Archive for the ‘Financial Markets/ Finance’ Category

The difficulty of being a monetary/banking policymaker in Europe: Balancing European and nationalistic interests

August 16, 2018

Ms Sabine Lautenschläger of ECB in this interview speaks about the state of banking developments and regulation in Euroarea. The interview talks about other things such as lack of women representation in central banking, stronger state of US banks and so on.

But what was most interesting is the way she balances her answers. The interviewer asks her a country specific question but she just replies for the Euroarea as a whole:

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How a Swiss bank was toppled by a financial scandal in Malaysia – and what can be learned from it

August 14, 2018

Salvatore Cantale and Ivy Buche of IMD Business School in this piece write about the misadventures of BSI Bank in the Malaysian 1MDB scam:

The 143-year-old bank was one of the oldest in Switzerland and the sixth largest, having expanded overseas during the 2000s into the high-growth markets of Asia, Eastern Europe, the Middle East and Latin America. As a strategically important financial centre, the bank opened a Singapore subsidiary in 2005. Under chief executive Hanspeter Brunner it grew rapidly. Among its clients were high net-worth individuals, family-owned companies, and several state-owned wealth and development funds – including 1MDB.

Storm clouds were gathering. In 2011, the Monetary Authority of Singapore, the state bank and financial regulator, inspected the bank for the first time, finding policy and process lapses and weak enforcement and control. A second inspection in 2014 uncovered serious shortcomings in BSI Singapore’s due diligence conducted on assets supposedly underlying the investment funds. The bank became embroiled in regulatory investigations related to 1MDB – now BSI Singapore’s largest and most profitable client.

A subsequent intensive on-site inspection of BSI Singapore revealed multiple breaches of anti-money laundering regulations, a pervasive pattern of non-compliance, poor and ineffective oversight from senior management and numerous acts of gross misconduct. The bank’s licence was withdrawn in May 2016, and the names of BSI Singapore employees, including Brunner’s, were passed to authorities to determine whether they had committed any criminal offence. Investigations into Brunner and other executives continue, although Brunner recently won back a confiscated passport.

On the same day, the Swiss Financial Market Supervisory Authority (Finma) started criminal proceedings against the BSI group for failing to prevent suspected money laundering and bribery in its dealings with 1MDB. The BSI group was fined 95m Swiss francs (US$96m), the amount the bank had generated in illegal profits. The group’s chief executive Stefano Coduri stepped down, and subsequently BSI was taken over by private banking group Zurich-based EFG International, on Finma’s condition that the BSI group would be dissolved within the next 12 months.

The US Department of Justice also filed civil forfeiture complaints in 2016 and 2017 seeking to recover about US$1.7 billion tied to 1MDB – the largest action brought under the US Kleptocracy Asset Recovery Initiative.

Lessons?

There will always be tension between the demands of business and regulations controlling a bank’s exposure to risk, especially when directives are given to achieve high growth targets. This scenario plays out in banks all over the world – but which should prevail? BSI appears to have prioritised customer demands in its pursuit of growth and profit, at the expense of compliance and internal controls. The outcome, as it was during the financial crash of 2007-08, is plain to see.

The failure of senior management to provide any effective oversight of non-compliance or misconduct of bank employees ultimately points to a dereliction of duty. Did BSI staff not notice that 1MDB had 100 accounts at the same bank? Such high numbers of accounts are considered a sign of “layering”, a method that makes it more difficult to detect money laundering activity. While precisely what happened has yet to be established, it seems clear that BSI failed to perform its due diligence or to monitor transactions.

In a globalised world economy, the risks associated with compliance breaches and management failures in one region can have far-reaching implications in others. All chief officers in banks like to say that compliance and risk management is their key priority. But most participate only at the strategic level, and other departments such as legal, IT and project management must implement it. A common vision of strategy and compliance across all levels of all departments of a company’s global operations is required to ensure that management oversight is consistent throughout the comany.

