BIZweek n°274 24 jan 2020
BIZweek n°274 24 jan 2020
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  • Parution : n°274 de 24 jan 2020

  • Périodicité : hebdomadaire

  • Editeur : Capital Publications Ltd

  • Format : (260 x 370) mm

  • Nombre de pages : 9

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VENDREDI 24 JANVIER 2020 BIZWEEK ÉDITION 274 excessive compensation in the banking industry can lead to a system that serves itself as much as it serves others. We do not have to go far for examples. The US has one of the most diversified economies in the world. And yet, in 2006, financial services firms comprised nearly 25 percent of the S&P 500 and generated almost 40 percent of all profits. This made the financial sector the single largest and most profitable sector of the entire S&P. What happened next — the Great Recession — brings me to the second dimension of how the financial sector impacts inequality : financial stability. b) Financial Stability Financial stability, and the economic damage inflicted from financial crises, was a defining issue of the last decade. We know that on average a financial crisis leads to a permanent output loss of 10%. This can change the entire direction of a country’s future and leave too many behind permanently. Stability will remain a challenge in the decade ahead. In the 2020s, the financial sector will have to grapple with preventing the traditional type of POST SCRIPTUM crisis, and handle newer ones, including climate related shocks. Think of how stranded assets can trigger unexpected loss. Some estimates suggest the potential costs of devaluing these assets range from $4 trillion to $20 trillion. So, we all have a vested interest in focusing our efforts on financial stability. Our new research shows that inequality tends to increase before a financial crisis, signalling a strong link between inequality and financial stability. Why does this happen ? One reason is that greater inequality can create political pressure for a quick fix that actually makes the problem worse. Look at the US housing market in the 2000s. A drive to help more Americans own a home led to an overzealous mortgage industry enabled by lax lending regulations. On paper, many low-income individuals became wealthier, but their gains were outpaced by those at the top. Then the housing bubble burst in 2007. The subsequent Global Financial Crisis (GFC) dealt a devasting blow to millions across the world and over the long-termworsened inequality. Just one example. Today, as a result of the crisis, 1 in 4 young people in Europe are at-risk of living in poverty. For them, and many others, the crisis has never ended. This connection between financial stability and inequality is not limited to the GFC or even the Great Depression. A survey of 17 advanced economies looked at every financial crisis between 1870 through 2013. The results confirmwhat our research shows : widening income inequality is consistently a strong predictor of a financial crisis and can be a lasting effect after one. As Mark Twain said, «History does not repeat itself, but it does often rhyme.» What lessons do our historical rhymes teach us ? One is that financial services are primarily a good thing. Developing economies need more finance to give everyone a chance to succeed. Think of deeper domestic bond markets that finance a new business or investment opportunities that help people save for retirement. It’s just that too much of a good thing can turn into a bad thing. Excessive financial deepening and financial crisis can fuel inequality. So, we need to find the right balance 6 Cont’d on page 7
VENDREDI 24 JANVIER 2020 BIZWEEK ÉDITION 274 between too much and too little. This brings me to the third dimension of how the financial sector can impact inequality : financial inclusion. c) Financial Inclusion Financial inclusion simply means more people and companies having cheaper and easier access to financial services. Research by IMF staff and others shows a strong association between increasing access to bank accounts and reducing income inequality. The data also shows that while both men and women gain from inclusion, the largest reduction in income inequality comes when women are given increased access to finance. Interestingly, the relationship between access to finance and inequality is consistent across nations with different income levels. For example, in Sweden, a country with one of the most even income distributions, the share of people having a bank account is the same for the rich and the poor. By contrast, in Indonesia, a country with high income inequality, the richest 20 percent are about twice as likely to have a bank account compared to the poorest 20 percent. Fintech is playing a major role all over the world by giving people access to banking services and delivering a chance for a better life. Think of Cambodia where mobile finance helped generate 2 million new borrowers over the past decade, representing nearly 20 percent of the adult population. Many of these borrowers never had a bank account before. While these changes may not immediately reduce income inequality, they create opportunity — and give people a chance to save, start a small business, and improve educational options for their children. What does this mean for the broader economy ? IMF staff research shows there is a 2-to-3 percentage point GDP growth difference over the long-termbetween financially inclusive countries and their lessinclusive peers. So, we know that financial inclusion can be an economic game changer. It can help break down the barriers presented by gender, race, geography, and unequal starting positions in life. … In each of the dimensions I have raised — from deepening to stability to inclusion — there are trade-offs when it comes to the financial sector and inequality. We want a financial sector that is