Rising Transactions Signaling A Recovery for Listed Real Estate

Economic

Summary:

A recent recovery in transactions volumes, coupled with optimistic rhetoric from commercial real estate bellwether, CBRE, is fostering optimism for appreciation in listed REITs, according to Portfolio Managers Danny Greenberger and Greg Kuhl.

Listed REIT prices declined sharply two years ago, as the market anticipated and priced in the forthcoming drop in property prices, moving lower ahead of the broader commercial real estate market. However, following a prolonged period of weakness for listed real estate, we are now seeing a beacon of optimism for the asset class. A recent resurgence in transaction volumes suggests that the bulk of the private market has now absorbed necessary write-downs, instilling confidence that private market values are stabilizing. Consequently, we believe the stage is set for real estate investment trust (REIT) investors to look forward with a renewed sense of optimism and potentially benefit from the pricing in of potential growth in earnings and assets values.

Early signs of a recovery

In the third quarter of 2024, for the first time in over two years, US real estate transaction volumes look to have increased as reported by CBRE, the world’s largest property brokerage ─ a bellwether for the corporate real estate sector. This is very welcome news for property investors following a painful period of higher borrowing costs, economic uncertainty, and declining asset values. All told, these factors contributed to transaction levels that collapsed nearly 70% from peak levels in 2021. With large gaps between buyer and seller pricing expectations, liquidity was not available at private real estate’s reported valuations. Non-traded (private) REITs’ gated investor funds, queues of unmet redemption requests in core property funds formed, and eventually losses for investors and lenders slowly crystalized through the private markets’ gradual adjustments to reported values. With reported real estate prices now starting to reflect their underlying asset values, supported by central banks beginning to lower interest rates, investor optimism has grown alongside improving real estate debt markets, fostering a recovery in real estate transactions.

CBRE advisory sales (year-on-year % change)

CBRE also reported a 20% revenue increase from US investment sales (also known as advisory sales – ie. buy/sell transactions) in the third quarter. According to its CEO, “Capital markets transaction activity has passed an inflection point and is in early stages of recovery.” Management further noted, “We think buyers and sellers have largely come together for most asset classes or are very close to having come together…there is debt available now…there’s increased interest in multi-family. We’ve seen a little bit of cap rate (rate of return) compression in multi-family and industrial.”

CBRE’s commercial mortgage originations advanced over 50% over the same quarter, signaling burgeoning strength in real estate lending as well. We see conditions as being ripe for increased lending as the transaction market recovers and evidence of stronger asset pricing surfaces and becomes better appreciated by the market.

Mounting evidence for a revival

Elsewhere, there are notable recent transactions illustrating healthy asset pricing and attractive lending, supporting our team’s view that real estate pricing has bottomed and a new cycle is beginning:

KKR/Lennar: In June this year (2024), private equity company KKR acquired 5,200 apartment units from home construction company Lennar’s multifamily division for US$2.1bn, representing an estimated 15-20% premium to asset value for the listed residential REITs.

Brookfield/DRA: In May, investment firm Brookfield acquired a 14.6m square foot portfolio of industrial warehouses from real estate investment adviser DRA for US$1.3bn. The deal encompasses 128 properties across 20 markets and is 98% leased.

Tishman Speyer/Rockefeller Center: In October, diversified real estate firm Tishman Speyer completed a US$3.5bn refinancing of NYC’s Rockefeller Center in the CMBS market for a 6.5% interest rate. For much of the past two years, office transactions remained dormant and plagued by distressed lending conditions. This refinancing marks the largest single-asset office debt deal in history and was significantly oversubscribed by debt investors.

What does the transactions recovery mean for REITs?

