The US government’s not-so-secret plan to break up the banks?

Bernie Sanders, US Senator and presidential candidate, has introduced legislation to force the biggest banks to break up. It probably won’t pass, but there’s a chance Sanders could still achieve his goal if regulators are assiduous in demanding credible “living wills” — plans systemically important lenders must draw up to show they could be wound down without blowing up the financial system.

When we thought about this piece of the Dodd-Frank Act in the past we were sceptical that, in the heat of the moment, any government would risk an untried plan to impose losses on creditors rather than err on the side of bailouts. Surely the exercise was a waste of time and scarce regulatory resources. But a recent meeting with some senior American financial regulators made us think there could be a deeper logic at work. Read more

The financial sector’s diamond age

In Neal Stephenson’s 1995 sci-fi novel Diamond Age — a story that explores how the world might be set up if nanotechnology and replicators make everything abundant — there is still room for commercial banking.

But banks don’t operate as they do now.

Take as an example Stephenson’s imagineered Peacock bank.

This is an institution where a line of credit can be secured only if a credit card is implanted directly into the borrower’s body directly. Different banks in Stephenson’s book vary on what part of the body they use, but embedded somewhere it must be. Once in place the borrower can “buy” anything he wishes just by asking it because the bank can monitor them diligently and share that information. Read more

Iceland’s grand monetary experiment?

One of the oddest things about the aftermath of the financial crisis is the extent to which things haven’t changed.

Yes, there are plenty of new rules, and stress tests, and of course there are more fines for wrongdoing, but the basic structure of the financial system doesn’t look much different from before it blew up. There is still plenty of money to be made (and lost) issuing short-term “safe” debt to buy long-term, illiquid, risky assets. Lenders still exacerbate the cycle by increasing their leverage when asset prices rise only to cut back on lending when the economy sours. And everyone knows that taxpayers are still on the hook when things go bad, which acts as a massive subsidy for the financial industry. Read more

How to eat a banker’s lunch

Bruce Packard over at the Lafferty group has an upcoming report on the fintech disruption that’s about to hit the traditional banking sector.

As he notes, most of the corporations vying for a slice of the action don’t look much like traditional banks and many don’t even have banking licenses. But they do offer substitute products that have the potential, he says, to harm bank margins.

In Packard’s view, even though new entrants have been trying to disrupt old banks since the 90s, banks find themselves in a vulnerable position today because their opaque price structures and overall reliance on cross-subsidisation techniques don’t necessarily do them any favours when it comes to defending market share. Read more

What will P2P lending look like 5 years from now?

One of the silver linings of the financial crisis has been the growth in alternative ways for people to raise money: the crowd-funders, the individuals who sell equity stakes in their future earnings, the private equity firms lending to small and medium businesses shut out by the big banks, and of course the peer-to-peer (P2P) lending platforms, among others.

It isn’t yet clear how much of this boomlet in financial creativity is a structural change or a temporary response to the combination of chastened banks and ultra-low real rates. Either way, the big banks have left many profitable niches open to smaller competitors that focus on origination and then distribute loans directly to investors. Read more

Negative rates as global cash burn

As Paul Krugman always likes to recount, strange things happen at the zero bound. Macroeconomics gets weird. Liquidity traps prevail. And a whole slew of paradoxes come into being.

And that’s largely because below the zero bound things get even stranger still.

What you think should happen, doesn’t, and what you think definitely won’t happen, does. Furthermore, negative interest rates don’t just kill off the traditional point of banking, they encourage bad incentives and dubious market practices for all purveyors of capital. Read more

NIM decay *alert*

About time we familiarise ourselves with a new three-letter acronym: NIM. It’s bank parlance for “net interest margin”. And all you need to know about NIM is that once you strip out all the other stuff banks do after lending, it’s probably the best measure we have of how profitable a bank’s core business is.

The problem these days is that a negative carry universe doesn’t sit well with NIM. Not only are you having to pay people to borrow from you, unless you’re particularly well funded or in the banking elite, you’re probably having to borrow at more than zero. So, unless you’re a bank that has a habit of err, creating false markets or artificial scarcities — which we know has been severely constrained in the new post-crisis regulatory climate — NIM compression is a bit of a big deal.

