Financial English

A ring fence is a virtual barrier designed to segregate a portion of an institution’s financial assets from the rest.

The reasons for doing so are varied but range from avoiding future government bailouts of failed banks, in the case of the UK’s unique banking ring fencing scheme, to protecting assets from the losses incurred by a riskier line of business and, in some instances, to reducing the taxes of an operation or individual.

On March 24, 2017 the British website gov.uk said

Ring-fencing will support financial stability by making banking groups simpler and easier to ‘resolve’. This means that if either the ring-fenced or non ring-fenced part of the bank fails, it will be easier to manage the failure in an orderly way without the need for a government bail-out. As well as ensuring that UK taxpayers are not on the hook for bank failures, ring-fencing should mean fewer and less severe financial crises in the future, which will benefit the whole UK economy.

Indeed, a report published by the Bank of England in October 2022 highlighted how reduced risk taking had led to lower funding costs which were beneficial during the pandemic induced period of market stress.

Ring(-)fencing is also used to prevent customers of public utilities companies from being harmed by credit risks or exposures of the parent company that result in customers losing access to essential services such as energy.

And if ringfencing is back in the news it’s due to the fact that in November 2022, Ofgem, in a bid to overhaul Britain’s failing energy markets decided not to enforce the ringfencing of customer deposits held by energy companies, despite 28 energy companies going under in 2021. Then just a few days later Andrew Griffith, the City Minister proposed relaxing the ringfencing rules, (supposedly an example of Brexit freedom despite the fact that the initiative had nothing to do with the EU) even though banks remain undercapitalised.

Expect the term to be doing the rounds again.

The portmanteau “stagflation” – a combination of stagnation and inflation – was first used in 1965. It refers to a situation with no economic growth but with rising prices, which in 2008 Money Week called a “toxic cocktail”.

The FT on October 3, 2022 mentioned

Gaurav Ganguly, senior director of economic research at Moody’s Analytics, said the government’s “recent actions had made stagflation and a deep recession almost inevitable”.

However, one of the perplexing things is that stagflation by definition is related to high unemployment but that currently is not the case as many economies are not experiencing high unemployment.

Forbes magazine briefly described a green swan event as

“a climate event that is unexpected and rare, with far-reaching impacts.”

https://www.forbes.com/sites/servicenow/2021/06/18/sustainable-finance-surviving-the-green-swan/

This concept is obviously related to Nassim Nicholas Taleb’s renowned book The Black Swan: The Impact Of The Highly Improbable.

However, if that description leaves you wishing to know more, the BIS has devoted an entire book to the issue of how Central Banks can mitigate the impact of climate change on the financial system; The green swan Central banking and financial stability in the age of climate change.

https://www.bis.org/publ/othp31.pdf

The word overhaul can be used both as a verb and a noun. It refers to the fact of changing a system to make it work better.

Deutsche accelerates overhaul of corporate bank after Brexit

Although it is often combined with adverbs such as radically or thoroughly, strictly speaking that shouldn’t be necessary as the word itself already implies making big and extensive changes.

Northern Ireland moves to radically overhaul legacy gambling rules

As I was scrolling some financial issues on the Harvard university website the following caught my eye :

ESG: Investors Increasingly Seek Accountability and Outcomes

and I realised that the term “accountability” is one many people have difficulty grasping. Let’s start by saying what it’s not: “accountability” is not related to accounting or accountancy. It is related to the expression “to account for something” or to explain or justify the outcome or result of something especially when an individual or organisation experiences consequences due to their actions. 

The above article mentions that the consequences can be shareholders not voting for proposed board directors if the board lacks diversity or investors not providing funding to companies who are not reducing their carbon footprint.

The British Institute for Government website has the following comment to make

Strong accountability provides the foundation of a healthy
democracy. It ensures a relationship between the public and those
in government who have power to shape their lives. People expect
performance to be rewarded if good or penalised if poor, and the
demonstration that this happens matters for their trust in
government. But the rules of accountability also need to enable
those in government to learn from failure.

IFG

While the website Global Banking and Finance claims that investors attach great importance to transparency and accuracy in reporting and that;

Globally, 79% of investors indicated that the CEO should be held accountable for a company’s financial reporting errors, while nearly four in ten (38%) thought the CFO should also be held to account.

GB&F

In other words CEOs’ and CFOs’ should pay the price in the event of misreporting of figures.

