About Me and my Blog

My name is Julien Noizet and I have been working as a financial analyst for several years for various banks and rating agencies, mainly covering the banking sector as well as other non-bank financial institutions in various countries. Before that I used to study engineering, management and finance and have developed a strong interest for monetary economics, financial and economic theory and financial and economic history over the last few years.

The goal of this blog is to reinject some classical liberal, free-market and laissez-faire ideas in today’s debate on banking and finance, in the tradition of thinkers that I admire such as Ludwig von Mises, F.A. Hayek, James Buchanan, Milton Friedman, John Stuart Mill, Frédéric Bastiat and Voltaire.

The views and opinions expressed on this blog are my own and do not reflect those of any of my previous and current employers.

This blog does not provide any investment advice and only provides a big picture-type analysis of the fundamental mechanics of the financial system and its link to the overall economy.

I also contribute to the Cato Institute’s Alt-M blog.

PS: I am not a native English speaker and I spend little time editing my posts so I apologise if ever my writings don’t always sound natural! 🙂

11 responses to “About Me and my Blog”

  1. Brent Morrison says :

    You might be interested in this – https://www.db.com/ir/en/content/ir_releases_2015_5045.htm. linked from here http://www.bloombergview.com/articles/2015-10-08/bank-goodwill-and-bond-market-liquidity

    Re the first point. “This is largely driven by the impact of expected higher regulatory capital requirements on the measurement of the value of these segments”.

    If DB is going to have a higher capital requirement it will need to fund it’s existing balance sheet with more equity and less debt. If the quantum of debt is therefore reducing (and arguably the cost thereof with it’s de-risking) cash flows attributable to the business should increase. The discount applied to the gross cash flows should reduce with reduced cost of capital driven by the de-risking mentioned above (they will need to raise equity, but theoretically this should be cheaper). I cannot thing of a scenario where the de-risking of the liability side of the balance sheet leads to a reduction in the earning on the asset side such that it would offset these effects.

    Any thoughts?

    Good luck with the lifting, what do you total?

    • Julien Noizet says :

      Brent, sorry for the late reply.

      My understanding is that by far the largest driver of the goodwill impairment is related to Postbank, which they are about to de-merge.

      I think we need to be careful with what we call ‘debt’ in a banking environment. A deposit is a debt intrument, and it’s not because the bank raises equity that it can get rid of those deposits.
      Same thing for wholesale debt. Debt isn’t ‘replaced’ by the capital raise (it can though if the bank tries to shrink). But the new capital usually merely becomes an extra funding source. So you still have cash outflows on the debt side and now new equity eagerly waiting to get its own cash too.
      And equity requires long run returns in the teens. Debt is cheaper. So in the end, you end up with:
      1. Total cash flows aren’t increasing
      2. Debt isn’t reducing (most of the time), and absorbs same amount of cash as before capital raising
      3. Equity is increased, meaning the remaining cash is lower per unit of equity (ie dilution) -> RoE is lower and the reduction of risk is not enough to offset the required return by investor (ie cost of capital)

      Re the lifting: thanks, total of around 570/580kg in the 83kg class at the moment

  2. Aaron Cuevas says :

    My new favorite blog. 🙂

  3. Jacob says :

    Hello Julien,

    I am a recent new follower and I find what you discuss very interesting.

    I have a question about reserve requirements. In Canada, we have no reserve requirements, but in the United States, they do.

    Am I correct to suggest that once there is an increased deposit, the Canadian banks can indirectly loan out the whole remaining deposit? Comparing it to the United States, if you have $100, and the $10 of reserves have to stay in the system and the $90 can be loaned out?

    Where does the money multiplier come in? Could you briefly address this?

    • Julien Noizet says :

      Thanks Jacob.

      When you say ‘an increased deposit’, do you mean an injection of reserves into the banking system? (which could be some cash already circulating in the economy that ends up being deposited at a bank)
      If yes, then yes, you are correct that the Canadian bank can technically ‘lend out’ the whole amount. In practice however, they normally don’t, because they need to keep some cash/reserves in hand in case a depositor withdraws his deposit or transfers it/makes a payment to another bank. And the market is scrutinizing banks to make sure they remain liquid. We end up with an informal and implicit reserve requirement that is defined by the market rather than by a regulator, and which fluctuates over time with the market’s own perception of risk.

