Negative interest rates. The new normal? – AFCA Think Tank Working Paper by Hubertus Väth

Abstract:

The concept of negative interest rates appears anathema to conventional economic thinking, and it is rarely discussed in economic literature. However, this changed when central banks began cutting their leading interest rates below zero. First in Sweden in 2009 and then in Switzerland, Denmark, the eurozone and Japan. Negative rates became a part of the monetary tool kit. Sub-zero rates soon spooked bond markets as well. For a brief moment in 2019, as US rates rose and even more euro-denominated bonds began to see some positive yields, markets expected a return to normalcy, that is, to positive rates. However, the sudden COVID-19 pandemic ended this trend and even the US, the UK and Singapore are on the brink of joining the negative yield club.
This article analyses negative rates from a European and mainly German perspective and focusses on three central aspects:

1) stiff headwinds for the international profile of the euro,
2) the impact on banks, particularly those with a strong deposit base, and
3) the interaction of rates and government debt.

This article also contrasts the views of central banks and their critics, which range from monetary economists warning of low-interest rate’s potential contractionary effects to followers of Modern Monetary Theory arguing that public debt volume and interest rates are mostly irrelevant.
Meanwhile, negative interest rates have become more common as the traditional arsenals of monetary policy have become depleted. However, the side-effects are considerable and deserve consideration.


Negative interest rates. The new normal?

To lend money and from the outset expect less in return is counterintuitive to the notion of money as a store of value. It also conflicts with the economic theory that foregoing consumption now to save for a later date deserves a reward, especially if you lend this savings instead, taking a risk. This thinking is not easy to align with negative rates. Hence negative rates send market participants a clear signal of an extreme economic scenario, a stressor on the system. Not surprisingly, except for some time from 1972 to 1979, when Switzerland tried to discourage foreigners from holding CHF deposits and lifting the Swiss Franc, interest rates were positive in all markets.

Times changed for good in July 2009, when the Swedish Central Bank, the Sveriges Riksbank, cut its main repurchase rate to 0.25 per cent, depressing the actual overnight deposit rate for the banks to minus 0.25 per cent.  For the first time in July 2012, Denmark’s Central Bank directly fixed its key interest rate below zero.  The European Central Bank (ECB) followed suit in June 2014, the Swiss National Bank in January 2015 and Nippon Ginkō – the Bank of Japan – in January 2016. The ECB cut rates four more times over the following years, reaching minus 0.50 per cent in September 2019.  Sveriges Riksbank cut the repurchase rate itself below zero to minus 0.10 per cent in February 2015 and to minus 0.50 per cent a year later  but reversed it to zero in December 2019.

Negative rates have spread to the bond market as well. By August 2019, USD 16.8 trillion of outstanding bonds carried a negative yield, according to Bloomberg. In December 2019, the volume decreased to USD 11.2 trillion. Governments and international organizations, as well as highly-rated banks and corporates from more than 30 countries across the globe from Japan to Germany, from the US to Singapore could raise money and essentially be paid for the issuance. The biggest countries to do so being Japan with USD 4.8 trillion, France and Germany with USD 1.6 trillion, Spain with USD 467.5 billion and international organizations with 428.9 billion.

Based on Sweden’s example and the reduction in outstanding sub-zero bonds from August to December 2019, one could have concluded that negative interest rates were gradually retreating. However, the COVID-19 pandemic stopped this trend in its tracks. It is safe to say that negative rates have become a fixture in the monetary toolbox and may even become the new normal provided inflation remains subdued – a provision that deserves debate. As the pandemic is both a demand and supply shock, we will see deflationary and inflationary forces at work at unprecedented levels. What we know for sure is that the vast recovery programs rely on these low or sub-zero rates. According to the International Monetary Fund (IMF), as of May 2020, these already amount to USD 9.0 trillion.   The OECD estimates that developed countries will raise at least USD 17 trillion of new public debt.

Considering this fiscal expansion, the US, the UK and Singapore are on the brink of joining the negative yield club. Interest rate futures markets in the US sent a remarkable signal during the first week of May 2020, as they appeared to price in expectations that the Fed’s benchmark federal-funds rate would fall below zero by year-end.  Donald Trump applauded via Twitter, “As long as other countries are receiving the benefits of Negative Rates, the USA should also accept the ‘gift’. Big numbers!”  On 20 May 2020, the UK government sold three-year gilts at a negative rate of minus 0.003 per cent for the first time.  A day later, the one-month swap offer rate in Singapore fell below zero.

