Category Archives: Notes

TIPS Goes Online

The ECB launches its Target Instant Payment Settlement (TIPS) system, which facilitates instant money transfers between banks and allows end users connected to those banks to make instant retail payments across the Euro zone.

Report in the FAZ. Last year’s report by Mehreen Khan in the FT.

From the ECB’s website:

TIPS was developed as an extension of TARGET2 and settles payments in central bank money. TIPS currently only settles payment transfers in euro. However, in case of demand other currencies could be supported as well. …

… a number of national solutions have been developed, or are under development, across the EU. A challenge for the Eurosystem is to ensure that these national solutions do not (re)introduce fragmentation … TIPS aims to minimise this risk by offering a service that can help ensure that any bank account holder in Europe can be reached. …

Participating payment service providers can set aside part of their liquidity on a dedicated account opened with their respective central bank, from which instant payments can be settled. It is only possible to add funds to TIPS accounts during TARGET2 opening hours.

As settlement in TIPS takes place in central bank money, participation in TIPS depends on being eligible to access central bank money. For this reason, in order to open an account in TIPS in euro, an institution needs to fulfil the same eligibility criteria as for participation in TARGET2.

Banks pay at most 0.2 cent per transaction during the first two years of operation.

See also the blog post on the Bank of England’s related, but different “interledger” program.

Central bank digital currency gets closer by the day …

IMF’s Lagarde Open to CBDC

At a conference in Singapore, IMF Managing Director Christine Lagarde has argued that

[w]hile the case for digital currency is not universal, we should investigate it further, seriously, carefully and creatively.

In her speech she emphasizes potential benefits related to financial inclusion; security and consumer protection; and privacy. (Privacy would be limited however.) She sees risks as well, including to innovation. But she de-emphasizes the notion of increased run risk which commentators often stress.

What about the risk of bank runs? It exists. But consider that people run when they believe that cash withdraws are honored on a first-come-first-serve basis—the early bird gets the worm. Digital currency, instead, because it can be distributed much more easily than cash, could reassure even the person left lying on the couch!

In addition, if depositors are running to foreign assets, they will also shun the digital currency. And in many countries, there are already liquid and safe assets to run toward—think of mutual funds that only hold government bonds. So, the jury is still out on whether digital currencies would really upset financial stability.

She also refers to a recent IMF working paper on the subject.

The FT reports.

Almost all working papers on the subject of CBDC claim that the introduction of CBDC would change equilibrium outcomes. Very few papers carefully lay out the reasons; instead most papers make implicit assumptions that are not spelled out although they are crucial for the results. I have argued elsewhere (see this blog post) that the introduction of CBDC could leave equilibrium outcomes unchanged in a benchmark case, and with Markus Brunnermeier we have formally presented the argument.

Legal Commentary on U.S. Iran Sanctions and the EU’s Blocking Statute

Laurent Ruessmann and Jochen Beck, FieldFisher, 17 July 2018, International firms caught between US Iran sanctions and EU blocking statute.

Several authors, Gibson, Dunn & Crutcher LLP, 9 August 2018, The “New” Iran E.O. and the “New” EU Blocking Sanctions—Navigating the Divide for International Business.

The “primary sanctions” that limit U.S. companies and persons from engaging with Iran have on the whole never been lifted. The principal sanctions relief provided by the United States [until 2018] have been of “secondary sanctions” that focus on non-U.S. companies’ transactions with Iran. These measures are designed to force non-U.S. firms to choose to either engage with Iran or the United States. …

All of the sanctions and [the EU’s] counter-sanctions are in large part discretionary. …

… the Blocking Statute allows EU operators to recover damages arising from the application of the extraterritorial measures. Though it is unclear how this would work in practice, it appears to allow an EU operator to exercise a private right of action and to be indemnified by companies that do comply with the U.S. laws if in so doing those companies injure the EU operator. …

The United Kingdom has in place a law … which broadly makes compliance with Blocked U.S. Sanctions a criminal offence. … other Member States have also opted for the creation of criminal offences, including Ireland, the Netherlands and Sweden. Other Member States, including Germany, Italy and Spain, have devised administrative penalties for non-compliance. Meanwhile some Member States, including France, Belgium and Luxembourg, do not appear ever to have even implemented the EU General Blocking Regulation …

… element of flexibility in the Blocking Statute is that EU operators will not be forced to continue business with Iran. Rather, the Guidance notes that EU operators are still free to conduct their business as they see fit …

Several authors, Dechert LLP, August 2018, Iran Sanctions—U.S. Reimposes Sanctions After JCPOA Withdrawal, First Measures Come Into Effect.

