If Stable and Efficient Banks Are Such a Good Idea Why Are They So Rare?
March 1, 2014 6:43 AM Subscribe
Why do some banking systems never have crises and some have them all the time? Our system is Fragile by Design, the title of a new book by Calomiris and Haber. (The first chapter can be read here.) This essay lays out the argument, as does this PowerPoint.
The authors interviewed.
The authors interviewed.
The Foreign Affairs link "This essay" is gated.
It opened okay for me. In any case here's a PDF mirror of the article.
(Full disclosure: I work with Haber.)
posted by jedicus at 7:56 AM on March 1, 2014 [1 favorite]
It opened okay for me. In any case here's a PDF mirror of the article.
(Full disclosure: I work with Haber.)
posted by jedicus at 7:56 AM on March 1, 2014 [1 favorite]
It's grifters all the way down.
posted by localroger at 8:11 AM on March 1, 2014 [4 favorites]
posted by localroger at 8:11 AM on March 1, 2014 [4 favorites]
Excellent title and layout. This was very enlightening.
posted by temporicide at 9:20 AM on March 1, 2014
posted by temporicide at 9:20 AM on March 1, 2014
I checked, and I think the Foreign Affairs article is gated on mobile, but not on regular browsers. Sorry about that, and thanks jedicus.
posted by anotherpanacea at 9:33 AM on March 1, 2014
posted by anotherpanacea at 9:33 AM on March 1, 2014
In the Econtalk interview they point out that Canada does not have bank crises. It is a choice.
posted by EnterTheStory at 11:41 AM on March 1, 2014 [1 favorite]
posted by EnterTheStory at 11:41 AM on March 1, 2014 [1 favorite]
Our banks aren't big enough, is the argument, and I think it's facially plausible.
posted by jpe at 12:07 PM on March 1, 2014
posted by jpe at 12:07 PM on March 1, 2014
It's actually not about size alone. It's about the fact that our banks can't be well-regulated so long as our political system is organized so that they can trick populists into helping them mobilize politicians.
The example of Acorn testifying on behalf of Bank of America is one of those moments: the only way for populists to achieve their goals was to take a very small part of the pie they won for the banks. They'd have been better off with direct subsidies, but so long as the subsidies run through the banks it created instability.
posted by anotherpanacea at 12:14 PM on March 1, 2014 [1 favorite]
The example of Acorn testifying on behalf of Bank of America is one of those moments: the only way for populists to achieve their goals was to take a very small part of the pie they won for the banks. They'd have been better off with direct subsidies, but so long as the subsidies run through the banks it created instability.
posted by anotherpanacea at 12:14 PM on March 1, 2014 [1 favorite]
i have heard that north dakota has a state bank, reputed to be solid and stable as banks go. i have heard that existing banks do deposits and withdrawals on the front end, and the execs take wild-ass bonuses out the back end. if we could create state banks in the other 49, the wild-ass bonuses would go right back to education, healthcare...i'm ready for socialized banking.
posted by bruce at 12:27 PM on March 1, 2014 [1 favorite]
posted by bruce at 12:27 PM on March 1, 2014 [1 favorite]
Yes, it has always seemed to me that retail and small business banking, including loan writing under a certain level (maybe a million?) ought to be a publicly regulated utility.
That is, if you believe the free market benefits all citizens equally when it operates most efficiently and with maximum access.
posted by spitbull at 12:32 PM on March 1, 2014
That is, if you believe the free market benefits all citizens equally when it operates most efficiently and with maximum access.
posted by spitbull at 12:32 PM on March 1, 2014
The wealthy and powerful are in the best position to leverage their power to profit from a rapidly failing overall economy. The wealthy and powerful are also in the best position to leverage their power to profit from a rapidly rising economy. The wealth gap grows in a bear economy and the wealth gap grows in a bull economy. A safe and moderate economy doesn't provide nearly as many niche opportunities that only the wealthy can exploit.
