The Never-Ending Story: Europe’s Banks Face a Frightening Future
bloomberg.com
bloomberg.com
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.
>> 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?
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...
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.
Counter example: an iPhone.
There are a lot of examples like this.