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The UK financial sector, one of our most important industries, has had its share of problems and faces more than its share of challenges.The uncertainty about Brexit and access to European markets, specifically the lack of much positive government action to capture the advantages of Brexit, does not help. Also, business is still flat since the Covid lockdowns; additionally, commercial property has been hit and more people are defaulting on loans. Higher interest rates have hit the mortgage market too. Then there is Fintech (financial technology) which is challenging some of the traditional players, like the high street banks. Though customers are increasingly demanding digital banking, their systems are largely stuck in a previous era — thanks to the laziness that comes from having a cosy regulated market rather than one more open to new competition. Plus all the problems in the pensions sector — investment conditions and the multiplicity of pension plans, and the general lack of transparency in pensions (need I say over-regulation by a jealous Treasury?). And there is growing competition from other financial sectors such as New York and Singapore (which again, is a direct result of the UK government's over-taxing and over-regulating).So what is to be done? Lower taxes on UK businesses would help. Instead of companies (and their financial needs) going abroad, or not coming to the UK in the first place, we need to attract businesses in and induce them to say. And encourage people to start new businesses too. High tax, by increasing the risk in already risky ventures, kills business creation stone dead.We need more competition, too. Right now, getting a banking licence out of the regulators is like getting a smile out of a stone. The barriers to entry should be a lot lower. Right now, we are regulating banks as if they are all enormous, and that their failure would be a national disaster — as the failure of big banks was in the 2008-09 financial crisis. (And what did Gordon Brown do about it? He forced banks to merge, creating institutions that were arguably safer but which were even more 'too big to fail'. ) And yes, if we have institutions that we really cannot afford to lose, they should indeed be carefully regulated.But new, small banks are different. If a small bank fails, it's a very limited disaster, not a nationwide one. We can get over it. Even if deposits are guaranteed by the taxpayer, the amounts at risk are manageable, unlike the 2008-09 bank bailouts, which saw government debt soaring and gave us much of the debt overhang we have today. It is quite possible too that customers of new banks are more aware of the risks than customers of large and established banks; so perhaps the need for taxpayer bailouts is less.So the answer there is to have banking regulation that reflects the existential risk (or lack of it) of the institution. Large 'too big to fail' banks should have tough regulation, small 'if it fails we can deal with it' banks should be more lightly regulated. That would encourage more competition in financial services, and therefore greater focus on customers and keeping customers safe, instead of regulator-focused box-ticking complacency.

 Three small thoughts. 1) There is much commentary that bank troubles will interfere with the Fed's plan to lower inflation by raising rates. Actually, this is a feature not a bug. The main mechanism by which, in the Fed's view, raising interest rates slows the economy and lowers inflation is by "constricting credit," "tightening financial conditions," lowering borrowing that finances investment and consumer durables purchases.  The Fed didn't want runs, no, but it wants the result. If you don't like that, well, we need to think of other ways to contain inflation, like taking the fiscal gasoline off the fire. 2) On uninsured deposits. A correspondent suggests that the Fed simply mandate that all large depositors participate in the sorts of services, there for the asking, that split large accounts into multiple $249k accounts spread over multiple banks, or sweeps into money market funds. I don't think that mandating this system is a good idea. If you're going to do that, of course, you might as well just insure all deposits and keep it simple. But the suggestion prompts doubt over the oft repeated notion that we want large sophisticated depositors to monitor banks. Anyone who was large and sophisticated enough to monitor banks had already gamed the system to make sure their accounts were insured, at some nontrivial cost in fees and trouble. The only people left with millions in checking accounts were, sort of by definition, financially unsophisticated or too busy running actual companies to bother with this sort of thing. Sort of like taxes. We might as well give in, that all deposits are here forth insured. If so, of course, then banks are totally gambling with the house's money. But we also have to give in that if they can't spot this elephant in the room, asset risk regulation is hopeless. The only workable answer (of course) is narrow deposit taking -- all runnable deposits invested in reserves and short term treasuries; fund portfolios of long term debt with long-term borrowing (CDs for example) and lots of equity.3) Liquidity and fixed value are no longer necessarily tied together. I still don't quite get why better payment services are not attached to floating value funds. Then we wouldn't need run-prone bank accounts at all.  

