Bruce's International Banking Thread

[olderstill]

The NYFRB SSG should study the FDIC agenda. Had they done so instead of sitting around discussing options, they'd be into correcting deficiencies instead of cogitating whether what they witness are deficiencies or not.

There comes a time when action is needed. Get out of the meeting rooms and out in the field! Do something! If you don't know what to do, surrender your chairs to someone who does. Two and a half years and they're still having meetings to discuss? What is the principal subject? When to have the next meeting?

[bimetalaupt]

Jan 6, 2011 13:43:34 GMT -5 olderstill said:

The NYFRB SSG should study the FDIC agenda. Had they done so instead of sitting around discussing options, they'd be into correcting deficiencies instead of cogitating whether what they witness are deficiencies or not.

There comes a time when action is needed. Get out of the meeting rooms and out in the field! Do something! If you don't know what to do, surrender your chairs to someone who does. Two and a half years and they're still having meetings to discuss? What is the principal subject? When to have the next meeting?

Older Still,
What makes me wonder is the OCC.. They have the vast number of bank in America to examine . I have not heard a word from them in two years..

It will be interesting to see what the FOMC does with Hoenig now off and retired.

Bi Metal Au Pt

[bimetalaupt]

Older Still,
This is too much... OCC is still talking about BIS II... I did not see a word on BIS III.. But that is more about international banks and BIS II is more about country banking???

Bi Metal Au Pt
Basel II - Advanced Approaches

In June 2006, the Basel Committee on Banking Supervision (BCBS) published the "International Convergence of Capital Measurement and Capital Standards: A Revised Framework" (Basel II or the Basel II framework). Basel II includes several options for calculating risk-based capital for credit risk and for operational risk. Basel II set forth a "three pillar" framework encompassing risk-based capital requirements for credit risk, market risk, and operational risk (Pillar 1); supervisory review of capital adequacy (Pillar 2); and market discipline through enhanced public disclosures (Pillar 3).

On December 7, 2007, the Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation (FDIC), and Office of Thrift Supervision (OTS) issued a final rule implementing the Basel II framework's advanced internal ratings-based approach for credit risk and the advanced measurement approach for operational risk in the United States. The U.S. final rule identifies two types of U.S. banking organizations that will use advanced approaches: those for which application of the rules is mandatory (core banks), and those that voluntarily apply the rules (opt-in banks). In general, the advanced approaches rule defines a core bank as a bank that has consolidated total assets of $250 billion or more, has consolidated on-balance sheet foreign exposure of $10 billion or more, or is a subsidiary of a core bank.

Resources available at the Bank for International Settlements (BIS):

* Publications
Access fact sheets, press releases, speeches, working papers, newsletters, and more

* Basel II Framework
Access up-to-date information on framework development

Related News & Issuances
12/15/2010 NR 2010-142, Agencies Seek Comment on Market Risk and Basel II Advanced Approaches
06/25/2010 NR 2010-107, U.S. Banking Agencies Express Support for Basel Agreement
03/02/2010 OCC 2010-10, Risk Weight for FDIC Claims and Guarantees: Joint Interagency Statement

[bimetalaupt]

Frank,.
I made a statement to the programmer last week " The only way to win is to do nothing".. My A++ is none-EU balanced with some Swiss Franc and a lot of T-Bonds with maturity to 2025, blue chips and some $$$$. After your 14,400 post for DJIA What more can I say. After I looked at the last winner of the best "Personnel Bankers " I see your point on the system.. Luxembourg Royal Bank is number one in the German speaking area of the Europe.

As my father said , Banking is all about service.. The chain banks are sure low on that. But service cost money so that is why Credit Unions are making 15% yearly increases in Accounts.

Just a thought,
Bruce

[comokate]

bump

[bimetalaupt]

Jan 8, 2011 21:25:33 GMT -5 @franktheimpaler said:

I agree Bruce Credit Unions and money stores at WalMart are taking over banking with service...bump my ass!

