Archive for the ‘Financial Markets/ Finance’ Category

Italian Banking woes update..

September 20, 2016

One is really sick of pointing to banking woes and upcoming crisis but they keep coming.

Italy is hardly a new player and its fiscal/banking woes have been talked for a while. The concerns have increased recently following Brexit. Infact, all this is happening in a country which apparently gave birth to idea of banking in Europe. Bankers from Italy migrated elsewhere to shape banking in other parts of Europe. And now they have just forgotten their own history lessons.

Caroline Gray of Focus Economics has an update on Italian banking:

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How and why lender of last resort function differs across the countries?

September 19, 2016

Charles Calomiris , Marc Flandreau and Luc Laeven have a really interesting paper on the topic.

Similarities in Wells Fargo’s fake bank account opening and Indian Banks’ Jan Dhan 1 Rupee deposits…

September 14, 2016

Banking and its crazy targets have similar stories across the world.

Wells Fargo employees got caught in a fake account opening case. Soon thereafter Indian Express reported how Indian bankers contributed Re 1 to several Jan Dhan accounts which had zero balances till date. Post Wells Fargo and before IE break out, Dhirendra Kumar of Valueresearch anyways said how these events are quite common to Indian banking.

Much of this is due to crazy pressure to meet quarterly/annual targets…It is amazing how all the banks/other firms keep revising their target upwards each year. Ask any sales person and he will tell you how difficult it was to meet previous year’s targets only to see management revise it upwards next year!

Growth at the cost of anything is the bottomline for most companies/banks..The model had to break down someday…

World’s most elite bond trading club (Fed and US Primary Dealers) is losing its sheen

September 14, 2016

All elite things are either going through a backlash or losing their sheen on their own.

One such is the most elite bond trading system –  Fed and Primary Dealers. There was a time when firms would compete/fight to be a part of the system. Now they are just giving up:

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Who Wants to Start a New Bank? A case of drought in opening new banks in US…

September 13, 2016

US Banking structure is perhaps one of the weirdest in the world. It has a multiple regulatory structure at the federal level and state level:

Which agencies you’ll go to depends on whether you plan to operate a national bank or a state bank. The Office of the Comptroller of the Currency oversees and approves national banks, and national banks are always Fed members as well. Each state has its own chartering agency for state banks; in addition, state banks must choose either to become members of the Federal Reserve System (placing them under the Fed’s oversight) or to be nonmembers (placing them under the FDIC’s jurisdiction). Finally, while banks are not required to apply for deposit insurance from the FDIC, the conventional wisdom is that it would be difficult to compete without it.

Not many know of this structure and just blindly say we should have as many banks as US. But the structure of regulation is very different. As states have their own charters, one could just open a local unit bank and remain a small community bank. There is obviously a lot of history behind this kind of multiple regulation structure. US always dissented central control of financial matters and thus states set their own agenda on banking matters. This has allowed many small unit banks to mushroom across the country apart from large banks.

Compare this to India where banking and finance are mainly a responsibility of Central govt.

Though post-2008 things have changed. There is a near drought in opening of new banks in US:

In late 2013, the Bank of Bird-in-Hand opened its doors in Pennsylvania’s Amish country. Even in normal times, a bank featuring a drive-through window built for a horse and buggy would have drawn curious onlookers. But the Bank of Bird-in-Hand made headlines for another reason: It was the first newly chartered bank anywhere in the United States in three years. According to the Federal Deposit Insurance Corporation (FDIC), there have been only seven new bank charters since 2010. By way of comparison, there were 175 new banks (or “de novos,” as they are called in the industry) in 2007 alone. Indeed, from 1997 to 2007, the United States averaged 159 new banks a year.

To be sure, the number of banks has been falling for decades. Before the late 1970s, banks were prohibited from operating branches in most states, which inflated the number of unique banks in the country. States gradually did away with these unit banking laws in the 1970s and 1980s, a process that culminated on a national level with the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. The total number of banks has fallen by about 9,000 since the mid-1980s, as weaker banks merged with stronger ones. (See chart below.) But there was always a steady influx of new banks to replace some of those lost — until now.

t has been many years since anyone even talked to us about starting a new bank,” says Wayne Whitham Jr., a lawyer in the Richmond office of the law firm Williams Mullen who has worked with banks and financial institutions since the early 1980s.

When it comes to de novos, the last seven years stand out in stark contrast to any time before. (See chart below.) What can explain this trend, and what does it mean for the future of banking?

Low interest rates followed by complex regulation has kept people away from opening new banks..

