The other day, the New York Times provided us with an example of how fads and fashions can be used to draw attention to, and win acceptance for, an economic argument. In his article In Search of a Stable Electronic Currency Nobel laureate Robert Shiller proposed the introduction of an inflation-indexed unit of account similar to the Chilean unit of development or unidad de foment (UF) which is existing since the 1960s. The article is in large parts a summary of the ideas of an academic paper the author published in 1998. In short, its main argument says that recent progress in computer technology has considerably widened the possibilities of inflation indexing which would allow for a better pricing, contracting and risk management in an economy.
This is rather dry stuff. Surprisingly the NYT article gained wide attention and was greeted almost with euphory on Twitter and elsewhere. Joe Weisenthal (Business Insider), for example, wrote: “Yale Professor and Nobel Laureate Robert Shiller has a great piece in the New York Times today that shows why he’s one of the greatest economic thinkers of our time.”
His next sentence indicates what this buzz is about: “The piece is kind of about Bitcoin — which he continues to think is a straight-up bubble* — but actually about how technology and electronic money can revolutionize the financial system in a good way [my emphasis.].” In contrast to Bitcoin, one would like to add, of which Joe Weisenthal, as his readers know, is a vehement opponent.*[On another occasion, Joe Weisenthal was quoting Robert Shiller even saying that as a currency Bitcoin is “a return to the dark ages.”]
After the Bitcoin Bubble, we can pursue other money innovations, see my “In Search of a Stable Electronic Currency” http://t.co/YwOtmsEuQc
— Robert J Shiller (@RobertJShiller) March 1, 2014
At first glance, the NYT text is a Bitcoin article – which may have attracted Joe Weisenthal and others in the first place. But upon closer examination it is not. The Bitcoin theme only serves as a teaser to the entirely unrelated topic of inflation indexing. Bitcoin, so the simple argument, is an electronic money and an electronic money is what it needs to realize Robert Shiller’s earlier idea of inflation indexing.
It is a long teaser. Robert Shiller wrote:
“Bitcoin, an experiment with a radically new kind of electronic money, has exhibited many of the characteristics of a speculative bubble. That was clear long before the collapse of the Bitcoin exchange Mt. Gox last week.
Bitcoin’s future is very much in doubt. Yet whatever becomes of it, something good can arise from its innovations — even if the results are very different from its current form or its numerous competitors. What I have in mind isn’t another wave of price speculation. Instead, I believe that electronic forms of money could give us better pricing, contracting and risk management.
The Bitcoin phenomenon seems to fit the basic definition of a speculative bubble — that is, a special kind of fad, a mania for holding an asset in expectation of its appreciation. Further, a bubble is publicized and amplified by news of price increases, often justified by some kind of inspiring “new era” story that attracts more attention as the price rises. In this case, the narrative was that a computer whiz invented a new kind of money in the form of electronic currency units, as part of a decentralized computer-driven system for a world economy that extends beyond the reach of any single government.
The central problem with Bitcoin in its present form, though, is that it doesn’t really solve any sensible economic problem. Nor should it substitute for banks and the governmental institutions that regulate them. They are reasonably effective institutions, despite their flaws, and should not just be scrapped and replaced by a novel electronic system.
Unfortunately, the Bitcoin success story has been tied intrinsically with instability, with excitement and envy for those who have become rich through investing in it — rich for a while at least, because the value of the electronic currency has fluctuated wildly. The instability of Bitcoin’s value in dollars is a measure of failure, not success. It means that any commerce using Bitcoin or its competitors would be buffeted by enormous inflation and deflation.
But if we go back to the electronic-money drawing board, we may conclude that Bitcoin has been focused on the wrong classical functions of money, as a medium of exchange and a store of value. Bitcoin offers a way of “mining” electronic coins that can replace our dollar bills and bank accounts. Yet there is no fundamental need for this. Money, as we’ve known it for decades, works quite well in these respects. It would be much better to focus on another classical function: money as a unit of account — that is, as a basic standard of economic measurement. Scientists spend a lot of time thinking about ways to improve systems of measurement. Business people should, too.
This has already begun to happen.”
What follows is a description of the idea of inflation indexing. From here onward, Bitcoin is only mentioned again once, in the last paragraph which reads almost like an obituary:
“Bitcoin has been a bubble. But the legacy of the Bitcoin experience should be that we move toward a system of stable economic units of measurement — a system empowered by sophisticated mechanisms of electronic payment.”
This is the narrative. Here, the Bitcoin example is used to draw attention to the main theme (inflation indexing) and to promote this idea by contrasting it to the negative Bitcoin experience which just caught the headlines with the MtGox debacle.
But, as Robert Shiller himself wrote in his earlier paper, the UF is not money, since it is not a medium of exchange. Therefore, in my view, there is no justification for the lengthy description of the factual or alleged weaknesses of Bitcoin in this context. The UF is a measure of daily price changes, based on monthly variation of the Chilean Consumer Price Index. The Chilean money is the peso. The UF serves to keep certain prices in the Chilean economy such as financial instruments or real estate constant in real terms. On 4 March 2014 the CPI-indexed unit of account (UF) published by the Banco Central de Chile was 23,515.17 pesos.
Maybe I’m missing something, but Shiller seems to use Bitcoin merely as a vehicle to discuss something else. http://t.co/4aCpnvZJgk
— Ivan the K™ (@IvanTheK) March 3, 2014
So far, all this has nothing to do with electronic money, let alone Bitcoin. The Chilean peso is not an electronic money. But if it were, so the argument, inflation indexing would be much easier to implement and more widely accepted.
In Chile, acceptance of the UF is limited. As Robert Shiller remarked in his 1998 paper, the UF is not used to quote everyday prices because, as he presumed, calculations between the indexed unit of account and the currency may seem “unnecessarily complicating for our lives.” This could change with the introduction of an electronic payment system. In the NYT article he wrote:
“With electronic software in the background, we can improve on the Chilean idea and make it more useful.”
In his 1998 paper, he had already used a similar argument:
“Indeed, there will inevitably be a blurring of the distinction between the currency and the separate unit of account once credit card companies allow charges to be made directly in the units of account, and banks allow writing of checks in terms of the units of account”.
I don’t want to delve too much into the intricacies of inflation indexing. I’m belonging to the generation who, as Robert Shiller decribed in a NBER research paper, “don’t like” inflation. This is because I know that if prices are on the rise someone has to pay them. As a rule, if one side of a contract is keeping the price fixed in real terms, the other side has to bear the full burden of inflation – and the former has no incentive whatsoever to care about rising prices.
In the New York Times, Robert Shiller gave an example:
“Consider rents. Increases may seem unfair to tenants, yet they may be needed to offset inflation. In Chile, a landlord can easily set the monthly rent for the tenant in U.F.s and then never have to change it, reducing the potential for errors, delays and misunderstandings. The name “U.F.” reframes people’s thinking so that keeping real economic values stable is natural and easy.”