Frank,
The savers best friend is low inflation!!! Both Axel Weber and James Bullard are all about keeping inflation down.. It is the only mandate for the Bundesbank and the Main thinking for the KCFRB.. As with his previous president.. Inflation Hawks.. Low inflation and low taxes ..
It is all about savings and the effect on the local area with more money being ready for the local firms to borrow.. What the small banks needs is an equal deal from the Federal Reserve or ECB..[/img]

Just a thought,
Bruce[/img]

Attachments:

[olderstill]

Bi Met

Amen to the demand for equal treatment for the small banks. Because of the greater threat from the larger institutions all the capital requirements have been skewed to serve their deficiencies at the same time they tread on the marginal but safe operations of many of the smaller, solid banks.

Again, it's one thing to turn to one of 10,000 employees and say, "Jack take care of this report, will you?" while a hands-on president at a community bank looks around at his half dozen or dozen back office staff and wonders which of his already overloaded staff members he can draft for the job.

About not hearing from the OCC for a while. . .

They all have different operating modes, the OCC, CFTC, SEC, FRB, FDIC. .

The FDIC is the only agency working in the real world. They have banks in trouble and it's their responsibility to be prepared to resolve those very real issues.

The Fed is an alliance of thousands of economists who hem and haw, have meetings, conferences, convocations, travel all over the world and pretend to have knowledge not available to normal humans but they're too busy to deal with the issues of the day. The Fed is the the Fed. . once and forever interested only in being "independent" of politics while it serves political ends. Always has been from the start in 1913 until today. Unfortunately, the politics of the Fed is not the politics of the real world. Trying to reconcile their disparate goals renders it a neutered, immobile institution. They cry the universal tears but feel only the pain of money and interest, bonds and currency. You don't need an army of tens of thousands to follow that path.

The OCC, if you recall, was on the verge of extinction with the first Dodd proposal. Dodd wanted the OCC to be absorbed into one of the new agencies created in his first draft of the Act. Initially, they were the go-to agency where banks were concerned. . . that was nearly two centuries ago. . after the Banking Act of 1863. So from prominence to disappearance in 145 years?

CFTC has been rendered impotent by the politicians over the past thirty years. The short crisp Brooksley Born saga was equivalent to the murder of Caesar, the coup d'etat to set up another coup d'etat. You know - et tu, Larry? and the GLBA was the biggest shovel of dirt tossed onto the grave. What have we heard from Gensler aside from an intermittent speech here and there.

The SEC. . . they'll have lot of work before they can recover from the damage to prestige caused by Cox. The regulating experience Mary Schapiro had may not be enough to provide the leadership the Commission desperately needs.

And, yet, those agencies are issuing statements to which they uniformly pledge lock-step support! Some of those agencies are depending too much on others to do the work, however, lip service? . . . . Sure!

The above is partly tongue in cheek. Anybody knows public service entails an unreal demand on time. This is multiplied in times of stress or crisis. It's impossible to be in every place calling for your attention or responding to all the demands for your time - as if no one else calls for your attention. Often, you might not have the time to think about the subject properly. During crises, forget nine to five. Conferences extend past daylight hours, into the weekend, entail meeting with those who have unwavering contrary views, yet whose participation is essential for recovery or stability.

Follow Bernanke for a month and we may understand why there are some extra wrinkles around the eyes, or the speeches sound strangely familiar. Yet, we can't forgive a man in his position if we don't see positive results. It's all a matter of who should be getting a piece of the pie. We may not all favor the same economic sector and the balance we can achieve may not satisfy anyone.

So, when I see these joint releases bearing the imprimatur of the Fed, SEC, FDIC and OCC I wonder who did the work and whose interest it serves.

You mention saving? When people see value disappearing from their house, and the savings account diminish by way of higher food and energy costs and the government says, "Those costs don't count", how are they supposed to feel? Is 0.49% an adequate enticement for these people to save? So, out of all our agencies, who serves these people? When do we see legislation that protects or serves them? Germany savings rate 15%! US will drift how much lower than current rates and levels before we see change? The sole reason the savings had that little bump up was due to the fear that we are all subject to, the other shoe - unexpected devaluation and possibly soon. If the hit doesn't come, that fear will be gone and the savings rate will tumble again. . . And, we might still be looking for another source for capital to feed the recovery.

