KnowNOW!

Global Economic Watch

Syndication

Recent Posts

Tags

Archives

  • McKinsey: Basel III To Bring Drop in Revenue for Europe's Banks

    With new regulations scheduled to hit, Europe's banks can expect lower returns, according to a new report from McKinsey & Company . Down the road, banks have an opportunity to make up the lost ground and build more sustainable practices, but first the hit on returns will look something like this: We estimate that without any mitigating action by banks or material changes in the economic and competitive environment, recent global rules, especially Basel III,1 and new regional and national regulations will help reduce retail banking’s average return on equity (ROE) in Europe’s four largest markets to 6 percent, from about 10—a 41 percent decline. The analysis, based on 2010 financial-year data, assumes that the cumulative regulatory impact expected over the next several years will be realized immediately. The effects vary across the four markets, but in all cases the outlook is grim (exhibit). In France, ROE will fall to 9.5 percent, from 13.5—a 29 percent decline driven by changes affecting mortgages, debit cards, and investments. In Germany, ROE will fall to 3.5 percent, from 6.6 (a drop of 47 percent); almost all retail products will be affected and many will become unprofitable. ROE in Italy’s retail banks starts from a lower base, 5.1 percent, but will fall further, to 3.1 percent. In the United Kingdom, returns will fall to 7 percent, from 13.6 percent. The impact here, 48 percent, is high because of extensive country-specific regulation. Access the full report here .
  • OECD: Canada's high standard of living dependent upon increased productivity

    Let's look north, for a moment. In its latest report on Canada's economy, the OECD credits Canadians with effectively "weather[ing]" the storm during the global economic crisis. The OECD gives Canadian policymakers high marks for a "timely macroeconomic response." And Canadian banks are cited for being more stable and prudent than their respective neighbors to the south. But the report gives some warnings, as OECD evaluators cite "sluggish" productivity as a cause for concern. Canada’s overall productivity has actually fallen since 2002, while it has grown by about 30% over the past 20 years in the United States. At the same time, income has shifted towards the resource-rich western provinces, while the regional economies of Ontario and Quebec are still adapting to increased external competition resulting from the high exchange rate. “Canada is blessed with abundant natural resources. But it needs to do more to develop other sectors of the economy if it is to maintain a high level of employment and an equitable distribution of the fruits of growth,” said Peter Jarrett, one of the authors of the study and the head of the Canada division at the OECD Economics Department. The OECD identifies two key priorities for meeting this long-term challenge. First, Canada needs to boost innovation. Canada has world-class research institutions and provides strong public support to business investment in research and development (R&D). However, the business sector devotes only about 1% of GDP to R&D, compared with 2% in the U.S. and more than 2.5% in Japan, Korea and some of the Nordic countries. Canada remains a low performer on business investment in R&D, even when the large share of natural resource production is taken into account. Here's a look at productivity in Canada relative to the US over the last three decades: Read a summary of the report here . For access to the Economic Survey of Canada (subscription required), click here .
  • Barry Ritholtz Reports Back from the Future on Effective Regulation of "Reckless Speculation"

    In his latest column for The Washington Post , Barry Ritholtz tells us he made a trip recently. A trip to 2015. And he brought back some good news. By then, apparently, " we had ended Too Big to Fail, eliminated taxpayer liability for reckless speculation, and freed hedge funds and investment banks from onerous regulations." To prove this seemingly unlikely development, Ritholtz brought back a letter from the chairman of the FDIC to bankers in which the chairman outlines some of the changes that the FDIC has put through after a round of very disheartening stress tests (performed in 2014). Here is an excerpt: 1. Effectively immediately, we have increased the FDIC deposit insurance for any U.S. bank that engages in ANY trading of derivatives or underwriting securities or other investment banking activities by threefold. This threefold fee increase goes into effect immediately. It applies whether these trades are hedges for proprietary trades or are made on behalf of clients. 2. Effective in 90 days, we are LOWERING the maximum insured deposit liability to $100,000 per account for derivative trading firms. Effective in 180 days, the insured maximum insured deposit liability will drop to $50,000 per account. 3. Effective one year from today, on May 23, 2016, we will no longer offer deposit insurance for any firm that engages in derivative trading or securities underwriting or that engages in investment banking. 4. Any bank with fewer than 1,000 depositors or less than $1 billion in assets may apply for a discretionary waiver of these rules. Read How the FDIC can curb banks’ reckless speculation here .
  • The Risky Business in Proprietary Trading

    Should we view investment banks as retail outlets? In explaining how proprietary trading works, Paddy Hirsch says that banks like JP Morgan want to be viewed that way. But the risk involved when the inventory is our money is quite a bit different than when the inventory is, say diamonds. Hirsch's latest Marketplace Whiteboard :
  • Can US Banking Policy Provide Lessons for Europe's Banks?

    At VoxEU , Mathias Hoffmann , of the University of Zurich, and Iryna Stewen , of the University of Mainz, argue that moves to separate banks along national lines could have the opposite effect of that desired by policy-makers. That is, Hoffman and Stewen argue for more integration, not less. They use a simple graph to illustrate the relationship between bank liberalization and uninsured risk. The blue line represents banks that had not been liberalized at the time of the recession. The red line represents banks that had been liberalized. Hoffman and Stewen: Interestingly, the co-movement between interstate risk-sharing and the US-wide business cycle started to weaken during the 1980s, which is the period during which banking liberalisation at the state level got into full swing (in fact, the correlation between the blue line and the red, dashed line in Figure 1 is -0.44 before 1984 and only -0.13 thereafter). We show that it is indeed the liberalisation of state bank branching restrictions that is responsible for this weakening. The role of banking liberalisation for risk-sharing is illustrated in Figure 2, which presents the extent of interstate risk-sharing that a state typically achieves in the years around a typical NBER business cycle trough. In Figure 2, we distinguish between two groups of states: Those that had already liberalised in a given recession (red dashed) and those that had not yet liberalised (blue solid line). The message is clear – for the states that had not liberalised, consumption risk–sharing with other states drops sharply (the fraction of unshared risk goes up in the picture) in a recession, only to recover to 'normal' levels a year after. For the states that have already liberalised during the recession, the extent of risk-sharing with the US as a whole remains stable. In the paper, we then also show that these improvements in risk-sharing overall are actually driven by better access to credit markets (and not some other channel of smoothing or risk-sharing). We believe that these results point towards an important benefit from banking liberalisation: Financial integration facilitates access to finance mainly when it is most urgently needed – during aggregate downturns. Read Recessions and small business access to credit: Lessons for Europe from interstate banking deregulation in the US here .
  • Four Vulnerabilities in the World Economy

    Philip Suttle --longtime J.P. Morgan economist and now Director of Global Macroeconomic Analysis at the Institute for International Finance --shared his big worries about the global economy in 2010 at a Carnegie Endowment panel discussion earlier this month. Suttle said there are many reasons to feel good about the state of things moving forward, but that he sees four potential vulnerabilities: oil, turmoil in the US treasury market, tensions in the Euro Zone, overly aggressive actions "to curtail bank activity." You can watch the full panel discussion, titled Happy New Year?: The World Economy in 2010 here .