Bank of England launches inquiry into forex manipulation claims

Senior currency trader says Bank officials condoned information sharing between traders under investigation

The Bank of England has launched an internal inquiry into allegations that its officials endorsed sharing of information between traders in the foreign exchange market, the central bank's deputy governor told MPs.

The inquiry will examine claims that at a meeting between Bank officials and senior currency traders last April the officials said it was permissible for traders in different banks to share information about clients' positions ahead of the setting of a benchmark rate in the foreign exchange market.

Andrew Bailey told the Treasury select committee: "The governors of the Bank have taken the claims about the meeting with the Bank's officials extremely seriously since we first heard about these allegations. Just so you know, we first heard about them in October.

"The governors immediately initiated a full review into it led by the Bank of England's legal counsel but also supported by external legal counsel and also in close collaboration with the FCA [financial conduct authority]."

Bailey, who is in charge of supervising financial firms, said the Bank had found no evidence that officials had endorsed sharing of information but added: "We do not regard that review as over."

Bloomberg News reported last week that a senior currency trader had informed the financial conduct authority that Bank staff at the April meeting had condoned information sharing. Alleged collusion in setting benchmark rates in the foreign exchange market is at the centre of allegations of market manipulation that could be as big as the Libor scandal.

Bailey said the Bank's inquiry had not yet seen the anonymous trader's notes from the meeting.

Bailey agreed with committee member Pat McFadden that if true the allegations would be "extremely damaging" to the Bank's reputation.

"I agree with you on that. That is why we have set up this investigation and this process," Bailey said. "The governors take the whole question of the reputation and integrity of the central bank extremely seriously. It's the most important thing we have."

The benchmark in question is used to price a wide variety of financial products and is the subject of regulators' attention amid allegations that traders at rival banks were sharing information about their orders from clients to manipulate the price.

A record of the April meeting released by the Bank showed it was chaired by Martin Mallett, its chief currency dealer, and included an entry entitled "extra item". The record says: "Processes around fixes. There was a brief discussion on extra levels of compliance that many bank trading desks were subject to when managing client risks around the main set-piece benchmark fixings."

Martin Wheatley, chief executive of the FCA, which is in charge of stamping out market abuse, told MPs last week that the allegations were "every bit as bad" as those surrounding Libor. Banks have been fined billions of pounds over the Libor scandal.

The meeting was between senior traders at investment banks and a subcommittee of the Bank's foreign exchange standing committee. Bloomberg was told that during a 15-minute conversation about currency benchmarks traders said they used chat rooms to match buyers and sellers ahead of the one-minute period when rates were fixed to avoid trading at a volatile time.

The officials are alleged to have said the practice might benefit markets because it made them more stable.

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UK economy to grow by 2.5% this year, says NIESR

The think tank said the UK's economic recovery had become "entrenched".

The estimates are broadly in line with those of other forecasters, including the UK's Office for Budget Responsibility.

NIESR also said it expected the unemployment rate to fall below 7% before the end of the year.

Jobless figures released last month showed that the unemployment rate fell to 7.1% in the three months to November.

Last year, the Bank of England said it would consider raising interest rates from their current historic lows if the unemployment rate fell below the 7% threshold, though it has since played down expectations of rate rises in the near future.

NIESR's forecast follows similar raised UK growth forecasts from the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD), which are also increasingly optimistic about the UK's economic prospects.

'Remarkable performance'

Falling unemployment and rising house prices have helped to encourage consumers to spend more, fuelling the recovery.

More sluggish sectors of the economy such as construction are also now showing signs of strengthening.

But concerns remain - particularly levels of business investment, which remain low, and stagnant wage growth which means prices are continuing to rise faster than many people's salaries.

"The UK's economic recovery is entrenched," the NIESR said in a statement. "Above trend growth returned in 2013, while the remarkable performance of the labour market persists."

"We expect consumer spending to remain the key driver of recovery in 2014 and 2015, supported by continued buoyancy in the housing market."

It added that the rapid fall in unemployment seen in recent months had "raised questions over the credibility" of the Bank of England's forward guidance, which saw 7% unemployment as an important threshold.