[bimetalaupt]

« Real GDP Grows at 2 Percent in the Third Quarter | Main | links for 2010-10-29 »
Friday, October 29, 2010
"Friedman was All Wrong about Japan ... and the Great Depression"

As I've noted before, one thing I've learned from this recession is that it's not as easy to increase the money supply as I thought. It's easy to create additional bank reserves and increase the monetary base, but if the new reserves simply pile up in the banking system, then they don't have much of an effect on the supply of money:

More On Friedman/Japan, by Paul Krugman: ...So: David Wessel quoted what Milton Friedman said about Japan in 1998, and interpreted it as meaning that Friedman would favor quantitative easing now. I think that’s right. And just to be clear, I also favor QE — largely because it might help some, and seems to be just about the only policy lever still available in the face of political reality.

But I think it’s also important to note that Friedman was all wrong about Japan — and that you can argue that he was also wrong about the Great Depression, for the same reason.

For what Friedman argued, both for Japan in the 1990s and America in the 1930s, was that all the central bank needed to do was more — push out those reserves into the banking system. This would raise the money supply, and a higher money supply would have the usual effects.

But the Bank of Japan tried that — and found that pushing more reserves into the banks didn’t even lead to rapid growth in the money supply, let alone end the problem of deflation. Here’s a chart of growth rates of the monetary base and of M2, Friedman’s preferred monetary aggregate:

DESCRIPTION
Bank of Japan

So, after 2000 the Bank of Japan engineered a huge increase in the monetary base; this was the original quantitative easing. And it didn’t even translate into a surge in the money supply! This is why I’m so skeptical of people who say that all the Fed has to do is target higher nominal GDP growth — in liquidity trap conditions, the Fed doesn’t even control money, so how can you blithely assume that it controls GDP?

And this also calls very much into question Friedman’s famous claim that the Fed could easily have prevented the Depression, which gradually got transmuted into the claim that the Fed caused the Depression. Yes, M2 fell — but why should we believe that the Fed had any more control over M2 in the 30s than the BOJ had over M2 more recently?

Again, that doesn’t mean that I oppose having the Fed engage in unconventional asset purchases. I’m just trying to be realistic about the likely results. We really, really need expansionary fiscal policy along with Fed policy; and we’re not going to get it.

Posted by Mark Thoma on Friday, October 29, 2010 at 05:39 PM in Economics, Monetary Policy | Stumble, Digg, del.icio.us, Reddit, Tweet, Share on Facebook, Like on Facebook | Permalink Comments (91)


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anne said...

krugman.blogs.nytimes.com/2009/03/02/friedman-and-schwartz-were-wrong/

March 2, 2009

Friedman and Schwartz Were Wrong
By Paul Krugman

It’s one of Ben Bernanke’s most memorable quotes: at a conference honoring Milton Friedman on his 90th birthday, he said: *

"Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again."

He was referring to the Friedman-Schwartz argument that the Fed could have prevented the Great Depression if only it has been more aggressive in countering the fall in the money supply. This argument later mutated into the claim that the Fed caused the Depression, but its original version still packed a strong punch. Basically, it implied that no fundamental reforms of the economy were necessary; all it takes to avoid depressions is for central banks to do their job.

But can we say that recent events appear to disprove that claim? (So did Japan’s experience in the 1990s, but that lesson failed to sink in.) What we have now is a Fed that is determined not to "do it again." It has been very aggressive about monetary expansion. Here’s one measure of that aggressiveness, banks’ excess reserves:

[Banks’ excess reserves are rocketing....]

And yet the world economy is still falling off a cliff.

Preventing depressions, it turns out, is a lot harder than we were taught.

* www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/default.htm

[bimetalaupt]

The Great Depression was a MASSIVE inventory correction. Unlike the "long depression" that lasted a generation, the Great Depression was a just a long, deep correction between booms."