Who says that tenants must bear the burden of inflation, and must bear it alone? Why is this “natural and easy”? Shouldn’t in a market economy pricing be the result of an individual bargaining process which would give both sides an incentive to keep prices low as both can be hurt by the effects of inflation? In an indexed economy, interests differ. In the example, landlords have no incentive whatsoever to care about rising prices and, for instance, to support an anti-inflationary policy. As a result, the risk of inflation may be higher than under a market solution casting doubt on the efficacy of Robert Shiller’s idea to actually establish a stable currency.
In my view, allowing contracts to be linked to an inflation index is a political decision about how the burden of rising prices is distributed. There are always winners and losers of inflation. Indexing means that governments are determining those winners and losers, and the resulting redistribution of incomes with rising (or falling) prices, in advance.
Robert Shiller is an expert on fashions, fads and bubbles. He knows how to use a fashionable topic to transport a message which he has, as he wrote, propagated for almost 20 years. In the current case, Bitcoin came handy after MtGox, one of the biggest Bitcoin online exchanges, declared bankruptcy, with 744,408 bitcoins – worth about $350m – missing.
Stressing it once again: Electronic money and inflation indexing are two different things. While the one may be desirable – for example as a means to introduce negative interest rates as several authors proposed recently (and in this case, there are lessons from the Bitcoin experience, see Izabella Kaminska for an overview) – the other may not. The establishment of electronic money may facilitate inflation indexing. The decision about the introduction of the latter is a highly controversial political matter which should be made independent of technical aspects.
Referring to a remark by Joe Weisenthal I would like to add: You need not be a Bitcoin believer to doubt the efficacy and social desirability of inflation indexing.
Are US regulators corraling their financial system with the latest financial-safety rules for foreign banks as Patrick Welter (Frankfurter Allgemeine Zeitung) and others argued or will their move eventually even pave the way for closer cooperation and a revitalization of the worldwide regime of bank supervision?
On 18 February, the Federal Reserve Board approved a final rule strengthening regulation of large US bank holding companies and foreign banking organizations. From July 2016 onwards, banks with a big US presence will have to form an intermediate holding company over their US subsidiaries which will have to meet capital, stress test and, from 2018 onward, leverage requirements. Furthermore, they “will be required to establish a U.S. risk committee and employ a U.S. chief risk officer to help ensure that the foreign bank understands and manages the risks of its combined U.S. operations.” The aim is to bolster the capital and liquidity positions of the US operations of foreign banks and promote a level playing field in the United States.
Fed governor Daniel K. Tarullo explained: “The requirements applicable to foreign banking organizations with a large U.S. presence are an essential part of regulatory reform in the aftermath of the financial crisis. Beginning in the mid-1990s, the profile of foreign bank operations in the United States changed significantly. Foreign banks became more concentrated, more interconnected, and increasingly reliant on the kind of less stable, short-term wholesale funding that proved so volatile when financial stress developed. Many reoriented their operations toward borrowing large amounts of U.S. dollars, often in demand elsewhere in the world, to provide to their parents abroad. Meanwhile, the mix of FBO activities in the United States shifted decidedly toward capital markets, to the point that in recent years the top 10 broker-dealers in the United States have included either four or five foreign-owned firms.
The consequences of these changes in foreign bank activities were seen dramatically during the crisis, when the funding vulnerabilities of numerous foreign banks and the absence of adequate support from their parents made them disproportionate users [my emphasis] of the emergency facilities established by the Federal Reserve. Yet the United States actually lags some other important financial jurisdictions in assuring that large domestic operations of foreign banking organizations have enough capital and liquidity to help provide stability when stress develops.”
And he added:
“I would suggest that the objections raised by those who say this rule would undermine the gains that come from global capital flows overlook or downplay some important points. First, those gains are most endangered when financial activity contracts rapidly in periods of high stress, which underscores the imperative of sound prudential policies. Second, as we have seen repeatedly, ad hoc ring-fencing becomes more likely precisely in those periods of stress, when it is far more damaging to a vulnerable financial system than a well-conceived set of generally applicable ex ante measures imposed in normal times. Third, the rule before us walks a middle road between the vulnerabilities of the status quo and a complete subsidiarization model by, for example, continuing to permit branching. In sum, I would say that the most important contribution we can make to the global financial system is to ensure the stability of the U.S. financial system.”
Among those who say that the rule would undermine the gains from global capital flows are financial lobbies such as the Global Financial Markets Association (GFMA) and the Institute of International Bankers (IIB). They fear that the rule could exacerbate, rather than mitigate, financial stability risks, harm the global economy and prompt foreign banks to pull back from the US market.
However, other commentators consider the move long overdue. Mayra Rodríguez Valladares, for example, observed:
“In fact, not only have foreign banks not been required to be sufficiently capitalized to sustain unexpected losses, but also they have been even less capitalized than banks with headquarters in the United States. This means that European banks have been in a position to play regulatory arbitrage and book some of their riskier transactions in the United States.”
Foreign banks benefit from “onshore-offshore” markets in the United States. Take the example of Wilmington, Delaware. As I wrote elsewhere:
“Wilmington is the largest city in the US state of Delaware with a population of about 70,000. Wilmington is a tax haven and, among others, home of Taunus Corporation, which up to 2011 was the eighth-largest bank holding company in the United States with assets of just over $380 billion (Simon Johnson). Taunus is a subsidiary of Deutsche Bank which in turn has about 2,000 subsidiaries and special purpose vehicles – 430 of which are registered in Wilmington.”
Lex Deutsche Bank?
Simon Johnson described the worries regarding Deutsche Bank from a US perspective. In November 2011 he wrote that “in the past, U.S. authorities have taken the view that Deutsche Bank had a strong enough balance sheet worldwide that more capital could be provided to its American subsidiary, if needed …
Such a presumption now seems questionable, at best. Earlier this year, Bloomberg News reported that Taunus needed almost $20 billion of additional funds to meet U.S. capital standards, and that Deutsche Bank was trying to declassify Taunus as a bank-holding company to avoid capital requirements entirely. …
All of this raises troubling questions. Have U.S. bank supervisors really satisfied themselves, through onsite inspections, that Deutsche Bank’s risk weights accurately reflect market conditions and the increasing structural weakness of the euro area? Can U.S. regulators document their satisfaction beyond the materials produced for the European Banking Authority, which earlier this year oversaw stress tests that pronounced now-collapsed Dexia as well-capitalized? (Actually, Dexia had stronger capital ratios than Deutsche Bank.)“
As I wrote, Deutsche Bank eventually managed to restructure its US business and circumvent financial regulation and capital requirements shifting those parts of the group which unavoidably require a banking licence into a banking group with modest $58 billion of assets, while the much larger part was transformed to an unregulated securities firm. In its 2012 annual report the bank explained in a footnote to a list of „significant subsidiaries“:
“Taunus Corporation is one of two top-level holding companies for the group’s subsidiaries in the United States. Effective February 1, 2012, Taunus Corporation is no longer a bank holding company under Federal Reserve Board regulations.”