What about future when rates will eventually rise (hope so):

there are signs that banks in general have been moving away from small-business lending. According to a 2013 paper by Ann Wiersch and Scott Shane of the Cleveland Fed, the share of banks’ nonfarm, nonres­idential loans worth less than $1 million has fallen steadily from just above 50 percent in 1995 to less than 30 percent in 2012. Some of this decline more recently may be due to increased competition from nonbank online lenders. While their share of consumer lending is still small, it is growing: In 2014, these marketplace lenders equaled under 4 percent of traditional consumer lending, but by 2015 their share had jumped to more than 12 percent.

These many changes highlight the uncertainty of banking’s future. Will new bank entry bounce back as interest rates eventually rise? And if it does, will those new banks look like the community banks of previous generations?

Marshall says blueharbor is sticking with the old model. “We’re just a good old-fashioned, general consumer community bank. If we tried to specialize in any one thing, we wouldn’t be serving our community,” he says. At the same time, he recognizes the environment is changing. His daughter is studying banking and finance in college (he hopes she will be the fourth-generation banker from his family), but he says many of the young bankers he meets or works with have expressed frustrations with current regulatory and economic conditions. “There are a lot of folks who say it’s just not worth it to start a bank today,” he says.

Mahan thinks the future is bright for new banks — if they’re willing to adapt to changing consumer demands. “You’ve got to be focused on technology and deliver products and services with a beautiful user experience,” he says. “Because at the end of the day, who wakes up and thinks about their bank?”

Hmm…

Alexander Hamilton: A finance genius or a second-hand dealer in retrograde mercantilist ideas?

September 9, 2016

There is a lot of discussion on Hamilton not just in US but in Europe too.This is the usual bit on Hamilton saying he was a financial genius.

However there is a contrarian piece as well by Lawrence White:

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Singapore’s financial centre – resilience, dynamism, trust

September 9, 2016

Just a few days ago, HK Monetary Authority chief TL Chan pointed to two factors for HK brand of finance: quality and credibility.

Now Monetary Authority of Singapore, Ravi Menon points to three factors for Singapore financial centre:  resilience, dynamism and trust. Not much difference between the two.

The competition between the two for higher share of financial services has been there for a while. But core values of finance remain the same across  countries..

How John Bogle first dissented on need for an index fund and then made them so popular..

September 7, 2016

Superb piece by Stephen Mihm of Bloomberg tracking the history of index fund idea. I didn’t know this at all. John Bogle who pretty much made index fund his own idea actually dissented against it!:

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What does it take to build a “Hong Kong Brand” for financial services?

September 6, 2016

Norman T.L. Chan, chief of Hong Kong Monetary Authority in his latest speech looks at the HK brand of finance.

It always is around quality and credibility whatever the brand. This is more so with financial services as people’s savings are involved.

  1. Today I would like to talk about building Hong Kong as a “Brand” for financial services.  So what is a “Brand” made up of?  For merchandise goods, “quality” and “credibility” are two major components of a “Brand”.

Quality

  1. Quality means the product or services are suitably designed, structured and built to meet the needs of consumers/customers.  In the field of fashion or luxury goods, customers’ taste is evolving all the time but very often the “Brand” actually takes the lead in shaping the trend.
  2. In the context of financial services, the concept of “quality” entails the availability of a wide range of financial products that can adequately and effectively meet the needs of customers with vastly different financial needs.  For individual customers, such products range from the basic banking services for the mass market, to very sophisticated private wealth management services for high net worth customers.  For corporate customers, quality products range from the basic transactional banking for the SMEs, to the very diverse and sophisticated services in treasury, hedging, and equity and debt financing for the very large corporates. 
  3. If Hong Kong is to become a “Brand” for financial services, it must be able to offer “quality” financial products and services.  This means that we should have ample supply of financial products and services that:

(a)           can effectively meet the needs of customers, be they individuals or corporates;

(b)          are competitively priced; and

(c)           are efficiently distributed through a network of intermediaries that treat customers fairly.

  1. So where does Hong Kong stand now in terms of “quality”?  If we benchmark Hong Kong against any of our regional peers, I would say Hong Kong stands out as one of the best in this regard.  It is hard to pinpoint any key areas in which Hong Kong would have a material gap in offering a suitable and competitive product to meet the financial needs of the customers. 
  2. Credibility
    1. As I am running out of time, I just wish to have a brief word on the second component of a Brand, and that is credibility.  It is not enough just to sell good quality products to customers.  Like any world class brands in cars, watches and luxury goods, post-sale maintenance or support service is equally important.  In other words, the success of a “Brand” also rests on establishing a reputation for being credible – to deliver a product that stands up to what it is sold for.
    2. Credibility is even more important when it comes to financial services.  This is because financial products usually have a finite life, and very often customers need to renew or purchase similar or different products from time to time.  To develop into a long-lasting and successful “Brand”, Hong Kong must be able to provide a platform for offering products that can effectively meet the changing needs of customers.  While such needs are always evolving, one thing never changes, and that is “fair treatment of customers”.  In the context of pricing, consumer/investor protection, distribution, dispute handling and resolution, the interests of the financial firms or intermediaries must not take precedence over those of the consumers or investors.  This is a difficult mission to accomplish as it requires not only a robust and yet user-friendly regulatory regime, but also a corresponding change in the culture, values, mind-set and behaviour of the financial firms and their staff.   As hard as it seems, I strongly believe that we cannot afford not to accomplish this mission.  We must try harder and harder until we have got it right.                    