The practical effect of these developments is to return the U.S. secondary sanctions regime to the status quo pre-JCPOA. However, the New Iran E.O. does expand upon the U.S. primary sanctions regime in one critical respect: U.S. owned or controlled foreign entities … Until now, OFAC’s sanctions have not prohibited a foreign subsidiary from dealing with a non-Iranian SDN. Although many such transactions would likely have subjected U.S. owned and controlled foreign entities to potential secondary sanctions pre-JCPOA (on the basis that they were providing material support to an SDN), they may now result in civil or criminal liability under U.S. law.

For other foreign businesses … The New Iran E.O. does little to clarify the Administration’s current posture, but does grant it significant discretion to target a wide range of activity, effective immediately. Given the Trump Administration’s rapidly shifting approach on other issues relating to international trade and national security, from tariffs to North Korea, businesses should plan for the worst while continuing to strategize and advocate for a more pragmatic approach.

Jeremy Paner, Holland & Hart, 8 November 2018, The Return of All Financial Secondary Sanctions on Iran:

U.S. law currently authorizes OFAC to impose correspondent and payable-through account sanctions on non-U.S. financial institutions that knowingly conduct or facilitate any significant financial transaction involving the following:

  • the Central Bank of Iran;
  • a designated Iranian individual or entity, other than banks solely designated for being Iranian;
  • the automotive sector of Iran;
  • the National Iranian Oil Company (NIOC) or Naftiran Intertrade Company (NICO);
  • petroleum, petroleum products, or petrochemical products from Iran;
  • the purchase or sale of Iran rials; and
  • a derivative, swap, future, forward, or other similar contract whose value is based on the exchange rate of the Iranian rial.

Additionally, non-U.S. financial institutions that maintain Iranian rial denominated funds or accounts outside of Iran are exposed to potential correspondent and payable-through account sanctions.

SWIFT’s Response to the U.S. Iran Sanctions Threat

SWIFT, the international financial messaging system, has responded to the U.S. sanctions threat (see this post)—it has agreed to comply. Michael Peel reports in the FT, that SWIFT

suspends certain Iranian banks’ access to its cross border-payment network.

According to Peel, SWIFT explains the step as follows:

“This step, while regrettable, has been taken in the interest of the stability and integrity of the wider global financial system.”

This does not only expose SWIFT to punitive actions by the European Union since

… new EU rules … forbid companies from complying with the US Iran sanctions.

It also seems to contradict the explanations that SWIFT provides on its homepage:

[w]hilst sanctions are imposed independently in different jurisdictions around the world, SWIFT cannot arbitrarily choose which jurisdiction’s sanction regime to follow. Being incorporated under Belgian law it must instead comply with related EU regulation, as confirmed by the Belgian government.

U.S. Sanctions against Iranian Authorities and Other Persons

The Executive Order. And what it means, according to the Treasury Department’s FAQs page (my coloring):

E.O. 13846 reimposes relevant blocking sanctions, correspondent and payable-through account sanctions, and menu-based sanctions previously provided for in E.O.s 13574, 13590, 13622, and 13645, which were revoked by E.O. 13716, and continues in effect sanctions authorities provided for in E.O.s 13628 and 13716. As incorporated into E.O. 13846, these measures include implementing authority for and additional tools related to: the Iran Sanctions Act of 1996, as amended (ISA), the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010, as amended (CISADA), the Iran Threat Reduction and Syria Human Rights Act of 2012 (TRA), and the Iran Freedom Counter-Proliferation Act of 2012 (IFCA) (see FAQ 605). As a general matter, E.O. 13846 incorporates exceptions to these sanctions, including for transactions for the provision of agricultural commodities, food, medicine, or medical devices to Iran, to the same extent such exceptions applied under the prior E.O.s. E.O. 13846 also broadens the scope of certain provisions contained in those E.O.s, as outlined in FAQ 601 below.

Section 1 of E.O. 13846 authorizes blocking sanctions on persons determined:

i. On or after August 7, 2018, to have provided material support for, or goods or services in support of, the purchase or acquisition of U.S. bank notes or precious metals by the Government of Iran (GOI) (subsection 1(a)(i));
ii. On or after November 5, 2018, to have provided material support for, or goods or services in support of, the National Iranian Oil Company (NIOC), the Naftiran Intertrade Company (NICO), or the Central Bank of Iran (CBI) (subsection 1(a)(ii));
iii. On or after November 5, 2018, to have provided material support for, or goods or services in support of:

a. Any Iranian person on the List of Specially Designated Nationals and Blocked Persons (SDN List) (other than an Iranian depository institution whose property and interests in property are blocked solely pursuant to E.O. 13599) (subsection 1(a)(iii)(A)); or
b. Any other person on the SDN List whose property and interests in property are blocked pursuant to subsection 1(a) of E.O. 13846 or E.O. 13599 (other than an Iranian depository institution whose property and interests in property are blocked solely pursuant to E.O. 13599) (subsection 1(a)(iii)(B)); or

