Archive for the ‘Financial Markets/ Finance’ Category

The possible trinity of financial inclusion and the five kinds of financial illiterates..

July 23, 2015

SS Mundra of RBI speaks on financial inclusion and has some interesting insights.

He says unlike the impossible trinity of macroeconomics, here there is a possible trinity of inclusion:


Guess who feels good about Greece?? Global investors..

July 22, 2015

The ones who bring trouble are also the ones who seem to be enjoying the most from Greece mess.

Matthew Winkler of Bloomberg has a story:


Have banks become today’s tanks? Their attempted coup in Greece..

July 21, 2015

He reflects on the ongoing Greece crisis (for how long will it continue). He says how earlier tanks took over countries and now it is banks:


Will computers replace human intelligence in finance?

July 16, 2015

Prof Shiller does not think so.

He says this vision of financial singularity where computers shall replace a fund manager and markets become super efficient is unlikely to happen:


What does digitalisation mean for banking sector?

July 16, 2015

This speech by Dr Andreas Dombret of Bundesbank is for German banking sector but actually applies to any country’s banking sector.

He says simply sitting and watching will not help banks. They have to figure out ways to get more and more digital in quick time at that:


A Tale of Two Ousted Bankers: Anshu Jain and Antony Jenkins..

July 9, 2015

This blog had wondered earlier on what led to the quick decline of Anshu Jain,  not long ago a highly celebrated banker.

This article provide more details on the decline of Jain along with that of another banker – Jenkins of Barclays. Interestingly both followed opposite approaches, Jain looked at everything in banking as an i-bank and Jenkins as a commercial bank:

What kind of chief executive does a big modern bank need? Apparently not a traditionally hypercompetitive investment banker like Anshu Jain, who lost his co-CEO job at Deutsche Bank last month — but evidently not a quiet retail banker like Antony Jenkins, Barclay’s freshly ousted chief, either.  Perhaps the reason it’s so hard to find a leader who can credibly run all the diverse parts of a big universal bank is that such institutions are doomed.

Jain and Jenkins had opposite ideas about which businesses were core to the crisis-racked banking empires they inherited.

True to his high-octane Wall Street personal history, Jain concentrated on investment banking and scorned the retail part. In his April presentation on Deutsche’s strategy, there were four slides titled “Reshape Retail,” but two of them dealt with divesting Postbank, the omnipresent German Main Street lender that Deutsche had acquired in 2010, and one of them focused on making Deutsche’s retail operation more like its investment banking one, turning it into “a leading advisory bank.”

Jenkins, who had only ever worked in retail and corporate banking, declared that the investment bank built up by his flamboyant predecessor Bob Diamond would be “a smaller part of the group going forward.” In an interview last year, he said 85 percent of the assets he wanted to “exit or run off over time” were from the investment bank. The U.K. retail bank remained his favorite, and he took an obvious pleasure in its technological rearmament. So the investment banking part of Barclays’ business struggled, providing 12 percent less net revenue in 2014 than it had in 2013, while the retail and corporate part showed the kind of placid growth this business is capable of, 1 percent in the same period.

Neither bank’s board was happy. Jain’s investment banking focus looked obsolete and dangerous as the bank paid one multibillion-dollar fine after another for all sorts of trading shenanigans. “Saint Antony” Jenkins’ love of commercial banking, for its part, appeared to hamper profit growth, and his management style seemed too timid when it came to cutting costs and too consensus-oriented for quick progress.

They could have done better if they stuck to their specialised businesses and not mixed the two different models. Then tech played a role too:

Deutsche Bank’s former co-chief executive paid lip service to universal banking. Two years ago, Jain argued that universal banks were “uniquely placed to finance the economy.” He noted that they’re diversified (so there’s less risk concentration), they provide essential liquidity to financial markets, and they provide a broad range of services that smaller companies would otherwise be forced to source from different banks. Jain told his audience of students:

Imagine you had to manage your loan account, your checking account and your savings account each with a different bank; and that not all of these banks have a branch anywhere near where you live or study. Would this make it easier to run your life? Imagine that for a company, or a city, or a national economy.

Jenkins, in contrast, unequivocally declared last year that “the universal banking model is dead.” To him, it was a matter of technology: With more and more banking done over the Internet and with mobile devices, Jain’s picture no longer made sense.

The modern customer can easily maintain multiple accounts at banks without much physical infrastructure, investing savings with the likes of Lending Club, using an online-based institution like Germany’s Fidor Bank for business and personal debit card spending, making international transfers through TransferWise, and otherwise taking advantage of the way the tech industry is slicing and dicing the traditional banking business. 

