Basel III

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pages: 726 words: 172,988

The Bankers' New Clothes: What's Wrong With Banking and What to Do About It by Anat Admati, Martin Hellwig

Alan Greenspan, Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, bonus culture, book value, break the buck, business cycle, Carmen Reinhart, central bank independence, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversified portfolio, en.wikipedia.org, Exxon Valdez, financial deregulation, financial engineering, financial innovation, financial intermediation, fixed income, George Akerlof, Glass-Steagall Act, Growth in a Time of Debt, income inequality, information asymmetry, invisible hand, Jean Tirole, joint-stock company, joint-stock limited liability company, junk bonds, Kenneth Rogoff, Larry Wall, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, margin call, Martin Wolf, Money creation, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Nick Leeson, Northern Rock, open economy, Paul Volcker talking about ATMs, peer-to-peer lending, proprietary trading, regulatory arbitrage, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Satyajit Das, Savings and loan crisis, shareholder value, sovereign wealth fund, subprime mortgage crisis, technology bubble, The Market for Lemons, the payments system, too big to fail, Upton Sinclair, Yogi Berra

The fact that these margins of safety were so thin played a major role in the crisis.55 For example, without help from the Singapore Sovereign Wealth Fund and from the Swiss government, the Swiss bank UBS would have become insolvent, destroyed by losses from mortgage-backed securities and related derivatives that had been treated as riskless.56 In the aftermath of the crisis, regulators set out to strengthen capital regulation. Although the resulting accord, “Basel III,” eliminates some abuses, it fails to address the basic problem that banks can easily game the regulation. Banks’ equity can still be as low as 3 percent of their total assets. It is not clear that anything would have been substantially different in the 2007–2009 crisis had Basel III already been in place. The weakness of Basel III was the result of an intense lobbying campaign mounted by bankers against any major change in regulation. This campaign has continued since. By now even the full implementation of Basel III is in doubt.57 Nonsense in the Debate According to bankers, higher equity requirements for banks will restrict bank lending and reduce economic growth.

Had the banks not made those payouts, there would have been less need for government support in the fall of 2008.26 Since 2011 the Federal Reserve and authorities elsewhere have allowed most banks to make cash payments to shareholders even though banks are still weak and some of them have still not reached the level of equity required under Basel III. Profitable banks could reach Basel III equity levels much more quickly if they retained their earnings. It makes no sense to delay the implementation of Basel III on the grounds that banks need time to adjust and at the same time to allow payouts that make the adjustment slower. Allowing the payouts before the new equity levels have been reached benefits the banks and harms the public.27 Healthy banks do not need to wait for equity to be built internally by retaining profits.

“Global Competition Needs Level Playing Fields” Representatives of banks and other industries often complain that government regulation unfairly harms their ability to compete with firms in other countries—and they make the argument expressed in the heading of this section. For example, Jamie Dimon, CEO of JPMorgan Chase, called Basel III “anti-American.”11 According to him, Basel III is biased in favor of European institutions and might lead to Asian banks’ taking some of the U.S. market share. Similarly, French banks complained that the new rules do not take account of the special situation of their bank and insurance conglomerates, and German public banks thought the new rules were biased against them.12 Public officials often sing the same songs. When criticized for watering down Basel III in response to French and German lobbying, Michel Barnier, the European commissioner for Internal Markets and Services, who is in charge of financial regulation, complained that the United States was slow to adopt Basel III, had not even fully adopted the previous Basel II agreement, and had gone back on a G20 agreement to limit incentives for bankers’ risk taking.13 The U.S.


pages: 701 words: 199,010

The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal by Ludwig B. Chincarini

affirmative action, Alan Greenspan, asset-backed security, automated trading system, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Black-Scholes formula, Bob Litterman, business cycle, buttonwood tree, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, delta neutral, discounted cash flows, diversification, diversified portfolio, family office, financial engineering, financial innovation, financial intermediation, fixed income, Flash crash, full employment, Gini coefficient, Glass-Steagall Act, global macro, high net worth, hindsight bias, housing crisis, implied volatility, income inequality, interest rate derivative, interest rate swap, John Meriwether, Kickstarter, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low interest rates, low skilled workers, managed futures, margin call, market design, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, Mitch Kapor, money market fund, moral hazard, mortgage debt, Myron Scholes, National best bid and offer, negative equity, Northern Rock, Occupy movement, oil shock, price stability, proprietary trading, quantitative easing, quantitative hedge fund, quantitative trading / quantitative finance, Ralph Waldo Emerson, regulatory arbitrage, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, Robert Shiller, Ronald Reagan, Sam Peltzman, Savings and loan crisis, Sharpe ratio, short selling, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, survivorship bias, systematic trading, tail risk, The Great Moderation, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond

Thus, banks relying on these ratings will still have inaccurate or not forward-looking assessments of risk unless the problems associated with rating agencies are fixed. Basel III made some modifications to the credit risk analysis methods for banks using their own models. Basel III introduces capital requirements to cover Credit Value Adjustment risk and higher capital requirements for securitization products. Derivatives and repos cleared through Central Counterparties (CCPs) are no longer risk free and have a 2% risk weight and clearing members shares in CCPs default funds shall be capitalized. Additionally, Basel III introduces a higher correlation factor (applicable to internal ratings-based approaches) to risk weight large and unregulated financial institutions.

Additionally, Basel III introduces a higher correlation factor (applicable to internal ratings-based approaches) to risk weight large and unregulated financial institutions. It also contains changes concerning collateral eligibilities and haircuts rules. Some Thoughts on Basel III It is without question that Basel III is more prudent than Basel II, but it brings some questions. First, is the tradeoff between the increased costs for banks and the financial system stability worth it? Second, does Basel III do enough to address key problems? Third, none of the risk weights for mortgages were altered despite the mess it caused. Let’s start with the first proposition. Raising bank’s capital requirements (lowering their leverage) means that it will cost banks more to conduct business.

The losses of many banks, investment banks, and even governnment agencies was so large that it wiped out their capital base leading to either bankruptcy or the takeover of the bank by another institution, the FDIC, or the U.S. government. Basel III is a modification of Basel II by adding a new liquidity ratio consideration, a new leverage consideration, increased capital requirements to the existing Basel II requirements, and modifications to the credit risk portion of Basel II. Increased Capital Requirements for Banks The Basel Committee found that, perhaps, one of the shortcomings of their previous proposals was that the required capital by banks was too low. Thus, one of the modifications of Basel III was to increase capital requirements. The new requirements have mainly to do with the numerator of the capital ratio.


pages: 304 words: 80,965

What They Do With Your Money: How the Financial System Fails Us, and How to Fix It by Stephen Davis, Jon Lukomnik, David Pitt-Watson

activist fund / activist shareholder / activist investor, Admiral Zheng, banking crisis, Basel III, Bear Stearns, behavioural economics, Bernie Madoff, Black Swan, buy and hold, Carl Icahn, centralized clearinghouse, clean water, compensation consultant, computerized trading, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crowdsourcing, David Brooks, Dissolution of the Soviet Union, diversification, diversified portfolio, en.wikipedia.org, financial engineering, financial innovation, financial intermediation, fixed income, Flash crash, Glass-Steagall Act, income inequality, index fund, information asymmetry, invisible hand, John Bogle, Kenneth Arrow, Kickstarter, light touch regulation, London Whale, Long Term Capital Management, moral hazard, Myron Scholes, Northern Rock, passive investing, Paul Volcker talking about ATMs, payment for order flow, performance metric, Ponzi scheme, post-work, principal–agent problem, rent-seeking, Ronald Coase, seminal paper, shareholder value, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, Steve Jobs, the market place, The Wealth of Nations by Adam Smith, transaction costs, Upton Sinclair, value at risk, WikiLeaks

In the 1980s, these had been calculated using simple rules of thumb, set out in the convention known as Basel I. By 2012, the Basel III convention had laid out a much more sophisticated system, aimed at ensuring that loans that were more likely to go bad required greater reserves. After all these years of work, how much better was Basel III than Basel I? Haldane brought two pieces of bad news. First, neither of the Basel rules was very good at predicting failure.2 Second, despite its sophistication, Basel III was actually a worse predictor of bank failure than Basel I, and Basel I was worse than simple accounting ratios.

He was speaking to the United Kingdom’s Parliamentary Commission on Banking Standards about the regulatory regime known as “Basel III,” which is today’s new, improved response to the crisis, but his description could apply to any doctrinaire modeling system. Before the crisis, he noted, “boards were following detailed Basel II capital adequacy metrics but ended up missing more than one elephant in the risk room, such as rapidly increasing gross leverage and decreasing liquidity. While Basel III now ‘catches’ these particular elephants, history teaches us that there are others roaming free and undetected—and that sooner or later they will strike.

They were so intent on explaining the world in terms of the economic and risk models they had been taught that they continued, and still continue, to adhere to the ways of thinking that failed us last time. This book is filled with examples of where this has happened. In chapter 5, we looked at the Basel III rules that have been put in place to regulate banks. We noted that they were not a good predictor of whether a bank would fail and that there was little reason to believe they would be effective in preventing the next crisis. One reason is that they used the risk measures we have just discussed. Regulators reasoned that the 2008 crash happened because the banks made too many risky loans. Basel III therefore requires that banks place their loans in different risk categories and hold more reserves against the risky ones.


pages: 318 words: 99,524

Why Aren't They Shouting?: A Banker’s Tale of Change, Computers and Perpetual Crisis by Kevin Rodgers

Alan Greenspan, algorithmic trading, bank run, banking crisis, Basel III, Bear Stearns, Berlin Wall, Big bang: deregulation of the City of London, bitcoin, Black Monday: stock market crash in 1987, Black-Scholes formula, buy and hold, buy low sell high, call centre, capital asset pricing model, collapse of Lehman Brothers, Credit Default Swap, currency peg, currency risk, diversification, Fall of the Berlin Wall, financial innovation, Financial Instability Hypothesis, fixed income, Flash crash, Francis Fukuyama: the end of history, Glass-Steagall Act, Hyman Minsky, implied volatility, index fund, interest rate derivative, interest rate swap, invisible hand, John Meriwether, latency arbitrage, law of one price, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, Minsky moment, money market fund, Myron Scholes, Northern Rock, Panopticon Jeremy Bentham, Ponzi scheme, prisoner's dilemma, proprietary trading, quantitative easing, race to the bottom, risk tolerance, risk-adjusted returns, Silicon Valley, systems thinking, technology bubble, The Myth of the Rational Market, The Wisdom of Crowds, Tobin tax, too big to fail, value at risk, vertical integration, Y2K, zero-coupon bond, zero-sum game

But Stress VaR is just one detail in Basel III, which, along with reams of new legislation in the US, EU and other OECD countries, is attempting to make the global banking system safer and more robust. The core of Basel III, unveiled in 2010, is the requirement for banks to hold more capital against the risks they run. It replaces Basel II (designed in 2004 and partially implemented in 2008), which was made redundant by the crisis like so many employees of the banks it regulated. In gradual stages, until 2019, banks that comply (because their home government has made compliance with Basel III – technically a voluntary code – obligatory in law) will require total capital of 10.5 per cent of RWA.

The problem – as was obvious in the crisis – is that sometimes the assessment of the riskiness of assets is incorrect: AAA tranches of CDOs turned out to be anything but low risk, for example. Now, under Basel III, the ratio of total assets to capital will not be able to exceed 33:1, regardless of the other, traditional, capital ratios. It is meant to act as a sort of risk backstop. In a similar way, Basel III introduces minimum requirements for liquidity, so that banks must have sufficient funding in times of stress. One measure tests banks’ ability to fund themselves for 30 days in an unpleasant scenario of severe funding pressure.

This was undeniably true, but it was not 2008; did we need to do anything? ‘No,’ he replied, ‘we have to produce the number and I just thought it was interesting.’ The meeting moved on. Stress VaR was the new computerised tool on banks’ risk workbench. Its use was made mandatory under the third iteration of the Basel capital adequacy rules – Basel III. The idea, since regular VaR had failed so dismally, was to supplement it with this new technique. Stress VaR takes banks’ risk positions on a trip back through time to see how they would have coped in prior meltdowns. It is hoped that this will make up for the acknowledged blind spot in VaR: it doesn’t say what happens in the 1 per cent of times outside its methodology.


pages: 524 words: 143,993

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

air freight, Alan Greenspan, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, break the buck, Bretton Woods, business cycle, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, currency risk, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, foreign exchange controls, forward guidance, Fractional reserve banking, full employment, Glass-Steagall Act, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, Les Trente Glorieuses, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low interest rates, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, Minsky moment, Modern Monetary Theory, Money creation, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, proprietary trading, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, subprime mortgage crisis, tail risk, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen, Tyler Cowen: Great Stagnation, vertical integration, very high income, winner-take-all economy, zero-sum game

Financial Times, 22 August 2013, http://www.ft.com/cms/s/0/6fea2b90-09bf-11e3-ad07-00144feabdc0.html. 3. ‘Declaration on Strengthening the Financial System’, London Summit, 2 April 2009, http://www.mofa.go.jp/policy/economy/g20_summit/2009-1/annex2.html. 4. On Basel III, see http://en.wikipedia.org/wiki/Basel_III. 5. On Basel I, see http://en.wikipedia.org/wiki/Basel_I. 6. On Basel II, see http://en.wikipedia.org/wiki/Basel_II. 7. Basel Committee on Banking Supervision, ‘Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems’, December 2010 (revised June 2011), http://www.bis.org/publ/bcbs189.pdf. See also Independent Commission on Banking, Final Report: Recommendations, London, September 2011, p. 84, https://hmt-sanctions.s3.amazonaws.com/ICB20final%20reportICB%2520Final%2520Report%5B1%5D.pdf. 8.

Subsequently, the authorities added yet more objectives: structural change (altering the way banks are allowed to organize themselves internally), stress tests (assessments of the ability of banks to survive extreme conditions), resolution regimes (new legal mechanisms for reorganizing the finances of failing financial institutions), changes to market structure (shifting trading from over-the-counter markets towards exchanges and clearing houses); and reforms of regulatory structures. They were trying to close all the stable doors at once. So what has happened with this complex agenda? Basel III A first area of focus was reaching agreement on a new Basel III accord (after the failures of Basel I and II demonstrated by the crisis) governing bank capital, risk-management – including management of market risk – macroprudential regulation and liquidity risk.4 Basel I, which imposed a minimum set of capital requirements for banks, had been agreed by the Basel Committee on Banking Supervision in 1988.

The hard minimum of broadly defined capital would be 8 per cent of risk-weighted assets.7 In addition, Basel III substantially tightened oversight of the risk-weighting procedures adopted by financial institutions. This was partly because the latter had proved hopelessly over-optimistic prior to the crisis and partly because different institutions applied radically different weights to the same assets. Because risk-weighting is vulnerable to gaming by financial firms, policymakers also agreed to impose a leverage ratio without risk-weighting. But the ratio under discussion among regulators in Basel has been a mere 3 per cent. Basel III promotes macroprudential regulation, by introducing strong stress tests, estimating probabilities of losses over long time-horizons and calling on regulators to pay attention to the building up of systemic risks.


pages: 183 words: 17,571

Broken Markets: A User's Guide to the Post-Finance Economy by Kevin Mellyn

Alan Greenspan, banking crisis, banks create money, Basel III, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, bond market vigilante , Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, business cycle, buy and hold, call centre, Carmen Reinhart, central bank independence, centre right, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, compensation consultant, corporate governance, corporate raider, creative destruction, credit crunch, crony capitalism, currency manipulation / currency intervention, currency risk, disintermediation, eurozone crisis, fiat currency, financial innovation, financial repression, floating exchange rates, Fractional reserve banking, Glass-Steagall Act, global reserve currency, global supply chain, Home mortgage interest deduction, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, junk bonds, labor-force participation, light touch regulation, liquidity trap, London Interbank Offered Rate, low interest rates, market bubble, market clearing, Martin Wolf, means of production, Michael Milken, mobile money, Money creation, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Nixon triggered the end of the Bretton Woods system, Paul Volcker talking about ATMs, Ponzi scheme, profit motive, proprietary trading, prudent man rule, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, rising living standards, Ronald Coase, Savings and loan crisis, seigniorage, shareholder value, Silicon Valley, SoftBank, Solyndra, statistical model, Steve Jobs, The Great Moderation, the payments system, Tobin tax, too big to fail, transaction costs, underbanked, Works Progress Administration, yield curve, Yogi Berra, zero-sum game

Second, the Basel Committee learned from the crisis to appreciate the need for banks dependent on interbank markets to have funding to stay afloat if those markets suddenly dry up. As a result, Basel III requires banks to bolster their liquid asset and cash holding enough to survive such episodes. Finally, the process identified 29 global systemically important financial institutions (GSIFIs) for Broken Markets additional capital requirements and more intense supervision—yet another fudge on too-big-to-fail. While only large and internationally active US banks will fall under Basel III, many GSIFIs are US domiciled. How to reconcile Basel III and Dodd-Frank is yet to be resolved. The original sin of Basel, zero capital weights on sovereign debt, was left unaddressed in a process that was run, not surprisingly, by central banks— institutions that managed their own nations’ sovereign debt.

Obviously, governments around the world strive to protect consumers from sharp practices, but it is highly unusual to shield such a function from political accountability. Basel III As noted, the Basel process has always been about bank capital, the first line of defense in a financial crisis. Before the crisis, the so-called Basel II rules (which the United States never fully implemented) tried to more closely tie the capital to the actual risks banks were carrying and their ability to measure and manage them. The crisis showed that “scientific” risk ­management left a lot to be desired, so it was back to capital, and more of it. Basel III added three new wrinkles to global bank regulatory standards. First, the amount and quality of bank capital required against various risk assets will be gradually increased until, by 2019, banks will have to hold, on average, about three times as much tier-one capital—essentially equity and cash equivalents.

The much-maligned deregulation of US financial markets only took place much later (the final demise of Glass-Steagall took place on President Bill Clinton’s watch), after the repression was no longer effective. And deregulation has proved remarkably easy to throw into reverse. The Dodd-Frank Act, the new Basel III international bank capital regime, and the policies of the European Central Bank make up the new financial repression regime on the hoof, a regime that will likely last for a generation or two. The result will be far slower growth than the finance-driven economy produced from 1983 to 2007. The impact of this will be felt globally because fastgrowing export economies and commodity producers in developing markets rely on growth and consumption in the developed economies.


pages: 414 words: 101,285

The Butterfly Defect: How Globalization Creates Systemic Risks, and What to Do About It by Ian Goldin, Mike Mariathasan

air freight, air traffic controllers' union, Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, barriers to entry, Basel III, Bear Stearns, behavioural economics, Berlin Wall, biodiversity loss, Bretton Woods, BRICs, business cycle, butterfly effect, carbon tax, clean water, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, connected car, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, digital divide, discovery of penicillin, diversification, diversified portfolio, Douglas Engelbart, Douglas Engelbart, Edward Lorenz: Chaos theory, energy security, eurozone crisis, Eyjafjallajökull, failed state, Fairchild Semiconductor, Fellow of the Royal Society, financial deregulation, financial innovation, financial intermediation, fixed income, Gini coefficient, Glass-Steagall Act, global pandemic, global supply chain, global value chain, global village, high-speed rail, income inequality, information asymmetry, Jean Tirole, John Snow's cholera map, Kenneth Rogoff, light touch regulation, Long Term Capital Management, market bubble, mass immigration, megacity, moral hazard, Occupy movement, offshore financial centre, open economy, precautionary principle, profit maximization, purchasing power parity, race to the bottom, RAND corporation, regulatory arbitrage, reshoring, risk free rate, Robert Solow, scientific management, Silicon Valley, six sigma, social contagion, social distancing, Stuxnet, supply-chain management, systems thinking, tail risk, TED Talk, The Great Moderation, too big to fail, Toyota Production System, trade liberalization, Tragedy of the Commons, transaction costs, uranium enrichment, vertical integration

The relationship between complexity and un certainty is also emphasized by Andrew Haldane in a 2012 speech given at the annual Jackson Hole symposium, the central gathering of the world’s leading central bankers.50 Haldane points out that regulation itself has become increasingly complex.51 Whereas Basel I, the predecessor of the current Basel III agreement, had a total length of 30 pages in 1988, the revised Basel II accord ran to 347 pages in 2004. Basel III almost doubled the regulatory text to 616 pages in 2010. The same trend holds for the national implementation of transnational agreements. The implementation of Basel I took 18 pages in the United States and 13 pages in the United Kingdom. Haldane estimates that by the time Basel III is fully implemented in the United States it will take up to 30,000 pages. Extreme integration means that if one node of a network collapses (for example, Lehman Brothers), the others will be affected.

A key lesson is that urgent reform of the governance structures, authority, personnel, and processes of the international financial system is required. Existing reform efforts, such as the transformation of the Financial Stability Forum into the Financial Stability Board and the establishment of the Basel III recommendations, do not go far enough and are unlikely to stop the next financial crisis. A major problem with the world’s response to the crisis was an inability to effectively agree on a single program. Ad hoc interventions, particularly during the second phase of the collapse (the European sovereign debt crisis) often simply aggravated the problem; they were either too slow or deemed not to display true commitment.

In addition, target values are easily manipulated. Instead of complex rankings, we should rely on the principle of simplicity. This might result in a proposal to use an array of crude indicators for financial stability rather than one sophisticated benchmark, such as risk-weighted capital requirements.87 In this way, the Basel III proposals to incorporate simple leverage ratios in regulatory recommendations are a significant step in the right direction; they are obscured, however, by an excessive regulatory framework that may well open more loopholes than it closes. Simple rules should be developed based on precautionary principles that draw on historical precedents.


pages: 269 words: 83,307

Young Money: Inside the Hidden World of Wall Street's Post-Crash Recruits by Kevin Roose

activist fund / activist shareholder / activist investor, Basel III, Bear Stearns, Carl Icahn, cognitive dissonance, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, deal flow, discounted cash flows, Donald Trump, East Village, eat what you kill, eurozone crisis, financial engineering, fixed income, forward guidance, glass ceiling, Goldman Sachs: Vampire Squid, hedonic treadmill, information security, Jane Street, jitney, junk bonds, Kevin Roose, knowledge worker, Michael Milken, new economy, Occupy movement, off-the-grid, plutocrats, proprietary trading, Robert Shiller, selection bias, shareholder value, side project, Silicon Valley, Skype, Steve Jobs, tail risk, The Predators' Ball, too big to fail, two and twenty, urban planning, We are the 99%, work culture , young professional

Many of the rules in Dodd-Frank had yet to be written and implemented (and would subsequently be watered down by lobbyists) but it was immediately apparent that the law would put a crimp in Wall Street’s profitability for the foreseeable future. Next came Basel III, an international regulatory standard that the United States decided to adopt in 2011. Basel III raised the amount of capital banks had to hold against their assets, which gave them bigger cushions and reduced the likelihood that a big, unexpected loss could wipe an entire firm out. By requiring banks to hold more capital relative to their assets, Basel III made the financial system less risky, but it also reduced the amount of leverage that banks could use to juice their trading returns.

“Dodd-Frank, which was signed into law by President Obama in July 2010, was the most sweeping piece of new regulation on the financial industry since the Great Depression”: For more on the intended (and actual) effects of Dodd-Frank, I recommend Jesse Eisinger and Jake Bernstein’s “From Dodd-Frank to Dud: How Financial Reform May Be Going Wrong,” published by ProPublica on June 3, 2011. “Next came Basel III”: For the backstory on Basel III and what it was meant to accomplish, I recommend Jack Ewing’s “A Fight to Make Banks More Prudent,” published in the New York Times, December 20, 2011. “That winter, JPMorgan Chase reported fourth-quarter profits that were 23 percent lower than the previous year’s”: Ben Protess, “Weak Quarter Weighs on JPMorgan’s 2011 Profit,” New York Times (DealBook), January 13, 2012.

Goldman Sachs’s profits for all of 2011 fell more than 50 percent from the previous year’s levels. The net income earned by Bank of America’s investment banking division, which includes Merrill Lynch, dropped by 53 percent, and Morgan Stanley’s earnings fell by 42 percent for the year. With Dodd-Frank and Basel III kicking in, it wasn’t clear when Wall Street would get its mojo back, if ever. “The new regulatory framework will undoubtedly make Wall Street less valuable than it was before,” William A. Sahlman, a professor at Harvard Business School, told me. “Whatever Wall Street used to look like, it looks half as good now.


pages: 416 words: 124,469

The Lords of Easy Money: How the Federal Reserve Broke the American Economy by Christopher Leonard

2021 United States Capitol attack, Affordable Care Act / Obamacare, Airbnb, Alan Greenspan, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, collateralized debt obligation, coronavirus, corporate governance, COVID-19, Donald Trump, Dutch auction, financial engineering, financial innovation, fixed income, Ford Model T, forensic accounting, forward guidance, full employment, glass ceiling, Glass-Steagall Act, global reserve currency, Greenspan put, hydraulic fracturing, income inequality, inflation targeting, Internet Archive, inverted yield curve, junk bonds, lockdown, long and variable lags, Long Term Capital Management, low interest rates, manufacturing employment, market bubble, Money creation, mortgage debt, new economy, obamacare, pets.com, power law, proprietary trading, quantitative easing, reserve currency, risk tolerance, Robinhood: mobile stock trading app, Ronald Reagan, Silicon Valley, stock buybacks, too big to fail, yield curve

This was the issue that Hoenig began to focus on when he realized the banks were not going to be broken up. If the big banks were getting bigger, regulators could at least insist that they put aside enough money to withstand big losses in a downturn. This problem had supposedly been dealt with by the passage of the Basel III accord, the international agreement on bank regulations named after the city in Switzerland. Like Dodd-Frank, Basel III tried to use complexity as a way to make banks safer without breaking them up or restructuring them. Basel did this by creating an accounting system under which the banks could report how much hard capital they had on hand, compared to the amount of assets on their books.

He created something called the Global Capital Index, which the FDIC started publishing regularly. The index was really just a glorified spreadsheet, but it told a shocking story. One row of numbers showed how much capital the banks had on hand under the Basel III standards. Usually, these numbers were reassuring. JPMorgan Chase, for example, reported in 2013 that its capital ratio under Basel III was an impressively fat 11.94 percent. But Hoenig’s spreadsheet went on to show how much capital the banks had on hand under a more traditionally used measure, called a leverage ratio, which didn’t use Basel’s risk-weighting. Under that standard, JPMorgan had only a 6.22 percent cushion.

His speeches for the FDIC followed a broad theme. He argued for the need to reshape the banking industry with an eye toward simplicity rather than complexity. When speaking to a crowd of bank regulators, Hoenig said they should tear up the very complicated rules they’d been negotiating for years (called the Basel III accord). When he spoke to a group of bank lobbyists and journalists, he told them the banks should be broken up rather than regulated, and monitored under the new Dodd-Frank Act, which was roughly 850 pages long. This approach was considered radical in the political environment of 2012, but Hoenig wasn’t irrational to pursue it.


pages: 492 words: 118,882

The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory by Kariappa Bheemaiah

"World Economic Forum" Davos, accounting loophole / creative accounting, Ada Lovelace, Adam Curtis, Airbnb, Alan Greenspan, algorithmic trading, asset allocation, autonomous vehicles, balance sheet recession, bank run, banks create money, Basel III, basic income, behavioural economics, Ben Bernanke: helicopter money, bitcoin, Bletchley Park, blockchain, Bretton Woods, Brexit referendum, business cycle, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, cashless society, cellular automata, central bank independence, Charles Babbage, Claude Shannon: information theory, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, complexity theory, constrained optimization, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-border payments, crowdsourcing, cryptocurrency, data science, David Graeber, deep learning, deskilling, Diane Coyle, discrete time, disruptive innovation, distributed ledger, diversification, double entry bookkeeping, Ethereum, ethereum blockchain, fiat currency, financial engineering, financial innovation, financial intermediation, Flash crash, floating exchange rates, Fractional reserve banking, full employment, George Akerlof, Glass-Steagall Act, Higgs boson, illegal immigration, income inequality, income per capita, inflation targeting, information asymmetry, interest rate derivative, inventory management, invisible hand, John Maynard Keynes: technological unemployment, John von Neumann, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, knowledge economy, large denomination, Large Hadron Collider, Lewis Mumford, liquidity trap, London Whale, low interest rates, low skilled workers, M-Pesa, machine readable, Marc Andreessen, market bubble, market fundamentalism, Mexican peso crisis / tequila crisis, Michael Milken, MITM: man-in-the-middle, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, natural language processing, Network effects, new economy, Nikolai Kondratiev, offshore financial centre, packet switching, Pareto efficiency, pattern recognition, peer-to-peer lending, Ponzi scheme, power law, precariat, pre–internet, price mechanism, price stability, private sector deleveraging, profit maximization, QR code, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, Real Time Gross Settlement, rent control, rent-seeking, robo advisor, Satoshi Nakamoto, Satyajit Das, Savings and loan crisis, savings glut, seigniorage, seminal paper, Silicon Valley, Skype, smart contracts, software as a service, software is eating the world, speech recognition, statistical model, Stephen Hawking, Stuart Kauffman, supply-chain management, technology bubble, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Nature of the Firm, the payments system, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, trade liberalization, transaction costs, Turing machine, Turing test, universal basic income, Vitalik Buterin, Von Neumann architecture, Washington Consensus

The authority that sets out these international banking regulations is the Basel Committee on Bank Supervision, which is part of the Bank for International Settlements (BIS), an international financial institution owned by central banks.8 The total capital that is held by a commercial bank is classified as Tier 1, Tier 2, and Tier 3 capital .9 As per the Basel III stipulations, the minimum amount of capital to be held by the central bank depends on the size of the commercial bank. Banks are grouped into two categories: Group 1 banks are those with Tier 1 capital in excess of €3 billion and are internationally active. All other banks are categorised as Group 2 banks (European Banking Authority, 2013). As of March 2016, under the implementation of the Basel III framework, the average capital ratio for Group 1 banks is 11.5%, with a Tier 1 capital ratio of 12.2% and total capital ratio of 13.9%.

The percentage allocated to each depends on how aggressive the investment strategy is. Appendix A: Bibliography and References Bibliography Chapter 1 Basel Committee on Banking Supervision. (2016). Basel III Monitoring Report. Basel: Bank for International Settlements. BIS. (2008). Credit Risk Transfer - Developments from 2005 to 2007 . Basel Committee on Banking Supervision. BIS. (2011). Basel III definition of capital - Frequently asked questions. Basel: Bank for International Settlements. Retrieved from http://www.bis.org/publ/bcbs198.pdf BIS. (2015). OTC derivatives statistics at end-June 2015.

All of these measures and a number of other changes were the result of the Dodd-Frank Act which was passed to limit systemic risk, allow for the safe resolution of the largest intermediaries, submit risky nonbanks to greater scrutiny, and reform derivatives trading (Lopez and Saeidinezhad, 2016). Following the crisis, these measures have been enacted not only in the USA, but also across other markets. As per the Basel III accord, large banks in every country are required to have higher capital requirements, annual stress tests, additional capital mandates, and new liquidity and asset-liability matching requirements (Bipartisan Policy Center, 2014). Thus, stress tests done by regulators today gauge whether the most centrally important institutions can withstand external and internal shocks to the economy.


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Crashed: How a Decade of Financial Crises Changed the World by Adam Tooze

"there is no alternative" (TINA), "World Economic Forum" Davos, Affordable Care Act / Obamacare, Alan Greenspan, Apple's 1984 Super Bowl advert, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bond market vigilante , book value, Boris Johnson, bread and circuses, break the buck, Bretton Woods, Brexit referendum, BRICs, British Empire, business cycle, business logic, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, company town, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, currency risk, dark matter, deindustrialization, desegregation, Detroit bankruptcy, Dissolution of the Soviet Union, diversification, Doha Development Round, Donald Trump, Edward Glaeser, Edward Snowden, en.wikipedia.org, energy security, eurozone crisis, Fall of the Berlin Wall, family office, financial engineering, financial intermediation, fixed income, Flash crash, forward guidance, friendly fire, full employment, global reserve currency, global supply chain, global value chain, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, high-speed rail, housing crisis, Hyman Minsky, illegal immigration, immigration reform, income inequality, interest rate derivative, interest rate swap, inverted yield curve, junk bonds, Kenneth Rogoff, large denomination, light touch regulation, Long Term Capital Management, low interest rates, margin call, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, military-industrial complex, mittelstand, money market fund, moral hazard, mortgage debt, mutually assured destruction, negative equity, new economy, Nixon triggered the end of the Bretton Woods system, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shale / tar sands, old-boy network, open economy, opioid epidemic / opioid crisis, paradox of thrift, Peter Thiel, Ponzi scheme, Post-Keynesian economics, post-truth, predatory finance, price stability, private sector deleveraging, proprietary trading, purchasing power parity, quantitative easing, race to the bottom, reserve currency, risk tolerance, Ronald Reagan, Savings and loan crisis, savings glut, secular stagnation, Silicon Valley, South China Sea, sovereign wealth fund, special drawing rights, Steve Bannon, structural adjustment programs, tail risk, The Great Moderation, Tim Cook: Apple, too big to fail, trade liberalization, upwardly mobile, Washington Consensus, We are the 99%, white flight, WikiLeaks, women in the workforce, Works Progress Administration, yield curve, éminence grise

Henceforth, they would be subject to a special regime of oversight, not just at the national level through stress tests but at a global level too. Given the mechanics of the 2008 crisis, Basel III focused on new areas of regulation. To give them resilience in the face of a “run on repo,” all SIFI would be required to hold sufficient high-quality liquid assets that could be sold or repoed to cover thirty days of net outflows from their businesses. In addition, to constrain maturity mismatch, banks had to demonstrate that they had sufficient stable long-term funding to match their book of long-term loans. What the Basel III regulations aimed to ensure was that banks could not find themselves in the situation of a Northern Rock, with a giant balance sheet of long-term mortgages funded by unstable short-term wholesale funding.