iv. Pursuant to the relevant statutory authorities in IFCA, to be:

a. Part of Iran’s energy, shipping, or shipbuilding sectors (subsection 1(a)(iv)(A));
b. A port operator in Iran (subsection 1(a)(iv)(B)); or
c. A person that knowingly provides significant support to a person determined to be part of Iran’s energy, shipping, or shipbuilding sectors, a port operator in Iran, or an Iranian person included on the SDN List (other than a person described in section 1244(c)(3) of IFCA)) (subsection 1(a)(iv)(C)).

Section 2 of E.O. 13846 authorizes correspondent and payable-through account sanctions on foreign financial institutions (FFIs) determined to have knowingly conducted or facilitated any significant financial transaction:

i. On or after August 7, 2018, for the sale, supply, or transfer to Iran of significant goods or services used in connection with Iran’s automotive sector (subsection 2(a)(i));
ii. On or after November 5, 2018, on behalf of an Iranian person on SDN List (other than an Iranian depository institution whose property and interests in property are blocked solely pursuant to E.O. 13599) or any other person on the SDN List whose property is blocked pursuant to subsection 1(a) of E.O. 13846 or E.O. 13599 (other than an Iranian depository institution whose property and interests in property are blocked solely pursuant to E.O. 13599) (subsection 2(a)(ii));
iii. On or after November 5, 2018, with NIOC or NICO, except for the sale or provision to NIOC or NICO of the products described in section 5(a)(3)(A)(i) of ISA provided that the fair market value of such products is lower than the applicable dollar threshold specified in that provision (subsection 2(a)(iii));
iv. On or after November 5, 2018, for the purchase, acquisition, sale, transport, or marketing of petroleum or petroleum products from Iran (subsection 2(a)(iv)); and
v. On or after November 5, 2018, for the purchase, acquisition, sale, transport, or marketing of petrochemical products from Iran (subsection 2(a)(v)).

Section 3 of E.O. 13846 authorizes menu-based sanctions on persons determined to:

i. Have knowingly engaged, on or after August 7, 2018, in a significant transaction for the sale, supply, or transfer to Iran of significant goods or services used in connection with Iran’s automotive sector (subsection 3(a)(i));
ii. Have knowingly engaged, on or after November 5, 2018, in a significant transaction for the purchase, acquisition, sale, transport, or marketing of petroleum or petroleum products from Iran (subsection 3(a)(ii));
iii. Have knowingly engaged, on or after November 5, 2018, in a significant transaction for the purchase, acquisition, sale, transport, or marketing of petrochemical products from Iran (subsection 3(a)(iii)); or
iv. Be a successor entity to a person determined to meet any of the criteria set out in subsections 3(a)(i)-(a)(iii) of E.O. 13846 (subsection 3(a)(iv)); or
v. Own or control a person determined to meet any of the criteria set out in subsections 3(a)(i)-(a)(iii) of E.O. 13846 and to have had knowledge that the person engaged in the activities referred to in the relevant subsection (subsection 3(a)(v)); or
vi. Be owned or controlled by, or under common ownership or control with, a person determined to meet any of the criteria set out in sections 3(a)(i)-3(a)(iii) of E.O. 13846, and knowingly engaged in the activities referred to in the relevant subsection (subsection 3(a)(vi)).

Section 4 of E.O. 13846 provides authority for the heads of relevant agencies of the U.S. government to implement the menu-based sanctions provided for in section 3.

Section 5 of E.O. 13846 provides authority for the Treasury Department to implement the menu-based sanctions provided for in ISA, CISADA, TRA, IFCA, and section 3 of E.O. 13846

Section 6 of E.O. 13846 authorizes correspondent or payable-through account sanctions or blocking sanctions on FFIs that are determined to have, on or after August 7, 2018: (a) knowingly conducted or facilitated any significant transaction related to the purchase or sale of Iranian rials or a derivative, swap, future, forward, or other similar contract whose value is based on the exchange rate of the Iranian rial (subsection 6(a)(i)); or (b) maintained significant funds or accounts outside the territory of Iran denominated in the Iranian rial (subsection 6(a)(ii)).