I like your take on this. I laughed when I heard Steve Ballmer say the crisis was not a recession, but rather an economic reset to a lower level. Interestingly, Alan Greenspan had to say:

"The current credit crisis will come to an end when the overhang of inventories of newly built homes is largely liquidated, and home price deflation comes to an end. That will stabilize the now-uncertain value of the home equity that acts as a buffer for all home mortgages, but most importantly for those held as collateral for residential mortgage-backed securities. Very large losses will, no doubt, be taken as a consequence of the crisis. But after a period of protracted adjustment, the U.S. economy, and the world economy more generally, will be able to get back to business."

This makes sense of Ballmer was saying. But there are psychological underpinnings here that I think many commentators have been missing. I thought it would be Niall Ferguson who would have taken a stab at what that would be, but I found a fascinationg bit from Minsky that made sense. He believes that human behavior is inherently pro-cyclical, which means that "bubbles" are a social phenomena. Humans would prefer to "momentun" invest rather than "value" invest. Thus counter-cyclical policy, in the way that Raghuram Rajan has proposed in his idea of "contingent capital requirements", would help to slow down the momentum during periods where "bubbles" are likely to occur. The key is regulate, regulate, and more regulation.

[olderstill]

Bi Met

I'm in agreement with all the above references that indicate short-comings in resuscitating money supplies. In reference to Friedman's pursuit of monetary policy, I mentioned before that the problem with monetary theory and policy is that it fails when needed the most.

The shortage of money whether due to an actual currency stock shortage or reduced velocity is a foregone conclusion when circulation begins to seize up in response to market short-comings. You're dealing with apprehension. Any new supply is gathered up and set aside in preparation for future use. The stylized description of the stalled system is found in the generality that new money supplies will remain in the hands of those who receive it first. Give it to banks and banks will hoard it waiting for better days to come; distribute it among consumers and they too will put it away in anticipation of "better buys", or more results for the dollar. No matter how it's distributed, it seems to have a stickiness about it, not a free flowing motion at all, brought on by the tendency to wait for the "other shoe to drop".

As for Japan, Krugman has spent a great deal of time studying thier situation and some of his writings such as The Return of Depression Economics demonstrate a feel for the Japanese quandary not found in Friedman and totally lacking in the Bernanke outlook. I believe Bernanke is too far removed from the Japanese psychology to understand their economic propensities much less their desires. A homogeneous group initiates and responds to crises in a manner completely different than a "melting pot" such as the USA. There's is much more trend toward a single standard, so much so that relatively minor glitches meet with what we might consider over-reaction. (In our case, differences of opinion would result in resistance to any decision or move in accordance with any single outlook. That's "uniformity of thought" in the Japanese may be considered the root of their current long-standing problem. Whereas we may have other problems with any of several sectors not accepting what might be perceived reality. Japan goes in one direction driven by belief because the next door neighbor believes it. And, we can't organize because we can;t unify our thought. Neither one has an advantage over the other. There must be some recognition of this psychology which is resistant to quantification via math .

That's why Friedman's construct has short-comings, there is no recognition for the herd variation. This is fatal to his system, more so when opinion turns toward a hint of panic or hysteria. And, of course, he has no way of quatifying the intinct as Jevons' proposals might have eventually developed.

I think I can agree with Mark Thoma and Bi Met on this issue.

[comokate]

As for Japan, Krugman has spent a great deal of time studying thier situation and some of his writings such as The Return of Depression Economics demonstrate a feel for the Japanese quandary not found in Friedman and totally lacking in the Bernanke outlook. I believe Bernanke is too far removed from the Japanese psychology to understand their economic propensities much less their desires.

misunderstanding cultural differences has had a long history of negative result;financial and other.
Are we doomed to never learn from history?

[bimetalaupt]

m2

[bimetalaupt]

Jan 10, 2011 17:31:10 GMT -5 bimetalaupt said:

m2

Japan M2 vs M0

[/img]

Attachments:

[bimetalaupt]

Jan 10, 2011 17:31:10 GMT -5 bimetalaupt said:

m2

effect of Japan use of QE and M2...

