegeSterling Bone, Professor of Marketing, Utah State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2014402023-04-05T14:51:43Z2023-04-05T14:51:43ZWhy you should care about bumper bank profits<figure><img src="https://images.theconversation.com/files/514942/original/file-20230313-14-7boqyc.jpg?ixlib=rb-1.1.0&rect=162%2C147%2C4610%2C2958&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/big-data-graph-virtual-screen-2023-2172883679">khunkornStudio/Shutterstock</a></span></figcaption></figure><p>The Bank of England has raised interest rates 11 times since December 2021 but, while this may boost bank profits, it is less likely to boost many people’s bank balances.</p>
<p>Alongside the sharp spike in interest rates over the past year, many big names in the UK banking business have been reporting bumper 2022 profits. NatWest made <a href="https://investors.natwestgroup.com/%7E/media/Files/R/RBS-IR-V2/results-center/17022023/nwg-announcement.pdf">£5.1 billion in 2022</a> before tax, up 33% and the highest since the 2008 global financial crisis. Fellow high street bank <a href="https://positivemoney.org/2023/02/29885/">Lloyds</a> made <a href="https://www.lloydsbankinggroup.com/assets/pdfs/investors/financial-performance/lloyds-banking-group-plc/2022/full-year/2022-lbg-annual-report.pdf">nearly £7 billion before taxes in 2022</a>.</p>
<p>Much like the energy companies that have experienced <a href="https://theconversation.com/why-energy-companies-are-making-so-much-profit-despite-uk-windfall-taxes-199523">huge increases in profits</a> as gas and electricity prices soared over the past year, the same is now happening at <a href="https://www.cityam.com/uk-banks-set-to-report-record-profits-of-37bn-beating-pre-financial-crisis-highs/">the UK’s large retail banks</a> as Bank of England interest rates have done the same. </p>
<p>These increases have little to do with CEO performance (although top executives took home <a href="https://committees.parliament.uk/committee/158/treasury-committee/news/186434/treasury-committee-questions-uks-largest-banks-on-savings-rates-and-ceo-pay/#:%7E:text=Several%20banks%20have%20also%20increased,rise%20in%20his%20pay%20package">significant pay packets for 2022</a>) or increases in efficiency within these banks. But they have everything to do with how retail banks make their money and the domination of the market by several key players. </p>
<p>Retail banking income has two main sources: interest income from lending or fee income from non-interest business (and sometimes a little trading income). Retail banks also earn interest on <a href="https://www.bankofengland.co.uk/bank-overground/2023/what-do-we-know-about-the-demand-for-bank-of-england-reserves">the billions they hold in reserves</a> with the Bank of England – this income has of course increased recently as the central bank has hiked its main rate.</p>
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Read more:
<a href="https://theconversation.com/interest-rates-why-your-mortgage-payments-are-going-up-but-your-savings-arent-and-how-better-monetary-policy-could-help-196528">Interest rates: why your mortgage payments are going up but your savings aren't – and how better monetary policy could help</a>
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<p>In the past 12 months there has been quite a steep rise in interest income, in particular net interest income. This is the amount banks pay out in interest (to savers, for example) versus the amount they make in interest from lending. So, for example, during 2022 NatWest Banking Group achieved a 30.6% increase in net interest income and Lloyds Banking Group an increase of nearly 50%. </p>
<p><strong>Growth in net interest income</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/514832/original/file-20230312-4945-xhq14p.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Chart showing two lines rising to depict annual growth of Net Interest Income at Lloyds Banking Group and NatWest Banking Group 2019-2022" src="https://images.theconversation.com/files/514832/original/file-20230312-4945-xhq14p.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/514832/original/file-20230312-4945-xhq14p.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=443&fit=crop&dpr=1 600w, https://images.theconversation.com/files/514832/original/file-20230312-4945-xhq14p.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=443&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/514832/original/file-20230312-4945-xhq14p.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=443&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/514832/original/file-20230312-4945-xhq14p.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=557&fit=crop&dpr=1 754w, https://images.theconversation.com/files/514832/original/file-20230312-4945-xhq14p.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=557&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/514832/original/file-20230312-4945-xhq14p.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=557&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Year-on-year growth of net interest income at Lloyds Banking Group and NatWest Banking Group (2019-2022)</span>