Do central bankers have too much power? Paul Tucker, a former official at the Bank of England during the 2008 financial crisis and author of the new book 'Unelected Power,' explains to Kate and Luigi how technocratic hubris can imperil democracy.

The Silicon Valley Bank failure strikes me as a colossal failure of bank regulation, and instructive on how rotten the whole edifice is. I write this post in an inquisitive spirit. I don't know the details of how SVB was regulated, and I hope some readers do and can chime in. As reported so far by media, the collapse was breathtakingly simple. SVB paid a bit higher interest rates than the measly 0.01% (yes) that Chase offers. It attracted large deposits from venture capital backed firms in the valley. Crucially, only the first $250,000 are insured, so most of those deposits are uninsured. The deposits are financially savvy customers who know they have to get in line first should anything go wrong. SVB put much of that money into long-maturity bonds, hoping to reap the difference between slightly higher long-term interest rates and what it pays on deposits.  But as we've known for hundreds of years, if interest rates rise, then the market value of those long-term bonds fall. Now if everyone comes asking for their money back, the assets are not worth enough to pay everyone back.  In sum, you have "duration mismatch" plus run-prone uninsured depositors. We teach this in the first week of an MBA or undergraduate banking class. This isn't crypto or derivatives or special purpose vehicles or anything fancy. Where were the regulators? The Dodd Frank act added hundreds of thousands of pages of regulations, and an army of hundreds of regulators. The Fed enacts "stress tests" in case regular regulation fails. How can this massive architecture fail to spot basic duration mismatch and a massive run-prone deposit base? It's not hard to fix, either. Banks can quickly enter swap contracts to cheaply alter their exposure to interest rate risk without selling the whole asset portfolio. Michael Cembalist assembled numbers. This wasn't hard to see. Even Q3 2022 -- a long time ago -- SVB was a huge outlier in having next to no retail deposits (vertical axis, "sticky" because they are insured and regular people), and a huge asset base of loans and securities. Michael then asks .. how much duration risk did each bank take in its investment portfolio during the deposit surge, and how much was invested at the lows in Treasury and Agency yields? As a proxy for these questions now that rates have risen, we can examine the impact on Common Equity Tier 1 Capital ratios from an assumed immediate realization of unrealized securities losses ... That's what is shown in the first chart: again, SVB was in a duration world of its own as of the end of 2022, which is remarkable given its funding profile shown earlier.Again, in simpler terms. "Capital" is the value of assets (loans, securities) less debt (mostly deposits). But banks are allowed to put long-term assets into a "hold to maturity" bucket, and not count declines in the market value of those assets. That's great, unless people knock on the door and ask for their money now, in which case the bank has to sell the securities, and then it realizes the market value. Michael simply asked how much each bank was worth in Q42002 if it actually had to sell its assets. A bit less in each case -- except SVB (third from left) where the answer is essentially zero. And Michael just used public data. This is not a hard calculation for the Fed's team of dozens of regulators assigned to each large bank. Perhaps the rules are at fault? If a regulator allows "hold to maturity" accounting, then, as above, they might think the bank is fine. But are regulators really so blind? Are the hundreds of thousands of pages of rules stopping them from making basic duration calculations that you can do in an afternoon? If so, a bonfire is in order. This isn't the first time. Notice that when SBF was pillaging FTX customer funds for proprietary trading, the SEC did not say "we knew all about this but didn't have enough rules to stop it." The Bank of England just missed a collapse of pension funds who were doing exactly the same thing: borrowing against their long bonds to double up, and forgetting that occasionally markets go the wrong way and you have to sell to make margin calls. (That's week 2 of the MBA class.)  Ben Eisen and Andrew Ackerman in WSJ ask the right question (10 minutes before I started writing this post!) Where Were the Regulators as SVB Crashed? "The aftermath of these two cases is evidence of a significant supervisory problem," said Karen Petrou, managing partner of Federal Financial Analytics, a regulatory advisory firm for the banking industry. "That's why we have fleets of bank examiners, and that's what they're supposed to be doing."The Federal Reserve was the primary federal regulator for both banks.Notably, the risks at the two firms were lurking in plain sight. A rapid rise in assets and deposits was recorded on their balance sheets, and mounting losses on bond holdings were evident in notes to their financial statements.moreover, "Rapid growth should always be at least a yellow flag for supervisors," said Daniel Tarullo, a former Federal Reserve governor who was the central bank's point person on regulation following the financial crisis...In addition, nearly 90% of SVB's deposits were uninsured, making them more prone to flight in times of trouble since the Federal Deposit Insurance Corp. doesn't stand behind them.90% is a big number. Hard to miss.  