Central bankers in Europe have been thinking a lot about The Death of Banks lately. Not so much in the US.
There’s good reason for that, of course. Europe has been bleeding out banks with negative rates, so policy makers there have become painfully aware of the banks’ role implementing monetary policy.
The US Federal Reserve, on the other hand, has been keeping banks alive with a steady drip of interest on excess reserves, or IOER, to control rates in a financial system awash with liquidity. The Fed’s releasing a policy statement today (we understand if you forgot about that in the heli-frenzy before the BoJ on Friday).
Of course, keeping banks on life support with IOER doesn’t help net interest margins. NIM is a key measure of bank profitability. It’s also closely tied to the US yield curve — which is unfortunate for banks, because that sucker has been positively steamrolled lately by the combination of low yields abroad, low inflation expectations and rising US policy rates. Read more
Take a look at Deposit Solutions, a Berlin-based fintech company backed by Peter Thiel. This week it raised another €15m from the Trump-supporting billionaire and other investors at a reported €110 million valuation. What’s the idea behind the four-year-old startup? Read more
‘Passporting’, per Citi, “allows financial institutions incorporated in one member state to establish branches in other member state and provide cross-border services to clients.”
The fact that system now most probably needs to be renegotiated — where once there was cohesion, now there is confusion — is bad news for UK banks and the EU/ US banks that operate out of London. It’s why they say things like, “in all likelihood we would ”. They being Goldman there in 2013 but whatever, the risk is obviously real.
So how would it all work? Read more
One of the ways finance is different to other types of business is that it’s exclusive, rather than inclusive.
Broadly speaking, if you have money most companies will serve you — so long as you don’t break things or cause a fuss. In finance, however, having money isn’t always good enough. You likely need an address, official identification and a squeaky clean criminal record too — and even with all of that, a bank might still close the door in your face rather than run the risk of legal or media scrutiny. Read more
There are many perplexing anecdotes in the book by Metro Bank chairman and co-founder Vernon Hill, but one stands out as particularly difficult to believe.
A little girl, just four years old, had come into a Metro Bank branch with her parents to use its coin counting machine (pictured above). The bank offers a prize to people who guess the value of their coins correctly, but, sadly, the girl didn’t get it right. Metro Bank’s magnanimous staff gave her the prize anyway after she started crying — other bankers, Hill suggests, would never have consoled the girl by doing the same.
But recent events in the United States at the bank that bought Hill’s old business got us thinking. What if the little girl had guessed correctly? What if she had been right and the machine had been wrong? In short, we started wondering, are Metro Bank’s coin counting machines accurate?
Startups that are just a few months old have to deal with a host of challenges, but losing a key selling point of their product shouldn’t be one of them. Read more
Negative central bank interest rates yet rising bank net interest income. Where else but Switzerland?
American senator and presidential candidate Bernie Sanders has repeatedly argued “the business model of Wall Street is fraud”. Critics were quick to claim this was “nonsense”, with some going so far as to call it “slander”.
Taken literally, they have a point. After all, widespread criminality across a range of business lines — just in the past decade many of the big financial firms have gotten into trouble for price fixing, bid rigging, market manipulation, money laundering, document forgery, lying to investors, sanctions-evading, and tax dodging, among other things — isn’t the same as actually having fraud as the core of the business. More generally, the financial sector contains many parts, often with competing economic and policy interests, so it doesn’t make much sense to talk about “Wall Street” as a unified entity.
Still, there is an essential truth in what Sanders said: from a certain point of view, banking is an act of fraud. Read more
Mike Cagney is one of those Silicon Valley entrepreneurs for whom humility is a foreign language.
Since raising around $1bn at a $3.8bn valuation for his online lending shop, SoFi — which stands for Social Finance — he has called his peers unambitious dorks for working with Wall Street and told America’s biggest banks to watch their backs, I’m coming for you.
All with one key message: SoFi is not a bank. It’s “happily not a bank”. In fact, it’s “better than a bank!”. Or even better still, it’s a way to “un-bank millennials”. One could say, SoFi’s ‘not a bank’ almost to the point that the word ‘bank’ itself becomes entirely meaningless. (The common view is a bank’s a platform which uses network effects to transfer risk from those can’t afford it to those who can.)
The Financial Stability Board wants banks to raise up to €1.1tn in so-called “total loss absorbing capital” (TLAC) to make the banking system less risky.
It’s their attempt to put skin back in the game for bank stakeholders and ease them off the notion that the government will always be around to rescue overly imprudent institutions.
