Banking update August-September 2020

  • ABN AMRO exits all its non-European corporate banking activities
  • CaixaBank and Bankia are planning a merger
  • HSBC wants to sell its French retail network
  • Rumors of a merger between Credit Suisse and UBS

The strategy of European banks ever since the Global Financial Crisis has been to focus on profitability1. How do you achieve a higher return on equity? There are two commonly followed options. Either you cut costs, e.g. by merging banks in the same geography and closing down the redundant branches. Or you sell the business, especially when you’re an also-ran outside of your home market.

The education business

Two insightful articles by Adam Keesling (Napkin Math) on education and content creation:

Why MasterClass isn’t really about mastery (tldr: MasterClass doesn’t compete against universities, it sells credibility and inspiration)

Why software is more profitable than content (tldr: “Content products talk to humans, while software products talk to computers. That’s why the value of content decays faster than the value of software.”)

Alex Zhu (TikTok) also discusses the challenges of online content and learning at the beginning of this interview:

His key insights:

  • people want light content, both as consumers and as creators
  • education goes against human nature: most people use their smartphone for communication and entertainment, not to learn

Neil Patel wrote a very instructive blog post about creating and selling online courses. By giving away the course for free (for a limited time), you can generate publicity and collect an email list for future courses.

Net Interest

Marc Rubinstein writes about the financial industry in his weekly newsletter Net Interest.

I especially liked his discussion of “front book, back book“. Banks and insurers accumulate a long-term book of assets. These generate a predictable stream of income (interest and premiums). Unfortunately, this “back book” exposes them to unexpected losses. As a result, financial firms need a lot of capital.

The business model of Software-as-a-Service (SaaS) companies is also based on a back book. However, unlike banks, their portfolio of subscribers does not require a lot of capital.

In the same newletter, Rubinstein discusses the possibility of bank M&A funded by badwill, as I suggested earlier.

BNP Paribas expands credit, banking in East Africa, and more

BNP Paribas expanded its balance sheet by 23% (!) in the first quarter of 2020, as companies took out emergency loans in response to the coronavirus panic.

Sean Pawley talks about banking in East Africa on the Palladium Podcast (discussion about banks between 6:50 and 22:15). Multiple issues with banking in Rwanda and other countries in the region: economy runs on cash payments -> banks lack reliable data on borrowers -> high default rates -> unstable banks, high interest rates and fees, preference of cash over bank deposits. His solution: a narrow bank that eliminates credit risk. Provide a cellphone-based payment solution. Collect payment data. Based on the data, start making loans.

The KBC mobile banking app will show highlights of the Belgian football Pro League. This service is available to anyone who installs the app, including non-customers.

Climate change’s new ally: big finance discusses the role of asset managers in reducing emissions.

A model of the Eurozone architecture embedded in the global US dollar system by Steffen Murau (using the analytical framework of interlocking balance sheets!)

Facts and myths about bank leverage ratios (from 2014, but timeless). Dan Davies explains why reducing risk to a single metric cannot work.

More on the miracles of bank regulation:

Revisiting the Ides of March: how banks’ liquidity rules complicated the corporate demand for cash during the coronavirus panic of March 2020.

Perverse prikkels

Is het een drama dat iemand tijdelijk meer krijgt om thuis te blijven dan om te gaan werken?

Dit verhaal uit Amerika toont wat er kan gebeuren wanneer mensen per se willen gaan werken uit schrik om geld te verliezen:

Wat kost de economie en de maatschappij meer?

An EU super rebate would solve a lot of problems

European Union leaders agreed on a package of measures to support the economy after the damage done by Covid-19.

The summit took four days, because of tensions between member states that will be net payers and those that will be net receivers of EU funds.

However, I had a more elegant alternative, as I explained on Twitter (thread):

The EU missed an opportunity to provide macroeconomic support that matches the size of the corona shock, to increase safe assets and to avoid transfers between member states.

Government debt and inflation

Do deficits automatically lead to default or high inflation? No.

Here are some good reads:

Will deficit spending lead to inflation? There is a difference between developed and developing countries.

Who pays for this? How the United States dealt with its national debt after the Second World War.

Historical lessons from large increases in government debt. The debt was set aside in a sinking fund for repayment at a later date.