[/img]

Attachments:

[bimetalaupt]

THE BUNDESBANK is one of the wonders of the Wirtschaftswunder that was ushered in by Ludwig Erhard's great reforms of 1948. Before the establishment of the Bundesbank in 1957, the Bank Deutscher Lander, a creation of the allied military government, had emphasized the importance of monetary policy in ensuring price stability. Both banks owe their independence and prestige to two catastrophes. The first was the great hyperinflation of 1920-23. This expropriated the wealth of the German middle classes and paved the way for Hitler; the gutter became the government. The second catastrophe was the hyperinflation of 1945-47--a consequence of the massive deficit financing of World War II. The Reichsmark currency was completely destroyed and the currency reform of 1948 ushered in the deutschemark, the Grail of which the authorities of the Bundesbank are the guardians.
During the early 1870s, the numerous states of Germany had fragmented currencies which were unified by the creation of the Reichsbank in 1876. From its inception the Reichsbank was completely dependent on the government. But as Germany had joined the gold standard, such dependence was not a matter of great concern. One of the central principles of international monetary economics is that if one fixes the exchange rate, then there is little or no scope for an independent monetary policy...a simple lesson that is forgotten more often than learnt. So, although Germany rarely obeyed the implicit rules of the old gold standard (it was a notorious hoarder of gold), the convertibility requirement prevented any inflationary financing until the abrogation of the standard in 1914. Then, at the behest of governments, the Reichsbank, by monetizing the large government deficits, ensured the hyperinflation of 1920-23.

As a result of the advocacy of Montague Norman, the powerful Governor of the Bank of England, and the pressure exerted by the Allies in May 1922, the Reichsbank was made independent of government by the Autonomy Act. The monetary reform of 1923 and the creation of the new stabilizing Rentenmark--"backed by the real estate of the Reich"--paved the way for the establishment of a new currency, the "Reichsmark," which was based on the gold exchange standard. The Reichsbank remained independent of government.

With the accession of Hitler, however, the Reichsbank was soon put in its place. Through one encroachment after another, the independence of the Reichsbank was repudiated. In 1937 it was made subject to the instructions of the Fuhrer, Hitler. In January 1939 six of its eight directors were dismissed when they criticized the excessive borrowing required to finance Hitler's spending plans. Thus Germany was all set for the great inflation that followed World War II.

It is not surprising that the German people developed a dread of inflation. Just as the hyperinflation of 1920-23 was important in projecting Hitler into power and to the devastation of war-time defeat, it also caused the complete collapse of the currency and of the economy after World War II. Never again. The independence of the central bank from government became the basis for the forerunner of the Bundesbank, the Bank Deutscher Lander, which was set up to implement the currency reforms of 1948. And with the establishment of the Bundesbank in 1957, a high degree of independence was written in the Bundesbankgesetz (charter).

All this is described in considerable accurate detail in David Marsh's book. Alas, he could not resist the temptation to dwell on the Nazi-party membership of some of the distinguished staff and councils of the Bundesbank. Such smear jobs might have been omitted. Yet Marsh is a gifted journalist and his command of events is most impressive. But he does not have the same respect for ideas as he does for the nitty-gritty of reportage.

In my view the change in ideas was of great importance in converting a collectivist Nazi state into the liberal market economy of the Federal Republic. The context of these great changes in Germany was the development of ideas behind the Sozialwissenschaft--the social market economy. A small band of German intellectuals, led by two great liberal (in the European and literal sense) economists, Walter Eucken and Wilhelm Ropke, bravely opposed the increased socialization and central planning of the Hitler economy and developed the ideas of Ordo-Liberalism (notably in Walter Eucken's book Grundsatze der Wirtschaftpolitik, Tubingen, 1952). The primary focus was through Ordnungspolitik, the "constituent principles" of a market economy (monetary stabilization, free entry, private property, and above all maintaining competition). But this Ordo-Liberalism was modified by Alfred Muller-Armark (Erhard's state-secretary) and other scholars who felt that, as a subsidiary matter, state intervention was needed in order to ensure a safety-net. They wanted to avoid the alienation of dispossessed and disaffected groups that had provided such a fertilizer for the poseurs and demagogues of fascism and communism. This modified Ordo-liberalism was called the "social market economy." Eucken, above all, emphasized the need for price signals, undistorted by inflation, for the market to work efficiently and thus the requirement of a stable general price level. It seems that Eucken, rather like Milton Friedman in our day, would have preferred to bind the central bank to strict monetary rules. But the preponderant opinion was in favor of the conduct of monetary policy by an independent central bank.