To get from the banking crises of the early 1970s to the first Basel regulations in 1988 had taken fourteen years of lackluster negotiations. The formal process of revision that turned Basel I into Basel II began in 1999. Eight years later, as the crisis struck, the new standards had still not been fully implemented. Basel III started off at an altogether different pace. The first call to action came from the G20 in November 2008. A new global Financial Stability Board chaired by the head of the Italian central bank, Mario Draghi, convened in the summer. Draghi had trained alongside Bernanke at MIT in the 1970s and was a fluent exponent of the new hybrid of finance and macroeconomics.

Within weeks, rumors began to circulate that the Basel Committee, in the manner of the US stress tests, had identified thirty financial groups as “systemically important” at a global level.62 They would be subject to tougher capital standards and required to draft living wills that would map out in advance how they would be wound up should it come to the worst. The G20 gave the new regulations its imprimatur at the November 2010 Seoul meeting. The first list of the twenty-nine systemically important financial institutions subject to the full Basel III regime was published in November 2011. Global Systemically Important Financial Institutions: Assets and Tier 1 Capital (end fo 2012) Source: A. Rostom and M. J. Kim, “Watch Out for SIFIs—One Size Won’t Fit All,” World Bank (blog), July 1, 2013, http://blogs.worldbank.org/psd/watch-out-sifis-one-size-wont-fit-all.


pages: 504 words: 126,835

The Innovation Illusion: How So Little Is Created by So Many Working So Hard by Fredrik Erixon, Bjorn Weigel

Airbnb, Alan Greenspan, Albert Einstein, American ideology, asset allocation, autonomous vehicles, barriers to entry, Basel III, Bernie Madoff, bitcoin, Black Swan, blockchain, Blue Ocean Strategy, BRICs, Burning Man, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, classic study, Clayton Christensen, Colonization of Mars, commoditize, commodity super cycle, corporate governance, corporate social responsibility, creative destruction, crony capitalism, dark matter, David Graeber, David Ricardo: comparative advantage, discounted cash flows, distributed ledger, Donald Trump, Dr. Strangelove, driverless car, Elon Musk, Erik Brynjolfsson, Fairchild Semiconductor, fear of failure, financial engineering, first square of the chessboard / second half of the chessboard, Francis Fukuyama: the end of history, general purpose technology, George Gilder, global supply chain, global value chain, Google Glasses, Google X / Alphabet X, Gordon Gekko, Greenspan put, Herman Kahn, high net worth, hiring and firing, hockey-stick growth, Hyman Minsky, income inequality, income per capita, index fund, industrial robot, Internet of things, Jeff Bezos, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, Joseph Schumpeter, Just-in-time delivery, Kevin Kelly, knowledge economy, laissez-faire capitalism, low interest rates, Lyft, manufacturing employment, Mark Zuckerberg, market design, Martin Wolf, mass affluent, means of production, middle-income trap, Mont Pelerin Society, Network effects, new economy, offshore financial centre, pensions crisis, Peter Thiel, Potemkin village, precautionary principle, price mechanism, principal–agent problem, Productivity paradox, QWERTY keyboard, RAND corporation, Ray Kurzweil, rent-seeking, risk tolerance, risk/return, Robert Gordon, Robert Solow, Ronald Coase, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, Steve Ballmer, Steve Jobs, Steve Wozniak, subprime mortgage crisis, technological determinism, technological singularity, TED Talk, telemarketer, The Chicago School, The Future of Employment, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, transaction costs, transportation-network company, tulip mania, Tyler Cowen, Tyler Cowen: Great Stagnation, uber lyft, University of East Anglia, unpaid internship, Vanguard fund, vertical integration, Yogi Berra

(i) Angry Birds (app game) (i) Anheuser-Busch (i) Ansoff, Igor (i) antitrust laws (i) anxiety and automation/high-tech employment (i), (ii) psychology of, and low growth expectations (i) Apollo, moon landing (i) Apple and Foxconn (i) iOS (i) iPad (i), (ii) iPhone (i), (ii), (iii), (iv), (v) iPod and value chains (i) and Nokia (i) unutilized cash balances (i) apps (i), (ii), (iii), (iv), (v), (vi), (vii) Arab Spring (2011) (i) Arendt, Hannah (i) Art Vandelay character (Seinfeld TV series) (i), (ii), (iii) artificial intelligence (AI) (i), (ii) see also automation; robotics/robots Asia Asian markets (i), (ii) labor market flexibility (i) regionalization of trade growth (i) see also East Asia Asian Tigers (Hong Kong, Singapore, South Korea, Taiwan) (i) Asimov, Isaac (i) aspirations (i), (ii), (iii), (iv), (v) asset bubbles (i) asset managers and financial regulation (i) and gray capitalism (i), (ii), (iii), (iv), (v), (vi) and modern portfolio theory (i) and retirement savings (i) AT&T, Bell Labs (i) automated teller machines (ATMs), and teller jobs (i) automation and labor (i), (ii), (iii), (iv), (v) see also artificial intelligence; New Machine Age thesis; robotics/robots; technology automobile industry see car industry “average is over” thesis (i) Babson College, entrepreneurship study (i) baby boomer (or boomer) generation (i), (ii), (iii), (iv) Back to the Future II (movie) (i) Bacon, Francis (i) Bailey, Ronald (i) Baldwin, Richard (i) Ballmer, Steve (i), (ii) ballooning (i) Balsillie, Jim (i) Bank for International Settlements (BIS) economists (i), (ii) banks bank services and globalization (i) bank teller jobs and ATMs (i) European banks and Basel III rules (i), (ii) and financial regulation (i), (ii) mobile banking in Africa (i) proneness to risk (i) “put option” (i) US banks and compliance officers (i) barber profession, evolution of (i) Basel III (i), (ii) BASF (i), (ii) Baumol, William (i), (ii), (iii), (iv)n70 “bazaar economy” (Hans-Werner Sinn) (i) Beals, Vaughn (i) Bean, Charles “Independent Review of UK Economic Statistics” (i) on UK productivity puzzle (i) Beer, Stafford (i), (ii) Being There (movie), Mr.

The role of compliance officers has expanded hugely in recent years. Tougher legislation and growing market and regulatory complexity have fueled the rise of the trade.63 “The age of the compliance officer arrives,” the Financial Times recently concluded.64 In Europe alone, suggests McKinsey, the Basel III rules will require banks to hire up to 70,000 new compliance officers.65 A survey of the US Federal Register estimated that the 30 “Dodd–Frank rules” that had been introduced a year after the full Act came into force (representing no more than 10 percent of all “Dodd–Frank rules”) would require banks in the US to put in an extra 2,260,631 labor hours every year.66 In 2014, a study by PwC shows, almost 50 percent of companies across US industries increased the number of compliance officers, while only 5 percent of companies reduced them.67 This is disturbing news for anyone who does not view corporate guardians as having a positive impact on a corporation’s dynamism, experimentation, and innovation.

Undoubtedly, past regulations needed to change. At the same time, many of the new regulations did not bring more clarity but created a higher degree of complexity in both the concept of regulation and compliance with it. Again, the result is uncertainty for everyone. The new bank regulations that followed on from the so-called Basel III rules, for instance, allow for unhealthy levels of discretion for regulatory authorities, partly because they are so complex and ambiguous. Thomas Hoenig, as director of America’s Federal Deposit Insurance Corporation, claimed that the Basel capital rules were “more complicated than simple, more confusing than clear and more easily gamed than not.”9 Other regulators have made the point that to police these confusing rules, financial authorities demand so many submissions from banks about their operations that no one really knows what to do with all the information they receive.


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How to Speak Money: What the Money People Say--And What It Really Means by John Lanchester

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, asset allocation, Basel III, behavioural economics, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamond, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collective bargaining, commoditize, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Dava Sobel, David Graeber, disintermediation, double entry bookkeeping, en.wikipedia.org, estate planning, fear index, financial engineering, financial innovation, Flash crash, forward guidance, Garrett Hardin, Gini coefficient, Glass-Steagall Act, global reserve currency, high net worth, High speed trading, hindsight bias, hype cycle, income inequality, inflation targeting, interest rate swap, inverted yield curve, Isaac Newton, Jaron Lanier, John Perry Barlow, joint-stock company, joint-stock limited liability company, junk bonds, Kodak vs Instagram, Kondratiev cycle, Large Hadron Collider, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, low interest rates, margin call, McJob, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, negative equity, neoliberal agenda, New Urbanism, Nick Leeson, Nikolai Kondratiev, Nixon shock, Nixon triggered the end of the Bretton Woods system, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, plutocrats, Ponzi scheme, precautionary principle, proprietary trading, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Right to Buy, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Jobs, survivorship bias, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tragedy of the Commons, trickle-down economics, two and twenty, Two Sigma, Tyler Cowen, Washington Consensus, wealth creators, working poor, yield curve

I met him once, when we were on the TV current affairs show Newsnight together, and liked him, though you could tell the subdued man in his forties who’d spent years in jail and recovered from cancer was a different man from the trader in his twenties who destroyed the bank. As I’m writing, the Nikkei is still at less than 14,500, so twenty years on it’s still a distance below the level Leeson was betting on. Basel III Officially the Third Basel Accord, it is an ongoing attempt to come up with a set of rules for international banking. The idea underlying Basel III is to save banks from themselves by setting up rules that make it harder for them to go broke. It is a voluntary process, with a global remit, and both of those are good things since the risks of banking are carried internationally, thanks to the interlinked and interdependent nature of financial markets.

The trouble with the Basel process is twofold: it tends to focus on actions that would have prevented the last crisis, rather than on actions to prevent the next one; and it is vulnerable to lobbying from the powerful, and powerfully shameless, sector that it’s attempting to regulate. At the time of writing, the financial sector has succeeded in having the timetable for implementation of Basel III extended to 2019, and also in weakening the rules on the kinds of asset that banks are allowed to count on their balance sheets as being safe. basis point One hundredth of a percentage point. Basis points are used a lot in talking about interest rates. If an interest rate moves by 50 basis points it has moved by 0.5 percent.

Critics of modern banking prefer a simpler number, the leverage ratio or multiple between the bank’s simple equity—the number that stands out clearly in the chart above—and its assets. The banks hate that, because it makes them look less safe. Core capital is one of the central subjects at issue in the Basel III accords on banking; the gnomes of Basel call it Tier One and Tier Two equity. correlation and cause Confusing these two things is the commonest mistake not just in economics, not just in the social sciences and humanities more generally, but in how most of us think about life most of the time. When we observe two things going together, we seem to have a hardwired tendency to believe that one of them caused the other.


The Trade Lifecycle: Behind the Scenes of the Trading Process (The Wiley Finance Series) by Robert P. Baker

asset-backed security, bank run, banking crisis, Basel III, Black-Scholes formula, book value, Brownian motion, business continuity plan, business logic, business process, collapse of Lehman Brothers, corporate governance, credit crunch, Credit Default Swap, diversification, financial engineering, fixed income, functional programming, global macro, hiring and firing, implied volatility, interest rate derivative, interest rate swap, locking in a profit, London Interbank Offered Rate, low interest rates, margin call, market clearing, millennium bug, place-making, prediction markets, proprietary trading, short selling, statistical model, stochastic process, the market place, the payments system, time value of money, too big to fail, transaction costs, value at risk, Wiener process, yield curve, zero-coupon bond

Human beings are a major cause of problems in the lifecycle and so an analysis of the part they play and how they fit together can lead to a better understanding of the risks and create a more successful operation. CHAPTER 16 Regulation he greatest change that has occurred to trading in recent years has been the increase in regulation. The list of regulations such as EMIR, Dodd-Frank, UCITs, AIFMD and Basel III grows in depth and breadth to cover all aspects of trading and trade processes. The subject of regulation is too vast to be covered in any one volume. Here we present a taste of how regulation affects modern investment banking, referring the reader to specific articles and books for more detailed explanations.1 There are regulatory controls and initiatives across the globe, but overall there still remains less pressure in the Asia Pacific region and more in the Americas and Europe, the Middle East and Africa.

Major regulatory authorities Apart from central banks such as the Federal Reserve and the Bank of England who have their own supervisory responsibilities, many other regulatory authorities exist such as: SEC (US Securities and Exchange Commission) FDIS (US Federal Deposit Insurance Corporation) CFPB (US Consumer Financial Protection Bureau) BaFin (Federal Financial Supervisory Authority) FCA (UK Financial Conduct Authority) FSA (Japan, Financial Services Agency) AMF (France, Autorité des Marchés Financiers) FINMA (Switzerland, Financial Market Supervisory Authority) CSRC (China, China Securities Regulatory Commission). 16.2 WHAT REGULATORS REQUIRE Regulatory pressure on banks has been in the areas of liquidity, systemic risk, remuneration and market infrastructure. However new initiatives broaden the pressure to include capital, supervision, governance and culture and conduct. Liquidity Banks must keep a certain quantity of high-quality liquid assets to cover a period of stressed cashflows over a defined time period (Basel III stipulates 30 days). This is to ensure they can weather financial storms that tend to stress the organisations that have poor liquidity, even if they hold good longer-term assets and a healthy balance sheet. Although this seems like a simple rule to enforce, in practice it leads to many complications such as what is considered a liquid asset.

Regulation 205 A more far-reaching problem is that the cost of regulation may have exceeded its benefits and if the banks are cutting back on their total offering this can negatively impact economic growth. 16.4 RISK-WEIGHTED ASSETS The idea of risk-weighted assets is to adjust risk based on the riskiness of a bank’s assets. For example, loans that are secured by a letter of credit would be weighted riskier than a mortgage loan that is secured with collateral. Basel III allowed an internal model approach to credit, market and operational risk. Regulators started reducing this flexibility because: Banks have been too aggressive in using their own models to reduce weightings. Banks are using general cleaning up of data and other housekeeping to show risk-weighting optimisation.


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Stress Test: Reflections on Financial Crises by Timothy F. Geithner

Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, Atul Gawande, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Bernie Sanders, Black Monday: stock market crash in 1987, break the buck, Buckminster Fuller, Carmen Reinhart, central bank independence, collateralized debt obligation, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency risk, David Brooks, Doomsday Book, eurozone crisis, fear index, financial engineering, financial innovation, Flash crash, Goldman Sachs: Vampire Squid, Greenspan put, housing crisis, Hyman Minsky, illegal immigration, implied volatility, Kickstarter, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, market fundamentalism, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, Nate Silver, negative equity, Northern Rock, obamacare, paradox of thrift, pets.com, price stability, profit maximization, proprietary trading, pushing on a string, quantitative easing, race to the bottom, RAND corporation, regulatory arbitrage, reserve currency, Saturday Night Live, Savings and loan crisis, savings glut, selection bias, Sheryl Sandberg, short selling, sovereign wealth fund, stock buybacks, tail risk, The Great Moderation, The Signal and the Noise by Nate Silver, Tobin tax, too big to fail, working poor

Stronger New Global Shock Absorbers Capital Requirements Under Basel III The Basel III reforms dramatically increased the quantity and the quality of capital that banks have to hold, with even stronger requirements for systemically important banks. The reforms also redefined risk-weighted assets, so the full impact of the rules (right bar) effectively requires the biggest banks to hold more than twice as much Tier 1 capital and four times as much of the highest-quality common equity as they were required to hold before the crisis. Sources: Bank for International Settlements, Bloomberg, Federal Reserve Board, and company estimates. Basel III also introduced the first international leverage restrictions, another way of limiting risk-taking, and U.S. regulators have proposed even stricter limits for the biggest banks.

But imposing haircuts on secured creditors would mean that they could no longer count on the full value of their collateral to backstop their loan, making them far more likely to run for the exits during times of financial distress. 5 Chart, Stronger New Global Shock Absorbers: Basel I: Tier 1 Common requirement extrapolated from regulatory guidance that common equity should be the “dominant component” of the 6 percent Tier 1 Capital “well capitalized” standard. Basel III: 7 percent Tier 1 Common includes a 4.5 percent minimum and a 2.5 percent capital conservation buffer. Common capital surcharge reflects the 2.5 percent maximum surcharge currently applied to the largest global banks. The only U.S. bank currently in the 2.5 percent bucket is JPMorgan. In total, eight U.S. banks are subject to a common capital surcharge as of November 2013 under BIS standards, which will be phased in through 2019. Basel III Adjustments: In addition to increasing capital requirements, Basel III substantially increased the risk weights on certain types of assets and limited the extent to which various factors could count to the common equity requirement.

If we had unilaterally imposed strict new limits on risk, without encouraging higher standards globally, we simply would have reduced the market share of U.S. firms around the world, without making the global system more resilient. So starting at that G-20 summit in London, we began leading the push for tougher international financial reforms, including the new capital, leverage, and liquidity requirements that became known as Basel III; broader oversight of derivatives markets; and better ways to deal with the failures of global banks. This would require a messy, protracted process of behind-the-scenes diplomatic negotiation, but it would be absolutely crucial to strengthening the system. We would pursue the rest of our reforms in Washington, and the process there would be messy and protracted as well.


India's Long Road by Vijay Joshi

Affordable Care Act / Obamacare, barriers to entry, Basel III, basic income, blue-collar work, book value, Bretton Woods, business climate, capital controls, carbon tax, central bank independence, clean water, collapse of Lehman Brothers, collective bargaining, colonial rule, congestion charging, Cornelius Vanderbilt, corporate governance, creative destruction, crony capitalism, decarbonisation, deindustrialization, demographic dividend, demographic transition, Doha Development Round, eurozone crisis, facts on the ground, failed state, financial intermediation, financial repression, first-past-the-post, floating exchange rates, foreign exchange controls, full employment, germ theory of disease, Gini coefficient, global supply chain, global value chain, hiring and firing, income inequality, Indoor air pollution, Induced demand, inflation targeting, invisible hand, land reform, low interest rates, Mahatma Gandhi, manufacturing employment, Martin Wolf, means of production, microcredit, moral hazard, obamacare, Pareto efficiency, price elasticity of demand, price mechanism, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, quantitative easing, race to the bottom, randomized controlled trial, rent-seeking, reserve currency, rising living standards, school choice, school vouchers, secular stagnation, Silicon Valley, smart cities, South China Sea, special drawing rights, The Future of Employment, The Market for Lemons, too big to fail, total factor productivity, trade liberalization, Tragedy of the Commons, transaction costs, universal basic income, urban sprawl, vertical integration, working-age population

In response, tightening and harmonization of bank regulation was accelerated under the aegis of the BCBR, and the G20 gave the go-​ahead for implementation and phasing-​in of the so-​called Basel III standards by 2018. These require that banks keep more capital, and better-​quality capital, in relation to risk-​weighted assets than hitherto, as well as introduce an overall minimum leverage ratio.20 On cross-​border banks, Basel III has recommended that foreign branches of banks should be converted into subsidiaries in the host countries in order to separate their assets and liabilities more clearly from those of their parent banks.

Regulations are also being contemplated in several other areas such as ‘shadow banks’, derivatives, bank resolution, and banks that are ‘too big to fail’. India has adopted the Basel III capital adequacy and leverage standards, indeed slightly tougher ones, to err on the side of safety.21 The RBI has also issued guidelines on liquidity management, and the expectation is that it will go along with the Basel Committee’s liquidity ratios, and its regulations on shadow banking, derivatives trading etc., as and when they arrive. In addition, the more welcoming policy towards the entry of foreign banks, recently announced by the RBI, is predicated on their coming in as subsidiaries, exactly as Basel III has proposed. All this makes good sense as an accompaniment of further liberalization of the financial sector.

It remains to be seen whether India will try to marshal its limited foreign aid resources through bilateral channels, and those small multilateral institutions where it has a leadership role, or operate through large global institutions where its voice is relatively limited. 19. See Joshi (2009), Joshi and Patel (2009), and Kapur, Khosla, and Mehta (2009). 20. The main ratios mandated by Basel III for banks are as follows: i) the minimum ratio of capital to risk-​weighted assets (CRWA) goes up from 8 per cent to 10.5 per cent, of which the extra 2.5 per cent is a ‘capital conservation buffer’; ii) the common equity component of CRWA goes up from 2.0 to 4.5 percentage points (7 per cent inclusive of the capital conservation buffer); iii) on top of the CRWA there is to be a ‘counter-​cyclical buffer’ of up to 2.5 percentage points, to be imposed by policymakers, if necessary, for ‘macro-​prudential purposes’ (to moderate a boom); iv) separately from all of the above, banks will have to maintain a minimum leverage ratio (i.e. ratio of equity capital to assets not weighted by risk).


pages: 554 words: 158,687

Profiting Without Producing: How Finance Exploits Us All by Costas Lapavitsas

Alan Greenspan, Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, borderless world, Branko Milanovic, Bretton Woods, business cycle, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, computer age, conceptual framework, corporate governance, credit crunch, Credit Default Swap, David Graeber, David Ricardo: comparative advantage, disintermediation, diversified portfolio, Erik Brynjolfsson, eurozone crisis, everywhere but in the productivity statistics, false flag, financial deregulation, financial independence, financial innovation, financial intermediation, financial repression, Flash crash, full employment, general purpose technology, Glass-Steagall Act, global value chain, global village, High speed trading, Hyman Minsky, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, job satisfaction, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, London Interbank Offered Rate, low interest rates, low skilled workers, M-Pesa, market bubble, means of production, Minsky moment, Modern Monetary Theory, Money creation, money market fund, moral hazard, mortgage debt, Network effects, new economy, oil shock, open economy, pensions crisis, post-Fordism, Post-Keynesian economics, price stability, Productivity paradox, profit maximization, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Robert Solow, savings glut, Scramble for Africa, secular stagnation, shareholder value, Simon Kuznets, special drawing rights, Thales of Miletus, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, total factor productivity, trade liberalization, transaction costs, union organizing, value at risk, Washington Consensus, zero-sum game

The characteristic feature of Basel II introduced in 2004 but receiving a comprehensive form in 2006 was to incorporate both market and operational risk in its stipulations.25 The crisis of 2007, irrespective of its origins, is prima facie evidence of the failure of Basel II. One consequence, therefore, has been the further development of the regulatory framework through the Basel III Accord that began to take shape in 2010–2011. The underlying logic of Basel III is similar to that of the previous two accords: market-conducive regulation designed by the financial system and aiming to strengthen the solvency of individual financial institutions by improving capital adequacy. One important difference, however, is the stronger emphasis on risk deriving from open market trading particularly in connection with derivatives.

In the years of financialization the conventional wisdom of banks has been given a computationally intensive scientific veneer, often with the use of mathematical formulae borrowed from physics.18 Regulatory changes in accounting systems, including mark-to-market, have reinforced the practice of continuous quantitative measurement of risk on bank balance sheets, thus determining required levels of bank capital. This approach to regulation has been institutionalized in the accords known as Basel I and II, which have been under review to form Basel III. The Basel Accords are instances of market-conforming regulation, essentially formed by banks for banks and promulgated internationally by bodies that have only loose connections with nation states.19 The Accords have been the product of the Bank for International Settlements (BIS) a body established to promote cooperation among central banks through a variety of institutional methods, including regular meetings.

The integration of derivative instruments into the accounting practices of banks has been instrumental in creating these new risks, a development that has become gradually evident in the 2000s. The change has been codified through the credit valuation adjustment desks which use mark-to-market practices to simulate changes in the value of the entire portfolio of trades for each counterparty to transactions, and including correlations between risk factors.26 Basel III has included credit valuation adjustment considerations directly in the accord with the aim of further improving capital adequacy.27 Irrespective of the eventual effectiveness of the new accord, the outcome will be the further legitimation of mark-to-market practices and thus the strengthening of the turn of banks toward trading in open markets.


Where Does Money Come From?: A Guide to the UK Monetary & Banking System by Josh Ryan-Collins, Tony Greenham, Richard Werner, Andrew Jackson

bank run, banking crisis, banks create money, Basel III, Big bang: deregulation of the City of London, book value, Bretton Woods, business cycle, capital controls, cashless society, central bank independence, credit crunch, currency risk, double entry bookkeeping, en.wikipedia.org, eurozone crisis, fiat currency, financial innovation, fixed income, floating exchange rates, Fractional reserve banking, full employment, global reserve currency, Goodhart's law, Hyman Minsky, inflation targeting, interest rate derivative, interest rate swap, Joseph Schumpeter, low skilled workers, market clearing, market design, market friction, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Northern Rock, offshore financial centre, Post-Keynesian economics, price mechanism, price stability, proprietary trading, purchasing power parity, quantitative easing, Real Time Gross Settlement, reserve currency, Ronald Reagan, seigniorage, special drawing rights, the payments system, trade route, transaction costs

Capital can also include liabilities that are, for regulatory purposes, allowed to be substituted for equity capital, such as subordinated (long-term) debt. Subordinated debt is the liability banks owe to the purchasers of their bonds, who have accepted the risk that if a bank falls into difficulty it may default on its bonds which may therefore become worthless. The most recent international regulations (Basel III) incorporate subordinated debt as an allowable form of capital (Chapter 5). Note that capital does not represent a physical pool of cash, as the funds are in practice invested. It is an entirely different concept from liquidity. Solvency is determined by whether you have sufficient capital to cover losses on your assets.

There is no intention to help authorities maintain consistency between the quantity of credit created and underlying economic activity, or to ensure a particular allocation of credit. The recent banking crisis, however, has shown that they do not fulfil even the limited goals of assuring bank solvency. It remains to be seen whether the latest round of revised Basel rules (known as Basel III) is an improvement. According to the rules, banks must set aside a certain amount of capital every time they make a loan. Capital can be derived from retained profits or money raised from investors, including, as we discussed in Chapter 4, the owners of the bank: the shareholders. This is also called the own capital or own funds of the bank.

Meanwhile, banking bailouts have increased government borrowing and national debt, whereas bailouts funded by the central bank would not have created any liabilities for taxpayers. Despite, or perhaps because of the success of internationally co-ordinated government action to avoid widespread banking collapses, the underlying weaknesses of an unregulated, off-balance-sheet credit system have not been addressed. Since the crash, Basel III and other efforts at regulatory reform have instead focused very heavily on the capital and liquidity provisions of commercial banks. 5.4. The financial crisis as a solvency and liquidity crisis The financial crisis revealed both the fragility of depending too much on the interbank lending market for liquidity and, hence, the weakness of the Bank’s dependence on attempting to influence commercial bank money creation indirectly through changes to Bank of England rate and open market operations (OMOs), as described in Chapter 4.


pages: 205 words: 55,435

The End of Indexing: Six Structural Mega-Trends That Threaten Passive Investing by Niels Jensen

Alan Greenspan, Basel III, Bear Stearns, declining real wages, deglobalization, disruptive innovation, diversification, Donald Trump, driverless car, eurozone crisis, falling living standards, fixed income, full employment, Greenspan put, income per capita, index fund, industrial robot, inflation targeting, job automation, John Nash: game theory, liquidity trap, low interest rates, moral hazard, offshore financial centre, oil shale / tar sands, old age dependency ratio, passive investing, Phillips curve, purchasing power parity, pushing on a string, quantitative easing, regulatory arbitrage, rising living standards, risk free rate, risk tolerance, Robert Solow, secular stagnation, South China Sea, total factor productivity, working-age population, zero-sum game

Thirdly, trade finance, which is an investment strategy that provides export – and sometimes also import – finance, mostly to companies in emerging markets. Across Asia, not unlike Europe, banks have pulled away from much of this business in recent years, as they continue to repair their balance sheets in preparation for Basel III and IV60. The tightening of banking supervision rules is not likely to end any time soon, as regulators are keen to avoid another 2008. Expect more to come after Basel III and IV have been implemented. An altogether different approach would be to invest in old world consumer brands, which appear to be in high demand in the East. Some would argue that old world property should also benefit from this trend, but I am not entirely convinced.

* * * 57 Source: The Economist (2015). 58 I would not for one second suggest that the average American is better off economically than the average Western European; the difference in food spending between the two continents is simply a function of different food cultures. The take-away culture keeps US food spending down, as money spent on restaurants and take-aways is not included in these numbers. 59 Source: United Nations (2014). 60 Basel IV is effectively the full implementation of Basel III. 7. The Death of Fossil Fuels Fossil fuels have been the key driver of economic growth since the Industrial Revolution. In this chapter, I argue that fossil fuels have come to the end of the road, and that the introduction of a new and much cheaper energy form is the key to get the economy going again.


pages: 481 words: 120,693

Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else by Chrystia Freeland

"World Economic Forum" Davos, activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, algorithmic trading, assortative mating, banking crisis, barriers to entry, Basel III, battle of ideas, Bear Stearns, behavioural economics, Bernie Madoff, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, Black Swan, Boris Johnson, Branko Milanovic, Bretton Woods, BRICs, Bullingdon Club, business climate, call centre, carried interest, Cass Sunstein, Clayton Christensen, collapse of Lehman Brothers, commoditize, conceptual framework, corporate governance, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Deng Xiaoping, disruptive innovation, don't be evil, double helix, energy security, estate planning, experimental subject, financial deregulation, financial engineering, financial innovation, Flash crash, Ford Model T, Frank Gehry, Gini coefficient, Glass-Steagall Act, global village, Goldman Sachs: Vampire Squid, Gordon Gekko, Guggenheim Bilbao, haute couture, high net worth, income inequality, invention of the steam engine, job automation, John Markoff, joint-stock company, Joseph Schumpeter, knowledge economy, knowledge worker, liberation theology, light touch regulation, linear programming, London Whale, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, Max Levchin, Mikhail Gorbachev, Moneyball by Michael Lewis explains big data, NetJets, new economy, Occupy movement, open economy, Peter Thiel, place-making, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, postindustrial economy, Potemkin village, profit motive, public intellectual, purchasing power parity, race to the bottom, rent-seeking, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, self-driving car, seminal paper, Sheryl Sandberg, short selling, Silicon Valley, Silicon Valley billionaire, Silicon Valley startup, Simon Kuznets, sovereign wealth fund, starchitect, stem cell, Steve Jobs, TED Talk, the long tail, the new new thing, The Spirit Level, The Wealth of Nations by Adam Smith, Tony Hsieh, too big to fail, trade route, trickle-down economics, Tyler Cowen: Great Stagnation, wage slave, Washington Consensus, winner-take-all economy, zero-sum game

The FSB’s big job at the moment is refining and implementing new international bank capital rules. These regulations, known as Basel III, have taken on particular importance because a lack of capital in many U.S. and European banks was a central cause of the 2008 financial meltdown. Meetings of bankers are generally pretty dry affairs, and relatively large international gatherings of this sort, whose participants don’t know one another well, are usually even more decorous. But this particular conversation soon heated up. Jamie Dimon, CEO of JPMorgan Chase, told Carney he thought the proposed Basel III rules were “cockamamie nonsense.” In fact, the bank chief said, the rules ran counter to the national interest.

If some institutions feel pressure today, it is because they have done too little for too long, rather than because they are being asked to do too much too soon,” Carney said. “Everyone is claiming to be a Boy Scout while accusing others of juvenile delinquency,” he said. “However, neither merit badges nor detentions will be self-selected but, rather, determined by impartial peer review and mutual oversight.” Dimon and Carney were fighting about a lot of money: the Basel III requirements would significantly increase JPMorgan’s cost of doing business and could cut into its profits. But much more is at stake than JPMorgan’s balance sheet. That weekend exchange is a telling moment in the story of the plutocrats’ relationship with the state—more significant, even, than high-profile wrangling over taxes on the plutocracy, like carried interest or the charge on large estates.

The complete loss of confidence in private finance—your membership—could only be arrested by the provision of comprehensive backstops by the richest economies in the world. With about $4 trillion in output and almost twenty-eight million jobs lost in the ensuing recession, the case for reform was clear then and remains so today.” Carney then cited a Bank of Canada calculation that found that “even if Basel III were to reduce slightly the probability of such crises in the future,” the economic value of that decreased risk to the G20 countries would be about $13 trillion. In other words, this may hurt your business a little, but it will help the economy as a whole a lot. Luigi Zingales, a professor at the University of Chicago’s Booth School of Business, frames this as the choice between being promarket and being probusiness.


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The Making of Global Capitalism by Leo Panitch, Sam Gindin

accounting loophole / creative accounting, active measures, airline deregulation, Alan Greenspan, anti-communist, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Basel III, Bear Stearns, Big bang: deregulation of the City of London, bilateral investment treaty, book value, Branko Milanovic, Bretton Woods, BRICs, British Empire, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon credits, Carmen Reinhart, central bank independence, classic study, collective bargaining, continuous integration, corporate governance, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, dark matter, democratizing finance, Deng Xiaoping, disintermediation, ending welfare as we know it, eurozone crisis, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, foreign exchange controls, full employment, Gini coefficient, Glass-Steagall Act, global value chain, guest worker program, Hyman Minsky, imperial preference, income inequality, inflation targeting, interchangeable parts, interest rate swap, Kenneth Rogoff, Kickstarter, land reform, late capitalism, liberal capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low interest rates, manufacturing employment, market bubble, market fundamentalism, Martin Wolf, means of production, military-industrial complex, money market fund, money: store of value / unit of account / medium of exchange, Monroe Doctrine, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, new economy, Nixon triggered the end of the Bretton Woods system, non-tariff barriers, Northern Rock, oil shock, precariat, price stability, proprietary trading, quantitative easing, Ralph Nader, RAND corporation, regulatory arbitrage, reserve currency, risk tolerance, Ronald Reagan, Savings and loan crisis, scientific management, seigniorage, shareholder value, short selling, Silicon Valley, sovereign wealth fund, special drawing rights, special economic zone, stock buybacks, structural adjustment programs, subprime mortgage crisis, Tax Reform Act of 1986, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, vertical integration, very high income, Washington Consensus, We are all Keynesians now, Works Progress Administration, zero-coupon bond, zero-sum game

By contrast, in September 2009, less than a year after the 2008 G20 meeting in Washington, the BIS Committee arrived at a framework for Basel III, and this was endorsed by the G20 the following year at its November 2010 meeting in Seoul. Indeed, the fact that Dodd-Frank largely left the specifics of new capital-adequacy requirements to be worked out by the Basel Committee already reflected Washington’s confidence that an international consensus would quickly be reached which, like Dodd-Frank itself, would not disturb the basic pillars of the existing regulatory system. Despite the fact that more emerging market states, including China, were now involved, the Basel III framework did not depart from the basic principles of Basel I and II.

