Category: English

Less is more

Don’t you hate it when books go on and on?

I sure do.

That’s why, from the very start, I decided that Bankers are people, too should focus on the basics.

Therefore, I chose to leave out many financial products and services.

If you want to learn more about things like cash pooling, discounting, factoring, leasing, securitization or structured products1, Bankers are people, too is not the book you’re looking for.

If, on the other hand, you want a 200 page introduction to money, banking and macroeconomics, I promise you will love it.

The Owl of Frankfurt: Lagarde discovers her powers

Big shoes to fill

Christine Lagarde took over the ECB from Mario Draghi in 2019. Draghi was widely respected as the man who saved the euro. He promised to do ‘whatever it takes’ when prices for bonds of large euro countries were unsustainably low. Furthermore, Draghi introduced monetary policy tools that were considered radical at the time, such as quantitative easing (buying bonds) and targeted refinancing operations (lending to banks).

Critics suspected that Lagarde would be no match for her predecessor. Indeed, Draghi was an economist and former banker. By contrast, Lagarde was ‘merely’ a lawyer and politician.

Maybe that is why her opponents would systematically underestimate Lagarde. Time and again during her presidency, she followed the same strategy. Instead of trying to come up with new ideas herself, she listened to all options. Not just those of an inner circle of old central bankers and professors, but especially the alternatives suggested by junior staff and independent thinkers. Once Lagarde made up her mind on the right course to follow, she used her political skills to win the day.

The 2020 review

But let’s return to the start. Although Draghi’s ECB had performed better than under the disastrous Trichet, all was not well. Unemployment in the euro area was high. The ECB’s interest rates were negative. Inflation in the euro area was below the two percent target. The contemporary consensus said that the central bank was out of ammo.

It was in this context that Lagarde launched a monetary policy review. She wanted to know how the ECB could boost economic growth and fight climate change.

The policy review set in motion the bureaucratic cogs of the ECB. Meanwhile, Lagarde was subtly consolidating her power. She kept a tight grip on meetings and did not tolerate leaks. She also improved communication with national leaders and the European Parliament.

But most importantly, Lagarde read the Internet. And what she read did not make her happy. Lagarde’s advisors had assured her that the ECB’s hands were tied. They claimed that the institution was powerless in the current macroeconomic environment and that fiscal stimulus was needed.

But online, she discovered that central banks had historically used instruments that none of the very serious people were talking about. It was as if everybody suffered from amnesia.

In the spring of 2020, Lagarde held a secret meeting with three outsiders. The quartet of conspirators hatched a plan…

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Next episode: the conference of the long knives

First episode: Paris, 2076

The Owl of Frankfurt: Paris, 2076

Eulogy by Aya Sissoko, President of the ECB, 8 January 2076

It is with great sadness that we say farewell to our honorary President and dear friend Christine Lagarde today.

Madame Lagarde will be fondly remembered as the fourth President of the European Central Bank, the predecessor of the Euro Central Bank.

Christine became President during a protracted malaise in the euro area. By throwing off the yoke of false dogma, she revitalized the ECB. Her curiosity, vision and political prowess changed the course of history.

Owl of Athens on Charon’s piece

Under her leadership, the ECB showed the world how to handle the climate transition. At the same time, the euro economy grew at a rate previously believed to be impossible.

Ask any of the Seven Bankers, and they will all agree: Christine was the first modern central banker. Her autobiography, published 30 years ago, is still a must-read.

Christine’s career set the gold standard for our profession. Not just for what she did during her presidency, but also for what she didn’t do.

Her resignation in the wake of the Crisis of 2033 was a clear statement against the all-powerful central banker. During her retirement, Christine refrained from commenting on current events.

Christine, Madame Lagarde, you were born Lallouette – the lark – but you will always be The Owl of Frankfurt.

On behalf of the 1.4 billion people who use the euro every day,

Bon voyage!

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Next episode: Lagarde discovers her powers

Germany’s export-led economy and the consequences for its banks

In the thread below, Benjamin Braun explains Germany’s political economy. More specifically, he and Richard Deeg studied the interaction between the financial and non financial corporate (NFC) sectors.

Let me try to summarize the argument.

The German NFC sector has high profits (1) and runs a trade surplus (2).

(1) enables companies to finance their own investments. They don’t need to borrow money from banks.

(2) leads to an inflow of reserves and deposits at banks. As a result, German banks lend to foreign entities.

This seems a sensible story.

However, I don’t agree with the conclusion:

First of all, I highly doubt any policymakers really want to help German banks. If that were the case, the monstrosity of publicly owned, unprofitable banks would have been cleaned up by now.

But even if German politicians cared, it’s not clear that stronger unions or higher wages would be more than a drop in a bucket.

A higher demand for credit would have an immediate positive impact on German banks. And there is a lot of room for growth.

Home ownership in Germany is low compared to non-German speaking countries, as you can see in this picture from Eurostat.

Stimulating home ownership would boost the demand for mortgages.