In this new world, universal banks have to remain competitive in every area, and that’s a superhuman task. There are probably executives out there who can handle it, but they’re so rare that the banking behemoths set up before the technological revolution are struggling to recruit them. The departures of Jain and Jenkins vividly illustrate the challenge.


Interesting times. The discussions on banking move from “what is an appropriate banking model” to “who is suited to run these global arrogant banks”? The real issue though has been banks have for sometime stopped playing the staid role they were playing in economies. Instead of being a channel of real economic growth, it started to think of itself as real growth. This has pushed banking into a highly  noisy industry with words of bankers being celebrated and eulogised. Earlier, no one really cared for all such celebrity bankers. The crisis was a wake up call to correct this image but unfortunately hardly any lessons have been learnt.

Guess who needs to finish Financial Reforms? US!!

July 8, 2015

IMF has released its usual country specific report. It is amazing how these reports are worked upon by IMF along with each country’s elite  policymakers. Still they miss the bus most of the times and worse make things even more pathetic via their interventions.

The recent report is on US and it says somethings on US financial sector. Asks US to complete its financial reform:


Six Memorable Months: The Best and Worst of Varoufakis

July 7, 2015

Nice Article on Greece’s Rock Star er Finance Minister.

There was the leather jacket, the motorbike and photo shoots of the man they said was like more a rock star than a finance minister. Then there were the lectures and proposals that left his European counterparts bemused and often annoyed.

As Greece’s Yanis Varoufakis leaves the job and bows out of ever-urgent talks to keep the country in the euro, the economic professor’s theories on how to fix Europe’s malaise return to the domain of academia, his blog and Twitter account.

From condemning Greece’s creditors to plans to enlist tourists to tackle tax evasion via angry exchanges at a summit in Latvia, here are some of the most memorable moments and comments from his time in office.

What you find amazing is how all this while it did not really look like a crisis. Compare Greece pictures to what you saw in previous crisis in emerging economies..

Teaching finance after crisis..

July 6, 2015

After deliberating on econ teaching, Jakob de Haan and Dirk Schoenmaker introspect on finance teaching:


The hype around institutional investors is finally getting some attention..(lessons for India)

July 3, 2015

I mean it should not have taken so long for World Bank to figure limitations of institutional investors. Seeing and analysing their performances for instance in SE Asian countries (or Latin American or African ) should have given enough evidence that things are not as per expected. Infact far off it. But then it needed a crisis in their own homes to realise what is going on. Till 2007, even having such talks was just a crime.

WB’s leading finance scholars discuss the role of institutional investors. They say the expectations are way off the mark. The focus of the article is on institutional investors without specifying domestic or foreign. But is can easily be extended to FIIs as well:


A bank that takes Parmesan cheese as collateral..

July 2, 2015

Interesting article in HBSWK.

Nikolaos Trichakis of HBS has prepared a case on Italian regional bank Credito Emiliano which takes cheese as collateral:


Another high profile banker falls off glory?

June 30, 2015

It was shocking to see Anshu Jain resign so quickly as a head of Deutche Bank. The Indian media had gone gaga over his appointment (as it always does) celebrating another Indian at the helm of global affairs.

And now there are reports that he was actually asked to go as he had misled the bank.


Is the Greece crisis the Treaty of Versailles moment?

June 29, 2015

One does not know how to even sum up the Greece crisis. Despite nearly 5 years of Greece under stress, not only there is no solution. But it has only become worse overtime. All kinds of expertise is being offered and most is actually asking more questions than giving answers. Draghi magic is over and hard reality has sunk in.

The ongoing crisis has many narratives from history. The obvious one is Great Depression which has been an overkill. People have argued on both sides for stimulus and against stimulus and there are both +ves and -ves with each point. Then there are comparisons with 1907 panic and so on.

The Greece crisis and coming agreement is now being compared to similar such events.

In this vein, Prof. Amartya Sen has a piece comparing the upcoming agreement to the one held in Versailles in 1919 which sowed the seeds of second world war. He argues by forcing countries towards austerity and really harsh conditions, we could be in for trouble again. Prof Simon Wren Lewis says Amartya Sen is right.

What times we are living in. Anything can happen..

Is too much Finance a concern, or is it just statistical illusion?

June 25, 2015

An interesting paper by William Cline of PIIE. Lately, there has been some research which shows that too much finance leads to lower growth.  The author critques such research.

He says much of this has been shown using a kind of econometric trick. What people have done is added a quadratic term (of say financial deepening) in the regression equation. This shows a negative coefficient leading people to make their claims that after such and such ratio/percentage (of say bank assets to GDP), finance leads to lower growth.