“Alternatives such as bank taxes, breaking up banks seen as too big to fail, or the separation of deposit taking and investment banking activities, have not made it onto the agenda.”94 Basel III was deliberately constructed to produce a greater symmetry between national and international regulations than in the past, but the accord still left room for further contention and compromise as to the form in which these would actually be applied by individual states, and the schedule for full implementation was stretched out over nine years. This was much longer than the US Treasury and Fed would have preferred and, especially in light of the fact that the largest US banks had already more than reached the capital-adequacy levels specified in Basel III, it did not take long before they were exerting pressure on other states to speed up implementation along US lines.

,” New York Times, May 29, 2011. 91 Li Daokui, quoted in Mark MacKinnon, “China Sees Yuan Becoming Third Global Currency,” Globe and Mail, June 4, 2011. 92 Just as this book was being completed, Charles Goodhardt published The Basel Committee on Banking Supervision: A History of the Early Years, 1974–97, Cambridge, UK: CUP, 2011. 93 See Walter W. Eubanks, “The Status of the Basel III Capital Adequacy Accord,” Congressional Research Service, October 28, 2010. The biggest source of contention during the negotiations centered around types of capital that would be considered top-quality reserve holdings, and the imposition of a 40 percent cap on the use of highly-rated securities as liquid assets. 94 Tony Porter, “Third Time Lucky or Out after Three Strikes? The Political Significance of the Basel III Transnational Standards for Bank Regulation,” paper prepared for presentation at the Canadian Political Science Association meeting, May 18, 2011, p. 2. 95 The quotations in this paragraph are from Andrew Walters, “Chinese Attitudes towards Global Regulatory Co-operation: Revisionist or Status Quo,” in Helleiner, Pagliari and Zimmermann, Global Finance in Crisis, pp. 154, 162, 168. 96 For a particularly scathing attack on Geithner’s June 2011 speech to the International Monetary Conference in this respect, see Simon Johnson, “The Banking Emperor Has No Clothes,” New York Times Economix Blog, June 9, 2011. 97 See Tom Braithwaite, Brooke Masters, and Jeremy Grant, “Financial Regulation: A Shield Asunder,” Financial Times, May 20, 2011.


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Economists and the Powerful by Norbert Haring, Norbert H. Ring, Niall Douglas

accounting loophole / creative accounting, Affordable Care Act / Obamacare, Alan Greenspan, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bear Stearns, Bernie Madoff, book value, British Empire, buy and hold, central bank independence, collective bargaining, commodity trading advisor, compensation consultant, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, information asymmetry, Jean Tirole, job satisfaction, Joseph Schumpeter, Kenneth Arrow, knowledge worker, land bank, law of one price, light touch regulation, Long Term Capital Management, low interest rates, low skilled workers, mandatory minimum, market bubble, market clearing, market fundamentalism, means of production, military-industrial complex, minimum wage unemployment, Money creation, moral hazard, new economy, obamacare, old-boy network, open economy, Pareto efficiency, Paul Samuelson, pension reform, Ponzi scheme, price stability, principal–agent problem, profit maximization, purchasing power parity, Renaissance Technologies, Robert Solow, rolodex, Savings and loan crisis, Sergey Aleynikov, shareholder value, short selling, Steve Jobs, The Chicago School, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tragedy of the Commons, transaction costs, ultimatum game, union organizing, Vilfredo Pareto, working-age population, World Values Survey

Interestingly, in both the UK and Switzerland, steps to force primary loss-absorbing capacity for “too big to fail” banks to more than twice that required by Basel III (to around 15–20 percent), and the separation of deposit operations from all other kinds of banking as the sole kind protected by government guarantee, are well under way – and up to the time of writing the dire warnings from bankers that banks would relocate in response have been ignored by policymakers. Unfortunately, the Fed has elected to implement the minimum required by Basel III for most banks, and is still deciding what capacity will apply to the eight largest “too big to fail” banks.

To get there, central banks should not withdraw the abundant amount of central bank money they have created to combat the financial crisis, but rather they should raise the minimum reserve requirement (the cash balances that banks have to hold with the central bank) as the crisis abates. In effect, the composition of all money would be changed in favor of money created by central banks. Increasing liquidity requirements for banks is at least as important as fiddling with capital requirements, the overwhelming focus of banking regulation so far. The Basel III Accord of 2010–11 does have some liquidity requirements, but they are far from stringent and appear to assume in their design the availability of government bailouts after 30 days of trouble beginning. Nevertheless, banks are fighting them tooth and claw, as there is nothing that they detest more than any impediment to this highly lucrative prerogative of creating money.

D. 13 American Economic Association ix, 10, 17, 20, 26–7, 44 American Economic Review 8, 20, 26–7 American International Group (AIG) 70, 90–91 Anglo-Saxon economics ix Arrow, Kenneth 7, 23–4, 212; see also impossibility theorem (Arrow’s) asset bubble 104 asymmetric information: see information, asymmetric AT&T 147 authoritarianism 24, 210 average cost 148, 151 Bank of America 77, 86, 94 barriers to entry 54, 160 Basel III Accord 104–5 Bear Stearns 90, 96, 107, 111 Becker, Gary S. 186 Bemis, Edward 9–10 Bentham, Jeremy 11 Berlin, Isaiah 25 Bernays, Edward 15–17 Bill of Rights (US) 208 Bolsa Família program 41 Boskin Commission 36 Bourdieu, Pierre 25, 115, 160 Bridgestone (tire manufacturer) 163–4, 166–7 British Empire ix, 16, 100 Buchanan, James 23–4 Buffett, Warren 93, 107–9 Bullionists 2 Bureau of Labor Statistics 32–3, 35 capitalism vii–viii, ix, 2, 5–6, 10, 18–19, 21, 31, 46, 142, 153, 158, 165 central bank 43, 67, 79–88, 104–5 CEO: see chief executive officer (CEO) Chicago, University of 10, 17, 19, 26, 27, 44, 80, 84, 168, 186, 193 chief executive officer (CEO) xi, 16, 47, 61, 70, 93, 95–6, 103, 107–13, 115–27, 132, 138–9, 215, 217 Chrysler xi, 113 Citicorp (bank) 43 Citigroup (bank) xi, 61, 63, 96, 105, 112, 125 Clark, John Bates 6, 10–11, 155, 193 classical value theory 5 Cold War 2, 18, 21, 25–8, 46 collective bargaining 185 Commodity Futures Trading Commission (CTFC) 90, 92 Commons, John R. 8–10 communism xii, 2, 19, 21, 25, 139 comparative advantage 4 Condorcet, Marquis de 23 conflict 165 consumption viii, 11, 13, 32, 78, 158, 192, 203, 211 control fraud 94–5 convergence vii 242 ECONOMISTS AND THE POWERFUL cooperation 73–5, 165, 167, 170, 198 cooperative 102 Cornell University 10 corporate elite x, xii, 115, 117, 140 corporate governance 92, 119, 127, 135, 136 corporate government 135 corporate management 109 corporation tax 139 corruption 220 credit x, xi, 29, 48–50, 59–60, 62, 65, 71, 73, 75, 77–84, 90–91, 95–8, 100, 104, 110, 149, 183 credit default swap 91, 93 CTFC: see Commodity Futures Trading Commission (CTFC) Darwinism 167 Debreu, Gerard 7 demand curve 146 democracy 18, 207, 211–13, 220 depreciation 33, 147 derivatives 67, 90–93, 96–7 Deutsche Bank 105, 121 disability adjusted life expectancy vii discrimination 130, 186–7 earnings management 129–30 economic growth xi, 80 economic policy xi, 46, 66, 76, 152 economic utility 4–5, 13 economics, mainstream viii, x–xi, xiii, 1, 29, 47, 136, 145, 164, 170, 208, 211, 214 economics, neoclassical ix, xii, 6, 8, 10–11, 13, 21–2, 25, 30, 38, 42, 45, 141, 143–4, 153–5, 157–60, 163–4, 168, 170–71, 173, 180–82, 188, 191–2, 210, 213 economies of scale 3, 54, 152, 161 economies of scope 54 Edgeworth, Francis Y. 10 efficiency vii, x, xi, xii, 13, 19, 25, 39, 43, 48, 62, 73, 101, 108, 136–7, 143, 144, 146–7, 149, 156, 160, 170, 176, 179, 183, 190, 193, 197, 202–4, 216, 219 efficient markets x Ely, Richard T. 9–10 employment protection 188, 200–203, 205 Enron 52, 92, 98, 110, 128, 132, 217 entrenchment 126, 135 equality of opportunity vii–ix, xii, 37, 39–41, 45, 53, 114, 124, 172 equality of outcome vii equilibrium x, 6–7, 37, 47, 146, 159, 161, 181–2, 197, 208 euro ix, 67, 82, 102 European Central Bank 103, 189, 215 European Commission/Union 67, 152 executive compensation 120–21, 138 exploitation 6, 156, 209, 212 exports 2, 34, 180–81 fairness ix, 13, 37, 39–40, 160, 164–6, 169–70, 177, 220 Fannie Mae (US government subsidizer of mortgages) 217 fear, uncertainty, doubt (FUD) 145 Federal Reserve (US) 43–4, 69–70, 85, 87–92, 143, 215 feedback loop 40, 216, 220 fiat money 75, 81 filibuster (US antilegislative maneuver) 218 financial industry xi, 44, 46–8, 51, 54–6, 64, 70, 89, 91–2, 121, 129, 217 financial markets xi, 47, 92, 108, 110, 128 financial rating agencies: see rating agencies financial sector xi, 43–4, 47–8, 53–4, 60, 64, 69, 79, 81, 83, 88–9, 100–101, 103, 105 Financial Stability Board 103 First (Workingmen’s) International 5 first mover advantage 132 Fisher, Irving 10, 13, 60, 75, 81, 83–4, 214 Fitch (ratings agency) 97 fixed costs 143 INDEX Fortune (magazine) 128 Fortune 500 (index) 49, 139 forwards (financial instrument) 67 founding fathers (of the United States) 207, 218 Freddie Mac (US government subsidizer of mortgages) 217 free market 6–7, 24, 46, 84, 147, 188, 193, 209 free riding 24, 37, 164 free trade 3–4, 16, 46, 209 freedom viii, 10, 18, 21, 25, 80, 94, 188, 191, 218 Freud, Sigmund 15 Friedman, Milton 44, 57, 81 front running (trading strategy) 65–6 FUD: see fear, uncertainty, doubt (FUD) fund managers 56–8, 63–4, 68, 134 futures (financial instrument) 67 Galbraith, John Kenneth 11, 74 GDP: see gross domestic product (GDP) General Motors xi, 16, 184–5 global financial crisis ix, 90; see also Great Financial Crisis God 24 gold 2, 72–7, 79–80, 86–7, 89 golden parachutes 112 Goldman Sachs 47, 49, 54, 56, 63, 66, 69, 88, 93, 105, 121, 215 goodwill 131 Great Depression 11, 70, 80, 138–9, 181, 204 Great Financial Crisis 79, 100, 111, 136; see also global financial crisis gross domestic product (GDP) vii–ix, xi, 28–31, 143 growth 27–8, 31, 33, 35, 39, 71, 90, 102, 108, 128, 132, 135, 151, 195, 203–4 Hadley, Arthur 10 happiness 202 Harvard Business Review 17–18 Harvard University 17–18, 26, 109, 208 243 hedge fund 29, 43, 46, 53, 58, 64–8, 92, 96, 101, 107 hedonic method 33–6 Hicks, John 13–14, 21 Homo economicus 164–6, 173 hostile takeovers 126 human capital 128 imports 2, 12, 34, 35 impossibility theorem (Arrow’s) 23–4, 212–13 incentives 39–40, 42–5, 52, 91, 93, 109, 114–15, 129, 132, 140, 172–4, 177, 182, 214 income guarantee 41 incompleteness viii, 12, 49, 145, 169, 184 incumbency 121, 134, 149 index tracking fund 55, 58 indifference 141, 168 industrial goods 2–3, 142 industrial production 2, 179 Industrial Revolution 5, 143, 181 inequality vii, 40, 138, 140 inflation 32–3, 36, 50, 78, 81, 104, 109, 120 information advantage 48, 131 information, asymmetric x, 191 information costs 144 information goods 143 information, imperfect x, xii, 142, 145, 149, 220 information technology 34, 218 innovation 34, 43, 147, 150–52, 160, 208 insider information 53–4, 62–3, 131 insider knowledge 131 insider trading 63–4, 131 institutionalism 8, 21 insurance xi, 39, 69, 82, 89–91,152, 189, 198, 204, 210 interest rate, real 50, 159 International Monetary Fund 27, 31, 48, 69, 74 International Workingmen’s Association 5 244 ECONOMISTS AND THE POWERFUL investment 32–3, 37, 41, 51, 56–7, 68, 78, 96–100, 103–4, 128–30, 133, 135, 140, 157, 184, 217 advice 51, 54, 56, 129 banking 29, 43, 47, 51, 52, 54, 55, 60–62, 64, 70–71, 89–90, 93, 94, 96, 97, 101, 107, 111–12, 125, 132 personal viii irrationality vii, 1, 13, 16, 38, 40, 151, 205, 211–12 Ivy League 27 Jevons, William Stanley 5, 16 job security viii, 108, 199–200, 202–4 J.P.


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Messy: The Power of Disorder to Transform Our Lives by Tim Harford

affirmative action, Air France Flight 447, Airbnb, airport security, Albert Einstein, Amazon Mechanical Turk, Amazon Web Services, assortative mating, Atul Gawande, autonomous vehicles, banking crisis, Barry Marshall: ulcers, Basel III, Berlin Wall, Bletchley Park, British Empire, Broken windows theory, call centre, Cass Sunstein, Chris Urmson, cloud computing, collateralized debt obligation, Computing Machinery and Intelligence, crowdsourcing, deindustrialization, Donald Trump, Erdős number, experimental subject, Ferguson, Missouri, Filter Bubble, financial engineering, Frank Gehry, game design, global supply chain, Googley, Guggenheim Bilbao, Helicobacter pylori, high net worth, Inbox Zero, income inequality, industrial cluster, Internet of things, Jane Jacobs, Jeff Bezos, Loebner Prize, Louis Pasteur, machine readable, Marc Andreessen, Mark Zuckerberg, Menlo Park, Merlin Mann, microbiome, out of africa, Paul Erdős, Richard Thaler, Rosa Parks, self-driving car, side project, Silicon Valley, Silicon Valley startup, Skype, Steve Jobs, Steven Levy, Stewart Brand, Susan Wojcicki, tacit knowledge, TED Talk, telemarketer, the built environment, The Death and Life of Great American Cities, the strength of weak ties, Turing test, Tyler Cowen, urban decay, warehouse robotics, William Langewiesche

Rather than competing in a natural way, investing in real projects all over the world, banks tended to try to squeeze through the same loopholes—lending money to Greece, buying subprime derivatives—and so all found themselves in distress at the same time for the same reason. Has follow-up legislation solved the problem? Perhaps; the post-crisis Basel III agreement is more conservative than Basel II. But it is also more complex. Basel III is twice as long as Basel II, and domestic legislation such as the Dodd-Frank Act in the United States is even longer—tens of thousands of pages. The lesson of Basel II seems to be that making targets more complex doesn’t stop their being gamed—it merely leads to their being gamed in more complex and unpredictable ways

His question was this: What if these ever more refined attempts to quantify risk were useless—or worse?16 Haldane reviewed what was known about banks that had gone bankrupt in the crisis, and how safe they had looked earlier according to the various sophisticated criteria laid out in Basel II and Basel III. He compared those numbers with the crudest possible measure of risk: Had the bank borrowed a lot of money? At an annual convocation of central bankers at Jackson Hole, Wyoming, Haldane presented his conclusions: every single way you sliced the data, the highly rational, hyper-quantified risk management methods were less effective than a crude rule of thumb: “Beware indebted banks.”


Firefighting by Ben S. Bernanke, Timothy F. Geithner, Henry M. Paulson, Jr.

Asian financial crisis, asset-backed security, bank run, Basel III, Bear Stearns, break the buck, Build a better mousetrap, business cycle, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Doomsday Book, financial deregulation, financial engineering, financial innovation, Glass-Steagall Act, housing crisis, Hyman Minsky, income inequality, invisible hand, Kenneth Rogoff, labor-force participation, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, opioid epidemic / opioid crisis, pets.com, price stability, quantitative easing, regulatory arbitrage, Robert Shiller, Savings and loan crisis, savings glut, short selling, sovereign wealth fund, special drawing rights, tail risk, The Great Moderation, too big to fail

The Obama administration and the Fed worked hard to achieve those goals, negotiating with Congress over the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 for the United States, while leading a global effort to apply tougher constraints on risk taking across the largest economies. And in those areas, the negotiations produced much more robust defenses against potential crises. The Basel III global regulatory regime tripled the minimum capital requirements for banks and quadrupled them for the largest banks, while also requiring higher-quality capital that could truly absorb losses, ensuring that the global system would have much hardier shock absorbers. The standards the Fed crafted for U.S. banks were even tougher.

See also Troubled Assets Relief Program (TARP) auto industry, 92, 95, 97, 103, 105, 107–8 backstops and arsenal for dealing with future crises, 120–21 and Bear Stearns rescue, 50 and causes of financial crisis, 4–5 and Fannie Mae/Freddie Mac conservatorship, 57 and Lehman failure, 67 and onset of financial crisis, 2 and policy responses to crisis, 170–73 and TARP, 88 Bagehot, Walter, 34, 36, 39, 48–49, 119 Bair, Sheila, 81, 88, 90–91 Baldwin, James, 7 bank holding companies, 78, 88, 157, 173, 209 Bank of America and causes of financial crisis, 4 and Countrywide sale, 40 and expansion of crisis, 157 and federal asset guarantees, 178 government investment in, 176, 177 and Lehman failure, 66–67 and onset of financial crisis, 155 and policy responses to crisis, 97 and post-crisis reforms, 115 private capital raised during crisis, 175, 181 and stress tests, 180 and TARP, 95, 96 and taxpayer profit from rescue, 208 Bank of England, 35, 89, 155, 196, 197 Bank of Japan, 196 Bank of New York Mellon (BoNY), 39–40, 175, 176, 181 bankruptcies, 69, 73, 74, 95. See also specific financial institutions Barclays, 66, 67–68 Basel III global regulatory regime, 113 Bear Stearns and acceleration of crisis, 22 and arsenal for dealing with future crises, 119, 121 and early stages of financial crises, 33 and Fannie Mae/Freddie Mac conservatorship, 55, 56 and Lehman failure, 61–62, 63 management firings, 73 and onset of financial crisis, 31, 155 and post-crisis reforms, 115 regulatory agency overseeing, 46–47 rescue of, 47–54 and stress tests, 102 Bernanke, Ben and acceleration of crisis, 24 and AIG rescue, 74–75 and arsenal for dealing with future crises, 120, 123 and Bear Stearns rescue, 50, 54 and Countrywide sale, 39 and early stages of financial crises, 33 and expansion of crisis, 76 and expansion of emergency authorities, 79–80 and Fannie Mae/Freddie Mac conservatorship, 57, 60 Great Depression expertise, 13, 109 and Lehman failure, 70 and monetary stimulus efforts, 43 and onset of financial crisis, 1, 30 and policy responses to crisis, 97, 98, 99, 103 and post-crisis reforms, 112, 118 and shortcomings of U.S. regulatory regime, 28–29 and spark of crisis, 16 and TARP, 89, 93, 94, 96 and Term Securities Lending Facility, 44–45 and theoretical approaches to financial crises, 34–36, 38 BlackRock, 50 Blankfein, Lloyd, 77 BNP Paribas, 32, 35, 155 Boehner, John, 44 bridge loans, 66, 68–69 Brookings Papers on Economic Activity, 107 bubbles and acceleration of crisis, 21–22 and causes of financial crisis, 4 and effects of liquidity crunch, 43 and onset of financial crisis, 30 and post-crisis reforms, 117 and roots of financial crisis, 12 and theoretical approaches to financial crises, 37 budget deficits, 104, 124–25 Buffett, Warren, 78 Bunning, Jim, 51, 58 Bush, George W.


pages: 405 words: 109,114

Unfinished Business by Tamim Bayoumi

Alan Greenspan, algorithmic trading, Asian financial crisis, bank run, banking crisis, Basel III, battle of ideas, Bear Stearns, behavioural economics, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, book value, Bretton Woods, British Empire, business cycle, buy and hold, capital controls, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, currency peg, Doha Development Round, facts on the ground, Fall of the Berlin Wall, financial deregulation, floating exchange rates, full employment, Glass-Steagall Act, Greenspan put, hiring and firing, housing crisis, inflation targeting, junk bonds, Just-in-time delivery, Kenneth Rogoff, liberal capitalism, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, market bubble, Martin Wolf, moral hazard, oil shale / tar sands, oil shock, price stability, prisoner's dilemma, profit maximization, quantitative easing, race to the bottom, random walk, reserve currency, Robert Shiller, Rubik’s Cube, Savings and loan crisis, savings glut, technology bubble, The Great Moderation, The Myth of the Rational Market, the payments system, The Wisdom of Crowds, too big to fail, trade liberalization, transaction costs, value at risk

Basel Committee on Banking Supervision (2005a): “The Application of Basel II to Trading Activities and the Treatment of Double Default Effects”, July 2005. Basel Committee on Banking Supervision (2005b): “Amendment to the Capital Accord to Incorporate Market Risks”, November 2005. Basel Committee on Banking Supervision (2006): “Results of the Fifth Quantitative Impact Study (QIS 5)”, June 2006. Basel Committee on Banking Supervision (2011): “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems”, December 2010, revised June 2011. Bastasin (2015): Carlo Bastasin, Saving Europe: Anatomy of a Dream, 2nd edn, Brookings Institution Press, Washington, DC, 2015. Bayoumi (2016a): Tamim Bayoumi, “The Dog That Didn’t Bark: The Strange Case of Domestic Policy Cooperation in the ‘New Normal’”, in Tamim Bayoumi, Stephen Pickford, and Paola Subacchi (eds), Managing Complexity: Economic Policy Cooperation After the Crisis, Brookings Institution Press, Washington DC, 2016.

Dagher and others (2016): Jihad Dagher, Giovanni Dell’Ariccia, Luc Laeven, Lev Ratnovski, and Hui Tong, “Benefits and Costs of Bank Capital”, IMF Staff Discussion Note SDN/16/04, March 2016. Dao, Furceri, and Loungani (2014): Mai Dao, Davide Furceri, and Prakash Loungani, “Regional Labor Market Adjustment in the United States and Europe”, IMF Working Paper WP/14/26, February 2014. Davis Polk (2013): “U.S. Basel III Final Rule: Visual Memorandum”, available at davispolk.com. Davis Polk (2014): “Supplementary Leverage Ratio (SLR): Visual Memorandum”, available at davispolk.com. Davis Polk (2015): “Federal Reserve’s Proposed Rule on Total Loss-Absorbing Capacity and Eligible Long-Term Debt”, available at davispolk.com.

Holton (1986): Richard Holton, “Industrial Politics in France: Nationalisation under Mitterrand”, West European Politics, Vol. 9, Issue 1, 1986. Horton, Kumar, and Mauro (2009): Mark Horton, Manmohan Kumar, and Paolo Mauro, “The State of Public Finances: A Cross-Country Fiscal Monitor”, IMF Staff Position Note SPN/09/21, July 2009. Howarth and Quaglia (2015): David Howarth and Lucia Quaglia, “The Comparative Political Economy of Basel III in Europe”, University of Edinburgh School of Law, Research Paper Series 2015/19 and Europa Working Paper 2015/03, 2015. Independent Evaluation Office of the International Monetary Fund (2005): The IMF’s Approach to Capital Account Liberalization, International Monetary Fund, 2005. Independent Evaluation Office of the International Monetary Fund (2015): The IMF’s Approach to Capital Account Liberalization: Revisiting the 2005 IEO Evaluation, International Monetary Fund, March 2015.


pages: 357 words: 110,017

Money: The Unauthorized Biography by Felix Martin

Alan Greenspan, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, call centre, capital asset pricing model, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, creative destruction, credit crunch, David Graeber, en.wikipedia.org, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, fixed income, Fractional reserve banking, full employment, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Hyman Minsky, inflation targeting, invention of writing, invisible hand, Irish bank strikes, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, land bank, Michael Milken, mobile money, moral hazard, mortgage debt, new economy, Northern Rock, Occupy movement, Paul Volcker talking about ATMs, plutocrats, private military company, proprietary trading, public intellectual, Republic of Letters, Richard Feynman, Robert Shiller, Savings and loan crisis, Scientific racism, scientific worldview, seigniorage, Silicon Valley, smart transportation, South Sea Bubble, supply-chain management, The Wealth of Nations by Adam Smith, too big to fail

Most of the definition and all of the implementation of prudential regulatory standards remains in the hands of national regulators, however—and after the crisis, many national regulators too proposed more stringent capital or liquidity requirements in addition to those agreed on in the Basel III accords (see n. 4 below). 2. Alessandri and Haldane, 2009, p. 3 and Chart 2. 3. Ibid., p. 3 and Chart 3. 4. Basel Committee on Banking Supervision, 2010, commonly called the Basel III Framework. As its name suggests, the Basel III Framework incorporated a more explicit focus on internationally co-ordinated measurement and standards of bank liquidity as well as capital. 5. This analogy is drawn from Haldane, 2010. 6.


pages: 363 words: 107,817

Modernising Money: Why Our Monetary System Is Broken and How It Can Be Fixed by Andrew Jackson (economist), Ben Dyson (economist)

Alan Greenspan, bank run, banking crisis, banks create money, Basel III, Bretton Woods, business cycle, call centre, capital controls, cashless society, central bank independence, credit crunch, David Graeber, debt deflation, double entry bookkeeping, eurozone crisis, financial exclusion, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, Greenspan put, Hyman Minsky, inflation targeting, informal economy, information asymmetry, intangible asset, land bank, land reform, London Interbank Offered Rate, low interest rates, market bubble, market clearing, Martin Wolf, means of production, Money creation, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, negative equity, Northern Rock, Post-Keynesian economics, price stability, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, risk-adjusted returns, Savings and loan crisis, seigniorage, shareholder value, short selling, South Sea Bubble, technological determinism, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, unorthodox policies

Second, it is thought that the ratio of capital to assets can be used as a regulatory tool to control a bank’s lending. This is a key aspect of the Basel Capital Accords, which stipulate that the ratio of a bank’s capital to its (risk-weighted) assets must not fall below some pre-determined amount. For Basel I and II, this was 8%. For Basel III the ratio will rise to 10.5%.7 In theory under Basel II if the ratio of a bank’s capital to its risk-weighted assets falls below 8% the bank would be unable to increase its lending any further. However, capital requirements do not fully constrain bank lending for several reasons. First, banks profit through charging interest on loans.

(Financial Services Authority, 2009) Before the financial crisis the FSA’s regulatory stance borne out by this philosophy was commonly referred to as ‘light touch’. Although there has been a change of direction since then, as a result of the other issues highlighted in this section, capital remains an ineffective tool for controlling bank credit creation, even taking into account the countercyclical buffer proposed by Basel III. Reserve ratios & limiting the supply of central bank reserves Recall that central bank reserves are used by commercial banks in order to make payments between each other, and the central bank has the monopoly on their creation. In theory, by forcing banks to hold a certain percentage of central bank reserves against their deposits, the central bank can restrict the quantity of deposits to a multiple of the quantity of central bank reserves.

However, banks classified as ‘Systemically Important Financial Institutions’ (SIFIs) will be required to hold up to 3.5% in additional capital, and, depending on the level of credit in an economy all banks may be required to hold an additional 2.5% in capital as a countercyclical buffer. As a result the total level of capital some banks will be required to hold under Basel III may be as high as 16.5%. 8. Although technically they attempted to do this through interest rates rather than by limiting reserves. 9. In the short run the price level can change for a variety of reasons. For example, sudden increases in demand for goods and services may push up their prices (demand-pull inflation).


Mastering Private Equity by Zeisberger, Claudia,Prahl, Michael,White, Bowen, Michael Prahl, Bowen White

Alan Greenspan, asset allocation, backtesting, barriers to entry, Basel III, Bear Stearns, book value, business process, buy low sell high, capital controls, carbon credits, carried interest, clean tech, commoditize, corporate governance, corporate raider, correlation coefficient, creative destruction, currency risk, deal flow, discounted cash flows, disintermediation, disruptive innovation, distributed generation, diversification, diversified portfolio, family office, fixed income, high net worth, impact investing, information asymmetry, intangible asset, junk bonds, Lean Startup, low interest rates, market clearing, Michael Milken, passive investing, pattern recognition, performance metric, price mechanism, profit maximization, proprietary trading, risk tolerance, risk-adjusted returns, risk/return, Savings and loan crisis, shareholder value, Sharpe ratio, Silicon Valley, sovereign wealth fund, statistical arbitrage, time value of money, transaction costs, two and twenty

Source for the MSCI World Index: Bloomberg. 3 Investors typically run extensive back-tests to explore how any new asset class might have impacted the portfolio performance historically. 4 Please refer to Chapter 24 Private Equity Secondaries for additional detail on the mechanics of secondaries. 5 Please refer to Chapter 1 Private Equity Essentials for further details on the J-curve. 6 The introduction of Basel III, the Dodd–Frank Act and the Volcker Rule for banks and Solvency II for insurance companies (in Europe) increased the cost of owning stakes in alternative investments. 7 Please refer to Chapter 19 Performance Reporting for a detailed description of the comparison of PE performance with other asset classes. 8 Refer to Chapter 18 LP Portfolio Management for a full overview of how LPs construct a portfolio. 9 Source: Greenhill Cogent 10 The number refers to professional fund management firms; but estimates vary widely on the number of active fund managers (source: Preqin 2016). 11 Before 2008, underlying companies were valued at cost until realization at exit, meaning that valuations of funds showed no volatility prior to the sale of the portfolio companies.

Secondaries can also be employed to mitigate the “denominator effect,” which occurs when falling prices in listed public markets reduce overall portfolio value and cause overexposure to private market assets that revalue more gradually. External factors: A key driver of secondaries activity has been regulatory pressure or change—for example, the constraints imposed on banks by Basel III and the “Volcker Rule” and on insurance companies by Solvency II—that make the cost of owning stakes in alternative investments untenable. LP financial distress is also a driver of secondary activity, as could be seen following the dotcom crash in 2001 and the financial crisis in 2008, when LPs reduced their liabilities by divesting their commitments through secondaries transactions.

Initially, secondaries consisted primarily of the sale and purchase of portfolios of interests in PE funds, yet as the market matured, direct secondaries began to make up a sizable portion of total transaction volume. Regulatory changes that made positions in alternative strategies prohibitively expensive for financial firms (e.g., Volcker, Basel III) added sizable volume and impetus. The secondaries market is of course a derivative of primary investment activity. Given the strong growth of the overall PE industry in recent years, the maturing and ballooning of LP portfolios, and the still small proportion of secondary transactions relative to the primary market, further growth seems assured.


pages: 223 words: 10,010

The Cost of Inequality: Why Economic Equality Is Essential for Recovery by Stewart Lansley

"World Economic Forum" Davos, Adam Curtis, air traffic controllers' union, Alan Greenspan, AOL-Time Warner, banking crisis, Basel III, Big bang: deregulation of the City of London, Bonfire of the Vanities, borderless world, Branko Milanovic, Bretton Woods, British Empire, business cycle, business process, call centre, capital controls, collective bargaining, corporate governance, corporate raider, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, deindustrialization, Edward Glaeser, Everybody Ought to Be Rich, falling living standards, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, Goldman Sachs: Vampire Squid, high net worth, hiring and firing, Hyman Minsky, income inequality, James Dyson, Jeff Bezos, job automation, job polarisation, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, laissez-faire capitalism, Larry Ellison, light touch regulation, Londongrad, Long Term Capital Management, low interest rates, low skilled workers, manufacturing employment, market bubble, Martin Wolf, Mary Meeker, mittelstand, mobile money, Mont Pelerin Society, Myron Scholes, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, proprietary trading, Right to Buy, rising living standards, Robert Shiller, Robert Solow, Ronald Reagan, savings glut, shareholder value, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, Tyler Cowen, Tyler Cowen: Great Stagnation, Washington Consensus, Winter of Discontent, working-age population

Moreover, subsequent negotiations to finalise the details of the new rules have led to further watering down. ‘Taken overall, the reform effort amounts to tinkering with the existing system rather than fundamentally reforming it’ wrote John Cassidy in the New York Review of Books . ‘Any comparison with FDR’s regulatory response to the Great Depression is specious.’397 New rules—called Basel III—were drawn up by the group of 27 central bankers across the world imposing tighter restrictions on banks’ capital requirements. Yet these are less stringent than thought necessary by analysts to prevent another bout of irresponsible lending and will not be fully implemented until 2019. In the UK, before they left office, Labour imposed a £3.5 billion ‘supertax’ on bank bonuses.