The presidential candidate Elizabeth Warren proposed, as senator in 2018, the Accountable Capitalism Act to radically overhaul fiduciary duty and governance issues, explaining in a New York Times article why companies shouldn’t be accountable only to their shareholders. While we know that she was not elected to be the 46th President, by some accounts, her proposals are becoming slightly more mainstream, there’s no accounting for taste.

On no account should I leave you without giving you the opportunity to see more related expressions. Click here for an exercise related to account word expressions.

Leverage is related to the noun “lever”, describing a structure which uses a mechanical advantage to make lifting or applying pressure easier and more effective . By extension, as a verb, it is also used to refer to the fact of gaining a strategic or political advantage, e.g. the Biden administration have suggested offering $100 to lever people into being vaccinated.

The process of applying a lever has become the term “leverage” and when saying leverage the first thing that springs to the mind ( or occurs) to financial people is the ratio of borrowed money, debt, to equity (also known as gearing, especially in English English rather than American English). For example, if you have 10 euros thanks to a bit of financial engineering you can borrow 100 euros against that.

In other words, the influence an amount of money can have can be multiplied various times by borrowing against it, as demonstrated in this example:

Prime brokers extend less of the leverage that hedge funds relied on to juice Spac returns

The word also has its place in traditional economics;

Shortage of adult workers has given younger employees more leverage to seek better wages

However, with the rise of ESG and CSR (aka Corporate Social Responsibility) issues, leverage is currently frequently used to refer to the pressure or influence an individual or entity can exert due to their stake in a company.

Which gave rise to the headline

activist-investors-leverage-esg-to-improve-stocks

meaning that investors that wish to enhance stock returns are taking into account alternative performance measures in order to outperform. Indeed Dan Ariely’s Irrational Capital’s research team claim there is a direct link between corporate culture and business performance.

Another example is that of the activist fund Bluebell Capital which leveraged a less than €20 million holding in Danone, worth over €40bn to oust ( or get rid of) the CEO and chair Emmanuel Faber. In other words, with only a small stake in the company, the fund manager managed to exert sufficient influence on other shareholders to bring about radical change.

But let’s not think that this attitude is a completely modern concept as Archimedes himself said back in the 3rd century B.C

“Give me a place to stand and rest my lever on, and I can move the Earth.”

Since the adoption of “paste” in word processing its equivalent “stick” has fallen out of favour. “Sticky”, and its derivative “stickiness”, however, is now being applied in various contexts with a vague meaning of resistance to movement.

Financially speaking, if wages, prices or interest rates are sticky then they are sluggish, or very slow to react to changes in the economy.

As this article from the Guardian explains

Wages are “sticky” because most workers have six-month or year-long contracts or are in permanent positions covered by multi-year agreements. But even then they do respond to the labour market and so once the impact of the surge in unemployment flows through we are likely to see a steep fall in wages growth.

Coronavirus has destroyed wages

If account holders are sticky then they take time to move their money to another entity even though conditions might be more advantageous there. So sticky customers are the ones that you want to create as they will be reticent to move elsewhere.

Lack of financial education or understanding can also result in clients not appreciating the benefits they might make from changing provider as referred to in this Financial Times article:

A lack of curiosity and subsequent inertia make customers sticky.

AJ Bell/Hargreaves:sticky situation

And then we have the specific case of a “sticky deal” which is used to refer to a new issue that an underwriter has difficulty placing with investors owing to market conditions or to the appeal of the company itself, in other words, they have difficulty getting the securities off their hands.

In a more general context, you might hear “I can’t go to the meeting as I’m stuck with the auditors”, in other words I can’t get out of the situation. Yet again, there is a meaning of not moving or being able to move from a position.

This also is the essential signifier of the expression “a sticking point” which is a controversial issue in a discussion or negotiation which prevents the people involved from reaching an agreement or consensus as in the headline

Brexit trade deal: What are the sticking points?

BBC 18th December 2020

Finally, the Economist magazine, renowned for its plays on words, when talking about creating a more circular economy brilliantly used the headline

Self-destructing glue solves a sticky environmental problem

as a sticky problem or issue is one which is difficult to eliminate.

We’ve all noticed that “stakeholder” is being more frequently used in part due to the rise of ESG issues. A recent article by the Economist magazine bore the headline

“How Japan’s stakeholder capitalism is changing“

while a Financial Times article mentioned

“calls by big investors for companies to ensure bosses’ pay reflected the coronavirus experience of wider stakeholders, including shareholders and employees” .