Within real estate, REITs are enviably positioned, with 30% loan-to-value ratios (compared to 60% for private real estate), have cheaper cost of funds, and can issue equity in public markets to grow, thereby taking advantage of the resurgent liquidity to buy assets. However, for the past two years, REITs have been stymied in their acquisition pursuits by lack of deal-flow and wide bid-ask spreads. As transactions pick up and pricing improves, REITs across sub-sectors are increasingly deploying capital for acquisitions or development projects, which we believe will advance earnings growth. Furthermore, many REITs have joint ventures or fund management platforms capable of delivering additional returns when assets are sold. These profits have largely diminished over the prior two-year standstill in the transaction market; but as deal volumes recover, REITs are likely to once again be positioned to harvest gains from these vehicles, bolstering profits.

The recovery in transactions, therefore, highlights multiple avenues for REITs to boost earnings growth, strengthening the outlook for asset values, and ultimately, the potential for higher share prices and growing dividends in a new cycle.

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PIIE

Economic

In a day-after-the-election briefing to a group of business executives on what the trade policy of a second Trump presidency might look like, the question was asked, “What would an example of a good tariff be?”

The answer is the same one that the 16th century Swiss physician and alchemist Paracelsus gave about dosages of medicine—given in moderation and for the right purpose, they can help heal. Given in excess, they become a poison.

Special additional tariffs are part of current trade remedies, adopted as a matter of national policy and embedded in domestic US law and international agreement. They are recognized therefore as “good” by Congress even if hardly ever welcomed by the measures’ opponents. Additional tariffs are mandatory to offset dumping (sales at less than fair value) and foreign subsidies where material injury is found. And where there is serious injury, the president is given discretion to impose additional tariffs under a safeguard provision. The policy behind the use of these remedies is not just one of equity. The provision of trade remedies may well have been necessary to allow a system of generally open trade to survive with sufficient domestic political support.

There is a second grouping of tariffs (and subsidies, which are another form of protection) that was considered good by the Biden administration and perhaps by a majority in Congress. These measures were selective. A key US national security objective during the Biden administration was to assure that the United States had the ability to manufacture leading edge semiconductors. This was done through subsidies in the CHIPS Act and through tariffs imposed under separate presidential authority. Similarly, climate change and geopolitics were seen during the Biden White House as worthy objectives for support. This accounts for the current additional tariffs and subsidies for batteries, electric vehicles (EVs), and the like.

The use of tariffs (and subsidies) is not free of controversy, however. The tariffs on EVs and batteries slow the ability of the country to meet climate objectives. At the other extreme, whether climate change is seen as a problem or even acknowledged by the next administration is unknown.

President Trump went far beyond suggesting the selective use of tariffs in his campaign. He spoke very often of imposing a blanket tariff of 10 or 20 percent on all imports, with a 60 percent tariff on Chinese imports. The blanket tariff of 10 or 20 percent would not readily be avoided unless an adequate domestic supply of the goods in question can be produced domestically at a higher price due to the tariff or a sufficient bureaucracy is installed from which to seek exemptions from the tariff.

It is clear that several of those likely to have a major role in the incoming Trump administration, as well as the president-elect, consider this to be a good use of tariffs. Others, outside the new administration, will continue to disagree—including nearly all economists, many US businesses dependent on imports for necessary inputs, and all US trading partners.

It is widely agreed that the high tariff signed into law in 1930 by President Herbert Hoover was a colossal error. Thirteen presidents, from Franklin D. Roosevelt up to and including Barack Obama, accepted the premise that lowering tariffs and conducting trade based on agreed rules would increase global economic activity and generally benefit the US. That policy ended with Donald Trump and was not revived by Joseph R. Biden Jr. High tariffs may now be tried with the announced goals of reining in the US trade deficit and raising US manufacturing employment. Trade deficit reduction, if it occurs, might be achieved at a lower level of economic activity at home and abroad. In that case, manufacturing employment could actually decline. A blanket tariff will clearly generate upward price pressure and lower consumption of imports. That much is sure.

