Bobsguide: Cross-Border Interoperability will be a Key Test for CBDCs, BIS and BoE Specialists Warn

Via Trade Finance Global

The macroeconomic impact of the pandemic and its prolonged impact on certain sectors of trade was discussed at length in a panel moderated by Jake Jacobson at the BAFT’s 2021 virtual Global Annual Meeting.

Where is inflation headed?

There has been a buzz surrounding inflation and its short and long term movements.

With inflation being at an all-time high in certain countries, it should come as no surprise that this term is being explored at alarming rates.

Due to high levels of fiscal and monetary policies being deployed globally, consumer confidence indices are dropping, as markets are riddled with uncertainty and consumers become more conservative. However, is this worry warranted, and how does it impact trade?

During the pandemic as people were forced to stay home, businesses were forced to close and the government intervened, causing global GDP to plummet. Despite this taking place over a short period of time, economic recovery from these short term shocks will take much longer. Coupled with the underlying uncertainty surrounding the duration of future lockdowns limits the ability of economies to return to a pre-covid level of activity, resulting in an economy that is bound to struggle to bounce back quickly.

Household expectations

Having said that, the panel strongly believed that inflation and its increase or decrease is strongly dependent upon market perception. Therefore, expectations are key: if consumers believe that there will be an inflationary rise, then economies may enter a wage-cost cycle, which could easily get away from the control of central banks. Data being released later this week about household expectations in the US could shed some light on these expectations. Household expectations are particularly important as these are the ones that tend to stick, impacting inflation the most, and are the hardest to turn around. Other surveys conducted in the US, indicated that in a 5-10 year period, households do expect an inflationary rise. This was, in part, expected and hoped by the Fed, however, there is the possibility inflation will surge higher than the Fed anticipated.

Labour market expectations

As a result of government intervention with financial aid packets to supplement the economy during the pandemic, the labour market appeared to have rebounded faster than other markets. However, the data collected so far appears to be somewhat contradictory. As the schemes that allowed employees to be paid to stay home and access to extensive government benefits continue until the summer, a new question arises: how will the labour market be mobilised to go back to work when they have health concerns?

We are now forced to come to terms with the harsh reality that we will not know if this is transitory inflation or lasting inflation for at least the next six months.

Expectations for the post-COVID-19 recovery

What was expected to last only a few months, appears to be harder to shake off than expected. During the pandemic, markets, such as the semiconductor market, experienced supply shocks, which could now last until 2022.

Central banks are very keen to prevent markets from viewing this shift in inflation as one that will remain. This is crucial for global recovery, as global recovery seems to be intact and going, somewhat, according to expectations. The Fed and ECB are concerned about markets starting to price higher yields as this could hinder the recovery that is underway.

Recovery tends to be cyclical. East Asia, China and surrounding countries appear to have peaked in terms of recovery and may now begin to experience a slowdown in economic activity. Contrastingly, Europe, which has struggled to recover until this, is likely to see an improvement in the coming months. America continues to perform well due to their strong policies.

Despite appearing slow, the speed of recovery, when compared to the 2008 financial crisis, is quite promising. The swift and quick actions of governments all around the world in conjunction with the fast implementation of fiscal policies have resulted in a recovery that is likely to last and not fail or stagnate

The pandemic did not impact everyone equally 

There were no winners or losers during the pandemic, but rather, put simply, there were people and businesses who were more technologically prepared and those who, unfortunately, were not. As a result, technology firms appear to have not only survived during this unprecedented time but thrived.

Their success and resilience cemented and accelerated the trend of digitisation. It became imperative to be able to not only utilise but also leverage technologies. This technology push was perceived by the panel as not only necessary but also a positive repercussion of the pandemic. Increasing the need for the implementation of technologies for survival in the post-COVID world will, inevitably, lead to innovation, and an increase in productivity.

The world post-COVID: resilience over efficiency

As previously mentioned digitisation is here to stay, particularly with giants, such as Amazon, thriving beyond any expectations leading to multiple businesses trying to copy their COVID-proof business model.

