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At the conference in Santander, I was particularly taken with a presentation by Jorge Yzaguirre from the Bolsas y Mercados Españoles (BME).
BME is the Spanish company that deals with all of the organisational aspects of the Spanish stock exchanges and financial markets, as well as providing clearing and settlement and technology consulting in 23 countries focused upon trading systems.Jorge presented in Spanish with English slides so I didn’t get much of the words, but the slides speak volumes.The discussion was all about that American flash crash on May 6th.This was the one when Accenture’s share price went from $41 at 2:30 p.m. to just one cent at 2:48 p.m.Tsk, tsk.I’ve read lots of explanations of the crash, and it boils down to bad programming or a virus it seems that caused a glitch in the system.For the best explanation looking at all this stuff, checkout Nanex’s website. The flash crash illustrates the fragility of our markets and how exposed they are to massive data spikes and bursts.What would happen if crossing systems were seriously cross?Well now we know and sure, we’re working on addressing such issues, but what I liked about Jorge’s presentation is that it’s the first time I’ve seen someone present what happened (rather than just reading it). I also like the charts he used, so here’s a wee selection.
The market indices went into a meltdown in the afternoon of May 6th.
With the Volatility Index at the Chicago Board of Exchange zapping skywards.
The brown stuff hits the fan at 2:48, when Accenture’s share price hits rock bottom.
As did Procter & Gamble.
And Exchange Traded Funds (ETFs) such as iShares.
Around the same time, shares such as 3M hit bottom.
As did IBM.
And Intel.
Meanwhile, some equities rocketed, such as the price of Sotheby’s, that auction house.
Going, going, that’s a gonner!
Overall, the volatility was massive as electronic liquidity provider’s black box algorithms traded intermarket sweep orders aggressively between the market makers and taker robots.
Which is why daily liquidity replenishment points –
a NYSE volatility control
built that automatically converts the markets' to “slow”
or Auction Market only mode temporarily, allowing specialists, floor brokers and
customers to supplement liquidity and respond to the stock’s volatility (see comments) – went through the roof.
So there you have it.
Jorge did put a load of other slides up there, but I think this collection gives you a good flavour of what happened.Now you may think this is a one-off, but our globally interlinked trading systems often spike and move in rapid cycles.
Just take a look at this chart which illustrates the ups and downs of the markets over the last five years, and take particular note of September 2008 when Lehman Brothers collapsed.
No wonder the non-rocket scientists, general investor, market participants and now legislators all fear High Frequency Trading (HFT) systems ... and why the ruling now is that any move in a stock price by more than 10% of its value in either direction in a five minute trading period, will result in a stop trading break of five minutes to ensure it's not some gaming going on.
Oh and yes, the whole thing was Apple's fault anyway.
Over the past week, I’ve spent time conferencing in the Spanish cities of Barcelona and Santander. In the case of the latter, my family thought I was going to a conference in the bank’s vaults, and I had to get a map out to show them that there actually is a city called Santander.
Now Spain has had a right old drubbing lately. Breathed in the same breath as Greece, Spain is viewed as being on the brink of failure and could bring down the Eurozone all on their own, although Portugal, Italy and Ireland may also have a say in this. Their only saving grace is that they actually have a football team who played in this World Cup, unlike France, England and Italy.
Mind you, the Germans are also playing some pretty neat football with Sebastian Schoepp giving Spain a good kicking in the German newspaper, Sueddeutsche Zeitung.The tone of his article may be summarised as follows:Spain was a country full of donkey trails and decaying villages but now has the fourth largest Eurozone economy, behind Germany, France and Italy. But its economy is all built on sand, as it was all developed using the unsustainable property boom, where Spanish businesses sold sunshine to Brits, Germans and Scandinavians. The sad fact is that Spaniards have been living beyond their means and now need to pay the bill. Its banks sit on mountains of bad loans and foreign speculators will sell Spain short just as Sir Francis Drake did to their galleons three centuries ago (is this guy not English?). OK, Spain is a bit of a sick dog of Europe, but is it really that bad?
In some respects, yes.
At the banking conferences I attended, a common theme is that Spanish banks over-expanded and now need to retrench. For example, there is a move to close down at least a quarter and maybe a third of all Spanish bank branches.
How come so many, I ask?
The answer is given to me that so many branches were opened to support and fuel the property boom that these branches are now desolate, unwanted, unnecessary and unforgiven.
Banks are on the back foot ... but not all banks.I recently blogged about how Spanish banks are thriving in social media. But these are the big banks and community banks. Savings banks, regional banks and mid-sized banks are all closing, merging and consolidating.Apparently, Zapatero’s government has been actively pushing for banks to merge rather than close, although regional and local governments across Spain also have a say in this.
This makes Spain's economic mess one of the worst in the Eurozone.
In reality, that figure is underestimating anyhow, as these figures vary by city, town and village, with the average rate reportedly running at 25% unemployed rising to almost half the population in some areas.Add onto this over developed property markets that cannot shift property, and this will continue to be an issue for the longer term.
The Spanish construction issues are also made worse by the fact that, like Dubai, a lot of the developments involved migrant workers from Eastern Europe, South America and Africa.
Money movement corridors for remittances are therefore well developed in Spain, but these have been impacted too.
First, many migrant workers have gone home as there is no new construction taking place.
