How the ECB can stop the coronavirus crisis overnight

I haven’t posted on the blog in a while, but I’m very active on Twitter.

Here’s my 3 point plan for the ECB:

(1) The ECB should issue bonds, which are risk free (the ECB cannot default on euro liabilities). It should buy every sovereign bond trading at a yield of 40 basis points or more above the yield on the ECB bonds.

(2) The ECB should set the interest rate on TLTROs at -5% until six months after the coronavirus public health crisis is over.

(3) The ECB should do helicopter money as soon as businesses are operational again, because the outlook for price stability is bleak.

This is not a drill

The ECB, government leaders and the banking sector must act immediately to stop the financial panic caused by the coronavirus.

A recession can still be avoided.

Banks should provide bridge loans to businesses suffering from the corona shock.

The ECB should do a TLTRO-like operation, providing cheap funding proportional to banks’ SME/corporate credit portfolios. Make the terms of the ECB loans conditional on coronavirus metrics. For example: banks should repay 4 months after the last new COVID-19 case is detected in the EU.

If Europe’s leaders fail to act decisively, the financial costs will snowball.

The economics of the coronavirus on Twitter

The coronavirus won’t cause a recession

But the reaction of policymakers might.

The direct impact of the coronavirus on the economy is limited. Unlike disasters such as hurricanes or earthquakes, there is no material damage. Few workers have been incapacitated by the virus.

Once the spread of the virus is under control, the economy can recover quickly.

The greatest risk is that politicians and central bankers will let financial uncertainty get out of hand. The stock market has taken a hit. Some companies will need to defer payments.

Continue reading “The coronavirus won’t cause a recession”

Cross border financial services: Europe’s Cinderella?

The Belgian Financial Forum and SUERF held a colloqium about cross border financial services in Europe.

An impressive line-up of speakers from the public and private sector discussed why European banks don’t sell more services outside their home countries.

Some pointed out that regulation is still fragmented along national borders – despite the banking union.

But the recurring theme of the day was the lack of profitability. There is no business case for mergers and acquisitions. Countries like Germany and Italy have way too many banks.

Chart by Morgan Stanley, via Johannes Borgen

The industry would be better off with fewer players, but nobody wants to take over small banks with wafer-thin margins.

You can read my Twitter thread about the event here.

The slides of the presentations are available here.

AI lawsuits are coming

AI will disrupt finance, but not in the way some tech bros think.

In a viral thread, David Heinemeier Hansson describes how Apple Card discriminates against his wife. Nobody at the company can explain how the algorithm makes its decision. Just “computer says no”.

That’s the kind of bureaucratic horror you expect from an old-fashioned state-run company. Ironically, Apple markets its credit card as “built on the principles of simplicity, transparency, and privacy” and “Created by Apple, not a bank”.

Yeah, I’ll stick to my bank, thanks.

If you can’t explain your AI, lawsuits are coming.

Long lawyers, short black box AI.

Life insurers are the real yieldbugs

Pseudonymous banking expert Johannes Borgen recently discussed the impact of low interest rates on European life insurers. Because insurers discount the value of their liabilities, low rates are a huge problem.

But as Johannes Borgen points out, the regulator lets insurers use a hypothetical long term rate that “is a f**** joke. IT IS NOT EVEN REMOTELY LOOKING LIKE REAL WORLD INTEREST RATES ; which mean that all insurer liabilities are grossly undervalued.”

Yikes.

You can read his thread here: https://threadreaderapp.com/thread/1184391852046409729.html

By the way, yieldbug is a term used by Bloomberg journalist Joe Weisenthal to troll people who believe they deserve to receive interest on their risk free investment.

Money laundering doesn’t pay (for banks)

Swedish tv station SVT has investigated suspected money laundering by Russian and Ukranian customers of Swedbank. Oligarchs used accounts at Swedbank’s Estonian branch to move money offshore. The documentary is available online in English: part 1 and part 2.

At the end of part 2, Daria Kaleniuk, executive director of the Anti-Corruption Action Center in Kiev is asked “why do you think they [i.e., the bank] let this happen?”. Ms. Kaleniuk replies “because it’s profitable!”.

However, I’m not convinced that is true. Payments are a low-margin activity that expose banks to a lot of downside risk. Violating anti-money laundering (AML) rules have cost banks hundreds of millions of dollars in recent years.

In my opinion, criminals succeed in money laundering because compliance with AML regulation was (is?) not a priority for top executives.1 A lack of funding and management attention for compliance leads to a mentality of “just check the boxes, so it looks like we did what we had to do”.

Stronger enforcement, including higher fines and other sanctions, might change that situation.