Diversity At the Fed and ECB? There is None, It’s a Big Self-Serving Lie

Link: https://mishtalk.com/economics/diversity-at-the-fed-and-ecb-there-is-none-its-a-big-self-serving-lie

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At the ECB, you better be gung-ho pro-EU. You better believe negative interest rates are a good idea. And you must back the idea that targeting 2% inflation makes sense.

Finally, if somehow you find yourself at the ECB disagreeing with any of those things, you are expected to shut your mouth so the consensus view never shows any dissent.

….

At FRBNY, I recall the people who ran Treasury markets, money markets, etc. literally had no relevant experience or expertise. The job of staff was to make them appear competent, but it didn’t really matter what they did because Fed can’t fail and they can’t get fired.  

This creates a culture where anyone with talent or ambition GTFO ASAP. There are exceptions, but those who rise tend to be those who have no where else go. It’s a weird structure where the higher you go, the more incompetent you are.

So it’s no surprise Fed is failing

Author(s): Mike Shedlock

Publication Date: 13 May 2022

Publication Site: Mish Talk

Why SWIFT Sanctions on Russia Might Not be Enough

Link: https://www.rstreet.org/2022/03/01/why-swift-sanctions-on-russia-might-not-be-enough/

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The news immediately following the removal of some Russian banks from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network has been a moment of victory for the international community in condemning Russia’s invasion of Ukraine. Soon after the sanctions took effect, the ruble sunk 21 percent compared to the U.S. Dollar (USD). Russia’s central bank is in damage control mode, raising interest rates to 20 percent. At a glance it might seem like these punishing sanctions could force Russia to change course, but any optimistic takes should be tempered by a review of the effect of sanctions after Russia’s annexation of Crimea in 2014.

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Unlike the United States and other western nations where oil and gas production are controlled by private companies, Russia’s oil and gas production is managed by state-owned enterprises. Oil and gas production in Russia directly finances Russia’s budget, including its military budget, and in 2019 oil and gas exports accounted for 39 percent of Russia’s federal budget revenue. Part of the reason oil and gas is such a lifeline to the Russian budget can be attributed to the effect of the sanctions. In January of 2014, the ruble was $0.03 USD, and by December 2014 it fell to $0.019 USD. In that same year, Russia was the largest producer of crude oil and exported 4.7 million barrels per day. The price of oil in January 2014 was $108/barrel, and by December had fallen to $62/barrel—thanks to high U.S. production. The value of Russian oil exports went from 16.9 billion rubles per day in January to 15.4 billion rubles per day in December, as the sharp decline of oil prices was counteracted by the rising ruble value of oil from the sanctions. If oil prices had remained constant, then the effect of the sanctions would have been to increase Russian export value in the local currency to 26.7 billion rubles per day. In plain English, the harder the sanctions hit, the more valuable Russian energy exports become and the better they are able to sustain the Russian budget.

Author(s): Philip Rossetti

Publication Date: 1 Mar 2022

Publication Site: R Street

Fermat’s Library – Japanese Banking Numerals

Link: https://www.linkedin.com/posts/fermatslibrary_japanese-contains-a-separate-set-of-numerals-activity-6888483726783717376-O8n4

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Japanese contains a separate set of numerals used in legal and financial documents to curb fraud by preventing someone from adding strokes to previously written numbers (e.g. turning a 1 into a 2, or changing 3 to a 5).

Author(s): Fermat’s Library

Publication Date: 17 Jan 2022

Publication Site: LinkedIn

Do We Really Need States to Be Bankers?

Link:https://www.governing.com/finance/do-we-really-need-states-to-be-bankers

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In 1919, the state of North Dakota established its own bank as a public institution. It’s the only one of its kind in the nation, having operated successfully for a full century through the Great Depression and a dozen recessions. Nine other states tried to follow suit in the following decades, only to fail and close their banks’ doors. Founded to provide capital in a farm-centric economy that was underserved by large regional financial institutions that charged double-digit interest rates for ag loans, the Bank of North Dakota has served as an inspiration and touchstone to political populists, anti-bank politicians and easy-money advocates.

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Even beyond what we call the “global superabundance of capital,” however, what the advocates and professional literature overlook is the spectacular disruptive growth of “fintech” — financial technology — that is bringing capital to previously underserved communities and businesses. It turns out that the capital markets, big data, artificial intelligence and techno-wizardry are filling in many of the niches that supposedly cry out for public banks. But first, there are two other strategic public policy alternatives of note: “linked deposits” and using pension-fund capital for nonbank lending, or “shadow banking” as it’s termed by its critics.