The article echoes some confusion about "liquidity"SVB and Silvergate both had less onerous liquidity rules than the biggest banks. In the wake of the failures, regulators may take a fresh look at liquidity rules,...This is absolutely not about liquidity. SBV would have been underwater if it sold all its securities at the bid prices. Also Silvergate and SVB may have been particularly susceptible to the change in economic conditions because they concentrated their businesses in boom-bust sectors...That suggests the need for regulators to take a broader view of the risks in the financial system. "All the financial regulators need to start taking charge and thinking through the structural consequences of what's happening right now," she [Saule Omarova] saidAbsolutely not! I think the problem may be that regulators are taking "big views," like climate stress tests. This is basic Finance 101 measure duration risk and hot money deposits. This needs a narrow view! There is a larger implication. The Fed faces many headwinds in its interest rate raising effort. For example, each point of higher real interest rates raises interest costs on the debt by about $250 billion (1 percent x 100% debt/GDP ratio). A rate rise that leads to recession will lead to more stimulus and bailout, which is what fed inflation in the first place. But now we have another. If the Fed has allowed duration risk to seep in to the too-big to fail banking system, then interest rate rises will induce the hard choice between yet more bailout and a financial storm. Let us hope the problem is more limited - as Michael's graphs suggest. Why did SVB do it? How could they be so blind to the idea that interest rates might rise? Why did Silicon Valley startups risk cash, that they now claim will force them to bankruptcy, in uninsured deposits? Well, they're already clamoring for a bailout. And given 2020, in which the Fed bailed out even money market funds, the idea that surely a bailout will rescue us should anything go wrong might have had something to do with it. (On the startup bailout. It is claimed that the startups who put all their cash in SVB will now be forced to close, so get going with the bailout now. It is not startups who lose money, it is their venture capital investors, and it is they who benefit from the bailout. Let us presume they don't suffer sunk cost fallacy. You have a great company, worth investing $10 million. The company loses $5 million of your cash before they had a chance to spend it. That loss obviously has nothing to do with the company's prospects. What do you do? Obviously, pony up another $5 million and get it going again. And tell them to put their cash in a real bank this time.) How could this enormous regulatory architecture miss something so simple? This is something we should be asking more generally. 8% inflation. Apparently simple bank failures. What went wrong? Everyone  I know at the Fed are smart, hard working, honest and dedicated public servants. It's about the least political agency in Washington. Yet how can we be seeing such simple o-ring level failures? I can only conclude that this overall architecture -- allow large leverage, assume regulators will spot risks -- is inherently broken. If such good people are working in a system that cannot spot something so simple, the project is hopeless. After all, a portfolio of long-term treasuries is about the safest thing on the planet -- unless it is financed by hot money deposits. Why do we have teams of regulators looking over the safest assets on the planet? And failing? Time to start over, as I argued in Towards a run free financial systemOr... back to my first question, am I missing something? ****Updates: A nice explainer thread (HT marginal revolution). VC invests in a new company. SVB offers an additional few million in debt, with one catch, the company must use SVB as the bank for deposits. SVB invests the deposits in long-term mortgage backed securities. SVB basically prints up money to use for its investment! "SVB goes to founders right after they raise a very, very expensive venture round from top venture firms offering:- 10-30% of the round in debt- 12-24 month term- interest only with a balloon payment- at a rate just above prime For investors, it also seems like a no-downside scenario for your portfolio: Give up 10-25 bps in dilution for a gigantic credit facility at functionally zero interest rate.If your PortCo doesn't need it, the cash just sits. If they do, it might save them in a crunch. The deals typically have deposit covenants attached. Meaning: you borrow from us, you bank with us.And everyone is broadly okay with that deal. It's a pretty easy sell! "You need somewhere to put your money. Why not put it with us and get cheap