Not every different from similar banking troubles across time and space…

Politicization and compromising integrity of official macroeconomics statistics: Lessons from Greece

August 14, 2018

Greece (along with Italy and Argentina) never fails to surprise.

Edwin M. Truman and Nicolas Véron of Peterson Institute write about Andreas Georgiou who was the chief statistical officer in Greece from 2010-15. Apparently, he did not give overstated GDP figures during the Greece crisis leading to all kinds of career problems for the person:

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What will the financial world look like in 2028?

August 14, 2018

Ravi Menon, Managing Director of the Monetary Authority of Singapore, engages in this so scenario planning for financial sector in 2028.

The speech is titled:  Financial regulation – 20 years after the Global Financial Crisis. Mr. Menon says in these 20 years we have also seen another crisis in 2023 which he terms as  Global Cyber Crisis of 2023!

Mr Mark Gould, Acting President, Federal Reserve Bank of San Francisco, Ladies and gentlemen, friends and colleagues, good morning. And welcome to the Symposium on Asian Banking and Finance 2028. 

It was 13 years ago, in 2015, that the Federal Reserve Bank of San Francisco and the Monetary Authority of Singapore (MAS) began this collaborative journey of organising this Symposium.

  • Let me, on behalf of MAS, thank Mark and his colleagues at the San Francisco Fed for the fruitful partnership and warm relationship over the years.

This Symposium began in 2007 to consider the lessons learned from the 1997 Asian Financial Crisis.

  • Since then, we have lived through two other major crises – the Global Financial Crisis of 2008 and the Global Cyber Crisis of 2023.

Today, I would like to take stock of the evolution of financial regulation over the last 20 years, since the Global Financial Crisis.  I think three broad themes characterise this journey:

  • first, fixing the fault lines that led to the Global Financial Crisis;
  • second, managing the risks posed by FinTech while harnessing its benefits;
  • third, defending against systemic cyber risk.

He looks at several ongoing and futuristic themes. One actually feels it is more a speech on technology than finance

For instance on DLTs:

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What Jane Austen and Mel Brooks Can Teach Us About Finance

August 9, 2018

Prof Mihir Desai of HBS has written this book which appears to be interesting: The Wisdom of Finance: Discovering Humanity in the World of Risk and Return.

Here is his earlier interview on what made him wrote this book (a nice talk on youtube as well):

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RH Patil’s critical role in Building India’s financial market infrastructure…

August 7, 2018

Another superb speech from Dr Reddy.

The speech is given as a RH Patil Memorial Lecture organised by CCIL. Dr Reddy profusely pays tribute to Dr Patil who was was behind many a financial institutions in India which took shape post-1991.  In the process, Dr Reddy tells us about this so called fin market infra and various things that go in building the same.

I am not sure how many of you know that Dr. Patil started his career in 1968 at the then  Economic Department of the RBI. In 1975, he joined IDBI, which he left in 1993 to set up the NSE as its first Managing Director. I am sure all of you know the kind of transformation that NSE brought about in the Indian capital markets. After retiring from NSE in 2001, he joined CCIL in May 2001 as the company’s founder Chairman. CCIL is singularly fortunate to have had a visionary and leader like Dr. Patil being entrusted with the task of setting it up. He was ably assisted by Mr. M.R. Ramesh, the first Managing Director, and a group of dedicated professionals as the initial team. By the time he left in early 2011, CCIL had come to be regarded as one of the success stories in the Indian financial markets. 
Dr. Patil spearheaded the setting up of such infrastructure not only in the equities market, but also in the government securities, money and forex markets. He led several major financial market reforms, and, apart from CCIL and NSE, he created other internationally acclaimed institutions like the National Securities Clearing Corporation Limited (NSCCL) and the National Securities Depository Limited (NSDL) which today stand as pillars of strength for the Indian economy. Under his dynamic leadership, these institutions have transformed  financial markets and introduced products and instruments that have captured the imagination of market players in India and abroad.
I can say without any hesitation that Dr. Patil was peerless as an institution builder in the financial sector of India. Dr. Patil was a multi-talented personality whose involvement was not limited to the financial sector. His contribution to the Disinvestment Commission is well known. He was on several RBI committees, including the Technical Advisory Committee on monetary policy. He was my guru in markets and I learnt a lot from him.