NIESR said it was forecasting a rise in interest rates as early as the second quarter of 2015, though this is expected to be a year after the 7% threshold is breached.

The Bank of England opted to keep its benchmark interest rate unchanged at 0.5% again on Thursday. The rate has been at the historic low since March 2009.

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Sterling to go plastic, Bank of England decides

New polymer banknotes to be introduced, beginning with Sir Winston Churchill £5 note in 2016

The Bank of England will announce plans on Wednesday to press ahead with switching to plastic banknotes, starting with the new Sir Winston Churchill £5 note in 2016.

The decision on polymer notes will mark the beginning of the end for 320 years of paper notes from the Bank. The move by Threadneedle Street follows Bank governor Mark Carney's native Canada, where plastic notes are being rolled out, and Australia, where they have been in circulation for more than two decades.

Carney launched a public consultation on polymer banknotes, seen as cleaner and more durable, shortly after arriving at the Bank this summer. However, the Bank's notes division has been considering plastic money for several years.

Bank officials have been touring shopping centres and business groups around the country with prototype notes to canvas public opinion and the final decision is due todayon Wednesday.

The Bank has promoted its polymer notes, featuring a see-through window and other new security features as less threadbare and tougher to counterfeit.

It has sought to quell concerns about the environmental impact of printing on plastic by suggesting they can last up to six times longer than the cotton-paper notes in circulation at the moment. The durability will also compensate for the higher production costs and save an estimated £100m, the Bank claims.

Its laboratory tests showed polymer banknotes only begin to shrink and melt at 120C, so they would fare better in washing machines but could be damaged by a hot iron.

The initial plan is to introduce polymer notes one denomination at a time, with the Churchill note in 2016 at the earliest and then the £10 note featuring Jane Austen next in 2017. The notes will continue to feature the Queen and retain their current colouring.

The move is the latest in a long line of changes for banknotes, first issued in return for deposits by the Bank when it was first established in 1694 to raise money for William III's war against France.

Colour £5 notes replaced white ones in the 1950s; the first portrayal of a monarch came in 1960, when the Queen appeared on a new £1 note; and the introduction of historical figures such as William Shakespeare started in the 1970s.

As part of the preparation for this latest change, banknote officials have already been working with retailers and the operators of vending machines and cashpoints.

Link, which runs the UK cash machine network, said its machines would need new cassettes to hold the plastic notes, because they will be smaller, and not because of the change in material. The 15% reduction in size for Churchill notes compared with the current Elizabeth Fry £5 note brings English notes into line with sizes in other countries. But they will remain larger than existing euro notes and the different denominations of sterling will retain tiered sizes to help blind people differentiate between them.

The prospect of polymer notes has raised some concerns for the visually impaired, however, as the popular practice of folding or creasing notes in different ways to identify different denominations will no longer be possible. Polymer notes can be folded but will not stay tightly folded in a particular way.

The Bank's prime task as banknote issuer is to maintain confidence in its money, and the move to polymer is expected to make life drastically more difficult for counterfeiters.

Advances in commercially available laser and inkjet printers over the past decade have helped criminals to produce fakes quickly and more cheaply.

The Bank concedes no note is counterfeit-proof but says the polymer notes will be slower and more expensive to copy.

The notes will be produced at the Bank's ultra-secure plant in Debden, Essex, by a private contractor.

The job is expected to go to either De La Rue, the existing maker of BoE notes, or Innovia, which manufactures most of the polymer notes currently in circulation around the world. The Bank has ruled out importing plastic money from China.

The British Plastics Federation welcomed the Bank's move towards polymer notes. "It's essential all the plastic banknotes are made in the UK. Why not make coins out of plastic? It will save wear and tear on our pockets," said director-general Peter Davis.

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UK GDP growth limited to 1% in longer term, economists warn

IEA paper predicts a post-crisis era of sluggish growth, tempering recent good economic news stories

Britain's economic growth will be limited to just 1% in the longer term as higher government spending, dwindling North Sea oil stocks and an ageing population all take their toll on the country's potential output, a group of economists has warned.