Second, volumes and values of remittances have gone through the floor.
Third, there are too many money transfer agents.
On this third point, that's for a reason.
According to the remittances conference I attended last week, there are around 25,000 money transfer agents in Spain which is almost the same number as America, and these figures need to come down to around 10,000.
But then someone else tells me that Spain doesn’t have 25,000 agents. It’s just 10,000 but with 2.5 exclusivity licences each.What?Well, most money transfer operators want their agents to be exclusive.This may be a problem but not for Spanish agents who have been getting around such rules for years. For example, papa signs an exclusivity agreement with Western Union, mama signs one with Moneygram and bambino signs one with Travelex.This is going to change as the Payment Services Directive (PSD) says that money transfer firms cannot have exclusivity licences. Well, says my Spanish remittances friend, the PSD is irrelevant here in Spain as we use derogation rules to get around anything that might cause an issue or impact our domestic markets.Ah well, that’s Spain for you. And this is why the German journalist was so vitriolic, as he’s not only worried that Spain will be another Greece but that, with their lackadaisical attitudes towards rules and regulations will be much worse.
This could be much more of a drag on the German economy and the Eurozone as a result.
To make matters worse, the FT reports today that the European Central Bank (Frankfurt!) has just put the hee-bee gee-bees up the Spanish Banks sails by refusing to extend their loans:
Spanish banks have been lobbying the European Central Bank to act to
ease the systemic fallout from the expiry of a €442bn ($542bn) funding
programme this week, accusing the central bank of “absurd” behaviour in
not renewing the scheme. On Thursday, the clock runs out on the
ECB financing programme – the largest amount ever lent in a single
liquidity operation by the central bank – under the terms of the
one-year special liquidity facility launched last summer.
Oh dear?
Will this push Spain to the brink and, therefore, the Eurozone?
Is there any optimism here?
Maybe.
Spain does have problems, but many of the conference attendees told me that they think they are getting over the worst of it.The exodus of migrant workers has halted, and volumes and values of money transfer are now stable.
The property disaster may come to an end. OK, it’s unlikely that Brits, Germans and Scandinavians are going to come back to Spain with remortgages for second homes, but retirees and holidaymakers still want sunshine.
And, for all of its foibles and practices, Spanish folks are nice people to get along with. Sure, some folks might want to kick ‘em up the rear-end but that doesn’t mean kicking them when they’re down if we're serious about a European Union for the future. And finally, for all of Spain’s economic issues, it’s still not a bad place to be.
However none of the optimisms above fix the loan mountain that Spanish banks sit on.
In summation, don’t expect Spain – or Portugal, Ireland, Italy and Greece – to get their act together fast or to sort out their issues without further hostility and acrimony between Europe's nations.
The EU will have its biggest test for the next decade to see if it’s getting its act together. In fact, as Gideon Rachman said in the Financial Times last week, Europe is having a midlife crisis and some folks emerge from a crisis with a new sense of purpose whilst others just get divorced.Unless Europe continues to behave in a united fashion, where Germany and France keep banging the drum of the Eurovision, then we may well go back to a disenfranchised and disenchanted Eurozone.A broken one.
And I guess that it is the net:net of my Spanish reality.
For the European Union to continue, it really just boils down to whether Germany and France can keep it together.
Oh dear ... think I’ll go down the pub to watch Spain and Portugal battle things out in the World Cup finals.
Sources: Private Eye for the cartoon and Fabio joke, and The Week for the links to articles
Walking around the lovely city of Santander, I was pleased to find a Santander bank branch in Santander.
Isn't it just a lovely looking branch?
Now Santander (the bank) is a bank that heavily promotes taking risks in this branch, which surprised me.
Admittedly, it's taking calculated risks but, if you look at the front of the branch, it's all about Formula 1.
OK, they sponsor Ferrari and need to make the most of that sponsorship but, after Webber and Kovalainen's spectacular crash last week at the European Grand Prix in Valencia ...
I like auctions and collecting stuff so when it was announced that England’s rarest coin was going to be sold by Spinks Auction House last week, I had to have a look.
The coin is a real rarity dating back to the 7th century and King Eadbald of Kent, who ruled from 616 to 640 A.D.
This type of coin was long known to be amongst the earliest of English examples, and is peculiarly Anglo-Saxon because it does not have motifs found on similar coins of that time, and does not try to copy Roman ones.
On the back of the coin can be seen the word londenv, indicating London as the mint for the coin.
The real significance though is the inscription naming King Eadbald, as this makes it the earliest coin identified as being issued in the name of an English king.
Eadbald succeded Aethelberht as king of Kent in 616.
Aethelberht is principally remembered for having accepted St. Augustine into his kingdom and his subsequent conversion to Roman Christianity.
According to Bede, Eadbald fell foul of the young Church after his accession by rejecting Christianity, ejecting its Bishops and incurring the wrath of the Church for committing 'such fornication as the Apostle Paul mentioned as being unheard of even among the heathen, in that he took his father's wife as his own.'
Whatever Eadbald did at that time the situation did not last, as he later repented and was duly baptised, rejecting his wife and favouring the Church within his kingdom thereafter.
These events reflect the conflict and confusion amongst the Anglo-Saxon elite at this time as Christianity sought to assert itself over the Pagan religion.