<span class="attribution"><span class="source">Capital IQ, Annual Reports</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>There is some history behind these recent profits. In the mid-1980s, the “<a href="https://www.investopedia.com/terms/b/bigbang.asp">big bang</a>” began the deregulation of banking in the UK. This led to a change in the traditional banking business model towards riskier activities. </p>
<p>Rather than making money from getting and holding on to deposits and loans (a strategy known as “<a href="https://link.springer.com/chapter/10.1057/9780230103245_5">originate and hold</a>”) banks started to package up their loans and sell them on to further boost their profits (“<a href="https://link.springer.com/chapter/10.1057/9780230103245_5">originate to distribute</a>”). The resulting rise in this business and the focus on non-interest income such as fees for non-traditional business ultimately led to the largest financial crisis the world has ever seen.</p>
<h2>A new era in banking</h2>
<p>Since the 2008 global financial crisis, some retail banks have retrenched into older-style banking. NatWest, for example, now makes over 60% of its revenue from deposits and lending, for Lloyds this figure is about 70%. But others, including HSBC and Barclays, have continued to make over 60% of their total revenue from non-interest income sources, according to their latest financial reports.</p>
<p>The latter strategy makes sense in the very low interest rate environment that the UK was in up until 2022. When the central bank base rate is low, there is little money to be made from lending and holding deposits so banks can <a href="https://www.bis.org/publ/work807.pdf">make more money from non-interest income</a>. But when interest rates start to rise, the big winners are those focused on the deposit and lending markets.</p>
<p>This is because even though the Bank of England raises the bank rate to <a href="https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate">influence other interest rates</a>, large retail banks get to choose when they feed these rate changes on to savers and borrowers.</p>
<p>Loans make up <a href="https://investors.natwestgroup.com/%7E/media/Files/R/RBS-IR-V2/results-center/17022023/nwg-annual-report-and-accounts.pdf">70% or more</a> of total assets at <a href="https://www.lloydsbankinggroup.com/assets/pdfs/investors/financial-performance/lloyds-banking-group-plc/2022/full-year/2022-lbg-annual-report.pdf">some high street banks</a>. This alone helps to boost revenues when rates rise. Many banks also charge a much higher rate on lending than they pay out for retail deposits and have been criticised in recent months for <a href="https://news.sky.com/story/banks-not-passing-on-higher-interest-rates-to-savers-mean-customers-miss-out-on-23bn-12829682#:%7E:text=Banks%20are%20under%20no%20obligation,shop%20around%20for%20better%20deals.&text=However%2C%20that%20hasn't%20stopped,response%20to%20soaring%20bank%20profits.">failing to pass on savings rate increases</a> as quickly as they’ve boosted mortgage costs.</p>
<p>This means that, at the same time banks are seeing increases in their interest income from loans (and their reserves at the Bank of England), the amount they are paying out in interest to depositors in some accounts can remain the same for a longer period – sometimes at 0%. Shockingly, the Bank of England estimates that UK households have a massive £265 billion sitting in non-interest-bearing deposits, up from £118 billion a decade ago.</p>
