Tag Archives: Banking

Updates from Chicago Booth

The safest bank the Fed won’t sanction – A ‘narrow bank’ offers security against financial crises
By John H. Cochrane – One might expect that those in charge of banking policy in the United States would celebrate the concept of a “narrow bank.” A narrow bank takes deposits and invests only in interest-paying reserves at the Fed. A narrow bank cannot fail unless the US Treasury or Federal Reserve fails. A narrow bank cannot lose money on its assets. It cannot suffer a run. If people want their money back, they can all have it, instantly. A narrow bank needs essentially no asset risk regulation, stress tests, or anything else.

A narrow bank would fill an important niche. Right now, individuals can have federally insured bank accounts, but large businesses need to handle amounts of cash far above deposit insurance limits. For that reason, large businesses invest in repurchase agreements, short-term commercial paper, and all the other forms of short-term debt that blew up in the 2008 financial crisis. These assets are safer than bank accounts, but, as we saw, not completely safe.

A narrow bank is completely safe without deposit insurance. And with the option of a narrow bank, the only reason for companies to invest in these other arrangements is to try to harvest a little more interest. Regulators can feel a lot more confident shutting down run-prone alternatives if narrow bank deposits are widely available. more>

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Goldman Thinks JPMorgan Is Too Big, But Not Too Big to Fail

By Matt Levine – So the math is: New JPMorgan plus New Chase make about $3 billion less from their businesses, but spend about $3 billion less on capital, leading to an all-in net improvement in their combined financial prospects of zero dollars.

So that’s not really a rousing value add. Somehow, though, those zero dollars of extra income are worth an extra $10.23 per share, or over $38 billion, to New JPMorgan and New Chase.

That’s a lot of value placed on no new income! Where could it come from? more> http://tinyurl.com/n2q99yw

Updates from CHICAGO BOOTH

Shocking news: The euro is a success!
By John Hintze – The Economist’s Big Mac Index shows that the price of the sandwich, when translated into US dollars, varies from $1.54 in India to $7.80 in Norway.

What interests economists is, why?

The researchers generally find large price differences between countries that use different currencies. Prices in Japan, for example, are about 20% higher, on average, than those in the United States for the same products.

For all the euro’s travails, it seems that it has reduced the influence of international borders on prices. more> http://tinyurl.com/lsk59h6

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Updates from CHICAGO BOOTH

Think you’re not racist?
By Alice G. Walton – There’s some good evidence that forms of discrimination including racial bias occur outside of our awareness, and Marianne Betrand has done extensive work in what’s known as implicit discrimination.

“It may be that the recruiters don’t read any further than the name,” she says, referring to her labor-market-discrimination study. “We really don’t know what level it’s happening on. But it doesn’t have to be a conscious choice.”

In other words, if a human-resources professional has a pile of resumes to get through, inferring information from the name might be a timesaving maneuver, so that even if the name is just one part of the, “Is this candidate worth a callback?” question, it could be computed quickly and subconsciously. more> http://tinyurl.com/qfnfb6z

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Updates from CHICAGO BOOTH

What a 1920s farm bust reveals about financial crises
By Roben Farzad – To understand this spiral, two researchers turned to data about another systemic financial meltdown–this one involving US farms in the trying 1920s.

Professor Raghuram G. Rajan, now India’s top central banker, and Rodney Ramcharan of the US Federal Reserve Board, studied bank failures during the collapse in American agriculture just ahead of the Great Depression, when plunging crop prices combined with excessive borrowing ravaged the countryside and its banks. (Think Jimmy Stewart in It’s a Wonderful Life, only in farmer’s overalls.) During that agrarian panic, banking regulators liquidated the assets of failed banks as quickly as possible.

At the time, local banking markets were segmented due to heavy interstate regulations and the steep transaction costs imposed by distance. Out-of-state banks were not allowed to extend loans to farmers in nearby states. Even if a farmer wanted to deal with a bank several counties over, it was difficult, as few farmers had cars, or phones.

Rajan and Ramcharan characterize this as “an almost ideal laboratory to study” their questions: Can the loss of financing capacity cause assets to sell at a discount relative to fundamental value? Can it also render asset markets more illiquid? And can these forces lead to contagion, propagating shocks through time?

When bank failures reduce local financing capacity, that reduces the recovery rates on failed assets of nearby banks, depresses local land prices, renders land markets illiquid, and accelerates subsequent financial-sector distress among nearby banks. Reduced capacity also leads to lower transaction volume.

Otherwise perfectly good assets–be those fertile, unexploited acres in 1925; secured, prime real-estate bonds in late 2008; or blue-chip, high-quality shares in 2009–will trade at a discount relative to fundamental value when they are sold by distressed owners. No matter how hale and performing an asset may intrinsically be, its real-time value is inextricably linked to the availability of financing. When banks stop extending credit, asset prices will almost reflexively fall. more> http://tinyurl.com/ndkqva7

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