      I simply cannot envisage how a financial centre can thrive and sustain its competitiveness over time if it cannot build a credible reputation for treating customers and investors fairly.  

Simple stuff. Still needs to be emphasied over and over again.

Finance is less about all the glitz and glamour it is known as today. At its core, it shares the same ideas of quality and credibility as all other products and services..

Robot Macroeconomics: What can theory and several centuries of economic history teach us?

September 6, 2016

Bank of England may be clueless on what next, but its blog Bank Underground keeps giving us food for thought via its posts.

In the recent one, John Lewis looks at this question of how robotics will impact macroeconomics. Will it lead to lower jobs as said and so on. For this, he draws upon years of history where some new technology has replaced an existing one.

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Why it makes sense for an M.D. to lead the World Bank? (some insights from history of Indian banks too!)

September 1, 2016

World Bank’s recently appointed Chief economist Paul Romer in this post talks about why a Doctor of Medicine (MD) is a good fit to lead the world bank. After all his new boss his Jim Yong Kim who heads the World Bank with the original Dr attached to his name. So Dr Romer (who is a doctorate in economics) has no choice but to defend his Doctor in Medicine boss! Boss is always right no matter who he/she is the cardinal rule in any organisation.

Jokes aside, Romer says an outsider appointment is more efficient at cutting the flab:

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How Kazakhstan’s cuurency tenge wins several awards for best currency design

September 1, 2016

Didn’t know this at all. 

Niccole Braynen-Kimani of IMF point to Kazakhstan currency Tenge winning many awards for its design:

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How US created Liberty Bond to finance World War I

August 31, 2016

Nice piece of economic history by Richard Sutch of Richmond Fed.

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App-only bank Mondo gets a limited banking licence in UK…

August 18, 2016

Mondo started only last February and has got a banking licence:

Startup app-only bank Mondo just made a crucial step in becoming an official bank after being granted a restricted banking licence by UK regulators.

Mondo is claiming the decision makes it the youngest-ever bank to be licensed in the UK, given that it only started up in February of last year.

Mondo aims to create a digital-only bank for the mobile generation that offers things like instant notifications of transactions and balances, a detailed Facebook-style feed of what you have spent your money on, and a breakdown of spending across the month.

Co-CEO and founder Tom Blomfield says in an emailed statement: “This is how the banking market changes, not with 800-page reviews from public bodies like the CMA, but with technology bringing new ideas to the table. We’re creating something that will completely revolutionise the way people think about their money.”

The 45-person company has been operating an early version of its product tied to a pre-paid card. It has proved hugely popular, with 30,000 customers spending £20 million ($25.9 million) on the cards since launch. Mondo also has a waiting list of 200,000 and the startupcrowdfunded £1 million in just 96 seconds earlier this year.

The restricted licence will let Mondo hold customer money for the first time – the crucial thing that makes a bank a bank – and let it test its products and services with a limited number of customers. Once regulators, the Financial Conduct Authority and the Prudential Regulation Authority, are satisfied, they will lift the restrictions.

Blomfield told Business Insider earlier this year that Mondo will alsohave to raise at least £15 million to get the restrictions lifted, as part of capital requirements. Mondo has to date raised £9 million and is valued at £30 million.

Mondo is one of a number of so-called “neobanks” in the UK: app-only banks with no branch network. Three others have so far been granted licences: Atom, Tandem, and Starling. Atom is the only one that has so far launched to the public, releasing a savings account earlier this year.

Mondo is also in the process of changing its name, after a legal dispute over its current one. The startup asked customers for suggestions 2 months ago and an announcement on the new name is expected in the next few weeks.

More on the name change here.

What does the app bank plan to offer?

While technology has changed every aspect of our lives, Blomfield says consumer banking has remained frozen in time. Banks continue to offer customers a static list of deposits and withdrawals rather than providing timely updates or useful tools to analyze spending or saving. In a world of instant messaging, many lenders don’t communicate in real time. Blomfield’s current bank (which he declines to name) took two weeks to alert him he’d overdrawn his account by £800 and then charged him £20. “The banks have their hands in your pockets constantly, taking money out,” he says.

