News digest: central bank independence, TBTF and ironic regulators
I’m quite busy at the moment so not many updates here. However I am almost done with Michael Lewis’ new book on high-frequency trading Flashboys. I’ll surely write something about it soon.
The FT had this week an interesting and quite comprehensive article on fintech and new financial start-ups (not sure they all qualify as ‘fintech’ though…). It’s a good introduction for those who don’t know what’s going on in the sector.
On the other hand, about a week ago, Martin Wolf had one of the worst articles on the recent BoE paper on money creation I have had the occasion to read. It looks like Wolf is oblivious to the intense debate on the blogosphere (and elsewhere) that was triggered by the publication of this controversial, and flawed, paper. But… I guess I have given up on Martin Wolf…
US banks have published (through the Clearinghouse association) a new paper arguing that large banks had not been benefiting from the ‘too big to fail’ funding advantage since 2013. I believe this study is quite right but I also think it misses the point made by previous research papers (see one of them here): the main question wasn’t “are banks subsidised for being TBTF?” but “were banks subsidised for being TBTF?”, which could lead to a crisis. There are many reasons why spreads between TBTF and non-TBTF banks would narrow in the short-term. A simple one could be: many large banks are actually currently in a worse financial shape than smaller banks. Another one: states have kept repeating their intentions not to bail out banks and introduced bail-in mechanisms. The paper doesn’t seem to have an answer to this and takes a way too short time horizon to really assess the effectiveness of anti-TBTF measures. It will take another few years to have a definitive answer.
As I said in a recent post, regulators are taking over all the corners of our modern financial system. Another recent target: bank overdraft fees. They basically complain that overdrafts can be more expensive than…payday loans. But they attacked payday loans as predatory. They didn’t seem to get the underlying mechanism at play here… So what’s their logic? Protecting the consumer. But by limiting payday loans, some people will be cut off credit altogether, while some others will have to use…more expensive overdrafts. If overdrafts costs are then pushed down, then it is highly likely that the cost of other services will be pushed up. In the end, regulators just move the problem rather than solve it.
The ironic news of the week is: US state regulators are concerned about the methods used by US federal regulators to crack down on payday lenders (gated link). Just wow.
Christine Lagarde, head of the IMF, declared this week that central bank independence from government control should probably end. While central banks are already arguably not fully independent, I find really scary the types of reaction brought about by the financial crisis. It is like humanity had all of a sudden forgotten the lessons learnt from several centuries of financial history.
Finally, the FT reports a new research paper on the use of pseudo-mathematical models in investment strategies (paper available here). Researchers argue that most of those models are deeply flawed as they are twisted to fit past data. I haven’t read the paper yet but I will soon as I suspect their conclusions also involve other parts of the banking industry.