Category: Banks

Interesting article in Belgian dutch newspaper De Morgen this week-end by Paul De Grauwe, Professor Economics at the University of Leuven.

Free translation of the key paragraph:

What is clear now, is that banks start to take advantage of the more positive economic climate. They do this in different ways. First of all they almost get free money from the European Central Bank (ECB). They invest those assets in government bonds at an interest rate of 3 to 4%.

The government has thus created a money machine for the banks. The ECB, part of the government sector, lends money to the banks and “charges” an interest of 1%. The same government pays 3 to 4 % interest rate to those same banks. The banks take no risk whatsoever. The manna falls out of the sky. That way, i also want to become a banker.

I was last week in New-York, and there was a lot to do on television channels and on Times Square billboards about the Goldman Sachs bonuses.

I just googled that subject, and i found this blog on Wall Street Journal:

It’s a bit cynical that this article gets the honesty ad from Barron’s.

Happens that over the week-end, i stumbles upon the latest blog from the always enlightened Sean Park on The Park Paradigm, with reference to Andy Haldane’s brilliant paper “Rethinking the Financial Network (April 2009).

Mr. Haldane is Executive Director, Financial Stability at the Bank of England. The Financial Stability area plays a key role in meeting the Bank’s responsibilities for maintaining the stability of the financial system as a whole. In this role, Andy has responsibility for developing Bank policy on financial stability issues and the management of the Financial Stability Area. Andy is a member of the Financial Stability Board, which gives high level guidance on priority-setting, and of the Bank’s Executive Management Team.

The document (text of a speech) starts with a comparison between the 2002 SARS pandemic (could also have been H1N1 in 2009) and the 2008-2009 Financial Market stand-still.

On 16 November 2002, the first official case of Severe Acute Respiratory Syndrome (SARS) was recorded in Guangdong Province, China. Panic ensued. Uncertainty about its causes and contagious consequences brought many neighbouring economies across Asia to a standstill. Hotel occupancy rates in Hong Kong fell from over 80% to less than 15%, while among Beijing’s 5-star hotels occupancy rates fell below 2%.

Etc….

On 15 September 2008, Lehman Brothers filed for Chapter 11 bankruptcy in a New York courtroom in the United States. Panic ensued. Uncertainty about its causes and contagious consequences brought many financial markets and institutions to a standstill. The market for Credit Default Swaps (CDS) froze, as Lehman was believed to be counterparty to around $5 trillion of CDS contracts.

Etc

And he goes on:

These similarities are no coincidence. Both events were manifestations of the behaviour under stress of a complex, adaptive network. Complex because these networks were a cat’s-cradle of interconnections, financial and non-financial.

Adaptive because behavior in these networks was driven by interactions between optimising, but confused, agents. Seizures in the electricity grid, degradation of ecosystems, the spread of epidemics and the disintegration of the financial system – each is essentially a different branch of the same network family tree.

This paper considers the financial system as a complex adaptive system. It applies some of the lessons from other network disciplines – such as ecology, epidemiology, biology and engineering – to the financial sphere. Peering through the network lens, it provides a rather different account of the structural vulnerabilities that built-up in the financial system over the past decade and suggests ways of improving its robustness in the period ahead.