Section 7 of E.O. 13846 carries forward sections 2 and 3 of E.O. 13628 and subsection 3(c) of E.O. 13716 (see FAQ 602 below) by providing for blocking sanctions on persons determined to:

i. Have engaged, on or after January 2, 2013, in corruption or other activities relating to the diversion of goods, including agricultural commodities, food, medicine, and medical devices, intended for the people of Iran (subsection 7(a)(i));
ii. Have engaged, on or after January 2, 2013, in corruption or other activities relating to the misappropriation of proceeds from the sale or resale of goods described in subsection 7(a)(1) of E.O. 13846 (subsection 7(a)(ii));
iii. Have knowingly, on or after August 10, 2012, transferred or facilitated the transfer of, goods or technologies to Iran, any entity organized under the laws of Iran, or otherwise subject to the jurisdiction of the GOI, or any national of Iran for use in or with respect to Iran, that are likely to be used by the GOI or any of its agencies or instrumentalities, or by any person on behalf of the GOI or any such agencies or instrumentalities, to commit serious human rights abuses against the people of Iran (subsection 7(a)(iii));
iv. Have knowingly, on or after August 10, 2012, provided services, including services relating to hardware, software, or specialized information or professional consulting, engineering, or support services with respect to goods or technologies that have been transferred to Iran and that are likely to be used by the GOI or any of its agencies or instrumentalities, or by any person on behalf of the GOI or any such agencies or instrumentalities, to commit serious human rights abuses against the people of Iran (subsection 7(a)(iv));
v. Have engaged in censorship or other activities with respect to Iran, on or after June 12, 2009, that prohibit, limit, or penalize the exercise of freedom of expression or assembly by citizens of Iran, or that limit access to print or broadcast media, including the facilitation or support of intentional frequency manipulation by the GOI or an entity owned or controlled by the GOI that would jam or restrict an international signal (subsection 7(a)(v));
vi. Have materially assisted or provided other support for activities listed in subsections 7(a)(i)-(a)(v) of E.O. 13846 (subsection 7(a)(vi)); or
vii. Be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant section 7 of E.O. 13846 (subsection 7(a)(vii)).

Section 8 of E.O. 13846 continues in effect the sanctions previously contained in section 4 of E.O. 13628, which prohibit an entity owned or controlled by a U.S. person and established or maintained outside the United States (a “U.S.-owned or -controlled foreign entity”) from knowingly engaging in any transaction, directly or indirectly, with the GOI or any person subject to the jurisdiction of the GOI, if that transaction would be prohibited by specified authorities if engaged in by a U.S. person or in the United States (see FAQs 621-623 below).

Section 9 of E.O. 13846 provides that it revokes and supersedes E.O.s 13628 and 13716 (see FAQ 602 below).

Sections 10-22 of E.O. 13846 contain exceptions, definitions, and other implementing provisions related to the sanctions in the E.O. [08-06-2018]

Truth, Triviality, and Contradiction

Nils Bohr chose

Contraria Sunt Complementa

as motto for his coat of arms. According to his son and others, Bohr distinguished between the logical properties of trivialities on the one hand and profound truths on the other:

The opposite of a correct statement is a false statement. But the opposite of a profound truth may well be another profound truth. [Unsourced]

There are two sorts of truth: Profound truths recognized by the fact that the opposite is also a profound truth, in contrast to trivialities where opposites are obviously absurd. [Quoted by Hans Bohr]

It is the hallmark of any deep truth that its negation is also a deep truth. [Quoted by Max Delbrück]

Swiss-German Media Quality

Two recent articles critically reflect on the quality of journalism in German speaking news, specifically in Switzerland. In the NZZ, Stephan Russ-Mohl reports about a study according to which in Switzerland, only 42 professors out of a sample of 1100 are regularly interviewed; they provide about half of the publicized statements. (In total, there are about 5500 professors in Switzerland.)

Eine Vielfalt wissenschaftlicher Stimmen gibt es in der Medienarena nicht: Von den 1100 der rund 5500 Professoren in der Schweiz, welche die Zürcher Forscher in ihrer Stichprobe erfasst haben, sind es ganze 42, die regelmässig von den Medien als Experten befragt werden und rund 50 Prozent aller Statements bestreiten. Die drei meistzitierten Medienstars der Schweizer Forscher sind Michael Hengartner (Molekularbiologe und Rektor der Universität Zürich), Michael Ambühl (Experte für Verhandlungsführung und Konfliktmanagement, ETH Zürich) und Kathrin Altwegg (Astrophysikerin, Universität Bern). Die meistgenannten Forschungsinstitutionen sind die Universität St. Gallen und das Hochschulinstitut für internationale Studien und Entwicklung in Genf.

In the NZZaS (other link), columnist Beat Kappeler explains that he has found it a waste of time to follow Swiss German radio, TV, or newspapers other than the NZZ. He argues that most German speaking news outlets lag the Financial Times and other Anglo-Saxon media by months or even years.

