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