That reform has failed to go far enough was admitted by the Governor of the Bank of England, Mervyn King, in a remarkably frank speech in New York on October 25 2010.440 The Governor accused the bailed-out investment banks of ‘financial alchemy’, criticised the proposed bank levy as a ‘foolish’ way to rein in the banks and called the new Basel III accord on capital ratios inadequate to ‘prevent another crisis’. He summed up his views as follows: ‘Of all the many ways of organizing banking, the worst is the one we have today.’ Whether these calls to action have much effect remains to be seen. There are many obstacles to reform. The banking and billionaire lobby continues to exercise a powerful grip on the US and UK governments and global finance forums.


pages: 263 words: 80,594

Stolen: How to Save the World From Financialisation by Grace Blakeley

"Friedman doctrine" OR "shareholder theory", activist fund / activist shareholder / activist investor, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, basic income, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, Big Tech, bitcoin, bond market vigilante , Bretton Woods, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, capitalist realism, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, cryptocurrency, currency peg, David Graeber, debt deflation, decarbonisation, democratizing finance, Donald Trump, emotional labour, eurozone crisis, Extinction Rebellion, extractivism, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, fixed income, full employment, G4S, gender pay gap, gig economy, Gini coefficient, global reserve currency, global supply chain, green new deal, Greenspan put, housing crisis, Hyman Minsky, impact investing, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), Jeremy Corbyn, job polarisation, junk bonds, Kenneth Rogoff, Kickstarter, land value tax, light touch regulation, low interest rates, low skilled workers, market clearing, means of production, Modern Monetary Theory, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, neoliberal agenda, new economy, Nixon triggered the end of the Bretton Woods system, Northern Rock, offshore financial centre, paradox of thrift, payday loans, pensions crisis, Phillips curve, Ponzi scheme, Post-Keynesian economics, post-war consensus, price mechanism, principal–agent problem, profit motive, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Right to Buy, rising living standards, risk-adjusted returns, road to serfdom, Robert Solow, savings glut, secular stagnation, shareholder value, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, the built environment, The Great Moderation, too big to fail, transfer pricing, universal basic income, Winter of Discontent, working-age population, yield curve, zero-sum game

If investors respond to rising interest rates by putting their money back into the global North, the result could be a series of sovereign debt crises not seen in the global economy for twenty years. In this context, the continued fragility of international financial regulation is a significant concern. The Basel Accords that have emerged since the crisis have been just as flawed as their predecessors. Whilst some positive steps have been made, Basel III has been described as a “necessary but not sufficient” improvement in regulation.68 Individual countries have also attempted to expand their own macroprudential regimes, but this has gone further in parts of the global North than emerging economies where risk is concentrated. Risk has therefore been pushed into shadow banking systems in emerging markets — which the Governor of the Bank of England, Mark Carney, recently cited as the biggest future threat to global financial stability.

50 Williams, A. (2017) “London House Prices Fall for the First Time Since 2009”, Financial Times, 29 September. 51 Office for National Statistics (2019) “UK House Price Index Summary: November 2018” 52 Office for National Statistics (2018) “Business Investment in the UK: July to September 2018 Revised Results” 53 Office for National Statistics (2019) “Insolvency Statistics — October to December 2018 (Q4 2018)” 54 Blakeley (2019). 55 World Bank (2018) “Gross fixed capital formation (annual % growth)” 56 IMF (2018) “Fiscal Monitor 2018: Capitalising on Good Times” 57 Oguh, C. and Tanzi, A. (2019) “Global Debt of $244 Trillion Nears Record Despite Faster Growth”, Bloomberg, 15 January. 58 Partington, R. (2018) “Wall Street Sets Record for Longest Bull Run in History”, Guardian, 22 August 59 Seeking Alpha (2019) ‘Stocks In 2019: Volatility Is Back’ https://seekingalpha.com/article/4234365-stocks-2019-volatility-back 60 Barrett E and Greifeld K (2019) ‘Treasuries Buying Wave Triggers First Curve Inversion Since 2007’ https://www.bloomberg.com/news/articles/2019-03-22/u-s-treasury-yield-curve-inverts-for-first-time-since-2007 61 Federal Reserve Bank of St Louis (2018) ‘Stock Market Capitalization to GDP for United States’ https://fred.stlouisfed.org/series/DDDM01USA156NWDB 62 Curran, E. (2018) “China’s Debt Bomb”, Bloomberg, 17 September. 63 Moody’s (2018) “Moody’s: China Shadow Banking Activity Increasingly Reveals Challenging Trade-Off Between Growth and Deleveraging”, Moody’s Investors Service, 3 December. 64 BIS (2019) 65 Banerjee, R. and Hofmann, B. (2018) “The Rise of Zombie Firms: Causes and Consequences”, Bank for International Settlements Quarterly Review, September. 66 Colombo, J. (2018) “The US Is Experiencing A Dangerous Corporate Debt Bubble”, Forbes, 29 August. https://www.forbes.com/sites/jessecolombo/2018/08/29/the-u-s-is-experiencing-a-dangerous-corporate-debt-bubble/#547ffa2f600e 67 Heath, M. (2018) “These May Be the World’s 10 Riskiest Housing Markets”, Bloomberg, 13 September. 68 Byres, W. (2012) “Basel III: Necessary, but Not Sufficient”, speech to the Financial Stability Institute’s 6th Biennial Conference on Risk Management and Supervision, Basel, 6 November 69 This account draws on: Laybourn-Langton, L., Rankin, L. and Baxter, D. (2019) “This is a Crisis: Facing up to the Age of Environmental Breakdown”, IPPR. http://www.ippr.org/research/publications/age-of-environmental-breakdown; Intergovernmental Panel on Climate Change (2018) “Global warming of 1.5°C.


pages: 892 words: 91,000

Valuation: Measuring and Managing the Value of Companies by Tim Koller, McKinsey, Company Inc., Marc Goedhart, David Wessels, Barbara Schwimmer, Franziska Manoury

accelerated depreciation, activist fund / activist shareholder / activist investor, air freight, ASML, barriers to entry, Basel III, Black Monday: stock market crash in 1987, book value, BRICs, business climate, business cycle, business process, capital asset pricing model, capital controls, Chuck Templeton: OpenTable:, cloud computing, commoditize, compound rate of return, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, currency risk, discounted cash flows, distributed generation, diversified portfolio, Dutch auction, energy security, equity premium, equity risk premium, financial engineering, fixed income, index fund, intangible asset, iterative process, Long Term Capital Management, low interest rates, market bubble, market friction, Myron Scholes, negative equity, new economy, p-value, performance metric, Ponzi scheme, price anchoring, proprietary trading, purchasing power parity, quantitative easing, risk free rate, risk/return, Robert Shiller, Savings and loan crisis, shareholder value, six sigma, sovereign wealth fund, speech recognition, stocks for the long run, survivorship bias, technology bubble, time value of money, too big to fail, transaction costs, transfer pricing, two and twenty, value at risk, yield curve, zero-coupon bond

Based on your forecasts for growth across different loan categories, VaR requirements for trading activities, and a bank’s net revenues, you can estimate the total RWA in each future year. Basel III establishes stricter rules for banks regarding how much capital they must hold based on their level of RWA. Requirements are defined for the bank’s so-called common-equity Tier 1 (CET1), additional Tier 1, and Tier 2 capital levels, relative to RWA. Of these capital ratios, CET1 to RWA is typically the most stringent. The total minimum CET1 requirements for a bank consist of different layers that add up to a total of 7.0 to 9.5 percent of RWA: Basel III CET1 capital requirements Percent of risk-weighted assets Legal minimum Capital conservation buffer G-SIB countercyclical buffer 4.5 2.5 0.0–2.5 Total 7.0–9.5 780 BANKS The first 4.5 percent is the so-called legal minimum that applies to any bank in any given year.

Risk-Weighted Assets and Equity Risk Capital Banks are required to hold a minimum level of equity capital that can absorb potential losses to safeguard the bank’s obligations to its customers and financiers. In December 2010, new regulatory requirements for capital adequacy were specified in the Basel III guidelines, replacing the 2007 Basel II accords, which were no longer considered adequate in the wake of the 2008 and 2010 financial crises.15 The new guidelines are being gradually implemented by banks across the world between 2013 and 2019. 15 The Basel accords are recommendations on laws and regulations for banking and are issued by the Basel Committee on Banking Supervision (BCBS). 778 BANKS EXHIBIT 34.13 Estimating Risk-Weighted Assets (RWA) for a Large European Bank billion Reported RWA Asset category 2013 Loans to countries Loans to banks Loans to corporations Residential mortgages Other consumer loans Overall Operational risk Market risk Credit risk Year Estimated RWA parameters, % Loans outstanding RWA 16,228 25,100 147,242 148,076 45,440 382,086 202,219 Standardized Standardized Allocated RWA/loans RWA RWA 10 35 35 35 75 Year VaR trading book RWA Estimated RWA/ VaR 2013 19,564 47,259 242 Year Revenues RWA Estimated RWA/ revenues 2013 32,826 50,891 155 1,623 8,785 51,535 51,827 34,080 147,489 2,220 12,016 70,486 70,885 46,613 202,219 Estimated RWA/loans 14 48 48 48 103 53 Basel III specifies rules for banks regarding how much equity capital they must hold based on the bank’s so-called risk-weighted assets (RWA).16 The level of RWA is driven by the riskiness of a bank’s asset portfolio and its trading book.

In December 2010, new regulatory requirements for capital adequacy were specified in the Basel III guidelines, replacing the 2007 Basel II accords, which were no longer considered adequate in the wake of the 2008 and 2010 financial crises.15 The new guidelines are being gradually implemented by banks across the world between 2013 and 2019. 15 The Basel accords are recommendations on laws and regulations for banking and are issued by the Basel Committee on Banking Supervision (BCBS). 778 BANKS EXHIBIT 34.13 Estimating Risk-Weighted Assets (RWA) for a Large European Bank billion Reported RWA Asset category 2013 Loans to countries Loans to banks Loans to corporations Residential mortgages Other consumer loans Overall Operational risk Market risk Credit risk Year Estimated RWA parameters, % Loans outstanding RWA 16,228 25,100 147,242 148,076 45,440 382,086 202,219 Standardized Standardized Allocated RWA/loans RWA RWA 10 35 35 35 75 Year VaR trading book RWA Estimated RWA/ VaR 2013 19,564 47,259 242 Year Revenues RWA Estimated RWA/ revenues 2013 32,826 50,891 155 1,623 8,785 51,535 51,827 34,080 147,489 2,220 12,016 70,486 70,885 46,613 202,219 Estimated RWA/loans 14 48 48 48 103 53 Basel III specifies rules for banks regarding how much equity capital they must hold based on the bank’s so-called risk-weighted assets (RWA).16 The level of RWA is driven by the riskiness of a bank’s asset portfolio and its trading book. Banks have some flexibility to choose either internal risk models or standardized Basel approaches to estimate their RWA.


pages: 497 words: 150,205

European Spring: Why Our Economies and Politics Are in a Mess - and How to Put Them Right by Philippe Legrain

3D printing, Airbnb, Alan Greenspan, Asian financial crisis, bank run, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, book value, Boris Johnson, Bretton Woods, BRICs, British Empire, business cycle, business process, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, clean tech, collaborative consumption, collapse of Lehman Brothers, collective bargaining, corporate governance, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Crossrail, currency manipulation / currency intervention, currency peg, debt deflation, Diane Coyle, disruptive innovation, Downton Abbey, Edward Glaeser, Elon Musk, en.wikipedia.org, energy transition, eurozone crisis, fear of failure, financial deregulation, financial engineering, first-past-the-post, Ford Model T, forward guidance, full employment, Gini coefficient, global supply chain, Great Leap Forward, Growth in a Time of Debt, high-speed rail, hiring and firing, hydraulic fracturing, Hyman Minsky, Hyperloop, immigration reform, income inequality, interest rate derivative, Intergovernmental Panel on Climate Change (IPCC), Irish property bubble, James Dyson, Jane Jacobs, job satisfaction, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, labour market flexibility, labour mobility, land bank, liquidity trap, low interest rates, margin call, Martin Wolf, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, North Sea oil, Northern Rock, offshore financial centre, oil shale / tar sands, oil shock, open economy, peer-to-peer rental, price stability, private sector deleveraging, pushing on a string, quantitative easing, Richard Florida, rising living standards, risk-adjusted returns, Robert Gordon, savings glut, school vouchers, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Skype, smart grid, smart meter, software patent, sovereign wealth fund, Steve Jobs, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, Tyler Cowen, Tyler Cowen: Great Stagnation, working-age population, Zipcar

In 2012, the figure was 306 per cent in Ireland, 230 per cent in Portugal and 104 per cent in Britain. 67 http://ftalphaville.ft.com/2010/11/08/397221/the-likely-cost-of-irelands-bank-bailout/ GNP figure in 2012 is €127 billion: https://namawinelake.wordpress.com/2012/12/16/irelands-gnp-and-gdp-in-2012/ 68 See in particular pages 72-75 of Aftershock: Reshaping the World After the Crisis, Little, Brown: 2010. 69 Ibid, page 74 70 See http://online.wsj.com/article/SB123371182830346215.html and http://blogs.ft.com/maverecon/2009/01/the-good-bank-solution/ 71 Philippe Legrain, Aftershock: Reshaping the World After the Crisis, Little, Brown: 2010, page 75. 72 http://en.wikipedia.org/wiki/List_of_bank_failures_in_the_United_States_(2008–present). Checked on 18 May 2013 73 http://uk.reuters.com/article/2013/02/01/uk-dutch-finance-cbank-idUKBRE9100A420130201 74 http://www.ft.com/cms/s/0/645b24e6-adbc-11e2-82b8-00144feabdc0.html 75 http://www.eba.europa.eu/-/eba-publishes-results-of-the-basel-iii-monitoring-exercise-as-of-end-2012 Around a third of the 170 banks surveyed by the EBA failed to meet the very weak Basel target of a 3-per-cent equity buffer, with a combined capital shortfall of €133 billion. When in October 2011 EU leaders did agree to force banks to boost their capital buffers somewhat, they unfortunately botched the decision, as Chapter 4 explains.

This was attributed to under-provisioning for expected credit and trading book valuation losses (£30 billion) and conduct costs (£10 billion), and the overstatement of capital ratios resulting from an aggressive use of risk weights (£12 billion). International Monetary Fund, United Kingdom 2013 Article IV Consultation, July 2013 77 The FPC’s target was an end-2013 benchmark of a 7 percent fully-loaded Basel-III common equity tier 1 capital ratio, computed after making appropriate adjustments for expected loan losses and conduct costs over the next three-years, and for prudent risk weights. Systemically important banks will ultimately need to hit a 9.5-10 per cent ratio. 78 International Monetary Fund, United Kingdom 2013 Article IV Consultation, July 2013, Figure 5. 79 Bank of England, Bankstats (Monetary & Financial Statistics) December 2013, Table A8.1 Monetary financial institutions loans to non-financial businesses http://www.bankofengland.co.uk/statistics/Pages/bankstats/2013/Dec13/default.aspx 80 ECB, MFI loans to non-financial corporations, annual growth rate at end of December 2013.

The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it.” 540 Eric Beinhocker, The Origin of Wealth: Evolution, Complexity and the Radical Remaking of Economics, Harvard Business School Press: 2006 541 John Maynard Keynes, The General Theory of Employment, Interest and Money, 1936 542 John Maynard Keynes, The Great Slump of 1930, 1930 543 Friedrich Hayek, The Fatal Conceit: The Errors of Socialism, Chicago: 1988 544 http://articles.latimes.com/2006/jul/16/business/fi-overheat16 545 The unemployment rate rose by only two percentage points. 546 James Mirrlees and others, "Mirrlees Review: Reforming the tax system for the 21st century", Institute for Fiscal Studies, 2010. http://www.ifs.org.uk/mirrleesReview/design 547 http://www.ifs.org.uk/mirrleesreview/design/ch17.pdf 548 The new Basel III capital-adequacy rules, which have been transposed into EU law through a package of regulations known as CRD IV. 549 Some countries, such as Switzerland, Iceland, Luxembourg, Netherlands and Slovenia do tax the imputed rental stream of owner-occupied housing. http://ec.europa.eu/economy_finance/events/2011/2011-11-24-property_taxation/pdf/andrews_housing_taxation_for_stability_and_growth_en.pdf 550 http://ec.europa.eu/economy_finance/events/2011/2011-11-24-property_taxation/pdf/andrews_housing_taxation_for_stability_and_growth_en.pdf 551 http://ec.europa.eu/economy_finance/events/2011/2011-11-24-property_taxation/pdf/andrews_housing_taxation_for_stability_and_growth_en.pdf 552 http://www.economist.com/node/13725843 553 http://www.indyposted.com/226135/airbnb-adds-250000-properties-6-million-guests-2013/ 554 http://www.bbc.co.uk/news/business-20890174 555 http://www.lamachineduvoisin.fr/ 556 http://www.ft.com/cms/s/0/fd8a20ca-3b3a-11e3-a7ec-00144feab7de.html 557 On 1 January 2012 there were 78.6 million under 15s in the EU and 98.4 million people aged 50–64.


pages: 329 words: 95,309

Digital Bank: Strategies for Launching or Becoming a Digital Bank by Chris Skinner

algorithmic trading, AltaVista, Amazon Web Services, Any sufficiently advanced technology is indistinguishable from magic, augmented reality, bank run, Basel III, bitcoin, Bitcoin Ponzi scheme, business cycle, business intelligence, business process, business process outsourcing, buy and hold, call centre, cashless society, clean water, cloud computing, corporate social responsibility, credit crunch, cross-border payments, crowdsourcing, cryptocurrency, demand response, disintermediation, don't be evil, en.wikipedia.org, fault tolerance, fiat currency, financial innovation, gamification, Google Glasses, high net worth, informal economy, information security, Infrastructure as a Service, Internet of things, Jeff Bezos, Kevin Kelly, Kickstarter, M-Pesa, margin call, mass affluent, MITM: man-in-the-middle, mobile money, Mohammed Bouazizi, new economy, Northern Rock, Occupy movement, Pingit, platform as a service, Ponzi scheme, prediction markets, pre–internet, QR code, quantitative easing, ransomware, reserve currency, RFID, Salesforce, Satoshi Nakamoto, Silicon Valley, smart cities, social intelligence, software as a service, Steve Jobs, strong AI, Stuxnet, the long tail, trade route, unbanked and underbanked, underbanked, upwardly mobile, vertical integration, We are the 99%, web application, WikiLeaks, Y2K

Just look at the erosion of processing fees thanks to the Payment Services Directive in Europe or the Durbin amendment to Dodd-Frank in the USA, or the intraday and soon real-time margin calls for collateralisation under the European Market Infrastructure Regulation and Dodd-Frank, if you want to see how that changes things (not to even mention Basel III). Finally, assuming you managed a successful migration to the new world, there are still massive exposures to risk. We live in a world where technology drives our markets and yet the fear of changing technology is killing us. Therefore banks avoid migration to new core systems, and are handcuffed into legacy operations through their legacy systems.

Anthony tells me that the bank has 80,000 customer accounts today and is opening around 2,000 new accounts a week but it’s not all plain sailing as, in the first 15 months of operation, the bank made just 100 mortgage loans. Nevertheless, the latest funding was over-subscribed and follows on from the first two funding rounds in 2010 of £75 million and £50 million, to give the bank over £250 million of backing and a Tier 1 Capital Ratio in the high teens (better than Basel III’s requirements and way above most European banks today). Interestingly, the bank advocates many of the same messages I hear from other upstarts, such as Virgin Money and ING Direct. For example, a big headline is: hire staff for attitude, not skills. You can train people once they join the bank, but you don’t need them to be bankers up front.


pages: 324 words: 90,253

When the Money Runs Out: The End of Western Affluence by Stephen D. King

Alan Greenspan, Albert Einstein, Apollo 11, Asian financial crisis, asset-backed security, banking crisis, Basel III, Bear Stearns, Berlin Wall, Bernie Madoff, bond market vigilante , British Empire, business cycle, capital controls, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, congestion charging, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-subsidies, currency risk, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, fixed income, floating exchange rates, Ford Model T, full employment, George Akerlof, German hyperinflation, Glass-Steagall Act, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, junk bonds, Kickstarter, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, low interest rates, market clearing, mass immigration, Minsky moment, moral hazard, mortgage debt, Neil Armstrong, new economy, New Urbanism, Nick Leeson, Northern Rock, Occupy movement, oil shale / tar sands, oil shock, old age dependency ratio, price mechanism, price stability, quantitative easing, railway mania, rent-seeking, reserve currency, rising living standards, risk free rate, Savings and loan crisis, seminal paper, South Sea Bubble, sovereign wealth fund, technology bubble, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, trickle-down economics, Washington Consensus, women in the workforce, working-age population

Regulations designed to reduce the risk of financial implosion are another useful device to divert funds into the hands of government. Again, the intention may never have been there initially, but that, however, is not really the point. Like quantitative easing, regulation can trigger the law of unintended consequences. The Basel III regulations provide a good example. Even with the revisions announced on 6 January 2013,13 which relaxed the constraints on banks, the rules still make it easier for governments than other would-be borrowers to raise funds from the banking system. To understand why, it's worth taking a look at the Liquidity Coverage Ratio (LCR), defined as the ratio of high quality liquid assets (HQLA) to total net cash outflows over the next 30 days and designed to protect an institution in the light of a 2008-style liquidity stress scenario.

(i) Asian crisis (i) recovery from (i), (ii), (iii) asset prices (i) asset-backed securities (i) Audit Commission (i) austerity (i), (ii), (iii), (iv), (v) and political extremism (i) Statute of Labourers (i) versus stimulus (i) wartime (i), (ii) see also Snowden's budget Australia (i), (ii), (iii), (iv) Austria (i) baby boomers (i), (ii), (iii) bailouts (i), (ii) Balls, Ed (i) Bank Negara (i) Bank of England (i), (ii), (iii) economic growth forecasts (i) interest rates (i), (ii) and Libor (i) Bank of Japan (i) banking free (i), (ii) and protectionism (i) union (eurozone) (i) banks (i), (ii) bankers' rewards (i) failure (i), (ii) liquidity buffers (i), (ii) mortgage loan-to-value ratios (i) regulatory uncertainty (i) and savers (i) see also central banks Barclays Bank plc (i), (ii) Basel III regulations (i) Bean, Charlie (i), (ii) Bear Stearns (i) Belgium (i) Ben Ali, Zine al-Abidine (i) Benedetti, Count (i) benefits (i), (ii) see also social spending Bernanke, Ben (i), (ii) Beveridge, William (i) bimetallism (i) Bismarck, Otto von (i) Black Death (i), (ii) blame culture (i), (ii), (iii), (iv), (v) Blenheim Palace (i) bonds (i), (ii), (iii), (iv), (v) borrowers (i), (ii), (iii) borrowing, government borrower of last resort (i) heavy (i) international (i) and low interest rates (i), (ii) and the New Deal (i) to offset private saving (i) relative to national income (i), (ii) rising (i) see also credit: queues Botswana (i) Brazil (i), (ii), (iii) Britain see UK (United Kingdom) British Empire (i), (ii), (iii) Bryan, William Jennings (i) budget deficits (i), (ii), (iii), (iv), (v) France (i) Germany (i) Spain (i) UK (i), (ii), (iii) US (i), (ii), (iii) Buenos Aires (i) Business Week (i) Buxton, Thomas Fowell (i) California (i) Calonne, Charles-Alexandre de (i) Canada (i), (ii) capital adequacy ratios (i) controls (i), (ii), (iii), (iv) flight and the euro (i) foreign (i), (ii) immobile (i) markets (i), (ii) and the rise of living standards (i) Carr, Jimmy (i) Case-Shiller house price index (i) Catalonia (i) Central African Republic (i) central banks and bailouts (i) expansion of remit (i) and government debt (i) and illusory wealth (i) interest rates (i) and a new monetary framework (i) nominal GDP targeting (i) and politics (i), (ii), (iii) and redistribution (i) see also quantitative easing (QE) Chicago (i) China and commodity prices (i) financial systems (i) and globalization (i) income inequality (i), (ii) living standards (i) per capita incomes (i) and regional tensions (i) renminbi currency (i) silver standard (i), (ii) trading partners (i) and the US (i), (ii) Chinese Exclusion Act (i) Chrysi Avgi (i) Churchill, Winston (i) circuit breakers (i), (ii) Coinage Act (i) Committee on National Expenditure (i) commodity prices (i), (ii), (iii) conduits (i) Connecticut (i) consumer credit (i), (ii), (iii) contingent redistribution (i) credit consumer (i), (ii), (iii) derivation of word (i) expansion (i) and the property boom (i) and protectionism (i) queues (i), (ii), (iii), (iv) Creditanstalt (i) creditors creditor nations (i), (ii) and debtors (i), (ii), (iii), (iv), (v) foreign (i), (ii), (iii) home grown (i) Japan (i) cross-subsidization, of banking services (i) currencies (i), (ii) ‘currency wars’ (i), (ii) see also eurozone; renminbi; ringgit; sterling Darling, Alistair (i) debt and asset prices (i) and central banks (i) eurozone crisis (i), (ii) excessive (i), (ii) France (i) household (i), (ii), (iii) and inflation (i) Japan (i) and national incomes (i), (ii), (iii) and quantitative easing (QE) (i) repaying (i) debt deflation (i) debtors and creditors (i), (ii), (iii), (iv), (v) eurozone (i) home grown (i) deficient demand (i), (ii) deficit expansion (i) deficit reduction (i) deficits (i), (ii), (iii), (iv), (v) France (i) Germany (i) Korea (i) pension funds (i), (ii) Spain (i) and surpluses (i), (ii) UK (i), (ii), (iii) US (i), (ii), (iii) deflation (i), (ii) democratic deficit (i), (ii) Deng Xiaoping (i), (ii) Denmark (i) the Depression (i), (ii), (iii), (iv), (v) and the UK (i), (ii) Dexia (i) Diamond, Bob (i) Dickens, Charles (i) disaster-avoidance (i) District of Columbia (i) dollar standard (i) dotcom bubble (i) Draghi, Mario (i) economics profession (i), (ii), (iii) Edelman Trust Barometer (i) education (i) financial (i) literacy (i) training (i) Edward III (i) Egana, Amaia (i) emerging nations (i), (ii) employment (i) see also labour; unemployment enfranchisement (i), (ii) the Enlightenment (i), (ii), (iii) entitlement culture (i), (ii), (iii), (iv), (v), (vi) absent from Asia (i), (ii) need to reduce (i), (ii) equities (i), (ii) ethics (i) Ethiopia (i) European Central Bank (ECB) (i), (ii), (iii), (iv), (v) eurozone banking union (i) crisis (i), (ii) and the European Central Bank (i) northern creditors and southern debtors (i), (ii), (iii), (iv), (v), (vi) and trust (i) and the UK (i), (ii) variations in borrowing costs (i) exchange rates (i), (ii), (iii), (iv) executive pay (i) exports (i), (ii) extremism, political (i) Fannie Mae (i) Federal Reserve (i), (ii), (iii), (iv) and the Great Depression (i), (ii) Ferguson, Niall (i) Ferguson, Roger (i) feudalism (i) financial services (i) innovations (i), (ii), (iii) Financial Services Authority (FSA) (i) Finland (i) First World War (i), (ii) ‘fiscal club’ concept (i) fiscal policy (i), (ii), (iii), (iv), (v) fiscal trap (i) fiscal unions (i) Fisher, Irving (i), (ii) football (i) forecasting (i), (ii), (iii), (iv), (v) Fortis (i) France age-related expenditure (i) ancien régime and the Revolution (i) and Austria (i) benefits (i) budget deficit (i) exports (i) Latin monetary union (i) per capita incomes (i), (ii) and political extremism (i) and public spending (i) Franco-Prussian War (i) Frank, Barney (i) fraudulent acts (i) Freame, John (i) Freddie Mac (i) free banking (i), (ii) French Revolution, and the ancien régime (i) Freud, Sigmund (i) Friedman, Milton (i), (ii), (iii), (iv), (v) Fuld, Dick (i) GDP forecasts (i), (ii) targeting (i) General Strike (i) generational divide (i), (ii), (iii) see also ageing populations Germany ageing population (i), (ii), (iii) benefits (i) budget deficit (i) and the eurozone crisis (i), (ii), (iii), (iv), (v) exports (i) Franco-Prussian War reparations (i), (ii) government borrowing (i), (ii) interest rates (i) late 19th-century economy (i), (ii) living standards (i) national income (i) per capita incomes (i), (ii) and the Protestant work ethic (i) and public spending (i) surplus (i) Treaty of Versailles (i) unification (i) Weimar Republic (i), (ii) GfK/NOP Inflation Attitudes Survey (i) globalization (i), (ii), (iii), (iv), (v) Gold Standard (i) and Germany (i) and the UK (i), (ii), (iii), (iv), (v) and the US (i), (ii), (iii) gold standards (i), (ii) Golden Dawn Party (i) Goodwin, Fred (i) Gordon, Robert J.


pages: 1,544 words: 391,691

Corporate Finance: Theory and Practice by Pierre Vernimmen, Pascal Quiry, Maurizio Dallocchio, Yann le Fur, Antonio Salvi

"Friedman doctrine" OR "shareholder theory", accelerated depreciation, accounting loophole / creative accounting, active measures, activist fund / activist shareholder / activist investor, AOL-Time Warner, ASML, asset light, bank run, barriers to entry, Basel III, Bear Stearns, Benoit Mandelbrot, bitcoin, Black Swan, Black-Scholes formula, blockchain, book value, business climate, business cycle, buy and hold, buy low sell high, capital asset pricing model, carried interest, collective bargaining, conceptual framework, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, currency risk, delta neutral, dematerialisation, discounted cash flows, discrete time, disintermediation, diversification, diversified portfolio, Dutch auction, electricity market, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, eurozone crisis, financial engineering, financial innovation, fixed income, Flash crash, foreign exchange controls, German hyperinflation, Glass-Steagall Act, high net worth, impact investing, implied volatility, information asymmetry, intangible asset, interest rate swap, Internet of things, inventory management, invisible hand, joint-stock company, joint-stock limited liability company, junk bonds, Kickstarter, lateral thinking, London Interbank Offered Rate, low interest rates, mandelbrot fractal, margin call, means of production, money market fund, moral hazard, Myron Scholes, new economy, New Journalism, Northern Rock, performance metric, Potemkin village, quantitative trading / quantitative finance, random walk, Right to Buy, risk free rate, risk/return, shareholder value, short selling, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, Steve Jobs, stocks for the long run, supply-chain management, survivorship bias, The Myth of the Rational Market, time value of money, too big to fail, transaction costs, value at risk, vertical integration, volatility arbitrage, volatility smile, yield curve, zero-coupon bond, zero-sum game

The increasing difficulty of obtaining bank loans was another, as banks realised that the interest margin on such loans did not offer sufficient return on equity. This pushed companies to turn to bond markets to raise the funds that banks had become reluctant to advance. The increasingly burdensome solvency and liquidity constraints imposed on banks (Basel III and IV) should increase the share of financing insured by the debt capital markets even further. Companies accounted for 7% of euro-denominated bonds outstanding in 2017. Source: European Central Bank Investors have welcomed the emergence of corporate bonds offering higher yields than government bonds.

Notes 1 Earnings before interest, taxes, depreciation and amortisation. 2 All the more so as in mature sectors inflation is lower than in the economy in general. 3 NOPAT (EBIT after tax) - WACC × Capital employed. 4 Including the value of hedging instruments, if any. 5 The interest rate calculated as interest in the income statement/net debt in the closing balance sheet does not reflect the actual interest rates paid on the ongoing debt during the year. 6 Through a temporary lower corporate income tax. 7 That is, before 1995 in Europe and the US. 8 Basel III. 9 Which could be the case under IFRS. 10 For more on this, see the Vernimmen.com Newsletter no. 24, May 2007. 11 Not that of subsidiaries, as it has already been taken into account when valuing the subsidiaries. 12 Acquisition of assets will most often generate deductible depreciation whereas acquisition of shares of a company will generate goodwill, which in most European countries does not give rise to tax-deductible amortisation. 13 Breakup of ABN AMRO, Scottish & Newcastle, Hagemayer.