Furthermore, deglobalisation is on the rise. One of the clearest weaknesses the pandemic brought out in a large number of businesses was their fragility and susceptible supply chains. As a result, companies are now trying to make their supply chains more regional to boost their resilience. Depending on how this move performs in the coming months, will determine if the era of globalisation is truly over.

Mobility of people or, lack thereof, is another prominent point of the post-COVID world. Pre-pandemic, the mobility of people had been on a steady increase despite a dip in globalisation. As a result, the transportation sector was hit hard in 2020. This sector was one of the few sectors whose recovery was projected to be quick, however, it would appear the projection was wrong. This sector may be permanently damaged, the panel highlighted.

Despite the bleak expectations for the transportation sector, the services sector is expected to recover fairly quickly once services are allowed to operate again.

One interesting aspect of this new normal is that despite the certain degree of reluctance to return to working in the office, businesses were reluctant to enter business deals without personal interaction. Building trust is now, more than ever, at the heart of all businesses interactions and agreements in all sectors.

Furthermore, as the world came to a halt in 2020 the push for sustainability became immense. Consumers became even more concerned about climate change forcing companies to address the issue more vocally. As a result, prices for short flights, for instance, could rise as their environmental repercussions are now widely acknowledged. The great dilemma around energy-intensive industries: can clean energy meet up the demand? Or will we have to, in the interim period, go back to burning black coal? Will the inevitable increase in CO2 emissions in the interim period discourage consumers as CO2 emissions rise which could negatively impact an economy trying to get back up on its feet.

The unemployment gap is being addressed by the Fed, in the US, by stimulating the economy thus attempting to bring marginalised groups to the labour market. The labour market in the US, Europe, China and Japan, for example, have not entirely recovered. The conjunction of the pandemic with a constrained labour market makes this a challenging sector to recover in these countries. Labour markets in Indonesia, India and Vietnam, on the other hand, are thriving as they possess a growing population allowing the market to be easily supplemented.

How was trade impacted?

US-China tensions, the post-Brexit trading environment, and the global focus on Russia, all influenced the state of global pre-COVID trade. Now the global trading landscape has changed even more.

In the last global financial crisis when production tanked in the economy, there was an inevitable shift toward protectionism. Countries took up a “us vs them” mindset, with China, France and America publicly stating their positions. These countries wanted to keep as much of the stimulus they were pumping into the economy, inside the economy, where possible.

This is harder to achieve in a global economy such as the one of today, where supply chains inextricably nterlinked. Nevertheless, this is not the case in 2021, in fact, there is substantial growth than countries can handle. Countries have an excess of demand and no supply to meet it. The panel highlighted the predominant challenge of the second half of 2021 will be to find ways to meet the high demand.

To meet the demand for certain products, governments appear to be willing to provide subsidies and, consequently, buff up the resilience of national supply chains. Nevertheless, with technological developments, supply chains may experience an upgrade, making traditional supply chains obsolete to a certain degree.

All in all, the COVID-19 pandemic made the impossible possible, businesses closed down, people were asked to remain home and working from home became the new norm. Though the panel theorised what changes might take place in the post-COVID global market, uncertainty remains high and anything can happen.

Via Global Trade Review

The Bankers Association for Finance and Trade (Baft) has released a new whitepaper that provides recommendations and key considerations for the development of high-speed cross-border payments around the world.

Produced by Baft’s cross-border faster payments working group, which is made up of 24 members based in North America, Europe, the Middle East and North Africa and the Asia Pacific region, the paper, titled Enabling Faster Payments Across Borders, is the first step of Baft’s larger strategy to facilitate global faster payments by encouraging the designers of national and regional payments systems to include the capability at the outset.

“Baseline standards and processes must be established to address the open issues that make real progress on cross-border faster payments difficult to attain,” says Samantha Pelosi, senior vice-president for payments and innovation at Baft and co-chair of the working group. “These issues fall into three broad categories of interoperability, business processes and compliance, and are similar to the frictions that the Financial Stability Board (FSB) and Committee on Payments and Market Infrastructures (CPMI) have identified as inherent to all cross-border payments.”