Ich habe bewusst in den letzten 40 Jahren nie TV geschaut, nie das deutschsprachige Schweizer Radio gehört, keine Deutschschweizer Presse gelesen ausser der NZZ …

[weil die angelsächsischen Quellen] mindestens drei Monate oder drei Jahre [voraus sind] …

Ihre Medien sind interessanter, kreativer und oft unkonventioneller. Die vielgekauten Themen Deutschlands und oft auch der deutschen Schweiz sagen mir nicht zu.

Conflicts of Interest at Bern’s Inselspital?

In the NZZ, Daniel Gerny and Simon Hehli report about potential conflicts of interest at Bern’s university hospital, the Inselspital.

A cardiologist found evidence of negative health effects of in vitro fertilization, which the Inselspital offers. But unusually, the hospital’s PR department didn’t advertize the findings. The motivation to keep quiet, according to the PR department, was that the findings are of relevance also for other groups at the hospital, and that this would have to be taken into account:

Publiziert wurde die Berner Studie im renommierten Fachmagazin «Journal of the American College of Cardiology». Seit Tagen sind die Untersuchungsergebnisse in aller Munde. … Umso erstaunlicher, dass ausgerechnet Scherrers Arbeitgeber, das Inselspital, der Studie keine grosse Beachtung schenkt: Aktiv wird darüber nicht informiert, eine Medienmitteilung ist nicht vorgesehen. Dabei waren sich die Studienautoren sehr wohl bewusst, welche Resonanz ihre Arbeit auslösen würde. Sie machten die Kommunikationsabteilung des Spitals deshalb gezielt und frühzeitig auf ihre Arbeit aufmerksam. Doch diese winkte kurzerhand ab: Im vorliegenden Fall wolle man keine aktive Medienarbeit betreiben, beschied sie in einer Mail, die der NZZ vorliegt. Als Erklärung für diesen Entscheid führt das Inselspital an die Adresse der Forschenden unter anderem an, «dass Ihre Ergebnisse direkt einen anderen Fachbereich der Insel-Gruppe tangieren. Da wir für die gesamte Gruppe die Kommunikation betreiben, müssen wir auch dies berücksichtigen.»

Negative Value Added of Switzerland’s Agricultural Sector

Farmers in Switzerland receive about CHF 2.7 billion in direct financial support annually. Total financial support by the federal and cantonal governments equals more than CHF 4 billion. But according to a report published by Zurich based think tank Avenir Suisse, this financial support constitutes just a minor part of the transfers from society at large to farmers, due to explicit and implicit subsidies, privileges, and—most importantly—negative externalities.

A list of privileges compiled by Avenir Suisse.

Avenir Suisse estimates the value added of Swiss agriculture to be hugely negative.

Die heutige Schweizer Landwirtschaft resultiert in einer negativen Wertschöpfung von minus 15,8 Mrd. Fr. pro Jahr. Damit kostet sie uns umgerechnet rund 1,8 Mio. Fr. pro Stunde.

In the NZZ, Nicole Rütti reports.

Germany, or the Bundesbank Caves In

In the FAZ, Philip Plickert reports that Deutsche Bundesbank changed its terms of business. Starting August 25, the Bundesbank may refuse cash transactions with a bank if the Bundesbank fears that, counter to the bank’s assurances, the cash transaction might help the bank or its customers evade sanctions or restrictions with the aim to impede money laundering or terrorism finance.

Conveniently, this will allow the Bundesbank to reject a request by European-Iranian Handelsbank to withdraw several hundred Euros.

Die staatliche Europäisch-Iranische Handelsbank (EIHB) in Hamburg hatte Anfang Juli bei der Bundesbank beantragt, mehr als 300 Millionen Euro in bar abzuheben. Nach Informationen der F.A.Z. war sogar von 350 bis 380 Millionen Euro die Rede. Dem Vernehmen nach soll es sich um Guthaben der iranischen Zentralbank bei der EIHB handeln. … Derzeit prüft die Finanzaufsicht Bafin, ob die EIHB die Vorschriften zur Prävention von Geldwäsche und Terrorfinanzierung einhält. Diese Prüfung könne sich hinziehen, heißt es in Berlin aus dem Finanzministerium. Bis die Bafin ihr Urteil abgibt, dürften die geänderten AGB der Bundesbank greifen.

The US has pressured the German government to prevent the cash withdrawal. And the Bundesbank closely cooperates with the Federal Reserve.

In ihren geänderten Geschäftsbedingungen ist explizit die Rede davon, dass auch die „drohende Beendigung von wichtigen Beziehungen zu Zentralbanken und Finanzinstitutionen dritter Länder“ ein Ablehnungsgrund für Bargeldgeschäfte sein könne.