Dr Reddy takes us through formation of CCIL which plays this hugely silent role in India’s financial markets. The lecture is a classic case on how several factors go into building financial institutions…

Israel joins development of Open Banking standard

August 7, 2018

The idea of Open Banking is picking up in countries. Open Banking means information about customers is shared with other providers for providing customised services and products.

Bank of England has been talking about it. Now Israel is also warming up to the idea:

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DBS (Development Bank of Singapore) celebrates 50 years…

August 6, 2018

2018 is just full of anniversaries especially pertaining to banking and finance.

Development Bank of Singapore or DBS completes 50 years of its journey (nice chronology of its history).

An event was organised to commemorate the occasion:

DBS played a crucial role in Singapore’s early industrialisation, taking risks and absorbing downsides to benefit the country but not necessarily the bank itself, Prime Minister Lee Hsien Loong said on Saturday night (Aug 4).

In a speech at a gala event to celebrate the bank’s 50th anniversary at Capitol Theatre,  Mr Lee noted that the year the bank was formed – 1968 – was a period of great uncertainty and anxiety for Singapore. 

It had separated from Malaysia three years earlier and had lost its Common Market and hinterland. 

One of its earliest projects was persuading Rollei, a German camera company, to shift its production facilities to Singapore in 1971.  Rollei was well known for making the best cameras in the world. But it was facing steep competition from Japanese camera manufacturers and was looking to  shift its factories out of Britain.  DBS took a risk on Rollei, offering attractive financing and investment terms to get Rollei to set up operations in Singapore. Rollei eventually folded 10 years later and DBS took losses on the deal.  “But Rollei created much needed skilled jobs for Singaporeans, and …helped us build up a cadre of highly skilled workers in precision machining and manufacturing,” said Mr Lee.  “Years later they would become invaluable when we got into hard disk manufacturing and wafer fabrication.”

When Singapore was striving to become an international financial centre, DBS was one of its anchors. It was the first local bank in 1971 to seek long term financing through an Asian Dollar Bond Issue of US$10 million. 

Hmm..

How it started?

The story of DBS was also captured in a 50th anniversary book that was presented to Mr Lee at the Capitol Theatre on Saturday. Called The 50 Years, the book chronicles the former Development Bank of Singapore’s heritage through reflections written by pioneers and other s from the bank. 

The book includes the story of how a small counter staffed by two cashiers at the entrance of its rented premises in Shenton Way marked the start of commercial banking at DBS.  When the bank set up its first branch in Jurong in 1972, fishmongers and stallholders would arrive wearing clogs and carrying paper bags of cash to bank in the morning.

Two staff set up a desk at shipyards and factories to open personal accounts for factory workers and enable direct salary crediting. 

In the book, Mr S Dhanabalan, part of the original team that left the Economic Development Board to set up DBS, wrote about the entrepreneurial spirit that in 1975 drove the bank to build the tallest building in Singapore at Shenton Way – the 50-storey DBS building. 

Fellow pioneer Mr Ang Kong Hua, shared his memories of bringing German camera maker Rollei to Singapore through financing, creating thousands of jobs and training local workers. The book will be available for download from Aug 15 at: go.dbs.com/ourjourney

Looking forward to reading the book.

The Lyon Stock Exchange: The Survival of the Fittest (1866-1914)

August 3, 2018

Interesting paper by Jérémy Ducros and Angelo Riva on this history of stock exchanges in France. We know so little about stock exchange history and even less about regional stock exchanges.

