Financial Stability News

News about financial stability, central banking and theory of money

Monthly Archives: January 2012

Small banks are good for the economy

This is a really interesting story about a guy who feels strongly that smaller banks are beautiful and is starting to invest on that basis. As Minsky  noted long ago, Community Development Banks (eller spare banker på godt norsk) are good for the economy, not Too-Big-Too-Fail banks.


For and Against the Volcker Rule

New York Times carries a story today that the so-called Volcker rule, that would bar US banks for carry out proprietary trading, could seriously harm the liquidity in foreign bond markets and drive borrowing cost up. This is not something the European countries want just now. Even Canada is upset and claims the rule would be a breach of the North-American free trade agreement.

The rules are out for hearing, based on a rather inept proposal from the Treasury with as many open questions as there are pages (around 300). This prompted one of the sponsors of the bill, senator Merkley, to tell the regulators recently to do a much better job of drawing up clear, bright lines so as to avoid another repeat of the financial crisis of 2008. In his words, the Volcker rule is about taking deposit-taking, loan-making banks out of the hedge fund business. Hedge funds should be able to make bets, but not with taxpayers money.

If you want another view, look up this post by our friend Doug Elliot at Brookings. In a testimony before Congress he claims the the Volcker rule is fundamentally flawed. This is basically because the current proposals try to regulate on the basis of (speculative) intent, which according to him, will be near impossible. He also notes that the blurring between traditional lending and securities lending have made the securities business an integral part of banking. Preventing banks from holding securities inventories would be paramount to ban banking, according to him.

With the FDIC, Fed and Treasury all against the new regulation, and now foreign government adding pressure to delay, my guess is it will take some time before the Volcker rule is enacted in the US.

Tightening the Limits on Big US Banks

On December 20 the Federal Reserve issued new proposals for tighter regulations of US financial institutions. This blog post from Harvard Law School brings the essence of the proposals. Their conclusion is that the effect will probably be small for large US banks that already have beefed up their capital, but that some of the new non-bank SIFIs may find it harder to comply with the new rules.

Shipping Loans Go Bad for European Banks

This post shows the free fall of the Baltic Dry index in 2012. Could be “canary in the mine” warning about harder times to come. Last time the index has been this low was back in the midst of the credit crisis. With China rolling over and lots of new tonnage coming along, the situation could become bad for large banks with lots of shipping loans. Watch out.


Bard College starts MBA in Sustainability

The new program will start this fall in NY City. With several intensive week-end course spread over two years, candidates will take on challenges facing business today in the environmental areas. Most of the faculty comes from Bard College, but is supplemented with sustainability experts working in business around the US.

Roubini Warns Of Tough Times Ahead

Dr. Doom is predicting tough times ahead in interview from Davos. Projections could be worse than the IMF’s. The debt overhang may lead to a decade of slow growth, according to Roubini.

EU Red-Flags ‘Volcker’

Latest news from Davos where commissioner Barnier stated that EU (like Japan and Canada before him) is concerned with the fallout from the introduction of the Volcker rule in the US on foreign debt markets. As noted in earlier posts, the administration in the US is not to eager on the Volcker rule either, which tries to prohibit trades done with the intent of making money. So, while the UK Treasury seem intent of going ahead with its variant of the Volcker rule (ring fencing the retail part of big banks), the US Treasury (and US banks) is getting surprising support for delaying the policy measure. The proposal is still out for hearing, but given the strong international reaction, my guess is it will remain out for hearing for quite some time.

The collateral squeeze

As central banks immobilizes more and more collateral through their liquidity support operations, banks are scrambling to find new ways to repo; where will it end?

US plan sponsors look to alternative repo – Finadium | securities lending latest news |

Mervin King wants fair pay

Short speech by Bank of England Governor Mervin King published yesterday. He notes at the end that the legitimacy of the market economy will be challenged if rewards go disproportionally to a small elite. It is important that “distribution of rewards is fair”.

Key message of the speech, apart for the above, is

  • There is scope for interest rates to remain low
  • BoE stand ready to provide more liquidity to healthy banks against good collateral should market conditions deteriorate
  • Appropriate supply-side reforms can, by raising income expectations, reduce the impact of  deleveraging on spending

He also notes that net export has increased since 2007 due to a 25% depreciation of the pound sterling, but that further adjusment will depend on the development in the world economy, which is uncertain.

As for the euro area, he notes also the

“imbalances are a problem not just for the debtor countries but for creditors countries too. For each loan incurred, a loan is extended. So if the position of debtors is unsustainable, so is the position of creditors. In practice, this means that large losses will need to be recognized and absorbed”.

It remains to be seen if the Bundesbank gets his advice.

Minsky in the news

Martin Wolf made a very favorable reference to Hyman Minsky’s 1986 book Stabilizing an Unstable Economy in the Financial Times on Monday. See my blog post for Levy Institute, where I notice that Wolf is correct on diagnosis, but short on cure for how to heal capitalism.