They're not trying to raise all boats. They're perfectly content with sinking everyone else's.
posted by Skwirl at 12:35 PM on March 1, 2014 [11 favorites]
They're not trying to raise all boats. They're perfectly content with sinking everyone else's.
posted by Skwirl at 12:35 PM on March 1, 2014 [11 favorites]
The size is important, though; the article notes that the TBTF Canadian banks' monopsony provides them with much greater diversification.
they go on to argue that regulation prevents them from using that position to extract rents. One would expect, I'd think, lower ROEs from Canadian banks if that were the case.
posted by jpe at 12:38 PM on March 1, 2014
they go on to argue that regulation prevents them from using that position to extract rents. One would expect, I'd think, lower ROEs from Canadian banks if that were the case.
posted by jpe at 12:38 PM on March 1, 2014
Because as Hyman Minsky discovered, apparent stability breeds instability:
[W]hile the early post-war period was a good example of a “conditionally coherent” financial system, with little private debt and a huge inherited stock of federal debt (from WWII), profit-seeking innovations would gradually render the institutional constraints less binding. Financial crises would become more frequent and more severe, testing the ability of the authorities to prevent “it” from happening again. The apparent stability would promote instability.posted by wuwei at 12:52 PM on March 1, 2014
Link
canadian banks earn about the same ROE as US banks taking a lot less risk. Since banking is a commodity business the only answer to this is that the regulator allows them to exercise some sort of market power in pricing deposits and loans.
public utility banking exists in a lot of countries. it doesn't really work super great - but its ok. you usually end up getting lower returns on deposits and shitty loan books that see big losses every crisis because its not in the loan officers interests to underwrite loans. The only way it really works is massive deposit overfunding. In effect instead of the equity holders taking losses you end socializing the costs of those bad loans across the deposit base. Which is bad I guess. Taken in isolation its a worse outcome. I guess the flipside is you avoid runs and bank crisis which is a good. Of course we in theory avoid runs with deposit insurance.
pretty much the entire cause of the last crisis was that too much lending was funded through the capital markets rather than deposits. So a utility bank doesn't really address that.
Arguably this paper is much more relevant to the early 90's banking crisis in the US than it is to the GFC for exactly that reason.
I think its point is a good one - the US banking system is inherently more risky - but that is not an absolutely bad thing. Risk and reward are tradeoffs just like in anything else.
I'm not sure you can blame the particular topic of this paper as a reason for the troubling increase in income inequality. I mean the circumstances that set it out the way it is are actually rooted in the progressive tradition of the early 20th century. When they created the Fed they could have moved to federally chartered banks and chose not to.
And yeah - if you believe this paper TBTF is a good thing.
posted by JPD at 1:13 PM on March 1, 2014 [1 favorite]
public utility banking exists in a lot of countries. it doesn't really work super great - but its ok. you usually end up getting lower returns on deposits and shitty loan books that see big losses every crisis because its not in the loan officers interests to underwrite loans. The only way it really works is massive deposit overfunding. In effect instead of the equity holders taking losses you end socializing the costs of those bad loans across the deposit base. Which is bad I guess. Taken in isolation its a worse outcome. I guess the flipside is you avoid runs and bank crisis which is a good. Of course we in theory avoid runs with deposit insurance.
pretty much the entire cause of the last crisis was that too much lending was funded through the capital markets rather than deposits. So a utility bank doesn't really address that.
Arguably this paper is much more relevant to the early 90's banking crisis in the US than it is to the GFC for exactly that reason.
I think its point is a good one - the US banking system is inherently more risky - but that is not an absolutely bad thing. Risk and reward are tradeoffs just like in anything else.
I'm not sure you can blame the particular topic of this paper as a reason for the troubling increase in income inequality. I mean the circumstances that set it out the way it is are actually rooted in the progressive tradition of the early 20th century. When they created the Fed they could have moved to federally chartered banks and chose not to.
And yeah - if you believe this paper TBTF is a good thing.
posted by JPD at 1:13 PM on March 1, 2014 [1 favorite]
The biggest problem with banking in the US, and really society wide, is concentration of wealth. If we had 50 big banks instead of 5 huge ones (or whatever the number is) than they aren't in nearly as strong a position. If one fails, who cares? we can absorb the loss, no big deal. But if we lose 20% at a wack...that is going to hurt. So the banks have a LOT of leverage on politicians and regulators. This allows all kind of shenanigans.
This is also at the heart of the problem with campaign contributions. Those 50 banks play each other off, contribute to different politicians, and so on. Who cares how much they give to a campaign if 49 other banks are willing to give to some other politician running against them? But those 5 can/will collude and buy enough politicians to allow them to influence the system, and they often do this to their own long term detriment.