A multi-pronged approach for economic growth and combatting deflation

In the wake of the financial crisis in 2008 and 2009, negative interest rates made their first prominent appearance in policy circles, when the traditional toolbox seemed depleted. The suggestion has been discussed by, amongst others, Mervyn King, governor of the Bank of England, George Mankiw from Harvard, a former Chairman of Economic Advisers, and Kenneth Rogoff, also Harvard, who even suggested abolishing paper currency to make it work . 
According to Philip R. Lane, the chief economist of the European Central Bank, the downward pressure on real rates has been “a significant environmental constraint on the options available to central banks.”  Since the 1980s, real interest rates have declined due to rising life expectancy, an ageing population, slower productivity growth and digitalization. 

Furthermore, the euro zone’s inflationary targets remain elusive, coming close but always below the ECB’s 2.0 per cent target. While this could be considered a success to the primary mandate of price stability, deflation is a major concern.

Therefore, the ECB pursued an “innovative, multi-pronged approach in the design of its policy stance.” The current policy mix includes four elements:

1) negative interest rate policy by fixing the deposit facility rate below zero,

2) an asset purchase program, specifically concerning eurozone government bonds,

3) support of bank lending through targeted longer-term refinancing operations (TLTROs), and

4) forward guidance on the path of policy instruments.

As a result, the European Central Bank received broad praise for its contribution to eurozone stability following the financial crisis.  Over the past six years, unemployment decreased as well as the risk of a deflationary spiral.

Nevertheless, critics focus on the harmful side-effects of negative interest rates. Just as any medicine carries certain risks and side-effects, it is a matter of careful consideration whether the positive impact outweighs potential negatives, especially long-term. Current research demonstrates that quite a few areas are affected by negative rates.

Side-effects on the domestic economy and international trade

Traditionally, central banks in industrialized countries cut rates by around 4% in response to recessions.  With rates already low or negative, possible changes will almost certainly be too small to substantially alter the profit rationale for households or corporates creating extra demand via credit. What low or even negative rates certainly do is relieve pressure to adjust and adapt, as the cost of debt remains manageable for most companies. Therefore, critics blame a “zombification” of the economy, citing the lack of dynamic in the Japanese economy as proof, by keeping weak companies afloat.

Sweden, an early advocate, became more sceptical on the balance of its impacts. At the December 2019 monetary policy meeting, Deputy Governor Henry Ohlsson remarked: “the minus world has not had a full impact on households […] The impact of monetary policy has been less than in the plus world.”

The so-called “theory of reversal interest rates” goes even further. According to Princeton University’s Markus Brunnermeier and Yann Koby, a specific interest rate level – which could even be above zero – exists at which the effects of accommodative monetary policy reverse and become contractionary for lending. The key determinants are the banks’ long-term fixed-income holdings, their capitalization, the tightness of capital constraints and the deposit supply. “A monetary policy rate decrease below the reversal interest rate depresses rather than stimulates the economy.”

Strong headwind for the international profile of the euro

Negative interest rates also affect exchange rates. Cuts can contribute to downward pressure, reducing a currency’s appeal to store value, hampering its role as an international reserve and investment currency. 
Despite the ECB’s strategic objective to strengthen the euro internationally, its share in global reserves peaked at the end of 2009, at almost 28 per cent at current exchange rates, but fell from 24.2 per cent at the end of 2013 to 21.2 per cent at the end of 2014 after the introduction of sub-zero rates. Since then it drifted in a narrow range of between 19 and 21 per cent.   The same is true for the international bond and loan markets. Initially, the share of the euro in the outstanding international debt securities climbed from just above 20 per cent in 2000 (at current exchange rates), to about 32 per cent in 2008 and 2009, but has since almost returned to its initial level.  
The US Federal Reserve has demonstrated the global lead of the US dollar during the Corona pandemic, offering swap lines to 14 foreign central banks. The move successfully calmed offshore US dollar markets, especially for euro- and yen-based borrowers who had to pay extra margins in US dollars. 
As exchange rates became politicized, the impact of interest rates on exchange rates has been significant as well. Interest rates impact monetary flows; thus, currencies can be strengthened or weakened through higher and lower rates, respectively, all else equal. Much like an afternoon espresso, the short-term effects of a weaker currency are positive.  Lower exchange rates stimulate growth, improving international competitiveness both for exports and import substitution. Thereafter, much like the coffee-induced stimulus subsiding, lower rates lead to worse terms of trade and in the long run, can impoverish a nation, relatively. Worse risks are written on the wall as well. There is a fine line between what other countries may consider currency manipulation rather than coping with a recession.  The former ultimately risks a trade war which would damage the global economy. In this regard, interest rates are obviously seen as a tool in trade wars as well.

