Archive for the ‘Financial Markets/ Finance’ Category

Can teaching of philosophy/ethics stop future bankers from stealing?

June 8, 2016

Prof Edward Kane of Harvard has written a recent research paper titled – Ethics vs. Ethos in US and UK Megabanking. Ethics in finance? That sounds like a  sure joke to most. Banking histories across most parts of the world tell you that early form of banks and their bankers were highly despised.  No one liked them on both religious grounds (as in Islamic countries) and general livelihood grounds (too high interest rates, pests etc). How a profession has changed from being an unethical sector to a highly wanted one is quite a story by all means.

And now we have come to a different extreme where all sins of bankers are just laughed away. Despite seeing it in so many crisis recently, banking  remains a coveted job. The kind of greed the sector has shown and the way we celebrate it will even surprise likes of Gordon Gekko. I am a banker is said with a huge pride leaving others to guess the kind of salaries the banker would be making.

Here Prof Kane discusses the broad findings. He starts with he most obvious question – why do bankers get away?

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The political economy of deposit insurance and why did deposit insurance pick up?

June 6, 2016

Nice piece by Charles Calomiris and Matthew Jaremski.

Many of us might no know that India was the second country after US to introduce deposit insurance. US introduced it in 1934 and India in 1961. In both countries, central banks primarily came up to look at the banking crises. Paradoxically, bank failures only grew post central banks coming up int eh two countries. It actually boiled down to introducing this deposit insurance scheme which stabilised the system and prevented bank runs.

One can always argue over costs and benefits of deposit insurance. But the kind of drama we have over central banks role in financial stability, much credit goes to these deposit insurance schemes as well. Though, this insurance bit has obviously interfered with market mechanisms. Earlier depositors had atleast some incentives to try and figure good banks from bad ones. There was some process for that weeding to happen. Now there is no such incentive as you know govt will give back your deposits via this deposit insurance scheme. It is also true that banks do not promise to pay back all your deposits in case of a crash. The insured amount is only RS 1 lakh and anything more you will lose that money. But as this  has barely happened, so depositors given their savings fully confident that 100% money will come back. All banks have become too big to fail no matter how small they are in the scheme of  things.

Coming to the topic. The authors say it is really surprising that the world took so long to introduce this facility after US introduced it in 1934. What triggered the rise? Politics of course:

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Profound changes in economics have made left vs. right debates irrelevant..

June 2, 2016

Eric Beinhocker has a long piece on how economics can become a better subject.  He says we need to make economics more realistic and that should be a good thing.

The idea is to move from the traditional camp based thinking to new thinking which is more flexible.

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Minsky moment for Australian banking?

June 2, 2016

The usual thing is to make hay when sun is shining. But this does not seem to work in banking/finance. It is when sun is shining that risks emerge. This is also what we also call as Minsky moment.

Satyajit Das has a piece on Australia and says all that glitters is not gold: (more…)

Why monetary economics and financial economics are taught in silos?

June 1, 2016

This blog has always believed (along with few others) that for economics to go forward we need to really sort out our economics education. This crisis is about fixing our econ education as much as it is about fixing all the jazz like macro policy, financial institutions etc. If we  don’t fix the former and jus keep the focus on latter as is the case, it will just be a ban aid solution, True, education will not ensure that there will be no crisis in future but it will just make us realise that economics is hardly a linear subject and needs to be studied with other disciplines.

What we have instead is highly siloisation of economics where you just study standard stuff without any politics, history, society etc meshed in the curriculum. Even worse is siolisation within economics. One is just a macro person, other is just a micro person, yet another is a finance person and so on. One may not need to know anything about the other. This blogger too has been a victim of this siloisation, a huge limitation which does not just go away thanks to years wasted in silos.

Ironically, this silo creation is one of the crucial reasons behind the crisis and acts as a hindrance to solve the issues. This silo is between monetary economics persons and finance persons. How do you fix the issues going forward without understanding the linkages. This blog has written about this silo issue earlier as well.

In a recent post, Prof Peter Mehrling mentions how attempts are being made to limit this bifurcation:

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Should US opt for longer term bonds of say 50 year and more?

May 24, 2016

The term premium to hold long bonds is in negative and lowest since JFK era.

Barry Ritholtz makes a case for US issuing 50 year treasuries. One can always debate pros and cons of ultra low rates. But the least US govt could have done is to take advantage of these low rates and issue much longer term bonds. Currently it stops at 30 years whereas so many countries have issued 50 year ones:

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What is it like to be the first US bank to do business in Cuba?

May 24, 2016

Here is an interview of David Seleski, CEO of Stonegate Bank which became first such bank. The interview reveals how a bank both gets trapped in bad relationships between two countries and also shapes them:

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How Financialisation is destroying US economy (how far is India from it?)

May 23, 2016

Rana Fourhar of Time Magazine has penned a new book on how Financialisation is destroying US economy. INET has an interview and here is a brief overview of the book by the author herself (thanks to Gulzar for the last link).

