… it is critical to account for indirect in addition to direct social costs and benefits when ranking monetary architectures.
… the costs and benefits we consider point to an important role of central bank digital currency in an optimal monetary architecture unless pass-through funding is necessary to stabilise capital investment and very costly.
… the interest rate on CBDC should differ from zero and from the rate on reserves.
From the text:
Notes: The dark grey area represents the efficiency advantage of CBDC needed to make it less costly than a two-tier system with optimum reserve holdings. The light grey area displays the same object but based on actual US reserve holdings rather than model-implied optimal ones. These distributions allow for pass-through costs and tax distortions, quantified by assuming taxing households causes deadweight burdens of 25% per tax dollar. The distributions are based on two million realisations.
… promoting the digital euro requires an aggressive marketing strategy because private incentives for adoption are limited. However, the pursuit of such an aggressive approach is unlikely as this runs counter to the ECB’s fourth, implicit objective of protecting banks’ existing business model.
This is problematic and could turn the project into a significant missed opportunity, for the potential social benefits of the digital euro substantially exceed its private ones.
Ein digitaler Euro könnte den Wettbewerb fördern, mehr Transparenz schaffen und das Too-big-to-fail-Problem entschärfen. Mit ihrer Minimalvariante aber priorisiert die EZB das Ziel der Bewahrung des Status quo im Bankensystem.
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.
Finanz und Wirtschaft, April 18, 2015. PDF. Ökonomenstimme, April 20, 2015. HTML.
Banks increasingly face competition in bread-and-butter businesses like term deposits, lending and payments.
Two trends shape the sector’s changes: Falling trust in banks, both at the political level and by individual clients; and the rise of the internet.
Trust has been squandered. But with cheap access to information, it also has lost importance.
Asymmetric information in financial markets might become less of a friction. This could turn into an existential threat for banks.
When trust is less important and technology more versatile, increasing returns to scale in the provision of financial services might be a thing of the past. And so the universal bank. New regulatory and tax regimes could foster the process of structural change.
Here are some links to background information:
SavingGlobal provides a marketplace for term deposits. It intermediates between German savers and European banks.
Proposed in 2012 by the FDIC, the single-point-of-entry strategy has widely been acknowledged as useful, both in the US and internationally (for example in Switzerland by FINMA). Guynn writes:
The key to solving the TBTF problem without taxpayer-funded bailouts is a high-speed recapitalization of the failed financial group that imposes losses on shareholders and other stakeholders but avoids unnecessary value destruction and preserves the group’s going-concern value. …
The SPOE strategy can be implemented under the existing Bankruptcy Code, although a new Chapter 14 could increase the likelihood of its success, particularly if it were coupled with a secured liquidity facility from the government that would be able to provide such liquidity under the most severe economic conditions.
The “Greenspan put” fostered risk-taking and overconfidence.
Low interest rates and the search for yield led to a lowering of lending standards and stronger demand for mortgages; a rise in housing wealth accompanied falling household incomes. The Fed’s strong policy response to the Great Recession may create new risks.
The 1980s savings and loans crisis led to stronger reliance on the originate to distribute model and securitisation of mortgages. Market participants lost sight of the risks. Regulatory incentives led banks to take the securitised loans back on their balance sheets and additional sources of maturity mismatch arose from strong reliance on short-term funding.
The “self-correcting markets myth” led Congress to deregulate financial services. The Gramm-Leach-Bliley Act fostered competition and consolidation; the Commodity Futures Modernization Act loosened oversight over the OTC derivatives market. Financial regulators also relaxed restrictions; Basel II replaced standardised regulator-set capital charges with internal models of banks.The Dodd-Frank Act reversed this trend, allowing for more discretion and micro-management.
The pre-crisis incentives led to large, “too-big-to-fail” institutions and bred moral hazard. Dodd-Frank improve things, by establishing consolidated oversight, living will requirements, enhanced prudential standards and enabling the FDIC to resolve systemic entities that cannot be resolved safely in bankruptcy. Clearing houses may require more regulation.
A Hoover Press book edited by Martin Baily and John Taylor collects articles about the financial crisis. The contributions in “Across the Great Divide: New Perspectives on the Financial Crisis” include (with links to PDF files):