Downsides push banks with more substantial deposit bases to invest in riskier assets

Banks are the point of entry for negative rates spreading into the economy. First, depositing excess liquidity with the central bank is costly. Deutsche Bank recently stated that as a result of negative rates, it paid EUR 327 million to the ECB in the first quarter of 2020, for the privilege of keeping its money. As long as cash storage is an option, banks find it difficult to pass on negative rates to households. Circulation of banknotes and coins increased by 27 per cent from EUR 1.041 billion at the end of 2014, to EUR 1.323 billion at the end of 2019. Corporates have also changed their behaviour in big and small ways. For example, financing has become increasingly geared, and equity light financing has made corporates so much more vulnerable during the pandemic. Even invoicing (later) and payment (earlier) behaviour adds risks to the system without anything in return other than saving negative rates.  
In April 2020, the European Central Bank published research on systemic banks showing those with a more substantial deposit base, primarily the German financial industry, are more affected by negative rates and therefore pressured to compensate by increasing risk. They prefer to invest additional in-flows in more liquid securities than illiquid loans. The ECB research shows that investments were directed towards riskier debt with longer maturities issued by private financial and non-financial companies, as well as higher-yielding securities denominated in US dollars, increasing risks to creditworthiness, maturity and exchange rates.  
Another more recent ECB study finds that net interest income has so far remained rather resilient. The adverse effects of interest rates have been offset by positive borrower creditworthiness reducing loan loss provision costs and decreases in financial asset yields, increasing the value of securities held by banks.  These arguments are likely to be severely tested in the coming months following COVID-19.
Where investments were once assessed in relation to a risk-free return, banks must now cope with return free risk in the system. This shift clearly has a negative impact on banks, particularly those with higher deposits, which would typically enjoy a better reputation. Pressures on profitability have made the banking system as a whole more fragile. 
German banks hesitated to pass on negative rates for a long time. Only some smaller actors raised negative rates for their wealthy clients in October 2014. However, banks have recently overcome their hesitation and typically charge negative rates for amounts exceeding EUR 500,000 to 1 million. 
The European Central Bank is aware of the dilemma between transmission and profitability. In late 2019, it introduced a two-tier system exempting part of a bank’s liquidity holdings in excess of the minimum reserve requirements from the negative remuneration. In December 2019, the ECB fixed the multiplier on the minimum reserve holding at six.  The estimated net charge for German banks was about EUR 2.4 to 2.5 billion in 2018 and 2019, respectively, and as a result, would fall to about EUR 1.6 billion in 2020. 
Furthermore, the ECB supports banks that expand their net lending activities. According to the terms and conditions of its targeted longer-term refinancing operations (TLTRO III), the banks can refinance at an interest rate even below the negative deposit rate. Facing the current economic disruption and heightened uncertainty, the ECB fixed the applicable rate 50 basis points below the average interest rate for a period until June 2021, meaning banks can refinance at minus 1.00 per cent p.a. when expanding their lending activities.
These policies demonstrate that negative rates lead to subsequent actions by central banks to avoid a banking crisis.

Are public debt and interest rates negligible?

