Financial Stability News

News about financial stability, central banking and theory of money

Monthly Archives: February 2012

Reading-list on the financial crisis

Gorton and Metric has just submitted a review (for the Journal of Economic Literature) on the essential readings about the financial crisis. They start with this observation:

The first financial crisis of the 21st century has not yet ended, but the wave of research on the crisis has already exceeded any single reader’s capacity, with the pace of new work only making this task harder. Many professional economists now find themselves answering questions from their students, friends, and relatives on topics that did not seem at all central until a few years ago, and we are collectively scrambling to catch up.

Some would argue that these missed topics have been around for years, and that they in fact was the centerpiece of the theories to Keynes and Minsky, just to name two.

For an overview of those that saw the crisis coming, you can read these two short blogs, from Matias Vernengo from Utah University and Gerald Epstein from University of Massachusetts – Amherst. They both give a nice overview and a different perspective.

Epstein reflects on why mainstream goes from crisis to crisis without learning, and notes that

As Economist Phil Mirowski pointed out to me, the problem is that, like the protagonist in the movie Memento , who has no memory but is trying to solve the mystery of his wife’s murder, and has to remind himself every minute about what happened the minute before by writing notes and even tattooing himself , mainstream macro-economists’  write themselves articles and books after every crisis and they then promptly forget what they wrote (no tattoos as far as I know).

A good illustration of this effect is the latest speech (very good one) by deputy governor in Bank of England Paul Tucker, who readily admits that the lessons he and Mario Draghi learned after the Asian crisis (and wrote down in a report then), that balance sheets matters and should be closely monitored, was forgotten and need to be re-learned. At least he is honest enough to admit it.

OECD: A new Basel III is required

A senior OECD official claims that the risk weights of Basel III should be scrapped:

a more fundamental rethink of the Basel framework for determining minimum capital requirements for banks is needed. Basel III is just a quick and dirty repair job, consisting of patches applied to fix things that went visibly wrong during the past four years. But it involves no reconsideration of the structure of a fundamentally flawed system that is opaque and far too complex. The risk weight system at the core of the approach for calculating capital charges needs to be scrapped in its entirety and a more coherent approach to exposures arising from derivatives, notionally in excess of $600 trillion at the end of 2010, must be found.

Read the rest at VOX

Reading today

Mark Carney: A monetary policy framework for all seasons 

Al Gore: A Manifesto for Sustainable Capitalism

South Korea posts rare current account deficit : Exports to Europe fell 38 percent in January year-on-year compared to a 20 percent fall in December.

Evaluating the Impact of Fair Value Accounting on Financial Institutions: Implications for Accounting Standards Setting and Bank Supervision

The overall conclusion based on the evidence presented is that implementing fair value accounting more broadly may not necessarily provide financial statement users with more transparent and useful reporting.

Ben Bernanke and the zero bound

Very interesting NBER paper by Ball



The beauty of being TBTF

Sometimes in the US you get these angry blog post with “jail the bankers”. There are obvious some folks out there who are angry if their house has been foreclosed, but this attitude is spread much wider, and not just with “radicals”. The financial crisis commission and the Senate Investigative Committee Report (and many others) have documented tons of evidence of fraud and malpractice. But despite all this,  few bankers have gone to jail. The Justice department and SEC has preferred to settle cases, and only the opposition by some brave judges have prevented a clean bill of health for the financial industry after the crisis.

The latest development is the settlement with the banks over “robo-signing”, a practice used in the heydays of the property boom, to make quick loans with little documentation. Now the Obama administration has signed an agreement with the industry that settles all claims and nobody goes to jail.

Simon Johnson is upset by this and discusses why the administration consistently avoids confrontation with the financial industry. A good read and it also gives some insight into the politics around the financial sector in the US.

Moderen Money Theory – A Primer

You may not have heard about it, but it is gaining traction. Modern Money Theory is advocating deficit spending and wants the Government to issue more debt. Money is “state money”, so a sort of Chartelist position. Professor Randell Wray of University of Missouri-Kansas City and Levy Institute is one of their main proponents, and they have some very active blogs, see Naked Capitalism and New Economic Perspectives. The “family tree” of the school is included in this recent article in the Washington Post.

This article in the Post gives a good overview of their main views, whereas this post from the FT today is an indication that their views are gaining influence in mainstream media. For  more info go this recent post by Prof Wray.


