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from The Great Debate UK:

Mental accounting – the jar fallacy

--Ian Bright is Senior Economist at ING. The opinions expressed are his own.--

When Dustin Hoffman was first starting out as an actor, struggling to make ends meet, he managed his money in a simple – but potentially financially dangerous – way.

On a tight budget with little income, Hoffman kept the money he had in separate jars for food, rent and other expenses. The story is retold in Richard Thaler and Cass Sustein’s famous behavioural economics book Nudge.

When Hoffman asked friend Gene Hackman for a loan for food, Hackman asked “why?” given there were jars filled with money. Hoffman apparently pointed to the empty money jar labelled "food". He had no money for food despite having money there in front of him, albeit assigned to other types of spending.

This is an example of the phenomenon known as “mental accounting”, a thinking trap coined by Thaler in the 1980s. It’s a trap that, decades later, many of us still fall into, and it can cost us dearly.

from India Insight:

Bandhan eyes India’s banking league with RBI licence

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Kolkata-based Bandhan Financial was little known in India’s corporate arena. But a new banking licence from the Reserve Bank has given Managing Director Chandra Shekhar Ghosh and his 13,000 employees a reason to cheer.

“This is a different type of win. In the last 13 years they (employees) have been working hard and now they have got the recognition,” said Ghosh. “I hope that this is not a big challenge, the challenge is to develop the skills of the staff, it will take some time.”

from Breakingviews:

Fannie investors may be using magic calculators

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By Daniel Indiviglio and Richard Beales
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Fannie Mae investors may be using magic calculators. With the latest reform blueprint taking shape in the U.S. Senate, hedge funds like Fairholme Capital Management have urged Washington to revitalize Fannie, the mortgage finance giant, which along with Freddie Mac was kept alive with nearly $190 billion of taxpayer cash in the aftermath of the financial crisis. The prospect has pushed up the price of Fannie’s preferred stock more than 10-fold in 18 months. But according to a Breakingviews analysis, even cheerful assumptions suggest Fannie’s business isn’t worth enough for shareholders to get much if anything back.

from Breakingviews:

World Bank boss Kim tested by Honduran loan fracas

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By Christopher Swann
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Newish World Bank President Jim Kim’s goal of cutting $400 million from the multilateral lender’s budget just got harder. With the Washington-based institution under fire for lending to a Honduran company accused of thuggish behavior, the temptation will be to add to red tape. That would slow the already sluggish loan process and impede efforts to cut poverty.

from India Insight:

Connecting borrowers and lenders: Indians try peer-to-peer model

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Srinivas Porika tried for months to get a loan of 250,000 rupees ($4,000) to pay for his sister’s wedding, but every bank he tried turned him down. The problem: Porika’s employer, a tech start-up company, was not on the banks’ lists of pre-approved companies.

“They were ready to give me a credit card, but were not ready to give me a loan,” said the 28-year-old from Hyderabad, who met several bank managers and officials to plead his case.

from Breakingviews:

Imagine a world without debt

I have a dream: a world without debt, and with much more equity. It’s not just that summer holidays are a good time for fantasising. The fifth anniversary of Lehman Brothers’ bankruptcy is a month away, and regulators have recently forced both Deutsche Bank and Barclays to issue more shares.

Some regulators’ beach thoughts may drift to the magic numbers of bank capital ratios. My approach is less technical and more philosophical. I wonder why the financial system relies so much on debt. Loans and bonds are poorly designed for their primary economic purpose - investment.

from Breakingviews:

China’s PBOC serves reformists an amuse-bouche

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By John Foley

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

China’s central bank has just whetted the appetites of reformists. The People’s Bank of China said on Friday that starting immediately it will let banks lend as cheaply as they like, removing the floor of around 6 percent for one-year loans. It smells like interest-rate liberalisation, but it’s only an amuse-bouche.

from Breakingviews:

Lending squeeze tests faith in China’s authorities

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By Peter Thal Larsen
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Forget U.S. talk of monetary “tapering”: to see what it really looks like when liquidity is sucked out of the market, look to China. A standoff between the People’s Bank of China (PBOC) and the country’s overextended lenders has pushed short-term interbank rates to record highs. China’s closed and state-controlled financial system has a better chance of averting the kind of meltdown that took place in the United States and Europe during the financial crisis. But everything hinges on the authorities’ ability to react quickly and decisively.

from Unstructured Finance:

Spinning single-family home investments into mortgage-backed securities

It's generally been thought the main exit strategy for Wall Street-backed firms that are buying distressed homes to rent them out, is to convert to a REIT and file for an IPO. That attempt to cash-out on the single-family home trade has obvious benefits for the big institutional buyers but risks for retail investors as the math behind the buy-to-rent model becomes increasingly suspect.

But there's another potential exit strategy for the institutional buyers beyond converting to a REIT or flipping homes earlier than anticipated and that's becoming a home lender.

from Global Investing:

European banks: slow progress

The Cypriot crisis, stemming essentially from a banking malaise, reminds us that Europe's banking woes are far from over. In fact, Stephen Jen and Alexandra Dreisin at SLJ Macro Partners posit in a note on Monday that five years into the crisis, European banks have barely carried out any deleveraging. A look at their loan-to-deposit ratios  (a measure of a bank's liquidity, calculated by dividing total outstanding loans by total deposits) remain at an elevated 1.15. That's 60 percent higher than U.S. banks which went into the crisis with a similar LTD ratio but which have since slashed it to 0.7.

It follows therefore that if bank deleveraging really gets underway in Europe, lending will be curtailed further, notwithstanding central bankers' easing efforts. So the economic recession is likely to be prolonged further. Jen and Dreisin write:

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