A review of the ECB’s negative deposit rate would be incomplete without a look at the central bank’s various Asset Purchase Programmes (APP). While negative rates focus on the short term, the purchase of securities focuses on the long term. According to the ECB, after the recalibration in 2018, the ten-year bond yield would have been around 95 basis points higher in the absence of the APP. 
There have been various APPs which have applied to covered bonds, asset-backed securities and corporate bonds. In March 2020, the ECB announced a EUR 750 billion Pandemic Emergency Purchase Programme (PEPP) of private and public sector securities to counter the serious risks posed by the outbreak and spread of the Corona pandemic.  However, the most important APP, the so-called Public Sector Purchase Programme (PSPP) applies to government bonds. By the end of April 2020, the Eurosystem held EUR 2.7 trillion in assets, of which almost EUR 2.2 trillion was public sector debt.  
The PSPP raised the question, whether the purchase of public sector bonds qualifies as monetary financing of member state budgets. A lawsuit was filed with the German Federal Constitutional Court. In May, the Court did not find a violation of monetary financing but requested an analysis on the side-effects of the program. Initially, this appeared to be simply a request for paperwork. Still, due to the legal independence between European and national courts as well as between central banks and courts within the EU, the German government must untangle the legal knot in order to find a solution for that judgement.
Modern Monetary Theory (MMT), the school behind negative rates, considers levels of public debt and interest rates for this debt irrelevant and would not be concerned with a debt overhang in a post-pandemic world. According to Stephanie Kelton of Stony Brook University, public debt poses no inherent danger to currency-issuing governments for three reasons. “First, a currency-issuing government never needs to borrow its own currency. Second, it can always determine the interest rate on bonds it chooses to sell. Third, government bonds help to shore up the private sector’s finances.”  She argues that governments only issue bonds to protect the “well-guarded secret about the true nature of their fiscal capacities” instead of directly enlarging the monetary base. 
The power of a currency-issuing government or at least a common fiscal policy is crucial in a system of free-flowing capital across borders. Until now, the eurozone lacks such competence, which escalated in Germany, the Netherlands and Austria’s refusal to accept the common liability for so-called Corona-bonds issued by eurozone countries, especially Italy. However, the EUR 500 billion recovery fund recently proposed by German and French leaders Angela Merkel and Emmanuel Macron has been compared by many, including the German Finance Minister Olaf Scholz, to Alexander Hamilton and could mark a turning point in the history of the European Union.
Yet, critics interject that governments can only print money as long as the public remains confident in its currency.  Willem Buiter, a former Global Chief Economist at Citigroup, is convinced “that governments […] able to monetize massive budget deficits without ever boosting inflationary pressure gets us to the wonderland.”

A return to the old normal?

The pandemic is undoubtedly a turning point which challenges all conventional doctrines. At this juncture, negative interest rates appear to be the new normal. Although negative rates may weaken the financial system, their effects on banks’ profitability seem manageable in the near-term; but only if inflation remains subdued by competing deflationary- and inflationary-impacts. At this stage, how negative rates will affect risk management in the entire financial system remains theoretical. Lacking alternatives, it becomes ever more like an all-in bet. Finding out where the risk created by negative rates is hiding in the system could prove a painful experience. 
Central banks newly confronted with negative rates, in countries like the US, UK or Singapore, at least enjoy the advantage of being able to reference others’ experiences. After almost a decade of negative rates, prophets of doom have reverted to the scientific and political fringes. But doubts do remain. Even the best medicine is poisonous in a high enough dose. So far, the world has proven receptive and resilient. And yes, policymakers are navigating unchartered monetary waters. Hopefully, the monetary world is round, rather than flat. But, they better hold their breath as there is plenty of concern of no option B on the horizon. Returning to the old monetary regime, in such an indebted world, would pose a substantial political risk, so it can safely be ruled out, at least for now. That is the new normal.

Source: Asian Financial Cooperation Association – Think Tank: Negative interest rates. The new normal? (Hubertus Väth)

First Virtual Food for Thought Event with Bryan Stirewalt

To what extent does the Covid19 crisis influence the development of new technologies? What impact does the home office have on the work of a regulatory authority? These and other questions were the focus of our first Virtual Food for Thought webinar this morning with Bryan Stirewalt, CEO of the Dubai Financial Services Authority (DFSA). The Virtual Food for Thought event series is the digital version of the established Financial Centre Breakfast series.

This morning Andreas Glänzel, Managing Director of Frankfurt Main Finance, welcomed the participants of the first Virtual Food for Thought webinar. He himself was connected live from the FMF office in Frankfurt. Speaker Bryan Stirewalt was connected live from his office in Dubai. His speech titled „Today’s disruptions, tomorrows opportunities. How disruption will shape the future of finance“ focused on the the development of new technologies and their implementation in the context of the Covid19 crisis but also on the question how does a regulatory authority works from home?

https://twitter.com/FMFdigital/status/1268443445145874433

https://twitter.com/FMFdigital/status/1268448819882143745

Upcoming Virtual Food for Thought with Philip R. Lane, Member of the ECB’s Executive Board

No sooner has the first Virtual Food for Thought webinar been successfully completed than the next webinar is already being planned. We are pleased to welcome Philip R. Lane, Member of the Executive Board of the ECB, as our speaker at the upcoming Virtual Food for Thought webinar on 24 June 2020! In his speech he will talk about the monetary policy of the ECB. We will distribute a free registration link via our social media channels within the next days – stay tuned!