<p><strong>UK household savings not earning interest (£ millions)</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/514936/original/file-20230313-166-s5gtyy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Line chart showing UK household savings rising from £118 billion in 2013 to £265 billion in 2023." src="https://images.theconversation.com/files/514936/original/file-20230313-166-s5gtyy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/514936/original/file-20230313-166-s5gtyy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=205&fit=crop&dpr=1 600w, https://images.theconversation.com/files/514936/original/file-20230313-166-s5gtyy.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=205&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/514936/original/file-20230313-166-s5gtyy.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=205&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/514936/original/file-20230313-166-s5gtyy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=258&fit=crop&dpr=1 754w, https://images.theconversation.com/files/514936/original/file-20230313-166-s5gtyy.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=258&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/514936/original/file-20230313-166-s5gtyy.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=258&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.bankofengland.co.uk/boeapps/database/fromshowcolumns.asp?Travel=NIxSUx&FromSeries=1&ToSeries=50&DAT=RNG&FD=1&FM=Jan&FY=2013&TD=13&TM=Mar&TY=2023&FNY=&CSVF=TT&html.x=81&html.y=35&C=ELU&Filter=N">Bank of England</a></span>
</figcaption>
</figure>
<p>Even then, <a href="https://www.tandfonline.com/doi/abs/10.1080/02692170802496695?journalCode=cira20">research suggests</a> retail banks tend to be much slower at increasing deposit rates than lending rates. Policymakers seem to have noticed this as the CEOs from four major UK retail banks – Barclays, NatWest, Lloyds and HSBC – were called to appear at a <a href="https://committees.parliament.uk/oralevidence/12667/pdf/">Treasury Committee hearing in February 2023</a> to discuss rapid increases in loan and mortgage rates versus limited rate rises for savers and depositors, among other issues.</p>
<p>“Customer choice” was cited as the main reason for the difference. All of the CEOs pointed out recent increases in rates on some savings products. However, research shows <a href="https://www.retailbankerinternational.com/analysis/7-day-current-account-switching-pay-uk-statistics-jan-2023/">savers often don’t switch</a> into these higher-paying accounts, people simply do not manage their deposits in such a dynamic way.</p>
<p>Since large retail banks <a href="http://fingfx.thomsonreuters.com/gfx/editorcharts/VIRGIN%20MONEY-M-A-CYBG/0H0012Y5G10G/index.html">dominate the deposit and lending market</a> in the UK, they are unlikely to change this aspect of their operations on their own. Some kind of regulation could help to force banks to pass on rate rises more quickly, of course. Introducing a windfall tax could also help. </p>
<p>But both of these solutions seem unlikely to happen in light of the government’s <a href="https://theconversation.com/banking-reforms-expert-qanda-will-relaxing-the-rules-help-the-uk-economy-and-what-are-the-risks-196312">recent banking reforms</a> and <a href="https://theconversation.com/silicon-valley-bank-how-interest-rates-helped-trigger-its-collapse-and-what-central-bankers-should-do-next-201697">the collapse of Silicon Valley Bank</a> (although this was not linked to net interest income). The fear of another banking collapse, alongside the new reforms, will only reinforce the perceived importance of bank profits and shareholders over consumers – even during a cost of living crisis.</p><img src="https://counter.theconversation.com/content/201440/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Robert Webb does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The UK retail bank business model has allowed banks to make significant profits as interest rates have risen over the past year.Robert Webb, Professor of Banking & Applied Economics, University of StirlingLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2016312023-03-21T20:49:57Z2023-03-21T20:49:57ZOSFI’s new guidelines: A step toward making banks and insurers more conscious of their climate impacts<figure><img src="https://images.theconversation.com/files/516492/original/file-20230320-1510-qx10gt.JPG?ixlib=rb-1.1.0&rect=7%2C7%2C4778%2C3312&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Office of the Superintendent of Financial Institutions has released guidelines for financial institutions to address climate change risks. </span> <span class="attribution"><span class="source">THE CANADIAN PRESS/Nathan Denette</span></span></figcaption></figure><p>After an extensive consultation process, the organization that supervises banks and large insurance companies in Canada — the Office of the Superintendent of Financial Institutions (OSFI) — has <a href="https://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/b15-dft.aspx">released guidelines for financial institutions</a> to address climate change. This is timely, considering banks and insurers are <a href="https://www.ran.org/wp-content/uploads/2022/03/BOCC_2022_vSPREAD-1.pdf">massive funders of the fossil fuel industry</a>. </p>