The current trend is not innovation in the large companies-Goldman sachs, Microsoft, Time warner, whoever. It is to buy up the small guys who can't overcome the regulatory hurdles the big ones have put in place to keep them the little guys from becoming competitors (see bought politicians above). The best way to fix the banks, and capitalism really, is to enforce the laws against monopoly and trusts. In an unchecked system wealth and power will allows accumulate to the top, and that is bad for everyone.
posted by bartonlong at 1:28 PM on March 1, 2014 [5 favorites]
This is also at the heart of the problem with campaign contributions. Those 50 banks play each other off, contribute to different politicians, and so on. Who cares how much they give to a campaign if 49 other banks are willing to give to some other politician running against them? But those 5 can/will collude and buy enough politicians to allow them to influence the system, and they often do this to their own long term detriment.
The current trend is not innovation in the large companies-Goldman sachs, Microsoft, Time warner, whoever. It is to buy up the small guys who can't overcome the regulatory hurdles the big ones have put in place to keep them the little guys from becoming competitors (see bought politicians above). The best way to fix the banks, and capitalism really, is to enforce the laws against monopoly and trusts. In an unchecked system wealth and power will allows accumulate to the top, and that is bad for everyone.
posted by bartonlong at 1:28 PM on March 1, 2014 [5 favorites]
And yeah - if you believe this paper TBTF is a good thing.
No, the paper is all about how Canada (and Australia) manage to have both large banks with lots of branches and avoid implicit/explicit bailouts. But the point is that it's a political institution problem: if we imported Canada's banks, we'd still have our own Congress, all too ready to provide an implicit backing in exchange for populist goodies worth a fraction of the implicit insurance.
It's not the banks, it's the politics.
posted by anotherpanacea at 1:32 PM on March 1, 2014 [6 favorites]
No, the paper is all about how Canada (and Australia) manage to have both large banks with lots of branches and avoid implicit/explicit bailouts. But the point is that it's a political institution problem: if we imported Canada's banks, we'd still have our own Congress, all too ready to provide an implicit backing in exchange for populist goodies worth a fraction of the implicit insurance.
It's not the banks, it's the politics.
posted by anotherpanacea at 1:32 PM on March 1, 2014 [6 favorites]
Canadian banks have an implicit guarantee - they pretty much have to. That's what happens when a few banks dominate.
posted by JPD at 1:37 PM on March 1, 2014 [1 favorite]
posted by JPD at 1:37 PM on March 1, 2014 [1 favorite]
The biggest problem with banking in the US, and really society wide, is concentration of wealth. If we had 50 big banks instead of 5 huge ones (or whatever the number is) than they aren't in nearly as strong a position. If one fails, who cares? we can absorb the loss, no big deal. But if we lose 20% at a wack...that is going to hurt. So the banks have a LOT of leverage on politicians and regulators. This allows all kind of shenanigans.
And if Canada loses 20% at a whack they aren't faced with the same issue? Or if Switzerland loses one of its two banks that are bigger than its entire annual GDP they don't have a problem?
This is also at the heart of the problem with campaign contributions. Those 50 banks play each other off, contribute to different politicians, and so on. Who cares how much they give to a campaign if 49 other banks are willing to give to some other politician running against them? But those 5 can/will collude and buy enough politicians to allow them to influence the system, and they often do this to their own long term detriment.
You don't think the major banks in the UK have not effectively captured their regulator?
The point I'm trying make is that the problem is populism. Both the low quality of the regulatory environment and the relatively high number of US banks are because of that.
posted by JPD at 1:41 PM on March 1, 2014 [1 favorite]
And if Canada loses 20% at a whack they aren't faced with the same issue? Or if Switzerland loses one of its two banks that are bigger than its entire annual GDP they don't have a problem?
This is also at the heart of the problem with campaign contributions. Those 50 banks play each other off, contribute to different politicians, and so on. Who cares how much they give to a campaign if 49 other banks are willing to give to some other politician running against them? But those 5 can/will collude and buy enough politicians to allow them to influence the system, and they often do this to their own long term detriment.
You don't think the major banks in the UK have not effectively captured their regulator?