As a young municipal finance officer, while moonlighting in grad econ classes in the late 1970s, I became enamored of the concept of linked deposits. The idea was that municipalities should invest in time deposits with banks that pledge to make local loans promoting economic development. I’ll never forget speaking on a panel at the state finance officers’ conference and watching the state’s most prominent public funds banker scowl and shake his head in disgust at what struck him as a pie-in-the-sky concept. At the time, that idea went nowhere.

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Meanwhile, with interest rates at record low levels, public pension funds have been searching everywhere for ways to get a better return on their fixed-income capital allocations. One of the vehicles that emerged in the past decade has been direct lending through professionally managed portfolios that provide loans to businesses at attractive interest rates.

Author(s): Girard Miller

Publication Date: 7 Dec 2021

Publication Site: Governing

Banks and Trade Groups Reject Saule Omarova, Biden’s New Currency Comptroller Pick

Link: https://reason.com/2021/10/07/banks-and-trade-groups-reject-saule-omarova-bidens-new-currency-comptroller-pick/?utm_medium=email

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Omarova’s most out-there academic ideas include directing the Federal Reserve to handle consumer deposits, taking that power away from banks. “Having Americans park their money at the Fed would allow the central bank to more directly and efficiently pull the levers of monetary policy by enabling it to credit individual citizens’ accounts when there’s a need to stimulate the economy,” notes Politico.

Rob Nichols, president of the American Bankers Association, has said such policies would “effectively nationalize America’s community banks,” according to The New York Times. Omarova “wants to eliminate the banks she’s being appointed to regulate,” agrees the Wall Street Journal editorial board. Groups representing both big and small banks, including the American Bankers Association, the Consumer Bankers Association, and the Independent Community Bankers of America, have reached out to more moderate Democrats to lodge their opposition to the pick—a ballsy move, given that she may end up passing down the rules that these associations’ members must later comply with.

Author(s): Liz Wolfe

Publication Date: 7 Oct 2021

Publication Site: Reason

Yellen, IRS Push Democrats to Require Banks to Report Taxpayers’ Annual Account Flows

Link: https://www.wsj.com/articles/yellen-irs-push-democrats-to-require-banks-to-report-annual-account-flows-11631727020

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Treasury Secretary Janet Yellen and IRS Commissioner Charles Rettig pressed lawmakers Wednesday to give the Internal Revenue Service more information about taxpayers’ bank accounts, as the Biden administration tries to salvage its tax-compliance proposal.

In letters to lawmakers, the administration officials again asked Congress to require banks to report annual inflows and outflows from bank accounts with at least $600 or at least $600 worth of transactions, a proposal aimed at letting the IRS target its audits more effectively. It would generate about $460 billion over a decade to cover the costs of Democrats’ planned expansion of the social safety net and climate-change policies, according to the administration.

But after a flurry of opposition from banks and credit unions, House Democrats omitted the proposal from their list of tax-policy changes this week. That was a sign that it lacked the support in the party to advance, though a scaled-back version raising about half as much money could still emerge from ongoing talks between administration officials and Congress.

Author(s): Richard Rubin and Orla McCaffrey

Publication Date: 15 Sept 2021

Publication Site: Wall Street Journal

Bias isn’t the only problem with credit scores—and no, AI can’t help

Link: https://www.technologyreview.com/2021/06/17/1026519/racial-bias-noisy-data-credit-scores-mortgage-loans-fairness-machine-learning/

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But in the biggest ever study of real-world mortgage data, economists Laura Blattner at Stanford University and Scott Nelson at the University of Chicago show that differences in mortgage approval between minority and majority groups is not just down to bias, but to the fact that minority and low-income groups have less data in their credit histories.

This means that when this data is used to calculate a credit score and this credit score used to make a prediction on loan default, then that prediction will be less precise. It is this lack of precision that leads to inequality, not just bias.

…..

But Blattner and Nelson show that adjusting for bias had no effect. They found that a minority applicant’s score of 620 was indeed a poor proxy for her creditworthiness but that this was because the error could go both ways: a 620 might be 625, or it might be 615.

Author(s): Will Douglas Heaven

Publication Date: 17 June 2021

Publication Site: MIT Tech Review

Federal Reserve to End Emergency Capital Relief for Big Banks

Link: https://www.wsj.com/articles/federal-reserve-to-end-emergency-capital-relief-for-big-banks-11616158811

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The Federal Reserve said it was ending a yearlong reprieve that had eased capital requirements for big banks, disappointing Wall Street firms that had lobbied for an extension.