capital too?"Update:1) Old Eagle Eye's comment below is fascinating. I am getting the sense that the rules actually preclude putting 2+2=4 together here. Copied here in totoSIVB did have a hedge put on during 2022, but it was limited to its available-for-sale securities ("AFS"). It was precluded from hedging its interest rate risk in held-to-maturity securities ("HTM") by U.S. GAAP rules. [My emphasis] Here is the explanation found at PwC:[PWC Viewpoint Commentary: "The notion of hedging the interest rate risk in a security classified as held to maturity is inconsistent with the held-to-maturity classification under ASC 320, which requires the reporting entity to hold the security until maturity regardless of changes in market interest rates. For this reason, ASC 815-20-25-43(c)(2) indicates that interest rate risk may not be the hedged risk in a fair value hedge of held-to-maturity debt securities." "ASC 815-20-25-12(d) provides guidance on the eligibility of held-to-maturity debt securities for designation as a hedged item in a fair value hedge."][Extracted subsection:"Chapter 6: Hedges of financial assets and liabilities. "6.4 Hedging fixed-rate instruments"6.4.3.4 Hedging held-to-maturity debt securities"ASC 815-20-25-12(d)"If the hedged item is all or a portion of a debt security (or a portfolio of similar debt securities) that is classified as held to maturity in accordance with Topic 320, the designated risk being hedged is the risk of changes in its fair value attributable to credit risk, foreign exchange risk, or both. If the hedged item is an option component of a held-to-maturity security that permits its prepayment, the designated risk being hedged is the risk of changes in the entire fair value of that option component. If the hedged item is other than an option component of a held-to-maturity security that permits its prepayment, the designated hedged risk also shall not be the risk of changes in its overall fair value."]Source: PWC Viewpoint (viewpoint.pwc.com) Publication date: 31 Jul 2022https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/derivatives_and_hedg/derivatives_and_hedg_US/chapter_6_hedges_of__US/64_hedging_fixedrate_US.htmlUpdate 2: Thanks to anonymous below for a pointer to a good New York Times article about SVB, what the Fed knew and when. Apparently the bank's supervisors knew about problems for a long time before the bank failed. Whether this is good or bad news for the regulatory project I leave to you. 

With amazing speed and impeccable timing, Erica Jiang, Gregor Matvos, Tomasz Piskorski, and Amit Seru analyze how exposed the rest of the banking system is to an interest rate rise.Recap: SVB failed, basically, because it funded a portfolio of long-term bonds and loans with run-prone uninsured deposits. Interest rates rose, the market value of the assets fell below the value of the deposits. When people wanted their money back, the bank would have to sell at low prices, and there would not be enough for everyone. Depositors ran to be the first to get their money out. In my previous post, I expressed astonishment that the immense bank regulatory apparatus did not notice this huge and elementary risk. It takes putting 2+2 together: lots of uninsured deposits, big interest rate risk exposure. But 2+2=4 is not advanced math. How widespread is this issue? And how widespread is the regulatory failure? One would think, as you put on the parachute before jumping out of a plane,  that the Fed would have checked that raising interest rates to combat inflation would not tank lots of banks. Banks are allowed to report the "hold to maturity" "book value" or face value of long term assets. If a bank bought a bond for $100 (book value) or if a bond promises $100 in 10 years (hold to maturity value), basically, the bank may say it's worth $100, even though the bank might only be able to sell the bond for $75 if they need to stop a run. So one way to put the issue is, how much lower are mark to market values than book values? The paper (abstract):  The U.S. banking system's market value of assets is $2 trillion lower than suggested by their book value of assets accounting for loan portfolios held to maturity. Marked-to-market bank assets have declined by an average of 10% across all the banks, with the bottom 5th percentile experiencing a decline of 20%. ... 10 percent of banks have larger unrecognized losses than those at SVB. Nor was SVB the worst capitalized bank, with 10 percent of banks have lower capitalization than SVB. On the other hand, SVB had a disproportional share of uninsured funding: only 1 percent of banks had higher uninsured leverage. ... Even if only half of uninsured depositors decide to withdraw, almost 190 banks are at a potential risk of impairment to insured depositors, with potentially $300 billion of insured deposits at risk. ... these calculations suggests that recent declines in bank asset values very significantly increased the fragility of the US banking system to uninsured depositor runs.Data:we use bank call report data capturing asset and liability composition of all US banks (over 4800 institutions) combined with market-level prices of long-duration