robust, but not overly complex. We want financial inclusion to bring new opportunities and credit, but not create heavy debt burdens and put an entire system at risk. So, what policies do we need to build a more inclusive system in the decade ahead ? Policies to Build a More Inclusive System in the Next Decade – Safer, POST SCRIPTUM Stable, Smarter There are three policy areas to match the three main ways the financial sector impacts inequality. First, a safer system. There is no substitute for high-quality regulation and supervision. Financial deepening is a worthy goal for all economies, but like a city, a financial system should grow sustainably and intentionally. Positive steps were taken to implement the regulatory reformagenda in the aftermath of the crisis. These efforts demonstrated that in an interconnected global economy strong financial sector reforms require strong international cooperation. Today, banks have higher capital and liquidity requirements. Winding down troubled banks has become easier. Transparency and accountability have improved. We are safer, but not safe enough. Rolling back these achievements — as has already begun in some places — would be a profound mistake. Instead, countries should follow through on the reformagenda and complement it with new efforts. Safe growth of financial markets requires increasing financial literacy, so people fully understand what they are being offered and what it means for their family. And this brings me to my second point, building a more stable system. The private sector and banking industry have a critical role to play here. That is certainly the case when it comes to climate and stability, an area where we willunveil new research in the spring. The financial sector can play a crucial role in moving the world to net zero carbon emissions and reach the targets of the Paris Agreement. To get there, firms will need to better price climate change impacts in their loans. This is where thinking about the decade ahead as opposed to just the year ahead makes a difference. A longer-termhorizon will crystallize the opportunities and risks. Last year climate change claimedits first bankruptcy of an S&P 500 company. It is clear investors are looking for ways to adapt. Stronger disclosure standards can help financial institutions see the full picture. If the price of a loan for an at-risk project increases, companies may simply decide the money for the project could be better spent elsewhere. This is not the only area where more information can bring more stability. Right now, many banks require excessively high levels of collateral for mortgages or business credit. Not everyone owns a home, nor should they have to in order to start a business. How can these risk assessments change ? Financial institutions could base more lending decisions on future cash flows. This would return the financial services industry to what it is supposed to be — an industry that serves people. When banks better assess risk, they will likely increase lending to smaller firms. This is key for stability. Our research shows that lending to small firms increases financial stability and reduces risk compared to lending to large firms. When risk is spread across hundreds of companies, instead of a few conglomerates, a more inclusive and healthier economy emerges. And how can a healthier economy be put to best use ? This brings me to my third and final point, create a smarter system. Broadening financial access to low-incomes households and small businesses is one of the most effective ways to reduce inequality. But too much too fast can backfire. Looking forward, the myriad of new fintech companies offering credit around the world presents a unique challenge. Governments can work with firms to unlock the full potential of fintech, while managing the risks. That is the goal of the Bali Fintech Agenda launched by the IMF and World Bank in 2018. It provides key principles — including on promoting competition, enhancing consumer protection, and fighting money laundering. These principles can help guide policymakers, reduce risks for banks, and deliver new jobs. In fact, a World Bank study which looked at 135,000 firms across 140 counties showed that lending to smaller firms is directly connected to improvements in income inequality. [20] That’s because these companies are often hiring people who need work the most. A good example is M-Pesa. M-Pesa started as a peer-to-peer mobile payment service in Kenya at the beginning of the last decade. Starting in 2020, the company will become a pan-African financial platform. There are still significant challenges ahead for M-Pesa, but the goal is right : bring millions of unbanked and underbanked online. Of course, it did not happen overnight. It was the result of years of work by entrepreneurs, government officials, and, most importantly, citizens who were searching for new opportunities. It is a good model to learnfrom. Conclusion The last several decades have sent us a clear signal — increasing inequality is a problem that will only get worse if left unaddressed. While fiscal policy remains a potent tool, we cannot overlook financial sector policies. If we do, we may find that the 2020s are all too similar to the 1920s. However, if we learnthe lessons of history, and adapt them for our time, we can build an even stronger system fit for the future. So, let me end by borrowing a line from the man who captured the spirit of the 1920s in America better than any other writer, F. Scott Fitzgerald. He once wrote, «Action is character.» Fitzgerald’s work was famously underappreciated in his own time, and his advice went unheeded. Let us not make the same mistake twice. Let us make the year ahead a year of action, and, in turn, the 2020s a decade of prosperity for all. Thank you very much. 7

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