As to the date of these named coins, the presence of Christian iconography dates them to after his conversion between 620 and 635.
Only six coins other than this example are known to exist and are held mainly in institutional collections. Only one example, other than this one, is therefore in private hands and is the reason why the auctioneers put an estimate on this coin’s value of between £6,000 to £8,000.
As most of the other coins in the catalogue were estimated at under £1,000, this was their star piece and attracted quite a lot of attention therefore ... and maybe even they were surprised when it sold for £26,000!
Now where’s my metal detector?
Ten years ago in the US of A, Sandy
Weill put great pressure on Bill Clinton's office to repeal the
Glass-Steagall Act with some success. At the time, Senator Byron Dorgan said this would lead to major bank failures and taxpayer bailouts. Boy, how right he was.
French and German banks have almost $1 trillion exposure to Southern
European economies according to a Bank of International Settlements
(BIS) report released last Monday. Read this post to download the BIS report
and checkout Europe's fragile economy.
Spent a lot of time yesterday talking with folks about the future of
money, payments and banking. The conversation got interesting in
two particular areas: branches and mobile services. And
suprisingly, the two areas reflect complementary strategies reflecting
whether the bank provider is in an emerging or developed economy.
We had a really interesting free-ranging conversation about
remittances and new services for remittances yesterday. Oh
yes, I should say that I’m at a remittances conference so that’s the
reason why.The discussion was about the NEXT BIG THING in money
transfer ... or rather whether and if there is a NEXT BIG THING in money
transfer.
To be honest, there’s not.There’s just mobile.
One solution for the underbanked discussed in some depth is SWIFT’s remittance services for banks. It is not
surprising we discussed this in depth, as SWIFT are the premier
conference sponsor. The service focuses upon those banks that
are trying to build bilateral services or using open correspondent
banking services.
Great conversations continue in the remittances / money transfer space,
with a chat with the global transaction services folks from a major
bank. This bank has a dilemma: are they in the remittances space
or are they not? They really want to be in this space but are
worried about risk exposures, particularly reputational risk. My
recommendation: don't bother.
I recently blogged a lot about 10,000 year thinking, the Long Now and
how it relates to financial services. We followed this up with a
discussion of the Long Now of Finance at the FSClub the other day and it
got me thinking that if we had perfect foresight, where would we invest?
So, it’s just a couple of days since returning to work and I’m
already fed up. My PC’s decided not to load Adobe
apps. Then my iPhone fell on the floor and broke, the crown
on my tooth fell out, my credit card has been defrauded and I’m no
longer on holiday. And then, to cap it all off, the new UK
Chancellor George Osbourne tells us that UK, France and Germany are all introducing a bank
levy. So ... to cheer me up ... I
thought I’d post a couple of holiday photos on the blog.
A final note on remittances and I've already been taken to task by one reader, who points out that a 'migrant worker' in one country is another country's customer overseas.
This is a key point for some banks, as they enable their customers to migrate and have full financial services whilst working overseas. That's an opportunity for some ...
However, as I responded, the point of workers' remittances in this migrant worker context is that they are either unbanked or underbanked. It's more about financial inclusion than banking, so it is a slightly different conversation.
And one solution for the underbanked discussed in some depth is SWIFT’s remittance services for banks. It is not surprising we discussed this in depth, as SWIFT are the premier conference sponsor.
The service focuses upon those banks that are trying to build bilateral services or using open correspondent banking services. The difficulties banks experience when dealing in such areas are all focused upon limitations in scalability, timing, price and service levels.If you have a bilateral agreement, that’s great for the countries covered. But then, if you need to cover new country corridors, a new agreement with another bank is required. Equally, what happens if you’re only transacting four or five times a month? A high cost for creating something that is basically unused.On the other hand, if you use open correspondent banking relationships there is no guarantee of service levels, and therefore pricing and processing can vary.Hence, SWIFT has focused upon creating a technical and commercial framework to solve these issues.The framework covers everything from the terms and conditions of correspondent bank contracts to best practice rules and procedures to the messaging standards and services based around Fileact store and forward.There’s a little bit more to it, and you can read all that stuff over here, but the bit that interested me is that the service already has 43 participants with 14 live users including certified payments services providers, such as Wall Street Exchange.It was stressed that non-bank payments providers are welcome to join the system and so the question came up: “but why would we use SWIFT as you are very expensive?”The SWIFT guys immediately responded by saying that the pricing is based upon a tiered system of usage volumes, with the most expensive items being priced at €0.08 per transaction down to €0.03 per transaction for the highest volume users.“That’s reasonable”, came the reaction from the PSP, “is that all of the pricing?”“Urm, there’s an annual fee of €1,000 to use the SWIFT directory of all participant’s reference data”, the SWIFT guys replied, “and, other than this, that’s about it.”
I think they won over a few more participants this week.
Great conversations continue in the remittances space, or money transfer space if you prefer, with a chat with the global transaction services folks from a major bank.