The American people have not been told that they will bear the cost of the tariff (in fact, they were told foreign exporters would pay it) nor that they should consume less. The blanket tariff is a way to lower consumption without admitting that this is what is going to take place. No US administration has sought to impose a value added tax (a national sales tax) because of its domestic unpopularity. There was no mandate from the election to make consumption less attractive, and even less possible for those at the lower end of the economic scale.

It has been claimed that a blanket tariff will cause the shifting of production to domestic factories. It is not at all clear, however, that this works. US production of steel and aluminum did not increase because of the Trump tariffs of 25 and 10 percent, respectively. Nor is it credible that goods that now are almost entirely sourced abroad, like shoes and clothing, will substantially return to being produced domestically. Does a 10-20 percent tax bring about a recapture of industries lost when competitive advantage has shifted abroad? And where would the additional resources come from to make these new goods, if not from sectors that are already producing needed goods and services, including for export industries. The economy is at full employment. It is true that a 10-20 percent cost advantage solely due to the tariff might be sufficient to determine future investment decisions about plant locations. But the US would have to be closer to being cost competitive for the product in question for that to take place, and tariffs would make the US a less competitive base for exports.

Winning the popular vote by a wide margin, reelected President Trump will consider that he has a clear mandate to make greater use of tariffs. A cautionary note should be sounded, however, due to the UK’s experience with Brexit. Brexit made trade far more difficult between Britain’s largest trading partner, the EU. The Conservative government sold Brexit as a cost-free stroke of good fortune. It wasn’t. In June 2016, 51.89 percent of the British electorate had voted for Leave compared with 48.11 percent for Remain, a margin of 3.78 percentage points. This year, the political party responsible was resoundingly beaten at the polls. Current polling (as of May 2024) shows that now over 55 percent think leaving was a mistake versus 33 percent that it was the right thing to do. Nonetheless, there are immense obstacles to Britain now returning to the EU. Some damage cannot easily be undone.

In the 2024 US presidential election, the vote for Trump was 50.3 versus 48.1 percent for Kamala Harris. This is a similar margin to the other major economic vote of our time, Brexit. Now there is little doubt that Trump is going to impose much higher tariffs perhaps with the aid of Congress. The 2026 mid-term election may show what voters think of an abrupt and substantial tariff imposed by President Trump early in 2025. Even if they change their minds, some of the resulting damage to the world trading system and the US economy will be hard to undo.

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Glendon

Economic

CO2 Energy Transition Corp, trading under the proposed ticker NOEMU, is preparing to make a significant entrance into the public markets. The company, focused on developing sustainable energy technologies and carbon capture solutions, is aligned with the global push for a cleaner, greener future. As industries worldwide embrace decarbonization, the NOEMU IPO has become a focal point for investors interested in sustainability-focused opportunities. Here’s what you need to know about this anticipated public offering.

About CO2 Energy Transition Corp

CO2 Energy Transition Corp is a leading innovator in the carbon capture and sustainable energy sector. The company specializes in developing technologies that capture and repurpose CO2 emissions, turning them into usable materials or energy sources. With a clear commitment to aiding industries in reducing their carbon footprint, CO2 Energy Transition Corp positions itself as a critical player in addressing climate change while creating economic value.

The company's technologies have diverse applications across industries such as manufacturing, energy production, and agriculture. Their solutions are not only environmentally friendly but also economically viable, offering a dual advantage of compliance with environmental regulations and cost savings.

NOEMU IPO Details

The NOEMU IPO represents CO2 Energy Transition Corp’s strategy to scale its operations and accelerate the adoption of its technologies globally. The funds raised through this IPO will allow the company to expand its research and development (R&D) efforts, strengthen its production capabilities, and establish new partnerships.

Key Details:

Ticker Symbol:NOEMU

Exchange:NASDAQ

Expected Price Range:$12–$15 per share

Shares Offered:8 million shares

Proceeds Allocation:Primarily for R&D, scaling production, and expanding the company’s international presence.