Notes 1 If its by-laws allow, a company may distribute shares that it holds in its portfolio in place of a cash dividend. This is not the same as paying the dividend in its own shares. 2 The practice made a comeback in 2008 as several banks wanted to preserve their cash reserves amid the sub-prime crisis and thereafter wanted to increase their solvency given new banking regulations (Basel III). Bibliography Empirical studies: P. Asquith, D. Mullins, The impact of initiating dividend payments on shareholders’ wealth, Journal of Business, 56, 77–96, January 1983. M. Baker, J. Wurgler, A catering theory of dividends, Journal of Finance, 59, 1125–1165, June 2004. M. Baker, J. Wurgler, Appearing and dividends: The link to catering incentives, Journal of Financial Economics, 73, 271–288, August 2004.


pages: 459 words: 103,153

Adapt: Why Success Always Starts With Failure by Tim Harford

An Inconvenient Truth, Andrew Wiles, banking crisis, Basel III, behavioural economics, Berlin Wall, Bernie Madoff, Black Swan, Boeing 747, business logic, car-free, carbon footprint, carbon tax, Cass Sunstein, charter city, Clayton Christensen, clean water, cloud computing, cognitive dissonance, complexity theory, corporate governance, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, Dava Sobel, Deep Water Horizon, Deng Xiaoping, disruptive innovation, double entry bookkeeping, Edmond Halley, en.wikipedia.org, Erik Brynjolfsson, experimental subject, Fall of the Berlin Wall, Fermat's Last Theorem, financial engineering, Firefox, food miles, Gerolamo Cardano, global supply chain, Great Leap Forward, Herman Kahn, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, Jane Jacobs, Jarndyce and Jarndyce, Jarndyce and Jarndyce, John Harrison: Longitude, knowledge worker, loose coupling, Martin Wolf, mass immigration, Menlo Park, Mikhail Gorbachev, mutually assured destruction, Netflix Prize, New Urbanism, Nick Leeson, PageRank, Piper Alpha, profit motive, Richard Florida, Richard Thaler, rolodex, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, South China Sea, SpaceShipOne, special economic zone, spectrum auction, Steve Jobs, supply-chain management, tacit knowledge, the market place, The Wisdom of Crowds, too big to fail, trade route, Tyler Cowen, Tyler Cowen: Great Stagnation, Virgin Galactic, web application, X Prize, zero-sum game

The Dodd–Frank reform act, signed by President Obama in July 2010, establishes a new Office for Financial Research which seems likely to try to draw up a map. The technology should, in principle, reveal which companies are systemically important – ‘too big to fail’ – and how systemic importance is changing over time. (The new ‘Basel III’ regulations discuss what rules should apply to systemically important institutions, but at present the definition of systemic importance is no clearer than the definition of art, literature or pornography.) A future Tim Geithner should never again be surprised to discover the unexpected importance of an institution such as AIG.

., 55, 59, 71 catastrophe experts, 184–6, 191, 194–5, 208 Cave-Brown-Cave, Air Commodore Henry, 81, 83, 85, 88, 114 centralised decision making, 70, 74–5, 226, 227, 228; warfare and, 46–7, 67–8, 69, 71, 76, 78–9 centrally planned economies, 11, 21, 23–6, 68–9, 70 Challenger shuttle disaster, 184 Charles, Prince, 154 Chernobyl disaster, 185 Chile, 3, 69–72, 76, 148 China, 11, 94, 131, 143, 147, 150, 152 Christensen, Clayton, 239–40, 242, 245 Chuquicamata mine (Chile), 3 Churchill, Winston, 41–2, 82, 85 Citigroup, 205131 Clay Mathematics Institute, 110 climate change, 4, 20; carbon dioxide emissions and, 132, 156, 159–65, 166–9, 173, 176, 178–80; ‘carbon footprinting’, 159–66; carbon tax/price idea, 167–9, 178–80, 222; environmental regulations and, 169–74, 176, 177; ‘food miles’ and, 159, 160–1, 168; governments/politics and, 157–8, 163, 169–74, 176, 180; greenhouse effect and, 154–6; individual behaviour and, 158–63, 164, 165–6; innovation prizes and, 109, 179; methane and, 155, 156, 157, 159–60, 173, 179, 180; new technologies and, 94–5; simplicity/complexity paradox, 156, 157–8; Thaler-Sunstein nudge, 177–8; uncertainty and, 156 Coca-Cola, 28, 243 Cochrane, Archie, 123–7, 129, 130, 140, 238, 256 cognitive dissonance, 251–2 Cold War, 6, 41, 62–3 Colombia, 117, 147 complexity theory, 3–4, 13, 16, 49, 72103, 237 computer games, 92–3 computer industry, 11–12, 69, 70–1, 239–42 corporations and companies: disruptive technologies and, 239–44, 245–6; environmental issues and, 157–8, 159, 161, 165, 170–1, 172–3; flattening of hierarchies, 75, 224–5, 226–31; fraud and, 208, 210, 212–13, 214; innovation and, 17, 81–2, 87–9, 90, 93–4, 95–7, 108–11, 112, 114, 224–30, 232–4; limited liability, 244; patents and, 95–7, 110, 111, 114; randomised experiments and, 235–9; skunk works model and, 89, 91, 93, 152, 224, 242–3, 245; strategy and, 16, 18, 27–8, 36, 223, 224–34; see also business world; economics and finance cot-death, 120–1 credit-rating agencies, 188, 189, 190 Criner, Roy, 252 Crosby, Sir James, 211, 214, 250, 256 Cuban Missile Crisis, 41, 63 Cudahy Packing, 9 dairy products, 158, 159–60, 164–5, 166 Darwin, Charles, 86 Dayton Hudson, 243 de Montyon, Baron, 107–8 Deal or No Deal (TV game show), 33–5, 253 decentralisation, 73, 74–8, 222, 224–5, 226–31; Iraq war and, 76–8, 79; trial and error and, 31, 174–5, 232, 234 decision making: big picture thinking, 41, 42, 46, 55; consistent standards and, 28–9; diversity of opinions, 31, 44–5, 46, 48–50, 59–63; doctrine of unanimous advice, 30–1, 47–50, 62–3, 64, 78; grandiosity and, 27–8; idealized hierarchy, 40–1, 42, 46–7, 49–50, 55, 78; learning from mistakes, 31–5, 78, 119, 250–1, 256–9, 261–2; local/on the ground, 73, 74, 75, 76–8, 79, 224–5, 226–31; reporting lines/chain of command, 41, 42, 46, 49–50, 55–6, 58, 59–60, 64, 77–8; supportive team with shared vision, 41, 42, 46, 56, 62–3; unsuccessful, 19, 32, 34–5, 41–2; see also centralised decision making Deepwater Horizon disaster (April 2010), 36, 216–19, 220 Democratic Republic of Congo, 139–40 Deng Xiaoping, 1 Denmark, 148 Department for International Development (DFID), 133, 137–8 development aid: charter cities movement, 150–3; community-driven reconstruction (CDR), 137–40; corruption and, 133–5, 142–3; economic ‘big push’ and, 143–5, 148–9; feedback loops, 141–3; fundamentally unidentified questions (FUQs), 132, 133; governments and, 118, 120, 143, 144, 148–9; identification strategies, 132–5; microfinance, 116, 117–18, 120; Millennium Development Villages, 129–30, 131; product space concept, 145–8; randomised trials and, 127–9, 131, 132, 133, 134, 135–6, 137–40, 141; randomistas, 127–9, 132, 133, 135–40, 258; selection principle and, 117, 140–3, 149; SouthWest project in China, 131; success and failure, 116, 118–20, 130–1; Muhammad Yunus and, 116, 117–18 digital photography, 240–1, 242 Dirks, Ray, 211–12, 213 disk-drive industry, 239–40, 242 Djankov, Simeon, 135 domino-toppling displays, 185, 200–1 Don Basin (Russia), 21–2, 24, 27 dot-com bubble, 10, 92 Dubai, 147, 150 Duflo, Esther, 127, 131, 135, 136 Dyck, Alexander, 210, 213 eBay, 95, 230 econometrics, 132–5 economics and finance: banking system as complex and tightly coupled, 185, 186, 187–90, 200, 201, 207–8, 220; bankruptcy contingency plans, 204; Basel III regulations, 195; bond insurance business, 189–90; bridge bank/rump bank approach, 205–6; capital requirements, 203, 204; centrally planned economiepos=0000032004 >11, 21, 23–6, 68–9, 70; CoCos (contingent convertible bonds), 203–4; complexity and, 3–4; decoupling of financial system, 202, 203–8, 215–16, 220; Dodd-Frank reform act (2010), 195; employees as error/fraud spotters, 210, 211, 212, 213, 215; energy crisis (1970s), 179; evolutionary theory and, 14–17, 18–19, 174–5; improvements since 1960s, 215; inter-bank payments systems, 207; latent errors and, 209–10, 215; ‘LMX spiral’, 183–4, 189; narrow banking approach, 206–7, 215; need for systemic heat maps, 195–6; reinsurance markets, 183; zombie banks, 201–2; see also business world; corporations and companies; financial crisis (from 2007) Edison, Thomas, 236, 238 Eliot, T.S., 260 Elizabeth House (Waterloo), 170–1, 172 Endler, John, 221–2, 223, 234, 239 Engineers Without Borders, 119 Enron, 197–8, 200, 208, 210 environmental issues: biofuels, 84, 173, 176; clean energy, 91, 94, 96, 245–6; corporations/companies and, 159, 161, 165, 170–1, 172–3; renewable energy technology, 84, 91, 96, 130, 168, 169–73, 179, 245; see also climate change Equity Funding Corporation, 212 Ernst and Young, 199 errors and mistakes, types of, 208–10; latent errors, 209–10, 215, 218, 220 European Bank for Reconstruction and Development (EBRD), 188 European Union, 169, 173 Evans, Martin, 100 evolutionary theory, 6, 12–13, 15–17, 174, 258; business world and, 14–17, 174–5, 233–4; Darwin and, 86; digital world and, 13–14, 259–60; economics and, 14–17, 174–5; Endler’s guppy experiments, 221–2, 223, 239; fitness landscapes, 14–15, 259; Leslie Orgel’s law, 174, 175, 176, 177, 178, 180; problem solving and, 14–15, 16; selective breeding and, 175–6 expertise, limits of, 6–8, 16, 17, 19, 66 extinction events, biological, 18–19 Exxon (formerly Jersey Standard), 9, 12, 188, 245 F-22 stealth fighter, 93 Facebook, 90, 91 failure: in business, 8–10, 11–12, 18–19, 36, 148–9, 224, 239–46; chasing of losses, 32–5, 253–4, 256; in complex and tightly coupled systems, 185–90, 191–2, 200, 201, 207–8, 219, 220; corporate extinctions, 18–19; denial and, 32, 34–5, 250–3, 255–6; disruptive technologies, 239–44, 245–6; of established industries, 8–10; government funding and, 148–9; hedonic editing and, 254; honest advice from others and, 256–7, 258, 259; learning from, 31–5, 78, 119, 250–1, 256–9, 261–2; modern computer industry and, 11–12, 239–42; as natural in market system, 10, 11, 12, 244, 245–6; niche markets and, 240–2; normal accident theory, 219; recognition of, 36, 224; reinterpreted as success, 254–5, 256; shifts in competitive landscape, 239–46; ‘Swiss cheese model’ of safety systems, 186–7, 190, 209, 218; types of error and mistake, 208–10; willingness to fail, 249–50, 261–2; of young industries, 10 Fearon, James, 137, Federal Aviation Administration, 210 Federal Reserve Bank, 193–4 feedback, 25, 26, 42, 178, 240; in bureaucratic hierarchies, 30–1; development and, 141–3; dictatorships’ immunity to, 27; Iraq war and, 43–5, 46, 57–8, 59–62; market system and, 141; praise sandwich, 254; public services and, 141; self-employment and, 258; yes-men and, 30 Feith, Douglas, 44, 45 Ferguson, Chris ‘Jesus’, 32 Fermi nuclear reactor (near Detroit), 187 Festinger, Leon, 251 financial crisis (from 2007), 5, 11, 25; AIG and, 189, 193–5, 215–16, 228; bankers’ bonuses, 198; banking system as complex and tightly coupled, 185, 186, 187–90, 200, 201, 207–8, 220; bond insurance business and, 189–90; collateralised debt obligations (CDOs), 190, 209; credit default swaps (CDSs), 187–9, 190, 194; derivatives deals and, 198, 220; faulty information systems and, 193–5; fees paid to administrators, 197; government bail-outs/guarantees, 202, 214, 223; Lehman Brothers and, 193, 194, 196–200, 204–5, 208, 215–16; ‘LMX spiral’ comparisons, 183–4, 189; Repo 105 accounting trick, 199 Financial Services Authority (FSA), 214 Firefox, 221, 230 Fleming, Alexander, 83 Food Preservation prize, 107, 108 Ford Motor Company, 46–7 fossil record, 18 Fourier, Joseph, 155 fraud, corporate, 208, 210, 212–13, 214 Friedel, Robert, 80 Frost, Robert, 260 A Funny Thing Happened on the Way to the Forum (musical), 248 Gage, Phineas, 21, 27 Galapagos Islands, 86, 87 Gale (US developer), 152 Galenson, David, 260 Galileo, 187 Galland, Adolf, 81 Gallipoli campaign (1915), 41–2 Galvin, Major General Jack, 62, 256 game theory, 138, 205 Gates, Bill, 110, 115 Gates, Robert, 59, 64, 78 Gates Foundation, 110 Geithner, Tim, 193–5, 196 GenArts, 13 General Electric, 9, 12, 95 Gilbert, Daniel, 255, 256 GlaxoSmithKline, 95 Glewwe, Paul, 127–8 Global Positioning System (GPS), 113 globalisation, 75 Google, 12, 15, 90, 91, 239, 245, 261; corporate strategy, 36, 231–4; Gmail, 233, 234, 241, 242; peer monitoring at, 229–30 Gore, Al, An Inconvenient Truth, 158 Göring, Hermann, 81 government and politics: climate change and, 157–8, 163, 169–74, 176, 180; development aid and, 118, 120, 143, 144, 148–9; financial crisis (from 2007) and, 193–5, 198–9, 202, 214, 215–16, 223; grandiosity and, 27–8; ideal hierarchies and, 46pos=00002pos=0000022558 >7, 49–50, 62–3, 78; innovation funding, 82, 88, 93, 97, 99–101, 102–3, 104, 113; lack of adaptability rewarded, 20; pilot schemes and, 29, 30; rigorous evaluation methods and, 29* Graham, Loren, 26 Grameen Bank, 116, 117 Greece, 147 Green, Donald, 29* greenhouse effect, 154–6 Gulf War, first, 44, 53, 65, 66, 67, 71; Battle of 73 Easting, 72–3, 74, 79 Gutenberg, Johannes, 10 Haldane, Andrew, 195, 258 Halifax (HBOS subsidiary), 211 Halley, Edmund, 105 Halliburton, 217 Hamel, Gary, 221, 226, 233, 234 Hanna, Rema, 135 Hannah, Leslie, 8–10, 18 Hanseatic League, 150 Harrison, John, 106–7, 108, 110, 111 Harvard University, 98–9, 185 Hastings, Reed, 108 Hausmann, Ricardo, 145 Hayek, Friedrich von, 1, 72, 74–5, 227 HBOS, 211, 213, 214 healthcare sector, US, 213–14 Heckler, Margaret, 90–1 Henry the Lion, 149, 150, 151–2, 153 Hewitt, Adrian, 169 Hidalgo, César, 144–7, 148 Higginson, Peter, 230 Hinkley Point B power station, 192–3, 230–1 Hitachi, 11 Hitler, Adolf, 41, 82, 83, 150 HIV-AIDS, 90–1, 96, 111, 113 Holland, John, 16, 103 Hong Kong, 150 Houston, Dame Fanny, 88–9, 114 Howard Hughes Medical Institute (HHMI), 101–3, 112 Hughes (computer company), 11 Humphreys, Macartan, 136, 137, 138–40 Hurricane aircraft, 82* IBM, 11, 90, 95–6 In Search of Excellence (Peters and Waterman, 1982), 8, 10 India, 135, 136, 143, 147, 169 individuals: adaptation and, 223–4, 248–62; climate change and, 158–63, 164, 165–6; experimentation and, 260–2; trial and error and, 31–5 Indonesia, 133–4, 142, 143 Innocentive, 109 innovation: corporations and, 17, 81–2, 87–9, 90, 93–4, 95–7, 108–11, 112, 114, 224–30, 232–4; costs/funding of, 90–4, 99–105; failure as price worth paying, 101–3, 104, 184, 215, 236; government funding, 82, 88, 93, 97, 99–101, 102–3, 104, 113; grants and, 108; in health field, 90–1, 96; large teams and specialisation, 91–4; market system and, 17, 95–7, 104; new technologies and, 89–90, 91, 94–5; parallel possibilities and, 86–9, 104; prize methodology, 106–11, 112, 113–14, 179, 222–3; randomistas and, 127–9, 132, 133, 135–40, 258; return on investment and, 83–4; skunk works model, 89, 91, 93, 152, 224, 242–3, 245; slowing down of, 90–5, 97; small steps and, 16, 24, 29, 36, 99, 103, 143, 149, 153, 224, 259–60; space tourism, 112–13, 114; specialisation and, 91–2; speculative leaps and, 16, 36, 91, 99–100, 103–4, 259–60; unpredictability and, 84–5 Intel, 11, 90, 95 International Christelijk Steunfonds (ICS), 127–9, 131 International Harvester, 9 International Rescue Committee (IRC), 137–8, 139 internet, 12, 15, 63, 90, 113, 144, 223, 233, 238, 241; randomised experiments and, 235–6, 237; see also Google Iraq war: al Anbar province, 56–7, 58, 64, 76–7; civil war (2006), 39–40; Commander’s Emergency Response Program (CERP), 77; counterinsurgency strategy, 43, 45, 55–6, 58, 60–1, 63–4, 65; decentralisation and, 76–8, 79; feedback and, 43–5, 46, 57–8, 59–62; FM 3–24 (counter-insurgency manual), 63; Forward Operating Bases (FOBs), 51–3, 57, 65; Haditha killings (19 November 2005), 37–9, 40, 42, 43, 52; new technologies and, 71, 72, 74, 78–9, 196; Samarra bombing (22 February 2006), 39; Tal Afar, 51, 52, 53–5, 61, 64, 74, 77, 79; trial and error and, 64–5, 66–7; US turnaround in, 35, 40, 46, 50–1, 53–6, 57–8, 59–61, 63–5, 78; US/allied incompetence and, 38, 39–40, 42–5, 46, 50, 64, 67, 79, 223; Vietnam parallels, 46 J&P Coats, 9 Jacobs, Jane, 87 James, Jonathan, 30 Jamet, Philippe, 192 Janis, Irving, 62 Japan, 11, 143, 176, 204, 208 Jay-Z, 119 Jo-Ann Fabrics, 235 Jobs, Steve, 19 Joel, Billy, 247–8, 249 Johnson, President Lyndon, 46, 47, 49–50, 60, 62, 64, 78 Jones, Benjamin F., 91–2 Joyce, James, 260 JP Morgan, 188 Kahn, Herman, 93 Kahneman, Daniel, 32, 253 Kantorovich, Leonid, 68–9, 76 Kaplan, Fred, 77 Karlan, Dean, 135 Kauffmann, Stuart, 16, 103 Kay, John, 206–7, 208, 215, 259 Keller, Sharon, 252 Kelly, Terri, 230 Kennedy, President John F., 41, 47, 62–3, 84, 113 Kenya, 127–9, 131 Kerry, John, 20 Keynes, John Maynard, 181 Kilcullen, David, 57, 60–1 Klemperer, Paul, 96, 205 Klinger, Bailey, 145 Kotkin, Stephen, 25 Kremer, Michael, 127–8, 129 Krepinevich, Andy, 45 Lanchester, John, 188 leaders: decision making and, 40–2; failure of feedback and, 30–1, 62; grandiosity and, 27–8; ignoring of failure, 36; mistakes by, 41–2, 56, 67; need to believe in, 5–6; new leader as solution, 59 Leamer, Ed, 132* Leeson, Nick, 184–5, 208 Lehman Brothers, 193, 194, 196–200, 204–5, 208, 215–16 Lenin Dam (Dnieper River), 24 Levine, John, 48–9 Levitt, Steven, 132–3 Liberia, 136–9 light bulbs, 162, 177 Lind, James, 122–3 Lindzen, Richard, 156 Livingstone, Ken, 169 Lloyd’s insurance, 183 Lloyds TSB, 214 Local Motors, 90 Lockheed, Skunk Works division, 89, 93, 224, 242 Lomas, Tony, 196, 197–200, 204, 205, 208, 219 Lomborg, Bjorn, 94 longitude problem, 105–7, 108 Lu Hong, 49 Lübeck, 149–50, 151–2, 153 Luftwaffe, 81–2 MacFarland, Colonel Sean, 56–7, 64, 74, 76–7, 78 Mackay, General Andrew, 67–8, 74 Mackey, John, 227, 234 Madoff, Bernard, 208212–13 Magnitogorsk steel mills, 24–5, 26, 153 Malawi, 119 Mallaby, Sebastian, 150, 151 management gurus, 8, 233 Manhattan Project, 82, 84 Manso, Gustavo, 102 Mao Zedong, 11, 41 market system: competition, 10–11, 17, 19, 75, 95, 170, 239–46; ‘disciplined pluralism’, 259; evolutionary theory and, 17; failure in as natural, 10, 11, 12, 244, 245–6; feedback loops, 141; innovation and, 17, 95–7, 104; patents and, 95–7; trial and error, 20; validation and, 257–8 Markopolos, Harry, 212–13 Marmite, 124 Maskelyne, Nevil, 106 mathematics, 18–19, 83, 146, 247; financial crisis (from 2007) and, 209, 213; prizes, 110, 114 Mayer, Marissa, 232, 234 McDonald’s, 15, 28 McDougal, Michael, 252 McGrath, Michael, 252 McMaster, H.R.


pages: 408 words: 108,985

Rewriting the Rules of the European Economy: An Agenda for Growth and Shared Prosperity by Joseph E. Stiglitz

"World Economic Forum" Davos, accelerated depreciation, Airbnb, Alan Greenspan, balance sheet recession, bank run, banking crisis, barriers to entry, Basel III, basic income, behavioural economics, benefit corporation, Berlin Wall, bilateral investment treaty, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, corporate social responsibility, creative destruction, credit crunch, deindustrialization, discovery of DNA, diversified portfolio, Donald Trump, eurozone crisis, Fall of the Berlin Wall, financial engineering, financial intermediation, Francis Fukuyama: the end of history, full employment, gender pay gap, George Akerlof, gig economy, Gini coefficient, Glass-Steagall Act, hiring and firing, housing crisis, Hyman Minsky, income inequality, independent contractor, inflation targeting, informal economy, information asymmetry, intangible asset, investor state dispute settlement, invisible hand, Isaac Newton, labor-force participation, liberal capitalism, low interest rates, low skilled workers, market fundamentalism, mini-job, moral hazard, non-tariff barriers, offshore financial centre, open economy, Paris climate accords, patent troll, pension reform, price mechanism, price stability, proprietary trading, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, Robert Shiller, Ronald Reagan, selection bias, shareholder value, Silicon Valley, sovereign wealth fund, TaskRabbit, too big to fail, trade liberalization, transaction costs, transfer pricing, trickle-down economics, tulip mania, universal basic income, unorthodox policies, vertical integration, zero-sum game

The Report of the European Commission’s High-level Expert Group on Bank Structural Reform (usually referred to as the Liikanen Report of 2012 after its chairman, former governor of the Bank of Finland Erkki Liikanen) set out the official position for the Eurozone in detail: a structural separation of riskier activities from deposit-taking in order to protect European credit creation from volatile trading cycles. In fact, it resembled the separation between investment and commercial banking mandated under the Glass-Steagall Act of 1933, before its repeal in 1999. The Liikanen proposals went further than the new international rules, known as Basel III, and the Volcker rule in the United States,* in recognizing that to protect society from the reckless behavior of banks, both regulatory and structural reforms are needed. In the wake of the Liikanen Report, the critical question of how to simplify finance, increase competition, and reduce perverse incentives remains.

See also central banks; ECB banking union creation (see banking union) big bank risk, managing, 166–69, 202 capital requirements increase, opposing, 163–64 common deposit insurance and, 90–91, 178, 179–80 common resolution and, 181–83 common supervision of, 180–81 cooperatives and local institutions, 184–86 decision-making impact of, 160–61 downturn affecting, 108 euro impacting, 175–79 globalization and, 309–10 housing finance and, 233, 234–35 lending caution of, 80–81 public (national) banks, 183 public development banks, 116–18 regulating and supervising, 84–85, 85–86, 161–63, 180–81 regulation and change, resisting, 159 shadow banking, 169–74 Single Market and, 37 too-big-to-fail banks, 164–69, 202 banking union common deposit insurance, 90–91, 178, 179–80 common resolution, 181–83 common supervision, 180–81 lack of, 90–91, 178 problems related to, 175–79 bankruptcy, 40–41 Banks-Know-Best Doctrine, 20–21 Bank Structural Reform, Report of the European Commission’s High-level Expert Group on, 167 Banque de France, 38–39 bargaining power. See also collective bargaining restoring workers’, 260, 262–65 weakened, 257, 258–59 base erosion and profit shifting, 197 Basel III, 167 behavioral economics, 16 BEPS initiative, 197 bonds. See government bonds; quantitative easing Britain, 31, 86, 88, 114, 140–41, 155, 247 Brown, Gordon, 308 budget deficits Austerity Doctrine related to, 17 limiting (see Stability and Growth Pact) policies impacting, 33–34, 47–48, 58–59 2008 crisis impacting, 35 businesses.


pages: 662 words: 180,546

Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown by Philip Mirowski

"there is no alternative" (TINA), Adam Curtis, Alan Greenspan, Alvin Roth, An Inconvenient Truth, Andrei Shleifer, asset-backed security, bank run, barriers to entry, Basel III, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, blue-collar work, bond market vigilante , bread and circuses, Bretton Woods, Brownian motion, business cycle, capital controls, carbon credits, Carmen Reinhart, Cass Sunstein, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, constrained optimization, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, dark matter, David Brooks, David Graeber, debt deflation, deindustrialization, democratizing finance, disinformation, do-ocracy, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, facts on the ground, Fall of the Berlin Wall, financial deregulation, financial engineering, financial innovation, Flash crash, full employment, George Akerlof, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Greenspan put, Hernando de Soto, housing crisis, Hyman Minsky, illegal immigration, income inequality, incomplete markets, information asymmetry, invisible hand, Jean Tirole, joint-stock company, junk bonds, Kenneth Arrow, Kenneth Rogoff, Kickstarter, knowledge economy, l'esprit de l'escalier, labor-force participation, liberal capitalism, liquidity trap, loose coupling, manufacturing employment, market clearing, market design, market fundamentalism, Martin Wolf, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Nash equilibrium, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, oil shock, Pareto efficiency, Paul Samuelson, payday loans, Philip Mirowski, Phillips curve, Ponzi scheme, Post-Keynesian economics, precariat, prediction markets, price mechanism, profit motive, public intellectual, quantitative easing, race to the bottom, random walk, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, Savings and loan crisis, savings glut, school choice, sealed-bid auction, search costs, Silicon Valley, South Sea Bubble, Steven Levy, subprime mortgage crisis, tail risk, technoutopianism, The Chicago School, The Great Moderation, the map is not the territory, The Myth of the Rational Market, the scientific method, The Theory of the Leisure Class by Thorstein Veblen, The Wisdom of Crowds, theory of mind, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, Tobin tax, tontine, too big to fail, transaction costs, Tyler Cowen, vertical integration, Vilfredo Pareto, War on Poverty, Washington Consensus, We are the 99%, working poor

If you don’t have a working comprehension of how the economic system failed—and a major thesis of this book is that most economists did not understand the economy’s peculiar path prior to the crisis, and persisted in befuddlement in the aftermath—then the notion that one could impose some one-size-fits-all format of rational regulation is a vain delusion. This catastrophic intellectual failure of the economics profession at large should quash wistful evocations of Cold War versions of “regulation” on the left, and further, frame the implosion of things such as the Dodd-Frank initiative and Basel III. The intellectual wing of the neoliberal movement had actually long made this argument concerning easy appeals to regulation many times before; the difference is that they currently preach that all and sundry consequently should simply capitulate to their natural state of ignorance, and give up most (but not all—an important caveat) attempts at steering the economy.

The dominant neoliberal narrative of the crisis, which had stabilized by 2010, blaming it entirely on government policies, is described below in chapter 5. 11 Lehmann, “Let Them Eat Dogma.” 12 This statement takes into account the numerous assertions of “reform,” from the Dodd-Frank bill in the U.S. to the Basel III international bank regulations. On these issues, see R. Lee, Running the World’s Markets; Konzelman et al., “Governance, Regulation and Financial Market Instability”; and Konczal, Will It Work? How Will We Know? “I am surprised—more than surprised, shocked even—that all that’s transpired since 2007–8 has produced as little as it has” (the historian Steve Fraser quoted in Chan, “Dissenters Fault Report on Crisis in Finance”).

Index A Acemoglu, Daron Adbusters Admati, Anat AEA (American Economics Association), AEI (American Enterprise Institute) “After the Crash of 2008” (Prasch), The Age of Uncertainty (PBS series) Agnotology, defined Agriculture, Department of AIG Financial Products Akerlof, George Allais, Maurice AlphaSimplex American Economic Review American Economics Association (AEA) American Enterprise Institute (AEI) American Finance Association American Institute of Certified Public Accountants American Majority Americans for Prosperity Ameriquest Angelides, Phil Anglo Irish Bank Animal Spirits (Akerlof and Shiller) Annapolis Center AOL Armey, Dick Arnsperger, Christian Aron, Raymond Arrow–Debreu theory Arrow, Kenneth Artaud, Antonin, The Theatre and Its Double, Atlanta Federal Reserve Bank Atlas Economic Research Foundation Atlas Shrugged (Ayn Rand) Audacity of Intervention Auerbach, Robert Austrian School of economics Austrian-inflected Hayekian legal theory Austro-libertarianism Ausubel, Lawrence B Bailey, Martin Baker, Dean Bank concentration in US Bank of America Bank of New York Mellon Bank of Sweden Bank of Sweden Nobel Prize Barclays Barnett, Clive Barro, Robert Basel III Bayesian Nash equilibrium Bear Stearns Beck, Glenn Becker, Gary The Beginning of History (De Angelis) Behrent, Michael Benjamin, Walter Benson, Bruce Berliner Zeitung Bernal, J. D. Bernanke, Ben on asset purchase program Brunnermeier on as Chairman of Federal Reserve Bank Board on CRA on economic crisis as economic influence on EMH on Friedman on Great Moderation on Great Recession “hold-to-maturity” prices Kestenbaum on on Lehman failure Mirowski on on mortgage market on “Panic of 2007” paper pronounced absolution upon orthodox economics profession shadow banking on TARP testimony before FCIC Bernard, Andrew Bernstein, Jared Bertelsmann AG Besley, Tim Bhagwati, Jagdish Big Lie The Big Short (Lewis) The Birth of Biopolitics (Foucault) Black Rock Black-Scholes option pricing Blackstone Group Blackwater (Scahill) Blanchard, Olivier Blinder, Alan Bloomberg, Michael Bockman, Johanna, Markets in the Name of Socialism Body Alteration Boettke, Peter Bookstaber, Richard Bootle, Roger Born, Brooksley Boskin, Michael Bradley Foundation “Break the Glass: Bank Recapitalization Plan” (Swagel) Brenner, Robert Bretton Woods Bristol University British Academy British National Health Service British Royal Society Brookings Institution Brooks, David Brown, Gordon Brown, Wendy Brunnermeier, Markus Buchanan, James Buiter, Willem Bulow, Jeremy Bush, George Business Week Buycott C Calabria, Mark Caldwell, Bruce Calomiris, Charles Calvo, Guillermo Cambridge University Cameron, David Campbell, John Capitalism and Freedom (Friedman) Carbon emission permits Cassano, Joseph Cassidy, John Cato Institute CDS (Credit Default Swap) Center for Audit Quality Center for Market Processes at GMU Center for the Dissemination of Economic Information CETUSA (Council for Educational Travel in the USA) CFPB (Consumer Financial Protection Bureau) Change.org Chari, V.


Money and Government: The Past and Future of Economics by Robert Skidelsky

"Friedman doctrine" OR "shareholder theory", Alan Greenspan, anti-globalists, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, barriers to entry, Basel III, basic income, Bear Stearns, behavioural economics, Ben Bernanke: helicopter money, Big bang: deregulation of the City of London, book value, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, constrained optimization, Corn Laws, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Graeber, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, Donald Trump, Eugene Fama: efficient market hypothesis, eurozone crisis, fake news, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, forward guidance, Fractional reserve banking, full employment, Gini coefficient, Glass-Steagall Act, Goodhart's law, Growth in a Time of Debt, guns versus butter model, Hyman Minsky, income inequality, incomplete markets, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Rogoff, Kondratiev cycle, labour market flexibility, labour mobility, land bank, law of one price, liberal capitalism, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, long and variable lags, low interest rates, market clearing, market friction, Martin Wolf, means of production, Meghnad Desai, Mexican peso crisis / tequila crisis, mobile money, Modern Monetary Theory, Money creation, Mont Pelerin Society, moral hazard, mortgage debt, new economy, Nick Leeson, North Sea oil, Northern Rock, nudge theory, offshore financial centre, oil shock, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, Phillips curve, placebo effect, post-war consensus, price stability, profit maximization, proprietary trading, public intellectual, quantitative easing, random walk, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, rising living standards, risk/return, road to serfdom, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, shareholder value, short selling, Simon Kuznets, structural adjustment programs, technological determinism, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, tontine, too big to fail, trade liberalization, value at risk, Washington Consensus, yield curve, zero-sum game

The record of augmenting banks’ capital stocks, which started with Basel I in 1988 and continued with Basel II in 1994, hardly inspires confidence. Basel I and II required banks to hold ‘riskweighted’14 capital equal to 8 per cent of their assets. (See Ch. 11, pp. 317–18.) When the crash came, the actual equity of some of the major banks was only 2–3 per cent of their assets. The new minimum capital ratios stipulated by Basel III – up to 30 per cent for systemically important banks – similarly assume that risks are measurable either by the regulator or by the banks themselves. If they are unknown and unknowable, there will always be either too much or too little capital in store for the next turn in the tide of activity.