This bank has a dilemma: are they in the remittances space or are they not?They really want to be in this space but are worried about risk exposures, particularly reputational risk.Their challenge is to find out whether there’s enough profit in remittances to be worth the risk.They recognise that processing money transfers is a good business to be in. It can make money for them, and would fill in some missing pieces of their transaction services business. Not just that, but it may be critical for them. For example, they see mobile money transfer as being key to their future, and see the use of mobile and transaction services as being so obvious that it’s a no brainer for them to be in this space.They would like to do this in partnership with one of the major mobile carriers as, if they aren’t in partnership, others will be and that is dangerous as there are only so many partners out there. If Deutsche Bank gets T-Mobile for example, and Citi gets AT&T, HSBC gets Hutchinson, Bank of Tokyo-Mitsubishi gets KDDI and Royal Bank of Scotland gets Vodafone, then there aren’t that many mobile firms left to partner with.Soon, the markets are stitched up and banks that want to be mobile payments processors globally will be left in the cold.Hmmmm.Meanwhile, the real dilemma is why would a mobile carrier want to be the partner?Sure, it’s not their business to process payments although, as they are also transaction processors, they can find this extension of their core business something they could implement quite easily. Mobile carriers are also used to dealing with small accountholders. Think of your son or daughter’s mobile account. How much is spent per month and how many transactions are made? Maybe a few hundred text messages and a few telephone calls? Maybe €5 to €10 of cost per month.That’s diddly-squat, so mobile carriers are used to processing high volume, low margin transactions on masse.And what’s the real game changer for mobile?Reach.Every person on the planet can probably get access to a mobile handset if they wanted – there are over four billion users out there – and so mobile carriers want to enable financial transactions for all o f their customers.And there’s the rub: a bank only wants to deal with profitable customers, which is why only a billion people on the planet are banked, whilst carriers want to work with all customers, and three out of four are unbanked.Now that wouldn’t be an issue, a bank could offer remittance and money transfers for the three out of four who are unbanked, but it is a problem because banks need to comply with AML and KYC rules.Mobile carriers don’t provide that information and, in many instance, they don’t get or need that information.Mobiles can be picked up and SIM cards used anonymously.That’s no good for a bank ... although if the account is only €5 a month, maybe that is OK as banks do support limited use prepaid cards anonymously.But then mobiles are topped up and that additional value needs to be monitored.So, you now have mobile carriers starting to come in to the AML and KYC rules.For example, on e African money transfer operator told me that customers are being instructed to re-register their telephones with some form of identification in some countries.All well and good you may say, but then a banker replied that that is OK except that the mobile firms just get an ID with no proof of correct details.For the banks, they need all the customer’s details plus proof to ensure the correct ID is being presented via utility bills and other means. So there is an issue here.But let’s say that it is solvable. Then there’s still another issue: profit.For a bank, the risk versus reward equation for remittances is skewed heavily against the money transfer market.For example, several banks got into buying money transfer operations during the first half of the last decade as global migrant worker movements exploded.They thought they could cross-sell to the users of these services and, as migrants became more affluent, maybe get them fully banked along with their family.But this was not the case.For example, Spanish banks tell me that the users they thought they could cross-sell to in Spain already had bank accounts. They just used the remittance service because it was cheaper, faster and more reliable than using the bank.Hence, the cross-sell dream was a flawed vision.And there are hardly any profits in remittances unless you’re a really big player with massive volume.In fact, on that note, it’s getting worse as the credit crisis means that not only are there fewer migrant workers these days, as many have moved back home, but the ones that remain are sending less money home. So margins are tight, there’s no growth in volumes or values, and profits are almost non-existent.But let’s say you overcome the issue of AML and profitability, then what?There’s another issue: coverage.To be a player in this game, you need a lot of agents – Moneygram has 200,000 agents worldwide for example – to disburse payments and manage accounts. Those agents need appropriate licensing and vetting, and that’s a challenge for a bank.Even if you have all the agents, you then need geographic coverage – Moneygram has reach to over 160 countries – and most banks do not have that coverage and, in the case of some, don’t want it.For example, think about an American bank. An American bank would have no issue covering global service provision ... except when you start talking about coverage in Iran maybe. Or in Pakistan and other politically sensitive country operations.Now these banks start to worry that they might have an exposure like the one that UBS encountered.When the American forces broke open Saddam Hussein’s vaults in Baghdad, they found millions of dollars of crisp new dollar bills. However, the US had outlawed the supply of US dollars to Iraq for over a decade, so how did they get there?The Fed investigated and found the currencies came through other outlawed nations including Libya and Syria, via branches of UBS.Result: UBS were fined $100 million which, at the time, was one of the largest fines ever made for a bank infringement of US regulations.So there’s the rub.Even if you can organise money transfers, monitor things well, get the AML and KYC in place and operate profitability, a bank still has a huge reputational risk exposure if they get heavily into the remittances market.Let’s say you can overcome all of this though, as a bank, then what?Well, there’s a final issue: smell.Banks think migrant workers are smelly and don’t want them in their branches and migrant workers think that banks are smelly, as they look down their noses at them.You may think it over-states that case, but one French bank openly stated that they did not want to be in remittance services because they don’t want these “poor, foreign workers” in their branches.And these “poor, foreign workers” often feel intimidated by bank lobbies and branches, and the sort of people who use them, so would rather deal with someone who speaks their language who they feel they can trust more.There are loads of other points that could be made here but, all in all, even if you can organise money transfers, deal with the AML and KYC issues, find a way to make some money and manage the high reputational risk, a bank shouldn’t be getting into remittances because it does not smell right.So who will make this space their own?Hmmm ... now who are leading the remittances and financial inclusion space today?Oh yes, Safaricom/Vodafone (M-PESA) and a few other mobile carriers and operators.And so the real dilemma is: why would a mobile carrier want to be the partner?Now it gets interesting...