Tempering the recent spate of upbeat news on the UK and chancellorGeorge Osborne's assertion that the economy has "turned a corner", a new paper predicts a post-crisis era of sluggish growth.

The long-term, sustainable growth rate in the UK may be only 1%, compared with the 2.5% that the Treasury thought standard from the 1980s to the 2000s, according to a discussion paper for free-market thinktank the Institute of Economic Affairs (IEA). "Until 2008 the UK had got used to our economy doubling in size every 25 years: unless action is taken it will now only double in size every 70 years," says the group of economists, which includes former Treasury adviser and UK Independence Party candidate Tim Congdon, and Andrew Lilico, the managing director of Europe Economics, an economics consultancy.

They highlight the weakest recovery in "industrial history" and blame a lack of growth for the government's deficit reduction plan being off target.

Commenting on the analysis, the IEA's editorial director, Philip Booth, said: "People shouldn't get too excited about better growth figures and recent forecasts from groups such as the OECD [Organisation for Economic Co-operation and Development]. We still have a long way to go before we recover the loss of output from the 2008 crash. Furthermore, the medium-term prospects for growth do not look healthy unless the government determinedly reduces government spending and regulation."

Following a string of positive indicators on the fledgling UK recovery, the OECD has lifted its forecast for the country's economic growth in 2013. The upgrade to projected growth of 1.5% this year came after stronger-than-expected growth of 0.7% in the second quarter, falling unemployment, and survey evidence suggesting the strongest growth in manufacturing output for almost two decades.

But the economists writing in the IEA paper painted a gloomier current economic picture, noting that five years on from the start of the financial crisis in 2008, GDP is still 3% below its peak. "That is unprecedented in 170 years of shocks that have hit the UK economy since industrialisation," sais the paper, "Will flat-lining become normal?"

Predicting sluggish growth rates, the IEA authors blame higher government spending and tax as a proportion of GDP, more regulation of energy and financial services, the depletion of North Sea oil, higher debt levels for government, business and households relative to GDP. They also note demographic pressures from an ageing population as well as the effects of "low-productivity immigrant workers being added to the working population", though the IEA stressed this was an analysis of the impact of much of the UK's immigrant labour being relatively unskilled, not an argument against immigration.

The paper advocates "bold" reforms if the UK wants to get back to sustainable growth rates of around 2% or more over the long run, including: the rolling back of government activity and influence; the regeneration of affordable credit channels to unencumbered households and businesses; and the implementation of radical supply-side measures.

Booth added: "Britain's growth problem is a productivity problem and not a problem caused by insufficient government borrowing. The government should take note. The solutions lie in its hands."

The comments from the free-market thinktank contrast with remarks from the leader of the UK's trade union movement, Frances O'Grady, on Monday. In her first speech to the annual congress as TUC general secretary, O'Grady called for the implementation of a political action plan to stimulate growth, paid for by taxing the rich, whose wealth had increased dramatically in the past few years.

Article Source : http://www.guardian.co.uk

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UBS should be broken up says Knight Vinke

Group says Swiss bank should sell off its investment arm and sell it to staff

Activist investor Knight Vinke has reopened the debate about investment banking by calling on the Swiss bank UBS to sell off its casino investment banking arm to its employees.

On the day of the bank's annual meeting, the fund management group said: "We question the merits of keeping the investment bank under the same roof as the wealth management and Swiss banking businesses".

The investment bank, a major employer in the City and fined £940m for rigging Libor last year, is already being scaled back by a new management team, led by Sergio Ermotti who was installed in the fall out from the unauthorised £1.3bn trading losses caused by Kweku Adoboli, who has since been jailed for seven years.

Knight says UBS should sell of its investment banking arm.

 The division has just posted strong results for the first quarter of 2013 and Knight Vinke, which sent a representative to the annual meeting on Thursday, said this was now the moment to debate the structure of the group.

The investment bank had "nearly destroyed UBS" between 2007 and 2009 when the bank was bailed out by the Swiss authorities, said Knight Vinke, which has in the past criticised HSBC.

Knight Vinke said: "Investment banking is a very risky business and these risks pose a serious threat to UBS's wealth management and swiss banking franchises.