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Greece in a monetary union: Lessons from 100 years of exchange rate experience, 1841-1939

May 17, 2016

Greece’s troubles on economic front are hardly anything new. They are as old as it gets.

Matthias Morys sums up the experiences of 100 years since 1841-1939.

Culture in financial services..a much neglected and a very important domain

May 17, 2016

One has been trying to read as much financial history as possible across countries. It is all fascinating to read through accounts of ways things were financed back then and the hardships faced. One also comes across how financial innovations of today were used historically and there is hardly anything modern or innovative about them.

Another thing which emerged is strong cultural and trust values in banking firms. Firms that instilled these values early on and remained committed survived much longer than their peers. Leave all balance sheet analysis and financials aside. It is this cultural aspect which matters as greatly for both survival and growth of a banking firm. This applies to most firms but much more to banks for whom gaining trust and maintaining it is really central to everything.

The crisis of 2008 is leading all these lost values to come back.  Regulators stinged by the crisis despite all the fancy financing techniques and Basel norms, now realise culture of a firm is what matters at the end of the day.

In this speech, Andrew Bailey of Bank of England sums up the issues:

There is a reasonable debate about what is culture, but that is not a debate about whether it is important.  In my view, culture is a product of a wide range of contributory forces:  the stance and effectiveness of management and governance, including that well used phrase “the tone from the top”; the structure of remuneration and the incentives it creates; the quality and effectiveness of risk management; and as important as tone from the top, the willingness of people throughout the organisation to enthusiastically adopt and adhere to that tone.  Out of this comes an overall culture.  It is not something that has a tangible form.  As supervisors, we cannot go into a firm and say “show us your culture”.  But we can, and do, tackle firms on all the elements that contribute to defining culture, and from that we build a picture of the culture and its determinants.
 
Culture has a major influence on the outcomes that matter to us as regulators.  My assessment of recent history is that there has not been a case of a major prudential or conduct failing in a firm which did not have among its root causes a failure of culture as manifested in governance, remuneration, risk management or tone from the top.  Culture has thus laid the ground for bad outcomes, for instance where management are so convinced of their rightness that they hurtle for the cliff without questioning the direction of travel. We talk often about credit risk, market risk, liquidity risk, conduct risk in it’s several forms. You can add to that, hubris risk, the risk of blinding over-confidence.  If I may say so, it is a risk that can be magnified by broader social attitudes.  Ten years ago there was considerable reverence towards, and little questioning of, the ability of banks and bankers to make money or of whether boards demonstrated a sufficient diversity of view and outlook to sustain challenge.  How things have changed.  Healthy scepticism channelled into intelligent and forceful questioning of the self-confident can be a good thing.  In turn, culture matters to us as financial regulators because it can, left alone, tend to shape and encourage bad outcomes, but it doesn’t have to do that.
Happy revisiting history.
So what can regulators do and not do?
What can we do therefore as regulators to shape and influence better outcomes on a more consistent basis?  Let me start with one thing that we cannot do.  As regulators, we are not able, and should not try, to determine the culture of firms.  We cannot write a regulatory rule that settles culture.  Rather, it is the product of many things, which regulators can influence, but much more directly which firms themselves can shape.  We seek to ensure that firms have robust governance, which includes appropriate challenge from all levels of the organisation; and promote the acceptance that not all news can be good and the willingness to act on and respond promptly to bad news.  We insist that remuneration is structured to ensure that individuals have skin in the game, namely that a meaningful amount of past remuneration is retained or deferred and for senior people is at risk should problems then emerge.  We require that risk management and internal audit in firms are effective and act to root out poor incentives and weak controls.  All of this is important and central to what we do as regulators, but let me reinforce the point that culture begins and lives, and I am afraid dies, at home, with firms.
 
It is not for us as regulators to prescribe culture, that would not work.  Firms and their management have to want good culture.  But we can have a lot of influence here. 
Then he sums up the steps taken by BoE to try and influence culture:
In the last few months we have taken a very important step here by introducing for banks the Senior Managers and Certification Regime, as proposed by the Parliamentary  Commission on Banking Standards.  It replaces the Approved Persons Regime, and in time it will be implemented across the regulated financial services sector.
 
There is, let me be clear, no magic bullet to change culture, but the new regime is a big step forward in my view.  This is because at its heart it embeds the notion of personal responsibility for the affairs of the firm at the level of senior management.  The Approved Persons Regime did not do this, and in practice it focused on a notion of culpability not responsibility.  These two notions are different.  I have said many times, but will keep doing so, that senior managers cannot delegate responsibility.  To be fair, many have said to me over the last few years that this change does not make a difference for them as they always thought they were responsible.  Good.  But, set this against other conversations I have had which have doubted the enforceability of this notion of responsibility.  This has concerned, but not distracted me.  So, to be clear, responsibility is the central plank of the new Senior Managers Regime.  We do want senior managers to feel this responsibility in all that they do and that includes a responsibility for forming and implementing a positive culture throughout the organisation.  In this respect culture is no different to strategy; where are we today, where do we aspire to be tomorrow, how will we get there and what risks must we mitigate along the way.
 