In July, JP Koning had blogged about the bank’s request. His conclusion was:

There are sound political and moral reasons for both censoring Iran and not censoring it. Moral or not, my guess is that most nations will breathe a sigh of relief if German authorities see it fit to let the €300 million cash withdrawal go through. It would be a sign to all of us that we don’t live in a unipolar monetary world where a single American censor can prevent entire nations from making the most basic of cross-border payments. Instead, we’d be living in a bipolar monetary world where censorship needn’t mean being completely cutoff from the global payments system.

The sooner the Bundesbank prints up and dispatches the €300 million, the better for us all.

In an earlier column, Koning had described the difficulties for financial institutions worldwide to circumvent U.S. financial sanctions.

Mobile Phone Use and Cognitive Functions

In Environmental Health Perspectives, Milena Foerster, Arno Thielens, Wout Joseph, Marloes Eeftens, and Martin Röösli report findings that suggest potential adverse effects of adolescents’ mobile phone use on cognitive functions.

We found preliminary evidence suggesting that RF-EMF may affect brain functions such as figural memory in regions that are most exposed during mobile phone use. Our findings do not provide conclusive evidence of causal effects and should be interpreted with caution until confirmed in other populations. Associations with media use parameters with low RF-EMF exposures did not provide clear or consistent support of effects of media use unrelated to RF-EMF (with the possible exception of consistent positive associations between verbal memory and data traffic duration). It is not yet clear which brain processes could be potentially affected and what biophysical mechanism may play a role. Potential long-term risk can be minimized by avoiding high brain-exposure situations as occurs when using a mobile phone with maximum power close to the ear because of, for example, bad network quality.

Financial Sanctions, the USD, and the EUR

On Moneyness, JP Koning discusses the ability or not of the U.S. treasury to enforce financial sanctions overseas. Focusing on the Iran sanctions that ran from 2010 to 2015 (with strong international support) and are scheduled to be reimposed soon (without such support) Koning compares the U.S. sanctions regime to an exclusivity agreement that a large retailer imposes on a manufacturer.

Foreign banks in places like Europe were free to continue providing transactions services to Iran, but if they did so they would not be able to maintain correspondent accounts at U.S. banks. To ensure these rules were enforced, U.S. banks were to be fined and U.S. bank executives incarcerated if found guilty of providing accounts to offenders. Fearful bank executives were very quick to comply by carefully vetting those that they offered correspondent banking services to.

Having a U.S. correspondent account is very important to a non-US bank. If a European bank has a corporate customer who wants to make a U.S. dollar payment, the bank’s correspondent relationship with a U.S. bank allows it to effect that payment. Since the revenues from U.S. dollar payments far exceeds revenues from providing Iranian agencies and corporations with payments services, a typical European bank would have had no choice but to abandon Iran in order to keep its U.S. correspondent account.

But what would happen if Iran were to invoice in EUR rather than USD and make payments using an account at a European bank, bank X say, without direct links to the U.S. and no U.S. correspondent account? The answer to that question depends on whether the U.S. treasury would be prepared to sanction a third financial institution, bank Y say, that collaborates with bank X (or a business partner of bank X) and relies on a U.S. correspondent account. In the most extreme scenario bank Y would be the European Central Bank.

One scheme would be to set up a single sanctions-remote bank that conducts all Iranian business. To defang the U.S. Treasury’s threat “do business with us, or them, but not both!”, this bank should not be dependent on U.S. dollar business. Without a U.S. correspondent, the Treasury’s threat to disconnect it from the correspondent network packs no punch. … Crude oil buyers from all over Europe could have their banks wire payments to [bank X’s] account via the ECB’s large value payments sytem, Target2. [Bank X] could also open accounts for companies in India, China, and elsewhere who want to buy Iranian crude oil with euros.

… There is also the extreme possibility that the U.S. would impose travel bans on the ECB itself, in an effort to force ECB officials to remove [bank X] from Target2. Here is one such threat: “Treasury this week designated the governor of Iran’s central bank—does any European country think Treasury can’t designate their own central bank governor too?” Look, the idea of preventing Mario Draghi from travelling to the U.S., or blocking his U.S. assets, sounds so unhinged that it’s not even worth entertaining.

The reason Iran and its trading partners were not able to break sanctions between 2010 and 2015, according to Koning, is that Europe (specifically the German chancellor Angela Merkel) supported the U.S. administration and imposed its own sanctions on bank X, cutting it off the SWIFT and Target2 networks.

Bullshit Jobs and Corporate Correctness

In the New Yorker, Nathan Heller reviews David Graeber’s “Bullshit Jobs.”