The authors of “The end of banking”, however, see things somewhat differently. In a post last week they outlined how it’s the digital age which has rendered the limited liability corporate structure unfit for purpose and in the process made the world much more systemically risky. Read more
It is a business now, some of these organisations have complexes not quite as big as Google but it is an office facility and people come to work. Instead of coming to work out how to create things for cell phones, they go after banks because that’s where the money is.
That’s from cyber-security expert Clay Calvert, director of Cybersecurity at MetroStar Systems, who we contacted last week to get some insight on the multiple ways banking is turning into a cyber-security story.
Also, we wanted to know the degree to which everything is spiralling out of control for banks because cyber criminals are now organising themselves in the style of more materialistic criminal syndicates before them. It is, experts fear, the beginnings of a new cold war, of Spectre-style proportions. The criminals aren’t lone hackers in basements anymore. They’re highly organised networks, often working out of jurisdictions which are happy to protect them. Read more
The case study in how a business can exist outside of the embrace of traditional banking — as, in this case, traditional banking is afraid of being done for money laundering, since the product in question is still illegal on a Federal level — continues.
That’s despite the efforts of Fourth Corner Credit Union in Denver, which, per the NYT, “applied in November to the Federal Reserve for a “master account,” which would allow it to interact with other financial institutions and open its doors to some of the hundreds of state-licensed marijuana businesses in Colorado.” It didn’t go well.
Still though, the legal pot industry is forging on regardless.
From Convergex’s “Beige Book of Pot” ‘on Monday (with our emphasis):
Our most recent survey showed even more progress among our contacts’ stores, and demonstrated the natural evolution of a maturing industry. Here are our findings from the interviews we conducted last week:
Evidence of a potentially large change in India’s banking system from Credit Suisse and Neelkanth Mishra’s India markets team:
Even within bank loans, which are losing share to bonds in corporate borrowing, [public sector, or PSU, banks] are losing share to private banks, being short of capital. In this environment, by allocating just Rs80 bn for PSU bank recapitalisation in the FY16E budget (half that of the previous year, and the lowest after FY10), the government has shown willingness to let PSU banks fall in relevance, and not perpetuate moral hazard by bailing out weak banks. This is a remarkable and unexpected change in stance, given the potential advantages in micro-managing three-fourths of the bank lending space in India.
And lo did the wails of certain politicians rent the sky. Read more
That was our takeaway from reading Bill Dudley’s speech at the “Workshop on Reforming Culture and Behavior in the Financial Services Industry”.
His thesis is that skewed incentives in banks and other financial firms encourage excessive risk-taking and even outright illegal behaviour. Losses from wild bets that go badly tend to be borne by shareholders and the rest of society, while the gains are often hoarded by the mid-level individuals making the trades. There is also a timing issue, where a trader can collect a bonus today for engaging in an activity that appears profitable in the short-term but has a high likelihood of catastrophic failure in the medium term. Read more
There was no bald supervillain stroking a white cat, but other than that the City of London hosted a conspiracy theorists’ perfect scenario yesterday: a meeting organised by the Rothschilds, sponsored by the Rockefellers and with managers of $30tn, or more than a tenth of all financial assets worldwide, in the room. Even the British royal family was represented, essential for any decent conspiracy, although usually Prince Philip is preferred to the Prince of Wales.
Perhaps there were shape-shifting reptilians present, as per David Icke. But if so, they were keeping their heads down: rather than discussing how to rule the world, the focus was on “inclusive capitalism”. Read more
The Bank of England is perhaps a little late getting around to this explanation of money creation and a debunking of the money multiplier theory… but that really doesn’t mean it shouldn’t get a wide reading.
Do click through for the full thing and we’ll put some tl;dr fodder below the break:
It’s bad enough having the most expensive bank bailout around. But not getting official recognition for it? Unbearable!
Luckily for Ireland, there’s a concerted effort underway to right that wrong… (h/t Nama Wine Lake) Read more
It’s bad enough finding out that you’ve been made redundant when your pass fails to let you in to the building. But finding out that you’ve been sacked and replaced by a computer (which has more or less made your skills redundant)? That’s even worse.
So spare a thought for David Gallers, former head of CDS index trading at UBS, who was let go last week, to be replaced by snazzy new algo. Read more
Here’s a talking point: “Socially useful banking.”
As luck would have it, Lisa Pollack has been invited to chair a discussion on this very topic, featuring none other than FT Alphaville favourite, Andy Haldane. (Mr Haldane is the Bank of England’s executive director for financial stability but you knew that.) Read more
John Mann, the battler from Bassetlaw, is back with the results of his very own banking inquiry.