The company’s valuation and financial performance will be closely watched by investors, particularly given the growing market interest in green technologies and ESG (Environmental, Social, and Governance) investments.

Why the NOEMU IPO Stands Out

The NOEMU IPO has garnered significant attention for several reasons:

Global Energy Transition: Governments and corporations are committing to net-zero carbon emissions by mid-century. CO2 Energy Transition Corp is well-positioned to capitalize on this shift with its innovative solutions that align with global sustainability goals.

Market Potential: The global carbon capture, utilization, and storage (CCUS) market is expected to grow from $4 billion in 2024 to over $15 billion by 2030, with a compound annual growth rate (CAGR) of approximately 20%. CO2 Energy Transition Corp’s unique approach to CO2 reuse provides an edge in this competitive and expanding market.

Technological Edge: Unlike traditional carbon capture methods that are often costly and inefficient, the company’s solutions are designed to integrate seamlessly into industrial systems, providing higher efficiency and scalability.

Strong Leadership and Partnerships: The company’s leadership team includes experts in energy technology, sustainable engineering, and finance. Moreover, CO2 Energy Transition Corp has established partnerships with leading industrial players, enhancing its credibility and market reach.

Investor Interest in ESG: As institutional investors prioritize ESG-compliant investments, the NOEMU IPO offers an appealing option with its clear sustainability focus and potential for long-term growth.

Risks and Considerations

While the NOEMU IPO presents exciting opportunities, investors should remain mindful of the inherent risks.

Market Volatility: The renewable energy and carbon capture sectors can experience fluctuations in demand due to regulatory changes, economic conditions, and technological advancements.

Competition: The CCUS industry is becoming increasingly competitive as new startups and established energy firms invest in similar technologies. CO2 Energy Transition Corp must continue innovating to maintain its competitive advantage.

Scaling Challenges: The success of the company’s technologies depends on their ability to scale effectively and prove commercially viable across various industries.

Future Outlook

The proceeds from the NOEMU IPO will empower CO2 Energy Transition Corp to address its growth objectives while driving the adoption of sustainable practices. Given the rising emphasis on carbon neutrality across industries, the company’s innovative solutions have strong potential to disrupt the market and become a cornerstone of global decarbonization efforts.

Looking ahead, CO2 Energy Transition Corp is expected to expand its reach into international markets, leveraging its expertise to address varying regional needs in carbon reduction. If the company executes its strategy effectively, its market value could significantly rise in the coming years.

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Glendon

Economic

Proprietary trading, commonly referred to as prop trading, is an exciting and lucrative segment of the financial markets. It involves traders using a firm’s capital to make trades rather than their own funds. This approach allows for potentially significant profits while minimizing personal financial risks. But what exactly is prop trading, and how does it differ from other forms of trading? Let’s explore the world of proprietary trading in this comprehensive beginner’s guide.

What Is Proprietary Trading?

Proprietary trading occurs when a financial firm—such as a bank, hedge fund, or trading firm—uses its own capital to trade stocks, bonds, commodities, forex, or other financial instruments. Unlike retail trading, where individuals trade with their own money, prop traders operate with the firm’s resources, sharing a percentage of the profits generated.

How Does Prop Trading Work?

Capital Allocation

The firm provides traders with access to significant amounts of capital, enabling them to execute high-value trades that would be difficult for retail traders.

Profit Sharing

Prop traders typically receive a portion of the profits from successful trades. The split varies between firms but often rewards high-performing traders generously.

Risk Management

Since the firm’s capital is on the line, risk management is a critical component. Firms implement strict guidelines and provide tools to ensure traders minimize losses.

Leverage and Tools

Prop traders benefit from advanced trading platforms, proprietary algorithms, and leverage that magnifies their purchasing power in the markets.

Benefits of Proprietary Trading

Access to Capital

Prop traders can execute large trades without risking their personal funds.

