Single Resolution Board and Banco Popular Bailin

In the FT, Martin Arnold, Tobias Buck, and Rachel Sanderson discuss the significance of the Banco Popular bailin.

The Single Resolution Board was created at the start of 2015 as a pan-European authority for dealing with failing banks. Since then however, the institution has remained almost entirely untested. Now with Banco Popular it has shown its teeth at last. The SRB, chaired by Elke Koenig, acted swiftly after it was informed by the European Central Bank that Popular was “failing or likely to fail” on Tuesday. It imposed heavy losses on shareholders and junior bondholders before transferring Popular’s remaining equity to Santander for only €1. The move is an unprecedented step as it imposes losses for the first time on holders of alternative tier one (AT1) securities — the riskiest bonds in a bank’s capital structure that are designed to absorb losses in a crisis.

On Publishing and Cost Benefit Analysis

On his blog, Gilles Saint-Paul comments on the publication process in economics.

Of course I was wrong in all accounts. The publication process in economics is not a publication process, it is a validation process by which we acquire a certain rank in a certain pecking order. Submitting a paper to a journal has nothing to do with research dissemination, it is far more similar to taking an exam or participating in a sports competition. The actual dissemination takes place mostly orally, in seminars and conferences; these seminars and conferences are also important validation events, because they allow authors to signal some of their characteristics that may influence their position in the pecking order, while not being easy to infer from their papers.

Now, when you take an exam as a student, you are graded by your professor, not by a fellow student – who would be a competitor if this exam is actually a contest. …

Yet this is the way our own profession is organized. Each submission is “peer reviewed’, that is, it has to be accepted by anonymous referees who happen to be participating in the same beauty contest as the author(s), most often in the same subcategory. At a minimum, as believers of cost-benefit analysis, we should consider that the journal editors and referees themselves perform a cost-benefit analysis when deciding whether or not to publish a paper. I must say that if I apply such a theory to explain my own experience with acceptances and rejections, I easily get an R2 of 80 %.

UBS Business Solutions AG

In the NZZ, Hansueli Schöchli reports about further steps by UBS, the Swiss bank, to prepare for the next financial crisis. In the future, a legally independent service unit—UBS Business Solutions AG—provides other business units with critical internal services, including payments, trading systems as well as legal services. A “Master Service Agreement” specifies that the service unit remains operative even if other business units fail.

Die UBS vollzieht nun einen weiteren Schritt. Sie überträgt dieser Tage die konzerninternen Dienstleistungen für das Schweizer Geschäft in die rechtlich selbständige Dienstleistungseinheit UBS Business Solutions AG. Übertragen werden damit im Inland rund 8000 Mitarbeiter. Weltweit soll diese Service-Einheit bis Ende Jahr etwa 18 000 Beschäftigte umfassen. Zu den betroffenen internen Dienstleistungen zählen unter anderem Informatik, Zahlungsverkehr, Handelssysteme, Risikomanagement, Rechtsdienst, Personal und Marketing. Hauptzweck der Übung: Auch wenn Teile des Konzerns in den Konkurs schlittern, sollen kritische Dienstleistungen weiterhin sichergestellt sein. «Dies ist eine Lehre aus der Pleite von Lehman», sagt Markus Ronner, Chef Notfallplanung bei der UBS.

Ein globales «Master Service Agreement» regelt die Service-Lieferungen gegenüber gut 130 UBS-Gesellschaften. Nebst Preisen und Qualitätserfordernissen ist dabei auch geregelt, dass die Service-Einheit im Fall des Konkurses eines Konzernteils ihre Dienstleistungen gegen Bezahlung noch mindestens zwei Jahre lang weiterführen muss. Wenn interne Kunden zahlungsunfähig werden, muss die Service-Gesellschaft genügend Liquidität haben, um in einer Übergangszeit ihre Dienste aufrechterhalten zu können; die Rede ist von sechs Monaten als Referenzmarke.

Marvin Goodfriend, the Fed’s Board of Governors, and Negative Rates

In the FT, Sam Fleming and Demetri Sevastopulo report that the White House considers Marvin Goodfriend for the Federal Reserve’s Board of Governors.