We had a really interesting free-ranging conversation about remittances and new services for remittances yesterday.
Oh yes, I should say that I’m at a remittances conference so that’s the reason why.The discussion was about the NEXT BIG THING in money transfer ... or rather whether and if there is a NEXT BIG THING in money transfer.
To be honest, there’s not.There’s just mobile.Building on yesterday’s discussions of mobile, there’s actually just two discussions about mobile worth having in the remittances space: SMS texts for receivers and Mobile Internet Services for senders.The general view is that SMS is it for wiring money to and fro. However, for the smart iPhone and Android users of this world, a fuller and richer experience using mobile internet apps might be a good thing.Then some really good conversation started about why mobile remittances are all focused upon national systems like M-PESA and GCash, rather than the promise we thought was there for global mobile remittance services.Global mobile remittance services still have that promise but, today, it is all national.This is because any mobile operator could launch a local remittance service.They don’t necessarily need to partner with a bank – did Safaricom for M-PESA or Globe Telecom for G-Cash – and they can just get on with it.However, if you were launching a global service, you would need to include so many other players. Banks, Money Transfer Operators, Money Transfer Agents and Merchants, Mobile Carriers and more. That gets way too complex and difficult.We ended up saying that the breakthrough will come as we move towards national and regional hubs for payments and transactions.In other words, SWIFT, the European Payments Council, the G8 payments development group, Mobey Forum, the GSMA and a few other key groups could create global standards and interoperability, along with multilateral clearing, to enable global money transfer.Could be a long time coming, but worth watching out for ...
So, it’s just a couple of days since returning to work and I’m already fed up. My PC’s decided not to load licensed and paid for Adobe apps. It tells me to reload and then won’t accept the paid for licence number.
Then my iPhone fell on the floor and broke, the crown on my tooth fell out, my credit card has been defrauded and I’m no longer on holiday.
And then, to cap it all off, the new UK Chancellor George Osbourne tells us that UK, France and Germany are all introducing a bank
levy.
Boy, am I fed up.
So ... to cheer me up ... I thought I’d post a couple of holiday photos on the blog.
This was the breaking holiday news in the place I’ve just been ...
If that one seems a bit of a shocker, you should have seen the front page headlines the following week:
Spent a lot of time yesterday talking with folks about the future of money, payments and banking.
The conversation got interesting in two particular areas: branches and mobile services.This is because I realised some things. Take branches.There appears to be an evolution of branch usage from underbanked economies through emerging economies to developed economies.In the underbanked economies, the issue is often a mixture of a lack of infrastructure and investment combined with low income and low prospects.In these instances, banks don’t make investments in branches as there is only going to be profitability from clients in major urban areas where there’s population density, wealth and work.As a result, these countries have had little banking prospects, availability or access, but this is changing due to the introduction of mobile wireless infrastructures.Even so, these communities will still remain underbanked as full bank services have limited availability in rural communities.You then move to emerging economies, and find the massive urbanisation of these economies is creating new wealth and new communities. You only have to look at the urbanisation of China, with the rural population to urban population changing from 74% to 26% in 1990 to a major switch in 2009 of 53.4% rural to 46.6% urban to realise such change.And with such change, comes branches and branch banking. China has seen a revolution in banking during their change process, and today’s Chinese banks hardly reflect those of two decades ago in service and style.In this instance, mobile services range from simple to complex, and the mobile channel is everything from basic payments to full service banking depending upon which consumer segment the bank serves.Then you look at developed economies, and the bank branch is already inbuilt to their model from the past. The branch may be an asset or liability, but the criticality is that new channels and technologies – internet and mobile internet specifically – are offering additional and alternative capabilities for these banks to reach their consumer.This also varies by culture and language. For example, Spanish bank customers much prefer bank branch access than UK customers, who would rather call their bank than visit a branch.So you cannot generalise too much about these services.Nevertheless, and this was my other realisation, you can also see big changes in mobile.I’m no mobile expert but in banking, I’ve seen five phases of mobile channel access and usage.The first was basic payments processing and transaction services using SMS text messaging.Then there were additional bank account services based upon Wireless Application Protocol, WAP.Third generation mobile bank services offered a more multimedia rich interaction, based upon smartphones. This was OK but limited by the fact that you had to design your apps for each phone operating system and, in some cases, model of phone. Hence, it was very limited.Fourth generation is where we are today, and I recently blogged about the killer apps offered by iPhones and Androids. The beauty of this generation is not only that we now have phones that can offer idiot proof bank services, but apps that can be developed and deployed for mobile internet. Therefore, the design is no longer for a specific phone model or operating system, but for easy access to multimedia rich banking services using Open APIs.Finally, there is a next generation mobile service appearing on the horizon ... the chip-neutral device.Today, we have EMV chips for cards, SIM chips for phones and RFID chips for contactless services. This is all going to change in the next few years as Visa, MasterCard, the GSMA and mobile operators work together to develop chip enabled services that are device-neutral.Hence you could stick your communicating wireless payments chip into any machinery, gadget, tool or technology you want ... a telephone, a watch, a television, an iPad, a laptop, a pair of sunglasses ... anything and everything can become a wirelessly communicating, interactive payments device.Roll on the next generation.