About DFSA

The DFSA is the independent regulator of financial services conducted in or from the Dubai International Financial Center (DIFC), a purpose-built financial free zone in dubai, uae.

The DFSA’s regulatory mandate includes asset management, banking and credit services, securities, collective investment funds, custody and trust services, commodities futures trading, Islamic finance, insurance, an international equities exchange, and an international commodities derivatives exchange. In addition to regulating financial and ancillary services, the DFSA is responsible for supervising and enforcing anti-money laundering (AML) and counter-terrorist financing (CTF) requirements applicable in the DIFC.

China Policy Update by Dentons and China Europe International Exchange

In terms of level playing field engagement in international cooperation, governments are seeking different measures. The German Foreign Trade and Payments Act—to be put in place this summer—is one of these policies. Who is affected by the decision? What does it mean in detail? Learn more in the China Policy Update provided by Dentons and China Europe International Exchange (CEINEX).

China Policy Update

28 May 2020

10.30-11.30 CEST (16.30-17.30 CST)

Register here.

 

What will the post-COVID era look like in Africa? What are the challenges and opportunities?

Our partner Casablanca Finance City will host a webinar on the challenges and opportunities that the post-Corona era provides for Africa:

Lockdown may progressively be lifting in Africa but its impact will live on. Casablanca Finance City is bringing together international experts and representatives from companies operating in Africa, to discuss the outlook and prospects of post-COVID Africa.

The panel will cover field experiences from different industries and the impacts on their respective businesses:

  • How will the private sector be impacted in Africa?
  • How is the financial services community supporting companies operating on the continent?
  • How can the digitalization boost be leveraged to support economic recovery? What are the risks?
  • What are the social impacts between employers and employees?

 

Understanding the landscape in a post Covid era: Outlook and prospects in Africa

Wednesday, May 20, 2020

12:00 pm Casablanca Time (UTC)

Moderator: Peter Walts, COO, ELA Alliance

Register here.

Deutsche Bundesbank – Learning from European cooperation in the field of financial stability

The Corona pandemic exposes the fragilities of our societies and economies. Policymakers at all levels are taking decisive action to protect firms and households. Common European action is highly desirable and feasible. We need to evoke the positive forces that give us strength. We need to find pragmatic solutions. European cooperation is indeed working better than often claimed. Financial stability is a prominent example: a lot has been achieved since the global financial crisis. We can be proud of these developments and learn from this experience.

Many people are asking themselves “what is the EU doing to tackle the crisis?” In our policy field, financial stability, a lot is being done.

A well-functioning financial system is not an end in itself. It is there to make the economy work; to foster sound investment and saving; to ensure safe and efficient payments.

Prior to the outbreak of the pandemic, the resilience of the banking sector had been strengthened, thanks to the reforms of the past decade. European and national supervisors have now been able to release buffers of capital and liquidity in order to allow banks to lend more. Supervisors also recommended to financial institutions not to finance payouts, in order to increase their resilience. All this has been done by exploiting flexibility in the rules; it does not mean reversing the reforms, which have made banks more robust ahead of the crisis.

In line with their responsibilities and mandate, the ECB and national central banks have acted promptly and decisively to avoid a downward spiral in price expectations and to ensure a smooth flow of liquidity to firms and orderly conditions on markets.

 

Read the full guest contribution at: https://www.bundesbank.de/en/press/contributions/learning-from-european-cooperation-in-the-field-of-financial-stability-832294.

 

Paris Europlace International Financial Forum: New Frontiers in Finance

Panel discussions, expert talks, and networking: The chances and challenges facing the global financial industry – including digitalisation and sustainable finance – were discussed at the International Financial Forum, which took place in mid-July 2019 in Paris. In a workshop moderated by Arnaud de Bresson, Chief Executive Officer of Paris Europlace and Chairman of the World Alliance of International Financial Centres, Frankfurt Main Finance (FMF) Managing Director Hubertus Väth discussed the cooperation between International Financial Centres (IFCs) and global economic growth alongside representatives from the IFCs Toronto, Astana, Tokyo and Abu Dhabi.