This paper reviews Lyons Stock exchange:

In this paper, we look back at the XIX century France to shed light on effect of competition in the stock
exchange industry. During the XIX century the Paris financial centre plays a central role in the French
financial markets. Nevertheless, six organized regional exchanges do exist along all the second half of the
century. A recent literature started to study the complex functioning of the Paris financial centre as well
as the interaction between its two components, the official Paris Bourse and its OTC rival, the Coulisse.
Nevertheless, a very small literature is devoted to the regional French exchanges.

By studying the interactions between Paris and Lyon, we find that, after the 1881-1882 boom and burst, the
Lyon stock exchange has to struggle for surviving facing fierce competition from the Paris Bourse and main
national banks particularly after the 1898 reorganisation of the Paris financial centre, while the strong activity
of Coulisse before the 1895 gold mines crash had a positive effect on the Lyon one. After the 1898 reorganisation,
the Lyon stock exchange survived thanks to a new listing policy favourable to SMEs and the development of
second tiers market for both these unofficially traded SMEs and unlisted risky (mainly foreign) stocks. On
the other side, the progressive homogenisation of the official market imposed by regulators to enhance their
control over the French securities market acted as force driving trading to Paris: only the facilities the Lyon
exchange gave to the main banks of the financial centre maintained some activity.

At the 25th anniversary of NSE, we should revisit the history of regional stock exchanges. We should try understand the evolution and the decline of these stock exchanges. There will be lot to figure here and will give us a sense of how regional equity capital was raised and deployed by the companies. We will also get to understand the process of how these RSEs competed before the equity markets completely shifted to Bombay/Mumbai…

How EU banks modelled their stress away in the 2016 stress tests?

July 31, 2018

Trust (or mistrust?) banks to figure out a way through most things.

Friederike Niepmann and Viktors Stebunovs of Federal Reserve argue how European banks managed to hide losses in the stress tests. Without the manipulation, their credit losses would have been higher by 28%:

Monetary historians need to move beyond Friedman and Schwartz’s Monetary History of the United States

July 31, 2018

I had blogged about the Nobel Money and Banking Symposium held in Sweden recently.

In the symposium, Prof Barry Eichengreen presented a paper chastising monetary/financial historians for being too narrow in their research.

First, there is too much attention on  Friedman and Schwartz’s Monetary History of the United States which basically looked at US as closed economy. Since then research (including Prof Barry’s) has shown how gold standard led the depression to become a global event. Second related point is much of research remains centred on US economy and does not look at other economies. Third, we draw false similarities such as those between gold standard and Euro whereas both systems are very different.

He starts with a bang:

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How South East Asian are gearing to become financial centres and compete with Singapore?

July 30, 2018

Interesting piece on how SE Asian nations such as Indonesia, Malaysia, Vietnam etc are trying to compete with Singapore for financial services. Though, Singapore dwarfs most of these countries but the others are trying their best to get some part of the pie:

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Banks lose trust, their buildings lose elegance

July 30, 2018

Nice piece by Sundeep Khanna of Mint.

He points how earlier bank buildings were so grandiose to display both awe and this sense of security given fortress like features. This does not apply anymore:

The big banks may not be dying but the big bank buildings that defined the skylines of cities across the world are certainly a thing of the past. Over the years, banks were housed in magnificent structures, beautiful buildings, often, the biggest in town. Their size was expected to convey solidity, a sense that people’s money was safe with them since they were not going anywhere in a hurry. When it came to money, the motto was as safe as a bank.

Thus, when the Hong Kong and Shanghai Banking Corp. was planning its office tower in Hong Kong, its brief to its architects was a simple one, to build “the best bank building in the world”. The eventual building that came up in 1986 was a work of art prompting The Observer Magazine to turn poetic in its description: “In the congested centre of Hong Kong, the Bank unfurls from the sky, like a mechanised Jacob’s Ladder, and touches the ground.”