Professional Environment

Working in a prop trading firm offers access to cutting-edge technology, mentorship, and market insights.

High Profit Potential

Successful traders can earn substantial incomes through performance-based profit sharing.

Skill Development

Prop trading environments are excellent for honing technical skills, market analysis, and risk management strategies.

Challenges of Proprietary Trading

Pressure to Perform

Firms expect consistent profitability, and underperforming traders may lose their positions.

Risk of Termination

While traders don’t risk personal capital, failure to adhere to risk management guidelines can result in termination.

Steep Learning Curve

Prop trading requires mastery of advanced strategies and quick decision-making.

Types of Assets Traded in Prop Trading

Equities

Stocks are among the most common instruments for prop traders due to high liquidity and volatility.

Forex

The foreign exchange market offers opportunities for leveraged trading in global currencies.

Commodities

Gold, oil, and other commodities attract prop traders for their volatility and diversification potential.

Derivatives

Options and futures are popular for their risk management capabilities and potential high returns.

Skills Needed for Prop Trading

Analytical Thinking

Traders must quickly analyze market data and make informed decisions.

Emotional Discipline

Success requires controlling emotions and avoiding impulsive actions.

Technical Proficiency

Familiarity with trading platforms and algorithms is essential.

Risk Management

Effective strategies to mitigate losses are crucial for long-term success.

Getting Started in Prop Trading

Join a Prop Trading Firm

Look for firms offering training, mentorship, and supportive environments for beginners.

Develop Your Skills

Focus on building expertise in market analysis, strategy development, and risk management.

Start Small

Begin with smaller trades to build confidence and minimize mistakes.

Leverage Training Programs

Many firms offer educational resources to help new traders succeed.

Conclusion

Proprietary trading is a dynamic and potentially rewarding career for those willing to put in the effort to master the skills and strategies required. By using a firm’s capital and leveraging advanced tools, traders can achieve significant profits without risking personal funds. However, the high-pressure environment requires discipline, adaptability, and a commitment to continuous learning.

For aspiring traders, prop trading represents an exciting pathway into the financial markets, offering both financial rewards and professional growth.

To stay updated on all economic events of today, please check out our Economic calendar

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Glendon

Economic

The world’s largest companies wield immense power, shaping industries, influencing economies, and driving innovation. These corporate giants span various sectors, including technology, energy, retail, and finance. In this article, we explore the largest companies globally based on revenue, market capitalization, and industry influence, shedding light on their achievements and impact.

Measuring Company Size

The size of a company is typically gauged by:

Revenue– Total income from sales and services, reflecting business scale.

Market Capitalization– Total market value of a company’s outstanding shares, indicating investor confidence.

Global Influence– Impact on industries, economies, and innovation.

Top Companies by Revenue

Walmart (Retail)

Revenue (2023):$611 billion

Headquarters:Bentonville, Arkansas, USAWalmart’s dominance in the retail sector stems from its vast global network, low-cost strategy, and diversified offerings.

Saudi Aramco (Energy)

Revenue (2023):$604 billion

Headquarters:Dhahran, Saudi ArabiaAs the world’s largest oil producer, Saudi Aramco plays a pivotal role in global energy markets.

Amazon (E-Commerce & Cloud)

Revenue (2023):$513 billion

Headquarters:Seattle, Washington, USAAmazon’s expansion into cloud computing, logistics, and AI underscores its adaptability and vision.

Top Companies by Market Capitalization

Apple (Technology)

Market Cap (2023):$2.8 trillion

Headquarters:Cupertino, California, USAApple’s innovative products and ecosystem have made it the most valuable company globally.

Microsoft (Technology)

Market Cap (2023):$2.5 trillion

Headquarters:Redmond, Washington, USADominating the software and cloud computing space, Microsoft continues to shape digital transformation.

Alphabet (Parent of Google, Technology)

Market Cap (2023):$1.8 trillion

Headquarters:Mountain View, California, USAAlphabet’s investments in AI, cloud, and search solidify its influence in tech.