<p>The release of the guidelines, called the B-15, comes more than a year after a <a href="https://www.osfi-bsif.gc.ca/eng/fi-if/in-ai/Pages/clrsk-mgm_let.aspx">January 2022 pilot study</a> by Canada’s central bank and OSFI on how resilient financial institutions would be <a href="https://theconversation.com/alberta-oilpatch-may-face-lending-crunch-as-financial-regulators-worry-about-the-risks-of-climate-change-175988">under new climate policies</a>. </p>
<p>The study found that the creditworthiness of oilsands producers is expected to fall over the next few decades. B-15 appears to address this concern by accommodating the needs of all stakeholders, including oilsands producers. </p>
<p>The <a href="https://www.osfi-bsif.gc.ca/Eng/osfi-bsif/med/Pages/b15-nr.aspx">development of B-15</a> is the result of one of the most ambitious consultations in OSFI history. It received nearly 4,400 submissions from financial institutions, non-regulated entities and other organizations and over 4,300 individuals.</p>
<p>But do the guidelines succeed in addressing the concerns of all stakeholders? And what, if anything, is missing?</p>
<p>Over the past 40 years, I have been involved in the formulation of financial sector policy, worked in a provincial financial institution and been a student of financial institution policy development. I have an appreciation for the role financial institutions play in modern economies and the importance of up-to-date policy frameworks and vigilant supervision.</p>
<h2>Sustainability reporting</h2>
<p>Sustainability reporting and <a href="https://www.businessinsider.com/sustainable-investing-esg-under-scrutiny-2022-7">environmental, social and governance investing</a> have come under scrutiny recently, creating a surge in reporting standards ranging from industry-supported standards to third-party independent ones. These variations have made it difficult for analysts to understand how financial institutions are contributing to climate change.</p>
<p>The proliferation of reporting standards are making it virtually impossible for international bodies, like the United Nations or the Financial Stability Board, to meet public expectations about risks caused by greenhouse gas-emitting corporations.</p>
<p>To address this issue, international banks joined the <a href="https://www.unepfi.org/net-zero-banking/commitment/frequently-asked-questions/">UN-sponsored Net-Zero Banking Alliance</a> in 2021. Members of the alliance have committed to aligning their loaning and investment activities with net-zero emissions by 2050.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1384734905511383040"}"></div></p>
<p>This has led to the creation of rating agencies that inform investors about climate risks and the performance of financial institutions. A November 2022 report <a href="https://www.morningstar.ca/ca/news/229362/canadian-banks-score-poorly-on-net-zero-transition.aspx">shed light on how poorly Canadian banks were progressing</a> on their net-zero strategies.</p>
<h2>Key takeaways from B-15</h2>
<p>The OSFI wants more detailed summary information about financial markets and the governance of federally regulated financial institutions. The guidelines, which are quite general, emphasize objectivity, reliability and consistency of data reported. Here are the main takeaways:</p>
<p><strong>1. Common definitions.</strong> Since federally regulated financial institutions are expected to understand climate-related risks and how to mitigate them, a common definition of climate risks is essential. The OSFI categorizes climate-related into two types of risks. </p>
<p>First, physical or operating risks include climate-related extremes and events, including mortality risks and physical risks. Second are transition risks, which include uncertainties about how climate-adjustment policies will unfold via government policies, legislation, greenhouse gas regulation, technological change and varying energy demands.</p>
<p><strong>2. Climate-related disclosures.</strong> The guidelines outline principles for federally regulated financial institutions to disclose climate-related risks and opportunities. These principles include relevance, specificity, comprehensiveness, understandability, balance, reliability, consistency and verification. Companies should ensure disclosures meet certain principles and expectations without overwhelming users with unnecessary information.</p>