As many such buildings in various architectural styles came up, the bank in the town square replaced the clock as a symbol of continuity, binding it to the popular culture. For over a hundred years, these buildings became a landmark for the cities they were in. London’s Midland Banks building, the Bank of China Tower in Hong Kong, Macquarie Bank Centre in Sydney or the Bank of America Tower in New York, each of them became the itinerant tourist’s most trusted marker. Get there and you can find your way around. Many of them were spanned with glass to offer that sense of transparency. In Luxembourg, for instance, the headquarters of the European Investment Bank is an impressive all-glass building.

In India, too, with a 200-year-old history of banking, the buildings have been an integral part of the landscapes of major cities. Thus, the Standard Chartered Bank building in Mumbai, built at the turn of the 20th century, is a highlight of the Fort area serving both as a city landmark as well as an exemplar of the neo-classical style of architecture. Through the many vicissitudes that the bank went through over the 120 years of existence, the building continued to serve as a metaphor for its motto, “Here for Good”. The elegant State Bank of India Chandni Chowk branch in Delhi built some 200 years ago as well as the SBI George Town branch in Chennai, built in the Indo-Saracenic style nearly 120 years ago, are both part of the cities’ folklore.

With Lehman failure in US and PNB failure in India, the banks have lost their sheen.  Then digital transactions imply bank branches no more in vogue as well. So, there is not much importance to the design of bank buildings.

Having said that, central bank of Bahamas recently approved a design for its new building which looks really grand. And then banks are using these branches in interesting way as Axis bank showed in opening its new branch at Kargil.

History of Mutual Funds in India: Was UTI the first?

July 23, 2018

We are celebrating 25 years of private mutual funds in India. In 1993, the Government allowed entry of private sector in mutual funds. This liberalisation of mutual fund space was part of broader economic reforms initiated in the country after the 1991 crisis. The first private mutual fund was Kothari Pioneer which interestingly was based in Chennai and not Mumbai, the centre of Indian financial markets.

This is also a good time to reflect on history of mutual funds in India.

The history of mutual funds in India is usually seen as starting from Unit Trust of India (UTI) in 1964, started by the government to help retail investors get access to capital markets in India. UTI may have been the first public sector mutual fund in India but it was hardly the first-time funds were mobilised from small investors and give them exposure to stock markets.

Dr. V.V. Bhatt in this research paper (1979) on Syndicate bank pointed how the bank started a stock market scheme in 1960.

In 1960, the bank pioneered a unique investment service through its Investors’ Agency Department. This service enabled middle-income savers to invest in shares of reputable companies. The persons joining the scheme were ensured a return of 9 to 10 percent per year on their saving; the bank, in turn, invested these sums in shares. This scheme became very popular with middle-income groups in semi-urban areas persons who were not familiar with the stock market. It was a precursor to the Unit Trust of India sponsored by the Central Bank in 1964. The following year the Syndicate’s investment service ended because the Central Bank thought it could compete with the Unit Trust of India.

One was simply taken aback reading this as just like several others, one thought UTI was the starting point for such initiatives in India. But Syndicate Bank’s IAD pioneered this earlier. Dr. VV Bhatt could figure this as he =was an independent director with Syndicate Bank in the 1960s. Otherwise, this too would be lost.

My further research revealed that Syndicate Bank’s founder Dr T.M.A. Pai wished to start a scheme to provide better returns to the bank’s depositors.  He was also looking to boost the earnings of the overall bank which was reliant on its own operations where one earned the spread between loan rate and deposit rate (adjusting for establishment expenses).  In finance parlance, the idea was to shift reliance from fund income to fee income.

Syndicate Bank had earlier also started initiatives such as insurance company, land management company and so on. This was for both purposes, increasing sources of income and offering wider bouquet of services to depositors/investors.

The Bank came across this idea of a scheme which would help achieve both the objectives.  The bank would start a scheme to help its depositors to invest in stock markets and the bank would charge a fee for these services. As the idea was new, the bank did not open a new company but opened a new department within the bank called Investor Agency Department.