The point I'm trying make is that the problem is populism. Both the low quality of the regulatory environment and the relatively high number of US banks are because of that.
posted by JPD at 1:41 PM on March 1, 2014 [1 favorite]
If Stable and Efficient Banks Are Such a Good Idea Why Are They So Rare?
Bankers.
posted by buzzv at 1:45 PM on March 1, 2014 [5 favorites]
Bankers.
posted by buzzv at 1:45 PM on March 1, 2014 [5 favorites]
Australia has 4 very large, profitable and stable banks. it's a cartel. Nice in times of financial crisis though.
posted by wilful at 1:54 PM on March 1, 2014
posted by wilful at 1:54 PM on March 1, 2014
Canada doesn't so much have a cartel. In addition to the Big 5 there are credit unions, online only options like ING and Presidents Choice (which, admittedly, relies on CIBC for its physical needs), HSBC, etc.
What we do have is regulation.
posted by feckless fecal fear mongering at 2:36 PM on March 1, 2014 [9 favorites]
What we do have is regulation.
posted by feckless fecal fear mongering at 2:36 PM on March 1, 2014 [9 favorites]
they go on to argue that regulation prevents them from using that position to extract rents. One would expect, I'd think, lower ROEs from Canadian banks if that were the case.
Canadian banks extract massive rents. The service charges for customer banking are a huge profit source and would shock most Americans and Brits.
Canadian banks don't have an implicit bailout guarantee because the government intervention occurs sooner than post failure. Banks in Canada are pretty much guaranteed huge profits from restricted competition and huge fees in exchange for reduced risk-taking.
Also what the hell is an efficient bank? Efficient at what?
posted by srboisvert at 2:43 PM on March 1, 2014 [3 favorites]
Canadian banks extract massive rents. The service charges for customer banking are a huge profit source and would shock most Americans and Brits.
Canadian banks don't have an implicit bailout guarantee because the government intervention occurs sooner than post failure. Banks in Canada are pretty much guaranteed huge profits from restricted competition and huge fees in exchange for reduced risk-taking.
Also what the hell is an efficient bank? Efficient at what?
posted by srboisvert at 2:43 PM on March 1, 2014 [3 favorites]
I bitch and moan about my service charges, srboisvert, and it's true the Big 5 make obscene gobs of money.
On the other hand, I'm kind of okay trading user fees that are a bit high for bankers not diving headlong into the shallow end of the Pool Of Unwise Financial Decisions.
There's a reason our economy didn't crater, and if that means I have to pay a few bucks per month--bucks that are in extremely short supply in my life--I am happy to do so.
Everything's got a cost.
posted by feckless fecal fear mongering at 2:51 PM on March 1, 2014 [1 favorite]
On the other hand, I'm kind of okay trading user fees that are a bit high for bankers not diving headlong into the shallow end of the Pool Of Unwise Financial Decisions.
There's a reason our economy didn't crater, and if that means I have to pay a few bucks per month--bucks that are in extremely short supply in my life--I am happy to do so.
Everything's got a cost.
posted by feckless fecal fear mongering at 2:51 PM on March 1, 2014 [1 favorite]
I think its point is a good one - the US banking system is inherently more risky - but that is not an absolutely bad thing. Risk and reward are tradeoffs just like in anything else.
My "savings" account earns 0.05% APY. It's so "high" because I'm in a Credit Union. Most banks offer 0.01% APY. When I was first learning to save money, the rates were 5.25% (higher in savings banks). Somehow, banks could pay 500x more in interest then and still stay in business.
So I don't know where the reward is going in this system, but it's certainly not to the people handing over their money.
posted by tommasz at 4:11 PM on March 1, 2014 [10 favorites]
My "savings" account earns 0.05% APY. It's so "high" because I'm in a Credit Union. Most banks offer 0.01% APY. When I was first learning to save money, the rates were 5.25% (higher in savings banks). Somehow, banks could pay 500x more in interest then and still stay in business.
