banks


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CASH is one of mankind’s greatest inventions; a vast improvement, one would imagine, on carting around sheep or bales of hay. Despite the proliferation of other forms of payment, cash retains qualities that alternative methods cannot match, including anonymity, instant clearing, universal acceptance and a relatively tech-free mechanism. It can be used even if the power grid goes down or the banks are all hacked. Yet a growing number of economists are now calling for cash to be phased out. Why?

In “The Curse of Cash”, published on August 16th, Kenneth Rogoff makes the case for gradually getting rid of most paper currency. It certainly has benefits, he admits, but these are outweighed by the costs associated with its murky side. Take anonymity. The same virtue that provides the ability to pay for a self-indulgent treat or a naughty service without its appearing on bank records or credit-card statements also allows criminals to fund their activities and tax-dodgers to avoid levies. The record $1.4 trillion circulating outside of banks in dollars alone, mostly in high-denomination bills, might suggest that every four-person American family has $13,600 in $100 bills stashed in a jam jar. That is unlikely. According to Mr Rogoff, the bulk of the rich world’s currency supply is used to facilitate tax evasion and illegal activities such as human trafficking and financing terrorism. A cashless world would also make monetary policy more effective, argue some, including Mr Rogoff, because savers would no longer be able to stuff cash under mattresses in case of negative rates. And as shopkeepers and businesses in relatively cash-light countries such as Sweden are discovering, there are other real benefits to preferring electronic payments over cash, including security, lower costs, hygiene and convenience, for both business and customer.

Moving away from cash would not be without complications. Some objections can be easily dismissed, such as a claim expressed by a fifth of a sample of Germans, who said in a recent survey that they like the feel of carrying cash. But other problems are harder to pooh-pooh. The most intractable are the loss of anonymity and the risk that parts of society will be left out of the financial system, in a world where smartphones and plastic become the only ways to pay. The anonymity problem can in part be solved by retaining smaller notes and coins; enough for punters to keep buying porn, weed and birthday presents, but not so much as to buy property. The point about financial exclusion is trickier. In a near-cashless world vulnerable groups, such as the poor, the elderly and migrants, could become further marginalised, and those who are especially cash-dependent for income, such as churches, charities and the homeless, could expect to see a drop in their incomes. But changes can be made gradually and intelligently, for example by paying benefits on prepaid debit cards and supplying charities with contactless card machines. The switch could in fact increase financial inclusion, by ensuring that the unbanked become banked.

The debate elicits strong reactions; Bild, a German newspaper, recently organised a reader protest against a €5,000 ($5,633) limit on cash transactions. And German academics have argued that banning cash won’t magically end crime and black-market dealings: electronic fraud, cyber-crime and anonymous payments online are easy enough for those with skill and determination. Yet as countries in the rich world grow increasingly detached from cash, with some shops and cafes flat-out refusing to accept the stuff, economists can already see early evidence of the benefits of going cashless—as well as the relatively painless nature of the transition.

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JPM beat by a little. The stock traded to a high of about $65, which was its expected move, more or less and is currently trading lower.

I guess the trend higher will continue higher if:

(a) the general market trades higher

(b) other bank stocks report decent earnings.

I would like to see $67 over the next 4-5 trading days. That would provide maximum profits on this trade. If (a) & (b) work out, that should be possible.

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There are likely to be more banking issues through emerging markets, which will roil US financial markets, increasing volatility.

Some are calling for another crash, similar to 2008.

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Looks like the beginning of a bank run in Greece.

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“Excess” reserves are reserves in excess of the requirements created through the creation of loans. Excess reserves could be used, but, are not. Will they be used? What if they were?

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With earnings season again approaching, one sector, banks, are set to disappoint, if not this quarter, possibly the next.

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Banks traded all of their MBS garbage, which had been largely written down, or at least discounted by the market for shiny new Treasuries, which, for a while provided some nice capital gains.

With yields taking off currently, those capital gains will evaporate, and in their place, some more write-downs which hurt earnings. The bond bear is not going to be a happy place for quite some time.

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Read the full article here

Snider

In changing from reserve targeting to interest rate targeting, the Federal Reserve upended that natural relation of interest and quantity. The FOMC now sets a target for the Fed Funds market and promises, through two-week “maintenance periods”, to issue or “fund” a potentially unlimited amount of “reserves” to maintain a specified interest rate target.

There is a need to clarify here exactly what is being funded and by whom. By saying that the Federal Reserve “funds” the wholesale markets, it really means that the Fed is providing a liquidity backstop. In almost every case, the Fed provides little actual funding into wholesale markets – the banks do that themselves by expanding their own balance sheets. What allows them to do so is this implicit backstop, knowing that the Federal Reserve will, if it is forced, create “money” to maintain whatever it is targeting (interest rates or reserves). The Federal Reserve only “fine tunes” money markets through open market operations, either adding or draining minor quantities of reserves in pursuit of whichever target level.

But the overall transition from reserve targeting to interest rate targeting was a fundamentally different approach to monetary engineering and banking in general. From the perspective of the banking system, in a reserve target environment there is an explicit limit to credit production, a marginal dollar if you will, which will trigger a rise in the cost of funding. At that marginal dollar, there is no guarantee or reliable estimate as to how much that marginal dollar will actually cost, and certainly less idea about a second marginal dollar. This is scarcity at work.

In a scarce dollar environment, banks view attaining “risky” positions far differently than if they have certainty about any marginal dollars. This imposes the process of intermediation upon banks; they must actively manage risk due to very imprecise knowledge about how much marginal funding will cost to add additional risk – they have to choose between risky propositions rather than opt for all of them. This is the beauty of monetary symmetry between quantity and cost.

By contrast, under the interest rate targeting scheme marginal dollars all cost the same. If the Federal Reserve targets a Fed funds rate of 1%, as Alan Greenspan did following the dot-com bust, then banks are assured of a 1% cost of marginal dollar funding. They know they can add risk to any level with only a minimal funding cost at inception. The only risk/funding parameter they have to model out is when that interest rate target is moved upward, and by how much. That provided little challenge to banks intent on adding to credit production or risky positions since they were explicitly guided by FOMC policy statements about what to expect – Greenspan telegraphed that rates would stay low and only gradually rise once the FOMC was assured of whatever economic variables they wanted to see moving in the “right” direction. It reduces the link between funding uncertainly and risk appetite to essentially nothing.

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