Max Colchester and David Enrich (The Wall Street Journal) commented: “The rules have been subject to years of gamesmanship. In 2011, Deutsche Bank irked federal regulators by saying it would change the status of its main U.S. vehicle, Taunus Corp., so that it was no longer a “bank-holding company” and therefore wouldn’t be subject to the Dodd-Frank provisions. Fed officials subsequently said they would adjust the rules to preclude banks from skirting them.”
The current decision however is not a Lex Deutsche Bank. Reuters published a preliminary Fed list of names of the 17 biggest banks that may need to change their structure under the new rules. Those are (in alphabetical order) Banco Santander, Bank of Montreal, Barclays Plc, BBVA, BNP Paribas, Credit Suisse, Deutsche Bank, HSBC Holdings Plc, Mizuho, MUFG, Natixis, Rabobank, Royal Bank of Canada, Royal Bank of Scotland, Societe Generale, Toronto-Dominion Bank and UBS AG.
As Fed governor Tarullo pointed out, experiences during the 2008 financial crisis played an important role. Citing Stephanie Armour and Ryan Tracy (The Wall Street Journal): “Many foreign banks sought emergency loans from the Fed during the 2008 financial crisis, and the Fed has questioned whether foreign governments of large international firms would always backstop their banks’ U.S. operations in a crisis.”
Yet again, public attention focused on Deutsche Bank. The Bank claimed that it never had state aid. Observers emphasized that this statement referred to the German state. As Deutsche Bank Risk Alert, a US site, wrote:
“Deutsche Bank … did not receive an equity infusion from the German government. Nor did it receive funds directly from the US Troubled Asset Relief Program (TARP.)
But that doesn’t mean it didn’t accept government rescue money …:
- As one of the largest counterparties of failed insurer AIG, Deutsche Bank received $11.8 billion of the funds used to bail out AIG.
- The Federal Reserve made emergency low-cost funds widely available to foreign as well as US member institutions through its discount window. Deutsche Bank was the second heaviest user of such funds, borrowing more than $2 billion.
- The Federal Reserve also created a program known as the Term Asset-Backed Securities Lending Facility, which allowed banks to use their assets, including troubled or hard-to-value assets, as collateral for short term loans. Deutsche Bank was the largest user of the program, sending the Fed more than $290 billion worth of mortgage securities.”
A step back
The rule comes in reaction to the fact that – despite the existence of an international framework for cooperative supervision and regulation of financial institutions – authorities outside the US long ignored, or tacitly approved of, their banks’ risky foreign activities. European parents didn’t take care of their wayward children, as Mayra Rodríguez Valladares put it, and the proverbial US taxpayer felt he was left with the bill.
Inevitably, the US initiative drew protests from Europe and Asia. There are complaints that the rule will distort competition in favor of US banks and undermine attempts to coordinate supervision at the global level through the Basel Committee brushing aside the fact that a growing awareness of the weaknesses of the Basel approach leaves regulators in countries with major financial centres everywhere with a nagging dissatisfaction.
Actually, the promotion of a “level playing field” in the US is a substantial change in the principles of international bank supervision and regulation which date back to the 1970s:
As I wrote elsewhere (Reszat 2005, chapter 6), it was the emergence of the Euromarkets in the 1960s and early 1970s which first raised the question how to monitor and regulate the growing activities of internationally operating banks: “The traditional approach to financial regulation had been surveillance on a territorial basis. The country in which deposits were held imposed reserve requirements on domestic banks and on branches and subsidiaries of foreign banks. Its authorities monitored bank activities and set the rules for bank business and in case of emergency were prepared to act as lender-of-last resort rescuing banks from illiquidity.”
However, this approach did not work in the case of external markets. Absence of reserve requirements on deposits denied policymakers direct control, and the apparently footloose nature of offshore banking required agreement among all countries where offshore activities might take place for territorial surveillance of banks to be effective.
The Basel Concordat of 1974 laid the foundations for consolidated worldwide supervision. Under the auspices of the Bank for International Settlements (BIS) the financial authorities of major industrial countries chose the domiciliary concept as an alternative to the territorial approach to surveillance. They agreed each country to assume lender-of-last-resort responsibility for its offshore banks with the country in which a bank’s headquarters is domiciled imposing consistent regulation across all its offshore branches and subsidiaries. In 1980, this agreement was complemented by rules requiring banks to consolidate worldwide accounts enabling bank supervisors to monitor and regulate offshore and onshore operations on a consistent basis.
The current Federal Reserve decision is a step back from the domiciliary to the territorial principle. Other regulators might follow. The Bank of England just published a Consultation Paper on its approach to supervising international banks. It sets out a series of requirements for non-EU banks wishing to do business in the UK with a special focus on branches (which are treated differently in the US and the UK). As Harry Wilson (The Telegraph) wrote:
“Branches set up in Britain allow overseas banks to do business in the country without having to meet the more onerous regulatory standards required by the UK financial authorities of full-blown subsidiaries. In contrast to a subsidiary, a branch operation does not have to be a separately capitalised legal entity and continues to be regulated in its country of origin.
Non-UK bank branches based in Britain now manage assets worth about £2.4 trillion, equivalent to 160pc of this country’s GDP. But they have become a source of concern for the Bank of England since the financial crisis, amid fears about the standards being imposed on them by their domestic regulators.”
Tit for tat?
The US decision risks to provoke retaliation. Michael Barnier, European commissioner for the internal market was quoted saying: “We will not be able to accept discriminatory measures which would have the effect of treating European banks worse than U.S. ones.”
The latter refers to the fact that as, for example, Michael Kemmer, head of the Association of German Banks, told the Wall Street Journal the US decision is considered as “a considerable competitive handicap for European banks, as their U.S. competitors aren’t subject to any equivalent requirements in the EU.” Sebastien de Brouwer, head of legal affairs at the European Banking Federation, stressed that the move risks creating a standards gap between the US and Europe which would duplicate reporting requirements and fragment liquidity in international markets. Gina Chon, Camilla Hall and Martin Arnold (The Financial Times) argued that the new rules will put European banks at a disadvantage to their US counterparts, “who can calculate their capital requirements based on their entire global operations while the largest foreign banks will be assessed on their US assets only.” And Douwe Miedema (Reuters) pointed to the Fed’s proposed leverage ratio of 6 percent of assets which is well above the 3 percent global requirement.
There is a danger of increasing protectionism worldwide as a consequence of the US decision and of a regulatory competition which in its variety of demands may become ruinous to the financial sector. Given the still dormant crisis in Europe, the stock market bubbles “of historic proportions” developing in the US and UK (Ha-Joon Chang, The Guardian) and the recent sell-off in emerging markets which “could go from a nasty slump in the market to a problem for the banking systems in these countries [and elsewhere]” (Matt Phillips, Quartz), a trade war in financial services is the last thing the world would need.
Cooperation would be the better alternative, especially as the offence should be undisputed. In the end, however, the game is neither about retaliation nor about securing world financial stability. Eventually, as in every important economic area, this is a fight for competitiveness and growth, for market shares and dominance in a more and more challenging global environment with shrinking business, higher costs, declining margins – and incalculable risks. Finding a balance between national interests and the requirements of a stable and secure international financial system as a major player is changing the rules of the game is the challenge ahead.