So I don't know where the reward is going in this system, but it's certainly not to the people handing over their money.
posted by tommasz at 4:11 PM on March 1, 2014 [10 favorites]
The 5 year review in the bank act is a major tool of policy in Canada and a major lever Parliament has on the banks. It's very much in the banks' best interests to play ball politically. Paul Martin used to play them like a fiddle section with it, and Flarety has used it to. The system also works because Canada has an elected dictatorship, unified legislative and executive power in the hand of Cabinet. The banks have few levers themselves to use on government, far fewer than the US system allows, with far less party discipline, divided powers and more frequent elections.
posted by bonehead at 4:16 PM on March 1, 2014
posted by bonehead at 4:16 PM on March 1, 2014
(expanding on the points made in the article, of course)
posted by bonehead at 4:17 PM on March 1, 2014
posted by bonehead at 4:17 PM on March 1, 2014
Paul Martin used to play them like a fiddle section with it
OKay so maybe I'm a bad person but could we please put Paul Martin back as Minister of Finance? Flaherty, with Harper's hand up his ass ventriloquist-style, has given us another lovely deficit.
posted by feckless fecal fear mongering at 5:08 PM on March 1, 2014 [1 favorite]
OKay so maybe I'm a bad person but could we please put Paul Martin back as Minister of Finance? Flaherty, with Harper's hand up his ass ventriloquist-style, has given us another lovely deficit.
posted by feckless fecal fear mongering at 5:08 PM on March 1, 2014 [1 favorite]
Canada doesn't so much have a cartel. In addition to the Big 5 there are credit unions, online only options like ING and Presidents Choice (which, admittedly, relies on CIBC for its physical needs), HSBC, etc.
What we do have is regulation.
ING Canada is now owned by ScotiaBank.
Our interest rates are piss poor but otherwise I have some degree of confidence in our system. I know a banker who said the Canadian banks were collectively begging the government to allow them to do some of the things the U.S. banks do and when the crash happened, they thanked their luck that they were not permitted to do what they wanted. I'm not sure what the hell that means though.
But the 40/35/30 year mortgages that were permitted for a time didn't last long, and there was not a huge amount of government interference outrage. Furthermore, the rate of of mortgage insurance is going up if you have less then 20% down, again with out a massive political outrage.
posted by juiceCake at 11:53 AM on March 2, 2014
What we do have is regulation.
ING Canada is now owned by ScotiaBank.
Our interest rates are piss poor but otherwise I have some degree of confidence in our system. I know a banker who said the Canadian banks were collectively begging the government to allow them to do some of the things the U.S. banks do and when the crash happened, they thanked their luck that they were not permitted to do what they wanted. I'm not sure what the hell that means though.
But the 40/35/30 year mortgages that were permitted for a time didn't last long, and there was not a huge amount of government interference outrage. Furthermore, the rate of of mortgage insurance is going up if you have less then 20% down, again with out a massive political outrage.
posted by juiceCake at 11:53 AM on March 2, 2014
Furthermore, the rate of of mortgage insurance is going up if you have less then 20% down
In a world where lots of people are defaulting on mortgages, I'm not really understanding why there should be any outrage here.
posted by feckless fecal fear mongering at 1:55 PM on March 2, 2014
In a world where lots of people are defaulting on mortgages, I'm not really understanding why there should be any outrage here.
posted by feckless fecal fear mongering at 1:55 PM on March 2, 2014
The mortgage insurance for people with less than 20% down was to reflect the fact that the Canadian government felt it was good policy to have high home ownership (about 70%) and that home ownership is virtually impossible even for for dual income, high earning couples if they are buying in most urban/suburban markets ($160,000 down payment in Vancouver, about $75,000 in the ROC). There hasn't been any outrage, but if there were it would be from people concerned that first time buyers would be unable to ever own a home. Defaults on mortgages are less than .5%, as they have been for the past thirty or forty years, personally I wouldn't consider that "lots of people" and I don't think increased defaults are a realistic concern considering all non-Alberta mortgages are recourse so the banks will most likely get their money one way or another.
posted by saucysault at 6:17 PM on March 2, 2014
posted by saucysault at 6:17 PM on March 2, 2014
In a world where lots of people are defaulting on mortgages, I'm not really understanding why there should be any outrage here.
Me neither, and yet in some countries, people are outraged about government regulation as a matter of some sort of bizarre principle.
posted by juiceCake at 7:10 PM on March 2, 2014 [1 favorite]
Me neither, and yet in some countries, people are outraged about government regulation as a matter of some sort of bizarre principle.
posted by juiceCake at 7:10 PM on March 2, 2014 [1 favorite]
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