He has criticised the Fed’s crisis-era balance sheet expansion, saying the central bank should generally not purchase mortgage-backed securities, and has advocated the use of monetary policy rules to guide policy, as has Mr Quarles. …

At the same time, however, Mr Goodfriend has been willing to contemplate the use of deeply negative rates to stimulate growth — something that the Fed has thus far not embarked upon. In 1999 he wrote that negative rates were a feasible option, years before central banks started actually experimenting with them.

To implement negative rates while preserving cash, Goodfriend has advocated a flexible exchange rate between deposits and cash. On Alphaville, Matthew Klein quotes from a recent paper of Goodfriend’s:

The zero bound encumbrance on interest rate policy could be eliminated completely and expeditiously by discontinuing the central bank defense of the par deposit price of paper currency. … the central bank would no longer let the outstanding stock of paper currency vary elastically to accommodate the deposit demand for paper currency at par. …

The reason to abandon the pegged par deposit price of paper currency is analogous to the … reasons for abandoning the gold standard and fixed exchange rate: it is to let fluctuations in the deposit demand for paper currency be reflected in the deposit price of paper currency so as not to destabilize the general price level … the flexible deposit price of paper currency would behave as it actually did when the payment of paper currency for deposits was restricted in the United States during the banking crises of 1873, 1893, and 1907.

MIT vs Trump, Contd.

In an open letter, MIT President Rafael Reif writes (from the opening paragraph):

Yesterday, the White House took the position that the Paris climate agreement – a landmark effort to combat global warming by reducing greenhouse gas emissions – was a bad deal for America. Other nations have made clear that the deal is not open to renegotiation. And unfortunately, there is no negotiating with the scientific facts.

In March, Reif questioned planned federal spending cuts. And in January, he condemned Trump’s immigration restrictions.

The SNB’s Currency Interventions

On the FT’s Alphaville blog, Matthew Klein reviews Swiss monetary policy over the last years and its effect on the real economy. He concludes that

it seems the SNB’s relentless accumulation of foreign assets has been pointless — at best. More likely, the behaviour qualifies as predatory mercantilism at the expense of the rest of the world, especially Switzerland’s hard-hit neighbours.

Smart Ponzi Games in the Blockchain

On the FT’s Alphaville blog, Izabella Kaminska points to a paper by Italian academics arguing that the Ethereum technology tends to incubate Ponzi schemes.

The uniqueness of the “smart Ponzi” is its capacity to protect the identity of the initiator but also its ability to persist even after being exposed. Since contracts are unmodifiable and thus unstoppable there is no central authority to terminate the execution of the scheme or force the initiator to refund victims. What’s more, the inability to shut it down means victims can be led to believe the scheme will last forever.

Does Decentralized Intermediation Add Value?

On the FT’s Alphaville blog, Izabella Kaminska questions the value of decentralization (and thus, blockchain technology) in intermediation.

Decentralisation is, in almost all cases, not an efficiency. To the contrary, it’s a cost that adds complexity and creates an unnecessary burden for both users and operators unless centralised layers are added on top of it — defying the whole point. …

At the end of the day, there are only two groups of people prepared to go to costly lengths to decentralise a service which is already available (in what is often a much higher quality form) in a centralised or conventional hierarchal state. One group is criminals and fraudsters. The other is ideologues and cultists. …

It’s not privacy, because a centralised system can be encrypted just as much as a blockchain-based one.

Effects of Climate Change for Switzerland

In the NZZ, Christian Speicher summarizes expected consequences of climate change for Switzerland by 2050–2060.

  • Mean temperatures exceed the 1980–2009 average by 1.6–2.9 degrees Celsius.
  • The temperature increase is more pronounced in Summer than in Winter. But ski resorts below 2000m are no longer competitive.
  • Less precipitation in Summer, maybe more in Winter.
  • More extreme weather events.
  • Increased need for water storage and conservation.

 

Brexit and Third-Country Treaties

In the FT, Paul McClean reports that according to FT estimates and as a consequence of Brexit, the UK will have to negotiate more than 700 treaties with third countries. More than 160 countries need to be dealt with; Switzerland, the US and Norway stand out.

Some negotiations have to be concluded very soon:

… the EU-US Open Skies accord for airlines, were agreed when the forces of liberalisation were at their peak. The political mood has hardened considerably since then. … The timing is tight. The US needs to know the UK’s arrangements with the EU before it can commit, and that may not be clear until late 2018. … “It is not as if you can wait until March 2019 to see what the regime will be. You probably need clarity by the early summer or spring of 2018.”