More investment by the government, as called for by industry and labor unions, would also increase the domestic supply of assets for banks if it’s funded by bonds instead of taxes.

If Angela Merkel wants some more advice, she can leave a comment 🙂

Three ways to attract new bank customers

Any banker will tell you that it’s not easy to attract and keep new clients. Why do people change banks? I see three reasons:

  1. Home buyers get better terms on a mortgage compared to their existing bank.
  2. Savers get a higher interest rate on their savings.
  3. The new bank has better services.

Roughly speaking, (1) is the stategy of traditional banks. Online savings banks attract deposits with (2) and fintechs employ strategy (3)2.

Let’s apply this framework to NewB, a new Belgian bank (yes, it’s really called NewB). How easily it will attract customers?

  1. You can’t get a mortgage at NewB.
  2. The interest rate on its savings account will be zero percent, which is less than the minimum of 0.11% at other banks.
  3. Finally, there’s no indication that it will delight customers with superior services.

So NewB scores zero out of three.

Yet NewB’s business plan expects the bank to have 277 million euro in deposits by the end of 2024.

Some Chinese banks offer pork meat as a reward for opening an account. Maybe NewB should give an Impossible Burger to new customers? Otherwise, this is gonna turn into Mission: Impossible.

Central banks will always be political

What do crypto enthousiasts have in common with defenders of independent central banks?

Based on the “Buy Bitcoin”-replies to ECB/Fed tweets, it seems the answer is “not much”.

However, that’s incorrect. Both groups think that their projects are apolitical.

Many central bankers view themselves as technocrats, divorced from politics.

But that’s a fantasy.

You see, anything a central bank does – even within its mandate – has political consequences.

Should monetary policy take into account climate change?

Should the central bank change interest rates or do QE to reach its inflation goal? Whatever option is chosen, monetary policy has distributional effects. For example, the German government has saved hundreds of billions in interest costs.

European non-financial corporations have benefited from low interest rates. Source

These two dilemmas illustrate that central banking is inherently political.

Therefore, economists should calculate the consequences of different monetary policy options. These scenarios will make the politics of the central bank’s actions explicit. For example, I estimated the effect of deeply negative interest rates (a proposal of Miles Kimball) on banks, governments, the ECB and the private sector.

Especially in the euro area, the ECB should take differences in asset mixes between countries into account.

Increased transparency will enable central bankers to defend monetary policy against criticism.

Update 26 January 2020: my arguments are obviously not new, see for example:

How mathematical modeling saved money and sped up innovation in 1570

Computer-aided design (CAD) enables engineers to create products much faster and cheaper compared to trial and error.

But did you know that innovators have used abstract modeling long before the existence of computers?

Anton Howes, a historian of innovation, tells the story of Matthew Baker. Baker was a 16th century shipbuilder who improved the construction of carvel ships.

Carvel-built hull versus the previous clinker-built method. Source

As Howes explains:

What Matthew Baker did in the 1570s was to take the design process out of the shipyard, and onto paper. He drew his ships, to scale. And by using pen and paper, with geometry to make such drawings possible, he opened up grand new possibilities for design. […] He drew out new designs for frames, using geometry to work out how any variation would affect the overall shape of the hull, as well as its weight and carrying capacity – all at the cost of only time, ink, and paper, and avoiding the huge potential waste of conducting experiments at full scale in wood. His process allowed him to innovate more easily, and even to design new measuring instruments.

Interestingly, the new methods were not quickly adopted in the rest of Europe:

By the 1580s, new English ships were among the most technically advanced in Europe, and even in the mid-seventeenth century, ship plans were apparently still unknown in France. Having once lagged far behind, geometry began to give English shipbuilding the edge.

It’s still true today that good business practices (a) can save you a lot of money and (b) are hard to copy.

Where do banks make money?

The FRED (Federal Reserve Economic Data) database is a treasure trove for bank geeks.

Bank’s return on assets by nation is one of many statistics that can be visualized with GeoFRED (click this link).

As you scroll through the years, you’ll notice a few patterns.

Return on assets is low in Western and Southern Europe, as well as in Japan.

Banks in the Americas, Africa and Central Europe achieve higher returns.

I’m curious to know what conclusions bank CEOs and regulators draw from these maps.

What are your thoughts?

Further reading:

Where in the world are banks profitable? (FRED blog)

Rethinking bank profitability (FT Alphaville, free but registration needed)

Cross border financial services: Europe’s Cinderella?

New Year’s resolution

This year, I want to (a) increase my writing output and (b) increase my audience.

I plan to release three posts per week:

  • A post on banking (including the ECB) on Monday
  • Wednesdays will be devoted to random topics (research, macroeconomics, book reviews, personal stuff like the current post)
  • You can expect a Dutch language post about personal finance or the Belgian tax system on Friday

I will also share my posts more often on Twitter, Linkedin and Facebook, and submit op-eds to newspapers and other websites.

If you think a post would be useful for your friends, feel free to share it!