Opinion

The Great Debate

Stress tests and cargo cults

How are European officials orchestrating the bank stress tests like Pacific islanders speaking into coconuts and waiting for cargo to drop from the skies?

They both make the elemental error at the heart of all cargo cults; they mistake necessity for sufficiency and hope that imitation and affect will make up for a lack of substance.

Most often associated with the south Pacific after World War II, cargo cults are religions whose practitioners try to use magic to produce the results of more powerful technologically sophisticated cultures.

In the Pacific that meant making clearings in the jungle to serve as runways and donning coconut earphones and microphones with vines for wires, all in hopes that the cargo that came with American or Japanese occupation would somehow return.

In Europe it means running a bank stress test that officials hope will, like the one in the U.S. in 2009, restore confidence in its banks.

The $5 trillion rollover

Banks around the world must refinance more than $5 trillion of debts in the coming three years, a massive rollover that poses threats to financial stability and growth.

The need to replace these debts, which are medium and long term, will place pressure on bank profit spreads and in turn may either prompt deleveraging, where banks sell assets that they can no longer economically finance, or simply lead to a bout of credit rationing, where borrowers must pay more to borrow, thus crimping investment and economic growth.

For banks in the UK, according to the Bank of England Financial Stability Report, the refinancings amount to about $1.2 trillion by the end of 2012.

from The Great Debate UK:

Banks, borrowing, bonds and Britain’s budget

BRITAIN/

-Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. Join Reuters for a live discussion with guests as UK Chancellor George Osborne makes  an emergency budget statement at 12:30 p.m. British time on Tuesday, June 22, 2010.-

George Osborne must be thankful to Don Fabio and his boys for ensuring that Wednesday’s tabloids will have other things to think about than the Budget, because it is going to be one of the toughest ever.

There is every indication the advance billing is more than just news management. The pain is going to be frontloaded for two reasons.

Euro zone medicine not working on banks

Fear of lending to banks is rising again in Europe, as even a 750 billion euro zone rescue package proves not enough to stem fears that the banking system will prove the weak link when southern European nations can’t meet their obligations.

Strikingly many European and British banks are now being forced to pay more to borrow money in the interbank markets than before the joint European Union, International Monetary Fund and European Central Bank package was announced two weekends ago.

That deal, which should insulate highly indebted countries such as Greece, Spain and Portugal from funding pressure for the next two years or so, was effective in driving down the extra interest those countries had to pay to borrow as compared to Germany. Tellingly, it was less effective, even counter-productive, in restoring calm to the markets in which banks fund their short-term borrowing needs.

Taxing spoils of the financial sector

If you want less of something, tax it.

That truism is often used as an argument against a tax on profits, or health benefits, or employment, but in the case of the rents extracted from the economy by the financial services industry here’s hoping it proves more of a promise than a threat.

The International Monetary Fund has put forward two new taxes on banks to pay the costs of future rescues, one of which is a fairly conventional “Financial Stability Contribution,” with an initial flat levy on all banks, to be refined later into something with more precise institutional and systemic risk adjustments.

More interestingly, the IMF is also proposing a “Financial Activities Tax,” (FAT) a tax on bank pay and profits which, if correctly designed, could serve as a tax on rents — the unwarranted spoils — of the financial sector.

from MacroScope:

A “Greed Tax” on banks

The International Monetary Fund has done what it was bid by the G20  and come up with proposals for getting banks to pay for the government help they receive when they get in trouble.  You can read the actual wording here, but it comes down to this:

Cat1) A "Financial Stability Contribution" which would be pooled into a fund that would use it to help weak banks, or just go into general government revenues.

2)  A "Financial Activities Tax" -- perhaps intentionally known as FAT -- to be levied on combined bank profits and remuneration (for which read "bonuses") and paid to governments.

from The Great Debate UK:

Punishing investment bankers: the nanny-state goes global

Laurence_Copeland- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -

In a previous blog, I expressed the fear that in the aftermath of the financial crisis we were going to see either the innocent punished or guilty men convicted of the wrong crimes, or maybe both.

A topical case is Goldman Sachs, an investment bank which weathered the crisis better than most, only taking Fed money when all the other dominos had already fallen, repaying it extremely quickly, and facing accusations ever since of having been too clever for its own good.

Bank lending and profits; a costly divergence

Don’t count on the profitability of the financial services sector as a leading indicator of anything. Well, anything other than financial services compensation.

A stupendous recovery in profits is underway at U.S. banks, brokerages and insurance companies, but the big picture shows that for the rest of us that rebound may prove sterile.

Data from the U.S. Bureau of Economic Analysis shows the sector had an absolutely cracking 2009, with profits rising in the fourth quarter by 240 percent against the same period a year before.

from The Great Debate UK:

Greenspan and the curse of counterfactual

Laurence_Copeland-150x150- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -

Suppose that, instead of appeasing Nazi dictator Adolf Hitler at Munich in 1938, Neville Chamberlain had taken Britain to war, what would today’s history books say about the episode?

It is of course impossible to know. Perhaps something along the lines: “the British prime minister’s stubborn refusal to compromise resulted in a war which dragged on for 6 months at a cost of over 300,000 lives.....” Make up your own scenario.

Volcker Rule unexpectedly revived by Dodd bill

Paul Volcker’s proposed ban on banks’ proprietary trading or owning hedge funds or private equity funds has been unexpectedly revived in the financial regulation bill published by Senate Banking Committee Chairman Christopher Dodd yesterday.

The Volcker Rule’s surprise survival comes despite fierce opposition from the banking industry and after many commentators had written it off as a short-term political gimmick in the wake of the shock election defeat in Massachusetts. Dodd himself had appeared lukewarm.

In fact, Section 619 of the bill (“Restrictions on Capital Market Activity by Banks and Bank Holding Companies”) would give legislative effect to the proposals almost exactly as outlined by President Barack Obama at the press conference in January.

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