tag:blogger.com,1999:blog-582368152716771238.post8048157841445912264..comments2024-03-18T07:59:05.430-05:00Comments on The Grumpy Economist: Europe's BanksJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger16125tag:blogger.com,1999:blog-582368152716771238.post-56709817035843366072018-11-19T11:08:01.429-06:002018-11-19T11:08:01.429-06:00Not sure if you take requests, but would love to h...Not sure if you take requests, but would love to hear your thoughts on TLAC and bail-in debt rules that are about to come into effect in the new year. Dannoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-90803086003903279732018-11-15T13:26:19.341-06:002018-11-15T13:26:19.341-06:00I am reminded of Mao's reply when asked about ...I am reminded of Mao's reply when asked about the impact of the French Revolution, "It's too early to tell." First, China started from zero (essentially) 40 years ago, so a lot of catch-up is already built in to their growth rates. But more importantly, I don't think you can make any determination about the efficacy of their "bad loan" policy just yet. These chicks have a habit of coming home to roost eventually.Animadvertisementhttps://www.blogger.com/profile/09110196634828780706noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-54709882479770468572018-11-13T06:44:49.393-06:002018-11-13T06:44:49.393-06:00thank you Professor Cochrane
I believe your commen...thank you Professor Cochrane<br />I believe your comments, especially the "coffee discussions", are right on target. <br />You seem to understand much more about the Eurozone situation than most European financial pundits. <br />Please keep on commenting. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-67840210525831224202018-11-10T11:35:03.461-06:002018-11-10T11:35:03.461-06:00They are target 2 balances.
It is a application o...They are target 2 balances.<br />It is a application of the system called contra accounting where parties to credits and debts keep a running tally of them.<br /><br />Dinerohttps://www.blogger.com/profile/14632385731642361211noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-76072154607139596812018-11-09T12:41:36.871-06:002018-11-09T12:41:36.871-06:00About the fact that Italy's central bank owes ...About the fact that Italy's central bank owes the German central bank a lot of money: the way I understood this, in this kind of operations (called Target2 system) both count as branches of ECB. The money is not due to be paid ever, at least as long as both countries stay in the Euro. In this sense I guess some say it is "an accounting glitch": it should be more about tracking where the money is flowing, and if there are financial flow imbalances created by having a "fixed exchange rate" between Euro countries. About what happens if Italy ever left the Euro, opinions diverge I think. Italy may have to actually pay this amount.<br /><br />Disclaimer: I'm not an economist, and not working in finance. Just an italian compulsive economic blog reader. So I am just writing here what I read elsewhere....Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-29494963990059271632018-11-09T12:17:05.180-06:002018-11-09T12:17:05.180-06:00But under the Cochrane system (which comes to the ...But under the Cochrane system (which comes to the same as full reserve banking I think), it's plain impossible for a bank to go insolvent. If a bank makes silly loans and the value of its stock of loans sinks to say 80% of book value, all that happens is that the value of its shares fall to about 80% of book value.<br /><br />It is wholly unjustified for a government or central bank to treat banks in any sort of favorable way compared to other industries. But under the existing bank system, that’s what they are forced to do periodically: e.g. witness the trillion or so dollars that the Fed loaned to sundry banks at the height of the crises. Don’t you wish you or your business could borrow at zero percent?<br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-40429312603868012012018-11-09T11:52:37.030-06:002018-11-09T11:52:37.030-06:00Are these TARGET2 balances? When an Italian writes...Are these TARGET2 balances? When an Italian writes a check from an Italian bank to buy an apartment in Germany, the money flows from Italian bank to Italian central bank, to German central bank, to German bank. Except the Italian central bank essentially makes a promise to pay rather than actually paying.jrosenkohttps://www.blogger.com/profile/01230851363876964848noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-70490811125176157682018-11-09T11:51:21.957-06:002018-11-09T11:51:21.957-06:00 Are these the TARGET2 balances? When an Italian w... Are these the TARGET2 balances? When an Italian writes a check from an Italian bank to buy an apartment in Germany, the money flows from Italian bank to Italian central bank, to German central bank, to German bank. Except the Italian central bank essentially makes a promise to pay rather than actually paying.jrosenkohttps://www.blogger.com/profile/01230851363876964848noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-13955670593140916422018-11-09T09:12:46.882-06:002018-11-09T09:12:46.882-06:00"Except the Italian central bank essentially ... "Except the Italian central bank essentially makes a promise to pay rather than actually paying. Italy is basically expanding government debt in this way. I don't totally understand it, nor did most people I talked to about it, and there is a wide disagreement whether this is another debt or just an accounting glitch."