Archive for the ‘Financial Markets/ Finance’ Category

Machine learning in UK financial services

October 18, 2019

I recently wrote a piece on Machine learning and its impact on economics and finance.

New BoE publication reviews what is happening in fin services industry in England. It finds ML is being used increasingly by the fin firms:



Video Clips of Economists Explaining for Intro Econ Classes

October 17, 2019

Superb Timothy Taylor on his super blog links to these intro econ videos:

I know a number of economics faculty who have been incorporating video clips into their classes. Sometimes it’s part of a lecture presentation. Sometimes it’s for students to watch before class. For intro students in particular, it can be a useful practice because it gives them a sense that they are being introduced to a universe of economists, not just to one professor and a textbook. The faculty member can also react to the video clip, and in this way offer students some encouragement to react and to comment as well–in a way that students might not feel comfortable reacting if they need to confront their own professor.

Amanda Bayer and Judy Chevalier have been compiling a list of video clips that may be useful for the standard intro econ class. It’s available at the Diversifying Economic Quality (“Div.E.Q”) website.  Most are in the range of 3-6 minutes, although a few are longer or shorter. The economists are often talking about their own research, but in a way that the evidence can easily be incorporated into an intro presentation.

For a few examples grabbed from lectures on micro topics. Kathryn Graddy talks about her work studying the Fulton Fish Market in New York City, and how even in a highly competitive and open environment, buyers sometimes pay different prices. (Graddy also wrote an article on this topic in the Spring 2006 issue of the Journal of Economic Perspectives.)

Petra Moser discusses her work showing that “copyright protection for 19th century Italian operas led to more and better operas being written, but the evidence also suggests that intellectual property rights may do more harm than good if they are too broad or too long-term.”

Heidi Williams describes new data and empirical methodogies to study and advance technological change in health care markets.

Kerwin Kofi Charles looks at his empirical research on how the extent to which prejudice leads to discrimination in the labor market and  how it may affect wages of black workers. 1

Cecilia Rouse talks about her research on how change in to blind procedures for the musicians auditioning for symphony orchestras led to more women being selected.

In short, the presenters in the video clips are top-quality economists describing their own research, in ways that spark interest among students. In addition, economics has an ongoing issue with attracting women and minorities. This list is heavily tilted toward presentations by economists from those groups, and there’s some evidence that when intro students see economists who look more like them, they may feel more comfortable expressing interest in economics moving forward. 

Should look them up..

The history of financial development of London

October 14, 2019

I had blogged about this new study by Prof Nathan Sussman which shows how London emerged as a financial centre before the 1688 glorious revolution.

Voxeu has a good interview of Prof Sussman where he explains his study and some more ideas on history of finance, London, Europe and so on..

The art of money laundering: How money laundering world uses art markets for illicit fund transfer

October 11, 2019

Tom Mashberg of IMF in this superb piece argues how art markets are being used in money laundering world:


What’s wrong with bank culture?

October 11, 2019

Huw Macartney of University of Birmingham has recently written a book: The Bank Culture Debate: Ethics, Values, and Financialization in Anglo-America.

In this LSE blogpost, he explains some bit:

Each year I give an undergraduate lecture on student loans. It is a thoroughly depressing two-hour slot. But each year it also reminds me how the student experience has changed since I began my undergraduate degree in 1997. One memory stands out in particular. It is the memory of visiting four large UK retail banks in my local village and being offered £50-£100 to open one of their credit card accounts. Free beer money for me I reasoned; and someone in the bank moved one step closer to reaching their sales targets. A win—win outcome.

Since the mid-2000s, though, this “culture” in the banks has come under a lot of scrutiny. In the UK customers became aware that the payment protection insurance they had been obliged to buy was virtually worthless; in the US mortgages were being sold to households who had no hope of making the repayments once the introductory offers expired; and then stories of Wells Fargo employees chasing potential checking account customers around shopping malls – to meet an end-of-month sales target – emerged in the mid-2010s.