<p><strong>3. Proportionality and materiality considerations.</strong> These terms refer to the fact that the guidelines are not one size fits all and largely depend on the size of financial institutions and their exposure to climate-related risks. Proportionality and materiality are necessary to understand the impact of catastrophic events, like a major breach from an oilsands tailings pond.</p>
<p><strong>4. Adequate climate-related capital and liquidity requirements.</strong> Regulators believe climate-related risks have the potential to cause financial risk within institutions. Because of this, federally regulated financial institutions are expected to incorporate climate-related risks into <a href="https://www.investopedia.com/terms/c/capitaladequacyratio.asp">capital adequacy</a> and <a href="https://www.investopedia.com/terms/s/solvency.asp">solvency assessments</a> to prevent bank runs and insolvency.</p>
<h2>Gaps in the guidelines</h2>
<p>One of the gaps in the B-15 guidelines is that it fails to provide guidance on assessing pre-existing and future environmental liabilities.</p>
<p>For example, one of the most vexing issues for lenders to oilsands producers is assessing the longevity of reserves and whether <a href="https://www.lse.ac.uk/granthaminstitute/explainers/what-are-stranded-assets/">borrowers’ assets will eventually become stranded</a>, potentially forcing creditors to pay for environmental cleanups. </p>
<p>In the <a href="https://scc-csc.lexum.com/scc-csc/scc-csc/en/item/17474/index.do">ground-breaking Redwater case</a>, the Supreme Court of Canada ruled that, when oil companies go bankrupt, creditors are required to step in and clean up old oil and gas wells before any lenders are paid back. This is why Canadian lending institutions are so against putting these companies into bankruptcy.</p>
<p>At present, security posted by oilsands producers for future mine cleanup depends on how close oilsands mines are to the end of their reserve life. This determination is not as simple as it might appear.</p>
<figure class="align-center ">
<img alt="A pumpjack sitting in a wheal field" src="https://images.theconversation.com/files/516494/original/file-20230320-2935-cr0ayg.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/516494/original/file-20230320-2935-cr0ayg.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/516494/original/file-20230320-2935-cr0ayg.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/516494/original/file-20230320-2935-cr0ayg.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/516494/original/file-20230320-2935-cr0ayg.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/516494/original/file-20230320-2935-cr0ayg.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/516494/original/file-20230320-2935-cr0ayg.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A de-commissioned pumpjack is shown at a well head on an oil and gas installation near Cremona, Alta., in October 2016.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Jeff McIntosh</span></span>
</figcaption>
</figure>
<p>Under the Alberta <a href="https://www.aer.ca/regulating-development/project-closure/liability-management-programs-and-processes/mine-financial-security-program">Mine Financial Security program</a>, financial deposits are required to ensure any financial burden from abandonment and reclamation remains with the energy companies that own them.</p>
<p>At present, there is <a href="https://static.aer.ca/prd/documents/liability/MFSP_Liability.pdf">$1.55 billion in security held for liabilities</a> estimated by the Alberta Energy Regulator to total $33.7 billion, a number that <a href="https://www.pembina.org/blog/alberta-government-has-transparency-problem-when-it-comes-oil-and-gas-liabilities">critics believe is seriously underestimated</a>. </p>
<p>However, under the regulator’s rules, an oilsands producer is only required to post an operating deposit when there are less than 15 years of reserves remaining. So long as the reserves are provable, climate change policies, environmental liabilities and economic viability appear irrelevant to the Alberta Energy Regulator.</p>
<p>This is highly problematic in the current climate of mistrust that has arisen from the <a href="https://financialpost.com/commodities/energy/oil-gas/ottawa-orders-imperial-oil-stop-tailings-leak-kearl-oilsands">behaviour of the Alberta Energy Regulator</a> concerning a large toxic spill at the Imperial Kearl Lake tailings ponds. The provincial regulator waited months to publicly disclose that waste was escaping from the pond and seeping into groundwater.</p>
<p>A second gap is the issue of third-party verification of institutions’ reporting. The current guideline does not require this, leaving it up to the institutions to handle themselves.</p>
