Question

The supply of financial services is undergoing change brought on by changes in the external environment. List and briefly describe three external factors that are changing and the impact they are having on the supply of financial services.

Answer 1

Three external factors that are changing and the impact they are having on the supply of financial services are as follows :

1. Economic and demographic changes and outlook : The positive development in global economic conditions that began in the second half of 2016 gained further momentum in 2017. The global economy is stronger than it has been over the past decade. In advanced economies, growth momentum was broad‑based, with stronger activity in the United States, Europe and Japan .Growth in Europe, with the exception of the United Kingdom (due to Brexit), reflects continued strength in domestic demand, which was supported by monetary conditions and diminished political risk and policy uncertainty, as well as an increase in exports.
2. Low interest rates and financial market stability : Market sentiment remained strong and volatility continued to be low in 2017. On the monetary policy front, the US Federal Reserve raised short-term interest rates in March, June and December. In most other advanced economies, the monetary policy stance remained broadly unchanged, with the exception of the European Central Bank’s (ECB) announcement that it will halve the pace of its bond-buying asset purchase programme, starting in January 2018. In 2017, long-term sovereign bond yields stayed broadly stable in Germany, the Netherlands and Japan, and declined by 20–30 basis points in other EU countries, as spreads relative to German yields reduced sharply after the French presidential election. Prices in equity markets have continued to increase due to strong company earnings, high consumer and business confidence, and strong macroeconomic data. As the search for yield intensifies, however, vulnerabilities and market risks increase.
3. Uncertain geopolitical developments : In the refinement of business strategies, financial services companies should take due account of other developments, such as ambiguity around geopolitical developments, which potentially lead to uncertainties in the economy and markets. The increased frequency and severity of major weather events mean that climate change has enlarged the risks and costs of insurance. Cyber risks to business and governments are growing, as events in 2017 demonstrated, with a sizable increase in the impact and sophistication of financially motivated cyber‑attacks on financial institutions. A greater reliance on technology, combined with the interconnectedness of the global financial system, means that many participants in the system could potentially be at risk.