So, what is bank culture? Academic accounts tell us that a corporation’s culture refers to the beliefs and actions of its employees. Culture drives behaviours and strategies. It is what employees of an organisation live and breathe daily. Neoclassical economics usually assumes that behaviours stem from financial incentives: offer an employee a big enough bonus and he or she will sell life insurance to a corpse. Behavioural economics shows that status and approval are equally important: getting the biggest bonus is often more important than the actual financial sum itself. Some studies have therefore concluded that culture may even be the determining factor behind the long-term success and sustainability of a firm. As the financial crisis showed however, the opposite can also be true.

After the financial crisis and numerous scandals – rate-fixing, money-laundering and mis-selling – policymakers in the UK and the US made banking culture a top priority. A multitude of new institutions were established, and new laws passed. Huge amounts of political and economic resources were thrown at the bank culture problem.

My most recent book argues, however, that after this monumental political and economic effort everything and nothing has changed in Anglo-American banking culture. What do I mean? Well, as is often the case, what you see depends on where you stand.

The message to reform culture has gone totally wrong:

For the 150 or more bank employees that I spoke to in both the US and the UK their work environment – their “culture” – has become extremely claustrophobic. Every email is scanned and scrutinized; casino-style cameras – monitoring employee behaviour patterns – have been introduced; in some banks sales targets have been completely abandoned; and criminal penalties have been introduced for misconduct. Bank staff feel constrained and derided. Countless times I was told that the world of banking has changed beyond recognition.

But I argue that this is an unhelpful way to think about bank culture, because it over-emphasises the internal perspective on cultural reform. Put differently, the degree of bank culture reform should also be examined from a broader perspective. The question ought to be: has the culture reform agenda helped remedy the inequality and instability that the largest banks contribute to and profit from? Seen from this perspective the answer – I argue – is, no. Banks – particularly in the UK and the US – are arguably amongst the most important corporations, wielding massive influence over democratic politics and a huge role in shaping society.

Debt is the most obvious example of the latter. Given relatively stagnant wages in both the UK and the US and the dependence on consumer spending – consumption – to drive these economies, it seems we cannot live without our credit cards. This process empowers the banks, as guardians of the credit economy. And it is also one reason why banking culture matters to us all.

From this wider perspective I argue that banking culture in the Anglo-America economies has changed very little. Wages in the financial sector are still disproportionately high. Pro-economic recovery measures such as quantitative easing and low interest rates have boosted asset prices and aided the profitability of the banks, but there is little evidence that these measures contributed to an economic recovery. And the figure below shows that after a slight dip bank bonuses at some of the top US banks soon rocketed again. This is why I say that everything and nothing has changed.

As regulators argue that so much has been achieved since the 2008 crisis in terms of banking capital and leverage. But this thing called poor or gross culture in financial services industry remains unchanged.


State’s role in the payment market is a matter of urgency: Case of Sweden

October 11, 2019

The usage of cash has declined significantly in Sweden. So much so, the polity has to pass laws to ensure people do not refuse cash as a payment.

Gabriel Söderberg of RIksbank in this note argues that the government needs to play an active role in development of e-krona.

The e-krona brings up many different issues. What is the role of the central bank and ultimately the state in society? What is money and how should we organise the payment  system so that it functions as well as possible? And what do we mean by “as well as possible”? In other words: what attributes do we as a society wish our money and our payment system to have? The economic analysis performed by the Riksbank at the start of the project has therefore been joined by a wider societal analysis and the insight that the ultimate decision on the future of the e-krona is affected by areas beyond economic analysis,
including values as to how society should be organised, and should therefore be the subject of a political decision.

Goes back to some of the fundamental questions about money. Some of these questions would have been asked when the State was beginning to get into money…



What a decade of monetary policy innovation has taught us?

October 10, 2019

Not sure there has been any innovation, but nevertheless.

Philip Lowe, Chair of the CGFS (and Governor of the Reserve Bank of Australia) and Jacqueline Loh, Chair of the Markets Committee (and Deputy Managing Director of the Monetary Authority of Singapore) in this FT piece argue:

The global financial crisis presented central banks with unprecedented challenges, and their response was to take extraordinary actions. A decade on, we can say that these measures succeeded in saving the global economy from deflation, but also introduced some distortions in a few areas of the capital markets.