The problem with stress tests is not so much that banks will find ways to evade them, but that they rely on the same risk-assessment techniques that failed to spot the risks banks were running before 2007. A more radical-sounding route to ‘resilience’ is to raise banks’ reserve or liquidity requirements. Cash reserves against deposits were run down to almost nothing pre-crash. This caused a credit-crunch when banks stopped lending to each other. Basel III seeks to ensure that at all times banks have enough sufficiently liquid assets to meet all payments due in thirty days. Since 2009, UK-based banks have been required to hold a buffer of central bank reserves or gilts, the amounts to be determined by ‘stress tests’. In the USA and China, 10 per cent and 20 per cent liquidity ratios are in force, respectively.

London: Centre for Policy Studies. 460 Index Italic figures refer to graphs and charts Abramovitz, Moses, 157, 158 the Acadamy and scholarship, 11–12, 13 ageing populations, 301–2, 371 AIG bail-out (2008), 325 Albermarle, Duke of, 78 Alesina, Alberto, 192, 231, 233, 241 anthropology, classical, 24 anti-Semitism, 30–31, 131 ‘Aquarius’ CDO structure, 326 Aquinas, Thomas, 28–9 Aristotle, 22, 23, 31 Asian Development Bank Institute, 327 ‘asset-backed commercial paper’ (ABCP), 326 ‘asset-backed securities’ (ABSs), 322–6, 327, 330 Attwood, Thomas, 48 austerity policy, 3, 49, 84, 114, 219, 225 and Bocconi School, 192, 231 and comparative recovery patterns, 241–4, 242, 243, 273, 273–4 cost of to British economy, 243–4, 244, 245 and financial folklore, 235–6 and inequality, 245–6 neo-classical errors, 232–3 Osborne’s crucial mistake, 229–30 Reinhart-Rogoff work, 232 theory behind, 228–35, 236–9 Austria, 91, 92 Austrian School, 46, 104, 192, 226, 296, 349–50 automation, 299, 370–71 Bagehot, Walter, Lombard Street (1873), 50 balance of payments, 103, 142, 143, 144, 145, 150, 152, 153, 159–60, 165, 332 balanced budget theory and gold standard, 56–7 and Keynesian economics, 126–7, 137–8, 142, 143–4, 146, 149–50, 151, 155 as mainstream until Keynes, 76, 95, 98 mandated by EU fiscal rules, 242–3 neo-Victorian reassertion of (from 1980s), 76, 114, 185, 193, 215, 221–2 nineteenth-century fiscal policy, 9, 29, 43, 76, 85, 87–8, 92 and post-2008 austerity policies, 223–4, 227–39, 242–6 461 i n de x balanced budget theory – (cont.) post-W W1 attempts to return to, 106–14 Roosevelt on, 130 Stiglitz’s balanced-budget multiplier, 235* Baldwin, Stanley, 108 Balogh, Thomas, 169 Bank of England 1950s view on monetary policy, 146 actions during 2008 crisis, 234–5, 253–4, 254, 257 Bank Charter Act (1844), 50 Bank Rate, 58, 101–2, 113, 115, 116, 145, 146, 249, 251, 253–6, 254, 261–2, 276 ‘Consols’ (consolidated debt), 43, 80–81 Currency School vs Banking School debate, 49–50 founding of (1694), 42–3, 80 given ‘operational independence’ (1998), 249, 272–3 imposes ‘Corset’ (1973), 168 inflation targeting, 188, 189, 249–53 and ‘law of reflux’, 46 as ‘lender of last resort’, 50, 249 ‘loss function’ for inflation target, 252 macroeconomic model (2004–10), 233, 310, 310–11 Monetary Policy Committee (MPC), 249, 254, 265, 275 during Napoleonic wars, 45–8 power over credit conditions, 105, 115–16 Prudential Regulatory Authority, 363 quantitative easing (QE) by, 254, 257, 259–62, 263–73, 274, 275–7, 276 Bank of International Settlements, 342–3 Bank of Japan, 271 Bank Rate after 2007–8 crisis, 254, 261–2, 279 during 2008 crisis, 253–6, 254, 278 and Bank of England, 58, 101–2, 113, 115, 116, 145, 146, 249, 251, 253–6, 254, 261–2, 276 and broad money monetarism, 186 in Cunliffe’s model, 54, 54–5, 102, 145 after First World War, 101–2 and inflation targeting, 188, 249, 251, 252, 358–9 and Keynes, 101, 102, 115, 166, 255* and managed gold standard, 71 in pre-crash USA, 340 and Radcliffe Report (1959), 146 set by independent central banks, 188, 249–50 and Thornton, 47, 278 transmission mechanism of, 250, 250–51 and Wicksell, 69, 70, 358–9 Banking School, 49–50 banks Austrian School’s 100 per cent reserve requirement, 350, 367 bail-outs, 30, 217, 223, 319–20, 364–5 ‘bank lending channel’, 64 Basel I (1988) and Basel II (2003), 320, 363 Basel III, 363, 364 capital adequacy requirements, 320, 363–4 capital/collateral requirements weakened, 320 collapse of in 2008 crisis, 217, 223, 319 and consolidated debt, 43, 80–81 continued bonuses after crash, 319–20 462 i n de x continued complaints by over regulation, 363–4, 367 creation of money by, 27, 34, 61, 67–8, 71, 311 damage inflicted by, 361–2 deposit and joint-stock banking, 92 deregulation, 307–9, 310–16, 318–22, 328, 332–3 development of modern system, 34 functional separation proposals, 362–3 funding of CR As by, 326–7, 329 Glass–Steagall overturned in USA (1999), 319 growth of unregulated sector, 168 late-medieval rediscovery of, 33–4 leverage concept, 317–18, 322 liquidity concept, 316–17 ‘living wills’, 365 LTROs (long-term refinancing operations), 257 macroprudential regulation, 363–5 maturity mismatch of SPVs, 326 ‘money multiplier’, 35, 64, 146, 179, 185, 258–9, 268–9, 277–8, 280 off balance-sheet assets, 318, 324, 325–6 post-crash reform agenda, 361–8 pre-crash orthodoxy, 5, 308–11 and quantity theory, 61, 64, 65–6, 67–70 reasons for regulation of, 316 reserve or liquidity requirements, 364 root of problem as greed, 365–6 solvency concept, 316–17 ‘stress testing’, 364 see also financial system Barber, Anthony, 167 Barings Bank demise of (1995), 366 rescue of (1890), 50 basic income guarantee, 371 Bavarian Banking Association, 266 Bayes’ theorem, 209 Bear Stearns, 217 ‘behavioural economics’, 388–90 Bernanke, Ben, 105, 179, 188, 248, 256, 275, 278, 334, 344 Besley, Tim, 226, 235 Bible, 30 Bismarck, Otto, 89, 92 Blanchard, Olivier, 230–31, 239 BNDES (Brazilian Development Bank), 354 Bocconi School, 192, 231 Bodin, Jean, 33 Boer War, 86 bond markets, 7, 90–92, 148, 186, 218, 219, 235, 246, 287, 341 Borio, C., 342–3 Brash, Donald, 188 Bretton Woods system, 16, 139, 159, 374–3, 381 collapse of in 1970s, 16–17, 162, 164–5, 166–7, 184 Brexit vote (June 2016), 257, 316*, 373 Britain, xviii adoption of Keynesian policy, 141, 142–3 austerity policy see austerity policy: cost to British economy bullionist vs ‘real bills’ controversy, 44, 45–9 centralization of tax collection, 80 Currency School vs Banking School debate, 44, 49–50 debate on post-crash policy, 225–8 deficit and public sector borrowing statistics (1956–2013), 156 Employment White Paper (1944), 141, 142 463 i n de x Britain – (cont.) final suspension of gold standard (1931), 113, 125 First World War borrowing, 95 fiscal experience (1692–2012), 77 forced out of ERM (1992), 188 GDP per capita growth (1919–2007), 154 ‘Geddes Axe’ (1920s), 108 and gold standard, 9, 42, 43, 44, 45–50, 53, 57–9, 80, 101 and Great Depression, 97, 98, 110–13 growth Keynesianism (1960–70), 148–9, 150–51, 152 industrial relations system, 147, 167–8, 169 inflation peak (1975), 166 inter-war cyclical downturns, 107, 113 and mercantilism, 78–81, 82 monetarism in, 185, 186–8, 189, 192–3, 249 nationalization in post-war period, 142, 158 post-crash bank liquidity ratios, 364 pre-crash housing bubble, 304 ‘prices and incomes policy’ in, 147, 150, 151, 167–8 public finances before 2008 crash, 224, 225 Public Sector Borrowing Requirement (PSBR), 155–6 public spending and tax revenue (1950–2000), 157 rearmament in late 1930s, 113 recession of early 1980s, 186–7 recoinage debate (1690s), 40, 41–3 return to gold standard (1925), 102, 103, 107 sharp rise in inequality since 1970s, 288–9, 299–300, 300 slow recovery from 2008 crash, 241, 242, 243–4, 245, 273, 273–4 ‘stop-go’ in post-war period (‘fine tuning’), 142–3, 145–6, 150, 152 victories over France (eighteenthcentury), 43, 80, 81 see also Bank of England; Conservative Party; Labour Party British Empire, 57, 58, 80 Brittan, Samuel, 225 Brown, Gordon, 193, 220, 221–3, 354, 357 and 2008 crash, 220, 223, 224 declares era of ‘boom and bust’ over, 215 ‘prudence’ as watchword, 226 Bryan, William Jennings, 52 budget deficit see balanced budget theory Buchanan, James, 198 Buffett, Warren, 326 Bundesbank, 140, 154, 257, 275 Bush, George W., 242 business schools, financing of, 13 Cairncross, A.


pages: 573 words: 115,489

Prosperity Without Growth: Foundations for the Economy of Tomorrow by Tim Jackson

"World Economic Forum" Davos, Alan Greenspan, bank run, banking crisis, banks create money, Basel III, basic income, biodiversity loss, bonus culture, Boris Johnson, business cycle, carbon footprint, Carmen Reinhart, Cass Sunstein, choice architecture, circular economy, collapse of Lehman Brothers, creative destruction, credit crunch, Credit Default Swap, critique of consumerism, David Graeber, decarbonisation, degrowth, dematerialisation, en.wikipedia.org, energy security, financial deregulation, Financial Instability Hypothesis, financial intermediation, full employment, Garrett Hardin, Glass-Steagall Act, green new deal, Growth in a Time of Debt, Hans Rosling, Hyman Minsky, impact investing, income inequality, income per capita, intentional community, Intergovernmental Panel on Climate Change (IPCC), Internet of things, invisible hand, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, laissez-faire capitalism, liberal capitalism, low interest rates, Mahatma Gandhi, mass immigration, means of production, meta-analysis, Money creation, moral hazard, mortgage debt, Murray Bookchin, Naomi Klein, negative emissions, new economy, ocean acidification, offshore financial centre, oil shale / tar sands, open economy, paradox of thrift, peak oil, peer-to-peer lending, Philip Mirowski, Post-Keynesian economics, profit motive, purchasing power parity, quantitative easing, retail therapy, Richard Thaler, road to serfdom, Robert Gordon, Robert Solow, Ronald Reagan, science of happiness, secular stagnation, short selling, Simon Kuznets, Skype, smart grid, sovereign wealth fund, Steve Jobs, TED Talk, The Chicago School, The Great Moderation, The Rise and Fall of American Growth, The Spirit Level, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, Tragedy of the Commons, universal basic income, Works Progress Administration, World Values Survey, zero-sum game

The identity follows mathematically from the construction of the GDP as a measure of both incomes and expenditures (see for example Jackson and Victor 2013, 2015). 22 Reinhart and Rogoff (2013: 8, figure 3). At the end of 2015, the gross external debt of the US public and private sector was almost $18 trillion – higher than the GDP, see http://ticdata.treasury.gov/Publish/debta2015q3.html (accessed 15 March 2016). 23 Piketty (2014). 24 See, for instance, Credit Suisse (2014: 34). 25 The Basel III guidelines on capital adequacy were amongst these initiatives. See BIS (2011). 26 Minsky (1992, 1986). 27 See, for example, Barwell and Burroughs (2011). See also Bezemer (2010), Keen (1995, 2011), Wolf (2015). 28 See Greenspan (2008). 29 ‘A short history of modern finance’, The Economist, 18 October 2008, p. 98. 30 Citibank quote is from the Financial Times, 10 July 2007.

‘US credit unions reach new record: $1 trillion in assets’. Credit Union Journal 16(15): 1, 26. BIS 2015. Secular Stagnation, Debt Overhang and Other Rationales for Sluggish Growth, Six Years on. BIS Working Paper 482. Geneva: Bank for International Settlements. Online at www.bis.org/publ/work482.pdf (accessed 4 November 2015). BIS 2011. Basel III: ‘A global regulatory framework for more resilient banks and banking systems. Basel Committee on Banking Supervision/Bank for International Settlements’. Online at www.bis.org/publ/bcbs189.pdf (accessed 15 March 2016). Blewitt, John and Ray Cunningham (eds) 2015. The Post-Growth Project: How the End of Economic Growth Could Bring a Fairer and Happier Society.


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Red-Blooded Risk: The Secret History of Wall Street by Aaron Brown, Eric Kim

Abraham Wald, activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, Asian financial crisis, Atul Gawande, backtesting, Basel III, Bayesian statistics, Bear Stearns, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Black Swan, book value, business cycle, capital asset pricing model, carbon tax, central bank independence, Checklist Manifesto, corporate governance, creative destruction, credit crunch, Credit Default Swap, currency risk, disintermediation, distributed generation, diversification, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, experimental subject, fail fast, fear index, financial engineering, financial innovation, global macro, illegal immigration, implied volatility, independent contractor, index fund, John Bogle, junk bonds, Long Term Capital Management, loss aversion, low interest rates, managed futures, margin call, market clearing, market fundamentalism, market microstructure, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, natural language processing, open economy, Pierre-Simon Laplace, power law, pre–internet, proprietary trading, quantitative trading / quantitative finance, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, shareholder value, Sharpe ratio, special drawing rights, statistical arbitrage, stochastic volatility, stock buybacks, stocks for the long run, tail risk, The Myth of the Rational Market, Thomas Bayes, too big to fail, transaction costs, value at risk, yield curve

Back-office risk management means compiling what has become a huge volume of risk reports for decision makers, regulators, and investors. Risk IT people build the computer systems, risk controllers get the data right, and risk reporting specialists know how to put it together. Within risk reporting there are regulatory experts, especially in Basel II and Basel III capital rules, and people who specialize in specific types of risk: market risk, credit risk, and operational risk (the last named is everything other than market risk and credit risk; it actually is mostly concerned with dangers, not risks). While I have done both front-office and back-office risk management, I consider myself a middle-office risk manager.

Once we built a middle office, regulators discovered it. Their interests were similar to those of CEOs. So the middle office took over the job of communicating with regulators. The regulatory reports were still produced in the back office, but the middle office designed and explained them. The Basel II and later Basel III capital accords are based on middle-office concepts and data. Investors never showed much interest in middle-office reports, which I find curious since that’s the information you need to evaluate the risk of an investment in a bank. Financial statements of large, diversified financial firms have little meaning.


pages: 688 words: 147,571

Robot Rules: Regulating Artificial Intelligence by Jacob Turner

"World Economic Forum" Davos, Ada Lovelace, Affordable Care Act / Obamacare, AI winter, algorithmic bias, algorithmic trading, AlphaGo, artificial general intelligence, Asilomar, Asilomar Conference on Recombinant DNA, autonomous vehicles, backpropagation, Basel III, bitcoin, Black Monday: stock market crash in 1987, blockchain, brain emulation, Brexit referendum, Cambridge Analytica, Charles Babbage, Clapham omnibus, cognitive dissonance, Computing Machinery and Intelligence, corporate governance, corporate social responsibility, correlation does not imply causation, crowdsourcing, data science, deep learning, DeepMind, Demis Hassabis, distributed ledger, don't be evil, Donald Trump, driverless car, easy for humans, difficult for computers, effective altruism, Elon Musk, financial exclusion, financial innovation, friendly fire, future of work, hallucination problem, hive mind, Internet of things, iterative process, job automation, John Markoff, John von Neumann, Loebner Prize, machine readable, machine translation, medical malpractice, Nate Silver, natural language processing, Nick Bostrom, Northpointe / Correctional Offender Management Profiling for Alternative Sanctions, nudge unit, obamacare, off grid, OpenAI, paperclip maximiser, pattern recognition, Peace of Westphalia, Philippa Foot, race to the bottom, Ray Kurzweil, Recombinant DNA, Rodney Brooks, self-driving car, Silicon Valley, Stanislav Petrov, Stephen Hawking, Steve Wozniak, strong AI, technological singularity, Tesla Model S, The Coming Technological Singularity, The Future of Employment, The Signal and the Noise by Nate Silver, trolley problem, Turing test, Vernor Vinge

Secondly, and also quite important, it would “reassure the owners-users of agents”, because, by considering the eventual “agents” liability, it could at least limit their own (human) responsibility for the ‘agents’ behaviour.85 In addition to the registration of AI on a distributed ledger such as blockchain, that ledger could also display the assets of the AI, with the result that any potential counterparty would know exactly how creditworthy the AI is. The international regulatory framework for banks (the current iteration of which is known as “Basel III”) requires that banks hold a minimum amount of regulatory capital which can be called upon in the case of an emergency.86 Similar requirements might be imposed on AI in order for it to be permitted to take advantages of the various benefits that personality brings.87 If an AI’s assets or credit rating drop below a certain level, then it could be frozen automatically out of certain legal and economic rights. 4.3.2 What Are the Limits?

See also Tom Allen and Robin Widdison, “Can Computers Make Contracts?”, Harvard Journal of Law and Technology, Vol. 9 (1996), 26. 85Francisco Andrade, Paulo Novais, Jose Machado, and Jose Neves, “Contracting Agents: Legal Personality and Representation”, Artificial Intelligence and Law, Vol. 15 (2007), 357–373. 86“Basel III: International Regulatory Framework for Banks”, Website of the Bank for International Settlements, https://​www.​bis.​org/​bcbs/​basel3.​htm, accessed 1 June 2018. 87Giovanni Sartor, “Agents in Cyberlaw”, Proceedings of the Workshop on the Law of Electronic Agents (LEA 2002), 3–12. 88Samir Chopra and Laurence White, “Artificial Agents—Personhood in Law and Philosophy”, Proceedings of the 16th European Conference on Artificial Intelligence (Amsterdam: IOS Press, 2004), 635–639. 89This is not always the case: a company could be ultimately owned by a trust, whose beneficiaries are non-human, such as a charity supporting animals. 90Koops, Hildebrandt, and Jaquet-Chiffell, “Bridging the Accountability Gap: Rights for New Entities in the Information Society?”


pages: 665 words: 146,542

Money: 5,000 Years of Debt and Power by Michel Aglietta

accelerated depreciation, Alan Greenspan, bank run, banking crisis, Basel III, Berlin Wall, bitcoin, blockchain, Bretton Woods, British Empire, business cycle, capital asset pricing model, capital controls, cashless society, central bank independence, circular economy, collapse of Lehman Brothers, collective bargaining, corporate governance, David Graeber, debt deflation, dematerialisation, Deng Xiaoping, double entry bookkeeping, energy transition, eurozone crisis, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, forward guidance, Francis Fukuyama: the end of history, full employment, German hyperinflation, income inequality, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invention of writing, invisible hand, joint-stock company, Kenneth Arrow, Kickstarter, land bank, liquidity trap, low interest rates, margin call, means of production, Money creation, money market fund, moral hazard, Nash equilibrium, Network effects, Northern Rock, oil shock, planetary scale, plutocrats, precautionary principle, price stability, purchasing power parity, quantitative easing, race to the bottom, reserve currency, secular stagnation, seigniorage, shareholder value, special drawing rights, special economic zone, stochastic process, Suez crisis 1956, the payments system, the scientific method, tontine, too big to fail, trade route, transaction costs, transcontinental railway, Washington Consensus

This negotiating structure would make acceptable compromises more achievable, for the recognition of the mutual influences between large zones would reduce the incentive for freeriding. The second compromise involves strengthening financial regulations and making them mutually compatible. This is an immense task, and one which financial lobbies continue to challenge. It has already been undertaken within the framework of the Basel III negotiations, under the aegis of the committee of G20 central bankers. This reinforced prudential regulation brings together many different elements. The first is the need to impose order on shadow banking, without which it is impossible to establish any financial stability. The second is the creation of macroprudential regulation compatible across the big central banks.

See also accounting; payment system(s); unit of account Addresses to the German Nation (Fichte), 129 ad hoc compromises/cooperation/negotiation/structures, 360, 361, 363, 367, 385, 386 agrarian empires, money and state in, 85–6 Aldrich–Vreeland Act of 30 May 1908, 219 Alibaba, 156 alienable goods, 67 alternative theory of value, 81 American natural interest rate, 278f Andreau, Jean, 72n9, 99n19 annuities, 192, 200, 205, 206, 207 antiquity crises in metal-based systems of, 191–5 money and state in, 85–6 antoninianus, 103, 104, 193 Argentina crisis (2002), 243 Aristotle, 32, 91, 95, 102, 287 Arrow, Kenneth, 165 as, 98, 99, 192 Asian crisis (1997–98), 237 Asset-Backed Commercial Paper (ABCP), 273 auctioneer, as Walras metaphor, 19–20, 21, 31, 38 aureus, 99, 103, 111, 112t Austrian school, 55, 56, 57 autonomisation of political/sovereignty, 70, 71, 73f, 83 B Bagehot, Walter, 211, 212–15, 246, 250 balance of payments adjustment of, 313, 319, 323, 324, 335, 353, 358, 384, 390, 397 China from 2008 to 2010, 379t deficit in/surplus in, 243, 295 emergency financing of, 393 equilibrium, 316, 350, 351 impact on, 378 instabilities/imbalances in, 257, 336, 344, 394 long-term stabilisers of UK balance of payments, 303t settlement of, 296 stabilisation of, 255, 302–4 banco florin, 136 bancor, 313–14 Bank Act of 1844, 212 bank collapses, 210, 250, 275, 310 Bank for International Settlements (BIS), 23, 80b, 158, 323, 324, 332, 335 banking club, 175 banking crises, 141, 219, 231, 237, 239, 240, 266, 305 banking principle, 56, 135, 137, 179, 257, 287, 316 Bank of Amsterdam, 123, 135, 136, 201 Bank of England, 135, 136, 143, 201, 204, 209, 210, 211, 212, 213–14, 246, 249–53, 256, 297, 301, 305, 384 Bank of France, 366 Bank of the United States, 134 bank reserves, 48, 49 banks. See central banks; commercial banks; merchant banks; specific banks Baring Brothers, 214–15, 305 barter, 21, 28, 30, 45, 49–51, 76–77b Basel Financial Stability Forum, 389 Basel III negotiations, 388 Basic Law of 1948, 131, 366, 368 benchmarking, 26 Bentham, Jeremy, 166 Bernanke, Ben, 376 bill of exchange, 108, 116–25, 119f, 136, 144, 250, 252 billons, 193–4 bimetallism, 140n50, 199, 202, 217, 217n13, 245, 297 biodiversity, 170 BIS (Bank for International Settlements), 23, 80b, 158, 323, 324, 332, 335 bitcoin, 157, 158, 173–6 Bland–Allison Act of 1878, 217n12 blockchain, 175–6 Blum, Léon, 310 Bodin, Jean, 115 bond crisis (1994), 237 Braudel, Fernand, 83, 84, 120–1, 135, 145 Brazil crisis (1999), 243 Brender, Anton, 162n6 Breton, Stéphanie, 68 Bretton Woods system, 286, 296, 302, 311–29, 348, 350, 352–3, 386, 387, 389, 390, 391 bronze money, 98, 192 Bryan, William Jennings, 217n13 Bundesbank, 260–1 Burns, Arthur, 327 business cycles, and financial cycles (1976 Q1–2014 Q3), 333f C Caillé, Alain, 66 Cailleux, P., 111 capital, foundations of, 48 Capital Asset Pricing Model (CAPM), 25 capitalism birth and spread of, 135 end of golden age of, 146 first era of, 198 as global, 144 invention of, 116 monetary regulation under, 245–83 most fundamental tendency of, 149 private credit as source of rise of, 115 private monetary innovations as inherent to history of, 156 spirit of, 107 transformation of, 120–5, 204 vertical debts in, 62–6 carbon currency, 80b Cardoso, Fernando Henrique, 234 ‘cash in advance’ hypothesis, 29 Cechetti, Stephen, 335 cens, 107 centime, 112t central banks, 48, 49, 56, 65, 69, 74, 75, 80b, 126, 139, 141–3, 151, 154–5, 158, 160, 161–4, 177–8, 179, 245, 246–9, 283 centralisation, 137–8, 139, 142, 152, 155, 189, 201, 221, 246 Chicago Boys, 232 Chinese antiquity, 88–9 Chinese currency, 371–83 Chinese exchange policy, 374–7 Chinese exchange rate, 372–4, 378 Chinese hyperinflation, 230–1 Chinese management of yuan and accumulation of exchange reserves, 377–80 Chinese Yuan Hong Kong (CNH) market, 381 chrematism, 95, 96 Christian-Democratic Union, 130 cigarette currency, 222–3 Civilization and Capitalism (Braudel), 121 Clearing House Loan Certificates, 141 clearing houses, 138, 139, 141–2, 143 climate change, 70, 85, 100, 170, 179, 182, 357 Coeuré, Benoît, 367 Cohen, Benjamin J., 387n17 Coinage Act of 1792, 134 of 1834, 140n50 of 1873, 217 collective action, 14, 168, 175, 312, 366 commensurability, 32, 50, 51, 68, 83 commercial banks, 69, 211, 215, 226, 238, 250, 252, 272, 322 Committee of Twenty (C20), 327, 329, 345, 391 Commons/commons, 80b, 168n11, 174, 180, 183 common unit of account, 41–2, 79, 222 confidence.


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Sabotage: The Financial System's Nasty Business by Anastasia Nesvetailova, Ronen Palan

Alan Greenspan, algorithmic trading, bank run, banking crisis, barriers to entry, Basel III, Bear Stearns, Bernie Sanders, big-box store, bitcoin, Black-Scholes formula, blockchain, Blythe Masters, bonus culture, Bretton Woods, business process, collateralized debt obligation, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, critique of consumerism, cryptocurrency, currency risk, democratizing finance, digital capitalism, distributed ledger, diversification, Double Irish / Dutch Sandwich, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, financial intermediation, financial repression, fixed income, gig economy, Glass-Steagall Act, global macro, Gordon Gekko, high net worth, Hyman Minsky, independent contractor, information asymmetry, initial coin offering, interest rate derivative, interest rate swap, Joseph Schumpeter, junk bonds, Kenneth Arrow, litecoin, London Interbank Offered Rate, London Whale, Long Term Capital Management, margin call, market fundamentalism, Michael Milken, mortgage debt, new economy, Northern Rock, offshore financial centre, Paul Samuelson, peer-to-peer lending, plutocrats, Ponzi scheme, Post-Keynesian economics, price mechanism, regulatory arbitrage, rent-seeking, reserve currency, Ross Ulbricht, shareholder value, short selling, smart contracts, sovereign wealth fund, Thorstein Veblen, too big to fail

Further consolidation is likely and, indeed, seen by some as a solution to the European financial system’s lack of competitiveness. Jamie Dimon, the legendary CEO of J. P. Morgan, has been a champion for the cause of bigger banks, applying his considerable political skills on the practical side: he lobbied hard against the introduction of Basel III capital requirements on bigger banks, which he deemed ‘un-American’.23 4. Bankers ensure that profits are flowing to them, but if left unpunished will also ensure that their mistakes are paid for by others. Actually, why confine yourselves to profit flows? What if you can get handsomely paid for losses, too?


pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", "there is no alternative" (TINA), "World Economic Forum" Davos, affirmative action, Alan Greenspan, Albert Einstein, algorithmic trading, Andy Kessler, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, book value, Bretton Woods, BRICs, British Empire, business cycle, buy the rumour, sell the news, capital asset pricing model, carbon credits, Carl Icahn, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, Daniel Kahneman / Amos Tversky, deal flow, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Dr. Strangelove, Dutch auction, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Fall of the Berlin Wall, financial engineering, financial independence, financial innovation, financial thriller, fixed income, foreign exchange controls, full employment, Glass-Steagall Act, global reserve currency, Goldman Sachs: Vampire Squid, Goodhart's law, Gordon Gekko, greed is good, Greenspan put, happiness index / gross national happiness, haute cuisine, Herman Kahn, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", job automation, Johann Wolfgang von Goethe, John Bogle, John Meriwether, joint-stock company, Jones Act, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, low interest rates, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Michael Milken, Mikhail Gorbachev, Milgram experiment, military-industrial complex, Minsky moment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, National Debt Clock, negative equity, NetJets, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, Phillips curve, planned obsolescence, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, proprietary trading, public intellectual, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, Reminiscences of a Stock Operator, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Thaler, Right to Buy, risk free rate, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, Satyajit Das, savings glut, shareholder value, Sharpe ratio, short selling, short squeeze, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, stock buybacks, survivorship bias, tail risk, Teledyne, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, the new new thing, The Predators' Ball, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, two and twenty, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

Financial Reform Act that emerged was 2,300 pages long. The Congress website warned: “This bill is very large, and loading it may cause your web browser to perform sluggishly, or even freeze.” As one commentator put it: “it’s no longer an act, it’s word processors gone mad.”12 In 2010, 500 central bankers and regulators from 27 nations produced Basel III, 440 pages of new rules. The frenetic activity recalled Italian author Giuseppe di Lampedusa: “everything must change so that everything can stay the same.” As before, the revised rules were susceptible to being manipulated, through regulatory arbitrage. Many of the rules had little to do with improving regulation, instead focusing on familiar regulatory turf wars or battles for power, staff and budgets, as well as settling of old scores.

See also AIG Greece, 355 Baker, Martin, 239 Bakkavo, 275 balance sheets, parking assets, 288 balloon payment mortgages, 182 Balls, Ed, 82 Baltic Dry Index, 344 Baltimore, Maryland, 333 Banco Santander, 79 bancor, 30 Bank of America, 191 merger with Merrill Lynch, 339 Bank of America (BA), 291 Bank of China, 333 Bank of England, 25, 50, 81, 195, 240, 272, 299, 342 analysis of financial networks, 272 Bank of International Settlement (BIS), 74-75, 268 Bank of Manhattan Trust, 79 Bank, The, 308 bankers earnings, 323-324 extravagances of, 322-323 Bankers Trust (BT), 141 Bankhead, Tallulah, 247 bankruptcies, 56, 242 Enron, 49 Lehman Brothers, 333, 339 banks, 32-33 bad loans (2008), 343-344 capital injections into, 348-350 CitiGroup, 75-77 credit cards, 71-72 culture of, 311-312 exotic products, 73-74 failures, 179, 358 investment, 57 jobs, 307-308 leveraged buyouts (LBOs), 147-148 loans, 70-71 networks, 270 regulations, 65-67 risks, 67-70 shadow banking system, 192 Banks, Tyra, 322 banksters, 294 Banksy, 365 Barbarians at the Gate: The Fall of RJR Nabisco, 135 Barclaycard, 71 Barclays Bank, 71, 275 Barclays Global Investors (BGI), 123 Barings, 227 BARRA, 123 Barrack, Tom, 327 Barron’s financial paper, 34 Barron, Clarence, 34 bartering, 23 Bartiromo, Maria, 93 Basel 2, 200 Basel III, 353 Basel, Switzerland, 74 basis risk, 213 Bass, Robert M., 137 Bateman, Patrick, 313 Baum, L. Frank, 26 Bauman, Zegmunt, 44, 312 Beach Boys, The, 157 Bean, Charles, 50 Bear Stearns, 162, 191, 204, 249, 316, 318, 326, 338 Asset Management, 191 Beasley, Jane, 62 Beat the Market, 121 Beatles, The, 157, 166 Beatrice, 141 Beckham, David, 339 Beerbohm, Max, 253 beggar-thy-neighbor policies, 349 behavioral economists, 125-126 bell-shaped normal distribution curves, 117 Beller, Ron, 321 benchmarking exercises, 315 benefits, employee, 47 Benna, Ted, 48 Berdymukhamedov, Gurbanguly, 299 Bergdorf Goodman, 330 Bergerac, Michel, 147 Berkshares program, 36 Berkshire Hathaway, 261, 322.


pages: 829 words: 187,394

The Price of Time: The Real Story of Interest by Edward Chancellor

"World Economic Forum" Davos, 3D printing, activist fund / activist shareholder / activist investor, Airbnb, Alan Greenspan, asset allocation, asset-backed security, assortative mating, autonomous vehicles, balance sheet recession, bank run, banking crisis, barriers to entry, Basel III, Bear Stearns, Ben Bernanke: helicopter money, Bernie Sanders, Big Tech, bitcoin, blockchain, bond market vigilante , bonus culture, book value, Bretton Woods, BRICs, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, cashless society, cloud computing, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, commodity super cycle, computer age, coronavirus, corporate governance, COVID-19, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cryptocurrency, currency peg, currency risk, David Graeber, debt deflation, deglobalization, delayed gratification, Deng Xiaoping, Detroit bankruptcy, distributed ledger, diversified portfolio, Dogecoin, Donald Trump, double entry bookkeeping, Elon Musk, equity risk premium, Ethereum, ethereum blockchain, eurozone crisis, everywhere but in the productivity statistics, Extinction Rebellion, fiat currency, financial engineering, financial innovation, financial intermediation, financial repression, fixed income, Flash crash, forward guidance, full employment, gig economy, Gini coefficient, Glass-Steagall Act, global reserve currency, global supply chain, Goodhart's law, Great Leap Forward, green new deal, Greenspan put, high net worth, high-speed rail, housing crisis, Hyman Minsky, implied volatility, income inequality, income per capita, inflation targeting, initial coin offering, intangible asset, Internet of things, inventory management, invisible hand, Japanese asset price bubble, Jean Tirole, Jeff Bezos, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Rogoff, land bank, large denomination, Les Trente Glorieuses, liquidity trap, lockdown, Long Term Capital Management, low interest rates, Lyft, manufacturing employment, margin call, Mark Spitznagel, market bubble, market clearing, market fundamentalism, Martin Wolf, mega-rich, megaproject, meme stock, Michael Milken, Minsky moment, Modern Monetary Theory, Mohammed Bouazizi, Money creation, money market fund, moral hazard, mortgage debt, negative equity, new economy, Northern Rock, offshore financial centre, operational security, Panopticon Jeremy Bentham, Paul Samuelson, payday loans, peer-to-peer lending, pensions crisis, Peter Thiel, Philip Mirowski, plutocrats, Ponzi scheme, price mechanism, price stability, quantitative easing, railway mania, reality distortion field, regulatory arbitrage, rent-seeking, reserve currency, ride hailing / ride sharing, risk free rate, risk tolerance, risk/return, road to serfdom, Robert Gordon, Robinhood: mobile stock trading app, Satoshi Nakamoto, Satyajit Das, Savings and loan crisis, savings glut, Second Machine Age, secular stagnation, self-driving car, shareholder value, Silicon Valley, Silicon Valley startup, South Sea Bubble, Stanford marshmallow experiment, Steve Jobs, stock buybacks, subprime mortgage crisis, Suez canal 1869, tech billionaire, The Great Moderation, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thorstein Veblen, Tim Haywood, time value of money, too big to fail, total factor productivity, trickle-down economics, tulip mania, Tyler Cowen, Uber and Lyft, Uber for X, uber lyft, Walter Mischel, WeWork, When a measure becomes a target, yield curve

As the Bank of England chief economist Andrew Haldane commented: ‘Dodd–Frank makes Glass–Steagall [the landmark Depression-era regulatory Act, totalling just 37 pages] look like throat-clearing,’ while Europe’s planned new regulations were reckoned to be twice as long as Dodd–Frank’s.55 International banking rules, set by the Basel Committee, also increased exponentially, from Basel I (1988) at 30 pages to Basel III (2011) at 616 pages. ‘[C]entral banks are printing rules almost as fast as they’re printing money,’ quipped James Grant. More regulations meant more regulators. Once upon a time, the City of London had been ruled by a raised eyebrow from the Governor of the Bank of England.fn9 Even in the late 1970s, the Old Lady of Threadneedle Street employed fewer than eighty regulators – one for every 11,000 City workers.