In fact, the whole meeting of the launch of the Long Now of Finance was recorded and, if you have 40 minutes free or even 10 minutes (bearing in mind that we’re talking 10,000 years ahead, that’s not bad) then you can hear Brian Eno, Alexander Rose and Stewart Brand introducing the concepts properly through this video:
We followed this up with a discussion of the Long Now of Finance at the FSClub on 7th June.
Here’s a short write-up of what transpired from guest contributor Richard O’Rourke:
Monday evening saw another excellent Financial Services Club event with the Long Finance team.
The evening was kicked off by the panel chair, Professor Michael Mainelli, founder of Long Finance.
He provided an overview of Long Finance and summed up its raison d'etre as 'When would we know when our financial system is working?'
Drawing attention to work he'd recently published, 'Just Doing My Job: Intelligence versus Integrity in Financial Professionals', he pointed out the difficulties facing the finance professions and their institutions.
He also talked about the impact of 'feed forward loops' which make financial systems intrinsically unstable, complex and not suited to normal distributions.
Drawing inspiration from David Hilbert's Meta Mathematics project of 1900 setting out a roadmap for the key mathematical challenges of the 20th century, Mainelli described the MetaCommerce part of Long Finance as an attempt to identify the impertinent challenges that need to be overcome by the global financial community.
First of the panelists to speak was historian Dr Malcolm Cooper, author of the first Long Finance Eternal Brevity paper, 'In Search of the eternal coin' (32 page pdf).
He made two observations of note, the first, that land has always been part of long term value. The second was that, despite the scale of their merchant empire, the Carthaginians had no coinage.
Next up was David Steven, author of the Finance Short paper, 'Time To Stop Betting The House' (42 page pdf).
He remarked on his surprise that despite what has arguably been the greatest financial crisis since the thirties, and the collapse of house prices in the US and elsewhere, in Britain house prices have barely paused for breath and have even started climbing again.
The question on his mind is 'has Britain simply delayed the inevitable?'
He also highlighted his belief that the pervading dynamic in Britain's housing market represents the single largest transfer of wealth from the young to the old in its history.
Inter-generational transfer was a point picked up on by the final panelist, Jan-Peter Onstwedder.
He pointed out how our generation is the first to turn an age old tradition on its head by attempting to consume future wealth today rather than enhance it for future generations.
He highlighted how it is becoming increasingly believed that we are bequeathing to our children a world in a worse state than we received it.
He also pointed out how a key financial tool for measuring value across time, NPV, has probably contributed to poor inter-generational decisions.
When the discussion was thrown open to the floor it revealed an audience of both pessimists and optimists.
The pessimists started by pointing out that we're locked into the current financial paradigm and a sustainable replacement can only emerge after our present system collapses. Malthus even got a mention.
Quick to rally to the optimists cause, Z/Yen's Ian Harris reminded us that throughout history there have been those concerned with catastrophe and collapse and each time our ingenuity has triumphed. Jared Diamond's 'Collapse' was mentioned in the context of what might motivate our present society to choose success over failure.
Finally, I recently spent a day with some futurists, as mentioned.
The result of that day is that we decided to create the Long Finance Futurists Forum, with founders including:
Chris Yapp (SAMI Consulting)
Gill Ringland (SAMI Consulting)
Ilaria Frau-Hipps (University of Cambridge)
Martin Duckworth (SAMI Consulting)
Michael Mainelli (Z/Yen)
Oliver Sparrow (Challenge! Forum)
Oh yes, and me!
Our first output from this meeting is the attached document:
Download "Where shall I invest" (Word Doc).
The idea is to look at what would have happened, post the last financial crisis of 1929, if someone had taken an investment position based upon the various geographic views of that time.
We then pose the question: with perfect foresight, where would you invest for the next century?
All in all, the Long Now and the Long Finance Futurists Forum will be an ongoing process of dialogue, discussion and debate, and will gain some traction at this year’s SIBOS I suspect.
Therefore, if you’re interested in the Long Now and a real focus upon Future Finance, let me know and will make sure you get invited to these discussions.
French and German banks have almost $1 trillion exposure to Southern European economies according to a Bank of International Settlements (BIS) report released last Monday (Download BIS report).
“Exposures” include loans, loan commitments, and derivatives contracts, and represent the cost to the banks if there were a default.All in all, Europe's banks have almost $1.6 trillion exposure to the four countries most susceptible to default in the Eurozone: Portugal, Ireland, Greece and Spain. $727 billion of exposures to Spain, $402 billion to Ireland, $244 billion to Portugal, and $206 billion to Greece.This builds on the chart I posted at the end of last month, but provides a more in depth view of the goings on.This is why the EU changed the rules last week for the way it looks at breaches of their rules on debt and deficits, by introducing a “dynamic debt” policy. This policy is based upon debt being allowable above the previous limits, as long as that debt is going down. So that’s alright then.Except that the level of debt is meant to be under 60% of GDP and yet, according to the latest economic forecasts by the European Commission, the average level of debt is going to reach 88.5% of overall Eurozone GDP in 2011 and 83.8% for the EU as a whole, Eurostat figures published in April (12-page PDF) reveal that the highest debt-to-GDP ratios are 115.8% in Italy, 115.1% in Greece, 96.7% in Belgium, 78.3% in Hungary, 77.6% in France, 76.8% in Portugal and 73.2% in Germany. Malta (69.1%), the UK (68.1%), Austria (66.5%), Ireland (64.0%) and the Netherlands (60.9%) came next.Mind you, this measures only public debt to GDP ratios, e.g. the government’s exposures, and many EU countries are arguing it should cover aggregate debt which would include the private sector borrowing levels. If this were taken into account, then the UK would lead the pack of debtors.Expect this all to be reviewed and redeveloped under new EU rules announced on 30th June.What fun!
