>> While American banks appear to have turned the corner since that gut-churning autumn nearly eight years ago, European institutions are girding yet again for another round of restructuring.
The world should not work for the banks. The fact that American banks are now bigger than ever before is not a good thing. We need more banks, more competition in the marketplace. For that to happen the big banks have to first shrink and/or be manually broken apart. Europe's banks may not be happy, but Europeans should be. They are doing what American and the UK want but have so far failed to accomplish.
>> there’s once again a flight to simplicity. That’s what regulators are demanding. And that’s what legions of customers are expecting as startups deliver financial services at the tap of an app.
I wouldn't go that far. The answer to the too-big banks isn't necessarily a new paradigm. A larger number of smaller and more traditional banks offering very traditional services is also an answer. I'm not sure I want any of my banking to ever be "at the tap of an app". I don't take money so casually. Online yes, app tapping no.
Exactly. I wonder how much of this transformation can be emulated in the states; how much people in Congress are paying attention to what's happening across the pond.
>> That month, Deutsche agreed to pay $2.5 billion in penalties to U.S. and U.K. authorities for its role in the Libor rate rigging. (No current or former member of the bank’s management board was implicated.)
It's very hard for me to feel bad for these people.
The core business of a bank is taking a global view on risk. The very idea of maturity transformation (at the heart of what a bank does) relies fundamentally on being big enough that the laws of large numbers come into play.
If we're saying we don't want big banks then we're saying we don't want banks. Maybe you want that - maybe mortgages should be sold directly to investors on the same maturity terms - but it would be a radical change to the way finance works for everyone.
Ideally banks should be done away with as soon as possible, that is for certain. Private institutions that control part of the the money supply in exchange for taking on the risk of evaluating and assessing worthy recipients of credit is something that made sense before there was a supercomputer in everyones pocket. There are now already better alternatives. Replacing banks should be just one example of recovering centralised power for the people by means of technology.
The only role banks fulfill that couldn't easily be replaced by a digital currency is financing speculative investments by providing loans. Unfortunately loans also expand the money supply (and contract the money supply upon repayment/default), resulting in a positive feedback on investment, which can induce instability (i.e. the business cycle).
It would be much better to decouple the money supply from investment. The money supply could be controlled either by a trusted agent (e.g. central bank), or possibly by a built-in stabilization algorithm (an interesting avenue for research), while investment could by financed privately. This would be the best of both worlds.
> "The core business of a bank is taking a global view on risk."
You don't need to own the assets of an economy to take a global view on risk. Anyone with access to financial indicators can do this, whether that comes from government statistics, stock market positions, etc...
I'm not sure I follow you on taking a global view on risk. The core business of banks is connecting people with money to people who need it. Risk management is vital, but they're in the connecting business, not the risk business. (Hedge funds should get paid to hold risk, banks should get paid for brokering connections)
Making a connection inherits risk. On a small scale, a bank loans money to people and then packages those investments into financial assets which it sells to investors who want to buy it. The mortgages HAVE to be packaged otherwise the investor wouldn't have incentive to buy it from the bank rather than directly lending. And the packaging itself has some level of risk since the actions of the buyers or sellers are unpredictable.
I'm not saying its a great thing, just that its the modern accepted role for big banks. If we take them away no one would be able to ACT on their global view of risk. You can have a global view but be too small to act rationally based on it. But that might not be a bad thing, its not like the current big banks are developing the right financial tools...
Ahh - got it. Basically for the real systemic international risks, only global banks can handle them. There is a bid of a tragedy of the commons with independent central banks too. I'm not sure I agree with it in practice though - did the large banks really attack risk systemically? Or did they just line up their bets all in the same direction?
> did the large banks really attack risk systemically? Or did they just line up their bets all in the same direction?
Again they're banks so they don't really line up their bets at all. Like you said, they are mostly making connections. I'm like 75% sure that I'm using the term right if I call them "market makers" when they do their job of making connections. And as market makers, they make money by brokering transactions, even in the abstract sense of the word.
