Archive for the ‘Financial Markets/ Finance’ Category

How a historic meeting laid the foundations of US fiscal policy and choice of Washington as capital…

March 8, 2018

Interesting bit of history by Vitor Gaspar and David Amaglobeli of IMF.

On the evening of June 20, 1790, James Madison and Alexander Hamilton met at Thomas Jefferson’s home on Maiden Lane, in New York. Over a long dinner, the three struck a historic deal that laid the financial groundwork for the fledgling nation. Madison agreed to have the US federal government take over the states’ Revolutionary War debt; in return, Hamilton agreed to support the move of the nation’s capital to the banks of the Potomac River, a location favorable to Madison’s home state of Virginia. The deal is an early and vivid example of how fiscal politics can shape history. The episode remains relevant because it shows that politics plays a crucial role in far-reaching reforms of public finances. Public finance reform is fundamentally political, and it has the potential to shape the political system itself. As this most famous dinner shows, political negotiation can help overcome apparently insurmountable obstacles and become a force for institutional transformation. Today’s policymakers who disregard political realities are doomed to be ineffective.

The whole narrative is fascinating to read…

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HSBC’s branch in Mansfield celebrate its 125th anniversary

March 7, 2018

Nice bit of history of a bank branch.

  • 1865 – The Nottingham Joint Stock Bank opened on September 1
  • 1893 – The Mansfield branch was opened by the Nottingham Joint Stock Bank
  • 1893 – Samuel Davidson appointed first Mansfield branch manager
  • 1905 – Nottingham Joint Stock Bank amalgamated with London City and Midland Bank (now HSBC UK)
  • 1914-1918 – Mansfield staff served their country in the First World War
  • 1916 – Mr Davidson retired after 38 years of service with his assistant manager Edward Matthew Ellis taking over responsibilities
  • 1938-1944 – The branch faced the strain of the Second World War with nine men leaving to join the Armed Forces and five temporary members of staff arriving to take their place
  • 1972 – Accounts at the Mansfield branch became computerised
  • 2018 – HSBC UK celebrates its 125 anniversary at the Mansfield branch

Failing banks, bail-ins, and central bank independence: Lessons from Cyprus

March 1, 2018

Panicos Demetriades, Former Governor of the Central Bank of Cyprus shares insights on the Cyprus banking crisis.

Banking woes have only become worse since the crisis.

Can Europe build a digital financial centre from scratch?

February 28, 2018

Interesting speech from Joachim Wuermeling of Bundesbank. It is nice when you read words like Continental Europe being used by central bankers.

He says post Brexit, things are difficult for both Europe and UK. London is poised to lose the several advantages it had pre-Brexit especially in the area of financial services where it was at numero uno position.

In this kind of a setting, can Europe build its own financial centre? History of financial centres suggests one can leapfrog over others:

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Listening to the buzz: social media sentiment and retail depositors’ trust

February 28, 2018

Interesting paper by Matteo Accornero and Mirko Moscatelli of Bank of Italy. They analyse the impact of Twitterati on bank deposits:  

We investigate the relationship between the rumours on Twitter regarding banks and deposits growth. The sentiment expressed in tweets is analysed and employed for the nowcasting of retail deposits. We show that a Twitter-based indicator of sentiment improves the predictions of a standard benchmark model of depositor discipline based on financial data. We further improve the power of the model introducing a Twitter-based indicator of perceived interconnection, that takes into account spillover effects across banks.

Need to figure the methodology of this research…

Bitcoin is more trustworthy than some academic critics

February 26, 2018

Prof Larry White takes on the academic critics on bitcoin:

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Banking crises and frauds: An Indian history..

February 26, 2018

My new piece in Mint.

I take a deep dive into Indian banking history of around 200 years and show that frauds and scams have been a fairly integral part of Indian financial history. Most banking euphoria whether in terms of opening new banks or giving loans is eventually met with some fraud or failure. Most bank crises are nothing but accounting adventures and misrepresentations.