The organisation of IAD was different from today’s mutual funds. The bank would research stocks and send the list to depositors. The depositors in turn would invest in the stocks based on initial advice and suggestions by the bank. The Bank also acted as a custodian of the stocks given the small investors might not handle the certificates etc properly. The bank charged a fee for the advisory and custodian services.

This is unlike the model followed by UTI and mutual funds later. First there was a separate company/trust which would pool the savings of the investors. The trust was to be managed by professional fund managers who would then invest in stocks through their research and experience. The organisation was different but the idea was similar: provide a platform for the small investors who don’t have the expertise to access stock markets.

But then as Dr Bhatt notes, the scheme was objected by the RBI. Though, I don’t think the RBI objected on competition grounds. It was more to do with the fact that RBI wanted banks to just engage in banking business. This was also the time when banks were failing in large numbers. The non-banking business of banks was a constant source of headache for RBI and it had been asking banks to close their non-bank operations. Syndicate Bank’s earlier mentioned initiatives were also hived off to another entity or closed by the central bank. The central bank might have been weary of any more initiatives by the banks.

RBI History Volume (1951-67) while discussing formation of UTI has more insights:

Tracing the evolution of ideas about investment trusts in India, the study recalled Manu Subedar’s minority report as member of the Indian Central Banking Enquiry Committee (1931) in which he urged the creation of these trusts as vehicles for financing investment in industry. Manu Subedar’s plea was not altogether wasted, as the colonial government soon decided to exempt investment companies from super-tax.

Despite this concession, there were only a handful of such companies in India; and only two of them could be regarded as investment companies in the proper sense of the term. Many investment companies were promoted ‘only to collect public money … for employment to the advantage of the management and directors in their speculative activities’.

Investments of several such companies, the study emphasized, were concentrated in the shares of a few joint-stock companies which were often either ‘private companies’ or those whose shares were ‘not quoted on the Stock Exchanges’. Many investment companies, moreover, also counted direct loans and advances among their assets. The study found that the investments of a majority of these companies were not, by and large, ‘sufficiently diversified … or strictly disinterested’.

Only two investment companies, the Industrial Investment Trust associated with the stock-broking firm of Premchand Roychand and the Investment Corporation of India (controlled by the Tatas) held reasonably large and well-diversified portfolios of securities, the former having deployed over Rs 1.25 crores in 200 different securities and the latter Rs 3.5 crores in twice as many securities. Echoing the recommendation of the Shroff Committee, the article noted the wide scope that existed for large industrial or financial houses to form unit trusts.

The State, it suggested, should encourage the process and regulate the functioning of these intermediaries from the point of view of safeguarding the interests of their investors. Unit trusts, the article concluded, would help mobilize the resources of small savers for industrial investment and democratize industrial share-ownership as envisaged in the directive principles of the Indian Constitution.

Interesting to read name of Premchand Roychand come up again given he was seen as a central figure in the 1860s cotton and banking crisis in then Bombay. The crisis also led to brokers organising themselves to form Bombay Stock Exchange in 1875 in which again Premchand played a crucial role. It seems his broking firm could regain the lost trust fairly quickly and was mobilizing money from small investors.

One is also surprised RBI history not including Syndicate Bank’s IAD in the discussion. This is especially given the fact that RBI was behind closure of IAD.  The Bombay based  investment trusts must have had moneys of even big investors but Udupi/Manipal based Syndicate Bank’s IAD catered mostly (if not all) to small depositors/investors.

We really know very little about history of financial services in India. Whatever little, is mostly on banks. Others like insurance, fund management, venture capital etc are just given a miss. The financial history scholarship in the west is widely spread with scholars interested in all aspects of financial services.

One hopes to learn much more from these anniversaries such as the recent 25th year of private sector mutual funds.  They should not be allowed to just go like that.