"They may also be preventing them from achieving their true potential. This is a discussion that is best had when all the businesses are doing well – as is the case today – and the board needs to be encouraged to act quickly and decisively so as not to lose the opportunity."

The fund manager, led by Eric Knight, suggested that the "best owners" for the investment could be its employees. Since 1998, the investment bank has paid Sfr115bn (£80bn) in salaries and bonuses to its employees but knocked a Sfr25bn hole in the entire group. "Transferring full or partial ownership of the investment bank to insiders would almost certainly lead to more prudent behaviour," Knight Vinke said.

The group voted against the remuneration report at the annual meeting at which 18% of shareholders failed to back the pay policies which included a potential £17m signing on fee for the new investment banking head Andrea Orcel.

However, this was an improvement on the 40% who had failed to support the pay awards the previous year. In response to the criticism by Knight Vinke, UBS said its shareholders had the opportunity to speak out at the annual meeting.

At the meeting "UBS confirmed that the firm is on track and comfortable with its new strategy".

"The results of the first quarter 2013 confirm that the company made significant progress and is reaping the benefits from its focus on wealth management and the Swiss bank supported by focused and de-risked investment banking activities and asset management," UBS said.

UBS has attempted to show restraint over pay since pharmaceutical company Novartis was forced to scrap a payoff of Sfr72m for its former head Daniel Vasella. There was also a national referendum which voted to ban big payouts for new and departing managers.UBS is said to have warned half its 16,000 investment bankers than they would not get bonuses and cut its total bonus pool by 7% to Sfr2.5bn.

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Article source : http://www.guardian.co.uk

The economics of enough

It's time to abandon the pursuit of growth in wealthy nations and consider a new strategy – to improve quality of life without expanding consumption

It's been over five years since the global financial crisis began, and yet we are still no closer to ending it. George Akerlof, a Nobel Prize–winning economist, has provided a good analogy for the uncertainty facing economists. "It's as if a cat has climbed this huge tree—the cat of course is the crisis. My view is 'Oh my God, the cat's going to fall and I don't know what to do'." Nor is he alone in this uncertainty. The IMF's chief economist, Olivier Blanchard, warns: "We don't have a sense of our final destination."

The economics profession has lost its moorings. The traditional cure to our economic ills has always been growth. But now, despite the best efforts of all concerned, the UK economy refuses to grow. The economic tools that have been applied – lower interest rates, quantitative easing, and strict austerity – are failing. GDP in the UK is now 2% lower than when the crisis began.

Jobs fair in New York. People fear that reducing consumption will lead to fewer jobs.

 In our new book, Enough Is Enough: Building a Sustainable Economy in a World of Finite Resources, Rob Dietz and I argue that it's time to abandon the pursuit of growth in wealthy nations and consider a new strategy – an economy of enough. Suppose that instead of chasing after more stuff, more jobs, more consumption, and more income, we aimed for enough stuff, enough jobs, enough consumption and enough income.

Abandoning the pursuit of growth may seem like a radical idea, but there's a strong case to be made for it. Economic growth is causing a number of global environmental problems, ranging from climate change to biodiversity loss. At the same time, economic growth is no longer improving people's lives in wealthy nations like the UK. To continue to pursue growth for growth's sake is simply irresponsible.

Our main indicator of progress, GDP, is a measure of economic activity—of money changing hands. It doesn't tell us anything about what kind of activity is occurring. If the police came to your door and said that "activity" in your neighbourhood had increased by 3% last year, you'd want to know what kind of activity. Was it more children playing in parks, or more break-and-enters? We need to ask the same kinds of questions about GDP. Did it grow because our society became wealthier, or did it grow because we ran up huge debts and liquidated our natural assets?

The blueprint that we describe in our book is based on the contributions of over 250 economists, scientists, NGO members, business leaders, politicians, and citizens. Some call the blueprint the "new economics", some call it "degrowth", and some call it a "steady-state economy". No matter what you call it, the key idea is to develop economic policies that improve quality of life without expanding consumption. These policies include methods to reduce resource use, limit inequality, fix the financial system, create meaningful jobs, and change the way we measure progress.