The banks will try to keep the burden as small as possible. As the Wall Street Journal put it: “European banks and the Federal Reserve began a chess match over new rules for U.S. units of foreign banks, with overseas firms expected to try and limit the impact and Fed officials vowing to prevent banks from evasion.” The question is to which extent the Fed will tolerate evasive moves.
Another question is how regulators elsewhere will react. Europeans which still seem absorbed with containing the consequences of the unsolved eurocrisis for their banks and, at the same time, shielding taxpayers from further bank bailouts, may consider the US rule – or any rule increasing their banks’ burdens beyond the internationally agreed compromise – as highly unwelcome.
However, as Douwe Miedema wrote: “… even some bankers see benefits in the new rule, given the often-acrimonious past problems when different countries had to save a bank with operations across borders. “It simplifies the U.S. part of the bank structure,” said a second senior investment banker, citing the example of the troubled rescue of Franco-Belgian bank Dexia. “If it’s implemented in a balanced way, it could improve the relationship between the home and host regulator, and strengthen cross-border cooperation in resolution.””
The current US initiative might harden fronts. But it might also pave the way for a revitalization of the dialogue on international bank supervision and regulation.
Let us hope that this will not become a habit. As David Enrich (The Wall Street Journal) wrote the other day on Twitter
RBS becomes second big EU bank to pre-announce lousy 4Q results, following Deutsche Bank eight days ago. pic.twitter.com/X6jCWcrCq1
— David Enrich (@davidenrich) January 27, 2014
The tactics to choose a favorable moment (in case of Deutsche Bank a Sunday) ahead of the regular presentation of results to confront the markets with bad news illustrates how much, five years after the peak of the financial crisis, both institutions are still struggling to explain their activities and performance to the public in a damage-limiting way. What happened to the two banks which were once the biggest in the world? The following is a short compilation of information from banks’ press releases, media comments and other readily available sources to find out what the main problems are. Of course, this is no substitute for a thorough analysis. If not mentioned otherwise, data are from the banks’ official websites.
At first glance, besides being big, both institutions do not have much in common. After a £45.5 billion taxpayers’ bailout in 2008, RBS is controlled by the UK government. In contrast, as I wrote elsewhere, Germany’s Number One prides itself that it never had, and never will have, state aid. (But, as I showed as well, this statement must be taken with a grain of salt.) In many respects, however, both are characteristic for the current state of banking in Europe.
1 As of 12/31/12. SNL Financial: http://www.snl.com/InTheMedia.aspx
2 Preliminary or estimated.
4 Based on European IFRS accounting rules as of the end of 2012. Federal Deposit Insurance Corp Vice Chairman Thomas Hoenig in an interview. http://www.reuters.com/article/2013/06/14/us-financial-regulation-deutsche-idUSBRE95D0X620130614
5 Based on U.S. GAAP. Deutsche Bank’s Chief Financial Officer Stefan Krause in a Reuters interview, when asked about Hoenig’s comments. http://www.reuters.com/article/2013/06/14/us-financial-regulation-deutsche-idUSBRE95D0X620130614
6 As of June 2013, based on IFRS. Deutsche Bank’s Chief Financial Officer Stefan Krause in the Reuters interview, when asked about Hoenig’s comments. http://www.reuters.com/article/2013/06/14/us-financial-regulation-deutsche-idUSBRE95D0X620130614
In an effort to reduce risks and meet stricter rules from regulators, both banks reduced assets in recent years. They were not the only ones. According to a report from the European Banking Authority, between December 2011 and June 2013, European Union banks shed more than $1.1 trillion of assets in a shift away from risky investments such as asset-backed debt.
In 2008, at the peak of the financial crisis, RBS was the biggest bank in the world by assets, followed by Deutsche Bank. At the end of 2013, Deutsche Bank ranked eighth, and RBS 16th, worldwide while Industrial and Commercial Bank of China, HSBC Holdings and Crédit Agricole Group had risen to the top of the list.
Like many financial figures, asset size is an ambiguous concept. It is noteworthy that all of the above-mentioned banks follow IFRS accounting principles. SNL Financial speculated that if JP Morgan, now the Number Six worldwide, followed the same principles instead of U.S. GAAP, it would most likely rank as the largest bank in the world.
The question is whether this is a good sign. The key difference between IFRS and GAAP is the treatment of derivatives. As SNL wrote: “IFRS filers must include the gross amount of derivative assets on their balance sheets, while U.S. GAAP filers report the net amount”.
Deutsche Bank, which is among the few banks that report their balance sheets under both GAAP and IFRS, may serve as an example. As of 31 December 2008, the bank’s total assets were €2,002 billion under IFRS and €1,030 billion under U.S. GAAP ‘pro-forma’ (Ackermann 2009).
Why may netting be a problem in this case? Daniel Gros gave an example:
“In the wake of the market’s reaction to the insolvency of Lehman Brothers … interconnected has been advocated as another principle for not letting a bank fail. Under IFRS this might not be a separate principle from the usual too big to fail, since most interconnections show up in the balance sheet, but not under GAAP. This difference between IFRS and GAAP could resolve to some extent the mystery of why the US authorities were surprised by the extent of the market reaction to the failure of Lehman. Lehman’s balance sheet (total assets around $600 billion, not far from Goldman Sachs) reflected GAAP and thus did not show the extent of the exposure of other market participants. The example from Goldman Sachs suggests that the balance sheet of Lehman under IFRS would have been several times larger, thus giving a better picture of the importance of Lehman. A balance sheet under IFRS would thus give a better picture of the exposure of the bank itself to counterparty risk. Assume a bank has a large amount of derivatives contracts outstanding, but without any significant net exposure. It could still make very large losses in case important counterparties fail and netting arrangements do not work or the pricing of the contracts is distorted, as happens typically in a systemic crisis. This is why the highly leveraged European banks came under such intensive pressure during the acute phase of the crisis.”
And it explains why “deleveraging” plays such a prominent role in current debates about crisis management and prevention. To the extent that Deutsche is reducing its risky activities the difference between its IFRS and GAAP figures should become smaller.
Despite an announced fourth-quarter pretax loss of €1.2 billion Deutsche Bank posted a pretax group profit of €2.071 billion for the full year. It had even a much higher core bank profit of € 5.277 billion, but this was partly eaten up by a €3.206 billion loss of the bank’s internal bad bank, the Non-Core Operations Unit (NCOU).
The £8 billion loss for RBS in the table is a rough estimate. As Robert Peston (BBC) wrote in Pre-crisis mistakes still haunt RBS, these are “not the biggest losses the bank has ever disclosed: in 2008 its losses were three times greater. But so long after the great crash of five years ago, such a dreadful performance will shock many.”