So they can make good markets or stupid inflated markets. A good market is loaning to businesses that want a little boost in growth and packaging that risk for investors. A bad market is lending huge amounts to people while using the house that they are paying off as collateral (sub-prime) and then packaging those assets in a hundred ways and telling your salesmen to push it, making the whole system so complicated that no one knows whats really going on. Most banking actions live in the middle of that.
begin_rant{
Speaking of global risk again. I need to look into it more but the biggest banks play a huge role in making the market in foreign investment especially the relatively new area of "emerging markets". I really think this ends up fucking over small developing economies on so many fronts. * The American/European money crowds out domestic investment, but then at the end of the day when the small country's currency starts inflating (it always does), the debtors owe their debt in dollars which is a terrible situation.
* American/Euro money might suddenly disappear when there is an American market scare. Small countries are so small that a blip on the American market can rock them into a crisis. That's why things that only temporarily shocked large companies and banks in the US changed entire political regimes in Argentina and Indonesia in 2001. Can you imagine an entire country (big ones!) more vulnerable to the market than a single US corporation thats actually being publicly traded?
* Politicians are humans. What inevitably happens is one political party in a country gets tons of under-the-table (with 21st century nuance of course) money by opening their country up to US investment. Monsanto and Rio Tinto and Starbucks move in and no local companies will ever compete again. History has not been written yet but I have a bad feeling this is what Mauricio Macri wants to do all over again with Argentina. Argentina will become a more favored subject nation to the global powers while the Macri family gets rich. He will deal with a few short-term economic problems while sacrificing the future of the nation to exist without the tyranny of globalization.
}
end_rant (excuse me)
You are using the therm "Market Makers" correctly. The key is the banks don't really set the price when they do this. They lend at a price just below what they can sell on the other side. (They can't make money by bucking the markets)
The challenge happens when banks veer from these activities, and start acting like hedge funds. It starts with banks carrying inventory. The slope gets slippery when traders start making proprietary bets on the inventory. Then proprietary desks get created, with Chinese Walls separating them from market makers. And then banks start investing their treasury in AAA securities that seem "risk free" according to ratings agencies....
They believed they were sufficiently diversified. They were prepared for a national housing crash, but not an international housing crash, all their CDS counterparties going bankrupt at the same time (including e.g. AIG who weren't even really related to the housing business at all), and a general recession on top.
That's a common misconception. In reality, banks don't need deposits in order to loan money. As long as they loan at an interest rate above that of the central bank (and they always do), they can borrow reserves from the central bank.
That being said, banks can currently offload loans as securities, which might be what you're referring to. This is a major problem, though, because it incentivizes banks to make bad loans, and then to try to hide the fact that they are bad loans.
There are trade-offs. Banks that hold all their loans to maturity get a benefit in knowledge of their borrower's true credit, but they lose the ability to hedge the idiosyncratic risk of their borrower base. (Example: A local bank in North Dakota that is holding all the recent mortgage loans to maturity may be struggling now)
You make a good point, but it implies that there are two core elements of banking; evaluating risk, and maturity transformation. Plainly, the big banks failed at having a 'global view of risk', to the point that governments bailed them out during the global financial crisis (GFC). What is different about the current situation? And why support a business that cannot honor its most basic function?
As for maturity transformation, perhaps there is a kind of 'paradox of thrift', where individually (or as a single large bank), size is of benefit, but global pools of financial assets and risk lead to crises, again evidenced empirically by the GFC. Perhaps having banks no bigger than, say, 1%-5% of global financial assets would be a useful middle ground.
There's a fundamental tension between mark-to-market capital requirements and the basic functions of banking. I've heard it argued that Lehman would still be in business if they hadn't been required to mark-to-market - that it wasn't their global view of risk that failed, but a panic in the market that sparked a (in some sense irrational) sell-off. And a big reason for AIG's involvement was differences in risk-modelling requirements between banking and insurance. Of course at the same time the reason for those requirements is to prevent a bigger bailout further down the line - like any risky business, we give them a certain amount of rope, but eventually call everything in.
