Go big or go home! (Finrestra podcast episode 3 transcript)

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Transcript:

“Hello and welcome to another episode of The Finrestra Podcast.

My name is Jan Musschoot.

The topic of today’s episode: Go big or go home!

According to economic theory, banks have good reasons to expand abroad. Bigger banks should benefit from economies of scale. A broader geographic footprint results in a more diversified loan portfolio. So multinational groups should be more resilient against economic downturns.

However, cross-border expansion is not what we observe in the real world. In fact, multinational banks have been selling their foreign subsidiaries for years. Earlier this year, American Citibank announced that it would exit retail banking in 13 countries, most of them in Asia. Last year, Spanish bank BBVA sold its unit in the United States.

Banks are also selling their foreign activities in Europe. Here are some examples, all from 2021.

British HSBC was so desperate to get rid of its French retail bank, that it sold the unit for one symbolic euro. Dutch ING also plans to leave the French retail market. That same ING has sold its retail bank in Austria. Dutch Rabobank decided to wind down its Belgian retail activities, as it couldn’t find a buyer. British NatWest and Belgian KBC have announced they would exit the Republic of Ireland. 

Bankers have good reasons to leave foreign markets. Because policymakers are scared of “too big to fail” banks, so-called systemically important banks need larger capital buffers. More countries also means higher costs for reporting and compliance. Banks have learned that there are few synergies between countries, even for branchless banks that only offer online services, like ING and Rabobank. 

That’s why there is a clear trend towards deglobalization.

But that’s not the end of the story. Not all banks are returning to their domestic past.

Economies of scale are a thing, but not in the sense that bigger is always better.

What you want is to have scale within a market.

A good example is Societe Generale. The French financial services group sold most of its Central and Eastern European units. But SocGen kept its subsidiaries in the Czech Republic and in Romania. In both countries, these banks are the third largest in the market. Hungarian OTP sold its small subsidiary in neighboring Slovakia to KBC-owned CSOB. But OTP has also recently signed a deal to buy the second largest bank of Slovenia. Merged with its existing Slovenian subsidiary, it will become the market leader. And this silent consolidation isn’t limited to the East. French Credit Agricole has been gradually increasing its market share in Italy, for example.

So while European policymakers despair at the lack of cross-border mergers and acquisitions, the much needed consolidation is happening. Banks are reducing their geographic complexity.

And some groups have become robust multinational banks that have a significant market share in multiple countries.

If you want to discuss banks’ strategy, you can find me on Twitter @janmusschoot.

To learn more about our research and courses, check out our website, finrestra.com.

Thanks for listening!”

The US debt ceiling and the trillion dollar platinum coin (Finrestra podcast episode 2 transcript)

Listen to this episode on Spotify, Apple or YouTube!

Transcript1:

“Here’s what you need to know about the debt ceiling.

The main player in this drama is the US congress. Congress is the legislative body of the federal government, similar to parliaments in Europe. Congress makes the laws.

In particular, Congress specified how much the US should spend on things like social security and the military. Congress also passed laws on taxation.

These laws are executed by the Treasury, what we call the Ministry of Finance in Europe.

Because expenditures exceed the tax revenue approved by Congress, the Treasury needs to borrow the difference. So US government debt goes up.

And that’s where the debt ceiling comes in.

In addition to laws on spending and taxation, Congress also passed a law on the maximum level of government debt. This so-called “debt ceiling” is currently somewhat above 28 trillion dollars.

If Congress doesn’t raise the debt ceiling, the Treasury has a huge problem.

To comply with the law, Treasury has to spend money on existing programs. But according to the debt ceiling, it cannot borrow any more money. And Treasury cannot create new taxes, that’s the responsibility of Congress.

So it seems that the Treasury is trapped in an impossible trinity, where it cannot satisfy the three demands of Congress (spend, tax, debt ceiling) at the same time.

But some smart lawyers have discovered a loophole.

Treasury has the right to make money. Specifically, the Treasury can mint coins from platinum, a precious metal. But the value of the coins isn’t in the metal. The coin can be whatever value the Treasury says it is. Just like a 100 dollar bill is worth a hundred dollars because it is issued by the Federal Reserve, not because the material is worth a hundred dollars.

So when Congress doesn’t raise the debt ceiling, Treasury can make a trillion dollar platinum coin. That way, it has extra money to keep paying the existing spending programs approved by Congress, without increasing the debt.

There’s a website, mintthecoin.org, which has answers to a lot of questions on the proposal to mint a trillion dollar coin. For example, whether it’s legal (yes, it is) and whether it would lead to hyperinflation (no, it won’t).