Digitalisation and Sustainable Finance in the Financial Industry

From July 9th to July 10th, financial industry experts, CFOs, CIOs, senior executives, investors and representatives of financial services providers, regulators, and politicians met at the annual International Financial Forum near the famous Champs-Élysées in Paris to discuss:

  • Sustainable Finance
  • European perspectives in a globally changing world
  • Digital trends in Finance
  • Growing capital markets

Two of those topics – digitalisation and green finance – were emphasized in the closing address presented by Francois Villeroy de Galhau, Governor of the Banque de France: The theme of this Forum – ‘New Frontiers in Finance’ – prompts us to look towards new territories that we have to explore and conquer. Regarding finance, I will focus on two of them: digitalisation and green finance. (…) Digitalisation is shaking up the way we live and consume, opening up a world of possibilities for corporates and customers alike. Worldwide, it clearly represents both an opportunity and a challenge for banks, as well as for supervisors. (…) We are currently witnessing a growing awareness from central banks, supervisors and financial institutions about climate-related risks. Clearly, green finance and climate risks management have gone from the ‘nice to have’ to the ‘must have’, from emotion to reason.

International Financial Centers: Cooperation for Economic Growth

In a workshop moderated by Arnaud de Bresson, Chief Executive Officer of Paris Europlace, FMF’s Managing Director Hubertus Vaeth, discussed Cooperation between International Financial Centres and economic growth alongside Keiichi Aritomo, Executive Director of FinCity Tokyo, Kairat Kelimbetov, Governor of the Astana International Financial Centre, Jennifer Reynolds, President & CEO of Toronto Financial International, and Philippe Richard, Director of the Financial Services Regulatory Authority, Abu Dhabi Global Market.

While Arnaud de Bresson highlighted the significance of financial technology, globalisation as well as green and sustainable finance for Financial Centres he also pointed out, that it is vital to further convey the relevance of International Finance hubs to the general public. Kairat Kelimbetov agreed and added that International Financial Centres should not only concentrate on the banking sector but rather focus on promoting the economy. Philippe Richard informed the workshop participants about current solar energy and Green City projects conducted in the United Arab Emirates and Abu Dhabi. Moreover, Hubertus Väth emphasized the role of young, innovative and agile start-up companies – which bridge the gap between agile technology and the financial sector – as a central competitive factor for all financial institutions.

Please find a photo gallery of the event on the Homepage of Paris Europlace.

Astana Finance Days

Astana Finance Days

What are the challenges that international and regional financial centers around the globe are facing? What new trends can be observed and what new opportunities are arising that can shape the future of regional and global financial markets? Those and many other questions were discussed by global thinkers, policymakers, representatives from business, public service, and academia discussed at the Astana Finance Days in Nur-Sultan, Kazakhstan, in July 2019. During the 4 day-long conference, the participants debated issues and opportunities related to governance, infrastructure, financial technology as well as global cooperation of International Financial Centres (IFCs).

With a shift in the balance of power between leading IFCs in Asia, North America, and Europe, that has occurred in the last decades, the role of IFCs has changed and so has their collaboration. Thus, on the second day of the conference, a panel moderated by the World Alliance of International Financial Centers’ (WAIFC) Managing Director Dr. Jochen Biedermann discussed the competitiveness of IFCs in a rapidly changing economy as well as the attractiveness of established IFCs vs. emerging IFCs. Frankfurt Main Finance’s president Dr. Lutz Raettig joined the panel “International Financial Centres: the outlook to 2025 and beyond” alongside Sandy Frucher, Vice Chairman of Nasdaq, Frederic de Laminne de Bex, Secretary-General of the Belgian Finance Club and James Martin, Deputy CEO of  AIFC.

Another theme that receives increasingly more attention was discussed by WAIFC representatives from Brussels, Busan, Casablanca, Frankfurt, London, Luxembourg, Mauritius, Moscow, Nur-Sultan, and Paris: FinTech talent development and capacity building, both of which are highly important for the success of Fintech ecosystem building. A lively panel discussion evolved around including FinTech into the curriculum of business schools, foreign education programs funded by local governments, short-term courses as well as professional certification and re-training of seasoned financial professionals.