I want to add how banking is not just an Indian problem but of most countries today. Post 2007, the malaise started with French bank BNP Paribas and then quickly the base shifted to US banks. Then it quickly spread to most western European countries. It has been more than  ten years since but no signs of abetting.We see continued signs of distress in banking system across countries: US, UK, Italy, Ireland, Greece, Spain, Russia, Australia, South Africa, Latvia and many more (still counting). There have been all kinds of problems starting from how LIBOR was rigged by players.

How greed and lack of ethics has got deeply entrenched in banking makes us go back to Amartya Sen’s words as mentioned in the article.

 

Asian political economy: China beats India to slice of Dhaka Stock Exchange

February 22, 2018

Didn’t know this was happening. Apparently Dhaka Stock Exchange is modernising and demutualising. It had set aside 25% ownership for a foreign player and both India and China were vying for the pie.

Finally, Chinese authorities managed their hands over it:

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Chit funds to be called as Fraternity funds..

February 20, 2018

The Cabinet recently approved a new bill to ban Unregulated Deposit Schemes and amend Chit Funds Act 1982. The Chit Funds Act is here.

So what does the amendment propose?

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The Chinese banking system: Much more than a domestic giant

February 19, 2018

Eugenio Cerutti and Haonan Zhou of IMF on Chinese banking system:

The Link between Jews and money is no longer taboo…

February 15, 2018

Interesting piece. The author starts with an anecdote linking money to Jews.

He then says: (more…)

The financialization of everything: How finance is reshaping the ‘rules of the game’?

February 15, 2018

A long post by Servaas Storm. But we know this narrative of how finance controls pretty much everything we do today.

The shift in financial intermediation from banks to financial markets, and the introduction of financial market logic into areas and domains where it was previously absent, have not just led to negative developmental impacts, but also changed the ‘rules of the game’, conduct and outcomes—to the detriment of ‘inclusive’ economic development and in ways that have helped to legitimize—what Palma (2009) has appositely called—a ‘rentiers’ delight’, a financialized mode of social regulation which facilitated rent-seeking practices of a self-serving global financial elite and at the same time enabled a sickening rise in inequality. Establishment (financial) economics has helped to de-politicize and legitimize this financialized mode of social regulation by invoking Hayek’s epistemological claim that (financial) markets are the only legitimate, reliably welfare-enhancing foundation for a stable social order and economic progress.

….

Rather than letting financial markets discipline the rest of the economy and the whole of society, finance itself has to be disciplined by a countervailing social authority which governs it to act in socially desirable directions. One famous account in the Talmud tells about Rabbi Hillel, a great sage, who when he was asked to explain the Torah in the time that he could stand on one foot, replied: “Do not do unto others that which is repugnant to you. Everything else is commentary.” If there is a one-foot summary of the literature reviewed in this introduction, it is this: “Finance is a terrible ‘ephor’, but, if and when domesticated, can be turned into a useful servant. Everything else is commentary.”

I don’t think this was the vision of markets which Hayek gave us. The markets are heavily regulated with numerous conflicts of interest present across the entire chain.

Growing shadow banking in China

February 13, 2018

Interesting (and worrisome) research by BIS researchers: Torsten Ehlers, Steven Kong and Feng Zhu.

They look at shadow banking system in China:

We develop a stylised shadow banking map for China with the aim of providing a coherent picture of its structure and the associated financial system interlinkages. Five key characteristics emerge. One defining feature of the shadow banking system in China is the dominant role of commercial banks, true to the adage that shadow banking in China is the “shadow of the banks”. Moreover, it differs from shadow banking in the United States in that securitisation and market-based instruments play only a limited role. With a series of maps we show that the size and dynamics of shadow banking in China have been changing rapidly. This reveals a marked shift in the relative importance of different shadow banking activities. New and more complex “structured” shadow credit intermediation has emerged and quickly reached a large scale, while the bond market has become highly dependent on funding channelled through wealth management products. As a result, the structure of shadow banking in China is growing more complex.

This map says it all:

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Tulip mania: the classic story of a Dutch financial bubble is mostly wrong

February 12, 2018

Oh boy there is so much to figure.

