Contributor: David Renz
In banking, the negative externality, i.e. the external cost of a bank failure to society, is enormous because of the interconnectedness of the banking industry and the reliance of both companies and individuals on banks. This externality comes from two distinctive features (i.e. term transformation and high leverage) and makes banking potentially very dangerous. It is thus imperative that regulators maintain control over the practices of banks.... read more
Contributor: David Renz
When thinking of the root causes of the recent financial crisis, clearly the unsustainable path of credit creation stands out as the central problem plaguing the financial sector. Due to the taming of inflation post-1982 and a secular decline of interest rates accelerated by changed aggregate savings processes in emerging economies, the price of credit has been very low for nearly two-and-a-half decades. This phenomenon, dubbed the Great Moderation stood, alongside the introduction of the Euro behind a very rapid growth of credit in many countries. Following the calamities of 2008, this bubble has burst with spectacular side-effects, among which are new efforts to regulate the banking industry. Basel III is set to yield higher capital and liquidity levels across the globe and thus make banking both safer and less profitable, as high-yielding credit is set to be partially replaced, at the same time, by low-yielding liquidity while capital requirements are set to rise drastically.... read more
Contributor: David Renz
Of course we should (says the mainstream economist). Moderate levels of inflation (2 percent) may be acceptable for they help greasing the wheels of an economy. But, as soon as inflation hovers around the 5 percent level for a prolonged period of time, its true nature becomes evident. Given that we are slowly ridding ourselves from the shackles of a terrible recession, this is all the more worrying because central banks have tried to mop up the mess by injecting unprecedented amounts of liquidity into the system. If withdrawal of these funds comes too late in an eventual recovery, we may be facing an inflationary episode with levels well above what we have witnessed during the period of relative calm since the early 1980s. But even without a proper recovery, commodity prices surging ahead of an obvious cycle could trigger stagflation, i.e, rising inflation without sizeable growth to go with.... read more
Contributor: David Renz
Recently, news broke in Switzerland that the government plans to hold a non-public consultation over the ever-rising Swiss Franc. This sparked a public debate about what the Swiss National Bank could do to stem the tide. Let’s look at what we can learn from this debate for risk management: building scenarios based on the past. Sounds familiar? Isn’t that the usual approach in risk management (and what got all of us in big trouble)?... read more
Contributor: David Renz
When looking at the Greek and Irish calamities over the last couple of weeks and months, the thing that got me thinking was, could this have been prevented? Of course, the thought itself is preposterous! Make no mistake, dodgy accounts in Greece’s case and a banking system that crippled Ireland’s finances are formidable issues. So, those in charge of running the treasuries and debt financing agencies deserve our utmost respect for theirs is truly a herculean task.... read more
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