The EU Core remains massively exposed to the PIIGS

This table from Credit Suisse has recently updated the bank exposure (by country) to peripheral sovereign debt that shows just how massively dependent each peripheral nation’s banking system is on its own government for capital and more importantly, how the core (France and Germany) remains massively exposed (in terms of Tier 1 Capital) to the PIIGS.

See Zero Hedge for the full story.


Who should be the next Governor of Bank of England?

The banking editor of Financial Times has an interesting piece today about who should be the next Governor of BoE when Mervin King retires in June next year. He quotes rumors that it is time for a private banker to enter the bank, after several periods with internal candidates. Two hot shots are both from HSBC, not surprisingly the late chairman Stephen Green (now trade minister and Lord) and his Douglas Flint, his replacement at the bank. Green should be well qualified after having written the excellent book on “Good Value: Reflections on money, morality and an uncertain world“.

However, the favorite seems still to be the current deputy governor Paul Tucker, who is a formidable internal candidate, with broad experience in both the price stability and financial stability part of the bank. Being an insider could be a handicap, and it is still too early to tell which are the preferences of the current government.

It is a key position, not least due to the intellectual leadership the Bank of England have been able to maintain over the years. By this time next year, we should be able to know more.

Volcker and his critics

There has been quite some press recently on the Volcker rule, in part related to the deadline for comments last week. The Financial Times carried a comment from Volcker himself where he rejected the claims from some capitals (JP, CA, EU among others) that the rule would sap liquidity from their sovereign bond markets.Today a chairwomen from the Institute of International Bankers responds.

A complete run on the arguments for and against the Volcker rule is given by Simon Johnson (former Chief Economist of the IMF) in this recent NY Times post, which also includes several relevant references. He notes that if anything, the bankers are getting away cheaply in the proposed new regime, which isn’t even finished yet.

Among those that have submitted comments are also the Occupy Wall Street subsidiary “Occupy SEC”, which have provided a well balanced and constructive comment paper of 190 pages! According to this report, it has been accomplished as a huge workshop,  with some of the participants clearly being well informed about the intricacies of Wall Street. You can find their comment letter on their web site.

Small banks are back

There has been some positive press about the beauty of small banks recently. Gillian Tett observed that small banks in the US are upbeat and doing well, and Ben Bernanke addressed the same topic at a recent FDIC conference where he supported their growth and support for small communities.

This is old news to Hyman Minsky, who back in the 90s was a strong advocate for smaller “Community Development Banks”. He criticized the TBTF long before the recent crisis and argued that small, locally based banks would be better for growth and investment. It’s interesting to note that his position is gaining traction, even in the Fed.

For those interested, there is a PhD thesis out by Morten Josefson of Norwegian Business School BI that actually proves that small owner-less savings banks in Norway are doing a better job (more profits) than their larger commercial bank peers. Quite interesting indeed, and as he notes contrary to the main findings of finance theory. His conclusion (on page 34 of the first paper: Stakeholder rights and economic performance: The profitability of nonprofits) is modestly stated as follows:

Our results do not support the idea that performance is higher the more profit-dominated the firm’s objectives and the stronger the ownership rights of the capital providers. After having accounted for differences in risk, size, and unobservable firm and industry effects, we find that owner-less firms are not outperformed by firms owned fully or partially by stockholders.

Quite some conclusion!

Where is the client money after MF Global? – Part II

As a followup on my post on the client funds after MF global on Tuesday, this new post from Zero Hedge today gives more detail. Somewhat tedious, but also very important, and of much relevant to the ongoing redesign of bankruptcy law and resolution regimes for financial institutions in general.

Until the Congress rectifies the current bankruptcy laws and allows trustees to claw back payments made to secured lenders and other counterparties, there is no reason for any rational personal to allow a broker dealer to hold securities in custody.  All of this business will go to the big banks, who will be just as happy to see the smaller dealers thrown into the meat grinder.

The uber-privileged position of derivatives in the 2005 Bankruptcy law was supposed to secure the payment system and therefor financial stability. In fact the crisis and this MF Global bankruptcy has shown that customers and markets are worse off as a result, and pressure are building for change:

Now why, you may be wondering, did the lobbyists from the big banks push Congress to expand the safe harbor for secured parties in the bankruptcy code?  As one former Bush II Treasury official told me last night: “The canard the banks used to get 546 amended was that overriding the trustee’s normal avoidance powers was said to be necessary to limit systemic risk and ensure access to credit.  God forbid the banks be required to do some due diligence.  As the bailouts showed, the systemic risk was in fact enhanced by the changes to the bankruptcy code and the illusion of superior claims to collateral, thus increasing leverage.”