Perhaps the biggest fear that most people have when they hear "no growth" is "no jobs", but the evidence for a relationship between economic growth and job creation is much weaker than you would expect and varies remarkably between countries. In the US, for example, a 3% increase in GDP tends to be accompanied by a 1% fall in unemployment. In France, the same amount of GDP growth reduces unemployment by only half a percent. In Japan, there is no relationship whatsoever. Clearly it is possible to break the connection between economic growth and unemployment; we just need the right economic policies.

What we do not need is unrelenting austerity: the best way to save the cat is not to cut down the tree. If we're serious about achieving a better life for the vast majority of people in Britain then we need a new approach – an economic model that prioritises people and planet over short-term profits. It's time to embrace the new economics and say"Enough Is Enough!"

• Dan O'Neill is a lecturer in ecological economics at the University of Leeds, and co-author (with Rob Dietz) of Enough Is Enough: Building a Sustainable Economy in a World of Finite Resources.

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Article source : http://www.guardian.co.uk

Universal credit: Major benefits shake-up begins

A massive shake-up in the UK benefits system starts on Monday, with the first claims being made for a new universal credit payment.

Universal credit will merge several benefits and tax credits into one monthly payout.

It begins with a very small number of new claimants in Ashton-under-Lyne in Greater Manchester, but will eventually affect nearly six million people.

Those who are looking for work will receive the new universal credit

 The system relies on a complex computer system, with claims made online.

  Simplification

The benefit is for working age people looking for work, and will replace income-based jobseeker's allowance, income-related employment and support allowance, income support, child tax credit, working tax credit, and housing benefit.

It is the central plank of a benefits overhaul, championed by Work and Pensions Secretary Iain Duncan Smith, which the government says will mean people are always better off in work than on benefits.

It is also designed to simplify the welfare system by bringing a number of benefits together and reducing fraud and error.

However, some groups have raised concerns that the system is entirely dependent on a complex computer network which may not be ready or able to cope with millions of claims. They are also concerned that many potential claimants do not have access to the internet.

Online claims

The key features of universal credit include:

• A single, monthly payment which the government says mirrors the world of work, but charities say could create problems for personal money management
• The inclusion of financial help to pay rent, which is currently paid directly to landlords
• An online-only claiming process, with accounts also managed online
• The benefit paid to households, rather than individuals, and put straight into bank accounts
• Benefits automatically adjusted depending on earnings, which employers enter into a computer system called real-time information

This means that there will no longer be a ceiling of 16 hours of work a week, below which people can sign on and above which claims are cancelled.

This is set to benefit people like Darren Bailey, an agency worker, whose working hours fluctuate, meaning he has to keep making claims under the current system.

"I have five kids so I can't afford to mess about," he said. "Any system has got to be better than this system."

Budgeting

The government estimates 3.1 million households will be entitled to more benefits as a result of universal credit, while 2.8 million households will be entitled to less.

Across all households, ministers say there will be an average gain of £16 per month. The long-term cost to the government is £100m in current prices.

The only claimants to receive universal credit in the initial stages will be single, new claimants at a jobcentre in Ashton-under-Lyne.

Three other pilot projects - in Warrington, Oldham, and Wigan - have been delayed until July.

From October, newly unemployed people will make claims under the new system. Current benefits and tax credits will gradually be shifted to universal credit from spring 2014, with the whole process completed by 2017.

Iain Duncan Smith said at the weekend that universal credit was being introduced over a four-year period because "I want to get these things right".

He added: "We want to say to people, you're claiming unemployment benefit but you're actually in work paid for by the state: you're in work to find work. That's your job from now on: to find work."

All claims for universal credit will need to be made online

 Labour's Shadow Work and Pensions Secretary Laim Bryne said that universal credit was "a fine idea that builds on Labour's tax credits revolution".

Yet he added: "The truth is the scheme is late, over budget, the IT system appears to be falling apart and even DWP [Department of Work and Pensions] ministers admit they haven't got a clue what is going on."

Benefits and grants charity Turn2us said that 43% of people whose benefits would be replaced by universal credit were not aware of the change.