<br /><br />Its not a glitch its a debt however , in the procedure, the Italian banking system has an asset to match the debt, and that asset could be an Italian Government Bond in the context of the Post.Dinerohttps://www.blogger.com/profile/14632385731642361211noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-89963659066569008172018-11-09T08:24:58.203-06:002018-11-09T08:24:58.203-06:00Hi John,
When should we expect your FTPL book to ...Hi John,<br /><br />When should we expect your FTPL book to be published? I'm really enjoying the draft and I'm looking forward to reading the final version.<br /><br />PiotrPiotr Zochhttps://www.blogger.com/profile/12339947279777746192noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-39162244479408921232018-11-09T04:23:20.704-06:002018-11-09T04:23:20.704-06:00"That means the data have, now, 10 years of s..."That means the data have, now, 10 years of stable growth and very low default."<br /><br />This might be true for the US, but certainly not for Europe:<br /><br />2008 GFC<br />2010/2011 European Debt Crisis<br />2012 Spanish Real Estate Crisis<br />2011 - 2013 Eurozone Recession<br />2016 Italian Banking Crisismathhttps://www.blogger.com/profile/10496792967931843777noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-66420494125572415322018-11-08T21:38:35.101-06:002018-11-08T21:38:35.101-06:00Risk weights are not terribly complex as these thi...Risk weights are not terribly complex as these things go. Yes there are alot of different things to keep track of depending on the asset class and whether you are using the standardized or advanced approach, but they are probably still simpler than many custom risk models developed by banks. Even under the advanced approach the calculation of input parameters like long-run probability of default often involve nothing much more complicated than simple averages. Maybe they are too complex from a regulatory point of view and could be replaced by higher capital across the board, but even if regulators got rid of them banks would still likely be building models to estimate the capital consumption of different products.<br /><br />The comment about banks using just 10 years of data strains does not ring true, or sounds like something that happened at one bank and is now the story everyone likes to tell. Not only would it get extreme pushback during an internal model review or a regulatory exam, but it assumes that management has no incentive whatsoever to maintain reasonable levels of capital. Moreover, no one has forgotten the 2008-09 experience, and data on that period is readily available, so investors would look askance at banks that are running the same business as before but have now suddenly lowered their capital levels relative to something like face value of assets.<br /><br />Speaking of Italy, a key problem is that it is hard to allocate resources within bank risk departments toward this type of big-picture thinking, which is largely concentrated among client-facing researchers. The vast majority of the risk department is involved in fairly mechanical tasks related to data management, routing reporting, and mathematical modeling that is often some variant of simple curve fitting. Less burdensome oversight coupled with higher across-the-board capital requirements might free up resources to study more high-level issues. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-50022107095066222052018-11-08T18:47:04.470-06:002018-11-08T18:47:04.470-06:00I feel like the outsider from Mars making this com...I feel like the outsider from Mars making this comment but here goes:<br /><br /> The People's Bank of China has for decades purchased bad loans and defaulted bonds. The short story is the central bank printed money and bought bad debts. China has a 40-year track record of growth, and is now below a modest 3% inflation target.<br /><br /> Yes, moral hazard. But a vital consideration is keeping a banking system liquid and solvent.<br /><br /> The Greek GDP is still 25% below the level that it was 2008.<br /><br /> There are times to take principled ideological positions. Then there are other times when discretion is the better part of valor. <br /><br />Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-28122065653872344502018-11-08T17:07:25.955-06:002018-11-08T17:07:25.955-06:00Throwing out a question for anyone who knows.