Fair enough. The author says one could actually do the same for doctors, telephones, R&D and so on. His analysis shows the coefficient is negative here as well. So, after so many doctors, so many telephones etc growth becomes lower. Does this sound plausible?

This Policy Brief shows that these recent fi ndings warrant considerable caution, however, because the negative quadratic term may be an artifact of spurious attribution of causality. I fi rst show that correlation without causation could similarly lead to the conclusion that too many doctors spoil growth (for example). I then demonstrate algebraically that if the variable of interest, be it fi nancial depth, doctors, or any other good or service that rises along with per capita income, is incorporated in a quadratic form into a regression of growth on per capita income, there will be a necessary but spurious fi nding that above a certain point more of the good or service in question causes growth to decline.

Fascinating. This quadratic term is an old idea (or a trick now) in econometrics and amazing to see how it has been used this time. It usually shows a negative term just to limit the same excesses (have limited understanding of this though).

Though, the author misses the main point. People used same tricks before the crisis as well. All kinds of fancy regressions were invented to show that only finance matters for growth. This was used to push policy agenda. So all kinds of financial indicators (bank assets, equity markets, bank accounts etc) were used to show how they lead to GDP growth. This was a phase where GDP growth was rising generally and by fitting such regressions, positive relationships were not difficult to find. So the mantra was simple. Just let financial sector grow. And hence, finance professors became the new dons and got huge fame. They were appointed to all kinds of committees to drive financial sector of respective countries. Same with the finance sector.

Post-crisis, we are now questioning these findings and arguing the opposite. After all, we have to show that the discipline is responsible and knows things. Nothing could be further from truth. It is even more bizarre that the professors who argued for finance earlier have only seen their fame grow!!

Another point is it is not right to compare finance with medicine/telephones/R&D etc. Finance interacts with the economy in many more ways than all these other factors. Too many doctors, telephones etc hardly impact the economy adversely but finance surely does. This is nothing new. For ages, speculations and manias in finance have impacted economies.

For any development, one needs several factors and finance is just one of them. We had overdone the analysis earlier and are perhaps overdoing it now.

What is a company and should it only maximize shareholder value?

June 19, 2015

Martin Wolf writes an interesting piece on companies.

He reviews all the basic ideas regarding what a company is and what it is expected to do:


Bankers think they have an ethical duty to steal from taxpayers..

June 19, 2015

Interview of Prof Ed Kane of Boston College. he has been a critique of fancy finance for a long time:


Building real markets for the good of the people..

June 11, 2015

How times have changed. Earlier any mention of markets automatically meant it is real and good for the people. Not anymore.

Mark Carney of BoE (while releasing the Bank’s Fair and Effective Markets Review Releases Final Report) says we need to build such markets:

 Almost 350 years ago, the Great Fire destroyed the City of London and rendered 100,000 people homeless. It took half a century to rebuild. The legacy of the Great Fire endures, including such Wren masterpieces as St Paul’s and his twenty-five other steeples that survive today within the City’s precincts. But the Fire’s legacy is not limited to how the City looks, it extends to what the City does. 
The blaze led Nicholas Barbon to establish the first insurance company, an innovation to fulfil a social need: the sharing of risk. Public authorities complemented private initiative.   
There was a Royal Proclamation that set standards for wider roads and houses built from brick and stone instead of timber. And Parliament passed the Parish Pump Act to prevent “mischiefs that may happen by fire” by establishing fire brigades and improving water supply. So that spark in Pudding Lane ignited much more besides the Great Fire itself:
  • the provision of liquidity to limit contagion;
  • a recognition that clear, well-understood codes contribute to the greater good; and
  • a belief that financial markets can solve real world problems.  

From the coffee houses that served as meeting places for entrepreneurs and merchants; to the exchanges that supported the trading of financial claims; to a central bank that acted as lender of last resort: a rich infrastructure developed to support markets that served the UK and the world.  As it grew into the world’s leading economic and trading power, the UK also became its centre of financial capitalism.