assets. How big and widespread are unrecognized losses?The average banks' unrealized losses are around 10% after marking to market. The 5% of banks with worst unrealized losses experience asset declines of about 20%. We note that these losses amount to a stunning 96% of the pre-tightening aggregate bank capitalization.Percentage of asset value decline when assets are mark-to- market according to market price growth from 2022Q1 to 2023Q1Most banks operate with (to my mind) tiny slivers of capital -- 10% or less. So 10% decline in asset value is a lot! (Banks get money by issuing stock and borrowing. The capitalization ratio is how much money banks get by issuing stock/assets. Capital is not reserves, liquid assets "held" to satisfy depositors.) In the right panel, the problem is not confined to small banks and small amounts of dollars. But...all of this is slightly old data. How much worse will this get if the Fed raises interest rates a few more percentage points? A lot. To runs, it takes 2+2 to get 4. How widespread is reliance on uninsured, run-prone deposits? (Or, deposits that were run-prone until the Fed and Treasury ex-post guaranteed all deposits!) Here SVB was an outlier. The median bank funds 9% of their assets with equity, 65% with insured deposits, and 26% with uninsured debt comprising uninsured deposits and other debt funding....SVB did stand out from other banks in its distribution of uninsured leverage, the ratio of uninsured debt to assets...SVB was in the 1st percentile of distribution in insured leverage. Over 78 percent of its assets was funded by uninsured deposits.But it is not totally alone the 95th percentile [most dangerous] bank uses 52 percent of uninsured debt. For this bank, even if only half of uninsured depositors panic, this leads to a withdrawal of one quarter of total marked to market value of the bank. Uninsured deposit to asset ratios calculated based on 2022Q1 balance sheets and mark-to-market values Overall, though, ...we consider whether the assets in the U.S. banking system are large enough to cover all uninsured deposits. Intuitively, this situation would arise if all uninsured deposits were to run, and the FDIC did not close the bank prior to the run ending. ...virtually all banks (barring two) have enough assets to cover their uninsured deposit obligations. ... there is little reason for uninsured depositors to run.... SVB, is [was] one of the worst banks in this regard. Its marked-to-market assets are [were] barely enough to cover its uninsured deposits.Breathe a temporary sigh of relief. I am struck in the tables by the absence of wholesale funding. Banks used to get a lot of their money from repurchase agreements, commercial paper, and other uninsured and run-prone sources of funding. If that's over, so much the better. But I may be misunderstanding the tables. Summary: Banks were borrowing short and lending long, and not hedging their interest rate risk. As interest rates rise, bank asset values will fall. That has all sorts of ramifications. But for the moment, there is not a danger of a massive run. And the blanket guarantee on all deposits rules that out anyway. Their bottom line: There are several medium-run regulatory responses one can consider to an uninsured deposit crisis. One is to expand even more complex banking regulation on how banks account for mark to market losses. However, such rules and regulation, implemented by myriad of regulators with overlapping jurisdictions might not address the core issue at hand consistently I love understated prose.There does need to be retrospective. How are 100,000 pages of rules not enough to spot plain-vanilla duration risk -- no complex derivatives here -- combined with uninsured deposits? If four authors can do this in a weekend, how does the whole Fed and state regulators miss this in a year? (Ok, four really smart and hardworking authors, but still... ) Alternatively, banks could face stricter capital requirement... Discussions of this nature remind us of the heated debate that occurredafter the 2007 financial crisis, which many might argue did not result in sufficient progress on bank capital requirements...My bottom line (again) This debacle goes to prove that the whole architecture is hopeless: guarantee depositors and other creditors, regulators will make sure that banks don't take too many risks. If they can't see this, patching the ship again will not work. If banks channeled all deposits into interest-paying reserves or short-term treasury debt, and financed all long-term lending with long-term liabilities, maturity-matched long-term debt and lots of equity, we would end private sector financial crises forever. Are the benefits of the current system worth it? (Plug for "towards a run-free financial system." "Private sector" because a sovereign debt crisis is something else entirely.) (A few other issues stand out in the SVB debacle. Apparently SVB did try to issue equity, but the run broke out before they could do so. Apparently, the Fed tried to find a buyer, but the anti-merger sentiments of the administration plus bad memories of how buyers were treated after 2008 stopped that. Beating up on mergers