<h2>A step in the right direction</h2>
<p>The total credit exposure of Canadian banks <a href="https://www.investorsforparis.com/wp-content/uploads/2022/11/Full-Report-Card-1.pdf">is estimated to be $164 billion</a> — less than 15 per cent of <a href="https://www.investopedia.com/terms/b/bigfivebanks.asp">Canada’s five biggest banks’ capital</a>.</p>
<p>That said, the <a href="https://research-information.bris.ac.uk/en/publications/black-box-accounting-discounting-and-disclosure-practices-of-deco">disclosure practices of fossil fuel producers on decommissioning environmental liabilities</a> is opaque and inconsistent.</p>
<p>Should the banks inherit stranded assets, not only will they have to write off their investments, but depending on the legal regime, they may be exposed to enormous additional costs of cleaning up tailings ponds. Otherwise, this bill may fall to taxpaying Canadians.</p>
<p>OSFI’s guidelines are a small step towards making financial decision-makers more conscious of the influence they have on climate outcomes, but there is still work to be done when it comes to climate-risk policies.</p><img src="https://counter.theconversation.com/content/201631/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Robert L. Ascah is a member of the Alberta NDP.</span></em></p>OSFI’s guidelines are a small step towards making financial decision-makers more conscious of their influence on climate outcomes, but there is still work to be done.Robert L. Ascah, Research Fellow, The Parkland Institute, University of AlbertaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2018532023-03-17T20:13:14Z2023-03-17T20:13:14ZWhat Canada can learn from the collapse of Silicon Valley Bank<figure><img src="https://images.theconversation.com/files/516125/original/file-20230317-3576-t4h8mo.jpg?ixlib=rb-1.1.0&rect=19%2C19%2C3260%2C2163&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Silicon Valley Bank, the sixteenth-largest bank in the U.S., collapsed on March 10, 2023 after customers tried to collectively withdraw $42 billion in a single day.</span> <span class="attribution"><span class="source">(AP Photo/Jeff Chiu)</span></span></figcaption></figure><p>The sudden collapse of Silicon Valley Bank left its investors reeling, shocked and unsure of what had happened to their funds. SVB was one of the top 20 banks in the United States, and many had trusted their money with the bank, unaware of the crisis that was brewing. </p>
<p>The U.S. Federal Deposit Insurance Corporation (FDIC) intervened to <a href="https://www.fdic.gov/news/press-releases/2023/pr23016.html">guarantee all deposits to customers, even those above the $250,000 limit</a>. Silicon Valley Bank’s failure was technically due to a liquidity crisis — a lack of sufficient cash inflows to sustain it during a period of significant cash outflows.</p>
<p>However, its downfall was also a culmination of several factors such as <a href="https://fortune.com/2023/03/13/risk-management-nightmare-silicon-valley-bank/">poor risk management</a>, <a href="https://www.ft.com/content/02576e3c-67c8-4a7c-86b3-bc9c270a90b6">materialized interest rate risk</a>, <a href="https://www.ctvnews.ca/business/after-the-collapse-of-silicon-valley-bank-how-likely-are-bank-failures-in-canada-1.6313635">inadequate regulation</a> and the aforementioned liquidity issues. </p>
<p>The collapse of a medium-sized financial institution like Silicon Valley Bank serves as a reminder of the importance of robust risk management, sound regulatory oversight and effective liquidity management to prevent such incidents from happening in the future.</p>
<h2>What happened exactly?</h2>
<p>Silicon Valley Bank serves numerous technology startups and venture capital firms. Its <a href="https://d18rn0p25nwr6d.cloudfront.net/CIK-0000719739/f36fc4d7-9459-41d7-9e3d-2c468971b386.pdf">annual report</a>, released two weeks ago, revealed a significant surge in client deposits during the pandemic. According to the report, the bank’s deposits tripled to $173 billion in 2022 from <a href="https://d18rn0p25nwr6d.cloudfront.net/CIK-0000719739/7e378d3a-e964-4a21-9209-1db147371d01.pdf">$60 billion</a> in 2019.</p>
<p>When Silicon Valley Bank took in these deposits, the funds didn’t just sit in the bank’s account. The bank invested them, as all banks do, in various financial products to generate additional profits. </p>