This piece by Prof Anne Goldar of Kings College just shook me a bit. For long one has read and wrote about the Dutch tulip mania and compared all the ongoing manias and frenzies to the tulip episode. However, this work by Prof Goldar says most things attributed to tulip mania are plain wrong:

Tulip mania was irrational, the story goes. Tulip mania was a frenzy. Everyone in the Netherlands was involved, from chimney-sweeps to aristocrats. The same tulip bulb, or rather tulip future, was traded sometimes 10 times a day. No one wanted the bulbs, only the profits – it was a phenomenon of pure greed. Tulips were sold for crazy prices – the price of houses – and fortunes were won and lost. It was the foolishness of newcomers to the market that set off the crash in February 1637. Desperate bankrupts threw themselves in canals. The government finally stepped in and ceased the trade, but not before the economy of Holland was ruined.

Yes, it makes an exciting story. The trouble is, most of it is untrue.

My years of research in Dutch archives while working on a book, Tulipmania: Money, Honor and Knowledge in the Dutch Golden Age, told me a different story. It was just as illuminating, but it was different.

Tulip mania wasn’t irrational. Tulips were a newish luxury product in a country rapidly expanding its wealth and trade networks. Many more people could afford luxuries – and tulips were seen as beautiful, exotic, and redolent of the good taste and learning displayed by well-educated members of the merchant class. Many of those who bought tulips also bought paintings or collected rarities like shells.

Prices rose, because tulips were hard to cultivate in a way that brought out the popular striped or speckled petals, and they were still rare. But it wasn’t irrational to pay a high price for something that was generally considered valuable, and for which the next person might pay even more.

 

Tulip mania wasn’t a frenzy, either. In fact, for much of the period trading was relatively calm, located in taverns and neighbourhoods rather than on the stock exchange. It also became increasingly organised, with companies set up in various towns to grow, buy, and sell, and committees of experts emerged to oversee the trade. Far from bulbs being traded hundreds of times, I never found a chain of buyers longer than five, and most were far shorter.

Further:

Prices could be high, but mostly they weren’t. Although it’s true that the most expensive tulips of all cost around 5,000 guilders (the price of a well-appointed house), I was able to identify only 37 people who spent more than 300 guilders on bulbs, around the yearly wage of a master craftsman. Many tulips were far cheaper. With one or two exceptions, these top buyers came from the wealthy merchant class and were well able to afford the bulbs. Far from every chimneysweep or weaver being involved in the trade, the numbers were relatively small, mainly from the merchant and skilled artisan class – and many of the buyers and sellers were connected to each other by family, religion, or neighbourhood. Sellers mainly sold to people they knew.

When the crash came, it was not because of naive and uninformed people entering the market, but probably through fears of oversupply and the unsustainability of the great price rise in the first five weeks of 1637. None of the bulbs were actually available – they were all planted in the ground – and no money would be exchanged until the bulbs could be handed over in May or June. So those who lost money in the February crash did so only notionally: they might not get paid later. Anyone who had both bought and sold a tulip on paper since the summer of 1636 had lost nothing. Only those waiting for payment were in trouble, and they were people able to bear the loss.

No one drowned themselves in canals. I found not a single bankrupt in these years who could be identified as someone dealt the fatal financial blow by tulip mania. If tulip buyers and sellers appear in the bankruptcy records, it’s because they were buying houses and goods of other people who had gone bankrupt for some reason – they still had plenty of money to spend. The Dutch economy was left completely unaffected. 

She says despite all this, the myth of the mania continues thanks to some writers and popular media.

So don’t attribute the crypto mania to tulip mania:

It was not actually the case that newcomers to the market caused the crash, or that foolishness and greed overtook those who traded in tulips. But this, and the possible social and cultural changes stemming from massive shifts in the distribution of wealth, were fears then and are fears now. Tulip mania gets brought up again and again, as a warning to investors not to be stupid, or to stay away from what some might call a good thing. But tulip mania was a historical event in a historical context, and whatever it is, Bitcoin is not tulip mania 2.0.

Actually, same logic could be applied to crypto-currencies as well. Very few are holding these currencies and there is a problem of oversupply of these currencies.

SBI saying “worst is over” is same as economists saying “this time is different”…

February 12, 2018

Deepak Shenoy, CEO and founder of Capitalmind has a superb piece.