The authors point out that over the previous four years, interest rates in 21 advanced economies had been negative in real terms for around half the time. 9. Carmen M. Reinhart and Jacob F. Kirkegaard, ‘Financial Repression: Then and Now’, VoxEU, March 2012. Reinhart and Kirkegaard state that under the Basel III regulations, bank holdings of government debt required lower capital requirements. In the UK in 2008, British banks were required to boost their holdings of UK government bonds. 10. Napier, ‘Capital Management in an Age of Financial Repression’. Napier states that after 2008, government-run pensions in France, Portugal, Ireland and Hungary had their assets taken over. 11.


pages: 294 words: 82,438

Simple Rules: How to Thrive in a Complex World by Donald Sull, Kathleen M. Eisenhardt

Affordable Care Act / Obamacare, Airbnb, Apollo 13, asset allocation, Atul Gawande, barriers to entry, Basel III, behavioural economics, Berlin Wall, carbon footprint, Checklist Manifesto, complexity theory, Craig Reynolds: boids flock, Credit Default Swap, Daniel Kahneman / Amos Tversky, democratizing finance, diversification, drone strike, en.wikipedia.org, European colonialism, Exxon Valdez, facts on the ground, Fall of the Berlin Wall, Glass-Steagall Act, Golden age of television, haute cuisine, invention of the printing press, Isaac Newton, Kickstarter, late fees, Lean Startup, Louis Pasteur, Lyft, machine translation, Moneyball by Michael Lewis explains big data, Nate Silver, Network effects, obamacare, Paul Graham, performance metric, price anchoring, RAND corporation, risk/return, Saturday Night Live, seminal paper, sharing economy, Silicon Valley, Startup school, statistical model, Steve Jobs, TaskRabbit, The Signal and the Noise by Nate Silver, transportation-network company, two-sided market, Wall-E, web application, Y Combinator, Zipcar

Consider how central bankers responded to increased complexity in the global banking system. In 1988 bankers from around the world met in Basel, Switzerland, to agree on international banking regulations, and published a 30-page agreement (known as Basel I). Sixteen years later, the Basel II accord was an order of magnitude larger, at 347 pages, and Basel III was twice as long as its predecessor. When it comes to the sheer volume of regulations generated, the U.S. Congress makes the central bankers look like amateurs. The Glass-Steagall Act, a law passed during the Great Depression, which guided U.S. banking regulation for seven decades, totaled 37 pages.


pages: 351 words: 93,982

Leading From the Emerging Future: From Ego-System to Eco-System Economies by Otto Scharmer, Katrin Kaufer

Affordable Care Act / Obamacare, agricultural Revolution, Albert Einstein, Asian financial crisis, Basel III, behavioural economics, Berlin Wall, Branko Milanovic, cloud computing, collaborative consumption, collapse of Lehman Brothers, colonial rule, Community Supported Agriculture, creative destruction, crowdsourcing, deep learning, dematerialisation, Deng Xiaoping, do what you love, en.wikipedia.org, European colonialism, Fractional reserve banking, Garrett Hardin, Glass-Steagall Act, global supply chain, happiness index / gross national happiness, high net worth, housing crisis, income inequality, income per capita, intentional community, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Johann Wolfgang von Goethe, Joseph Schumpeter, Kickstarter, market bubble, mass immigration, Mikhail Gorbachev, Mohammed Bouazizi, mutually assured destruction, Naomi Klein, new economy, offshore financial centre, Paradox of Choice, peak oil, ride hailing / ride sharing, Ronald Reagan, Silicon Valley, smart grid, Steve Jobs, systems thinking, technology bubble, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, Tragedy of the Commons, vertical integration, Washington Consensus, working poor, Zipcar

Act 3.0: regulated commodity. As a commodity, money turns into a vehicle for creating financial bubbles. The moment the bubble bursts, the real economy falters and everyone pays the price. The response to these crises are regulations such as the Glass-Steagall Act of 1933, which followed the stock market crash of 1929, and Basel III, which followed the market crash of 2007–08. The market deals with money as a regulated commodity. Regulations aim to ensure that the mistakes of the past don’t repeat themselves. In that regard, they are effective. The shortcoming of most regulations is that they only look one way: into the past.


The Making of a World City: London 1991 to 2021 by Greg Clark

Basel III, Berlin Wall, Big bang: deregulation of the City of London, Boris Johnson, British Empire, business climate, business cycle, capital controls, carbon footprint, congestion charging, corporate governance, cross-subsidies, Crossrail, deindustrialization, Dissolution of the Soviet Union, East Village, Fall of the Berlin Wall, financial innovation, financial intermediation, gentrification, global value chain, haute cuisine, high-speed rail, housing crisis, industrial cluster, intangible asset, job polarisation, Kickstarter, knowledge economy, knowledge worker, labour market flexibility, low skilled workers, manufacturing employment, Masdar, mass immigration, megacity, megaproject, New Urbanism, offshore financial centre, open immigration, Pearl River Delta, place-making, rent control, Robert Gordon, Silicon Valley, smart cities, sovereign wealth fund, trickle-down economics, urban planning, urban renewal, working poor

The EU continues to propose measures aimed at weakening London’s pre-eminent position in finance, including a financial transaction tax and a requirement that euro-denominated business be cleared within the eurozone. Although the UK is unlikely to ever sign up to such a transaction tax, European signatories could require it to collect tax from London banks on behalf of others. Meanwhile, the Basel III regulations are setting high capital requirements, thereby reducing the leverage that enabled high profits in the lead up to the financial crisis. The mechanisms for limiting debt also impact upon lending across many sectors, not just high-risk areas, thus affecting overall economic dynamism. A number of overlapping regulatory hurdles threaten to make it incrementally more costly for firms to carry out business or enter new markets.


pages: 920 words: 233,102

Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State by Paul Tucker

"Friedman doctrine" OR "shareholder theory", Alan Greenspan, Andrei Shleifer, bank run, banking crisis, barriers to entry, Basel III, battle of ideas, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Bretton Woods, Brexit referendum, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, conceptual framework, corporate governance, diversified portfolio, electricity market, Fall of the Berlin Wall, financial innovation, financial intermediation, financial repression, first-past-the-post, floating exchange rates, forensic accounting, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, George Akerlof, Greenspan put, incomplete markets, inflation targeting, information asymmetry, invisible hand, iterative process, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, liberal capitalism, light touch regulation, Long Term Capital Management, low interest rates, means of production, Money creation, money market fund, Mont Pelerin Society, moral hazard, Northern Rock, operational security, Pareto efficiency, Paul Samuelson, price mechanism, price stability, principal–agent problem, profit maximization, public intellectual, quantitative easing, regulatory arbitrage, reserve currency, risk free rate, risk tolerance, risk-adjusted returns, road to serfdom, Robert Bork, Ronald Coase, seigniorage, short selling, Social Responsibility of Business Is to Increase Its Profits, stochastic process, subprime mortgage crisis, tail risk, The Chicago School, The Great Moderation, The Market for Lemons, the payments system, too big to fail, transaction costs, Vilfredo Pareto, Washington Consensus, yield curve, zero-coupon bond, zero-sum game

The advent of public stress testing of banks and others, discussed below, can help to inform that badly needed debate. An International Standard of Resilience Already Exists However ethereal this might seem, I want to insist that something like a tolerance for crisis is already, and unavoidably, implicit in existing regulatory standards, such as the Basel III Accord for banks. When it was blessed by G20 leaders and, in Europe, formally passed into EU law by the Council and Parliament, politicians surely understood that they could have chosen a much tougher or much lighter standard.7 I want to argue that, under the Principles for Delegation, in the interests of effectiveness and legitimacy, what the standard means (the accepted residual tolerance for crisis) should become as explicit as possible, if only by way of illustrative examples.

Reflecting proposals that George Blunden and I had each aired in the late 1970s, mid-1980s, early 1990s, and late 2000s, the micro body was initially established, on the French model, as a formal subsidiary in order, among other things, to give the external members a statutory role in internal organization given that some supervisory outputs are effected at desk level. 18 The euro area’s macroprudential structure is much more complicated, involving the Commission and others. 19 Regulatory Capital Rules: The Federal Reserve Board’s Framework for Implementing the U.S. Basel III Countercyclical Capital Buffer, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20160908b.htm. Policy statement on the scenario design framework for stress testing: https://www.federalreserve.gov/supervisionreg/dfa-stress-tests. 20 This problem is recognized but, in my view, not solved in Amtenbrink and Lastra, “Securing Democratic Accountability.” 21 Transparency is not complete: notably, the regulator’s own models are not published given the risk of gaming by the banks (Tarullo, “Departing Thoughts”), although that may change. 22 Constancio, “Macroprudential Stress Tests.” 23 Cecchetti and Tucker, “International Cooperation?”


pages: 336 words: 95,773

The Theft of a Decade: How the Baby Boomers Stole the Millennials' Economic Future by Joseph C. Sternberg

Affordable Care Act / Obamacare, Airbnb, Alan Greenspan, American Legislative Exchange Council, Asian financial crisis, banking crisis, Basel III, Bear Stearns, Bernie Sanders, blue-collar work, centre right, corporate raider, Detroit bankruptcy, Donald Trump, Edward Glaeser, employer provided health coverage, Erik Brynjolfsson, eurozone crisis, financial engineering, future of work, gig economy, Gordon Gekko, hiring and firing, Home mortgage interest deduction, housing crisis, independent contractor, job satisfaction, job-hopping, labor-force participation, low interest rates, low skilled workers, Lyft, Marc Andreessen, Mark Zuckerberg, minimum wage unemployment, mortgage debt, mortgage tax deduction, Nate Silver, new economy, obamacare, oil shock, payday loans, pension reform, quantitative easing, Richard Florida, Ronald Reagan, Saturday Night Live, Second Machine Age, sharing economy, Silicon Valley, sovereign wealth fund, Steve Bannon, stop buying avocado toast, TaskRabbit, total factor productivity, Tyler Cowen, Tyler Cowen: Great Stagnation, uber lyft, unpaid internship, women in the workforce

§ Lenders make a guess at how much riskier they think a given loan is relative to the “risk-free” federal funds rate and add additional interest to compensate for that risk. ¶ These have come to be known as the Basel standards, after the Swiss city that serves as headquarters for the Bank for International Settlements, a financial and intellectual clearinghouse for the world’s central banks. We’re now on “Basel III,” a set of rules proposed in 2010 in response to the 2007–2008 global panic, which had notably not been prevented by either Basel I or Basel II. * They also must hold more safe assets to protect themselves in case so-called Mortgage Servicing Assets (MSAs) run into trouble. If a bank writes a new mortgage, the bank might then sell the loan to an investor or Fannie or Freddie, but will keep the right to “service” the mortgage, such as by collecting payments on behalf of the mortgage’s new owner.


pages: 352 words: 98,561

The City by Tony Norfield

accounting loophole / creative accounting, air traffic controllers' union, anti-communist, Asian financial crisis, asset-backed security, bank run, banks create money, Basel III, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, capital controls, central bank independence, colonial exploitation, colonial rule, continuation of politics by other means, currency risk, dark matter, Edward Snowden, Fall of the Berlin Wall, financial innovation, financial intermediation, foreign exchange controls, Francis Fukuyama: the end of history, G4S, global value chain, Goldman Sachs: Vampire Squid, interest rate derivative, interest rate swap, Irish property bubble, Leo Hollis, linked data, London Interbank Offered Rate, London Whale, Londongrad, low interest rates, Mark Zuckerberg, Martin Wolf, means of production, Money creation, money market fund, mortgage debt, North Sea oil, Northern Rock, Occupy movement, offshore financial centre, plutocrats, purchasing power parity, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Ronald Reagan, seigniorage, Sharpe ratio, sovereign wealth fund, Suez crisis 1956, The Great Moderation, transaction costs, transfer pricing, zero-sum game

He was taken on to replace Mervyn King, who had fallen out of favour, not least for his critical comments on British banks. 4Martin Wolf, ‘Bank of England’s Mark Carney Places a Bet on Big Finance’, Financial Times, 29 October 2013. 5Other examples include new Basel rules for the required levels of bank capital and proposals from the UK’s Vickers Commission on Banking to ‘ring fence’ retail banking from what was considered to be more risky wholesale market activities. See BIS, ‘The Basel III Capital Framework: A Decisive Breakthrough’, speech by Hervé Hannoun, Deputy General Manager of the Bank for International Settlements, 22 November 2010; Patrick Jenkins, ‘HSBC Prepares to Leap the Vickers Ringfence’, Financial Times, 8 December 2013; ‘The Independent Commission on Banking: The Vickers Report’, House of Commons Library Standard Note SNBT 6171, by Timothy Edmonds, 3 January 2013. 6Oxfam, ‘Financial Transaction Tax’, 2014, at oxfam.org. 7Thomas Richter, ‘Financial Transaction Tax Will Damage Economy’, Financial Times, 8 September 2013. 8Joshua Smith, ‘Update on the EU’s Proposed Financial Transactions Tax’, 24 June 2014, available at lexology.com. 9Philip Stafford and Brooke Masters, ‘Libor Deal Commences Rehabilitation of Benchmark’, Financial Times, 9 July 2013. 10Mark Hollingsworth and Stewart Lansley, Londongrad: From Russia with Cash.


pages: 378 words: 110,518

Postcapitalism: A Guide to Our Future by Paul Mason

air traffic controllers' union, Alan Greenspan, Alfred Russel Wallace, bank run, banking crisis, banks create money, Basel III, basic income, Bernie Madoff, Bill Gates: Altair 8800, bitcoin, Bletchley Park, Branko Milanovic, Bretton Woods, BRICs, British Empire, business cycle, business process, butterfly effect, call centre, capital controls, carbon tax, Cesare Marchetti: Marchetti’s constant, Claude Shannon: information theory, collaborative economy, collective bargaining, commons-based peer production, Corn Laws, corporate social responsibility, creative destruction, credit crunch, currency manipulation / currency intervention, currency peg, David Graeber, deglobalization, deindustrialization, deskilling, discovery of the americas, disinformation, Downton Abbey, drone strike, en.wikipedia.org, energy security, eurozone crisis, factory automation, false flag, financial engineering, financial repression, Firefox, Fractional reserve banking, Frederick Winslow Taylor, fulfillment center, full employment, future of work, game design, Glass-Steagall Act, green new deal, guns versus butter model, Herbert Marcuse, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Internet of things, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Perry Barlow, Joseph Schumpeter, Kenneth Arrow, Kevin Kelly, Kickstarter, knowledge economy, knowledge worker, late capitalism, low interest rates, low skilled workers, market clearing, means of production, Metcalfe's law, microservices, middle-income trap, Money creation, money: store of value / unit of account / medium of exchange, mortgage debt, Network effects, new economy, Nixon triggered the end of the Bretton Woods system, Norbert Wiener, Occupy movement, oil shale / tar sands, oil shock, Paul Samuelson, payday loans, Pearl River Delta, post-industrial society, power law, precariat, precautionary principle, price mechanism, profit motive, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, RFID, Richard Stallman, Robert Gordon, Robert Metcalfe, scientific management, secular stagnation, sharing economy, Stewart Brand, structural adjustment programs, supply-chain management, technological determinism, The Future of Employment, the scientific method, The Wealth of Nations by Adam Smith, Transnistria, Twitter Arab Spring, union organizing, universal basic income, urban decay, urban planning, vertical integration, Vilfredo Pareto, wages for housework, WikiLeaks, women in the workforce, Yochai Benkler

Leave a well-regulated space for complex financial activities. The aim would be to ensure the global finance system could, in the short to medium term, return to its historic role: efficiently allocating capital between firms, sectors, savers and lenders, etc. The regulations could be a lot simpler than the Basel III Treaty, because they would be backed up by strict criminal enforcement and professional codes in banking, accountancy and law. The guiding principles would be to reward innovation and to penalize and discourage rent-seeking behaviour. For example, it would become a breach of professional ethics for a chartered accountant or qualified lawyer to propose a tax avoidance scheme, or for a hedge fund to store uranium in a warehouse to drive its spot price higher.


pages: 438 words: 109,306

Tower of Basel: The Shadowy History of the Secret Bank That Runs the World by Adam Lebor

Alan Greenspan, banking crisis, Basel III, Bear Stearns, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business climate, central bank independence, corporate governance, corporate social responsibility, deindustrialization, eurozone crisis, fiat currency, financial independence, financial innovation, foreign exchange controls, forensic accounting, Glass-Steagall Act, Goldman Sachs: Vampire Squid, haute cuisine, IBM and the Holocaust, Kickstarter, low interest rates, Occupy movement, offshore financial centre, Ponzi scheme, power law, price stability, quantitative easing, reserve currency, special drawing rights

So there has to be a trade where one does the best one can.”4 Looking back with hindsight at the economic crash of late 2007, it is clear that the capital requirements of Basel II were insufficient, said McDonough. “The aim of Basel II was to bring up capital requirements but to do so in a way that would not stifle the world economy. In the event the rules were not as strong or as fine-tuned as they needed to be when the crisis came.”5 The Basel III accords, which have not yet been implemented, aim to further hone the regulations governing banks’ capital requirements. No matter how dedicated the regulators are, they are always behind the traders. McDonough said, “We did not anticipate the blowing up of the exotic instruments that brought down Lehman Brothers and the spin effect that resulted from that.


pages: 350 words: 103,270

The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . And Are Ready to Do It Again by Nicholas Dunbar

Alan Greenspan, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, Black Swan, Black-Scholes formula, bonus culture, book value, break the buck, buy and hold, capital asset pricing model, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, delayed gratification, diversification, Edmond Halley, facts on the ground, fear index, financial innovation, fixed income, George Akerlof, Glass-Steagall Act, Greenspan put, implied volatility, index fund, interest rate derivative, interest rate swap, Isaac Newton, John Meriwether, junk bonds, Kenneth Rogoff, Kickstarter, Long Term Capital Management, margin call, market bubble, money market fund, Myron Scholes, Nick Leeson, Northern Rock, offshore financial centre, Paul Samuelson, price mechanism, proprietary trading, regulatory arbitrage, rent-seeking, Richard Thaler, risk free rate, risk tolerance, risk/return, Ronald Reagan, Salesforce, Savings and loan crisis, seminal paper, shareholder value, short selling, statistical model, subprime mortgage crisis, The Chicago School, Thomas Bayes, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, yield curve, zero-sum game

Treasury new powers to take over mortgage agencies Lehman Brothers tries to raise capital from Korea Development Bank, but talks go nowhere (September 8) Fannie Mae and Freddie Mac placed into conservatorship by Treasury (September 12) Counterparties lose confidence in Lehman, prompting a weekend of attempted deal making at the New York Fed Credit ratings agencies warn of imminent downgrade of AIG; New York Fed holds discussions concurrent with Lehman talks (September 14) U.K. government declines to facilitate takeover of Lehman by Barclays; Bank of America takes over Merrill Lynch (September 15) Lehman files for bankruptcy (September 16) New York Fed provides an emergency $85 billion loan facility to save AIG from bankruptcy triggered by collateral calls, and appoints a new CEO at AIG Reserve Primary Fund, invested in Lehman, “breaks the buck,” forcing the Fed to support money market funds (September 24) Goldman Sachs and Morgan Stanley receive new equity investments and become bank holding companies, formalizing their “too big to fail” status FDIC seizes Washington Mutual (September 29) Congress fails to pass TARP, and the Dow falls 770 points (October 3) Revised TARP bill passes Congress (October 6) Wells Fargo acquires Wachovia Germany, Belgium, and The Netherlands announce bailouts for problem banks (October 8) Federal Reserve and international central banks impose coordinated emergency interest rate cuts (October 10) OIS-Libor spread peaks at 364 basis points: interbank lending has broken down (October 12) Royal Bank of Scotland receives emergency bailout from U.K. government, and CEO Sir Fred Goodwin is ousted (October 14) U.S. government announces injection of $250 billion of TARP capital into U.S. banks New York Fed creates two special companies to buy AIGFP-related CDOs and securities lending-related mortgage bonds, paying counterparties such as Goldman 100 percent of market value (October 3) Avoiding the need for U.K. government funds, Barclays raises £7 billion of capital from Middle Eastern investors (November) President Obama elected; Geithner tapped as Treasury Secretary HSH Nordbank receives German government bailout (December) Irish government bails out banks Citigroup receives an additional $20 billion TARP bailout and $300 billion of debt guarantees from the U.S. government 2009 (January) U.K. government announces additional bailout of Royal Bank of Scotland and other banks President Obama inaugurated (April) Case-Shiller house price index reaches a trough 2010 (May) Greece is frozen out of bond markets, leading to an EU and IMF bailout (July) Goldman pays $550 million to settle SEC lawsuit over Abacus 2007 AC-1 Dodd-Frank bill signed into law (September) Basel III banking rules finalized (October) “Robo-signing” foreclosure scandal leads to wave of lawsuits against banks (November) Market confidence in Ireland evaporates, leading to an IMF/EU bailout in December Notes Chapter One 1. According to the Bank for International Settlements (Triennial Central Bank Surveys, December 2007 and September 2010), the global turnover in currency forwards outstripped spot transactions in 1995 and today is twice the size of the spot market. 2.


pages: 397 words: 112,034

What's Next?: Unconventional Wisdom on the Future of the World Economy by David Hale, Lyric Hughes Hale

"World Economic Forum" Davos, affirmative action, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, Berlin Wall, biodiversity loss, Black Swan, Bretton Woods, business cycle, capital controls, carbon credits, carbon tax, Cass Sunstein, central bank independence, classic study, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, currency risk, Daniel Kahneman / Amos Tversky, debt deflation, declining real wages, deindustrialization, diversification, energy security, Erik Brynjolfsson, Fall of the Berlin Wall, financial engineering, financial innovation, floating exchange rates, foreign exchange controls, full employment, Gini coefficient, Glass-Steagall Act, global macro, global reserve currency, global village, high net worth, high-speed rail, Home mortgage interest deduction, housing crisis, index fund, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), inverted yield curve, invisible hand, Just-in-time delivery, Kenneth Rogoff, Long Term Capital Management, low interest rates, Mahatma Gandhi, Martin Wolf, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, military-industrial complex, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mortgage tax deduction, Network effects, new economy, Nicholas Carr, oil shale / tar sands, oil shock, open economy, passive investing, payday loans, peak oil, Ponzi scheme, post-oil, precautionary principle, price stability, private sector deleveraging, proprietary trading, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, risk/return, Robert Shiller, Ronald Reagan, Savings and loan crisis, sovereign wealth fund, special drawing rights, subprime mortgage crisis, technology bubble, The Great Moderation, Thomas Kuhn: the structure of scientific revolutions, Tobin tax, too big to fail, total factor productivity, trade liberalization, Tragedy of the Commons, Washington Consensus, Westphalian system, WikiLeaks, women in the workforce, yield curve

Minimum Canadian banks’ Tier 1 and Tier 2 capital ratios were already at 7 and 10 percent, respectively, when Basel II requirements were at 4 and 8 percent. Moreover, Tier 1 capital was required to be at least 75 percent common equity. Since then, Canadian banks have significantly increased their capital ratios and, at well into double-digit territory for both Tier I and total capital, are well ahead of the new 7 percent Basel III capital guidelines agreed to at the November 2010 G-20 meeting in Seoul. Along with the constraints noted above, Canadian banks also face a regulatory limit on total leverage of twenty time’s total capital, which has been more conservative than in most other jurisdictions. (Depending on individual institution performance, OSFI can allow a somewhat higher ratio or demand a lower ratio.)


pages: 457 words: 125,329

Value of Everything: An Antidote to Chaos The by Mariana Mazzucato

"Friedman doctrine" OR "shareholder theory", activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Airbnb, Alan Greenspan, bank run, banks create money, Basel III, behavioural economics, Berlin Wall, Big bang: deregulation of the City of London, bonus culture, Bretton Woods, business cycle, butterfly effect, buy and hold, Buy land – they’re not making it any more, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Carmen Reinhart, carried interest, clean tech, Corn Laws, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, David Ricardo: comparative advantage, debt deflation, European colonialism, Evgeny Morozov, fear of failure, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, full employment, G4S, George Akerlof, Glass-Steagall Act, Google Hangouts, Growth in a Time of Debt, high net worth, Hyman Minsky, income inequality, independent contractor, index fund, informal economy, interest rate derivative, Internet of things, invisible hand, John Bogle, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour market flexibility, laissez-faire capitalism, light touch regulation, liquidity trap, London Interbank Offered Rate, low interest rates, margin call, Mark Zuckerberg, market bubble, means of production, military-industrial complex, Minsky moment, Money creation, money market fund, negative equity, Network effects, new economy, Northern Rock, obamacare, offshore financial centre, Pareto efficiency, patent troll, Paul Samuelson, peer-to-peer lending, Peter Thiel, Post-Keynesian economics, profit maximization, proprietary trading, quantitative easing, quantitative trading / quantitative finance, QWERTY keyboard, rent control, rent-seeking, Robert Solow, Sand Hill Road, shareholder value, sharing economy, short selling, Silicon Valley, Simon Kuznets, smart meter, Social Responsibility of Business Is to Increase Its Profits, software patent, Solyndra, stem cell, Steve Jobs, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, transaction costs, two and twenty, two-sided market, very high income, Vilfredo Pareto, wealth creators, Works Progress Administration, you are the product, zero-sum game

Montgomery, ‘Bankruptcy court must clarify Millennium Labs fraud release', Law 360, 20 March 2017. 26. Barba and de Vivo, ‘An “unproductive labour” view of finance' p. 1491. 27. A. Hutton and E. Kent, The Foreign Exchange and Over-the-counter Interest Rate Derivatives Market in the United Kingdom (London: Bank of England, 2016), p. 225. 28. Bank for International Settlements, Basel III phase-in arrangements: http://www.bis.org/bcbs/basel3/basel3_phase_in_arrangements.pdf 29. Jordan Weissmann, ‘How Wall Street devoured corporate America', The Atlantic, 5 March 2013: https://www.theatlantic.com/business/archove/2-13/03/how-wall- street-devoured-corporate-america/273732/ 30. L.


pages: 479 words: 113,510

Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America by Danielle Dimartino Booth

Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, bank run, barriers to entry, Basel III, Bear Stearns, Bernie Sanders, Black Monday: stock market crash in 1987, break the buck, Bretton Woods, business cycle, central bank independence, collateralized debt obligation, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, financial deregulation, financial engineering, financial innovation, fixed income, Flash crash, forward guidance, full employment, George Akerlof, Glass-Steagall Act, greed is good, Greenspan put, high net worth, housing crisis, income inequality, index fund, inflation targeting, interest rate swap, invisible hand, John Meriwether, Joseph Schumpeter, junk bonds, liquidity trap, London Whale, Long Term Capital Management, low interest rates, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, moral hazard, Myron Scholes, natural language processing, Navinder Sarao, negative equity, new economy, Northern Rock, obamacare, Phillips curve, price stability, proprietary trading, pushing on a string, quantitative easing, regulatory arbitrage, Robert Shiller, Ronald Reagan, selection bias, short selling, side project, Silicon Valley, stock buybacks, tail risk, The Great Moderation, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, yield curve

I began to cover the subject of collapsing bond inventories at the biggest banks. The twenty-one primary dealers that traded with the Federal Reserve had trimmed their debt holdings to $56 billion by March 27, 2013, down from $235 billion in 2007. The combination of Dodd-Frank, with its aim of limiting risk-taking, and Basel III, with its increased capital requirements, had proved to be a toxic combination. Was it any wonder that commercial bank officers were stumped? The stated aim of QE was to encourage banks to loan money. But other rules required they hold more capital against fresh loans if they did—to say nothing of the risk they assumed if yield curve normality ever made a comeback.


pages: 387 words: 119,244

Making It Happen: Fred Goodwin, RBS and the Men Who Blew Up the British Economy by Iain Martin

Alan Greenspan, asset-backed security, bank run, Basel III, Bear Stearns, beat the dealer, Big bang: deregulation of the City of London, Bletchley Park, call centre, central bank independence, computer age, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, deindustrialization, deskilling, Edward Thorp, Etonian, Eugene Fama: efficient market hypothesis, eurozone crisis, falling living standards, financial deregulation, financial engineering, financial innovation, G4S, Glass-Steagall Act, high net worth, interest rate swap, invisible hand, joint-stock company, Kickstarter, light touch regulation, London Whale, Long Term Capital Management, long term incentive plan, low interest rates, moral hazard, negative equity, Neil Kinnock, Nick Leeson, North Sea oil, Northern Rock, old-boy network, pets.com, proprietary trading, Red Clydeside, shareholder value, The Wealth of Nations by Adam Smith, too big to fail, upwardly mobile, value at risk, warehouse robotics

, Daily Telegraph, 9 October 2008. 5 ‘The real story behind Sir Mervyn King and RBS’, Ed Conway, economics editor of Sky News. www.edmundconway.com. 6 Credit Action, 1 August 2008. 7 ‘Debt and deleveraging: The global credit bubble and its economic consequences’. McKinsey, July 2011. 8 See the string of stories and revelations by Harry Wilson, banking editor of the Daily Telegraph. 9 ‘The world’s worst banker’, Newsweek, 1 December 2008. Chapter 15 1 Basel III forces banks to hold considerably more capital than before the crisis, and in time it will introduce new rules on liquidity and leverage. 2 ‘RBS chief waives bonus over NatWest glitch’, Daily Telegraph, 29 June 2012. 3 In early 2009 Cameron discussed joining Greenhills, the boutique investment bank. 4 King stepped down in June 2013, at the end of his term, and handed over to Mark Carney, the former Governor of the Bank of Canada. 5 ‘Scott steps down after scrutiny from shareholders’, Financial Times, 21 May 2009. 6 Workshop on Neuroeconomics and Endocrinological Economics, University of California, 20–21 November 2009.


pages: 478 words: 126,416

Other People's Money: Masters of the Universe or Servants of the People? by John Kay

Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Monday: stock market crash in 1987, Black Swan, Bonfire of the Vanities, bonus culture, book value, Bretton Woods, buy and hold, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, Cornelius Vanderbilt, corporate governance, Credit Default Swap, cross-subsidies, currency risk, dematerialisation, disinformation, disruptive innovation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial engineering, financial innovation, financial intermediation, financial thriller, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Greenspan put, Growth in a Time of Debt, Ida Tarbell, income inequality, index fund, inflation targeting, information asymmetry, intangible asset, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, it is difficult to get a man to understand something, when his salary depends on his not understanding it, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jim Simons, John Meriwether, junk bonds, light touch regulation, London Whale, Long Term Capital Management, loose coupling, low cost airline, M-Pesa, market design, Mary Meeker, megaproject, Michael Milken, millennium bug, mittelstand, Money creation, money market fund, moral hazard, mortgage debt, Myron Scholes, NetJets, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, Paul Samuelson, Paul Volcker talking about ATMs, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, reality distortion field, regulatory arbitrage, Renaissance Technologies, rent control, risk free rate, risk tolerance, road to serfdom, Robert Shiller, Ronald Reagan, Schrödinger's Cat, seminal paper, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, vertical integration, Washington Consensus, We are the 99%, Yom Kippur War

The scale of activities undertaken by traders within a modern investment bank is not viable without the implicit and explicit support provided by retail deposits and the taxpayer. The existing structure of the finance sector requires much more capital, not the small additional amounts required by Basel III. But equity investors will not provide financial conglomerates with fresh capital on the scale necessary. Investors no longer trust the financial statements of banks or the people who run these banks. They have little confidence in the long-term profitability of these institutions, and fear that, if banks do make profits, both regulators and senior executives will have priorities other than distributions to shareholders.


pages: 496 words: 131,938

The Future Is Asian by Parag Khanna

3D printing, Admiral Zheng, affirmative action, Airbnb, Amazon Web Services, anti-communist, Asian financial crisis, asset-backed security, augmented reality, autonomous vehicles, Ayatollah Khomeini, barriers to entry, Basel III, bike sharing, birth tourism , blockchain, Boycotts of Israel, Branko Milanovic, British Empire, call centre, capital controls, carbon footprint, cashless society, clean tech, clean water, cloud computing, colonial rule, commodity super cycle, computer vision, connected car, corporate governance, CRISPR, crony capitalism, cross-border payments, currency peg, death from overwork, deindustrialization, Deng Xiaoping, Didi Chuxing, Dissolution of the Soviet Union, Donald Trump, driverless car, dual-use technology, energy security, European colonialism, factory automation, failed state, fake news, falling living standards, family office, financial engineering, fixed income, flex fuel, gig economy, global reserve currency, global supply chain, Great Leap Forward, green transition, haute couture, haute cuisine, illegal immigration, impact investing, income inequality, industrial robot, informal economy, initial coin offering, Internet of things, karōshi / gwarosa / guolaosi, Kevin Kelly, Kickstarter, knowledge worker, light touch regulation, low cost airline, low skilled workers, Lyft, machine translation, Malacca Straits, Marc Benioff, Mark Zuckerberg, Masayoshi Son, megacity, megaproject, middle-income trap, Mikhail Gorbachev, money market fund, Monroe Doctrine, mortgage debt, natural language processing, Netflix Prize, new economy, off grid, oil shale / tar sands, open economy, Parag Khanna, payday loans, Pearl River Delta, prediction markets, purchasing power parity, race to the bottom, RAND corporation, rent-seeking, reserve currency, ride hailing / ride sharing, Ronald Reagan, Salesforce, Scramble for Africa, self-driving car, Shenzhen special economic zone , Silicon Valley, smart cities, SoftBank, South China Sea, sovereign wealth fund, special economic zone, stem cell, Steve Jobs, Steven Pinker, supply-chain management, sustainable-tourism, synthetic biology, systems thinking, tech billionaire, tech worker, trade liberalization, trade route, transaction costs, Travis Kalanick, uber lyft, upwardly mobile, urban planning, Vision Fund, warehouse robotics, Washington Consensus, working-age population, Yom Kippur War

China’s government worries about the fate of workers displaced by robots and the profits that will accrue to firms that can cut head count while boosting output—but rather than let them offshore billions in profits, it taxes and takes shares in them to raise capital from their growth. Indonesia is steadily expanding its tax-to-GDP ratio to reach 20 percent by 2020.17 Asians have also taken on board IMF recommendations of “macro-prudential measures” such as the Basel III regulations that require high bank-deposit-to-lending ratios, sound loan-to-value ratios in property markets, and preferential lending to small and medium-sized enterprises (SMEs)—all steps that have helped Asians graduate from IMF support and protect themselves from the financial domino effects of crises generated elsewhere.18 Meanwhile, the United States and numerous Western economies ignore the IMF wisdom they once dispensed.