Many central banks introduced unconventional monetary policy tools following the crisis. They embarked on large-scale asset purchases and expanded lending programmes, increasing their balance sheets to historic levels. Interest rates were cut below zero in several countries. Two committees at the Bank for International Settlements released complementary reports today assessing the effectiveness of unconventional monetary policy instruments and analysing the impact of large central bank balance sheets on market functioning.

Unconventional policy tools emerged out of necessity. In the countries hardest hit by the economic crisis, the financial sector stalled and stopped doing its job, hamstrung by losses and drained of liquidity. The subsequent recession sent unemployment soaring. With inflation and interest rates at low levels, the limited room for conventional policy manoeuvre was quickly exhausted.

On balance, central bankers say that the results of unconventional policies have been positive. Interventions helped smooth investor and consumer expectations and jump-start markets. Research by bankers and academics points to a positive response of economic activity to the extra stimulus provided by unconventional tools. The risk of a deflationary spiral was largely avoided, though inflation still undershot central bank objectives.

Balance sheet-expanding policies aimed at improving market functioning delivered on this front. Balance sheet policies aiming primarily to provide monetary stimulus had some side-effects on market functioning.

The path has been neither smooth nor straight, and some policies have been more successful than others. The reports conclude that corrections to the initial plans were necessary in view of the experience gathered in the course of implementation. Balance sheet policies aiming primarily to provide monetary stimulus had some side-effects on market functioning – especially in terms of reducing the availability of bonds in the market – which were addressed by central bank countermeasures.

In addition, the style of central bank communication about policy intentions and use of these tools had to be adjusted to changing circumstances and fine-tuned to the interpretations that market participants gave to policy messages. Monetary policy is a powerful but not very precise tool and prolonged easing can have side-effects. In part, it works by stimulating aggregate expenditure in a slump by encouraging investors and consumers, who have become overly cautious, to take more risk. Unconventional tools work the same way and, as the reports discuss, protracted use may also encourage imprudent behaviour by market participants.

In a world with open financial borders, it also has spillovers. Investors obtaining cheap funding at home can seek returns abroad, and recipient economies need to manage capital flows in a way that is consistent with their own priorities and needs.

The central banks that used unconventional policies report that these tools have earned a place in their policymakers’ toolbox. They can provide additional policy space and flexibility, allowing a central bank to achieve its mandate when conventional tools have reached their limits. In a world of low inflation and structurally low real rates, they may become increasingly important.

Another lesson is that the tools need to be complemented with measures that reduce side-effects. Such measures could include securities lending facilities that mitigate the scarcity effects from central bank asset purchases, and policies that reduce the impact of negative rates on banks funded by retail deposits.

Money markets must maintain sufficient capacity to function after the extraordinary liquidity is withdrawn, and central banks must preserve operational flexibility to address unexpected changes. Central banks also need to strike the right balance between providing guidance that reduces uncertainty and unduly narrowing down central bankers’ options to respond to changing circumstances in the future.

The reports suggest that unconventional tools’ effectiveness can be strengthened if central banks communicate that they are willing and able to use them. This is best done in a way consistent with each bank’s legal mandate and institutional framework.

Central bank credibility is a major determinant of the effectiveness of monetary policy and this applies as well in the use of unconventional tools. At the same time, their use is best seen as one component of an overall public policy framework that encompasses fiscal and prudential policy responses. Policymakers should avoid placing a disproportionate burden on monetary policy.

This is more like patting one’s own back!

Are Bankers like magicians who pull rabbits from hats?

October 9, 2019

Another interesting speech by Lars Rhode, head of Denmark Central Bank. See earlier ones: one, two).

This speech is given on occasion of 100 years of banking supervision in Denmark.  He starts comparing bankers to magicians!:

What are the characteristics of banking?