<p>One of the investment vehicles Silicon Valley Bank used was held-to-maturity securities (43 per cent of total assets), which are mostly bonds that pay a fixed <a href="https://www.investopedia.com/terms/c/coupon.asp">coupon</a> regularly. These securities are considered low risk, as they are unlikely to default, but they can be problematic if the bank suddenly needs to sell them for cash.</p>
<figure class="align-center ">
<img alt="A man and a police officer open the front door to a Silicon Valley Bank buliding" src="https://images.theconversation.com/files/516120/original/file-20230317-4654-js4ch1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/516120/original/file-20230317-4654-js4ch1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/516120/original/file-20230317-4654-js4ch1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/516120/original/file-20230317-4654-js4ch1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/516120/original/file-20230317-4654-js4ch1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/516120/original/file-20230317-4654-js4ch1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/516120/original/file-20230317-4654-js4ch1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A customer exits Silicon Valley Bank’s headquarters in Santa Clara, Calif., on March 13, 2023. The federal government had to intervene to secure funds for depositors to withdraw from Silicon Valley Bank after the bank’s collapse.</span>
<span class="attribution"><span class="source">(AP Photo/ Benjamin Fanjoy)</span></span>
</figcaption>
</figure>
<p>Interest rates <a href="https://www.cbc.ca/news/business/us-federal-reserve-interest-rates-1.6685534">rose consistently in 2022</a>, which caused bond values to fall significantly. Up until the end of 2022, Silicon Valley Bank had an unrealized loss of $15 billion generated from its held-to-maturity products.</p>
<p>Silicon Valley Bank was forced to sell the debt instruments at a loss, leading to the sudden liquidity crisis. This loss was then made public, as the bank <a href="https://www.cnbc.com/2023/03/10/silicon-valley-bank-financial-in-talks-to-sell-itself-after-attempts-to-raise-capital-have-failed-sources-say.html">sought to increase its capital by selling stock</a>.</p>
<p>When customers — many with <a href="https://www.schroders.com/en-ch/ch/wealth-management/insights/silicon-valley-bank-what-are-the-implications/">large and poorly diversified balances</a> — realized there was a significant difference between their balance sheets and deposits, they tried to withdraw their funds from the bank in a short period, causing a bank run.</p>
<h2>How bad was the bank run?</h2>
<p>Silicon Valley Bank’s total liability at the time of the bank run was <a href="https://d18rn0p25nwr6d.cloudfront.net/CIK-0000719739/f36fc4d7-9459-41d7-9e3d-2c468971b386.pdf">$195 billion, $173 billion of which were deposit liabilities</a>. </p>
<p>On the day of the bank run, the bank’s customers attempted to withdraw <a href="https://fortune.com/2023/03/11/silicon-valley-bank-run-42-billion-attempted-withdrawals-in-one-day/">$42 billion in cash</a> — nearly 20 per cent of the bank’s total assets. However, Silicon Valley Bank didn’t have sufficient cash and available-for-sale securities to pay the deposit liabilities.</p>
<p>In the end, Silicon Valley Bank ran out of all available cash to pay its depositors, leaving the bank with a <a href="https://dfpi.ca.gov/wp-content/uploads/sites/337/2023/03/DFPI-Orders-Silicon-Valley-Bank-03102023.pdf">$1 billion negative balance</a>, according to a regulatory filing by the company.</p>
<p>As a result of the bank run, regulators had to intervene and take control of the bank. This was done to prevent further damage to the financial system and to protect the interests of the bank’s depositors. </p>
<p>The situation at Silicon Valley Bank serves as a cautionary tale for banks and investors alike, highlighting the importance of risk management and the potential dangers of wrongful asset liability management.</p>
<h2>Lessons learned from SVB’s failure</h2>
<p>In the short term, the greatest risk lies in something called <a href="https://www.weforum.org/agenda/2023/03/banking-crisis-svb-financial-jargon-explained/">financial contagion</a>. This refers to a situation where investors lose confidence not only in the bank that failed, but also in other banks, leading to them withdrawing their deposits and triggering bank runs across the industry. </p>
<p>This contagion risk can affect not only investors in the U.S., but also those in Canada. If contagion occurs, it could destabilize the markets for some time until the situation is resolved.</p>
<figure class="align-center ">