There's no easy answer. The traditional line is that governments should act as a lender of last resort, but charge a penalty rate when doing so, which sounds reasonable to me.
Do we need more competition in banks? We have way more viable banks than say viable mobile operating system makers, or viable desktop operating system makers, or viable search engines, etc. Do those markets lack adequate competition?
What makes you think competitive markets keep entities from becoming "too big to fail?" There are enormous economies of scale in nearly any business. There is a reason there are just a handful of companies left capable of gabbing their own chips. Same with say Amazon and Wal-Mart. The market equilibrium in any moderately capital-intensive industry favors just a handful of huge competitors.
> "The market equilibrium in any moderately capital-intensive industry favors just a handful of huge competitors."
That's why it's necessary to occasionally clip their wings. Even if capitalism left unchecked results in large concentration of power, the role that government plays in regulating these markets is to enable (or at least, should be 'to enable') new competitors to emerge that can compete with established players, in order to maintain healthy levels of competition.
> "I'm not sure I want any of my banking to ever be "at the tap of an app". I don't take money so casually. Online yes, app tapping no."
I'm not sure why convenience takes away the seriousness of what a bank does. It's just a place to store money and invest in the economy, what does it matter how you access the information about your account? For example, what's the issue with a bank like Mondo?
Big banks have horribly dated systems and are bureaucratic to the extreme, but I doubt peer to peer lending will make more than a small dent in the consumer lending market. For a simple reason: banks can lend that much money that cheaply only thanks to a large, cheap and stable source of funding: bank deposits. And there are two types of deposits: current account and savings account.
Current accounts come with the capacity to make payments, and for that you need to be a bank. So the only way the p2p lenders will access this source of funding is by becoming big bureaucratic and highly regulated banks themselves.
Then you have savings account. It sounds like an investment but it's not. It's really a risk free, lazy investment. If the bank makes a loss on its loans, it is not passed on to the depositors. Even if the bank goes bust, and unless you have a very large deposit, your deposit is insured by the State. People who keep money on savings accounts aren't the type who are looking for risk and high returns.
P2p relies on investors actively investing in these vehicles. I don't see how this will be nowhere as large as the deposit base in a country.
On the wholesale funding market, things are different. Investors are active investors and it is much easier to shortcircuit banks and lend to corporations directly. Initially the banks were arranging the transaction, but I expect the investors to increasingly cut the middle man.
And all these articles miss what makes the biggest barrier to entry to the banking market: regulations. A bank would typically employ dozens of people just to read and follow all the regulations that apply to them. Regulations kill their profitability (they have to operate with 3 times the capital base they had in 2007), but also shields them from competition.
I think the whole point of a savings account is that it's not an investment. Thankfully.
Banks don't use deposits when lending out money. They create the loan amount out of thin air. There are regulations as to how much they can do that relative to their assets. Thankfully.
What the economists mean by "creating money" is that people treat deposits as cash, and therefore have the feeling they have cash when they have a positive balance on their bank account, where in reality all they have is an IOY from a bank. But their cash is not in the bank anymore.
This is a common misconception. The reality is that banks lend money at interest rates above what the central bank offers them, meaning they can lend as much as they want irrespective of deposits, and then borrow reserves from the central bank at a lower rate.
> Startups are reinventing the business of retail banking.
Sorry but this is complete bullshit. Both cooperative banks and public savings banks are both bigger in retail than the private banks. Then you still have some special banks like the federal KfW that offers cheap loans for things the government wants to promote.
The whole article actually only concentrates on the private banks and ignores the existence of public and cooperative banks that had significantly less problems in the crisis.