In the words of the historian Søren Mørch – loosely quoted – banking belongs in the department where rabbits are pulled out of top hats and ladies are sawn in half. This only works if the audience – the banks’ customers – behave as expected and do what they usually do.

If the customers do not trust the bank, there will be a run on the bank. The trick will fall flat, and the money will vanish.

We can try to regulate our way out of the risk that the trick will fall flat. But whatever we do, we can never guarantee that the banks will not experience problems. So does that mean that we should avoid regulation? The answer is “no”. Regulation is a must.

🙂 Interesting way to explain need for banking regulation.

He then reviews the history of banking supervision in Denmark which is a decent read for banking historians.

In the end:

I started by talking about pulling rabbits out of top hats and sawing ladies in half. But don’t get me wrong. Banking is no joking matter. Regulation of the banks is necessary as they play a special role in society.

Financial regulation and the financial supervisory function, which has now existed in Denmark for 100 years, are primarily there for the citizens and
firms – not for the banks.

Banking and rules undergo continuous change. Take for example payment services, where costs to society are almost halfed since 2009. Increased competition and innovation is something we should welcome.

Future financial services and functions will perhaps be delivered by new actors. They may claim they are not banks and therefore should not be
subject to supervision. However, the guiding principle should always be that it is the function which is regulated.

The new challenges for the supervisory authority are best solved in close and binding cross-border cooperation, which is precisely what the strengthened banking cooperation is about. None of us know what tomorrow brings. But it is our duty to do our best to protect the fundamental financial functions of our society.


Creating a World wide currency

October 7, 2019

Interesting food for thought piece by the trio of econs: Pierpaolo Benigno, Linda Schilling, Harald Uhlig


Law and macroeconomics – the global evolution of macroprudential regulation

October 4, 2019

When we say law and economics, it usually means micro. In this speech, Randal Quarles of Federal Reserve in this speech says law and macro are connected as well:


How “deep” parameters of central banking of 1990s are a distant memory now

October 3, 2019

Interesting speech by Mary Daly, President of San Francisco Fed. She gives the speech on 30 years of inflation targeting in NZ.

She joined the Fed in 1990s and there were three main parameters around mon policy. All those have changed now:

To understand the new environment we face, we first have to look back to the past. And here I will use the United States as an example.

When I started working at the Federal Reserve in 1996, I learned three important facts—the “deep” parameters of central banking. First, the potential growth rate of the U.S. economy averages around 3.5%. Second, the real neutral rate of interest—or r-star—changes over time but is well-bounded away from zero, mostly in the range of 2% to 3% or higher (Congressional Budget Office 2019, Laubach and Williams 2003, FRB New York 2019, Christensen and Rudebusch 2019). Third, unemployment and inflation are strongly linked through the Phillips curve.

Fast forward to 2019. These facts—these deep parameters—feel like a distant memory. As of June, participants of the Federal Open Market Committee put longer-run potential growth in the United States at about 1.9%. Estimates of the long-run neutral rate of interest were penciled in at just 0.5% (Board of Governors 2019b). As for the Phillips curve, most arguments today center around whether it’s dead or just gravely ill. Either way, the relationship between unemployment and inflation has become very difficult to spot.

Although the numbers may be a little different, the changes I’ve described are not unique to the United States. Global demographic shifts and lower productivity gains are tempering growth and reducing long-run interest rates in many countries (Holston, Laubach, and Williams 2017). And a number of central banks are finding that inflation is less responsive to labor market improvements than in the past.

These trends have important implications for monetary policy. Lower r-star and the zero lower bound mean we’ll have less room to maneuver when the next downturn occurs. One of the lessons learned from the financial crisis and its aftermath is that alternative tools like forward guidance and the balance sheet can be effective at stimulating economies. However, they’re still imperfect substitutes for the most effective tool at our disposal: traditional interest rate adjustments. And the fainter signal coming from the Phillips curve means we have less direct, real-time feedback about how monetary policy is playing out in the economy.

In other words, the jobs of central banks have gotten harder.