Thi...Throwing out a question for anyone who knows.<br /><br />This point from G20 list<br />guidance on financial resources available to support central counterparty (CCP) resolution to deliver resilient and resolvable CCPs<br />sounds like it might be cryptic policy speak for the issue of <br />Additionally, there is a big kerfuffle going on that Italy's central bank owes Germany's a lot of money.Italians see this coming, and there is a lot of capital flight out of Italy. When an Italian writes a check from an Italian bank to buy an apartment in Germany, the money flows from Italian bank to Italian central bank, to German central bank, to German bank. Except the Italian central bank essentially makes a promise to pay rather than actually paying. Italy is basically expanding government debt in this way. I don't totally understand it, nor did most people I talked to about it, and there is a wide disagreement whether this is another debt or just an accounting glitch. Still, that most people at a financial regulation conference know this is a big problem and nobody is quite sure what it means is telling.<br /><br />Is this correct? Or is 'CCP resolution' something else?rdknoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-33969979840965289832018-11-08T12:34:03.702-06:002018-11-08T12:34:03.702-06:00Risk weighting is a total waste of time. The objec...Risk weighting is a total waste of time. The objective is to maximise the amount of maturity transformation banks can do for a given amount of risk. Put another way, the object of the exercise is to maximize the amount of liquidity / money creation that private banks can do for a given amount of risk.<br /><br />The monster flaw in that is that central banks can create limitless amounts of money at no cost and at no risk. So why have private banks create liquidity / money at all? Full reserve banking just abolishes private banks’ ability to create money. <br /><br />As the Nobel laureate economist Merton Miller put it in reference to Irving Fisher’s full reserve proposals, “Think how much national economic welfare could rise under Fisher’s banking scheme when thousands of no longer needed bank regulators (and hundreds of academic banking economists) find themselves forced at last to seek more socially productive lines of economic activity.”<br />Sanjay Mittalhttps://www.blogger.com/profile/18032814733307421482noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-87738814498188720762018-11-08T11:19:32.411-06:002018-11-08T11:19:32.411-06:00A (brief) comment from Italy about Italy.
"It...A (brief) comment from Italy about Italy.<br />"It occurs to me that simply removing risky local government debt from banks would go a long way to solving the problem. Defaultable government debt should be held via floating-NAV mutual funds, not via bank accounts." And you are absolutely right in saying so: but, will never happen. Reason? The situation is intended to preserve the corporate balance of powers in the banking sector.<br />"When an Italian writes a check from an Italian bank to buy an apartment in Germany, the money flows from Italian bank to Italian central bank, to German central bank, to German bank. Except the Italian central bank essentially makes a promise to pay rather than actually paying. Italy is basically expanding government debt in this way.". You are again right in saying so: notice that this process is "oversighted" by the ECB, and is an "alternative" way to recapitalise the banking sector (not just in Italy, notice) at the same time mantaining the above mentioned balance of powers, as well as most of the existing inefficiencies of the business practices.<br />To sum up: here you have further indications that the whole season of QEs has been nothing more that a risky and inaccurate policy to freeze up the (existing) banking system as it is. This happened in the Eurozone, and in the US as well: and it happened precisely when the economy as a whole were in need of new players, new practices, new managements and new business strategies.<br />As I wrote before here (and subsequently I have read from Nassim Taleb) QE has been nothing more than a massive (and indiscriminate) transfer of market/credit/default risk from the private sector to the public, and for free. A bonanza for all inefficiencies: no (established) player, amd their friendship, will pay for any mistake. The policy response to the run was: make life easier to those that generated the instability that originated the run.<br />Newcomers have no access to the "easy financing": they must be kept at bay.<br />And there are still those who go around asking why productivity remains stuck at the lowest level.Valter Buffo, Recced, Milan, Italynoreply@blogger.com