Could we have forecast the credit crisis? Yes. Lots of thoughts on this, including last week's comment, but here's some more new stuff.
Ten years ago in the US of A, Sandy Weill put great pressure on Bill Clinton's office to repeal the Glass-Steagall Act with some success. This was because Sandy had a vision for Citigroup, which had grown from a retail bank to an integrated bank and insurer thanks to the merger with Travellers.
Sandy now wanted to create a global universal bank, integrating insurance, securities and retail banking, with Citibank, Travellers and Salamon Smith Barney at the forefront.
Trouble was that his plans were being thwarted by regulations, as Glass-Steagall prohibited any one institution from acting as
a combination of investment bank, commercial bank and insurance company. This ruling was made after the 1929 Great Depression and stock market crash.
After years of lobbying, Weill was successful, and the Glass-Steagall Act was repealed and Gramm-Leach-Bliley (GLB) came into force. The Gramm-Leach-Bliley Act allowed commercial banks, investment
banks, securities firms and insurance companies to consolidate, and therefore created the legal platform for Citigroup to emerge.
At the time, we thought the revolutionary model the act would allow was bancassurance, where more banks would offer full service in-house insurance. Instead, it allowed the riskier activities of the investment markets to infect the rest of the financial ops.
These risky activities would infect the rest of the financial ops regardless - just look at Long Term Capital Management - as the markets are like a house of cards. However, it did create a significant step towards the crash situation we are dealing with today.
Did no-one object?
Sure, a few did and, today, the US Senator Byron Dorgan is being accredited as the visionary. Here's what he had to say back in 1999:
I spoke earlier today about this legislation, which is called the Financial Services Modernization Act of 1999, and said then that I am probably part of a very small minority in this Chamber, but I feel very strongly that this is exactly the wrong bill at exactly the wrong time. It misses all the lessons of the past and, in my judgment, it creates definitions and moves in directions that will be counterproductive to our financial future.
What does this bill do? It would permit common ownership of banks, insurance, and securities companies, and to a significant degree commercial firms as well. It will permit bank holding companies, affiliates, and bank subsidiaries to engage in a smorgasbord of expanded financial activities, including insurance and securities underwriting, and merchant banking all under the same roof.
This bill will also, in my judgment, raise the likelihood of future massive taxpayer bailouts. It will fuel the consolidation and mergers in the banking and financial services industry at the expense of customers, farm businesses, family farmers, and others, and in some instances I think it inappropriately limits the ability of the banking and thrift institution regulators from monitoring activities between such institutions and their insurance or securities affiliates and subsidiaries raising significant safety and soundness consumer protection concerns.
CONGRESS PASSES WIDE-RANGING BILL EASING BANK LAWS By STEPHEN LABATON November 5, 1999
WASHINGTON, Nov. 4— Congress approved landmark legislation today that opens the door for a new era on Wall Street in which commercial banks, securities houses and insurers will find it easier and cheaper to enter one another's businesses.
The measure, considered by many the most important banking legislation in 66 years, was approved in the Senate by a vote of 90 to 8 and in the House tonight by 362 to 57. The bill will now be sent to the president, who is expected to sign it, aides said. It would become one of the most significant achievements this year by the White House and the Republicans leading the 106th Congress.
''Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,'' Treasury Secretary Lawrence H. Summers said. ''This historic legislation will better enable American companies to compete in the new economy.''
The decision to repeal the Glass-Steagall Act of 1933 provoked dire warnings from a handful of dissenters that the deregulation of Wall Street would someday wreak havoc on the nation's financial system. The original idea behind Glass-Steagall was that separation between bankers and brokers would reduce the potential conflicts of interest that were thought to have contributed to the speculative stock frenzy before the Depression.
Today's action followed a rich Congressional debate about the history of finance in America in this century, the causes of the banking crisis of the 1930's, the globalization of banking and the future of the nation's economy.
Administration officials and many Republicans and Democrats said the measure would save consumers billions of dollars and was necessary to keep up with trends in both domestic and international banking. Some institutions, like Citigroup, already have banking, insurance and securities arms but could have been forced to divest their insurance underwriting under existing law. Many foreign banks already enjoy the ability to enter the securities and insurance industries.
''The world changes, and we have to change with it,'' said Senator Phil Gramm of Texas, who wrote the law that will bear his name along with the two other main Republican sponsors, Representative Jim Leach of Iowa and Representative Thomas J. Bliley Jr. of Virginia. ''We have a new century coming, and we have an opportunity to dominate that century the same way we dominated this century. Glass-Steagall, in the midst of the Great Depression, came at a time when the thinking was that the government was the answer. In this era of economic prosperity, we have decided that freedom is the answer.''