This article has a strong sideline of Banks fear of fintech startups eating their lunch and goes on to cite 2 specific examples of large banks doing things the disruptive way: Chase disbursing loans thru ondeck.com and Deutsche Bank sending its COO to built a totally Digital "startup bank". In reality the culture hasn't changed at all - both in my personal experience as well as others I've talked to. Dealing with mid-level Bank managers is till pretty much a "closed club" game. The attitude seems to be (1) either you get to Series A/B before we talk to you - at which time its too late because the business model for a fintech startup is defined early on -well before Series A or (2) Sorry we just don't deal with startups (and cite some regulatory "grey area" as an excuse). Unless the culture changes down to mid-level ranks Banks will loose big time
34 comments
[ 4.5 ms ] story [ 103 ms ] threadThe world should not work for the banks. The fact that American banks are now bigger than ever before is not a good thing. We need more banks, more competition in the marketplace. For that to happen the big banks have to first shrink and/or be manually broken apart. Europe's banks may not be happy, but Europeans should be. They are doing what American and the UK want but have so far failed to accomplish.
>> there’s once again a flight to simplicity. That’s what regulators are demanding. And that’s what legions of customers are expecting as startups deliver financial services at the tap of an app.
I wouldn't go that far. The answer to the too-big banks isn't necessarily a new paradigm. A larger number of smaller and more traditional banks offering very traditional services is also an answer. I'm not sure I want any of my banking to ever be "at the tap of an app". I don't take money so casually. Online yes, app tapping no.
>> That month, Deutsche agreed to pay $2.5 billion in penalties to U.S. and U.K. authorities for its role in the Libor rate rigging. (No current or former member of the bank’s management board was implicated.)
It's very hard for me to feel bad for these people.
> It's very hard for me to feel bad for these people.
Why would anyone feel bad for them? They got what they wanted (bonuses), and didn't face any negative consequences (jail).
If we're saying we don't want big banks then we're saying we don't want banks. Maybe you want that - maybe mortgages should be sold directly to investors on the same maturity terms - but it would be a radical change to the way finance works for everyone.
It would be much better to decouple the money supply from investment. The money supply could be controlled either by a trusted agent (e.g. central bank), or possibly by a built-in stabilization algorithm (an interesting avenue for research), while investment could by financed privately. This would be the best of both worlds.
You don't need to own the assets of an economy to take a global view on risk. Anyone with access to financial indicators can do this, whether that comes from government statistics, stock market positions, etc...
I'm not saying its a great thing, just that its the modern accepted role for big banks. If we take them away no one would be able to ACT on their global view of risk. You can have a global view but be too small to act rationally based on it. But that might not be a bad thing, its not like the current big banks are developing the right financial tools...
Again they're banks so they don't really line up their bets at all. Like you said, they are mostly making connections. I'm like 75% sure that I'm using the term right if I call them "market makers" when they do their job of making connections. And as market makers, they make money by brokering transactions, even in the abstract sense of the word.
So they can make good markets or stupid inflated markets. A good market is loaning to businesses that want a little boost in growth and packaging that risk for investors. A bad market is lending huge amounts to people while using the house that they are paying off as collateral (sub-prime) and then packaging those assets in a hundred ways and telling your salesmen to push it, making the whole system so complicated that no one knows whats really going on. Most banking actions live in the middle of that.