I hope you enjoyed this episode of the Finrestra Podcast. Don’t forget to listen to our first episode with Uuree Batsaikhan of Positive Money Europe. You can follow me on Twitter @janmusschoot, that’s @ j a n m u s s c h o o t. Our website is finrestra.com. Thanks for listening!”

Energy, inflation, and the impotence of the European Central Bank

This is the blog version of episode 12 of The Finrestra podcast: “What can the ECB do when inflation is driven by energy costs? Three proposals” (listen on Spotify, Apple Podcasts or YouTube).

Euro area inflation was estimated at 5.1% in January 2022. That’s mainly due to energy costs. Furthermore, businesses will try to pass on their higher costs (transport, heating, materials) to consumers.

Source

According to Isabel Schnabel, “Monetary policy cannot reduce the price of oil or gas.

I disagree, as I told the ECB back in 2020. If instead of government bonds, the ECB had bought a controlling stake in oil & gas majors, it could force them to lower prices.

That’s probably too radical for conservative central bankers.

But there are other, more conventional paths.

Energy makes up about 11% of Eurostat’s basket of harmonized index of consumer prices.

File:Weights of the main components of the euro area HICP (‰) - 2022 (estimated).png

What if that percentage was lower? Volatile (fossil) energy prices would have less of an effect on inflation. This would make the ECB’s job easier.

To be clear, I’m not suggesting that the ECB interferes with how Eurostat measures inflation.

Rather, the central bank could reduce our dependence on (fossil) energy.

How? Years ago, in 2017, I wrote a proposal for green investments in Europe. A European Green Infrastructure Company (EGIC) would install solar panels, build energy-efficient schools, networks of charging stations for electric vehicles… All of this infrastructure would be funded by the ECB. Why? It’s hard to imagine now, but we’ve had years were inflation was too low, i.e. below the target of the ECB. In my proposal, the EGIC would build in countries with low inflation and high unemployment. In case of the economy is overheating, new projects would be put on hold, so real resources like workers, machines and building materials can be used elsewhere in the economy.

If the EU had done this, there would be an abundance of renewable energy. This would price fossil fuels out of the market, making international energy prices almost irrelevant for European inflation.

Of course, in the real world EU politicians and central bankers have wasted the opportunity of low inflation and low interest rates.

But it’s never too late. Even without a European Green Infrastructure Company, the ECB can reduce the weight of (fossil) energy in consumers’ expenditure. High energy prices make it attractive to make buildings more energy efficient. In fact, central bankers like Isabel Schnabel have argued that the slow transition to a carbon-neutral economy is a market failure (see also this video).

The ECB could correct this market failure by making loans for energy-efficiency cheaper, for example by charging a negative rate of -5%. Banks would pass this on homeowners and landlords. At the same time, the ECB could raise rates on other loans. This would stimulate investments in building improvements, and reduce the demand for consumer loans. Companies would respond by increasing the production of building materials. It would also alleviate the labor shortage, because workers would be attracted by higher wages in the renovation business relative to other jobs.

Further reading:

The ECB can help fix the energy price crisis: Play the long game

Inflation: raising rates is not the answer

Are higher interest rates going to crash the economy? A quick calculation suggests no

Even with inflation at 5%, some people believe that higher interest rates will crash the economy. Is this 2011 all over again1?

As I explained on Twitter, increases in debt servicing costs are small compared to rises of other production costs (e.g. labor). So if the economy does crash after rate hikes, it must be because of some other/indirect cause.

Financial news January 2022

As always, I start the first Finrestra podcast episode of a month with a selection of the financial news of the previous month. Listen to the episode of 7 February 2022 on Spotify, Apple Podcasts or YouTube.

My 2022 KPI: 150,000 views on YouTube

Today (January 5, 2022), the Finrestra YouTube channel has 1525 views and 27 subscribers.

I started the channel on May 28, 2021. Now that I have some data on what “works” and what doesn’t, I plan to post a video about once per two weeks. This doesn’t include episodes of the Finrestra podcast.

FYI, what works is: me talking in front of the camera. I’ll do more about the ECB, European banks and climate finance in 2022.

What doesn’t work: videos with data and without a human face. That doesn’t mean I’ll stop making bank profiles, because these are crucial for my professional services.

I’ll revisit this post at the end of the year to see if I’ve succeeded 🙂

Financial news November 2021

I also covered the news in the first Finrestra episode of December:

Financial news October 2021