In the House debate, Mr. Leach said, ''This is a historic day. The landscape for delivery of financial services will now surely shift.''
But consumer groups and civil rights advocates criticized the legislation for being a sop to the nation's biggest financial institutions. They say that it fails to protect the privacy interests of consumers and community lending standards for the disadvantaged and that it will create more problems than it solves.
The opponents of the measure gloomily predicted that by unshackling banks and enabling them to move more freely into new kinds of financial activities, the new law could lead to an economic crisis down the road when the marketplace is no longer growing briskly.
''I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010,'' said Senator Byron L. Dorgan, Democrat of North Dakota. ''I wasn't around during the 1930's or the debate over Glass-Steagall. But I was here in the early 1980's when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.''
Senator Paul Wellstone, Democrat of Minnesota, said that Congress had ''seemed determined to unlearn the lessons from our past mistakes.''
''Scores of banks failed in the Great Depression as a result of unsound banking practices, and their failure only deepened the crisis,'' Mr. Wellstone said. ''Glass-Steagall was intended to protect our financial system by insulating commercial banking from other forms of risk. It was one of several stabilizers designed to keep a similar tragedy from recurring. Now Congress is about to repeal that economic stabilizer without putting any comparable safeguard in its place.''
Supporters of the legislation rejected those arguments. They responded that historians and economists have concluded that the Glass-Steagall Act was not the correct response to the banking crisis because it was the failure of the Federal Reserve in carrying out monetary policy, not speculation in the stock market, that caused the collapse of 11,000 banks. If anything, the supporters said, the new law will give financial companies the ability to diversify and therefore reduce their risks. The new law, they said, will also give regulators new tools to supervise shaky institutions.
''The concerns that we will have a meltdown like 1929 are dramatically overblown,'' said Senator Bob Kerrey, Democrat of Nebraska.
Others said the legislation was essential for the future leadership of the American banking system.
''If we don't pass this bill, we could find London or Frankfurt or years down the road Shanghai becoming the financial capital of the world,'' said Senator Charles E. Schumer, Democrat of New York. ''There are many reasons for this bill, but first and foremost is to ensure that U.S. financial firms remain competitive.''
But other lawmakers criticized the provisions of the legislation aimed at discouraging community groups from pressing banks to make more loans to the disadvantaged. Representative Maxine Waters, Democrat of California, said during the House debate that the legislation was ''mean-spirited in the way it had tried to undermine the Community Reinvestment Act.'' And Representative Barney Frank, Democrat of Massachusetts, said it was ironic that while the legislation was deregulating financial services, it had begun a new system of onerous regulation on community advocates.
Many experts predict that, even though the legislation has been trailing market trends that have begun to see the cross-ownership of banks, securities firms and insurers, the new law is certain to lead to a wave of large financial mergers.
The White House has estimated the legislation could save consumers as much as $18 billion a year as new financial conglomerates gain economies of scale and cut costs.
Other experts have disputed those estimates as overly optimistic, and said that the bulk of any profits seen from the deregulation of financial services would be returned not to customers but to shareholders.
These are some of the key provisions of the legislation:
Banks will be able to affiliate with insurance companies and securities concerns with far fewer restrictions than in the past.
The legislation preserves the regulatory structure in Washington and gives the Federal Reserve and the Office of Comptroller of the Currency roles in regulating new financial conglomerates. The Securities and Exchange Commission will oversee securities operations at any bank, and the states will continue to regulate insurance.
It will be more difficult for industrial companies to control a bank. The measure closes a loophole that had permitted a number of commercial enterprises to open savings associations known as unitary thrifts.
One Republican Senator, Richard C. Shelby of Alabama, voted against the legislation. He was joined by seven Democrats: Barbara Boxer of California, Richard H. Bryan of Nevada, Russell D. Feingold of Wisconsin, Tom Harkin of Iowa, Barbara A. Mikulski of Maryland, Mr. Dorgan and Mr. Wellstone.
In the House, 155 Democrats and 207 Republicans voted for the measure, while 51 Democrats, 5 Republicans and 1 independent opposed it. Fifteen members did not vote.
Tucked away in the legislation is a provision that some experts today warned could cost insurance policyholders as much as $50 billion. The provision would allow mutual insurance companies to move to other states to avoid payments they would otherwise owe policyholders as they reorganize their corporate structure. Many states, including New York and New Jersey, do not allow such relocations without the consent of the insurer's domicile state. But the legislation before Congress would pre-empt the states.
Both the Metropolitan Life Insurance Company and the Prudential Life Insurance Company are in the midst of reorganizing into stock-based corporations that are requiring them to pay billions of dollars to policyholders from years of accumulated surplus. In exchange, the policyholders give up their ownership in the mutual insurance company.
The legislation would permit any mutual insurance company to avoid making surplus payments to policyholders by simply moving to states with more permissive laws and setting up a hybrid corporate structure known as a mutual holding company.
The provision was inserted by Representative Bliley at the urging of a trade association. It attracted little opposition because it was attached to a provision that forbids insurers from discriminating against domestic-violence victims.
In a letter sent to Congress this week, Mr. Summers said that the provision ''could allow insurance companies to avoid state law protecting policyholders, enriching insiders at the expense of consumers.''
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