RBS will not have to raise additional capital to absorb the losses. But, as Robert Peston remarked, as for when and whether taxpayers will get back the £46 billion the UK government invested in the bank to save it in 2008, with the shares languishing a third below the price it paid, that looks more and more challenging.
RBS will publish its final full year results on 27 February. Deutsche Bank intends to publish its Annual Report 2013 on 20 March 2014.
Core Tier 1 ratio
As Norton Rose Fulbright, a global legal practice, wrote in their short introduction to the new European Capital Requirements Directive, CRD IV: “The purpose of capital is to absorb the losses that a firm does not expect to make in the normal course of business.”
There are several concepts which differ in the way capital is calculated for regulatory purposes. In general, it is expressed as a percentage of banks’ risk-weighted assets (RWAs) to account for the fact that the quality of assets and the related probability of loss may differ. The riskier the asset, the more capital is needed. The initial Basel Accord of 1988, which for the first time introduced global harmonized capital standards in order to limit credit risks of internationally active banks, called for minimum capital of eight per cent of risk-weighted assets with risk-weights ranging from zero over 20 and 50 to 100 per cent depending on the type of borrower or collateral.
Meanwhile, the framework developed from Basel II over Basel 2.5 to Basel III becoming ever more complex in successively introducing new concepts and new capital charges for market and operational risks, and allowing for new methods of risk measurement. Basel III was released in December 2010 to start in 2013 and be completed by 1 January 2019.
The Basel framework distinguishes between two types of capital. Quoting Norton Rose Fulbright again: “Tier 1 capital is going concern capital which allows a firm to continue its activities and helps prevent insolvency. The highest form of Tier 1 capital is Common Equity Tier 1 (CET 1) capital. [Additional Tier 1 categories include hybrid capital instruments which combine both debt and equity characteristics. My remark.] Tier 2 capital is gone concern capital which is designed to ensure that depositors and senior creditors are repaid if the firm fails.”
Capital specialist, blogger and former central banker Cetier the First wrote on Pieria in this context: “the numerator of this [CET 1] ratio is mainly accounting equity, including reserves and other comprehensive income; adjusted for prudentially weak accounting items such as Goodwill and Deferred Tax Assets. Common Equity Tier 1 … is capital of the highest quality. We all want banks to have high levels of this type of capital.”
The Basel rules are recommendations. Basel III is transposed into European law under a proposal by the European Commission which divides the current Capital Requirements Directive (CRD) into two legislative instruments: the Capital Requirements Regulation (CRR) and the CRD IV Directive. As before, banks must have total capital of at least 8 per cent of risk-weighted assets. The minimum Tier 1 capital, however, is increased from 4 to 6 per cent including a Capital Conservation buffer, and the minimum requirement for CET 1 is increased from 2 to 4.5 per cent. In addition, member states will be able to apply systemic risk buffers.
The Bundesbank provides a chart (regrettably only available in German) illustrating the changes coming with Basel III, which may be helpful:
Basel III: Changing Capital Definitions
Source: Deutsche Bundesbank.
Many investors are already expecting full Basel III compliance. Furthermore, the asset quality review (AQR) the ECB is conducting between November 2013 and October 2014 in preparation of the Single Supervisory Mechanism (SSM) sets a capital benchmark of 8 per cent CET 1. This comprises (a) the CRD IV 4.5 per cent CET 1 minimum requirement plus (b) the 2.5 per cent Capital Conservation buffer included in Basel III, and (c) an add-on of 1 per cent to take into account the systemic relevance of the banks considered significant under the SSM Regulation (ECB). As observers note, in this the AQR is de facto foreshortening the CRD IV transition period as none of these components have been required in full under CRD IV by 1 January 2014.
As a consequence, many European banks, including Deutsche Bank and RBS, have started to measure capital accordingly. For 2013, Deutsche Bank is presenting a CRD 4 Common Equity Tier 1 capital ratio “fully loaded”, while RBS apparently intends to report a wider core Tier 1 ratio. “Fully loaded” in this context means the final ratio after all phase-in arrangements shown in the table below have taken place.
Source: Bank for International Settlements.
RBS is expected to see a significant fall in capital levels as a consequence of the announced Q4 losses. If its reported ratio of 11 per cent is transformed into a fully loaded Basel III Core Tier One capital ratio the expected resulting figure is between 8.1 and 8.5 per cent at the end of December 2013 – down from 9.1 per cent at the end of September. Moody’s reacted promptly and put RBS’s debt “on review for downgrade”. The credit rating agency argued that
“the bank has indicated that at this point in time its capital targets for 2015 and 2016 remain unchanged because these costs, which although being incurred earlier than forecast, were already accounted for in its three-year capital plan. However, their acceleration leaves RBS with less flexibility to manage other unforeseen charges that could further affect its capital position.”
And: “Moody’s considers RBS’s recovery plan as clear, credible and positive for its creditors over the medium-term, albeit not immune from execution risk. The rating agency believes that, if adequately executed, the recovery plan will gradually improve the bank’s currently weak asset quality profile, increase its solvency and will eventually restore the bank’s sustainable profitability. However, RBS’s recent announcement demonstrates that its management faces a number of short-term headwinds, which could challenge the implementation of this plan and in turn be negative for its creditors. In addition, Moody’s believes that the overall downside risks associated with the bank’s recovery have increased.”
For Deutsche Bank, at first glance, despite the poor Q4 results the figures look impressive. In increasing its capital by €3 billion and reducing its risk-weighted assets by more than €100 billion the bank managed to improve its CET 1 capital ratio from 6 per cent at the beginning of 2012 to almost 10 per cent at the end of December 2013. But, this appears less remarkable for one of the biggest banks in Europe considering that, these days, “the median Core Tier 1 capital ratio of the largest euro area banks stands close to 12%” (ECB).
Is Deutsche Bank still “horribly undercapitalized” as Federal Deposit Insurance Corp Vice Chairman Thomas Hoenig said in June 2013 in a Reuters interview? Hoenig would probably stick to his view. His remark focused less on published figures than on the fact that the Basel rules allow banks to use their own internal models to calculate how risky their assets are and how much capital they must hold thereby enabling lenders to appear well-capitalized when they are not. (See for the history and basic principles of the main concept to determine a bank’s Value at Risk (VAR) here.)
In a recent American Banker article, Mayra Rodriguez Valladares of MRV Associates, a New York-based capital markets and financial regulatory consulting and training firm, made a similar argument: “Banks struggle to produce high quality and consistent data for their securitization risk measurement models. Every time I poll a classroom of market participants on how they value securitized products or how they measure the products’ risk, the choices are more numerous than at Baskin Robbins. Even the Basel Committee’s own studies last year confirmed that risk-weighted assets vary significantly between banks even when they have similar exposures.”
Many observers consider the leverage ratio a better method to show a firm’s ability to absorb sudden losses. A leverage ratio compares a bank’s capital to its total assets without using risk-weightings.