In the course of Graeber’s diagnosis, he inaugurates five phyla of bullshit work. “Flunkies,” he says, are those paid to hang around and make their superiors feel important: doormen, useless assistants, receptionists with silent phones, and so on. “Goons” are gratuitous or arms-race muscle; Graeber points to Oxford University’s P.R. staff, whose task appears to be to convince the public that Oxford is a good school. “Duct tapers” are hired to patch or bridge major flaws that their bosses are too lazy or inept to fix systemically. (This is the woman at the airline desk whose duty is to assuage angry passengers when bags don’t arrive.) “Box tickers” go through various motions, often using paperwork or serious-looking reports, to suggest that things are happening when things aren’t. (Hannibal is a box ticker.) Last are “taskmasters,” divided into two subtypes: unnecessary superiors, who manage people who don’t need management, and bullshit generators, whose job is to create and assign more bullshit for others. …

Graeber comes to believe that the governing logic for such expansion isn’t efficiency but something nearer to feudalism: a complex tangle of economics, organizational politics, tithes, and redistributions, which is motivated by the will to competitive status and local power.

My view is that what Graeber describes is a reflection of growing “corporate correctness,” the tendency

  • to structure and regulate everything, and often in an incompetent way;
  • to focus on appearance rather than content (think of power point);
  • to avoid responsibility by forming commissions and commissioning reports; and
  • to replace common sense by a mentality of box ticking, buzz wording, and bull shitting.

Of course, corporate correctness transcends the corporate sector. Universities and the public sector are leading the way.

Redenomination Risk in the Eurozone

In a CEPR discussion paper Christian Bayer, Chi Kim, Alexander Kriwoluzky analyze redenomination risk during the European debt crisis and how the European Central Bank’s interventions affected this risk. They conclude that the risk fell in the case of Italy but increased for France and Germany.

From the abstract:

… first estimate daily default-risk-free yield curves for French, German, and Italian bonds that can be redenominated and for bonds that cannot. Then, we extract the compensation for redenomination risk from the yield spreads between these two types of bonds. Redenomination risk primarily shows up at the short end of yield curves. At the height of the euro crisis, spreads between first-year yields were close to 7% for Italy and up to -2% for Germany. The ECB’s interventions designed to reduce breakup risk successfully did so for Italy, but increased it for France and Germany.

See also this earlier blogpost.

Marx was Right—Partly

According to René Scheu in the NZZ.

Die zehn «Massregeln» für die «fortgeschrittensten Länder», in die das «Kommunistische Manifest» mündet, lesen sich aus heutiger Sicht wie ein sozialdemokratisches Programm, dem auch viele softbürgerliche Politiker sogleich vorbehaltlos zustimmen würden. Starke Progressivsteuer, Geldmonopol der Nationalbank, Zentralisation des Transportwesens, nationale Industriepolitik, Verstaatlichung des Bauernstandes und unentgeltliche Erziehung aller Kinder gehören längst zu den Errungenschaften avancierter Wohlfahrtsstaaten – damit sind wohlgemerkt bereits sechs der zehn Punkte erfüllt….

Marxens Kritik zielt nicht auf den Unternehmer und Eigentümer als solchen, sondern auf den Bourgeois, der auf der faulen Haut liegt und auf Kosten anderer lebt. …

Der Verfasser des «Manifests» ist kein Moralist, sondern ein geradezu passionierter Ökonomist der ersten Stunde.

And according to The Economist:

  • Modern “capitalism” often reduces to rent seeking: The Economist mentions “corporate bureaucrats”, “management consultants”, “professional board members”, “retired politicians (who spend their twilight years sponging off firms they once regulated)”.
  • It is global (WEF).
  • It has a tendency towards monopoly (Google, Facebook, …).
  • It yields an army of casual workers (gig economy).
  • But Marx overestimated poverty and underestimated reform.

Isaiah Berlin: Karl Marx and his Environment.


On their blog, Stephen Cecchetti and Kermit Schoenholtz voice doubts regarding the usefulness of universal central bank digital currency (U-CBDC). They argue:

… in an effort to retain their deposit base, commercial banks would surely raise the interest rate they offer to their customers relative to the rate on U-CBDC. … the introduction of U-CBDC would cause a substantial fraction of deposits to shift to the central bank, with the remainder prone to exit in a period of financial stress.

… if the Federal Reserve were to issue U-CBDC, we expect that this would not only hollow out the U.S. commercial banking system, but also destabilize the financial system in a range of countries.

… what would the central bank become? As its U-CBDC liabilities grow, its assets will need to expand as well. And, since commercial banking will have shrunk, so will the sources of private credit. At this point, the central bank turns into a commercial lender. It will become the state bank. In the allocation of funds, it will substitute increasingly for the discipline of private suppliers and markets, inviting political interference in the allocation of capital, slowing economic growth.