<img alt="People stand outside of a Silicon Valley Bank" src="https://images.theconversation.com/files/516123/original/file-20230317-14-37x1xw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/516123/original/file-20230317-14-37x1xw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/516123/original/file-20230317-14-37x1xw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/516123/original/file-20230317-14-37x1xw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/516123/original/file-20230317-14-37x1xw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/516123/original/file-20230317-14-37x1xw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/516123/original/file-20230317-14-37x1xw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">People look at signs posted outside of an entrance to Silicon Valley Bank in Santa Clara, Calif.,on March 10, 2023. The Federal Deposit Insurance Corporation seized the assets of Silicon Valley Bank, making it the largest bank failure since Washington Mutual during the 2008 financial crisis.</span>
<span class="attribution"><span class="source">(AP Photo/Jeff Chiu)</span></span>
</figcaption>
</figure>
<p>Fortunately, the U.S. Federal Reserve has provided <a href="https://www.federalreserve.gov/monetarypolicy/bank-term-funding-program.htm">a liquidity account for all banks feeling the pinch</a>; this has been enough to stop bank runs in the past. </p>
<p>In Canada, <a href="https://www.osfi-bsif.gc.ca/Eng/osfi-bsif/med/Pages/nr20230315.aspx">the Office of the Superintendent of Financial Institutions took permanent control of Silicon Valley Bank’s Canadian assets</a> to protect creditors, but since the bank does not have a banking licence, this is more of a market-calming measure rather than any specific local liquidity concerns. Also, while smaller banks have special regulations concerning liquidity, the OSFI has the authority to change these rules and require more capital or liquidity whenever necessary. </p>
<h2>Are current regulations good enough?</h2>
<p>One question that remains is whether the current U.S. banking regulations are fit for their purpose. Two separate issues can be considered here.</p>
<p>The first is that small and medium-sized institutions have <a href="https://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/SMSB.aspx">a different set of laxer rules they play under</a>, compared to larger institutions. The ethos of this ruleset is that smaller banks are regional and likely won’t cause systemic risk if they fail. Silicon Valley Bank and <a href="https://theconversation.com/why-svb-and-signature-bank-failed-so-fast-and-the-us-banking-crisis-isnt-over-yet-201737">other bank failures</a> suggest otherwise. The Federal Reserve <a href="https://www.reuters.com/business/finance/us-fed-consider-tougher-rules-midsize-banks-after-svb-signature-failures-wsj-2023-03-14/">is now considering changing these rules</a>. </p>
<p>The second question is whether the rules themselves moderate risks, particularly interest rate risk. So far, the regulations don’t prescribe how much interest rate risk <a href="https://www.investopedia.com/trading/hedging-beginners-guide/">hedging</a> an institution must undertake. This has been clearly insufficient in the face of rapidly rising interest rates and inflation. <a href="https://www.garp.org/risk-intelligence/market/silicon-valley-bank-031423">Silicon Valley Bank was particularly guilty of poor hedging</a>, but the regulations were not there to account for this, nor are they there to stop downward spirals in other banks.</p>
<p>The failure of medium-sized banks will most likely not lead to a major crisis, but it should serve as a wake-up call to regulators and to the markets of the risks that occur when central banks are taking measures to keep inflation in check. </p>
<p>Regulators and central banks need to take a close look at the current rules to see if they are fit for their purpose and create new frameworks where they detect they are not sufficient.</p><img src="https://counter.theconversation.com/content/201853/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Cristián Bravo receives funding from NSERC via the Canada Research Chair program and a Discovery Grant in topics related to credit risk.</span></em></p><p class="fine-print"><em><span>Yuhao Zhou does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The collapse of Silicon Valley Bank serves as a reminder of the importance of robust risk management, sound regulatory oversight and effective liquidity management.Yuhao Zhou, PhD Candidate in Financial Modelling, Western UniversityCristián Bravo, Associate Professor and Canada Research Chair in Banking and Insurance Analytics, Western UniversityLicensed as Creative Commons – attribution, no derivatives.