"Once you look at the nuts and bolts, budgeting is not going to be easy especially for those with a small amount of money," said Alban Hawksworth, welfare benefits specialist at the charity.

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Article Source : http://www.bbc.co.uk

Bank lending to UK businesses predicted to rise in 2013

The Ernst & Young ITEM Club expects lending to grow by 3% to £440bn this year, and by 8.5% to £447bn in 2014

Bank lending to UK businesses will go up this year for the first time in four years as economic growth picks up, according to an influential forecasting group, in a boost to government attempts to kickstart a flatlining economy.

The prediction comes after the Treasury and Bank of England extended the £80bn Funding for Lending scheme in an attempt to boost support for small businesses, which are still struggling to borrow.

Lending is expected to grow by 3% to £440bn this year, and by 8.5% to £447bn in 2014, according to a report published on Monday by independent forecaster the Ernst & Young ITEM Club. The news is a further boost to George Osborne after the chancellor escaped the ignominy of a triple-dip recession last week with the publication of official figures that showed GDP growth of 0.3% in the first quarter of 2013.

The flow of money towards British business in the ITEM report would be a dramatic reversal of last year's crackdown on credit, which saw lending to corporates shrink 5%, hitting the lowest level since 2006.

"You might be forgiven for thinking we were still in the midst of the banking crisis," said Andy Baldwin, head of financial services in Europe at Ernst & Young. "But behind the scenes banking fundamentals have quietly been improving and banks are now in a better position to be able to provide funds to the wider economy." Nonetheless the optimism of the ITEM forecast is at variance with some of the Bank of England's own soundings, which show that small firms are still faced with a tough lending environment.

The main drivers of banks' return to lending would be better access to wholesale funding and a decrease in bad loans, Baldwin said, rather than any marked impact from Funding for Lending, which was launched by the Bank of England last year but has failed to have a marked impact on business lending.

A fall in money lost to bad loans is also helping to rebuild confidence. Write-offs are forecast to fall to £9.3bn, just 0.56% of all borrowing this year, after peaking in 2013 at £11.6bn.

However, even minor changes to the UK interest base rate could push many companies into bankruptcy, the report's authors warn. The Bank of England has held rates at a record low of 0.5% for four years, helping businesses and home owners stay solvent.

The Ernst & Young ITEM club's prediction follows the Bank of England's extension of its Funding for Lending scheme

Banks have been more lenient than in previous recessions, allowing weaker loans to continue rather than foreclosing. Many companies being kept afloat are simply able to service their debts and are unable to invest or expand.

"It wouldn't take a significant shift in interest rates to increase the repayment burden of families and businesses across the UK, at great social cost and with a detrimental knock on effect on lending," said Baldwin.

ITEM is the only non-governmental forecaster to use the Treasury's model of the UK economy. It also consults a network of company executives, from a range of corporate life including FTSE companies and small-sized firms. According to ITEM, economic growth will be modest, with the UK economy growing 0.9% in 2014.

The Bank of England, which administers the Funding for Lending scheme, will be extending it for a year until January 2015, and it will offer lower interest rates to lenders who can prove they are extending credit to small businesses.

The senior economic adviser to the ITEM Club, Carl Astorri, said the upbeat outlook reflected the fact that company executives are coming to terms with an uncertain business environment, where the implosion of the eurozone and the Chinese economy is a constant but so far unrealised threat.

"Things like the eurozone collapse, the Chinese hard landing or sequestration in the US have been prevalent when we speak to top chief executives and chief financial officers. But increasingly they are less fearful and are becoming used to operating in an environment where those risks exist."

The ITEM Club's optimism comes despite a more cautious assessment of the business lending environment from the Bank of England. In its agents' report for April, which gauges the economic environment around the UK, the bank says firms are "relatively positive" about their likely use of bank borrowing over the next 12 months.

In a survey of 370 firms, the bank said large companies had seen an improvement in availability of credit but small firms, classified as businesses with a turnover below £1m, had seen a deterioration in the availability and cost of loans. Medium-sized companies said access to borrowing was easier, but more expensive.

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Article Source : http://www.guardian.co.uk