      As I said in an old post (https://spontaneousfinance.com/2015/06/04/endogenous-money-creation-is-back-with-a-vengeance/) (not super super clear sorry):
      “So in short, in the absence of reserve requirements, what we end up with is a banking system whose endogenous expansion is bound by the (also inherently endogenous) market actors’ perception of the need for an exogenous variable (reserves/high-powered money).”

      The money multiplier can still be calculated in Canada: it is simply the measure of broad money divided by the monetary base.

  4. Harsha says :

    Hi Julien,

    I have a thought experiment for you about banks and money creation. Let’s imagine a closed system with just one bank in which every public and private entity has an account. Furthermore, there is no transactions conducted with physical cash and are only settled with bank money.

    Before I get to my questions/thoughts for you, let me say that these assumptions aren’t too far-fetched considering how much of the banking market is controlled by a few banks, and how prevalent electronic payments are becoming.

    So in this world of an all-electronic banking monolith:

    1. Will there be a need for central bank reserves?

    2. Won’t the bank be able to create money without any restriction – assuming no government enforced capital adequacy or leverage ratios?

    3. Would there be any real consequence to credit losses especially if there are no capital rules?

    4. Would the only limiting factor be rampant inflation that arises from unrestrained money creation?

    I would like to hear your thoughts especially since I see today’s banking environment tending towards this outcome. True that banks today can default but I think the market has been conditioned to expect no risk to the financial system ala 2008/9. Fundamentally, we are dealing with one monolithic financial system that faces no potential monetary collapse (government will do all that is necessary to prevent losses to creditors).

    Best,

    Harsha

    • Julien Noizet says :

      Hi Harsha, sorry for the very late reply, just back to blogging now.

      “only settled with bank money.”
      I guess you mean electronically?

      I think it depends on a lot of other parameters like: is it possible to withdraw money from the system or not, what sort of payment system existed before that system, and so forth.
      In the end, it’s gonna be hard to rely on your assumptions to depict our current world, because they remain unrealistic!

  5. Tobi says :

    I am writing you here since I didn’t find any other way to contact you and my question doesn’t seem to fit to any of your articles.

    This is how I understand the monetary system works: There are two kind of monies, base money (or high-powered money) which is created by central banks and demand deposits which are created by commercial banks.

    Base money is much more powerful than demand deposits, because banks can create a multiple of demand deposits out of base money, if they get hold of it. So if John puts $ 100 of base money into his bank account, and the reserve requirement is 5%, the bank can put the $ 100 into its reserves at the central bank and would be allowed to create $ 2.000 in demand deposits that it can lend to another customer.

    However, had John put $ 100 from a demand deposit of another bank into his bank account, this would not have had the same effect, as the bank could not multiply the money from a demand deposit.

    So here is my question:
    If my reasoning above is right, why aren’t there two different “prices” for base money and demand deposit money? For example, if the bank could charge 4% interest rates on newly created credit money, and reserve requirements are 5%, hence it could create up to $20 out of every dollar it received in base money, wouldn’t it make sense to pay interest on base money far in excess of these 4%?

    Thank you very much!

    • Julien Noizet says :

      Tobi,
      I think the mistake you’re making here is this:
      “However, had John put $ 100 from a demand deposit of another bank into his bank account, this would not have had the same effect, as the bank could not multiply the money from a demand deposit.”

      If John transfers $100 from one bank to another, he doesn’t transfer the ‘deposit’ itself. He transfers the underlying reserves. Therefore the first bank sees an outflow of reserves and potentially has to contract its deposit base or to find reserves elsewhere if ever it was ‘fully loaned up’, whereas the bank that sees reserves inflows is now able to increase its lending.
      It’s an abuse of language to say that deposits are transfered. It’s just accounting. It’s the underlying reserves that are transferred.

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