He digs evidence from 2010 onwards with each time SBI chief saying “Worst is over” or “Worst is behind us”. Only for worst to keep coming each year.

Quite similar to economists saying this time is different where they justify the current exuberance to fundamentals and there is no sign of crisis.

Just that these three SBI words have been said many times in recent year than the economists’ four words..

Virtual banks to be licenced in Hong Kong..

February 12, 2018

Apparently Hong Kong authorities are thinking about opening virtual banks for a while. The first guideline was released in 2000 to be  updated in 2012 and is coming into action now.

What we see is that the concept is hardly new but the HKMA has made changes in the new guidelines based on banking developments.

First what is a virtual bank?

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Malaysia adopted inflation anchoring over inflation targeting…

February 12, 2018

Interesting speech by Mr Muhammad bin Ibrahim, Governor of the Central Bank of Malaysia.

He says despite strong preferences to adopt inflation targeting before 2008, the central bank did not straightjacket itself. They had a broader role with focus on inflation anchoring and not targeting. This way they avoided groupthink as well:

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When a bank holds on to old style banking and personal touch: Citizens Bank in Weston (Florida)

February 1, 2018

Nice to read about some banks still holding onto traditional ways of banking.

It was established in 1892  and continues to maintain old ties and relationships:

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How French are pushing to make Paris an international financial centre at cost of London…

January 25, 2018

Interesting speech by Mr François Villeroy de Galhau, Governor of the Bank of France.

The title of the speech is: New Year wishes to the Paris financial centre. This clearly signals how the central bank is pushing to making Paris a Financial centre post Brexit and relocation of EBA to Paris.

He highlights four wishes for the New year. The third is with respect to shaping Paris as a financial centre:

My third wish is for financing. Often, the Governor of the Banque de France encourages banks to lend more; this is not the case at present! Bank lending in France is very buoyant. Bank lending to households and firms is growing at almost 6% per year. This is good news, but we must avoid excesses. There are thus several efforts to be made in 2018 to ensure the smooth financing of our economy:

  • Remain vigilant to ensure financial stability, first and foremost. At last December’s meeting of the Haut Conseil de Stabilité Financière (HCSF – High Council for Financial Stability), we decided to take a macroprudential measure to limit the sharp rise in the debt of certain large companies, including bond debt. It will apply as of 1 July after approval by the European authorities. If credit cycle risks persist – i.e. growth that is significantly higher than that justified by economic fundamentals – we stand ready to act further at any time in 2018, including if necessary by implementing a countercyclical capital buffer.
  • Promoting the attractiveness of the Paris financial centre in the context of Brexit, second: irrespective of the possible transition, the City will most likely lose its EU passporting rights. The Paris financial centre must continue to develop, notably in the area of the clearing of financial instruments, and promote its numerous qualities, enhanced by the arrival of the EBA, in order to become the main euro area centre for market activities. This is our collective challenge, over and above announcements of welcoming registered head offices.
  • Lastly, better channelling our savings. Overall, the French economy has no lack of financing, thanks also to the soundness of its financial institutions. Our challenge concerns more the nature of this financing: developing equity financing more than debt financing. Flat tax is a welcome step towards a greater tax neutrality between the different forms of investment. I have already stated this, insurers must create new tailored products, in the area of life insurance, which are less liquid but allow savers to benefit from the higher returns offered by equities in the long term, with a form of capital protection. The PACTE law on growing and transforming companies, presented by the Minister of the Economy, could provide an opportunity. Banks are also considering offering a new long-term savings product: I understand this point of view, provided that the aim isn’t to create a new tax loophole; we have had enough of this great French speciality.

He clearly mentions that one has to look beyond announcement of registered head-0ffices to things more concrete that shape financial centres. It will be really interesting to track whether and how Paris becomes a respected centre in arena of global financial services.

When bank deregulation is dangerous if not done properly…

January 24, 2018

The usual narrative is that when you deregulate banking, crisis follows as banks take on more risks, lend/invest foolishly and so on.

Prof George Selgin says deregulation is dangerous not for the above reason but if not implemented properly:

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