Responsibility, as embedded in the Senior Managers Regime, is therefore an important hook to assist in firms’ shaping their own culture, and also to provide regulators with the powers to conduct supervisory oversight and to act when needed.  But, let me reiterate that it is not the job of regulators to enforce culture and to change culture.  If we have to step in, and occasionally we do, the overriding conclusion is that management has failed.

Alas, none of these measures are likely to work much. These things are pretty much inbuilt and historical. Moreover, there is no guarantee that once culture is set, it will continue. Change of senior management who do not believe in culture and history undo all the goods of the past and then sow the seeds for eventual destruction of the firm..

Peer to peer lending: Old wine in a new bottle..

May 12, 2016

If one gets an idea to write on, he/she should write/blog about it immediately. Else, someone will write about it soon. This is one such article.

There has been a lot of noise about this word P2P  (peer to peer) in financial world recently. What was essentially a term used in tech industry for sharing music, movies etc pioneered by likes of Napster, has come to hit the world of banking/finance.

What does P2P banking mean? Like in tech world, where a person creates a music file and shares it with others via a tech platform, same is the case with P2P banking as well. Some person with funds lends it to others via a tech platform as well. Important to note the role of individuals here. Unlike a music firm or a banking company this time the distribution of music/funds done by individuals. Just like tech made it easier for people to share music, same tech helping to make it easier for people to lend funds.

Sounds exciting? Yes it does but we know what happened with all these P2P music/video platforms. Eventually, the big firms lobbied to throw these guys out of business. One could expect banks to retaliate in similar fashion as well in future.

But the point is even deeper than this. P2P banking is hardly anything new. It is perhaps the oldest form of banking when people lent funds to others as there were hardly any organised form like a bank of today. In India, there were several such forms of P2P banking which British together called as indigenous banks. Within these indigenous banks, there were nidhis, chit funds etc which were nothing but P2P forms of lending. Group of persons came together to lend funds to each other minus all the tech of today. Infact, the tech then was trust, social networks, peer pressure etc.

This is what Mr Rajwade also says in this article:

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What China can teach us about the future of banking?

May 10, 2016

One has to rub his eyes on reading title of this post. I did too.  Lessons of Banking from China? That too on future? Really?

But Spontaneous Finance Blog thinks so.  And the lessons are not about how China made the right banking policy etc. But how it made the policy which led to troubles:

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What leads to profits in mutual fund industry?

April 21, 2016

James Kwak has a piece wondering why does mutual fund industry make large profits?

It is mainly because they continue to get high asset management charges. Why have people not ditched these active funds for index funds where charges are far lower?

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Are banks intermediaries of loans or originators of loans?

April 19, 2016

This is a hard hitting piece by Prof Steve Keen which questions the basic ideas on banking.  It is hard hitting as he takes on Prof. Joseph Stiglitz of all people. I am ignoring the hard hitting bit and getting directly to the banking bit.

Traditionally, we are taught that banks intermediate between depositors (surplus units) and loan seekers (deficit units). So they take deposits from someone and pass them on to others as loans. It charges higher interest rates on loans than interest it pays on deposits. This spread in turn should ideally help recover operational costs and also result in profits.

Lately. this model is being questioned as too simplistic. Bank of England econs make a great case of this.

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Towards a theory of shadow money..

April 18, 2016

Those who think shadow money/banking is a new idea and came to the fore only in 2008 crisis, should know better.

Similar concerns arose when banks started offering deposits and one was not sure whether they should be counted as money or not. Over a period of time, deposits are not just counted as money but has become the most dominant form of money as well.  So will repos the new shadow banking instrument make the similar transition as well?

Daniela Gabor and Jakob Vestergaard of INET have a paper on the topic. A broad summary is here..

 

How it is still easier to become Financial Adviser than a Hairdresser?

April 18, 2016

Jason Zweig points to research on the topic:

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Shocked by the Panama Papers? Blame Switzerland…(History of offshore tax havens)

April 12, 2016

Stephen Mihm of Bloomberg has a superb piece saying Panama papers shocker is nothing new.

It all started from Switzerland which made offshore financial centres a cool thing:

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Was deregulation or overregulation responsible for the 2008 crisis?

April 7, 2016

The purpose of this post was primarily to introduce this new finance blog called – Spontaneous Finance (HT: Alt-M blog). For the uninitiated, spontaneous order was a term popularised by Austrian school. So the blog as one would expect mixes finance ideas with Mises, Menger, Hayek etc. And even more interestingly, the blogger Julien Noizet works as an analyst in finance industry.

In his inaugral post at alt-m, Noizet sums his core thoughts:

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This Is where bad bankers went to Prison in Iceland…

April 4, 2016

Just like Iceland, its jail too is in a pretty picturesque place.

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How doorstep banking has been forgotten in India but is increasing savings in Sri Lanka..

April 4, 2016

Interesting article by a team of scholars: Michael Callen , Suresh de Mel , Craig McIntosh  and Christopher Woodruff.

They point how a bank in Sri Lanka has pioneered this doorstep banking approach. In this, deposits are collected from houses of people:

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