and buyers of bad banks has come back to haunt our regulators.) Update: (Thanks to Jonathan Parker) It looks like the methodology does not mark to market derivatives positions. (It would be hard to see how it could do so!) Thus a bank that protects itself with swap contracts would look worse than it actually is. (Translation: Banks can enter a contract that costs nothing, in which they pay a fixed rate of interest and receive a floating rate of interest. When interest rates go up, this contract makes a lot of money! )Amit confirms,As we say in our note, due to data limitations, we do not account for interest rate hedges across the banks. As far as we know SVB was not using such hedges...Of course if they are, one has to ask who is the counterparty to such hedges and be sure they won't similarly blow up. AIG comes to mind. He adds: note we don't account for changes in credit risk on the asset side. All things equal this can make things worse for borrowers and their creditors with increases in interest rates. Think for a moment about real estate borrowers and pressures in sectors such as commercial real estate/offices etc. One could argue this number would be large.  So don't sleep too well.  From an email correspondent: Besides regulation, accountancy itself is a joke. KPMG Gave SVB, Signature Bank Clean Bill of Health Weeks Before Collapse.  How can unrealised losses near equal to a bank's capital be ignored in the true and fair assessment of its financial condition (the core statement of an audit leaving out all the disclaimers) just because it was classified as Held to Maturity owing some nebulous past "intention" (whatever that was ever worth) not to sell?It strikes me that both accounting and regulation have become so complicated that they blind intelligent people to obvious elephants in the room.  

There's an interesting article on Politico about how the Biden administration's pledge to limit emissions from fossil fuels will be implemented on the global stage. Sure, reducing subsidies for fossil fuel extraction and consumption at home to set an example for the rest of the world is one thing. However, there are also things the United States can do internationally to help ensure fossil fuels are kept in the ground. In an executive order issued last month, Biden tasked the United States' agencies involved in foreign assistance and development financing--the International Development Finance Corporation (formed in 2019 by combining the Overseas Private Investment Corporation and the Development Credit Authority), Treasury, USAID, and the Millennium Challenge Corporation among others--with devising emissions-reducing financing. This executive order also extends to the multilateral organizations the US is a member of, including the World Bank. It states:[The Treasury Secretary shall] develop a strategy for how the voice and vote of the United
States can be used in international financial institutions, including
the World Bank Group and the International Monetary Fund, to promote
financing programs, economic stimulus packages, and debt relief
initiatives that are aligned with and support the goals of the Paris
Agreement. In doing so, the Biden administration wants to contrast clean, green American with dirty energy China. However, there is a danger that developing countries not as green-minded as Biden may instead be pushed to deal more with China:President Joe Biden's plan to halt
U.S. funding for overseas fossil fuel projects will turn the global
spotlight on China for bankrolling coal projects around the globe. But it could also push poor countries
closer to Beijing — and risk ceding the United States' position as a
leading financier for developing economies...Biden's directive last month to move toward withholding money from international institutions like the World Bank that help poor nations build fossil fuel power plants stands in stark contrast to Beijing's flow of cash under its Belt
and Road Initiative, which supplies 70 percent of the financing for the
world's new coal-fired plants. The White House is betting its move will
paint China as hypocritical as that country — the world's top
greenhouse gas emitter — aims to take a leading role in international
climate change efforts. To be sure, there will need to be a (sorry for the public administration jargon) whole-of-government approach for the US to get its message across in a way that resonates with developing countries deciding between clean energy and fossil fuels:But the plan will require the Biden team to closely coordinate its
foreign policy, trade and clean energy initiatives, because the absence
of U.S. money for coal projects won't on its own sway other nations'
energy plans. And the U.S. cannot unilaterally offer sweet enough
financial terms for clean energy to lure countries away from China's
coal finance.It's fair to say the US has its work cut out for it in a world which has not forsworn fossil fuels. It is worth pointing out that the Obama administration which Biden was a part of already started encouraging similar measures at the World Bank that have impacted the amount of fossil fuel-based energy projects it funded:But the U.S.