However, global cooperation between IFCs was not just a topic during the conference: On the last day of the event, the WAIFC presented an Honorary Award to Nursultan Nazarbayev, First President of Kazakhstan, for creating the AIFC and his significant contribution to fostering global cooperation among International Financial Centres.

Guangzhou Municipal Local Financial Supervision and Administration and Frankfurt Main Finance e.V. sign Memorandum of Understanding

Guangzhou Municipal Local Financial Supervision and Administration and Frankfurt Main Finance e.V. strengthen their cooperation. From May 9th to May 10th, 2019, a Chinese delegation with 11 representatives from the Guangzhou Municipal Local Financial Supervision and Administration and some Guangzhou local state-owned enterprises visited the Financial Centre Frankfurt to conduct a two-day business visit. During these two days, the delegation had meetings with various financial organizations and several agreements on bilateral cooperation plans were achieved.

On the first day of the visit, the Guangzhou Municipal Local Financial Supervision and Administration and Frankfurt Main Finance (FMF), committed to a long-term cooperation in a Memorandum of Understanding. Dr. Lutz Raettig, President of Frankfurt Main Finance e.V., and Qiu Yitong, Director of the Guangzhou Municipal Local Financial Supervision and Administration, signed the agreement at Frankfurt’s city hall, the Römer. Dr. Nargess Eskandari-Grünberg, Deputy Mayor of Frankfurt, also greeted the delegation with a welcome speech. The partnership is an important milestone in the bilateral cooperation of both financial Centres and will guide the future implementation of a series of joint projects between both organisations.

The agreement focuses on many key issues facing today’s financial industry such as Green Finance, FinTech, and Cross-border Finance. The agreement aims to foster the development of an effective cooperation via joint programs, financial trainings, research activities, workshops, publications and study trips. Moreover, both parties will further explore the establishment of a Guangzhou-Frankfurt Financial Alliance.

Qiu Yitong, Director of Guangzhou Municipal Local Financial Supervision and Administration, stated, “Guangzhou is the only city in China’s history that has never closed its door to trading with to the rest of world – and Guangzhou would like to open its door even wider in the future. We hope that we can learn more from Frankfurt about how to develop into a leading Financial Centre.”

Frankfurt Main Finance’s Managing Director Hubertus Väth declared, “We are delighted to sign the MoU with the Guangzhou Municipal Local Financial Supervision and Administration today. We look forward to the fruitful cooperation in the future.”

During their two-day visit of the Financial Centre Frankfurt, the Guangzhou delegation also visited the CEINEX (China Europe International Exchange), the BaFin and Deutsch Bank. As many enterprise representatives from the delegation stated, Guangzhou is one of the most active trading cities in China. Participating in an international capital market is an important step for all enterprises pursuing an international development strategy. Frankfurt, as the “financial heart” of Europe, is a very good choice for these enterprises as they can benefit from the proximity to the banking sector, various stock exchanges, and regulatory authorities. Moreover, Guangzhous local enterprises are keen to attract financial institutions from Frankfurt and to foster cooperation.

Front (from left): Dr. Lutz Raettig, President Frankfurt Main Finance e.V. and Qiu Yitong, Director Guangzhou Municipal Local Financial Supervision and Administration. – Back(from left): Liu Xianchang, Director Economic Development and Finance Bureau of Guangzhou Aerotropolis Development District, Gao Shudong, Director Guangzhou Development District Bureau of Financial Affairs, Deng Xiaoyun, Director China (Guangdong) Pilot Free Trade Zone Nansha Area of Guangzhou and Guangzhou Nansha Economic and Technological Development Zone Bureau of Financial Affairs, Dr. Nargess Eskandari-Grünberg, Deputy Mayor of Frankfurt, Hubertus Väth, Managing Director Frankfurt Main Finance e.V., Eduard Hechler, Director International Affairs City of Frankfurt and Dr. Jochen Biedermann, Senior Advisor Frankfurt Main Finance e.V.

Cairo Financial Industry meets Frankfurt to discuss options post Brexit

More than 1.2 trillion USD in assets will need to be relocated after Brexit. Frankfurt is poised to gain more than 800 billion USD. Frankfurt Main Finance, representing the Financial Centre Frankfurt, with the support of the Central Bank of Egypt, informed the Financial Industry in Cairo on the most recent developments on 25 March 2019, at the Diplomatic Club Cairo.