 By the early 20th century, though no longer the world’s largest economy, the UK was still its hub of international finance.  It held close to a half of the world’s stock of overseas investments and traded one third of all negotiable instruments. 
The City has retained its pre-eminence through market innovation.  From eurobonds to emerging market debt, credit derivatives and centralised clearing; the City has continually created new financial products and markets to serve the real economy. Today the City remains the leading global financial centre.  The UK is the venue for 40% of foreign exchange trading volume, half of all trades in OTC interest rate derivatives, and more than two-thirds of trading in international bonds.  More international banking activity is booked in London than anywhere else, and the UK is host to the world’s third largest insurance sector as well as its second largest asset management industry. UK markets matter for global commerce.  But above all, our markets matter for our prosperity.
How this crisis changed things:
Though markets can be powerful drivers of prosperity, markets can go wrong. Left unattended, they are prone to instability, excess and abuse. Markets without the right standards or infrastructure are like cities without building codes, fire brigades or insurance. Poor infrastructure allowed the spark of the US subprime crisis to light a powder keg under UK markets, triggering the worst recession in our lifetimes.  
Poor ‘soft’ infrastructure such as codes of conduct that too few read and too many ignored.\ Faulty ‘hard’ infrastructure like interest rate and foreign exchange benchmarks that were quite literally fixed; and Weak banks whose light capital and heavy reliance on short-term funding created a tinder box.
Central banks shared in these failings, operating a system of fire insurance whose ambiguity was anything but constructive when global markets were engulfed in flames. The Bank of England’s general approach was consistent with the attitude of FICC markets, which historically relied heavily on informal codes and understandings.  That informality was well suited to an earlier age.  But as markets innovated and grew, it proved wanting. 
Most troubling have been the numerous incidents of misconduct that exploited such informality, undercutting public trust and threatening systemic stability.  This has had direct economic consequences.  Mistrust between market participants has raised borrowing costs and reduced credit availability.  Falling confidence in market resilience has meant companies have held back productive investments.  And uncertainty has meant people have hesitated to move job or home.  These effects are not trivial, and they have reduced the dynamism of our economy in the post-crisis years.Widespread mistrust has also had deeper, indirect costs.  Markets are not ends in themselves, but powerful means for prosperity and security for all.  As such they need to retain the consent of society – a social licence – to be allowed to operate, innovate and grow.  Repeated episodes of misconduct have called that social licence into question. 
We have all been let down by these developments.  And we all share responsibility for fixing them.

It is really surprising to see such reflections. For all you know, BoE and London were seen as the benchmarks for anything in finance.

What are real markets?

I believe everyone in this room would agree: we need real markets for sustainable prosperity. Not markets that collapse when there is a shock from abroad.  Not markets where transactions occur in chat rooms.  Not markets where no one appears accountable for anything.
Real markets are professional and open, not informal and clubby.  Participants in real markets compete on merit rather than collude online. Real markets are resilient, fair and effective.  They maintain their social licence. Real markets don’t just happen; they depend on the quality of market infrastructure.
Robust market infrastructure is a public good, one in constant danger of under-provision because the best markets innovate continually.  This inherent risk can only be managed if all market actors, public and private, recognise their responsibilities for the system as a whole. The City has a special responsibility given London’s pre-eminent position in global markets, which is why it has already brought so many ideas and such energy to advance financial reform.
He then goes onto the various reforms underway to make financial markets real markets. It is ironical to see markets being shaped by govts and central banks of all players.
The key is humility and not let hubris set in. For years we have been told that we have arrived at a perfect real market framework which will continue to deliver prosperity to people. And then it was upto others to inch towards this kind of policy setting. And now we know how much of these ideas were not just plain wrong.

Has Mario Draghi lost his touch? If yes, that is good news for Eurozone..

June 5, 2015

There was a time when Mario Draghi was the most celebrated central banker of the world. His famous words “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough”  stirred European  markets like nothing else could. Suddenly markets jumped and ECB ended up lowering yields without spending a penny. This was in 2012 and 2013 leading to several awards for the central banker.

And now we are in 2015, The same news sites which celebrated Draghi are wondering whether the central banker has lost his touch. One’s luck in central banking can only stretch so far. It is the usual story. The awards should instead be titled as the luckiest central banker of the year. Those central banks who claim that they are not cheerleaders of markets are living in utopia. The success of a central banker is just dependent on how markets perceive and cheer the monopolist leader. Most of these awards anyways are usually sponsored by the financial street directly or indirectly.

On to Draghi:


Is finance parasitic?

June 3, 2015

Finance Professors have been ignorant of the practices in the financial industry for years. Like magicians they have only shown us the bright side of their occupation. It required a crisis like in 2008 to break all these myths of a well functioning efficient market mechanism. All doyens of financial industry were seen indulging in practices which make all the previous money making frauds and tricks look so lame in comparison.

But then guess what? The aura of the industry and its soothsayers has not just remained but increased manifold. It is a classic case of bad behaviour continuing to be rewarded by the society. For instance this story of a young person really excited on getting a job offer from one of the doyens only to end in a really bad tragedy.

So such posts comparing the sector to a parasite is interesting to read:


Putting Economic Models in Their Place (and economists too?)

June 3, 2015

Prof. Brad Delong has a piece reflecting on the Paul Romer outlash.



Get every new post delivered to your Inbox.

Join 1,504 other followers