Friday’s decision means banks will lose the temporary ability to exclude Treasurys and deposits held at the central bank from lenders’ so-called supplementary leverage ratio. The ratio measures capital — funds that banks raise from investors, earn through profits and use to absorb losses — as a percentage of loans and other assets. Without the exclusion, Treasurys and deposits count as assets. That will likely force banks to hold more capital or reduce their holdings of those assets, both of which could ripple through markets.

Analysts have been keying on the issue, which is widely viewed on Wall Street as carrying potential implications for markets from bonds to stocks to commodities.

Author(s): Andrew Ackerman, David Benoit

Publication Date: 19 March 2021

Publication Site: Wall Street Journal

Aldermen Vow to Keep Pressure on Banks that Hold the City’s Cash to Lend Equitably

Link: https://news.wttw.com/2021/03/22/aldermen-vow-keep-pressure-banks-hold-city-s-cash-lend-equitably#new_tab

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Aldermen endorsed a measure Monday that would allow the city to expand the number of banks authorized to hold its cash — even as city officials vowed to keep pressuring financial institutions to do a better job lending to Black and Latino Chicagoans.

Led by Ald. Harry Osterman (48th Ward), the chair of the City Council’s Housing Committee, and Treasurer Melissa Conyears-Ervin, city officials plan to form a task force and a working group to draft new requirements for banks to meet if they want to keep the city’s lucrative business.

Author(s): Heather Cherone

Publication Date: 22 March 2021

Publication Site: WTTW News

Fed Policy Is Smothering Private Lending

Link: https://www.wsj.com/articles/fed-policy-is-smothering-private-lending-11615250626

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The 25 largest U.S. banks currently hold 45.7% of their assets in loans and leases, according to Fed data released Friday, down from 54.1% this time last year. Meantime, their year-over-year holdings of Treasury and agency securities increased 33.5%. This reflects more-stringent borrowing standards and diminished loan demand. But it also reveals a subtle yet persistent change in how banks operate.

Banks have pulled back from making risky loans in favor of engaging more directly with the Fed — avoiding the type of lending that spawned stricter regulatory standards after 2008 while readily accommodating the Fed’s expressed satisfaction with an “ample reserves” regime. Bank lending to small businesses has remained low throughout the postcrisis years, with the largest declines in small-business lending at large banks, as shown in a 2018 report commissioned by the Small Business Administration.

The switch is understandable. The cost of regulatory compliance is a huge disincentive for banks, and selling government-backed securities to the Fed and piling up reserves can turn out to be a profitable business model.

Author(s): Judy Shelton

Publication Date: 8 March 2021

Publication Site: Wall Street Journal

America Went on a Borrowing Binge, but Banks Were Left Out

Link: https://www.wsj.com/articles/america-went-on-a-borrowing-binge-but-banks-were-left-out-11612953008

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Large U.S. lenders saw their loan books shrink in 2020 for the first time in more than a decade, according to an analysis of Federal Reserve data by Jason Goldberg, a banking analyst at Barclays. The 0.5% drop was just the second decline in 28 years.

Bank of America Corp.’s loans and leases dropped by 5.7%. Citigroup Inc.’s loans dropped by 3.4% and Wells Fargo & Co.’s shrank by 7.8%. Among the biggest four banks, only JPMorgan Chase & Co. had more loans at the end of the year than the start.

Lenders are flush with cash that they want to put to use, and executives say they are hopeful loan growth will pick up in 2021. Brisk lending typically suggests there is enough momentum in the economy to give companies and consumers the confidence to borrow. But the current weakness suggests questions remain about the vigor of the economic recovery.

Author(s): Ben Eisen

Publication Date: 10 February 2021

Publication Site: WSJ

Banks in Germany Tell Customers to Take Deposits Elsewhere

Link: https://www.wsj.com/articles/banks-in-germany-tell-customers-to-take-deposits-elsewhere-11614594601?mod=djemwhatsnews

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Germany’s biggest lenders, Deutsche Bank AG and Commerzbank AG , have told new customers since last year to pay a 0.5% annual rate to keep large sums of money with them. The banks say they can no longer absorb the negative interest rates the European Central Bank charges them. The more customer deposits banks have, the more they have to park with the central bank.

That is creating an unusual incentive, where banks that usually want deposits as an inexpensive form of financing, are essentially telling customers to go away. Banks are even providing new online tools to help customers take their deposits elsewhere.

Banks in Europe resisted passing negative rates on to customers when the ECB first introduced them in 2014, fearing backlash. Some did it only with corporate depositors, who were less likely to complain to local politicians. The banks resorted to other ways to pass on the costs of negative rates, charging higher fees, for instance.

Author(s): Patricia Kowsmann

Publication Date: 1 March 2021

Publication Site: Wall Street Journal