Cass Finance Blog

April 15, 2014
by Thorsten Beck
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Banking Union – mission not accomplished yet

The European Parliament passed the legislation for the Single Resolution Mechanism (SRM) yesterday.  In my opinion, this will neither provide the common financial safety net that the Eurozone so urgently needs nor will it solve the current crisis (for which it is not even designed.

The Single Resolution Mechanism is supposed to complement the Single Supervisory Mechanism at the ECB, providing options for resolving failing banks as identified by the ECB.  By centralizing decisions, national biases vis-a-vis their own banks should be minimized and a level playing field created. Ultimately, the purpose is to overcome the increasing renationalization of European banking systems.    However, there is only partial and gradual mutualization of risks and losses and the intervention and resolution process is a complicated one, which makes a swift process, preferably over the weekend all but impossible.  And while it foresees a joint resolution fund, it is a small one, which, critically, lacks a public backstop as we have it in other countries with their own currencies. Ultimately, the current structure will not help cut the deadly embrace between banks and sovereigns in many Eurozone countries.  While designed for the next crisis, it will almost certainly fail to help if it stays in its current form.

More importantly, it does not (and is not supposed to) address the current banking crisis in the Eurozone. Continue Reading →

April 7, 2014
by Andrew Clare
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ECB QE – all hot air?

Last Thursday the ECB president, Mario Draghi, announced that the ECB would be in favour of radical measures to stave off the zombie-like state of deflation, including Quantitative Easing (QE).  The bond markets greeted this news enthusiastically.  The yields on bonds in the prephiery of the Eurozone fell in anticpation of the prospect of being able to sell these toxic instruments to a buyer with potentially infinite resources.

In this respect then the announcment had a beneficial impact on the Euozone’s financial climate, and at a notional cost of zero too.  In financial terms at least, it cost the ECB President nothing to utter these words, just as it cost him nothing when he told the world that the ECB would do “whaterever it takes” to support the Euro and the Eurozone.

There are two points worth pondering. Continue Reading →

February 28, 2014
by Thorsten Beck
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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 10, 2014
by Thorsten Beck
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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 →

January 27, 2014
by Jose Luis Peydro
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Low monetary policy rates and the search for yield

Andrew Clare argued last week that equity markets still rally despite of US tapering because the Fed promised to keep low monetary policy rates for long. Many commentators have also suggested that low levels of monetary rates induced an excessive softening of lending standards in the run-up to the 2007-08 financial crisis and are now creating another credit and asset price bubble in e.g. emerging markets. What are the effects of monetary rates for bank risk-taking? Continue Reading →

January 24, 2014
by Thorsten Beck
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Friday links

Anjan Thakor provides an interesting literature survey over the causes of the Global Financial Crisis and what lessons to draw from it.

Too much or too little consumer credit: on a familiar theme, Jonathan Zinman reviews different theories that can explain either under- or over-supply of consumer credit.

Viral Acharya and Sascha Steffen offer some estimates on what to expect from the ECB’s asset quality review with some surprising and some less surprising news.

Coming up next week: A postcard from Mauritius, dark pools and the effect of monetary policy on risk-taking.  Happy weekend!

January 22, 2014
by Thorsten Beck
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After the Troika left town – the future of Ireland’s banking system

I was recently asked to contribute to a conference on Ireland’s economy, co-organized by the European Commission and Trinity College. Ireland is the first of the Eurozone crisis countries to exit the Troika program, which has created quite some positive buzz, but also lots of questions about the medium- and long-term perspectives for its economy.   While a lot has been written about boom-and-bust cycle of Irish finance and the resolution of the crisis, I was asked to take a bit of a longer-term view on Ireland’s banking system. What role, if any, can we expect from the financial sector in the recovery phase and in the medium- to long-term future?  What is the optimal structure of Irish banking in the future, in terms of ownership and types of banks and integration with international financial markets? What impact will the global and European regulatory reforms have on Irish banks and what should the focus be on the national level? And finally, what impact will the ultimate shape of the banking union have on the Irish banking system? Continue Reading →

January 17, 2014
by Thorsten Beck
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Friday links

In Strong Governments, Weak Banks, Paul de Grauwe and Yuemei Ji argue that the Eurozone crisis has perverse effects on banks’ capital ratios, with banks in the core countries reducing capital ratios relying on their governments’ solidity, with the opposite in the peripheral crisis countries.  Exactly the opposite what your macro-prudential text book would recommend.
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.For those who have not met Charles yet, he combines an excellent academic record with policy experience across the globe and is an outstanding and entertaining speaker! 
Coming up next week in our blog: The future of Ireland’s banking system, the effect of tapering on stock markets, and more…

December 13, 2013
by Thorsten Beck
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Friday links

If you are a migrant, does experiencing a banking crisis in your home country affects your use of banking service in your new country?  Una Okonwko Osili and Anna Paulson argue that yes.

The Eurozone is making progress on the future banking union, but seems to ignore existing problems, as I argue here.

Coming up next week: Financial panics and regulation: Lessons from the ABCP crisis; and: finance and growth: lessons from the crisis

November 29, 2013
by Thorsten Beck
0 comments

Friday links

Is Europe facing a lost decade like Japan? Takeo Hoshi and Anil Kashyap argue that yes and point to some striking parallels in the Japanese approach to crisis resolution post-1997 and the approach in several European countries post-2008.

We have been talking a lot about housing prices in the UK these past two weeks, so here is a cross-country version, with data for 51 countries, and some interesting graphs.

Cass’ Emerging Market Group, the European Central Bank and the Journal of International Money and Finance organize the 4th Emerging Markets Group Conference on Emerging Markets Finance, with Viral Acharya and Helene Rey as keynote speaker, on 8th-9th May 2014 in London. Deadline for submissions is December 6!

Coming up nxt week on our blog: Labor and Finance – An Uneasy Relation; Should Investors Worry about Companies that Delist from the London Alternative Market?; and much more.  Happy weekend!

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