My beef with bitcoin bulls

Everybody has heard of bitcoin by now. The price of the cryptocurrency is hitting all-time highs. John McAfee has bet that one bitcoin will be worth $500,000 in the year 2020. Bank chief Jamie Dimon called bitcoin a fraud. His statements were (predictably) followed by articles saying that bankers should be afraid of cryptocurrencies.

It seems there are two bitcoin camps: the true believers and the naysayers. Izabella Kaminska from FT Alphaville in particular has been explaining for years why cryptocurrencies are not the utopia some imagine them to be. In this post, I summarize my own reasons why I don’t think bitcoin is a credible threat to the banking industry.1 Continue reading “My beef with bitcoin bulls”

Bankers are people, too

My book is published!

Do you think banking is too hard for you? Are you convinced that all bankers are crooks? Would you like to follow the financial news, but you always get stuck on terms like derivatives, cryptocurrency or quantitative easing?

Then I have some good news. Continue reading “Bankers are people, too”

Problems with Christopher Balding’s analysis of Chinese banks and currency

Professor Christopher Balding has published a blog post with his views on the link between the China’s banking system and its currency: Can China Address Bank Problems without Having Currency Problems?

He believes that “it is much more likely that if there are systemic banking issues that currency problems will also arise.”

It is laudable that Prof. Balding summarizes his arguments. By being explicit about the assumptions, readers don’t just have to trust his opinion. Instead they can follow the logic and evaluate the strong and weaker points themselves.

The goal of this post is to counter some of the points listed by Balding to support his conclusion. Continue reading “Problems with Christopher Balding’s analysis of Chinese banks and currency”

A lost decade (for bank investors)

2007 seems ages ago. It was the final year of another era, the time before the Crisis. Whatever you prefer to call it – credit crisis, debt crisis, global financial crisis, banking crisis – the crisis has scarred the shareholders of banks. Even though ten years have passed, most bank stocks still have not recovered to their pre-crisis highs.

This post looks at the evolution of the stock prices of the largest banks1 in Europe and the US. For European banks, I made a distinction between institutions with headquarters inside and outside the euro area. Continue reading “A lost decade (for bank investors)”

WannaCry about cybersecurity? Consider this first

In an event that has been called the WannaCry ransomware attack, hackers encrypted data on computers all around the world. The victims – which included hospitals and car factories – had to pay ransom in Bitcoin to get their files back.

Computers without up to date operating systems were particularly vulnerable to the attack.

People who have never come into contact with the internal IT operations of a large company find this hard to understand. Why don’t companies just install the latest patches, like private persons do on their home computers?

Software engineer Jürgen ‘tante’ Geuter has a nice blog post that explains why things are not so simple in the real world: “Why don’t they just update?” Continue reading “WannaCry about cybersecurity? Consider this first”

Stop calling banking ‘monetary intermediation’

Banks create money. To be more precise, when a bank grants a loan, it simultaneously creates a deposit. Bank deposits are functionally equivalent to cash.

The insight that bank lending creates money is a direct result of basic accounting, and has been explained many times. See for example the Bank of England, Positive Money, this blog, and most recently the Bundesbank (h/t Benjamin Braun) and Norges Bank (h/t Frank van Lerven).

A while ago, Daniela Gabor pointed out that economists have know this for a long time (see the replies to her tweet for even earlier references):

I wouldn’t be surprised if the Renaissance bankers who understood double-entry bookkeeping were well aware of the fact that they were creating money.

So how is it possible that some famous economists still don’t know that banks really do create money? Why do they insist that banks lend out savings?

Economics education apparantly fails to pass on some elementary knowledge to students.

It doesn’t help that the activities of banks are often described as ‘monetary intermediation’. Intermediation implies that bankers are the middle men between borrowers and savers.

Monetary intermediation is even an official term in the statistical classification of economic activities in Europe:

The English description of NACE code 64.1 is ‘monetary intermediation’. Source

However, there exists a much better description for banks. In Dutch, the formal description of banks is “geldscheppende financiële instellingen”, which literally means “money-creating financial institutions”:

The Dutch description of NACE code 64.1 means ‘money-creating financial institutions’. Source

As far as I can tell, Dutch is the only European language in which banks are described as active money creators1. All other languages use ‘monetary intermediation’.

