Coppola Comment

Yesterday the European Banking Authority (EBA) published the results of its "stress tests" on European banks. The full report is here for those with time on their hands! The "stress tests" were designed to test the ability of European banks to withstand economic problems such as recession. Losses arising from difficult economic conditions should be absorbed by shareholders' equity (common stock) and retained earnings - what is known as "Core Tier 1 capital" (see my blog explaining this, Reserve Confusion ).  Banks have historically held very little Core Tier 1 (CT1) capital, so in the financial crisis they had little ability to absorb losses, and taxpayers were forced to provide funds to many banks to prevent creditors (bond holders and retail depositors) losing their money.  Financial regulators around the world have since required banks to hold a higher percentage of risk capital, particularly CT1, against risk weighted assets. The European stre

Hot on the heels of Johann Hari's exposure as a plagiarist - and comments from many that "he's not the only one" - comes the disorderly demise of the News of The World amid allegations of phone hacking. And again, comments from many that "they're not the only ones". Think back a few years. Do you remember the MPs expenses scandal? The initial belief from Conservatives that "it wasn't any of us" only to discover that yes, it was some of them as well? Suddenly policitians could not be trusted with the nation's finances. Corruption was exposed. Now look at the financial crisis of 2008. I know I keep singing this tune, but what was exposed was excessive risk-taking and fraud in retail banking. Traditional, safe retail banks suddenly could not be trusted with our money. Admittedly considerable attempts have been made to blame investment banking for the crisis, because that's always been a bit dodgy, hasn't it? But the reality, th

On my blogpost "There's no more money " I stated that one reason for the Bank of England's QE programme was to stave off deflation . There has been one comment in response:                                                 "Why is deflation bad?" It's an amazing question. My immediate reaction was "well, obviously it is".  And then I thought, "well, actually it's not obvious at all, and I don't know the answer".  So I did some research to find out what economists say about whether deflation is a good or bad thing.  I found Krugman 's article on this, and several others as well. As I expected, Krugman's article was accurate in description but uniformly negative in opinion about deflation. But the others were more balanced. And one, ElliotWave , pointed out that deflation was not bad unless you were unprepared for it. Now, according to ElliotWave's description, the UK is pretty unprepared for a period of deflat

I'm aware that most of my posts so far have talked mainly about the way the UK retail banking system works and its role in the financial crisis of 2008. It has not escaped my notice that the US retail banking system is very different, but I must admit that until a recent twitter conversation with Cate Long I hadn't realised just HOW different it is. In particular, the US mortgage market operates in a fundamentally different way from the mortgage market in any other country - and that very different model was at the heart of the financial crisis not only in the US but throughout the Western world. I'm also aware that some of my blogs get quite technical and they aren't always jargon-free. And the way the US mortgage market works is complex and hard to get your head round without illustration. So I thought I would describe it in terms of something much more familiar. I'm going to talk about sausages. Imagine there are a hundred small farms all producing various va

Yesterday I had a conversation with several people who believed that the purpose of Quantitative Easing (QE) in the UK and the US was to provide cash to banks so that they could lend more.  They called it "printing money" and insisted that it would cause inflation and therefore lead to interest rate rises, which is a bad thing, of course, isn't it? They have missed the point completely. QE is an interest rate management tool.  Nominal interest rates (base lending rates) in both the US and UK have been nearly zero for a long time now.  Low interest rates would normally encourage spending - which is needed to stimulate economies - but both these economies were in such a poor state after the financial crisis and ensuing deep recession that near-zero rates made little difference and there was a serious risk of deflation . It was not possible to cut nominal rates further as this would make them negative, which would mean central banks were paying commercial banks to borr