The problem with this argument is twofold: First, it disregards the possibility of liability substitution: Deposits may be replaced by other forms of bank debt. Second, bank balance sheet length is equated with lending capacity. But empirically, one is far from a perfect predictor of the other. For example, some countries rely much more heavily on bank credit than others, without obvious implications for intermediation and investment.

… we are compelled to ask what problem it is that U-CBDC is designed to solve. There seem to be three possibilities: the inability of monetary policymakers to set interest rates much below zero; the fact that paper currency is a vehicle for criminality; and the need to broaden financial access. On the first, we currently see little political support for interest rates that go meaningfully below zero. … As for criminal use of paper currency, as we argued in a recent post, there is a strong case for eliminating anything bigger than the equivalent of a U.S. 20-dollar note, but doing so does not imply a need for U-CBDC. Finally, there is financial access. Here, we see technology as providing solutions outside of the central bank [e.g., India’s program of providing costless, no-frills accounts].

Indeed, none of these arguments makes a convincing case for CBDC (especially since only the first one directly relates to the monetary system). But there are two more convincing arguments. First, it is preposterous to have governments prohibit citizens from using cash—the legal tender—for large transactions, and to force them into using privately issued money instead. Opening the central bank’s balance sheet to the public is a more liberal approach than restricting access to financial institutions.

Second, private money creation puts the central bank at a second mover disadvantage, effectively forcing it to serve as lender of last resort during liquidity crises or even as provider of bailout funds. Since the central bank is obliged to safeguard the payment system it cannot escape this disadvantage; regulatory measures—to the extent that they work and do not cause more harm—may alleviate moral hazard but cannot solve the time consistency problem completely. The more payments are conducted using CBDC the less can the banking sector and its customers dictate monetary policy.

To conclude, we see very little upside for central banks to issue retail digital currency. Instead, we see an enormous risk to the commercial banking system and political challenges for central banks. In the end, we wonder: would capitalism survive the introduction of U-CBDC? It may, but we are not at all sure.

As argued above, threats to capitalism also lurk in other corners.

Does CBDC Increase Run Risk?

Central bankers often argue that CBDC would increase the risk of bank runs. On his blog, JP Koning rejects this notion. After all, he retorts, during a confidence crisis bank customers would no longer have to queue to withdraw cash; lender of last resort support would be provided much more quickly; and “large” cash holders would continue to shift funds into treasury bills, not into CBDC.

Koning writes:

The general criticism here is that during a crisis, households and businesses will desperately shift their deposits into the ultimate risk-free asset: central bank money. Presumably when deposits were only redeemable in banknotes (as is currently the case) and one had to trudge to an ATM to get them, this afforded people time for sober contemplation, thus rendering runs less damaging. But if small depositors can withdraw money from their accounts while in their pajamas, this makes banks more susceptible to sudden shifts in sentiment, goes the Carney critique.

I don’t buy it. … even in jurisdictions without deposit insurance, I still don’t think that shifts into digital currency in times of stress would exceed shifts into banknotes. A bank will quickly run out of banknotes during a panic as it meets client redemption requests, and will have to make arrangements with the central bank to get more cash. Thanks to the logistics of shipping cash, refilling the ATMs and tellers will take time. In the meantime a highly visible lineup will grow in front of the bank, exacerbating the original panic. Now imagine a world with digital currency. In the event of a panic, customer redemption requests will be instantaneously granted by the bank facing the run. But that same speed also works in favor of the bank, since a request to the central bank for a top-up of digital currency could be filled in just a few seconds. Since all depositors gets what they want when they want, no lineups are created. And so the viral nature of the panic is reduced.

But what about large depositors like corporations and the rich … ? During a crisis, won’t these sophisticated actors be more likely to pull uninsured funds from a bank, which have a small possibility of failure, and put them into risk-free central bank digital currency?

I disagree. In a traditional economy where banknotes circulate, CFOs and the rich don’t generally flee into paper money during a crisis, but into short-term t-bills. Paper money and t-bills are government-issued and thus have the same risk profile, t-bills having the advantage of paying positive interest whereas banknotes are barren. The rush out of deposits into t-bills is a digital one, since it only requires a few clicks of the button to effect. Likewise, in an economy where digital currency circulates, CFOs are unlikely to convert deposits into barren digital currency during stress, but will shift into t-bills. The upshot is that banks are not more susceptible to large deposit shifts thanks to the introduction of digital currency—they always were susceptible to digital bank runs thanks to the presence of short-term government debt.

Of course, depending on the type of CBDC, central banks might also choose to pay negative interest on CBDC in order to depress demand for it.