[scaredshirtless]

Half a thought I've had on our national banks...

So when do you think the Fed and the Treasury will "cleanse" B of A's debts and hand the rest over to JPM Chase?

I know - half a thought.

[Aman A.K.A. Ahamburger]

Couple of things to note!

Targeting 28% Jump in Money Signals Bid to Contain Rates: Argentina Credit
www.bloomberg.com/news/2011-01-10/targeting-28-jump-in-money-signals-bid-to-contain-rates-argentina-credit.html

Fed pays US Treasury record $78.4B last year
www.dailyfinance.com/rtn/press/fed-pays-us-treasury-record-78-4b-last-year/rfid403314988/?channel=pf

[Virgil Showlion]

I finally found the site on ECB international reserves. This thread seemed like a decent place to bookmark/share it.

www.ecb.int/stats/external/reserves/html/index.en.html

[bimetalaupt]

Virgil,Thank-you .. for the posted data address..
Bruce
This should improve the bankers dreams on CDO.. AT the cost of 186 Billion $$$.. make money in the 10's of Billion on the Re-Capitalization of AIG..

The recapitalization of bailed-out insurer American International Group Inc (NYSE:AIG - News) closed on Friday, leaving the government with a 92 percent stake that it plans to sell quickly.

Bankers were buzzing on Friday about how soon that might happen, with at least one saying he would not be surprised if the government picked the deal's managers next week and others saying the fee on the deal was already under pressure.

The recapitalization was intended to simplify AIG's $182 billion bailout by paying off the Federal Reserve and leaving the U.S. Treasury as AIG's majority owner. The Treasury said on Friday its cash investment in AIG is $68 billion.

"Treasury remains optimistic that taxpayers will get back every dollar of their investment in AIG," Treasury Secretary Timothy Geithner said in a statement. The government stands to make a profit in the tens of billions of dollars on its AIG shares, given their appreciation over the last year.

A person familiar with the situation told Reuters on Monday a large Treasury-AIG share sale was likely after mid-May, and other sources have said in the past that Treasury likely would dispose of the stake by 2012.

The Treasury spent all day Thursday meeting bankers in New York to find the right group to manage the stock sales. The CEOs of some of the world's largest financial institutions appeared in person to make their case for what could be one of the 10 largest share offers ever.

Sources have said the banks' proposals would includes fees of no more than 75 basis points -- some $150 million for the winning banks on a $20 billion deal, but half the typical fee for a deal of this type and size.

Some bankers said on Friday they would not be surprised, given the competitive nature of the deal, if the fees went even lower -- although one banker pointedly noted he had no interest in doing the deal for free.

BUYING A MISSILE

The fee structure would be broadly in line with what the government paid banks last year to manage the initial public offering of automaker General Motors Co (NYSE:GM - News). Multiple people familiar with the situation said it did not make sense for the AIG fees to be higher than for GM.

"It's like buying a missile at $1 billion when the last time you paid half a billion," one person said.

While no decision has been made yet on the lead bank or banks for the offering, there is a broad assumption among bankers involved in the process that those who committed to $4.3 billion in bank credit lines for AIG in December have the best chance of winning a lead role in the share sale.

JPMorgan Chase & Co (NYSE:JPM - News), Bank of America Corp (NYSE:BAC - News) and Citigroup Inc (NYSE:C - News) were joint lead arrangers on the loans.

Having a lead role gives a bank a larger chunk of the fee pool, more control over the sale process and the prestige of having managed a marquee deal for the U.S. government.

The government saved AIG from collapse in September 2008. Over the last year, the company has raised tens of billions of dollars through asset sales and IPOs of international units as it slimmed down and shifted focus.

AIG shares fell 5.4 percent to $54.12 in early afternoon trading. The stock price has fallen in recent days and is expected to settle in the mid-$40s level by next week as recently issued stock warrants start trading