Early French and German central bank charters: Central Banking before Riskbank and Bank of England

October 3, 2019

Superb ECB paper by Ulrich Bindseil.

We usually say central banking started with Swedes and British. There were earlier attempts too but their charters were not accessible and available in English. Bindseil translates the charters of six French and German banks starting with Nurnberg exchange and lending bank of 1498. They suggest central bamks arrived much earlier:

In some recent studies, the question of the origins of central banking has been revisited, suggesting that beyond Swedish and British central banking, a number of earlier European continental institutions would also have played an important role. However, it has often been difficult to access the charters and regulations of these early central banks – in particular in English.

This paper contributes to closing this gap by introducing and providing translations of some charters and regulations of six pre-1800 central banks in France and Germany. The six early public banks displayed varying levels of success and duration, and qualify to a different degree as central banks. An overview table maps the articles of the early central banks’ charters and regulations into key central banking topics.

The texts also provide evidence of the role of central banking legislation, and of the distinction between, on the one side, the statutes and charters of the banks, and on the other side the operational aspects which tend to be framed by separate rules and regulations.

Finally, the texts provide evidence of the policy objectives of early central banks, including in particular those of a monetary nature. To put these documents into context, the objectives, balance sheet structure, achievements and closure of each central bank are briefly summarised.


Mario Draghi interview: He reflects on the 8 years as ECB President

October 1, 2019

Mario Draghi steps down as ECB President at end of this month.

In this FT interview, Draghi discusses and reflects his term:


The Puzzling Lure of Financial Globalization

October 1, 2019

Arvind Subramanian and Dani Rodrik in this Proj Syndicate piece argue that financial globalisation continues to excite economists:

Although most of the intellectual consensus behind neoliberalism has collapsed, the idea that emerging markets should throw their borders open to foreign financial flows is still taken for granted in policymaking circles. Until that changes, the developing world will suffer from unnecessary volatility, periodic crises, and lost dynamism.


After holding off for decades, China has finally embraced financial globalization, announcing recently that it would eliminate capital controls to allow unfettered short-term foreign inflows (so-called hot money). By contrast, after decades of boom-bust cycles, Argentina is facing another a macroeconomic crisis, and has finally imposed capital controls to prevent a catastrophic decline in its currency.

Both of these episodes reveal the intellectual hold that financial globalization still has on policymakers, despite its history of failure. Why, after all, would China abandon capital controls now, and what took Argentina so long to adopt such obviously necessary measures?

The Chinese economic miracle has many sources. In addition to the turn to markets, China has benefited from exports and foreign investment, internal migration, and the Maoist legacy of a public education and health system. It is also the civilizational heir to a strong, effective state with an enlightened, albeit ruthless, leadership. Its people collectively crave stability. But an important factor in China’s rise was the decision not to open the economy to capital flows

Consider the following counterfactual history. In the late 1990s, when China’s economic miracle was becoming evident, it could easily have succumbed to the prevailing orthodoxy on financial globalization. Had it done so, the likely outcome would have been a surge in foreign capital chasing high Chinese returns, rapid appreciation of the renminbi, slower export growth, and lost dynamism. China’s export machine would not have become the juggernaut that it is, and its economy may well have suffered through much more volatility as a result of the fickleness of foreign capital. In fact, Argentina – with its periodic macroeconomic volatility and recurring financial crises – offers a perfect illustration of these downsides.

Nearly every major emerging-market financial crisis of the past few decades has been preceded or accompanied by surges in capital inflows. That was true of Latin America in the 1980s, India in 1991, Mexico in 1994, and East Asia and Russia in the late 1990s. It was also true of Brazil, Turkey, and Argentina in the early 2000s; the Baltics, Iceland, Greece, and Spain in the late 2000s and early 2010s; and the “Fragile Five” emerging-market economies (Brazil, India, Indonesia, South Africa, and Turkey) in 2013. And it is true of Argentina today.