Basel III for the first time introduces a minimum target for a non-risk-based leverage ratio of 3 per cent. The leverage ratio is defined as Tier 1 capital divided by a measure of non-risk weighted assets which covers not only on-balance sheet assets, but also off-balance sheet instruments such as derivatives (Mayra Rodríguez Valladares). The ratio is intended to serve as a backstop to the risk-based capital requirement and also to help contain system wide build up of leverage. As a new regulatory tool it is not binding at this stage but an additional feature at the discretion of supervisory authorities.
In Europe, under the CRR banks will have to publish leverage ratios from 2015 onwards. BaFin explains the further process: “A harmonized EU-wide concept for the leverage ratio is to be determined by early 2018. Currently it is not foreseeable whether it will apply as a binding risk-dependent criterion alongside of the (then already applicable) risk-based minimum own funds requirements (Pillar I) or instead will be adopted as part of an institution’s Supervisory Review and Evaluation Process (SREP) (Pillar II).”
Whoever hoped that the leverage ratio is a less ambiguous concept than risk-weighted measures however will be disappointed. The figures may vary widely as debates about Deutsche Bank’s results show. Thomas Hoenig, for example, claimed that at the end of 2012 Deutsche Bank’s leverage ratio stood at 1.63 per cent based on European IFRS accounting rules. Confronted with this statement in June 2013 Deutsche Bank’s Chief Financial Officer Stefan Krause said the number then stood at 2.1 per cent. He added however that using U.S. generally accepted accounting principles, the ratio stood at a much more comfortable 4.5 per cent.
JP Morgan estimated that in 2015 Deutsche Bank will have a leverage ratio of 2.4 per cent thereby missing the 3 per cent Basel III target in a group with Credit Suisse (2.5 per cent) and Société Générale (2.9 per cent). This compares with Barclays (3.4 per cent), Morgan Stanley (3.6 per cent) UBS (4.0 per cent) and Goldman Sachs (4.1 per cent).
Laura Stevens (The Wall Street Journal) observed in this context that “few banks in Europe have faced the degree of scrutiny or doubt about capital and leverage calculations that Deutsche Bank has”. The hypothetical measures included in the bank’s calculations of the leverage ratio are widely considered far too optimistic.
Apparently, Deutsche uses a mix of IFRS and GAAP which shows a more favorable picture than the JP Morgan figures: Quoting Laura Stevens again: “The bank last month said it has already hit its targets on its leverage ratio under the newly instituted European guidelines, with a ratio of 3%, using an “adjusted” balance sheet of €1.583 trillion, which is calculated in part using U.S. accounting rules. The U.S. rules typically reduce the size of the balance sheet. There are still too many unknowns to calculate the bank’s leverage ratio under the new proposals, the bank said.”
RBS is not in the JP Morgan list published by the Wall Street Journal. Its estimated leverage ratio of 3.6 at the end of 2013 is already above the Basel III target. This is a positive sign which, however, should not be seen isolated. Experts emphasize that the leverage ratio is most useful in combination with other measures.
For instance, Mayra Rodríguez Valladares wrote: “Critics of the proposed guidelines argue that the leverage ratio would encourage banks to transact riskier on- or off-balance sheet instruments. If banks were to do that, however, this added riskiness would raise banks’ RWAs and force them to increase their capital. This action would also impact their liquidity coverage ratio [another Basel III component] by making the banks less liquid since most risky assets do not count for the LCR. This is another reason why the leverage ratio is an important complement to the RWA and liquidity buffers.”
Cetier the First’s critique focuses on the capital concept. He noted that under Basel III definition, “the numerator is Common Equity Tier 1 plus subordinated, debt-like, securities. These securities are really weak bank capital. They are not even perpetual as they can be repaid within 5 years. Banks are fascinated by these hybrids, even though they tend to end in tears …” And: “Under Basel III rules, a bank can meet a leverage ratio of 30% with 10% Common Equity Tier 1 and 20% hybrid securities. That is exactly where we don’t want to end up. We learned from the crisis that hybrid securities failed abysmally in their role of capital. Hybrids acted like debt, thus not absorbing the losses they promised to absorb. … hybrids are accidents waiting to happen.” And he concluded for the Common Equity Tier 1 ratio and the leverage ratio: “Neither of both ratios are perfect. Using both ratios may therefore have merit.”
Key sources of Q4 losses
In the centre of the pre-announcements of Deutsche and RBS were the losses that considerably weaken their 2013 results. Deutsche’s fourth-quarter pretax loss of €1.2 billion came as a surprise as analysts had expected a fourth-quarter profit of about €698 million. Under the impression of an ongoing series of legal disputes, investigations and scandals media interest focused on litigation costs for which the bank took a €528 million charge. Thomas Atkins (Reuters) reminded the readers that the bank was fined $1.9 billion in December by the U.S. Federal Housing Finance Agency to settle claims that it defrauded two U.S. government-controlled companies in the sale of mortgage-backed securities before the 2008 financial crisis and that it was also fined €725 million by EU antitrust regulators for rigging interest rates. All in all, he wrote, Deutsche spent €2.5 billion on fines and settlements in 2013 and, at the end of the year, its litigation reserves had declined to €2.3 billion.
An even bigger source of losses for Deutsche Bank was writedowns in credit, debt and funding (CVA, DVA, FVA) which amounted to €623 million. The bank explained: “FVA is an adjustment being implemented in 4Q2013 that reflects the implicit funding costs borne by Deutsche Bank for uncollateralized derivative positions”.
FVA is a comparably new concept which is reported by a small number of banks, including both Deutsche and RBS. According to Matt Cameron (Risk Magazine) this is “primarily because there is no standard approach, and some accountants have been reluctant to sign off on the adjustments.” He further wrote:
“At its heart, FVA is a simple concept. For traders, it reflects the funding cost generated when hedging an uncollateralised client trade in the interdealer market, where two-way posting of margin is standard – the market risk may be fully offset, but the collateral requirements are asymmetrical. When a dealer is in-the-money on the client trade, it would have to post collateral to its hedge counterparty, and would therefore need to borrow money from its internal treasury, which is a funding cost.
On the flipside, if the dealer is out-of-the-money on the client trade, it receives collateral from its hedge counterparty, and if the collateral is assumed to be rehypothecable, the dealer should be able to lend that collateral to its treasury, which is a funding benefit.”
Deutsche Bank is not the first bank to see its results weakened by FVA. Sarah Butcher mentioned the example of JP Morgan’s results for 2013:
“FVA made an important appearance in JPMorgan’s fourth quarter results, announced today. Until combined adjustments for FVA and debt valuation (DVA) were added to results for the quarter, JPMorgan did quite well. However, JPMorgan registered a $1.5bn FVA cost in the fourth quarter. Once combined DVA and FVA were factored in, the bank did incredibly badly – return on equity fell to a mere 6% in the corporate and investment bank and costs there rose to 81% of revenues.”
There were others as well. Nomura recorded a loss of ¥10 billion ($98 million) after introducing FVA for its over-the-counter derivatives portfolio in 2013. Lloyds Banking Group and Barclays reported £143 million and £101 million of FVA respectively for the year 2012 and RBS reported FVA of £475 million in its fourth-quarter report for 2012 (Matt Cameron).