Maybe everybody should take a cue from Dutch and start saying ‘money creating institutions’ from now on, so we don’t have this debate a hundred years from now 😛

Do you want to know more about banks, central banks or monetary policy? Follow me on Twitter!

What I like about America, finance edition

Or to be more precise, debate about the financial institutional framework edition.

How should banks be regulated? Ten years ago, this question would have only interested a few specialists. Discussions about bank supervision and the role of the central bank were way too boring for the general public1. Besides, bankers surely knew what they were doing?

The global financial crisis and its aftermath changed this complacent attitude. The existing rules did not prevent the worse financial crisis since the 1930s. Governments had to bail out banks at a moment’s notice. Politicians took drastic decisions during the panic of September 2008. While those actions were taken with little democratic oversight, national leaders2 were the only agents willing and able to stop the collapse.

The crisis spurred a thorough update of bank regulation. Both in the United States and in Europe, legislation was passed to make banks safer. Avoiding a repetition of ad-hoc bailouts became a priority. The U.S. got its Dodd-Frank Act. The European Union (EU) set up the European Banking Authority (EBA) and worked towards a banking union3. America and Europe implemented capital and liquidity standards based on the Basel III recommendations. Continue reading “What I like about America, finance edition”

Robot shark lifeguard

One of my business ideas has recently been implemented. My former colleagues at KBC launched a platform where small business owners can find entrepreneurs who want to take over an existing company.

I had this idea when a well-run shop for fishing gear and pet products in my hometown closed down. The owners retired and none of their children was interested in continuing their work.

This was a shame, because a lot of know-how and service to customers was lost. The owners missed out on the sale of a profitable business. A sale of the going concern could have yielded much more than selling separate assets. For the bank, a sale would have brought the opportunity to manage extra retirement funds. In addition, it could offer a loan to the new owner, sell insurance1, payment solutions etc.

As I regularly have ideas for startups or other business opportunities that I cannot pursue myself, let me share an idea that I had today. Feel free to implement it! You can thank me later when you’re a millionaire.

Engineers at the US Navy are developing a robot shark. They intend to use this robot to patrol around ships and in harbors. It is normal that the Navy explores military applications first.

A clever startup could market such robots as lifeguards.

But such devices could find widespread civilian use. A clever startup could market such robots as lifeguards. Imagine a robotic lifeguard loaded with sensors that can detect when a swimmer is in trouble. And that can grab them and bring them to the surface or to shore. This would give extra support to human lifeguards. And because it is seaborne already, a robot shark would cut down valuable intervention time.

The market for such a device would be huge. Think of all the swimming pools and beaches that would want to improve the safety of their bathers. Or robot sharks could assist in saving drowning migrants in the Mediterranean.

Central bank liabilities and profits

Central banks (CentBs) have drastically expanded their balance sheets in the wake of the global financial crisis. The Federal Reserve (Fed) and the European Central Bank (ECB) followed the example of the Bank of Japan (BOJ) by buying trillions of dollars and euros worth of long-term bonds, a policy known as quantitative easing (QE).

The CentBs make these purchases by “base money”, i.e. cash and reserves1. Neglecting legal restrictions, CentBs can create base money at will.

There is a lot of controversy among economists about QE and its consequences for the balance sheets of central banks.

This post discusses the question of whether or not base money should be considered a liability of the central bank. After that issue is understood, we can clarify when the CentB can book a profit and how this affects government finances.

One of the stated goals of QE is to raise inflation. Some worry that once this happens, rising interest rates will cause massive losses to the central bank, resulting in unspecified “bad things”. I argue that these fears are unjustified. Continue reading “Central bank liabilities and profits”

The annual general meeting of KBC

I had a new KBC experience today, after being a lifelong customer and having worked for 5 years at the bank-insurance group. This time not as a client or as an employee, but as a (co-)owner of the company.  The annual general meeting of shareholders was organized in the company’s Molenbeek1 headquarters this morning. Continue reading “The annual general meeting of KBC”