could immediately start shifting billions of dollars away from fossil
energy if [Treasury Secretary] Yellen directs U.S. representatives at the World Bank and
other multilateral funders to vote against coal, said Joe Thwaites, an
associate with the World Resources Institute's Sustainable Finance
Center.The number of coal projects funded by those
institutions has already dwindled, due in part to efforts under the
Obama administration, though multilateral development banks in which the
U.S. is a shareholder accounted for $69.5 billion of fossil fuel
finance between 2008 and 2019, according to environmental group Oil
Change International.

In its zeal to slay the inflation beast at all costs, the European Central Bank continues to raise interest rates at the highest level since the Euro's 1999 launch. It does so despite the flashing warning signals that the Eurozone could be on the cusp of a recession.
The post A Mistake Prone European Central Bank appeared first on American Enterprise Institute - AEI.

Australia's military weakness in an increasingly threatening regional environment requires that serious consideration be given to setting up a defence strategy and procurement body that operates with the same independence as the central bank. The ...

Europe's unwillingness to invest in public services and meet the greatest need is creating second-class citizens.

Banks profit from the European Central Bank´s interest-rate policy at the expense of taxpayers.

The CPI data out yesterday were not good news. Annual headline inflation was, more or less as expected, down, but at around 6 per cent is miles from the 2 per cent target midpoint the Reserve Bank’s MPC has been required to focus on delivering. Much more importantly, core inflation measures show little or no … Continue reading Inflation, monetary policy, and central bank spin

An interesting picture from Jim Reid/Deutsche Bank: Source: Jim Reid/DeutscheBank.

In July 2023, a bipartisan group of U.S. lawmakers introduced the Inter-American Development Bank Transparency Act seeking to limit Chinese influence at the IDB — a regional financial institution established in 1959 at the request of Latin American leaders to promote development in the region.U.S. policy makers are right to be concerned about some of China's activities in the region and interactions through the IDB, which today is owned by 48 sovereign states. Likewise, during her presentation to the House Armed Services Committee, U.S. Southern Command Commander, General Laura Richardson, noted that the United States should seek to maximize its shares in the recently voted on IDB capital increase as a means of countering China. However, Washington must be careful in how it approaches China's engagement in regional organizations lest it undermine U.S. interests and the ability of regional organizations to address the challenges that are facing the Americas.China joined the Inter-American Development Bank as a non-borrowing member in 2009 and in its first few years the IDB quickly developed ties to Beijing. Indeed, in the years following the 2008 financial crisis, not only did China engage with the region through the IDB, but was an important source of regional finance.However, in recent years, U.S. policy makers have become increasingly wary of Chinese engagement in the Bank and in the region at large. Not only are U.S. leaders concerned about Chinese influence, but also about Chinese firms winning a disproportionate share of IDB-funded infrastructure contracts — receiving approximately $1.7 billion in contracts between 2010 and 2020 compared to just $249 million won by U.S. firms.It is important to note, however, that while U.S. firms win 61% of the IDB contracts that they compete for, they are unlikely to compete for all contracts — thus ceding some to others such as Chinese companies. And Chinese firms often employ Chinese workers, limiting the positive spillovers of these loans to Latin American and Caribbean countries.But given the sizable value of contracts going to Chinese companies, there has been push back from both the United States and other member states within the Bank. In 2019, the IDB canceled its annual meeting in Chengdu due to Beijing's refusal to recognize Juan Guaidó as the interim president of Venezuela.Furthermore, in 2020, the bank elected U.S. citizen and vocal China critic, Mauricio Claver-Carone, as its president — he has since been removed from the role. These efforts put a spotlight on Chinese engagement at the bank and showcased concerns to key U.S. policy makers.The IDB is not the only regional organization in the Americas where China has sought to curry favor. The Americas are home to over 30 regional organizations, forums, and initiatives with overlapping memberships and mandates. While China is only a formal