The event brought legal and regulatory experts together the financial industry to discuss Frankfurt’s increasing role as a financial hub in the wake of the United Kingdom’s impending exit from the European Union, not just for continental Europe, but also the larger MENA region.

“As the financial centre of Europe’s leading economy, Germany, and the home of the European Central Bank, Frankfurt is in the pole position to benefit post Brexit. 48 Financial institutions, mainly from the US, Europe and Asia have decided to relocate all or part of their European banking business to Frankfurt,” explains Hubertus Väth, Managing Director of Frankfurt Main Finance e.V.

“We now see a second wave coming from the MENA region.” Yusef Ahmed, Founder and Managing Director of FIC Frankfurt International, notes. “As companies and banks finalize their Brexit contingency plans, Germany is committed to supporting Frankfurt’s key position in the new landscape of Europe’s financial industry.”

From a legal perspective, regulatory issues faced by banks moving to Frankfurt have been discussed in the context of new political conditions. Brexit also hosts opportunities for Frankfurt to establish itself as an M&A centre as well as a transaction-financing hub,” says Dr. Nicolas Bremer, Partner at the international law firm Alexander & Partner.

Dr. Rüdiger Litten, Partner at the international law firm Fieldfisher, who supported the Kuwait Finance House in establishing their fully licensed bank in Frankfurt, adds that “in the past months, we have experienced an increasing number of banks and financial institutions from the MENA-region seeking our advice on opening shop in Frankfurt.”

 

Fifth visit of FMF delegation to South Korea and Hong Kong

In January 2019, a German delegation, headed by Dr. Lutz Raettig, President of Frankfurt Main Finance, traveled to South Korea and Hong Kong.

Seoul

In Seoul, the delegation attended the FinTech & Blockchain Forum at Sogang University at which Korean and German companies were presenting their business models. Moreover, the group met with Suk Heun Yoon, President of the Korean Financial Supervisory Service (FSS) to discuss Britain’s exit from the European Unit as well as the potential implications for European financial markets and the Financial Centre Frankfurt. Furthermore, the World Alliance of International Financial Centres (WAIFC) was discussed with representatives of the city council – a global strategic alliance of which both the Korean financial centre Busan and FMF are founding members.

Busan

On the second day, the delegation took the KTX high-speed train to Busan  – the second largest Korean city and partner of FMF. After meeting with the Busan Economic Promotion Agency (BEPA) and a warm welcome by Chairman Dr. Ki Sik Park, the delegation went to the United Nations Memorial Cemetery –  a burial ground honoring United Nations Command soldiers who fell in the Korean War (1950-1953).

Thereafter, the delegation was welcomed at the Busan city hall by Jae-soo Yoo, Deputy Mayor. Mr. Yoo and Dr. Raettig emphasized the close collaboration between the two financial centres following the signing of the cooperation agreement in 2013, which will be further strengthened by the joint WAIFC membership. Back in Seoul, the delegation met with Korean politicians, companies as well as with Prof. Sooyong Park, Head of the Global FinTech Research Institute.

Hong Kong

In Hong Kong, the delegation participated at the Asian Financial Forum (AFF) – titled Creating a Sustainable and Inclusive Future and held under the auspiece of the Government of the Hong Kong Special Administrative Region and Hong Kong Trade Development Council (HKTDC).

Asian Financial Forum 2019

The stall of the International Financial Centre Frankfurt, jointly organised by FrankfurtRheinMain GmbH, Hessen Trade & Invest and Frankfurt Main Finance, attracted many visitors who were interested in Brexit related topics as well as Frankfurt’s thriving FinTech scene.

In her opening address, Carrie Lam, Chief Executive of Hong Kong Special Administrative Region of the People’s Republic of China, highlighted the success of FinTech in Hong Kong. Moreover, she emphasized how important the Greater Bay Area initiative, implemented by the Guangdong province, Macao and Hong Kong, are to the government of Hong Kong.

While the members of the delegation with a background in the banking sector listened to interesting presentations, the Frankfurt-based FinTech company AsiaFundManagers presented itself to a number of potential investors at the so-called Deal Flow Matchmaking Session of the AFF. At the final meeting with Dr. Raettig on the last day of the trip, the two participating managing directors of AsiaFundManagers voiced their satisfaction with the results of the talks.