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!

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.

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.

Consumer Credit and Payment Cards

ECB has posted some new WP from a retail payment conference held in May this year. This paper explores why people still use so much cash, despite other and cheaper electronic alternatives are available. They find that the liquidity monitoring is better done with cash, i.e. you know what your remaining balance is, and that this function of cash is important for several liquidity pressed groups of the population. Still, they wonder about the large cross-country differences, where cultural tradition also plays a role. The paper should be of interest for those working in the payment system area, but it has also a greater interest for us all, since payment patterns shape the way banks do business and the way we as consumers adapt.