begin_rant{ Speaking of global risk again. I need to look into it more but the biggest banks play a huge role in making the market in foreign investment especially the relatively new area of "emerging markets". I really think this ends up fucking over small developing economies on so many fronts. * The American/European money crowds out domestic investment, but then at the end of the day when the small country's currency starts inflating (it always does), the debtors owe their debt in dollars which is a terrible situation. * American/Euro money might suddenly disappear when there is an American market scare. Small countries are so small that a blip on the American market can rock them into a crisis. That's why things that only temporarily shocked large companies and banks in the US changed entire political regimes in Argentina and Indonesia in 2001. Can you imagine an entire country (big ones!) more vulnerable to the market than a single US corporation thats actually being publicly traded? * Politicians are humans. What inevitably happens is one political party in a country gets tons of under-the-table (with 21st century nuance of course) money by opening their country up to US investment. Monsanto and Rio Tinto and Starbucks move in and no local companies will ever compete again. History has not been written yet but I have a bad feeling this is what Mauricio Macri wants to do all over again with Argentina. Argentina will become a more favored subject nation to the global powers while the Macri family gets rich. He will deal with a few short-term economic problems while sacrificing the future of the nation to exist without the tyranny of globalization. } end_rant (excuse me)
The challenge happens when banks veer from these activities, and start acting like hedge funds. It starts with banks carrying inventory. The slope gets slippery when traders start making proprietary bets on the inventory. Then proprietary desks get created, with Chinese Walls separating them from market makers. And then banks start investing their treasury in AAA securities that seem "risk free" according to ratings agencies....
That being said, banks can currently offload loans as securities, which might be what you're referring to. This is a major problem, though, because it incentivizes banks to make bad loans, and then to try to hide the fact that they are bad loans.
As for maturity transformation, perhaps there is a kind of 'paradox of thrift', where individually (or as a single large bank), size is of benefit, but global pools of financial assets and risk lead to crises, again evidenced empirically by the GFC. Perhaps having banks no bigger than, say, 1%-5% of global financial assets would be a useful middle ground.
There's no easy answer. The traditional line is that governments should act as a lender of last resort, but charge a penalty rate when doing so, which sounds reasonable to me.
Yes, they certainly do. All of the markets you listed could do with stronger competition.
As for banks, I also think they could do with stronger competition. We should never have any company which is 'too big to fail'.
That's why it's necessary to occasionally clip their wings. Even if capitalism left unchecked results in large concentration of power, the role that government plays in regulating these markets is to enable (or at least, should be 'to enable') new competitors to emerge that can compete with established players, in order to maintain healthy levels of competition.
I'm not sure why convenience takes away the seriousness of what a bank does. It's just a place to store money and invest in the economy, what does it matter how you access the information about your account? For example, what's the issue with a bank like Mondo?
https://getmondo.co.uk
Current accounts come with the capacity to make payments, and for that you need to be a bank. So the only way the p2p lenders will access this source of funding is by becoming big bureaucratic and highly regulated banks themselves.
Then you have savings account. It sounds like an investment but it's not. It's really a risk free, lazy investment. If the bank makes a loss on its loans, it is not passed on to the depositors. Even if the bank goes bust, and unless you have a very large deposit, your deposit is insured by the State. People who keep money on savings accounts aren't the type who are looking for risk and high returns.
P2p relies on investors actively investing in these vehicles. I don't see how this will be nowhere as large as the deposit base in a country.
On the wholesale funding market, things are different. Investors are active investors and it is much easier to shortcircuit banks and lend to corporations directly. Initially the banks were arranging the transaction, but I expect the investors to increasingly cut the middle man.
And all these articles miss what makes the biggest barrier to entry to the banking market: regulations. A bank would typically employ dozens of people just to read and follow all the regulations that apply to them. Regulations kill their profitability (they have to operate with 3 times the capital base they had in 2007), but also shields them from competition.
Banks don't use deposits when lending out money. They create the loan amount out of thin air. There are regulations as to how much they can do that relative to their assets. Thankfully.
What the economists mean by "creating money" is that people treat deposits as cash, and therefore have the feeling they have cash when they have a positive balance on their bank account, where in reality all they have is an IOY from a bank. But their cash is not in the bank anymore.
Sorry but this is complete bullshit. Both cooperative banks and public savings banks are both bigger in retail than the private banks. Then you still have some special banks like the federal KfW that offers cheap loans for things the government wants to promote.
The whole article actually only concentrates on the private banks and ignores the existence of public and cooperative banks that had significantly less problems in the crisis.
https://en.wikipedia.org/wiki/Banking_in_Germany#Market_over...
Counter example: an iPhone.
There are a lot of examples like this.