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Archive for the ‘Blog’ Category:

Part II – The costs of bailing out European banks

Many banks in Europe face insolvency. If we want to recapitalize them, this will likely cost us more than 5% of GDP – and there are even worse side effects of another round of bank bailouts.

 

Bailout is originally a maritime term that means removing water from a sinking ship. And as with today’s banking system, a bailout sometimes is not enough to make a vessel float again. (Photo: dimitrisvetsikas1969)

 

Bailout season has started. In contrast to 2008, the current crisis started in the real economic sector. But in a few months, the real losses in the economy will result in credit impairments for the European banks and eat into their ridiculously low capital reserves. It is only a matter of time until politicians and bankers once again tell us: Bail out banks, or all hell will break loose – in fact, the European Central Bank is supposed to already set up bad banks.

 

Before we decide on bailing out banks, however, we should answer the following three key questions:

 

  • What is the point of bailing out European banks?
  • How much does it cost?
  • Do the benefits justify bank bailouts?

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Prologue – Economics in the Time of Corona

The Covid-19 pandemic poses unprecedented challenges for our economy. What are the options to deal with these? And why is the banking sector once again the elephant in the room? In a blog series, we want to shed light on these questions.

 

A Coronavirus is haunting the world. A lot will change, but be it love or economics, some fundamentals stay the same. (Photo: Daniel Tafjord)

 

On February 22, Italy reported the first two humans that fell victim to Covid-19 in Europe. Barely six weeks later, thousands of people have died from this new coronavirus, and virtually the entire continent has shut down. To prevent further infections, people have stopped traveling, reduced work and stayed at home. Production and consumption is collapsing.

 

While many aspects of economic life come to a halt, others continue. Companies might not sell their products and services anymore, but they still have to pay interest on their debt, rent for their premises, taxes, salaries and other operating costs. For most businesses, the Covid-19 pandemic reduces income much more than expenses. This is causing economic distortions of unprecedented dimensions – and called for governments and central banks to step in.

 

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Part I – The Upcoming European Banking Crisis

How resilient are the largest banks of the eurozone? We looked at their balance sheets and recent stress test results in great detail. What we have found out is not reassuring.

 

The coronavirus pandemic might trigger a severe economic shock. Will the European banking system withstand this storm? (Photo: lenalindell20)

 

The coronavirus pandemic struck Europe completely unprepared. The old continent ignored the key lesson that Asian countries like South Korea, Singapore, or Hong Kong learned when dealing with SARS in 2003: You better be prepared.

 

When a new virus spreads, it is all important to act as fast and as determined as you possibly can. The same lesson applies when your banking system is collapsing.

 

 

 

 

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How banking regulation has grown out of all proportions

Over the last forty years, banking regulation has grown extensively. The framework developed by the Basel Committee on Banking Supervision alone consists of two million words. What is actually stated in all these documents?

 

For our data analysis, we parsed more than 163 regulatory documents issued by the Basel Committee on Banking Supervision.

 

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What will happen after the next financial crisis?

Three scenarios for our financial system in 2050 – told by the fictional story of Ivo Salvini, who started his career in a fintech startup in 2018.

 

Where is the financial world heading to? Find out in our three scenarios for 2050. (Photo: composita)

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Banking regulation moves closer towards peak complexity

Basel III just keeps on giving: The global framework for banking regulation is already extremely complex. Newly presented rules will complicate matters further.

 

This is what global banking regulators believe in: More rules, more complexity, and less transparency. (Photo: Fotomek)

 

Basel III is the name of the global framework for banking regulation. It is the reaction of regulators around the world to the financial crisis of 2007/08. Even ten years after the crisis, the work on Basel III is still ongoing. Yesterday, a so-called “output floor” was added. The new rules should prevent banking institutions from abusing their internal risk management models to overstate the size of their capital ratios.

 

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Coming Soon – The End of Banking in seven languages

There are some exciting news to share. We have teamed up with publishers around the world to get The End of Banking translated.

 

Coming soon, the German edition of The End of Banking (Photo: Campus)

 

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Regtech: Regulators will miss the Frisbee once again

Complexity of financial regulation is exploding. The underlying causes are still not addressed. Instead, regulators want to use technology to keep the inextricable regulatory framework under control – an approach that is doomed to fail.

 

Catching a Frisbee is hard, regulating banking in the digital age impossible (Photo: 825545)

Information technology wouldn’t have helped much to catch this Frisbee (Photo: 825545)

 

“The Dog and the Frisbee”: This was the title of a speech by Andrew Haldane. Already a few years ago, the economist of the Bank of England complained about the ever growing complexity of financial market regulation. He used the image of a dog who wants to catch a Frisbee. The exact calculation of the trajectory requires an understanding of complex physical relationships. Nevertheless, a Border Collie is quite good in catching the flying disc. The dog just follows simple rules of thumb.

 

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Why Fintech needs a license to disrupt finance

Financial regulation treats banks as protected species. This prevents long overdue structural change. The way forward is a fintech license. But current proposals, such as the latest one by the Swiss government, are not comprehensive enough.

 

The financial industry will not get disrupted if regulators continue to protect banks

The financial industry will not get disrupted if regulators continue to protect banks.

 

The digital revolution causes sleepless nights among managers of the “old economy”. Successful business models are increasingly disrupted by the geeks from Silicon Valley. People do no longer hail cabs, they Uber, and travel offices have become rare and deserted places. However, one industry has resisted successfully the disruption from digitalized competitors so far: the financial industry. The very same banks that have existed one hundred years ago still dominate the financial sector.

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One of the Top 5 Books to Learn About the Banking Industry

We are proud that The End of Banking has been selected as one of the top five books to learn about the banking industry. You find the full list on the website of Investopedia.

“The End of Banking offers an intriguing look into the financial future” (Source: Investopedia/own illustration)

“McMillan carefully details what he sees as ultimately unsolvable problems confronting the current banking system, and then offers a plan for a new type of banking system…” (Source: Investopedia/own illustration)