It is a good time for the stock market regulator SEBI, to commission a study which looks at all these historic episodes of India’s fund management industry. More than anything else, it shows how the seeds of today’s trees were planted way back then through several ideas at work.

 

The political origins of section 13(3) of the Federal Reserve Act..

July 23, 2018

Parinitha Sastry (formerly at NY Fed) writes a fascinating paper which is based on this old school research. She digs through several archival material and reports to tell us how section 13 (3) of the Federal Reserve Act came into being. For the uninitiated, section 13 (3) was central to Federal Reserve’s policies during the crisis. It allows the Fed to lend to non-banking firms and invited fair bit of criticism including within Fed.

Her research shows this gradual evolution of Section 13 (3):

At the height of the financial crisis of 2007-09, the Federal Reserve conducted emergency lending under authority granted to it in the third paragraph of Section 13 of the Federal Reserve Act. This article explores the political and legislative origins of the section, focusing on why Congress chose to endow the central bank with such an authority.

The author describes how in the initial passage of the act in 1913, Congress demonstrated its steadfast commitment to the “real bills” doctrine in two interrelated ways: 1) by limiting what assets the Fed could purchase, discount, and use as collateral for advances, and 2) by ensuring that any newly created government-sponsored credit enterprises were kept separate from the Federal Reserve System. During the Great Depression, however, Congress passed legislation that blurred the line between monetary and credit policy, slowly chipping away at the real bills doctrine as it sought to combat the crisis. It was in this context that Congress added Section 13(3) to the Federal Reserve Act.

In tracing this history, the author concludes that the original framers of Section 13(3) meant to sanction direct Federal Reserve lending to the real economy, rather than simply to a weakened financial sector, in emergency circumstances. This Depression-era history provides insights into the evolving role of the Federal Reserve as an emergency provider of liquidity.

I wish more such papers were written. We might not realise but legal powers are key to central bank policies. Their decisions flow from the powers given by them to the government via their Act. Most of these legal powers come not via some scientific rule etc but based on trial and error. The author shows how multiple institutions were created to fight credit problems but eventually all things came at Fed’s door,

This blog looked briefly at evolution of the Section 7 (1) in RBI Act which allows the Govt to pass instructions to the Central Bank. This was under discussion during the demonetisation.

 

25 years of private sector mutual funds in India…

July 20, 2018

The Indian Mutual Fund industry was opened to private sector in 1993. 2018 marks the 25th anniversary.

ET has interesting articles:

There is another piece by Arati Krishnan in Business Line on the hits and misses.

KYC’s new full-form: Know Your Culture

July 13, 2018

Interesting speech by Jay Clayton, SEC’s Chairperson. Apart from central bankers, even securities market regulators are worried over slipping culture in financial services industry.

Clayton says looking at culture is no more optional but a must.

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How the Medici family created and lost their banking empire

July 11, 2018

Mike Colagrossi in Big Think has this piece on Medici banking history:

The Medici family had a long and powerful influence in European history for hundreds of years. They were well known for their banking prowess and are synonymous as an unparalleled patron of the arts during the Italian Renaissance. Early historical records point to some of the first Medici’s being active in political affairs starting in the 13th century.

But it wasn’t until the late 14th and 15th century that the family truly came to power with the creation of the Bank of Medici. Giovanni de’ Medici opened up one of the first family banks in 1397 in Florence,  the city which would become and remain a central hub for the family for the next four hundred years. Throughout the years they saw their fortunes grow and flounder through a variety of ventures.

From running one of the largest banks in Europe to shifting their fortunes to patronage and control of the papacy and other political posts, the Medici’s reign was a complex affair. This is how they rose to financial prominence because of their banking success and their eventual downfall. The family took their once great banking kingdom and dominance and turned it into a dynastic legacy that affected Europe and the world as we know it today.