In addition, the Santander ESG supplement for 2020 uses the term 17 times but never actually defines it. Given this, can we really appreciate the implications of its policies?

And where does the river come into it?

That, in fact, is an important question.

What Is a Stakeholder?

Generally speaking, in a business context, a stakeholder is a party that has an interest in a company’s decisions as it can either affect or be affected by the business. This means the primary stakeholders in a typical company are its clients, providers, employees and investors. Indeed, in company speak, stakeholder is often used to refer to a particular shareholder that has sufficient shares for their votes to be able to affect company decisions.

However, the term stakeholder is also used in political contexts with increasing attention on any person or organization that has a legitimate interest in a specific project or policy decision. Consequently, stakeholders can also include governments, communities and trade organisations. This raises the question of whether narcos should be considered stakeholders in government policies as, while they are clearly affected by a drug policy, their interest is presumably not considered legitimate. ?

In 2017 the Whanganui river in New Zealand was granted the same legal rights duties and liabilities as a legal person in recognition of the deep spiritual connection between it and the Whanganui people. The Ganges and Yumuna rivers and their related ecosystems have also been declared by a court in India to have the status of a legal person, and in early July 2019 Bangladesh became the first country to grant all of its rivers the same legal status as humans. Does this imply that they are considered to be stakeholders?

Back in March 30, 2011, the Provincial Court of Justice of Loja in Ecuador had already ruled in favour of nature, and more particularly the Vilcabamba River, stating that

nature has to be fully respected in its existence and maintenance of its vital cycles, structure, functions, and evolutionary processes.

The construction company implicated by the related court ruling did not respect it, the NGO representing the river could not afford the costs of the ensuing legal battle so, in the end, the ruling was not upheld, but surely this is already an example of a river considered to be a stakeholder?

And should anyone believe these concepts are just for the green warriors, consider this comment from Michel Jabre, of Jabre Capital as quoted in the Financial Times

“Our overarching philosophy is based on conscious capitalism, whereby businesses should serve all stakeholders, including employees, humanity, the environment, not just the ones they’ve historically served — the management team and shareholders”

Many talk down ESG issues rightly saying that there are no established rigorous criteria that can be applied to compare investments. Could defining stakeholder be a good starting point for the EU taxonomy for sustainable activities?

……markets are likely to remain rocky, argues Ms Hooper. “We’re certainly getting closer to the bottom, but I don’t think we’re at it yet,” she said. “This is probably a dead cat bounce.”

Financial Times March 13 2020

Let’s face it, this expression does nothing to help convince you that traders are charming people you’d like to introduce to your parents! Be that as it may, the expression has come up a fair amount recently so needs some elucidating (=explaining).

Basically, a dead cat bounce is a small, short-lived recovery or rebound in a downward trend of a market, otherwise known as a bear market.

Simple as that. At least, simple to say, but not simple to spot, because in the heat of the moment, how do you know whether it’s a temporary rebound or that the market has bottomed out?

That’s the million dollar question and obviously if they could be clearly identified at the time, then I would be a multi-millionaire by now. They are in fact identified with hindsight, that is looking backwards.

This word is what is known as a portemanteau – which means that the word was created by joining two words and combining their meanings. Think of what maybe you eat late on a Sunday morning – brunch. This is a combination of breakfast and lunch. Or how about smog , which resulted from smoke and fog?

So, greenwashing clearly comes from green and washing doesn’t it? Well, not quite, as it actually is a combination of green relating to environmental issues and whitewashing.

Whitewashing initially refers to the fact of painting a wall in white so it hides any imperfections or blemishes and looks cleaner. Metaphorically, it can be used to refer to a situation in which there is not total transparency in order to hide failings or to avoid blame.

 We must maintain the integrity of the White House, and that integrity must be real, not transparent. There can be no whitewash at the White House.

Richard Nixon April 30 1973

Richardson quits Myanmar’s ‘whitewash’ Rohingya crisis panel

Reuters January 24 2018

So by combining these two concepts we arrive at the buzzword greenwashing . This is related to the concept of putting a “spin” on things, presenting them in a biased, i.e. not objective, manner, so they appear more positive.

It’s greenwashing when a company or organisation spends more time and money claiming to be “green” through advertising and marketing than actually implementing business practices that minimise environmental impact. So let’s take the example of McDonald’s swapping from single use plastic straws to paper ones and drawing attention to the fact in the media. This is used to refer to a company’s practice of making misleading claims about its products, politics or strategies to make them appear more “environmentally friendly” rather than less environmentally damaging.