Speeding up cross-border payments has long been an area of focus for the financial services industry. While Swift’s global payments innovation (gpi) service, launched in 2017, has increased the speed, transparency and tracking of cross-border payments through the Swift network, delays still come about when the final leg of the transaction needs to be cleared on the recipient country’s domestic payments system.

“To benefit international trade and economic growth, we need to enhance global connectivity by making payment systems in different geographies interoperable,” says Vinayak Prabhu, vice-president of global transaction banking at Mashreq Bank and co-chair of the working group. “The paper provides recommendations along with potential models for building a seamless, transparent, and faster cross-border payments ecosystem.”

Speaking to GTR, Pelosi outlines Baft’s work in this area, and explains why the association is currently encouraging entities that are currently building or upgrading their domestic faster payments systems to incorporate the functionality and operating rules necessary for processing cross-border payments.

GTR: What is driving Baft’s work on cross-border faster payments, and why now?

Pelosi: Over the last couple of years, we have been interfacing on behalf of our members with the developers of national and regional faster payments systems, such as the Federal Reserve System in the US and Buna in the Middle East, in standing up new platforms. In fact, many countries have work underway to modernise their entire national payments system and the core of these efforts is often faster payments. Baft’s objective is to ensure that the basic requirements for processing cross-border transactions are incorporated in the design of national and regional faster payment systems in order to create a global faster payments ecosystem.

GTR: Is this work a precursor to a set of standards or rulebook for faster payments systems around the world?

Pelosi: We are currently looking at the functionality and rulebooks of different existing domestic and regional cross-border systems, such as the EU’s Sepa Instant, the Nordic countries’ P27, and the Arab Monetary Fund’s Buna system. We are comparing these features and considering the best in class, so that we can hold them up as an example of best practice. Our next step will be to go out to operators and infrastructure providers, and encourage them to build this functionality in at the outset instead of having to retrofit it in the backend. So, we’re not necessarily looking to put together specific standards, but rather identifying the key underlying considerations and requirements.

GTR: According to the whitepaper, over 50% of payments are already completed with 30 minutes through Swift and correspondent banking. What gains therefore are there to be made by further speeding up the cross-border payments system?

Pelosi: By analysing its gpi payments, Swift has observed that a lot of cross-border correspondent banking transactions take place within 30 minutes. When speaking of cross-border faster payments, we are not seeking instant delivery – a couple of hours to reach the beneficiary might suffice. However, there are still significant barriers to faster payments, and we are certainly a long way from having 100% straight-through processing. There is still a lot of ground that can be covered, and I think that if some of these issues identified in the paper are tackled, the industry can attain a more efficient, more cost-effective global payments system.

GTR: A large section of the whitepaper is given over to looking at the state of readiness for cross-border faster payments around the world. What’s your assessment? Do bottlenecks still remain?

Pelosi: I do think that we will collectively need to take baby steps in achieving a cross-border faster payments ecosystem. Certain institutions are more ready than others to move cross-border.  The UK rolled out its domestic faster payments system almost 15 years ago.  Because of Brexit, all payments traveling outside the country are now considered international and UK banks may be looking for a faster method of delivery. Meanwhile, in the US, The Clearing House’s real-time payments network has been active for five years and the Federal Reserve System’s FedNow platform will launch in 2023. Therefore, US banks are likely focused on their capability to deliver domestic, rather than cross-border, payments. Readiness really differs from country to country and from region to region.

GTR: This work has come out of Baft’s Global Payments Industry Council (GPIC), which was launched last year as part of Baft’s new payments strategy. What other issues is the GPIC working on?

Pelosi: The GPIC has three different work streams underway. Cross-border faster payments is one of them and we intend to engage in some advocacy later on. Another workstream is around ISO20022, which is about standardising the use of the standard globally, with a particular focus on payment purpose codes. Another area we are looking into is making sure there is a level playing field for our bank and non-bank members in payments with respect to anti-money laundering (AML) requirements. Our aim is to tackle all of this low-hanging fruit along the most voluminous corridors for cross-border payment flows.