Industry Leaders by Sector

Technology:Companies like Apple, Microsoft, and Samsung drive innovation, shaping the future of AI, hardware, and software.

Energy:Firms like Saudi Aramco and ExxonMobil dominate, ensuring energy supplies in a volatile market.

Retail:Walmart, Amazon, and Alibaba transform shopping with their vast scale and technological integration.

Finance:JPMorgan Chase and ICBC lead in banking, impacting global capital flows and investments.

The Impact of These Giants

Global Influence

These companies contribute significantly to GDP, create jobs, and set trends in their respective industries.

Technological Advancements

Firms like Tesla and Apple push boundaries in electric vehicles, consumer electronics, and renewable energy.

Social Responsibility

Many large companies invest in sustainability, aiming to address global challenges like climate change and inequality.

Future Trends Among the Largest Companies

Tech Expansion

The rise of AI, machine learning, and quantum computing will likely boost companies in the tech sector.

Sustainability Focus

Energy companies are pivoting towards renewable energy as the world seeks greener solutions.

Globalization and Localization

Firms continue to expand internationally while adapting to local markets to meet consumer needs.

Conclusion

The largest companies in the world are more than just economic powerhouses; they are drivers of innovation, progress, and societal change. As they evolve to meet global challenges, their influence will only grow, reshaping industries and setting the stage for the future.

Understanding these corporate titans offers valuable insights into the global economy and the trends shaping tomorrow’s world.

To stay updated on all economic events of today, please check out our Economic calendar

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Economic

Trump’s election raises bets for a Fed pause

The US dollar continued flexing its muscles for another week, with the so-called ‘Trump trades’ showing no signs of cooling as the president-elect Republican party will control both chambers of the US Congress, which will make it very easy for Donald Trump to turn his pre-election promises into legislation.

The newly elected US president has been advocating for massive corporate tax cuts and tariffs on imported goods from around the globe, especially China, measures that are seen by the financial community as fueling inflation and thereby prompting the Fed to delay future rate reductions.

With the US CPI data already pointing to some stickiness in price pressures during October and Fed Chair Powell noting just yesterday that they do not need to rush in lowering interest rates, more market participants are becoming convinced that the Fed may need to take the sidelines soon. They are assigning a decent 37% chance for this happening in December and a stronger 57% for a January pause.

Week Ahead – Flash PMIs, UK and Canadian CPI Data Enter the Spotlight_1

Will the PMIs seal the deal for a Fed pause?

With that in mind, next week, dollar traders may closely monitor the preliminary S&P Global PMI data for the month of November, due out on Friday, for clues as to whether the state of the US economy can indeed allow Fed officials to proceed at a slower pace.

Week Ahead – Flash PMIs, UK and Canadian CPI Data Enter the Spotlight_2

The prices charged subindices may attract special interest as traders may be eager to find out whether the October stickiness rolled over into November. If this is the case, the probability for a January pause may increase further, driving Treasury yields and the US dollar even higher.

Amidst tariff clouds, euro awaits PMIs as well

On the same day, ahead of the US data, S&P Global will release the Eurozone and UK flash PMIs for November. In the Euro-area, the better-than-expected GDP data for Q3 and the rebound in CPI inflation for October have lessened the likelihood of a 50bps rate cut by the ECB at the upcoming decision.

Nonetheless, concerns that higher tariffs by a Trump-led US government could weigh on the Euro-area economy revived speculation for bold action by the ECB in December, with the euro tumbling to a more-than-one-year low.

Week Ahead – Flash PMIs, UK and Canadian CPI Data Enter the Spotlight_3

Even if the PMIs point to some further improvement in business activity for November, concerns about the impact of Trump’s policies could remain elevated. Therefore, a potential rebound in the euro on the PMIs is likely to stay limited and short-lived.

