Cass Finance Blog

February 28, 2014
by Thorsten Beck

Friday links

Charles Calomiris was at Cass yesterday, presenting his book with Stephen Haber on Fragile by Design.  Slides are here in case you missed it.  Bottom line:  it is all about politics!

Dirk Schoenmaker and Toon Peek take a look at the development of Europe’s banking systems. Lots of interesting data and facts.

And more on shadow-banking – an attempt at mapping the shadow banking system through a global flow of funds analysis.

Coming up next week: do dividends signal economic growth and some thoughts on bitcoins.

February 26, 2014
by Thorsten Beck
1 Comment

Central bank independence meets natural resource curse

The suspension of governor Sanusi from the helm of the Central Bank of Nigeria is not only important for observers and analysts of future Nigerian monetary and exchange rate policies but gives broader insights into central banks’ role and limitations in institutionally weak environments, such as Nigeria. The suspension might come as a surprise given that his term was about to come to an end in a few months anyway. However, it comes in the wake of claims by Governor Sanusi of billions of dollars of missing revenues in the state oil company, claims rejected by the company and government officials, and raises the suspicion that a messenger is being shot. Continue Reading →

February 24, 2014
by Andrew Clare

Alex Salmond – the advocate of forced marriage

The decision to marry, or not, is an important one for most – choose the right partner and you can look forward to lifelong happiness, but choose the wrong one and you can look forward to a life full of misery and, in the event of a divorce, financial ruin to boot.  Monetary union is a bit like marriage too.  If the economies are well suited everyone should benefit from the economic benefits, if they are not then economic misery for at least one of the partners is likely. Continue Reading →

February 14, 2014
by Thorsten Beck

Friday links

In the tradition of the politics of finance literature: How suffrage reforms can influence whether countries go more for capital market- or bank-based financial systems, by Hans Degryse, Thomas Lambert and Armin Schwienbacher

Lehman Brothers vs. Lehman Sisters: Renee Adams and Vanitha Ragunathan argue that banks with more female board members did not take more or less risk going into the crisis, but still performed better.

And for potential PhD students: there is a possible PhD bursary for students interested in banking. Contact me

The Cass Finance Blog will go off on half-term break and will back in late February!

February 13, 2014
by Andrew Clare

Cutting off tail risk: impossible thinking

In Lewis Carrol’s Alice in Wonderland, the eponymous heroine claimed that there was “no use trying to believe in impossible things”. However, the White Queen disagreed: “Why sometimes I’ve believed as many as six impossible things before breakfast.”

If we have learned anything over the last few years of crisis and economic depression it’s that the apparent ‘impossible’ can happen. Here are a few:

  1. Despite the accolades heaped on the UK’s regulatory financial framework, the UK experienced a run on one of its banks for the first time in 150 years.
  2. In the US, Lehman Brothers, a blue chip investment bank, deemed too big to fail, failed. RBS, a pre-crisis leviathan of the global banking community, collapsed into a cesspit of its own making, along with most of its competitors.
  3. The interbank market, arguably one of the most important financial market for the global economy, literally seized up as it became paralysed with fear.
  4. Previously conservative and cautious central bankers started experimenting with extraordinary monetary measures including the creation of cash, mainly because they couldn’t think of anything else to do.
  5. US government debt, in the pre-crisis period, the premiere risk free asset class, suffered the humiliation of a ratings downgrade.
  6. And finally, that Southampton football club could establish themselves in the Premiership. Continue Reading →

February 12, 2014
by Thorsten Beck

When Arm’s Length is Too Far…

In the wake of the global financial crisis policy makers’ attention has focused on lending to small and medium-sized enterprises (SMEs) as these firms were among the most affected borrowers when the credit cycle turned.   In the UK, policy makers have put a lot of pressure on banks to increase or at least not reduce lending to SMEs, often seen as the backbone of the economy. But what is the best way for banks to reach out to SMEs?  While the traditional literature has focused on relationship lending as the prime lending tool for SMEs, recent evidence has shown that transaction-based or arms-length lending – using hard information and hard assets as collateral – can be more cost-effective and allows larger and non-local banks to lend to SMEs.  In recent research (with Hans Degryse, Ralph de Haas and Neeltje van Horen), we gauge how these different lending techniques co-vary with firms’ financing constraints over the business cycle. We find evidence that while relationship and transaction-based lending is as effective during good times, relationship-based lending seems to be more effective during downturns.  Continue Reading →

February 10, 2014
by Thorsten Beck

OMT goes from BVG to ECJ

More alphabet soup coming out of the Eurozone. This time courtesy of the German Constitutional Court (BVG in its German abbreviation), which decided last week to refer a court case on the ECB’s Outright Monetary Transactions (OMT, where the ECB buys government bonds on the secondary market subject to certain conditions) to the European Court of Justice (ECJ).  The irony is that the ECB has not even used this program yet, the simple announcement has helped calm markets sufficiently last summer.  The argument against the OMT was that this would constitute effectively financing of government deficits by the ECB and would therefore go beyond the letter and spirit of the ECB’s mandate.  This decision has several dimensions, some of which are lost in the current debate.  It illustrates not just a dispute about the tools and legal limitations of central banking, market discipline vs. market panic concerns and national vs. Eurozone interests, but it highlights again that too much burden has been put on the ECB during this crisis.  It illustrates the failure so far of governments in the Eurozone to come to an agreement on how to (i) address the current crisis and (ii) turn the Eurozone into a sustainable currency union. Continue Reading →

February 7, 2014
by Thorsten Beck

Friday links

A post-mortem on the Icelandic crisis,  by Richard Portes and Fridrik Mar Baldursson, looking at both the gambling part and the successful recovery from the hang-over.

Little known in the broader public, Federal Reserve Banks are actually private entities, with bankers on their boards.  Does this raise governance issues, asks Rene Adams.

And just to remind you: Charles Calomiris from Columbia University will present his new book (Fragile by Design: The Political Origins of Banking Crises and Scarce Credit – co-authored with Stephen Haber from Stanford University) on February 27 at Cass.The event is open to the public, but registration is required. This promises to be an exciting event!


February 6, 2014
by Meziane Lasfer

Should investors believe financial analysts recommendations?

Financial analysts have always played a significant role in advising clients as to whether to buy, hold or sell some shares. For example, yesterday, Deutsche Bank issued a “buy” recommendation and kept its 1,025p target price for Compass group, a UK company, despite the firm’s underperformance relative to the FTSE during the past month due to emerging market concerns. DB argued that Compass has a good ability to deliver strong earnings per share growth, and therefore, its share price is expected to increase from its current value of 907p.  The question remains as to whether such forecasts will materialise. This is a topic that has been widely research for a number of years and views on this issue diverge significantly. Overall, the investors may need to think carefully before following such recommendations. Continue Reading →

February 5, 2014
by Thorsten Beck

Postcard from Tunis

Tunisia has been hailed as a lone success story among the countries that experienced change during the Arab Spring. A relatively peaceful transition with a recent agreement on a new constitution has enabled the country to avoid the bloodshed of other countries in the region and has prevented the economy from further damage. As usual in political transition processes, this has also affected the financial sector, both in a good and a bad sense. Continue Reading →

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