The Labour MP set up the alternate inquiry after expressing his displeasure at the omission of fellow committee member Andrea Leadsom and his good self from the specialist Libor inquiry because they were “too outspoken”. The words “whitewash” and “farce” also made an appearance: Read more
Here are some charts we knocked up (in our usual MS paint, so excuse the pixelation) to try and explain why the banking system’s biggest problem may lie in ‘negative carry’ — a phenomenon that would make investment-focused lending unprofitable, pushing the onus instead on predatory-profits extracted from economically destructive practices.
We begin with the following (click to expand): Read more
There are many gems in the annual report of the Bank of International Settlements that came out on Sunday. One of the most intriguing is a trail which leads to an actual estimate of the cost to society of scientists becoming hedge fund managers.
The trail starts at a section about debt sustainability across a number of countries. It notes that elevated levels of debt got us into this crisis and the situation still hasn’t improved for many countries. In fact, for some countries, the debt burden of the private sector has gotten even worse. Check out the last row of these charts on debt service ratios (looking at the red lines): Read more
It’s a commonly-held belief that the bailout of Spain’s banks won’t be sufficient to solve the country’s problems. It will increase the government’s borrowing, and may not be large enough anyway.
The real solution is
fiscal banking political some kind of union. See if you can spot one of the barriers to moving forward with that: Read more
It has come to FT Alphaville’s attention that the NYMag is admirably trying to completely prepare the latest crop of would-be bankers for their summer sojourn as interns.
For those in NYC, there is advice on where to live. For those who haven’t clocked that working at a bank involves dressing up in a suit and not having a ridiculous haircut, there’s advice on what to wear and appearance. Finally, there’s advice on what to do, and what most definitely not to do, inside and outside the work environment. Read more
Banking in Europe boomed upon the creation of the euro and the global expansion of credit in the 2000s. In the US, banks were also riding high on strong assets growth and accompanying increases in market capitalisation. Cross-border claims also climbed as banks sought to grab an even bigger share outside their domestic markets.
Things have since changed. Read more
A particularly eagle-eyed FT Alphaville reader noticed this when strolling in the heat of Miami Beach:
Time for more BIS-timates of international banking activity — this time looking at developments in the deleveraging turn among eurozone lenders in late 2011.
These stats from the Bank for International Settlements go up to the end of December. Predictably they show a massive pullback in credit throughout the banking system with Europe and the eurozone leading the way. Read more
Royal Bank of Scotland is to cut an additional 3,500 jobs as the state-controlled bank rapidly shrinks its investment banking activities in response to the worsening economic outllook and wide ranging reforms of the banking sector due to take effect before the end of the decade, the FT reports. Stephen Hester, chief executive, on Thursday outlined plans to restructure RBS’ wholesaling or investment banking operations into two divisions and withdraw from activities such as cash equity broking and merger and acquisition advisory work that were aggressively expanded by former disgraced chief executive Sir Fred Goodwin. Risk weighted assets, under Basel III regulatory definitions, will be shrunk to £150bn from £225bn under the restruring plan. The bank will continue to operate in the fixed income and debt raising markets where it has a strong position but reduce its dependence on wholesale funding markets which have frozen up in the last three years. Since taking over in 2009, Mr Hester has shrunk RBS’s balance sheet by £600bn following the disastrous acquisition of Dutch bank ABN Amro in 2008 by Sir Fred, which forced the bank to seek a government bail-out.
Andy Haldane’s latest speech is a coherent, logically argued history of modern banking that ends with four intriguing policy ideas. The Bank of England’s Executive Director, Financial Stability, is always worth reading but his Wincott Annual Memorial Lecture, delivered on Monday evening, is the best introduction to his views on banks.
The FT’s Martin Wolf includes a cogent summary of Haldane’s proposals as part of his formal response to the speech, highlights of which are available on his blog. Read more
Ireland’s stricken banking sector will require €24bn in additional capital, pushing the total cost of the government’s rescue to about €70bn (£62bn), according to the country’s latest banking “stress tests”, reports the FT. Also on Thursday, Dublin announced a radical shake-up of the industry aimed at restoring confidence in the troubled sector, which remains dependent on the European Central Bank for funding. Allied Irish Banks, which had been told to raise an additional €5.3bn, must now raise €13.3bn. Bank of Ireland must raise €5.2bn, Irish Life & Permanent €4bn and Educational Building Society €1.5bn. Essentially, says the WSJ, Ireland is on track to nationalise its banking sector, belying politicians’ claims that the tests are the final episode in the country’s banking crisis.