Week Ahead – Flash PMIs, UK and Canadian CPI Data Enter the Spotlight_4

The uncertainty surrounding Germany’s political scene could also be a headache for euro traders as a lengthy process to form a new coalition government may result in delays in entering negotiations with the US for finding common ground on trade.

Will the UK CPIs reveal early signs of rebound?

In the UK, there are more important releases for pound traders coming in ahead of Friday’s PMIs. On Wednesday, the CPI data for October are coming out, while on Friday, ahead of the PMIs, retail sales are due.

At its latest gathering, the BoE cut interest rates by 25bps but signaled it will proceed with caution on the pace of further easing, prompting market participants to push back their rate cut expectations. There is only an 18% chance for another reduction in December, with a quarter-point cut being fully penciled in for March 2025.

And this is despite the headline inflation rate dropping to 1.7% y/y in September. Perhaps investors have taken into account the still-elevated core rate and the upward revisions of the BoE itself. Just for the record, the Bank has raised its inflation forecast for 2025 to 2.7% y/y from 2.2%.

Week Ahead – Flash PMIs, UK and Canadian CPI Data Enter the Spotlight_5

If Wednesday’s CPI data indeed show early signs of a rebound in price pressures, investors could push further back the timing of the next interest rate cut, something that could prove positive for the pound, especially if Friday’s retail sales come in on the bright side as well.

Canadian and Japanese inflation numbers also on tap

More CPI numbers are coming out next week. On Tuesday, the inflation chorus will start with the Canadian numbers, while on Friday, it will end with Japan’s Natonwide CPI data.

In Canada, there is a decent 35% chance for the BoC to deliver a back-to-back 50bps rate cut in December. The jobs data for October have been on the mixed side, with the unemployment rate holding steady at 6.5%, instead of rising to 6.6% as expected, but with the net change in employment slowing more than expected.

Week Ahead – Flash PMIs, UK and Canadian CPI Data Enter the Spotlight_6

The report was not enough to stop the loonie from tumbling against the almighty US dollar, with dollar/loonie now trading at levels last seen in May 2020. Both the headline and core CPI rates stood at 1.6% y/y in October, while the closely watched trimmed CPI held steady at 2.4%. Further cooling may corroborate the notion that there are no upside inflation risks in Canada and may convince more traders to bet on a 50bps reduction in December, thereby pushing the loonie even lower.

In Japan, the BoJ kept interest rates untouched on October 31, but signaled that the conditions for raising rates again are falling into place. This and the latest slide in the yen convinced market participants that Japanese policymakers could hike again at the turn of the year, seeing rates 13bps higher in December and 20 in January.

Having said that though, even if Friday’s CPI data corroborates the view of higher rates soon, any yen recovery is likely to stay limited and short-lived due to further potential strength in the US dollar and due to the hikes being already priced in.

Source:XM

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NIESR

Economic

Using a global sample of 7,368 banks over 1990-2022, we have found that a range of macroprudential policies have a significant positive effect on banks’ noninterest income, particularly those focused on loan supply/demand restrictions and capital measures. Similar results are found for a range of disaggregated samples by type of noninterest income, country development, bank size and pre and post the Global Financial Crisis, and in three robustness checks. These positive effects can be attributed to an impact of macroprudential policy akin to that of financial change that originally generated the shift to noninterest income, notably the decline in lending and tightening of capital requirements on loans. Positive effects of macroprudential policy on total noninterest income and fee income feed through to total profitability, thus allaying concerns that macroprudential policy may inhibit scope to raise capital via retentions. But nonfee income is found to be adverse for total profitability Moreover, a boost to noninterest income, and particularly its nonfee component, may also affect bank risk adversely, as highlighted widely in the literature and also with our dataset.

