Stephen G. Cecchetti and Kermit L. Schoenholtz — Understanding Bank Capital: A Primer

“It is clear that the banks have too much capital.” Jamie Dimon (CEO, JPMorgan), Annual Letter to Shareholders, April 4, 2017.

“If JPMorgan really had demand for additional loans from creditworthy borrowers, why did it turn those customers away and instead choose to buy back its stock?” Neel Kashkari (President, Federal Reserve Bank of Minneapolis), Jamie Dimon’s Shareholder (Advocacy) Letter, April 6, 2017

Money & Banking
Understanding Bank Capital: A Primer
Stephen G. Cecchetti, Professor of International Economics at the Brandeis International Business School, and Kermit L. Schoenholtz is Professor of Management Practice in the Department of Economics of New York University’s Leonard N. Stern School of Business

Brian Romanchuk — Banks Borrowing Short And Lending Long

Now that there appears to be a chance that the Fed could possibly hike rates by at least a little bit within a few months (maybe), there is increasing interest on what the effects would be on the economy. One area of contention is the effect on the banking system. In my view, you will need a microscope to find the direct effects on banking system profitability (I ignore any macroeconomic feedback from rate hikes, which are an entirely more awkward question). That is not to say that enterprising bank CEO's would not seize upon blaming the Fed for their own failures of leadership. It appears that the belief that the level of interest rates affect bank profitability are based upon inapplicable historical analogies, as well as blurring the distinction between liquidity risk and interest rate risk. 

The academic J.W. Mason did an interesting piece of analysis in "Interest Rates and Bank Spreads." He was responding to an internet debate, which I am not directly addressing. In Mason's article, he crunches the published average bank interest rate charges (both lending and borrowing), and shows that they are consistent with a relatively steady spread regardless of the level of interest rates. Luckily, I do not have to download the data and analyse it myself; he did the work for me. Instead, I want to explain why we should expect this spread behaviour to occur, and an interested reader can then consult his analysis to see that the theory matches observed behaviour.

How banking works.

Bond Economics
Banks Borrowing Short And Lending Long
Brian Romanchuk

US & EU Both Pledge "1 billion" ($/euro) Loan Guarantees For Ukraine - While Pledging Nothing More For Their Own Electorates

   (Commentary posted by Roger Erickson)

Loan Guarantees For Ukraine

This raises two sets of questions, about what we're doing domestically, and why, compared to what we're doing internationally, and why. Initial questions about why domestic US/EU electorates can't guarantee fiat investment in themselves, and instead submit to austerity ... is exceeded only by the sheer number & depth of half-truths, mis-conceptions and outright lies included in this article.

Example? Reduced tariffs go directly back to the exporter? No, that only reduces costs for the importing consumers (maybe only the intermediary merchants), and MAY increase the volume of exports being extracted from the "beneficiary" country. In reality, look for more EU/US firms to set up subsidiaries in the UK, and move yet more jobs from serfs in receiving countries to even lower-paid serfs in sending countries being looted. Can you say "internal devaluation?"

Where have we heard this story before?

Read on, & decide for yourself what these loan guarantees really imply.

There's a theme to the last 40 years? When electorates cede all governance to their merchant classes, they get what they claim was unpredictable ... less innovation, invention & leadership ... and more risk control, "management" and stagnation.

What, exactly, WOULD the Desired Outcome for national policy be, if we bothered to survey our actual citizens? Can we pick some worthwhile goals FOR OURSELVES, and go for them, instead of merely managing existing risks? Forget defense & offense, the best cultural evolution is an active Adaptive Rate?

Frances Coppola — Something's rotten in retail banking

Frances Coppola shows why the banking crisis is not limited to the "fancy" stuff. Ordinary "plain vanilla" banking is also a shambles if HBOS is at all representative.

Professional management of customers' money was completely lost in the drive to sell products.

So the final lesson for today is that there needs to be a fundamental rethink of the nature of retail banking and the core skills required. Professional investment management and risk management skills need to be at the heart of retail banking just as much as other areas of the financial industry. And this change must come from within. Regulators may be able to curb the worst excesses, but they cannot fix the underlying cultural problems. Retail banks must stop "selling" and start "serving". Until they do, there will continue to be major failures in retail banking.

Coppola Comment
Something's rotten in retail banking
Frances Coppola

Winterspeak — Securitization of real estate serves no purpose

The purpose of banking is to make credit decisions by having private capital in first loss position against default. To ensure that that private capital remains in first loss position, any loan extended by an institution which has made a credit evaluation should stay on the books of that institution until the loan has matured.

This may make loans more expensive, but you're getting what you are paying for -- good credit decisions where the incentives are to lend out money when you expect it will be paid back.

Winterspeak.com
Securitization of real estate serves no purpose
Winterspeak

Do we want banks to be chiefly risk managers or risk takers?

Sell on News — Risk is Always With Us

A question that has been asked, but not nearly often enough, is why did the complex risk defrayal methods fail so completely during the global financial crisis? The GFC proved that risk measures based on INTERNAL measures, i.e. measures within the system, will fail. At the time of the GFC many participants thought they had defrayed their risk only to find out that they had not.

What is needed is a measure of risk that is EXTERNAL to the system. This is a logical necessity. The financial system works of the assumption that risk can be shifted from individual exposures. But risk cannot be eliminated, it can only be moved, something that was obvious to many outside observers but not to financial practitioners. What happens is that the risk is moved on to the system, which exposes all participants in ways they cannot anticipate. That defeats risk management.....

Naked Capitalism
Risk is Always With Us
By Sell on News, a global macro analyst.
Cross posted from MacroBusiness