The Mondo app is designed to tell you if you mess up. It lets you set up real-time notifications that say how much you’ve spent daily or whether you’re going into overdraft. If you need £500 to tide you over to payday, Mondo will tell you how much it will cost for a short-term loan instead of charging you after the fact.

Pulling out his phone, Jason Bates, Mondo’s 43-year-old co-founder and chief customer officer, shows his Mondo prototype app. He’d just had a burger with his wife at Five Guys in Soho, which turned up immediately on his account with a map of where he’d used his Mondo card. With a swipe, he demonstrates how you can turn off the card if you lose your wallet and immediately turn it back on if you find it. You can even block your card at pubs to encourage a dry spell.

By tracking your regular bills, Mondo can alert you if something is out of the ordinary, like a utility charge that’s higher than normal. This smarter use of data can help detect fraud, Bates says. “We see your phone is in Manchester but your card was being used in London,” he says. “We can block your card and send you a text saying: ‘Something is fishy. Can you confirm?’”

Though, one can always question the hype:

Blomfield and Bates say Mondo could charge much lower fees and still become profitable because its cost base is a fraction of what major banks shoulder. Old-style lenders are saddled with the expenses of maintaining branches and updating antiquated IT systems. Back-end computer systems that process transactions can date to the 1970s and have had meltdowns, says David Parker, head of banking at Accenture in London. Last year, British regulators fined RBS £56 million for a computer failure in 2012 that left 6.5 million customers without access to their accounts for weeks after a contractor updated software. The problems “revealed unacceptable weaknesses in our systems,” Philip Hampton, RBS’s chairman, said.

“It’s difficult to build an app that’s fantastic when you have an ugly core banking system,” Parker says. “The banks have to change quickly or they run the risk their customers will desert them.” 

Not everyone is convinced tech-savvy banks will lure enough customers from the big four to become major players. New fintech banks may have a hard time attracting more than just “hardcore money geeks,” says James Moed, a consultant to fintech startups and a former director of IDEO,  where he was a London-based financial services designer. “Most people find managing their money boring and regard banking as a utility,” Moed says. “I’m not sure great apps will motivate people enough to switch.”

Even so, mobile bank users globally are forecast to more than double by 2019, according to a 2015 KPMG report. Generation Y, the so-called millennials, born from the 1980s to the early 2000s, may be the most fertile hunting ground. Almost 67 percent prefer mobile apps for banking, compared with 46 percent of baby boomers, aged 51 to 69, according to PricewaterhouseCoopers. A study by Viacom’s Scratch research unit called “Sorry Banks, Millennials Hate You” found 71 percent of 18- to 34-year-olds would rather go to the dentist than listen to what their bank says.

Blomfield acknowledges that Mondo isn’t for everyone. “My grandmother would not use this bank,” he says. “But a big segment of the population would.”

Technology has challenged old banks every once a while but so far they have managed to remain planted. It will be interesting to see whether this time is any different..

More links on Mondo bank here

Look behind the scenes of the world’s biggest mutual fund

August 17, 2016

A nice story of the world’s biggest Mutual Fund – Vanguard’s Total Stock Market Index Fund – and its low profile fund manager – Gerry O’Reilly. He manages the $450 billion fund!

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How Central banks moved from fiscal dominance to financial dominance..

August 16, 2016

Daniela Gabor of University of the West of England has a nice paper on political economy of repo markets.

The summary of the paper is here. She explains how we move from one crisis to another in macro/monetary policy. Emergence of Repo was seen as an end to fiscal dominance. But it triggered a new problem of financial dominance:

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Using prospect theory to figure today’s monetary policy and its impact on markets..

August 12, 2016

Prof Jayant Varma of IIM Ahmedabad has a nice post which gets to the crux of the negative interest rate issue.

He says as bonds have negative rates, the concept of yield/coupon etc is lost. So, investors are looking at bonds in terms of prices alone just like stocks. Whereas, investors are looking at stocks as bonds as they give dividends. So bonds are the new equities and equities are the new bonds.

This is like the prospect theory applying in monetary policy as risk averse bond investors are seeking risks in wake of losses:

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Building a balance sheet of a sandwich seller and then lending him a loan..

August 11, 2016

This is a superb tale from Kshama Fernandes of IFMR.

She narrates how an IFMR executive built a balance sheet of a sandwich seller and gave him a loan:

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Debate between efficient finance school and behavioral finance school…

August 9, 2016

The two leaders of both the schools – Profs. Eugene Fama and Richard Thaler – debate over financial markets (HT MR blog) .

Nice bit..

The Warren Buffet economy: How Central Bank enabled financialization divided America

August 9, 2016

David Stockman points to this amazing figures on rise in wealth of a few and inequality for others:

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