Summarising the main results for 100 countries over 1990-2022, we have found noninterest income is persistent over time and negatively related to bank size and the loan/asset ratio. The ratio to average assets links positively to the capital ratio and the net interest margin, and negatively to credit risk, the return on average assets, market power, bank crises and inflation. The ratio to total income links positively to credit risk, the cost/income ratio, the return on average assets and inflation, and negatively to the net interest margin.

A number of measures of macroprudential policy influence noninterest income, and the significant effects are positive. From the summary measure results, the effects appear to be stronger for the measure noninterest income/average assets than for noninterest income’s share in total income – indeed, the latter are generally zero. This suggests a greater effect on profitability from noninterest income than from bank strategy in terms of its division with net interest income. In terms of individual measures, loan-targeted policies have a positive effect across global banks, while capital measures also boost noninterest income in a number of cases. Only tighter loan/deposit ratios have a consistently negative effect.

The results for determinants of noninterest income are also largely apparent for samples disaggregated by type of noninterest income, region, bank size and pre and post the Global Financial Crisis, and also in three robustness checks. One interesting contrast, however, is that fee income is boosted by economic growth whereas nonfee income rises in recession. Especially for the summary measures, macroprudential policy effects are also similar and positive across subsamples. Unlike the global sample, there are a number of positive effects of macroprudential policy categories on the share of noninterest income, notably for EMDE banks, nonfee income and small banks. Only pre-crisis were positive effects of macroprudential policy on noninterest income relatively absent.

These results are of considerable relevance to regulators. Notably, the results for the ratio of noninterest income to average assets suggest that negative effects of macroprudential policies on net interest margins are at least partly offset by such diversification. This reduces concern that banks may be less able to accumulate capital when macroprudential policy is tightened.

On the other hand, there may be grounds for caution since a rise in dependence on noninterest income due to macroprudential policy increases bank risk, as has been found widely in the literature and in our own dataset. This is especially since some negative effects of the nonfee component of noninterest income on profitability is also found. We also note that banks facing higher credit and liquidity risks seek higher noninterest income. Digging deeper, we have found that nonfee noninterest income boosts risk consistently at a bank level (as measured by the log Z score) and in some cases also in the loan book (NPL/loan ratio). Nonfee income also reduces profitability, from which capital to enhance reliance against risk could be accumulated. Higher fee income on the other hand tends to lower risk or have a zero effect, albeit not in advanced countries when it raises risk. It also tends to boost profitability.

This raises further regulatory issues relating to whether it is desirable to encourage fee as opposed to nonfee income generation, both when macroprudential policy is tightened and in general terms, and how that could be accomplished. Given the inverse relation of nonfee income to economic growth, recessions would need particular vigilance for this reason also. Choice of macroprudential policy is also relevant in this context, since we find both types of noninterest income are boosted by macroprudential policy tightening, although fee income is raised by both demand and supply measures while nonfee is largely affected by supply measures. Among individual measures, provisioning requirements and loan-to-value limits have opposite effects on fee and nonfee income.

Further research could investigate the effects of macroprudential policies on other components of overall bank profitability (such as the net interest margin, noninterest costs and provisions). Assessment of impacts of macroprudential policies by regions and for individual country banks could also be fruitful. Further work on risk and noninterest income could focus on the positive effects of fee income on bank risk in advanced countries.

Macroprudential policies have become crucial tools for maintaining financial stability, but their effect on banks’ noninterest income has not yet been examined. This is a paradox in light of results in the literature linking noninterest income to bank performance indicators such as risk and profitability. Using a global sample of 7,368 banks over 1990-2022, we find macroprudential policies have a significant positive effect on noninterest income. Similar results are found for disaggregated samples by type of noninterest income, country development, bank size and pre and post the Global Financial Crisis, and in three robustness checks. However, the extent to which such positive effects feed through to overall profitability depends on the type of noninterest income. Furthermore, stimulus from macroprudential policies to noninterest income, and especially its nonfee component, is found to affect bank risk adversely. Our findings have important implications for central bankers, regulators and commercial bank management.

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