To be sure, capital flows have often reflected deeper policy problems or imbalances within a given emerging market. But they are also usually the necessary transmission mechanism for crises, and thus have magnified the eventual costs to those economies. Although most tenets of the neoliberal consensus – privatization, deregulation, trade integration, immigration, fiscal discipline, and the primacy of growth over distribution – are now being challenged or outright rejected, financial globalization remains a glaring exception.

Well, there is too much money and too many careers are at stake and they all try their best to keep the circle going..

The financial development of London in the 17th century revisited

September 30, 2019

Fascinating research by Nathan Sussman of Graduate Institute of Geneva.

The history of London as a Financial centre is always an interesting area of research:

Most research on the development of English financial markets begins with the Glorious Revolution of 1688. 

Financial conditions and purchasing managers’ indices: exploring the links

September 25, 2019

Purchasing Managers’ Indices (PMI) is becoming increasingly popular with analysts.

In the BIS quarterly review (Sep-19), Burcu Erik, Marco Jacopo Lombardi, Dubravko Mihaljek and Hyun Song Shin explore links between PMI and Financial conditions:

Purchasing managers’ indices (PMIs) have found a place in global conjunctural analysis and quarterly GDP nowcasting, serving as reliable concurrent indicators of real economic activity. They also closely mirror changes in equity prices and corporate bond spreads. More surprisingly, PMIs react to changes in the dollar index, and do so in a way that runs counter to a trade competitiveness explanation. We show that the financial variables help predict PMIs and explain a significant proportion of their variation. The two seem to be linked through shifts in macroeconomic sentiment and global financing conditions.


When banks use economic nationalism to drive up customers: Case from NZ

September 23, 2019

With Nationalism being the flavour of the day, how can economic nationalism remain behind? Infact both have coexisted for as long as one can imagine.

Recently Kiwibank, a NZ based bank issued an ad hitting out at competitors.

Kiwibank 1

Michael Reddell, who writes a terrific blog on NZ economy disapproves the tactic:


Are Trump’s tweets undermining Federal Reserve’s independence?

September 23, 2019

Reinhart and Reinhart in a Proj Syndicate Piece wrote how Federal Reserve’s easy monetary policy will basically lead to Trump reelection:

Probably to Powell’s deep and never-to-be-expressed frustration, the Fed is setting monetary policy in a way that increases the likelihood that Trump will be reelected next year. That instruction is not contained in the Federal Reserve Act, of course, but the Fed is supposed to deliver maximum employment and stable prices. Its mandate of sustainable economic growth thus requires Powell to attempt to offset the effects of policy uncertainty under Trump.

Fed officials are not thinking of intentionally letting the economy stumble between now and the 2020 election. Thus, if Powell succeeds, Trump will not bear the cost of his words and actions. This will invite more of the same.

There is a reason that Powell often has a haunted look, and not just at Jackson Hole.

In a new NBER paper, authors actually show how Trump’s tweetstorm (hatestorm?) leads to lower Federal Funds rate:

This paper presents market-based evidence that President Trump influences expectations about monetary policy. The main estimates use tick-by-tick fed funds futures data and a large collection of Trump tweets criticizing the conduct of monetary policy. These collected tweets consistently advocate that the Fed lowers interest rates.

Identification in our high-frequency event study exploits a small time window around the precise time stamp for each tweet.

The average effect of these tweets on the expected fed funds rate is strongly statistically significant and negative, with a cumulative effect of around negative 10 bps. Therefore, we provide evidence that market participants believe that the Fed will succumb to the political pressure from the President, which poses a significant threat to central bank independence.

Interesting times!

The impact of digital money on educating kids about money

September 23, 2019

As of now, kids learn about basic math using money. Most math textbooks teach kids additions, subtraction, decimals etc using money. Money is visually depicted in the books to help students see and do math problems.

What happens to this useful way of learning math once digital money rules the world?

Johannes Beermann of Bundesbank  poses this question too:


Hong Kong as a risk management hub

September 20, 2019

Amidst all the developments in financial markets, the thing of international financial centres competing with each other remains on the sidelines but is an exciting area.

Mr Norman T L Chan of HKMA discusses how HK’s international financial centre is shaping as a risk management hub:


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