member of two of these organizations, it is a permanent observer in six and there are signs of active engagement with 11 other regional bodies. China has even developed a forum with the Community of Latin American and Caribbean States to further facilitate its engagement with the region.Also, the IDB isn't even the only regional development bank in the Americas where China engages. China is also a member of the Caribbean Development Bank — where it holds 5.58% of shares and engages in regional projects. It also has actively sought to boost its engagement with the CAF- Development Bank of Latin America through the Belt and Road Initiative and it was recently reported that China was seeking to become a member of the Central American Bank for Economic Integration. Given the number of channels that China is engaging Latin America and the Caribbean, simply pushing to limit its engagement through the IDB would be futile.I've been researching the topic and recently authored the report, "When the Dragon Joins the Club," published by the Jack D. Gordon Institute for Public Policy at Florida International University.While U.S. policy makers are seeking to curb Chinese influence at the Inter-American Development Bank, the organization's recently elected president, Brazilian economist Ilan Goldfajn, is making it clear that he does not want the bank to become embroiled in U.S.-China geopolitical competition.While it is true that the IDB allows the United States to leverage its funding to greater impact in the region, which can improve U.S. perceptions vis-à-vis China, forcing the bank to engage in a "cold war" between the United States and China will undermine the ability of the IDB to promote regional development or to push for meaningful reform. While the United States has previously leveraged its position in the IDB for geopolitical purposes, doing so makes the bank appear to be an extension of U.S. foreign policy rather than as a tool for Latin American and Caribbean leaders to access critical resources for development and as a purveyor of knowledge on development practices. Pushing for a U.S. president of the IDB, as the Trump administration did with Claver-Carone, already fueled this perception.Furthermore, the IDB is actively engaging with the United States in ways that promote U.S. interests. In September 2023, the IDB launched its "BID for the Americas" initiative aimed at encouraging U.S. companies to engage more and promote regional development through deeper integration across the Americas.In November, the IDB hosted an event on boosting interconnectedness in the Americas in the leadup to the White House's Americas Partnership for Economic Prosperity Summit. Goldfajn also visited Miami where he sought to build ties between the city and the region, an effort that would further promote regional U.S. trade and interests. He also met with U.S. Southern Command which has recently taken the approach that "economic security is national security." These actions support U.S. regional interests and can boost U.S. influence vis-a-vis China while supporting the IDB's role and not directly putting the bank into confrontation with China.As the United States seeks to curb Chinese influence in the Americas it must be cautious and recognize both the interests of the region and the important role that regional organizations play. Forcing regional organizations, like the IDB, to choose between China and the United States hinders their ability to meaningfully engage on the issues impacting the region. Engaging this way also reeks of the Monroe Doctrine and of U.S. interventionism, perceptions that will undermine U.S. interests and engagement with Latin America and the Caribbean.Instead of seeking to counter Chinese involvement at the IDB, the United States should engage with the bank and the region to develop mechanisms to encourage U.S. companies to integrate with the region and compete for IDB contracts. By showing that the United States wants to engage rather than trying to ban the region from relations with China, U.S. policy makers will not only build closer relationships with the region, but limit Chinese influence in the process.

We have to hope that Jerome Powell's Fed has learned from that experience. Maybe then it will not make the mistake of keeping interest rates too high for too long and thereby avoid an unnecessary hard economic landing.
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But first a correction. As I noted on Twitter and very briefly on the post itself on Saturday, it seems that the gist of my post on Friday was wrong. The repeal of Labour’s tobacco de-nicotinisation legislation – whatever motivated the parties that championed the change – will leave the flow of tobacco excise revenue … Continue reading The new government and the Reserve Bank