Adam Smith: Father of Economics by Jesse Norman

active measures, Alan Greenspan, Andrei Shleifer, balance sheet recession, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, Berlin Wall, Black Swan, Branko Milanovic, Bretton Woods, British Empire, Broken windows theory, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, centre right, cognitive dissonance, collateralized debt obligation, colonial exploitation, Corn Laws, Cornelius Vanderbilt, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, David Ricardo: comparative advantage, deindustrialization, electricity market, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Fellow of the Royal Society, financial engineering, financial intermediation, frictionless, frictionless market, future of work, George Akerlof, Glass-Steagall Act, Hyman Minsky, income inequality, incomplete markets, information asymmetry, intangible asset, invention of the telescope, invisible hand, Isaac Newton, Jean Tirole, John Nash: game theory, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, lateral thinking, loss aversion, low interest rates, market bubble, market fundamentalism, Martin Wolf, means of production, mirror neurons, money market fund, Mont Pelerin Society, moral hazard, moral panic, Naomi Klein, negative equity, Network effects, new economy, non-tariff barriers, Northern Rock, Pareto efficiency, Paul Samuelson, Peter Thiel, Philip Mirowski, price mechanism, principal–agent problem, profit maximization, public intellectual, purchasing power parity, random walk, rent-seeking, Richard Thaler, Robert Shiller, Robert Solow, Ronald Coase, scientific worldview, seigniorage, Socratic dialogue, South Sea Bubble, special economic zone, speech recognition, Steven Pinker, The Chicago School, The Myth of the Rational Market, The Nature of the Firm, The Rise and Fall of American Growth, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, time value of money, transaction costs, transfer pricing, Veblen good, Vilfredo Pareto, Washington Consensus, working poor, zero-sum game

Officials and politicians have been remarkably naive, to put the matter kindly, in deregulating an industry long known to be subject to periodic crises. These trends have, if anything, significantly worsened since the financial crisis of 2008. Thus the Basel I rulebook governing international bank capital requirements, published in 1988, was 30 pages long; the Basel II rulebook of 2004 was 347 pages long; the Basel III rulebook of 2010 came in at 616 pages. In the USA, a key piece of post-Depression legislation, the Glass–Steagall Act of 1933, was 37 pages long; the Dodd–Frank Act of 2010 was no fewer than 848 pages long—and that ignores more than 400 pieces of associated further rule-making which could take Dodd–Frank as a whole up to a mind-boggling 30,000 pages of regulation.


pages: 515 words: 132,295

Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, additive manufacturing, Airbnb, Alan Greenspan, algorithmic trading, Alvin Roth, Asian financial crisis, asset allocation, bank run, Basel III, Bear Stearns, behavioural economics, Big Tech, bonus culture, Bretton Woods, British Empire, business cycle, buy and hold, call centre, Capital in the Twenty-First Century by Thomas Piketty, Carl Icahn, Carmen Reinhart, carried interest, centralized clearinghouse, clean water, collateralized debt obligation, commoditize, computerized trading, corporate governance, corporate raider, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, crowdsourcing, data science, David Graeber, deskilling, Detroit bankruptcy, diversification, Double Irish / Dutch Sandwich, electricity market, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial deregulation, financial engineering, financial intermediation, Ford Model T, Frederick Winslow Taylor, George Akerlof, gig economy, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, Greenspan put, guns versus butter model, High speed trading, Home mortgage interest deduction, housing crisis, Howard Rheingold, Hyman Minsky, income inequality, index fund, information asymmetry, interest rate derivative, interest rate swap, Internet of things, invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", John Bogle, John Markoff, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, Kickstarter, knowledge economy, labor-force participation, London Whale, Long Term Capital Management, low interest rates, manufacturing employment, market design, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, offshore financial centre, oil shock, passive investing, Paul Samuelson, pensions crisis, Ponzi scheme, principal–agent problem, proprietary trading, quantitative easing, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, Rana Plaza, RAND corporation, random walk, rent control, Robert Shiller, Ronald Reagan, Satyajit Das, Savings and loan crisis, scientific management, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, Snapchat, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, Steve Jobs, stock buybacks, subprime mortgage crisis, technology bubble, TED Talk, The Chicago School, the new new thing, The Spirit Level, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, too big to fail, Tragedy of the Commons, trickle-down economics, Tyler Cowen: Great Stagnation, Vanguard fund, vertical integration, zero-sum game

See also Neil Irwin, “Wall Street Is Back, Almost as Big as Ever,” New York Times, May 18, 2015; and Ratna Sahay et al., “Rethinking Financial Deepening: Stability and Growth in Emerging Markets,” Staff Discussion Note no. 15/08, International Monetary Fund, May 2015. 51. Financial Stability Board, “Global Shadow Banking Monitoring Report 2015.” 52. “Basel III Capital: A Well-Intended Illusion,” remarks by FDIC Vice Chairman Thomas M. Hoenig to the International Association of Deposit Insurers 2013 Research Conference in Basel, Switzerland, April 9, 2013. 53. Warren, A Fighting Chance, 124. 54. Author interview with Warren for this book. 55. Warren, A Fighting Chance, 106. 56.


pages: 561 words: 138,158

Shutdown: How COVID Shook the World's Economy by Adam Tooze

2021 United States Capitol attack, air freight, algorithmic trading, Anthropocene, Asian financial crisis, asset-backed security, Ayatollah Khomeini, bank run, banking crisis, Basel III, basic income, Ben Bernanke: helicopter money, Benchmark Capital, Berlin Wall, Bernie Sanders, Big Tech, bitcoin, Black Lives Matter, Black Monday: stock market crash in 1987, blue-collar work, Bob Geldof, bond market vigilante , Boris Johnson, Bretton Woods, Brexit referendum, business cycle, business process, business process outsourcing, buy and hold, call centre, capital controls, central bank independence, centre right, clean water, cognitive dissonance, contact tracing, contact tracing app, coronavirus, COVID-19, credit crunch, Credit Default Swap, cryptocurrency, currency manipulation / currency intervention, currency peg, currency risk, decarbonisation, deindustrialization, Donald Trump, Elon Musk, energy transition, eurozone crisis, facts on the ground, failed state, fake news, Fall of the Berlin Wall, fear index, financial engineering, fixed income, floating exchange rates, friendly fire, George Floyd, gig economy, global pandemic, global supply chain, green new deal, high-speed rail, housing crisis, income inequality, inflation targeting, invisible hand, It's morning again in America, Jeremy Corbyn, junk bonds, light touch regulation, lockdown, low interest rates, margin call, Martin Wolf, mass immigration, mass incarceration, megacity, megaproject, middle-income trap, Mikhail Gorbachev, Modern Monetary Theory, moral hazard, oil shale / tar sands, Overton Window, Paris climate accords, Pearl River Delta, planetary scale, Potemkin village, price stability, Productivity paradox, purchasing power parity, QR code, quantitative easing, remote working, reserve currency, reshoring, Robinhood: mobile stock trading app, Ronald Reagan, secular stagnation, shareholder value, Silicon Valley, six sigma, social distancing, South China Sea, special drawing rights, stock buybacks, tail risk, TikTok, too big to fail, TSMC, universal basic income, Washington Consensus, women in the workforce, yield curve

Because Treasuries were the ideal raw material for fast-moving and complex financial markets, there was no shortage of demand for them. Mutual funds absorbed them as an interest-bearing liquidity reserve. Hedge funds built elaborate strategies to profit from tiny deviations in their price. Banks held them to meet the liquidity buffer requirements of the new Basel III regulations. From 2014 onward, foreign investors were no longer big buyers in net terms, but they already had huge holdings of U.S. Treasuries and they rolled those over uncomplainingly. If you were the foreign exchange reserve manager of a big emerging market central bank, you held Treasuries against the currency risk that business borrowers in your jurisdiction had incurred by borrowing in dollars.


pages: 514 words: 152,903

The Best Business Writing 2013 by Dean Starkman

Alvin Toffler, Asperger Syndrome, bank run, Basel III, Bear Stearns, call centre, carbon tax, clean water, cloud computing, collateralized debt obligation, Columbine, computer vision, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, Erik Brynjolfsson, eurozone crisis, Evgeny Morozov, Exxon Valdez, Eyjafjallajökull, factory automation, fixed income, fulfillment center, full employment, Future Shock, gamification, Goldman Sachs: Vampire Squid, hiring and firing, hydraulic fracturing, Ida Tarbell, income inequality, jimmy wales, job automation, John Markoff, junk bonds, Kickstarter, late fees, London Whale, low interest rates, low skilled workers, Mahatma Gandhi, market clearing, Maui Hawaii, Menlo Park, Occupy movement, oil shale / tar sands, One Laptop per Child (OLPC), Parag Khanna, Pareto efficiency, price stability, proprietary trading, Ray Kurzweil, San Francisco homelessness, Silicon Valley, Skype, sovereign wealth fund, stakhanovite, Stanford prison experiment, Steve Jobs, Stuxnet, synthetic biology, tail risk, technological determinism, the payments system, too big to fail, Vanguard fund, wage slave, warehouse automation, warehouse robotics, Y2K, zero-sum game

The more sensible response, if you want to prevent this sort of thing from blowing up the universe, is something like “stop doing sophisticated things” or at least “raise unsophisticated but large amounts of capital against your sophisticated things.” Because obviously forcing JPMorgan to have capital equal to 20 percent of its non-risk-weighted assets would make it less likely that this would bring down JPMorgan. So, fine, that’s probably right. But JPMorgan’s Basel III capital (for what it’s worth!) is down like twenty basis points on the loss, and there’s no evidence at all that this brought down JPMorgan or did anything close to it. That’s not much of an argument—many other banks are less well capitalized, and less well endowed with modeling skills, than JPMorgan, so if this did some small damage there it could do much larger damage elsewhere.


pages: 497 words: 144,283

Connectography: Mapping the Future of Global Civilization by Parag Khanna

"World Economic Forum" Davos, 1919 Motor Transport Corps convoy, 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 9 dash line, additive manufacturing, Admiral Zheng, affirmative action, agricultural Revolution, Airbnb, Albert Einstein, amateurs talk tactics, professionals talk logistics, Amazon Mechanical Turk, Anthropocene, Asian financial crisis, asset allocation, autonomous vehicles, banking crisis, Basel III, Berlin Wall, bitcoin, Black Swan, blockchain, borderless world, Boycotts of Israel, Branko Milanovic, BRICs, British Empire, business intelligence, call centre, capital controls, Carl Icahn, charter city, circular economy, clean water, cloud computing, collateralized debt obligation, commoditize, complexity theory, continuation of politics by other means, corporate governance, corporate social responsibility, credit crunch, crony capitalism, crowdsourcing, cryptocurrency, cuban missile crisis, data is the new oil, David Ricardo: comparative advantage, deglobalization, deindustrialization, dematerialisation, Deng Xiaoping, Detroit bankruptcy, digital capitalism, digital divide, digital map, disruptive innovation, diversification, Doha Development Round, driverless car, Easter island, edge city, Edward Snowden, Elon Musk, energy security, Ethereum, ethereum blockchain, European colonialism, eurozone crisis, export processing zone, failed state, Fairphone, Fall of the Berlin Wall, family office, Ferguson, Missouri, financial innovation, financial repression, fixed income, forward guidance, gentrification, geopolitical risk, global supply chain, global value chain, global village, Google Earth, Great Leap Forward, Hernando de Soto, high net worth, high-speed rail, Hyperloop, ice-free Arctic, if you build it, they will come, illegal immigration, income inequality, income per capita, industrial cluster, industrial robot, informal economy, Infrastructure as a Service, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Internet of things, Isaac Newton, Jane Jacobs, Jaron Lanier, John von Neumann, Julian Assange, Just-in-time delivery, Kevin Kelly, Khyber Pass, Kibera, Kickstarter, LNG terminal, low cost airline, low earth orbit, low interest rates, manufacturing employment, mass affluent, mass immigration, megacity, Mercator projection, Metcalfe’s law, microcredit, middle-income trap, mittelstand, Monroe Doctrine, Multics, mutually assured destruction, Neal Stephenson, New Economic Geography, new economy, New Urbanism, off grid, offshore financial centre, oil rush, oil shale / tar sands, oil shock, openstreetmap, out of africa, Panamax, Parag Khanna, Peace of Westphalia, peak oil, Pearl River Delta, Peter Thiel, Philip Mirowski, Planet Labs, plutocrats, post-oil, post-Panamax, precautionary principle, private military company, purchasing power parity, quantum entanglement, Quicken Loans, QWERTY keyboard, race to the bottom, Rana Plaza, rent-seeking, reserve currency, Robert Gordon, Robert Shiller, Robert Solow, rolling blackouts, Ronald Coase, Scramble for Africa, Second Machine Age, sharing economy, Shenzhen special economic zone , Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, six sigma, Skype, smart cities, Smart Cities: Big Data, Civic Hackers, and the Quest for a New Utopia, South China Sea, South Sea Bubble, sovereign wealth fund, special economic zone, spice trade, Stuxnet, supply-chain management, sustainable-tourism, systems thinking, TaskRabbit, tech worker, TED Talk, telepresence, the built environment, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, Tim Cook: Apple, trade route, Tragedy of the Commons, transaction costs, Tyler Cowen, UNCLOS, uranium enrichment, urban planning, urban sprawl, vertical integration, WikiLeaks, Yochai Benkler, young professional, zero day

Without the risk-taking appetite of private investors, credit markets across the developing world would be in as sorry a state as their infrastructure, undercapitalized and institutionally rudimentary. Trade finance is a perfect example of markets doing their best to help people build connectivity. According to the WTO, 80 percent of global trade is supported by financial institutions, but postcrisis regulations (such as Basel III, which requires banks to hold more capital onshore) inadvertently choked this crucial conduit between the financial sector and the real economy that helps companies produce exportable goods and has proven to be a reliable investment given its low default rate. Funds such as the European Investment Bank and the Abraaj Group have stepped in to back region-wide funding exchanges for the Middle East and Africa so that SMEs can more easily raise capital.


pages: 482 words: 149,351

The Finance Curse: How Global Finance Is Making Us All Poorer by Nicholas Shaxson

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, activist fund / activist shareholder / activist investor, Airbnb, airline deregulation, Alan Greenspan, anti-communist, bank run, banking crisis, Basel III, Bear Stearns, benefit corporation, Bernie Madoff, Big bang: deregulation of the City of London, Blythe Masters, Boris Johnson, Bretton Woods, British Empire, business climate, business cycle, capital controls, carried interest, Cass Sunstein, Celtic Tiger, central bank independence, centre right, Clayton Christensen, cloud computing, corporate governance, corporate raider, creative destruction, Credit Default Swap, cross-subsidies, David Ricardo: comparative advantage, demographic dividend, Deng Xiaoping, desegregation, Donald Trump, Etonian, export processing zone, failed state, fake news, falling living standards, family office, financial deregulation, financial engineering, financial innovation, forensic accounting, Francis Fukuyama: the end of history, full employment, gig economy, Gini coefficient, Glass-Steagall Act, global supply chain, Global Witness, high net worth, Ida Tarbell, income inequality, index fund, invisible hand, Jeff Bezos, junk bonds, Kickstarter, land value tax, late capitalism, light touch regulation, London Whale, Long Term Capital Management, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, megaproject, Michael Milken, Money creation, Mont Pelerin Society, moral hazard, neoliberal agenda, Network effects, new economy, Northern Rock, offshore financial centre, old-boy network, out of africa, Paul Samuelson, plutocrats, Ponzi scheme, price mechanism, proprietary trading, purchasing power parity, pushing on a string, race to the bottom, regulatory arbitrage, rent-seeking, road to serfdom, Robert Bork, Ronald Coase, Ronald Reagan, Savings and loan crisis, seminal paper, shareholder value, sharing economy, Silicon Valley, Skype, smart grid, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, special economic zone, Steve Ballmer, Steve Jobs, stock buybacks, Suez crisis 1956, The Chicago School, Thorstein Veblen, too big to fail, Tragedy of the Commons, transfer pricing, two and twenty, vertical integration, Wayback Machine, wealth creators, white picket fence, women in the workforce, zero-sum game

In the end, the US never implemented Basel II: in 2007 it issued binding regulations covering the largest US banks, but delayed individually approving these banks’ risk model systems; in the meantime, the banks remained subject to Basel I. It was only after the Dodd-Frank Act of 2012 that the Basel II framework of using banks’ internal models became part of US bank supervision. A new Basel agreement, Basel III, was announced in 2010; at the time of writing, its implementation was ongoing. 31. Britain made a very similar boast when it came to corporate tax. For instance, Ian Barlow, a top UK tax adviser, boasted that US corporations found the UK taxman’s approach ‘refreshing’ and that HMRC was ‘much easier to deal with than their own tax authorities’.


pages: 475 words: 155,554

The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge by Faisal Islam

"World Economic Forum" Davos, Alan Greenspan, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, bond market vigilante , book value, Boris Johnson, British Empire, capital controls, carbon credits, carbon footprint, carbon tax, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, crony capitalism, Crossrail, currency risk, dark matter, deindustrialization, Deng Xiaoping, disintermediation, energy security, Eugene Fama: efficient market hypothesis, eurozone crisis, Eyjafjallajökull, financial deregulation, financial engineering, financial innovation, financial repression, floating exchange rates, forensic accounting, forward guidance, full employment, G4S, ghettoisation, global rebalancing, global reserve currency, high-speed rail, hiring and firing, inflation targeting, Irish property bubble, junk bonds, Just-in-time delivery, labour market flexibility, light touch regulation, London Whale, Long Term Capital Management, low interest rates, margin call, market clearing, megacity, megaproject, Mikhail Gorbachev, mini-job, mittelstand, Money creation, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, North Sea oil, Northern Rock, offshore financial centre, open economy, paradox of thrift, Pearl River Delta, pension reform, price mechanism, price stability, profit motive, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, reshoring, Right to Buy, rising living standards, Ronald Reagan, savings glut, shareholder value, sovereign wealth fund, tail risk, The Chicago School, the payments system, too big to fail, trade route, transaction costs, two tier labour market, unorthodox policies, uranium enrichment, urban planning, value at risk, WikiLeaks, working-age population, zero-sum game

Unfortunately, many banks saw these flawed models as a target to hit rather than as a guide to their safety. So how did this soup of mismeasurement and misspecification come to be hardwired into the rules that seek to ensure the solvency of every major bank in the world? New rules for bank capital requirements, Basel II and Basel III, have emerged over the past decade. At their heart they make use of Vasicek’s work. For the trading book, it is the VaR method, as discussed already. For calculating possible losses on their traditional loan book, banks can volunteer to use the ‘advanced internal ratings basis’ (AIRB) for calculating capital, which was identified in 2005 as a modified version of the Vasicek model.


pages: 580 words: 168,476

The Price of Inequality: How Today's Divided Society Endangers Our Future by Joseph E. Stiglitz

affirmative action, Affordable Care Act / Obamacare, airline deregulation, Alan Greenspan, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Bear Stearns, behavioural economics, Berlin Wall, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collapse of Lehman Brothers, collective bargaining, colonial rule, corporate governance, Credit Default Swap, Daniel Kahneman / Amos Tversky, Dava Sobel, declining real wages, deskilling, electricity market, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, Glass-Steagall Act, Great Leap Forward, income inequality, income per capita, indoor plumbing, inflation targeting, information asymmetry, invisible hand, jobless men, John Bogle, John Harrison: Longitude, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, London Interbank Offered Rate, lone genius, low interest rates, low skilled workers, Marc Andreessen, Mark Zuckerberg, market bubble, market fundamentalism, mass incarceration, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, negative equity, obamacare, offshore financial centre, paper trading, Pareto efficiency, patent troll, Paul Samuelson, Paul Volcker talking about ATMs, payday loans, Phillips curve, price stability, profit maximization, profit motive, public intellectual, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, Savings and loan crisis, search costs, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, stock buybacks, subprime mortgage crisis, technology bubble, The Chicago School, The Fortune at the Bottom of the Pyramid, The Myth of the Rational Market, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, Tragedy of the Commons, transaction costs, trickle-down economics, ultimatum game, uranium enrichment, very high income, We are the 99%, wealth creators, women in the workforce, zero-sum game

The true market value of these nonperforming mortgages was often a fraction of the face value. But recognizing the losses would have required the banks to come up with more capital, and they were struggling to get enough capital under the current regulations, let alone the new regulations (called Basel III) adopted in fall 2010. Of course, the Obama administration and the bankers didn’t present their case this way.47 Two main arguments were advanced for not doing much for homeowners. It would be “unfair” to help those who were struggling with their mortgages when there were so many good and responsible citizens who had worked hard and paid off their mortgage, or were able to make their current payments.


Manias, Panics and Crashes: A History of Financial Crises, Sixth Edition by Kindleberger, Charles P., Robert Z., Aliber

active measures, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, Boeing 747, Bonfire of the Vanities, break the buck, Bretton Woods, British Empire, business cycle, buy and hold, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, Corn Laws, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-border payments, currency peg, currency risk, death of newspapers, debt deflation, Deng Xiaoping, disintermediation, diversification, diversified portfolio, edge city, financial deregulation, financial innovation, Financial Instability Hypothesis, financial repression, fixed income, floating exchange rates, George Akerlof, German hyperinflation, Glass-Steagall Act, Herman Kahn, Honoré de Balzac, Hyman Minsky, index fund, inflation targeting, information asymmetry, invisible hand, Isaac Newton, Japanese asset price bubble, joint-stock company, junk bonds, large denomination, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, market bubble, Mary Meeker, Michael Milken, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, new economy, Nick Leeson, Northern Rock, offshore financial centre, Ponzi scheme, price stability, railway mania, Richard Thaler, riskless arbitrage, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, special drawing rights, Suez canal 1869, telemarketer, The Chicago School, the market place, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, very high income, Washington Consensus, Y2K, Yogi Berra, Yom Kippur War

Still another proposal is that bank transactions in derivatives could occur only on an organized exchange much like the futures markets in currencies and in gold, rather than in the over-the-counter market. A large set of proposals was directed at the capital structure of banks. One generic proposal was to increase the bank capital requirement, which is the thrust of the next update to the Basel Accords (‘Basel III’). A variant is that the required capital of each bank would depend on the composition of the bank’s assets, the higher the share of ‘risky assets’, the higher the required capital. Another variant is that the capital requirements would be keyed to the rate of growth of bank assets; the higher the rate, the higher the requirement.


pages: 772 words: 203,182

What Went Wrong: How the 1% Hijacked the American Middle Class . . . And What Other Countries Got Right by George R. Tyler

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, 8-hour work day, active measures, activist fund / activist shareholder / activist investor, affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, benefit corporation, Black Swan, blood diamond, blue-collar work, Bolshevik threat, bonus culture, British Empire, business cycle, business process, buy and hold, capital controls, Carmen Reinhart, carried interest, cognitive dissonance, collateralized debt obligation, collective bargaining, commoditize, company town, compensation consultant, corporate governance, corporate personhood, corporate raider, corporate social responsibility, creative destruction, credit crunch, crony capitalism, crowdsourcing, currency manipulation / currency intervention, David Brooks, David Graeber, David Ricardo: comparative advantage, declining real wages, deindustrialization, Diane Coyle, disruptive innovation, Double Irish / Dutch Sandwich, eurozone crisis, financial deregulation, financial engineering, financial innovation, fixed income, Ford Model T, Francis Fukuyama: the end of history, full employment, George Akerlof, George Gilder, Gini coefficient, Glass-Steagall Act, Gordon Gekko, Greenspan put, hiring and firing, Ida Tarbell, income inequality, independent contractor, invisible hand, job satisfaction, John Markoff, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Rogoff, labor-force participation, laissez-faire capitalism, lake wobegon effect, light touch regulation, Long Term Capital Management, low interest rates, manufacturing employment, market clearing, market fundamentalism, Martin Wolf, minimum wage unemployment, mittelstand, Money creation, moral hazard, Myron Scholes, Naomi Klein, Northern Rock, obamacare, offshore financial centre, Paul Samuelson, Paul Volcker talking about ATMs, pension reform, performance metric, Pershing Square Capital Management, pirate software, plutocrats, Ponzi scheme, precariat, price stability, profit maximization, profit motive, prosperity theology / prosperity gospel / gospel of success, purchasing power parity, race to the bottom, Ralph Nader, rent-seeking, reshoring, Richard Thaler, rising living standards, road to serfdom, Robert Gordon, Robert Shiller, rolling blackouts, Ronald Reagan, Sand Hill Road, Savings and loan crisis, shareholder value, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Ballmer, Steve Jobs, stock buybacks, subprime mortgage crisis, The Chicago School, The Spirit Level, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transcontinental railway, transfer pricing, trickle-down economics, tulip mania, Tyler Cowen, Tyler Cowen: Great Stagnation, union organizing, Upton Sinclair, upwardly mobile, women in the workforce, working poor, zero-sum game

Galbraith, Predator State, How Conservatives Abandoned the Free Market and Why Liberals Should Too (New York: Free Press, 2008), 182. 44 Niall Ferguson, The Ascent of Money, 50. 45 Leon Gettler, “It Will Happen Again,” Sydney Morning Herald, July 20, 2010. 46 Brooke Masters, Tom Braithwaite, and Helen Thomas, “Bankers Target ‘Anti-US’ Parts of BASEL III,” Financial Times, Sept. 15, 2011. 47 Paul Krugman, “Reagan Did It,” New York Times, June 1, 2009. 48 Gretchen Morgenson, “Into the Bailout Buzzsaw,” New York Times, July 2012. 49 Niall Ferguson, The Ascent of Money, 255. 50 Kevin Phillips, Bad Money, 41. 51 Paul Krugman, “Disaster and Denial,” New York Times, Dec. 14, 2009, and Thomas Heath, “Making Money From the Collapse,” Washington Post, Oct. 4, 2008. 52 “Insiders Off Side,” Editorial, Financial Times, Nov. 28, 2010. 53 Paul Krugman, “Blindly into the Bubble,” New York Times, Dec. 21, 2007. 54 Alan Greenspan, “Corporate Governance,” Speech to 2003 Conference on Bank Structure and Competition, Chicago, May 8, 2003. http://www.bis.org/review/r030509a.pdf.


EuroTragedy: A Drama in Nine Acts by Ashoka Mody

Alan Greenspan, Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Basel III, Bear Stearns, Berlin Wall, book scanning, book value, Bretton Woods, Brexit referendum, call centre, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, credit crunch, currency risk, Daniel Kahneman / Amos Tversky, debt deflation, Donald Trump, eurozone crisis, Fall of the Berlin Wall, fear index, financial intermediation, floating exchange rates, forward guidance, George Akerlof, German hyperinflation, global macro, global supply chain, global value chain, hiring and firing, Home mortgage interest deduction, income inequality, inflation targeting, Irish property bubble, Isaac Newton, job automation, Johann Wolfgang von Goethe, Johannes Kepler, Kenneth Rogoff, Kickstarter, land bank, liberal capitalism, light touch regulation, liquidity trap, loadsamoney, London Interbank Offered Rate, Long Term Capital Management, low interest rates, low-wage service sector, Mikhail Gorbachev, mittelstand, money market fund, moral hazard, mortgage tax deduction, neoliberal agenda, offshore financial centre, oil shock, open borders, pension reform, precautionary principle, premature optimization, price stability, public intellectual, purchasing power parity, quantitative easing, rent-seeking, Republic of Letters, Robert Gordon, Robert Shiller, Robert Solow, short selling, Silicon Valley, subprime mortgage crisis, The Great Moderation, The Rise and Fall of American Growth, too big to fail, total factor productivity, trade liberalization, transaction costs, urban renewal, working-age population, Yogi Berra

“no bailout” principle, 265–266 Washington Mutual Bank, 214–215 Bair, Sheila, 167, 214, 215 Baker, James, 79 Balkenende, Jan Peter, 189 Balladur, Édouard, 94, 109 Banca d’Italia, 117, 281, 295, 356, 370 Banca Etruria (Italy), 377 Banca Marche (Italy), 374, 377 Banca Monte dei Paschi di Siena (MPS), 369, 378 Banca Popolare dell’Etruria e del Lazio (Italy), 374, 375 618   i n d e x Banca Popolare di Vicenza (Italy), 377 Banco de España, 182–183, 301, 307 Bank for International Settlements (BIS), 212 Bankia (Spanish bank), 306–307 Bank of Canada, role in steadying euro, 138–139 Bank of England, 69, 198f, 218, 222–223, 223f, 307, 314 Bank of Greece, 244 Bank of Ireland, 180, 182, 271 Bank of Japan (BOJ), 344, 354, 359, 382–384 Bank of Spain. See Banco de España Bank Recovery and Resolution Directive (BRRD), 371 banks/​banking systems. See also subprime mortgage crisis; specific banks bailouts in Spain, 307–308 Basel I/​II agreements, 166–168 Bear Stearns and, 209f ceremonial committees, processes, 170 comparison with Japan, U.S., 162–163 euro-​area troubled banks, 202 Europe’s fascination with, 161–164 eurozone struggles, 158, 159f, 227–229 France, 161–164 French crisis, 195 Germany and, 162, 165, 194–195 IMF’s evaluation of Greek banks, 232 increased risk taking, 166–173 increasing assets, falling productivity, 159f interbank market, 196, 197, 202, 206, 213, 218, 299, 371, 475 interest rates, debts, 173f Italy, 162, 164, 177, 298–299, 298f, 369–379, 380f leveraging for high equity return, 168f LTROs and, 305–306 mergers and expansion, 164–166 MPS scandal, 332 post-​WWII role, 162–163, 163f pre-​euro mergers, expansions, 164–166 stalling productivity, greater risk-​ taking, 169–173 subprime crisis, 14, 172, 183, 192, 194–196, 203, 208–209, 224, 227, 369, 428, 475 tumbling of bank stocks, 298–299, 298f U.S. stress-​test results, 200f Banque de France, 68, 104, 312–313 Barbagallo, Carmelo, 375 Barber, Lionel, 122, 137 Barroso, José Manuel, 216–217, 227, 365, 367 Barthle, Norbert, 275 Basel Committee, 167–168 Basel I and II, international banking agreements, 166–168 Bavaria, 114 BDI.