On the US-German Trade “Imbalance”

Paul Krugman argues that the bilateral trade position is irrelevant.

And he summarizes potential explanations:

… one theory of imbalances is macroeconomic: countries that save more than they invest will run surpluses, countries that invest more than they save will run deficits. …

But … [t]he bilateral imbalance is a lot bigger … The other story … is about “triangular trade.” Here’s my version: think of a world containing three countries, Spendthriftia, Austeria, and Petrostan. The first two mainly sell manufactured goods, which are differentiated products so there’s a lot of two-way trade. The third sells raw materials, which it trades for manufactures. However, Spendthriftia also produces a lot of raw materials, e.g. by fracking, which makes it relatively less reliant on imports. What we would expect to see here, even if each country’s overall trade was balanced, would be a pattern of bilateral imbalances: Austeria running a deficit with Petrostan, Spendthriftia a surplus with Petrostan, but Austeria running a surplus with Spendthriftia. …

… [Moreover] I suspect that part of the US-Germany bilateral imbalance is an optical illusion, brought on by transshipment. … we do an awful lot of trade with the Netherlands, and we run a huge surplus in that trade … Surely this represents US exports unloaded at Rotterdam or Antwerp and then shipped on to other EU destinations, including Germany. I’m not sure why German exports to the US don’t go the same route …

Tax Evasion in Hong Kong and the US

The Economist reports about new strategies to evade taxes. One is based on an occupational retirement scheme (ORS) in Hong Kong:

A German or Australian with money to hide can set up a Hong Kong shell company, appoint himself as its director, with a local employment contract, and sign up with a trust company that provides an ORS. He can throw in cash, property or other assets, oversee the account himself, retire as soon or as far in the future as he likes, and then take out as much or as little as he chooses, whenever he wants. An ORS, in short, is like a flexible bank account.

The arrangement falls outside the CRS [Common Reporting Standard] and FATCA because the Hong Kong authorities classify ORS as “low risk” from a tax-evasion standpoint, meaning those running them are “non-reporting financial institutions” under both standards. Not surprisingly, some financial firms are hawking them enthusiastically to foreigners.

Another strategy exploits the secrecy provided by the United States:

It gets all the information it needs from other countries through its heavy-handed application of FATCA, and therefore sees no need to sign up to the CRS. So it is in the unique position of being able to take a lot, give little, and continue getting away with it. Not surprisingly, lots of tainted foreign cash is believed to have flowed into American banks, trusts and shell companies in recent years.

Bankrupt US Public Sector Pension Schemes

In a Hoover Institution Essay, Joshua Rauh describes the extent to which US states and communities under fund public sector pensions.

Even under states’ own disclosures and optimistic assumptions about future investment returns, assets in the pension systems will be insufficient to pay for the pensions of current public employees and retirees. Taxpayer resources will eventually have to make up the difference.

Despite the implementation of new Governmental Accounting Standards Board (GASB) guidelines, most public pension systems across the United States still calculate both their pension costs and liabilities under the assumption that their contributed assets will achieve returns of 7.5–8 percent per year.

But new GASB disclosures allow Rauh to estimate the size of the funding gap. He finds

unfunded accumulated benefits of $3.412 trillion under Treasury yield discounting. These are the unfunded debts that would be owed even if all plans froze their benefits at today’s promised levels.

Puerto Rico’s Debt Restructuring

On Econofact, Daniel Bergstresser provides background information on Puerto Rico’s debt crisis. From his text:

  • Unlike U.S. municipalities, a U.S. territory cannot resort to Chapter 9 of the Bankruptcy act.
  • The island’s economy benefited from corporate tax exemptions (until 2006) and from tax exemptions on interest paid by municipal bonds issued by Puerto Rico and its agencies (“triple tax exemption”).
  • Total bond indebtedness (face value) amounts to over $70 billion, about 70 percent of the island’s GDP. The island owes an additional $50 billion in unfunded pension obligations to its state employees and retirees. Different government-sponsored entities issued the debt, apparently representing different claims on the Commonwealth’s revenue streams.
  • Puerto Rican issuers were downgraded from investment grade status in 2014. In March 2015, governor Padilla announced that the island’s debt was unpayable.
  • Resolution has been delayed by disagreement about the borrowers’ capacity to repay.
  • Puerto Rico defaulted on its general obligation debt in June of 2016 and President Obama signed the “Puerto Rico Oversight, Management, and Economic Stability Act” (PROMESA) law. This created an oversight board with the authority to oversee the island’s budget and facilitate restructuring talks. The law also created a bankruptcy-like “Title III” mechanism. The oversight board placed a moratorium on debt collection by the island’s creditors until May 1, 2017. On May 3 the island entered the debt restructuring process. Chief Justice John Roberts has assigned the case to U.S. District Judge Laura Taylor Swain, and the first hearing in that case is scheduled to occur on May 17.

Fintech Regulation in Switzerland: Open Questions

In the NZZ, Jürg Müller reports about the developing regulatory framework for fintechs in Switzerland. A proposal by the federal finance department drew—reasonable—criticism by various lobbies and industry associations, including the CFA Society Switzerland.

Die CFA Society Switzerland will das systemrelevante Bankensystem von anderen Finanzdienstleistern trennen. Dafür sei eine präzisere Bankendefinition nötig, als sie heute vorgenommen werde. Nur Banken sollen demnach dem Bankengesetz unterstehen. Finanzdienstleister, die kein traditionelles Bankengeschäft betreiben und keine Liquiditätsrisiken eingehen, sollen einem anderen Regulierungsmodell unterstehen. Dabei sollen je nach Tätigkeit unterschiedliche funktionale Lizenzen zum Zuge kommen – dieser letzte Punkt wird von vielen Vernehmlassungsteilnehmern ebenfalls eingefordert.

Schliesslich identifiziert die CFA Society Switzerland auch zentrale Fintech-Themen, die in der Vernehmlassung aussen vor gelassen wurden. Eine dieser Lücken sei der direkte Zugang zur Schweizerischen Nationalbank (SNB). Aus heutiger Sicht sei nicht ersichtlich, weshalb nur Banken elektronisches Zentralbankgeld halten dürften. Auf Anfrage wollte die SNB zu dieser Forderung keine Stellung nehmen. Andere Zentralbanken wie die Bank of England zeigen sich solchen Ideen gegenüber derweil aufgeschlossen. Auch einzelne Schweizer Ökonomen wie beispielsweise Dirk Niepelt stehen allgemein zugänglichem elektronischem Notenbankgeld positiv gegenüber.

Link to my article mentioned above.

Zimbabwe’s Monetary Policy

On his blog, JP Koning provides an account of recent monetary policy in Zimbabwe:

  • The country dollarized in 2008.
  • The central bank offered USD deposit accounts for banks, specifically for inter bank payments. But these accounts were not fully backed by USDs, or the central bank rationed access to USDs for other reasons (early 2016).
  • Banks got squeezed, bank customers started a run, and the government imposed withdrawal limits. Retailers started to charge higher prices for “plastic money” (USD denominated bank deposits) than for USD cash.
  • In November 2016, the central bank introduced another parallel currency, “bond notes.” The government promised that bond notes would be fully backed and redeemable in USD cash (via the African Export Import Bank) but it defaulted on that promise too. Redeeming bond notes now is as difficult as cashing in deposits.
  • Bond notes and deposits trade at a discount vis-a-vis USD cash. But the government forbids retailers to charge different prices.
  • Gresham’s law works its way.

Predictors of Default

On Science of Us, Seth Stephens-Davidowitz reports about predictors of loan repayment choices.

… language that potential borrowers use is a strong predictor of their probability of paying back. And it is an important indicator even if you control for other relevant information lenders were able to obtain about those potential borrowers, including credit ratings and income. …

Here are the phrases used in loan applications by people most likely to pay them back: debt-free, lower interest rate, after-tax, minimum payment, graduate.

And here are the phrases used by those least likely to pay back their loans: God, promise, will pay, thank you, hospital.

Social Insurance in Switzerland

Information from the Swiss Federal Social Insurance Office on the social insurance system in Switzerland:

  • Brief Overview: HTML. Longer overview: PDF.
  • Social Insurance Accounts with links to data, in German (Schweizerische Sozialversicherungsstatistik): PDF.
  • Pocket statistics, in English: PDF. In German: PDF.