Another source of Q4 losses for Deutsche Bank was €509 million of cost-to-achieve (CTA), a cost related to the bank’s restructuring process. In September 2012, the bank had presented its Strategy 2015+ which emphasized three aspects: the need for organic growth of its capital base, the reduction in risk and higher operating performance.
One element of the process was a restructuring of the bank’s business which now consists of
Corporate Banking & Securities (CB&S)
Global Transaction Banking (GTB)
Deutsche Asset & Wealth Management (DeAWM)
Private & Business Clients (PBC)
Consolidation & Adjustment (C&A)
Non-Core Operations Unit (NCOU).
Beside the Non-Core Operations Unit (NCOU) which for the fourth quarter 2013 recorded a loss before income taxes of €1.1 billion, two of the segments, CB&S and GTB, contributed substantially to the bank’s fourth-quarter losses – with the decline in CB&S revenues by €916 million outstanding. This figure has a special quality as it concerns the flagship of the group, investment banking.
The reason for the decline is found in bond markets. As Thomas Atkins remarked: “Revenue at Deutsche’s debt-trading business, which accounts for nearly three quarters of its trading revenue, fell by almost a third, much more than at U.S. rivals which also suffered from a bond trading slowdown ahead of a cut in the Federal Reserve’s bond buying to help the U.S. economy. … Deutsche, one of Europe’s major bond trading houses, has been able to vacuum up business from rival banks that are scaling back. But tougher regulatory demands after the financial crisis have forced it to shed assets itself.”
In contrast to Deutsche Bank’s results, RBS’s losses were widely expected. Markets were surprised however by the amount of provisions made. As Robert Peston wrote:
“£1.9bn of costs to cover fines and damage claims for mis-selling mortgage bonds in the US, along with other penalties for market manipulation;
Another £650m of losses for mis-selling payment protection insurance;
A further £500m of losses for compensating small businesses who were wrongly sold interest rate hedging products.
And … up to £4.5bn of further losses on bad loans and investments, together with unspecified losses on the accelerated sale of dodgy assets.”
This latter amount for “accelerated and increased impairments” results from an effort to get rid of a pool of non-core assets. For this purpose, RBS established an internal bad bank, RBS Capital Resolution, on 1 January 2014. In its 2013 Q3 results the bank explained:
“RBS announces management actions to accelerate the building of its capital strength and to enhance its strategic focus on its core UK businesses and its international corporate capabilities.
● The measures will include the creation of an internal “bad bank” to manage the run-down of high risk assets projected to be £38 billion by the end of 2013. The goal is to remove 55-70% of these assets over the next two years. While there is inevitable uncertainty associated with running down such assets, there is a clear aspiration to remove all these assets from the balance sheet in three years.
● Faster run-down of high risk assets is expected to entail accelerated and increased impairments in Q4 2013 of £4.0 billion to £4.5 billion but the capital impact of this will be neutralised by a commensurate reduction in expected loss capital deductions. The net impact on the current Core Tier 1 ratio is expected to be a reduction of c.10 basis points. However, the new strategy will result in a strengthening of the Group’s capital ratios in the medium term.”
With the establishment of an internal bad bank, RBS followed the earlier example of Deutsche Bank and others. As I wrote elsewhere, in recent years, in particular German financial institutions developed a high level of bad-bank sophistication finding ways for banks to “clean” their balance sheets by transferring non-performing loans and other loss-generating assets to special institutions.
There are several possible variants of official and private, internal and external solutions (See, for example, McKinsey 2009: Bad Banks: Finding The Right Exit From The Financial Crisis). Compared to external solutions an internal bad bank is simpler to set up. The disadvantage is a lack of “clear separation in terms of a clean balance sheet separation and de-consolidation of risks”, but “while this on-balance sheet solution still lacks efficient risk transfer, it provides a clear signal to the market and increases transparency of the core bank’s performance” (McKinsey).
Experiences with bad banks are mixed (see for example my earlier article here about the Japanese experience with both private and public solutions). Ulrike Dauer (The Wall Street Journal) reported in January 2014 that “Deutsche Bank is selling noncore assets to boost its capital ratios, complementing an effort last year to end questions about its capital adequacy by issuing about €3 billion of new shares. That effort generated large losses in the fourth quarter as the bank sold assets at cut-rate prices, according to people familiar with the matter. The bank previously has said it aimed to sell about €80 billion of assets in 2013. By the end of the third quarter, it had sold about €66 billion.”
The figures presented here are preliminary. The picture will become clearer when the banks publish their final full year results.
But, the real cause of concern at the moment seems less that still more bad news may emerge, but the fact that here in both cases a point in time was chosen for the announcement that took markets by surprise. The banks appeared less driven by the wish to provide as much information and transparency as possible to convince investors that, even if their results are still deplorable, they actually are “at the forefront of cultural change in the financial services sector” as Deutsche Bank claims to be, but to get as little notice as possible. Unfortunately, this strategy is already imitated. For instance, on 3 February, in an unusual announcement 10 days ahead of its results, Lloyds reported that it is setting aside another £1.8bn for compensation for mis-selling PPI credit insurance.
As Phillipa Leighton-Jones (The Wall Street Journal) wrote: “Sneak previews are becoming all the rage in European banking.”
Stoppen oder weitermachen? Das ist die Frage, vor der Zentralbanken in den USA, Europa und anderswo zurzeit in Bezug auf ihre extrem lockere Geldpolitik stehen. Dabei wird an ein Zurückfahren der Programme und ein Abschöpfen der überreichen Liquidität, die sichtbar kaum produktive Verwendungen findet, noch gar nicht gedacht. Und das obwohl Beobachter seit langem vor dem Inflationspotential dieser Politik warnen. Auf Twitter & Co. werden sie dafür mit Spott überhäuft und, sofern sie aus Deutschland kommen, als typisch deutsche Inflationshysteriker abgetan.
Ein Blick auf die offiziellen Preisstatistiken scheint den Spöttern recht zu geben. Gerade meldet Eurostat, dass die jährliche Inflation im Euroraum im Dezember 2013 auf 0,8 Prozent vorausgeschätzt wird. Damit wird selbst eine Inflationsrate von zwei Prozent, wie sie die Europäische Zentralbank (EZB) auf längere Sicht anpeilt, zu einem höchst ehrgeizigen Ziel. Welche Seite recht hat, ist dennoch schwer zu beurteilen. Mit der Geldpolitik wird der Rahmen für Preissteigerungen in einer Volkswirtschaft abgesteckt. Inwieweit dieser ausgefüllt wird, hängt von der Wirtschaftsdynamik und den Aktionen und Reaktionen vieler Einzelner ab. Die entscheidende Frage, die sich hier stellt, ist: Würde ein dauerhafter Anstieg der Preise auf breiter Front, wenn er im Anzug wäre, so rechtzeitig erkannt, dass die Geldpolitik darauf angemessen reagieren könnte? Ein Blick auf die Art der Preisbildungsprozesse in der Wirtschaft und die Konstruktion von Preisindizes lässt daran Zweifel aufkommen.