Comparing financial integration in Britain and France (also 4 ways types of financial history)

July 11, 2018

I just came across this lecture series organised by State Bank of Pakistan (celebrating its 70 years) in the memory of Zahid Husain, the first Governor of the bank. Quite interesting set of speakers since 1975.

The sixth lecture was given by Prof Charles Kindleberger and needless to say it a is a superb read. Prof Kindleberger discusses how financial integration differed in Britain (where finance picked up) compared to France (where it remained limited to Paris).

He points to this interesting work by Charles Jones who said there are 4 ways to write financial history:

  • Orthodox: The problem through time is to curb the tendency to overissue banknotes or overlend.  So, you will ahve authorities rising from time to time to curb this tendency. This leads to rise of a central authority such as a central bank who monpolises banknotes and regulates the credit system.
  • Heroic: Starting a particular innovation or institution which leads to manifold rise in financial activity. Like the industrial banks in India or mortgage markets and so on.
  • Populist: Opposite of orthodox where there is opposition to this centralisation and support for financial activity outside the major centre. This is especially true in case of US where there was support for so called wildcat banking despite its flaws.
  • Statist: This holds that banks were created to serve the needs of the State/Government. Jones mentioned that central banks in Canada, Australia and Argentina fit in this category.

Prof Kindleberger adds that these histories do not remain static and one keeps moving from one form to another. For instance central banks in both England and France started for Statist reasons but then diverged. Bank of England became more orthodox as it tried to curb adventurous financial activity outside of London. Whereas in Paris, there were elements of both Orthodoxy and Populism.

Just fascinating way to categorise research on financial history. Even the whole discussion on financial history of Britain and France is worth a read..

 

 

The Austrian Banking Crisis Of 1931: One Bad Apple Spoils The Whole Bunch

July 6, 2018

The Austrian Banking Crisis of 1931 continues to be of great interest to economic history folks. After all, it is seen as one major reason for spreading of Great Depression from US to Europe shores. Once Credit Ansalt, the major Austrian Bank failed, others followed like a pack of cards.

An interesting paper by Flora Macher revisits the evidence so far and offers a new perspective:

The current literature is inconclusive on the relative importance of foreign and domestic factors in bringing about the Austrian financial crisis in 1931.

This paper has emphasized the importance of a domestic cause behind the Austrian banking crisis in 1931. The universal banking structure heavily exposed the largest banks to Austrian industry through their Konzerns. When Konzern corporations performed badly, as they did during the second half of the 1920s, so did the universal banks. The four banks that came under distress in 1925-31 were all insolvent from 1925 due to the weak performance of their Konzern. The paper has also shown that one bad apple, the UB’s Konzern, spoiled the performance of a whole bunch of other universal banks and caused a systemic crisis in 1931. This finding suggests that the crisis may have been avoidable had the UB’s troubles been adequately managed. Finally, while it remains unresolved whether the CA was illiquid before it decided to seek a bailout, it is certain that after 11 May 1931, the flight of both domestic and foreign creditors contributed to the banks’ illiquidity.

Could this have been avoided? One option would have been allowing the UB to fail. The CA’s, the BCA’s, and the VB’s Konzerns were performing much better in relative terms. Had these banks not been poisoned with the UB’s Konzern, they may have survived. Their absorption of the UB’s failing corporations and their avoidance to acknowledge and write off nonperforming assets were what caused them to fail. At the same time, since the universal banks were closely interconnected through their Konzerns, they were reluctant to let one member go under who might then have undermined the stability of the rest as well. Not choosing this, however, eventually buried them all.

Another option would have been a state bailout of the UB. Had this bank been provided sufficient state support to write off its non-performing assets, it would not have gone bankrupt and would not have had to be merged into other stronger banks whom it would gradually weaken and cause to fail. What made this impossible was that the state was bound by restrictions set by financial markets and the League of Nations, which considered bank bailouts anathema to the orthodox fiscal and monetary principals of the time.

Hmm..


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