Quants Relieved: They Will Survive the End of BankingApril 4, 2015
The End of Banking has reached the quant community that invented so many of the derivatives and statistical methods that turned foul during the financial crisis of 2007-08. Reason enough for Dan Tudball, editor of Wilmott magazine, to ask Jonathan McMillan what quants should do in a world without banking. He was relieved about Jonathans take on this delicate question:
Banking is dead, long live FinanceMarch 3, 2015
The digital revolution has left banking broken beyond repair. But information technology also opens up new possibilities that render banking redundant. Consequently, we should end banking and replace it with a transparent and disintermediated financial system, supported by peer-to-peer networks and modern trading technology. In the digital age, such a system is superior in supporting the real economy with money and credit to a banking system that is completely out of control.
Read the full interview with Jonathan McMillan about his vision of a stable, efficient, and fair financial system for the digital age.
The Strategic Mistake of Marketplace LendingMarch 3, 2015
The marketplace lending industry in the U.S. has done very well lately. Its players, however, underestimate their disadvantage within the current regulatory framework. The incumbent banks are backed by government guarantees and access to Federal Reserve liquidity. This will give banks a decisive edge over marketplace lending in the next financial crisis. Focusing on cost-efficiency and quality will not be enough for marketplace lending to succeed. They have to reinforce their strategic vision of disintermediating the financial system and to push for a regulatory reform.
Find out more here.
The Blind Spot of Economists When Analyzing the Eurozone CrisisFebruary 2, 2015
The Greek elections have brought the eurozone crisis to the surface again. These days, politicians fight once more about how to deal with financial instability in Europe. Depending to what side they stand on, economists either demand that traditional principles of monetary policy need to be adhered to or claim that these principles are of no value during an extraordinary crisis.
Unfortunately, both camps ignore the radical shift that has happened over the last decades. They do not consider how the digital revolution has transformed the financial system. If we ignore the impact of information technology on banking, however, we cannot deal properly with the challenges our financial system faces today.
Our article in the “Ökonomenstimme,” which is an economics blog written in German, takes up these issues.
The Failure of Financial Regulation in the Digital AgeJanuary 1, 2015
Our article in The Guardian discusses how the digital revolution undermined the effectiveness of banking regulation. For this, we adopt a historical perspective. We conclude that today's gradual approach in regulating the financial system is doomed to fail. The failure of capital requirements à la Basel I and II exemplify how the boundary problem of financial regulation has become insurmountable in the digital age. As we put it in the article:
"Restoring a functioning financial system in the digital age requires a fundamental overhaul of financial regulation. If regulators do not progress to the digital age, our financial system will remain in its current dysfunctional state."
Find the full article here.
"An important book about finance"January 1, 2015
Dominic Elliott from Reuters Breakingviews has recently published an insightful review. According to him, the book “… provides a holistic and compelling explanation of the crisis of 2008.” Elliott states that “the illustration of how balance sheets multiply and money grows in The End of Banking is illuminating,” and he concludes with the following paragraph:
“At just 180 pages, including footnotes and many charts and tables, The End of Banking is succinct. Its prescriptions for a better banking system may be excessively ambitious. But wild ideas may be more helpful for fixing finance than an endless series of enhancements of a system which is unsuitable for the modern age.”
Read the whole review here.
Today's Financial Regulation Restrains P2P-LendersJanuary 1, 2015
Find out how the current banking regulation hinders innovative financial start-ups in exploiting their full potential in our guest post on the Blick Log (in German). Related to this topic, see also our previous guest post in the FTAlphaville and the interview on the AltFi Blog (both in English).
The CFA Institute Blog Reviews The End of BankingDecember 12, 2014
Last week, Manuel Stagars from the CFA Institute blog published a review of The End of Banking. The CFA Institute is known for its program to obtain the Chartered Financial Analyst credential, one of the most respected and recognized investment designations in the world. We are delighted that the important discussion about how to adapt our financial system to the digital age is picking up pace, also in the financial community.
Stagars' review starts with a thoughtful and well-written summary of the book, so it is an excellent resource to learn what The End of Banking is about. He concludes that the book "is well researched and is a stimulating, thought-provoking read" and thinks that:
"In addition to carefully explaining how the financial sector maneuvered itself into the financial crisis of 2007–08, it presents several unconventional ideas to do away with regulatory capital arbitrage that sticks taxpayers with the bill for bankers’ risk taking. The book proposesa fairly straightforward policy framework that promises to reduce shadow banking, decentralize financial services from too-big-to-fail banks, improve regulation, and realign the private and the public sector with transparent monetary policy."
At the end of the review, Stagars rightly cautions on the political and economic challenges to transform the current banking system into a financial system without banking. We are the last to deny that the transition might be a rocky road. But there is one statement in his review we need to discuss further:
Banks seem to be fine with finesDecember 12, 2014
In The End of Banking, we explain why banking regulation is no longer effective in the digital age. In particular, we highlight why the boundary problem of financial regulation has become insurmountable. But the boundary problem is not the only factor that inhibits the effectiveness of banking regulation.
Banks operating with razor thin equity ratios also take excessive risks with regard to legal sanctions -- for example, by ignoring rules that restrict analysts' involvements in IPOs. Although major investment banks paid $1.4 billion in 2003 to settle a dispute with the New York attorney general, they did not learn their lesson. In 2010, the same banks again broke the rules that are designed to manage the conflict of interest between research and advisory.
To make matters worse, the grip of banking over politics seems to be as strong as ever. Last week, the senate and congress passed a legislation that effectively expands government guarantees in the $700 trillion derivatives market. The large banks themselves drafted crucial parts of this legislation, and Jamie Dimon helped whipping the votes. These bold moves even surprised the vice chairman of the Federal Reserve, who noted that "we are two bad decisions away from not being an independent central bank.”
Last weeks' events further underscore that banking is out of control and that central banks are losing control.