And small surprise, bankers are beginning to worry, especially now that negative rates are a Eurozone-wide thing. (FWIW FT Alphaville’s “negative carry” tag takes that concern back as far as 2012.) Read more

Why banking got out of control in the digital age

Could the real cause of today’s financial malaise have less to do with greedy bankers, bad regulation and poor monetary policy, and more to do with the effects of the information technology age on banking?

That at least is the argument proposed in a new book, “The end of banking – money, credit and the digital revolution” by Jonathan McMillan, a collective pseudonym for two authors who are keeping their identities secret, but who hail from the world of banking and academia.

Not to say the financial system was free of instability before the IT age, it’s just that the way in which the instability was dealt with was entirely different. Read more

The real disruption at the heart of banking

The FT’s John Gapper follows up our mythbusting finance 2.0 post with some extremely wise points on what technology land is missing when it comes to “disrupting” banking.

The key point being, banks have already been disrupted! There’s not much positive value left to transfer, unless, of course, you’re prepared to work in the shadows or outside the regulatory climate that has been especially devised to segregate the sort of risk that is still intolerable to the system:

Mr Andreessen believes non-banks will manage to work around regulations. There may be something to this – it is striking that my energy supplier offers a higher rate of interest on deposits than my bank – but neither regulators nor the public will tolerate shadow retail banking for long if something goes wrong, as it tends to do

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Banking will never know a more disruptive force than Excel, say bankers

We think Deutsche Bank’s IB analysis team may be demonstrating some wishful thinking when it comes to their industry’s exposure to tech disruption in the next 10 years:

Tech disrupts, absolute tech disrupts absolutely. FX has been the laboratory for tech disruption. The early 2000s saw the advent of electronic trading to the largest market in the world for clients. Since then spreads have collapsed by 85%. Volumes have risen to make up for some of the spread compression, but the tale is cautionary. Rates, and to some extent credit, will likely get jolted by technology and will see a structural fall in revenues. On the other hand, advisory services such as M&A would be unaffected. The last tech disruption was the use of the spreadsheet in the 1970s/80s, it is difficult to see what new technology will affect an advisor’s job as much as that.

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The Fed as universal banker

The Federal Reserve’s June minutes are out and as usual offer good insight into the FOMC’s thinking when it comes economic confidence and recovery (more positive) as well as its opinion on rates (still dovish).

But they also reveal a new preoccupation with matters related to exit strategy and financial plumbing.

Here’s the section we’re referring to (H/T David Beckworth)

While generally agreeing that an ON RRP facility could play an important role in the policy normalization process, participants discussed several potential unintended consequences of using such a facility and design features that could help to mitigate these consequences. Most participants expressed concerns that in times of financial stress, the facility’s counterparties could shift investments toward the facility and away from financial and nonfinancial corporations, possibly causing disruptions in funding that could magnify the stress.

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The cronut-ification of banking

Tracy Alloway hosted a session on the “death of a financial intermediary” at last week’s Camp Alphaville.

The discussion featured Renaud Laplanche, CEO of Lending Club, Cormac Leech, bank analyst at Liberum Capital, Krishan Rattan, founder of Voltaire Capital and Matt Levine, Bloomberg View columnist.

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Goldman Sachs on coping with negative rates

There’s a good note from Goldman Sachs this week on the implications of negative rates at the ECB.

But given that many of the points echo much of the discussion already featured on FT Alphaville for years, we’ll cut straight to the interesting bits.

Goldman agree there isn’t anything conceptually special about negative rates because bond math works with negative numbers (as it’s focused on real returns). However, they add, there is a specific reason why negative rates might have qualitatively different macroeconomic implications, unless controls on cash were put in place with them: Read more

DBW: ECB negative deposit rate edition

Citi’s Hans Lorenzen contemplates the implications of a possible negative deposit rate at the ECB.

The relevant DBW (death of banks watch) quote is this: Read more

Death of Banks Watch

Introducing a new series tracking the slow death of the traditional investment banking model (if not banking itself).

Just to round up the recent spate of gawd awful Q1 results from the banking sector: Read more