Mehr dazu auf CARTA.
SUMMARY Regarding the ongoing extremely loose monetary policy in the United States, Japan and Europe, some observers worry about inherent inflationary dangers. Those worries are ridiculed by others who point to the lasting tendency of declining prices everywhere as reflected in major price indices. Which side is right is difficult to decide:
- Even in a deflationary environment there are constantly some prices rising, while others fall.
- The current state of the economy and our economic knowledge does not allow deciding at an early stage, which would enable monetary policy to act adequately, whether the general level of prices has begun to rise persistently.
- Official price indices are poor early-warning signs. In simply adding up weighted price changes of goods and services for special groups of economic actors they fail to capture the underlying price dynamics in an economy. Hidden price changes and people’s reactions to rising prices further complicate the diagnosis.
- The calculation of the German consumer price index may serve to illustrate the way in which official statistics account for a changing environment as well as its shortcomings.
Shortly after the US default had been averted on October 16, the S&P 500 closed at an all-time peak of 1,744.50. Alan Wheatley (Reuters) commented enthusiastically:
“If Wall Street’s record high is a signpost, the U.S. economy has every chance of pulling further ahead of a stuttering Europe despite new battles to come in Washington over the government’s budget and debt ceiling.”
Does this mean that all the worries of the past weeks about a “Lehman moment” were nothing but hot air? Is the debacle that we observed nothing more than an episode in an endless soap opera that long ceased to impress markets?
Die Welt ist noch einmal davongekommen, so scheint es, nachdem sich in dem US-Haushaltsstreit die Beteiligten auf einen Kompromiss geeinigt haben. Wobei das Ultimatum vom 17. Oktober insofern nie eine unmittelbare Gefahr dargestellt hat, als sich das US-Schatzamt, wie von Goldman Sachs angemerkt, zwar von diesem Tag an nicht hätte neu verschulden können, aber immer noch zusätzlich zu den täglich hereinkommenden Steuereinnahmen über eine Barreserve von etwa 30 Milliarden Dollar verfügt hätte, die ihm eine weitere Atempause gewährt hätte. Wie lange jene gereicht hätte, ist angesichts der folgenden Zahlen allerdings fraglich: Bereits am 31. Oktober muss die US-Regierung 60 Milliarden Dollar für Zinsen und Tilgungen aufbringen, am 29. und 30. November sind es zusammen weitere 87 Milliarden (NZZ).
Krise beendet also – wieder einmal. Oder auch nicht: In einem vielbeachteten Beitrag wies Felix Salmon (Reuters) vor wenigen Tagen darauf hin, dass, unabhängig davon, ob es im US-Senat zu einer Einigung kommt, der Schaden für die Weltwirtschaft und die internationalen Finanzmärkte längst angerichtet ist. Nur werden die Auswirkungen des scheinbar abgewendeten Worst Case erst allmählich spürbar werden und sehr viel unauffälliger und weniger spektakulär daherkommen als in den zahlreichen Krisenszenarios, die jetzt beschworen wurden. Sie werden allerdings möglicherweise auch verhängnisvoller sein.
Mehr dazu auf CARTA …
The BIS Triennial Central Bank Survey of foreign exchange turnover in April 2013 makes a fascinating read.
First of all, there is the rise in turnover volume: $5.3 trillion. Per day. By comparison: World exports in 2011 (the latest available number) were about $17.8 trillion. Per annum.
Second, there is the number of currencies traded which, as the following list shows, has increased markedly. The Mexican peso and Chinese renminbi are even found among the top 10 most traded currencies now.
Fascinating, but also deeply worrying. In contrast to other comments which emphasise recent changes, I would like to draw attention to some aspects of global foreign exchange trading which have not changed – and which, in a changed environment, should give more cause for concern than ever before.
Zu behaupten, Deutschland sei ein Bitcoin-Land, wäre wohl übertrieben. Allerdings gibt es gerade hier in jüngster Zeit eine Reihe von Entwicklungen, die, sollte das Land in dieser Hinsicht jemals in Wettbewerb mit anderen Plätzen und Regionen treten, ihm eine besondere Stellung verschaffen.
The German Ministry of Finance hit the headlines with an official statement recognizing Bitcoin as unit of account thereby giving it the legitimacy to be used as a settlement currency in one of the world’s largest economies. After the official opinion issued by the US Treasury Department that I mentioned elsewhere, this is the second time a country has taken an official stance on Bitcoin.
To quote Matt Clinch (CNBC):
“Bitcoins is not classified as e-money or a foreign currency, the Finance Ministry said in a statement, but is rather a financial instrument under German banking rules. It is more akin to “private money” that can be used in “multilateral clearing circles””.
The decision will increase legal certainty and strengthen the role of the currency. Furthermore, together with another development it may have far-reaching EU-wide consequences:
One German bank, Fidor Bank, has applied for a license from the German BaFin to operate a Bitcoin exchange in Germany. Fidor is an online bank which with its use of social media and its business model of “Banking with Friends” differs from traditional banks. As Dawn Cowie of FS magazine wrote:
“Founded in 2009 in the middle of the financial crisis, Fidor has built an online banking community with about 160,000 users who offer peer-to-peer advice on saving, investment and everyday financial problems. What’s more, online users are also encouraged to come up with innovative ideas to develop and improve the bank’s products and services.”
In July 2013, Fidor formed a large-scale partnership with the German marketplace operator of bitcoin.de. It agreed to provide a ‘liability umbrella’ to Bitcoin Deutschland GmbH thereby enabling the marketplace to prove it is officially following financial market regulations, such as anti-money laundering legislation (CoinDesk).
At first glance, the Fidor application does not make sense. As Franz Nestler (FAZ) emphasizes, operating a Bitcoin exchange in Germany would require only registration. But, the move is not necessarily aimed at merely “being on the safe side”, as Nestler presumes. As Adrianne Jeffries (The Verge) rightly states, a BaFin license would allow the exchange to operate anywhere in the EU.
In this context, Adrianne Jeffries draws attention to an interesting article by Karl-Friedrich Lenz who compares the European and US systems:
“I have not studied American law on the point in detail, but I understand that you need to get a license as a “money transmitter” in 48 States to start a Bitcoin exchange. That is a significant regulatory burden. Essentially you need to tell 48 times the same story, and pay some lawyers to do that. This recent article at FoxNews titled “Could Bitcoin go legal” gives some interesting background on the cost involved for getting those licenses in the United States.
In contrast, if someone gets a “regulated market” licensed under the EU MIFID Directive, they need to deal only with the regulator of their own Member State. You don’t need to run around all the 27 Member States applying for licenses.”
The thought may be far-fetched that with the latest German Ministry of Finance decision Bitcoin could become an alternative to the euro if it ever ceased to exist, as Kathleen Brooks of Forex.com is quoted by CNBC’s Matt Clinch.
However, with recent developments in Germany, Bitcoin’s importance is growing and its door to Europe is opening a little wider.