Showing posts from June, 2013

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Mortgages are dangerous beasts

Barclays is complaining. The Prudential Regulation Authority (PRA) is proposing to test the bank's ability to comply with a proposed new regulatory target - the leverage ratio.

In corporate finance, the leverage ratio is the ratio of equity to total debt. But in the banking world, the leverage ratio is the ratio of equity to total assets. It is in theory a simple measure, although different accounting standards do make a difference to its calculation - for example, US GAAP and IFRS netting rules for derivative exposures are different, which leads Simon Johnson to make the mistake of claiming that Deutsche Bank's leverage ratio is too low relative to US banks, when actually under US GAAP it is rather good....However, I digress. The capital ratio, by contrast, is the ratio of equity to risk weighted assets. Risk weighting reduces the value of a particular asset or asset class in the capital ratio denominator: unsecured risky loans are weighted at 100% (i.e. the denominator inclu…

Financial dislocation

My latest post at Pieria considers, among other things, the recent BIS report on the global economy and comments from the Archbishop of Canterbury on the future of banking:

"The conventional view of the financial system is that it acts as an intermediary function, converting the money created by central banks into a form that can be used in the wider economy and circulating it through lending and deposit-taking. The unconventional monetary policy instruments that have been used by central banks to reflate economies since the financial crisis (and in the case of Japan, for much longer) make use of this model. One way or another, the additional money created by central banks was supposed to find its way out into the wider economy, stimulating new investment, creating jobs and generally increasing economic activity.

But this isn't happening. Economies in the developed world remain flat, while the additional money created by QE has gone to inflate asset bubbles and increase infla…

QE myths and the Expectations Fairy

There are perhaps more myths about QE than almost any other monetary policy instrument. Here are five of the most pernicious QE myths:

Myth 1: QE raises inflation. Despite the considerable evidence that it does nothing of the kind, people still persistently believe that it does - that "eventually" inflation will come. This is because of the widespread misrepresentation of QE as "printing money". Numerous people have painstakingly explained what QE is and how it works, but inflationistas aren't listening. To them, QE is printing money, and everyone knows that printing money causes inflation. (That isn't necessarily true either, but as I said, they aren't listening). An alternative view proposes that because QE props asset prices, eventually the increase in asset values would feed through into an increase in the money supply as asset holders take profits and spend the proceeds, increasing inflation. This is perhaps more reasonable, but again there is littl…

A broken model

My latest article at Pieria is on the contradiction at the heart of banking:

"In my article on the slow death of banks, I suggested that banks maintained on life support would eventually become redundant as new forms of financial intermediation took their place. This is the first of two posts in which I discuss what those new forms might look like.

The key change that we are seeing is what we might call "disintermediation" - flight of both lenders (depositors) and borrowers from traditional deposit-taking lenders to other types of financial intermediary, many of them specialists in particular aspects of financial management networked to other providers that do different things. This has already happened to a large extent in the US, but the UK and European models of banking are founded on universal banks and it is difficult for many people even to imagine what a banking system deconstructed into its component parts looks like. But when you break down the traditional bankin…

In the countries of the old

Germany is exporting people.

Well, Eurozone countries exporting people is hardly news. But Germany isn't exporting the same sort of people as other Eurozone countries. Other countries are exporting their young and their skilled. Germany is exporting its old.

Economically this makes complete sense. Germany has a lot of old people and a relative shortage of the young & skilled. So it imports young & skilled people and exports old ones. After all, exporting old people is surely better than killing them.

There's nothing new about this, of course. Britain has been exporting old people for years. Relatively well-off pensioners like to retire to the sun after years of tolerating British weather. The southern countries of Europe contain substantial populations of expatriate Brits, many of them retired and living on savings. The economic collapse of the southern European states has taken its toll on them, of course: many British retirees in Cyprus lost substantial amounts of mo…

Under the radar

This is the interesting story of how the Co-Op Bank got itself into a terrible mess without anyone noticing.

The Co-Op Bank was originally created by the Co-Operative Group, a mutually-owned retailer, primarily but not exclusively to serve the needs of its members. It painstakingly created a brand image around ethical banking and customer service, and aimed to occupy a small unique niche in the UK's high street retail banking landscape. To describe it as a "mutual" in the same way as a building society is misleading. It is not. It is a wholly-owned subsidiary of a mutual, and it is a bank. That is in theory a significant difference.

But in the run-up to the financial crisis, the differences between banks and building societies had become increasingly blurred. Many building societies had converted to banks - floating themselves on the financial markets - and in turn been swallowed up by larger banks. And many of the remaining building societies were acting much more like …

The zero-sum trade in people

The problem that I identified for the Eurozone in my previousposts is already well-documented on a smaller scale within countries - migration from rural areas to cities. And as various people have pointed out, we are also seeing it in the US and UK, which are currency unions. It's also a particularly worrying feature of the Baltic states and other Eastern European members of the European Union. In short, it's not just a problem peculiar to the Eurozone.

The theory behind free movement of labour runs as follows. Consider countries within an economic union  where there are no legal barriers to the movement of people. When a country undergoes internal devaluation which causes wages to fall and increases unemployment, the result is migration of the young, able and skilled to other countries where there is more work and higher wages. We can regard this as export of labour, and the countries receiving the migrants can be said to be importing labour. 
We assume that importing countries…