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Bye Bye Banking

by crankykarsten Wed Jun 30th, 2010 at 03:04:15 AM EST

I have no time now for a full diary but I thought this was so interesting that I'd post it with just a few comments.

Siemens, a big German conglomerate has just applied for a banking licence. Before I quote an article or press release, just google Siemens and banking licence you will find a bunch of articles from all major German newspapers, reuters, etc...

Why is this so important? Well, beyond the "marketing" (e.g. "now we can offer our customers even more customized finance solutions blah, blah, blah), there are several commentaries in the press which got me thinking... More after the fold...


Here my random rantings which could apply to any big company going through the arduous task of getting a licence, but who says that politicians couldn't get an easy licence liteTM in place to "only" have a central bank account but no right to engage in lending???

  1. Big Company could probably use this to get an account at the ECB - so it doesn't actually need a "real" bank account anymore? (theoretically)

  2. Big Company could then park it's money at the ECB directly and not at banks, if many companies do this (and private people) banks would lose a lot of deposits! Not good when the inter-banking market is not working as it is now (and no use if none of the banks taking part have any deposits...)

  3. Wouldn't it make sense to allow everyone to have a fully functional account at the ECB? We would then finally have an entity taking care of (a part of) the utility function of the banking market. Just think how much resources get spent on EU legislation to make cross-border money transfer cheaper, (IT-)economies of scale, etc...

  4. Having no account at a commercial bank which only wants to sell its costumers crappy structured products which makes its investment bankers rich or sell overpriced loans would be beneficial for society as a whole as commercial banks wouldn't have the "gateway drug" of accounts to lure unsuspecting customers... In my opinion the biggest benefit of all!

  5. the saving and investing function would then be fulfilled, hopefully more efficiently, by e.g. building and loan or other institutions who would cater solely to specific important needs of society (e.g. housing, energy, agriculture).

Just my random thoughts, hopefully I will soon publish my diary "pay-as-you go vs. funded pensions, Wall Street Bandits and future fair finance" (or something like that) where I will discuss some of the stuff above in more detail...

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Re. number 4, unfortunately this is not going to happen as the banking lobby is too strong...
by crankykarsten (cranky (where?) gmx dot organisation) on Wed Jun 30th, 2010 at 03:08:53 AM EST
European Tribune - Bye Bye Banking
Having no account at a commercial bank which only wants to sell its costumers crappy structured products which makes its investment bankers rich or sell overpriced loans would be beneficial for society as a whole as commercial banks wouldn't have the "gateway drug" of accounts to lure unsuspecting customers... In my opinion the biggest benefit of all!
The most useful service retail banking provides is the payment and clearing system, and cash points. I doubt people will be able to do with a debit/ATM card from Siemens...

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Wed Jun 30th, 2010 at 04:00:09 AM EST
[ Parent ]
that is exactely what I am saying, this would all be done by the ECB, not by Siemens or any other industrial company. Sorry for not stating that clearer...
by crankykarsten (cranky (where?) gmx dot organisation) on Wed Jun 30th, 2010 at 04:04:36 AM EST
[ Parent ]
Well, if we hadn't privatised all public banks about 20 years ago (and forgotten how to carry out a regulatory intervention of a failing bank in the intervening time) the response to the Global Clusterfuck might have been different.

After subverting bank insolvency, our leaders are now about to make a mess of liquidity | Willem Buiter's Maverecon | FT.com

Unless there is a major change of direction among global economic and financial officialdom, we are at risk of ending up with a world in which liquidity provision is privatised and insolvency risk for banks is socialised.  This would be the exact opposite of what makes sense: solvency is (or should be) a private good and liquidity is (or should be) a public good.

...

When there is a crisis of confidence and trust, central banks should act aggressively as lenders of last resort and market makers of last resort and provide any amount of liquidity demanded, albeit at a price.  It may be possible for private banks to hold enough liquid assets (government debt, effectively) on their balance sheets to survive even a major liquidity crunch without recourse to the central bank.  But that would be socially inefficient.  Banks are meant to intermediate short liabilities into long-term assets, and frequently into long-term illiquid assets.  It's what their raison d'être is.  Banks should hold enough liquid assets to meet the needs of the trade and the random inflows and outflows of normal times, when confidence and trust are high.  When confidence and trust in an individual bank are low but the system is sound, an individual institution may be able to access credit lines and other forms of liquidity insurance with private counterpaties.  But when confidence and trust in the system as a whole are low, there is no efficient solution involving just the private sector.  The banks then rightly turn to the central bank for funding liquidity or market liquidity.

Providing liquidity is what God made central banks for.  Their domestic currency liabilities have the highest degree of liquidity of any domestic-currency-denominated financial instruments.  Central banks should be the providers of emergency liquidity of first resort - at a price.  If private banks have to hold enough government debt during good times to allow them to survive a systemic liquidity crunch during bad times, they are engaged in a privately and socially inefficient and dysfunctional form of self-insurance, rather like China and some other emerging markets who stockpiled huge liquid reserves.  It is individually rational in the case of China, because they don't trust the IMF to come to their aid on acceptable terms and because there is no other market maker of last resort or lender of last resort for sovereign nations.



By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Wed Jun 30th, 2010 at 04:14:07 AM EST
[ Parent ]
European Tribune - Comments - Bye Bye Banking
Siemens, a big German conglomerate has just applied for a banking licence. Before I quote an article or press release, just google Siemens and banking licence you will find a bunch of articles from all major German newspapers, reuters, etc...
Not so unusual...

General Electric - Wikipedia, the free encyclopedia

GE's divisions include GE Capital, GE Energy, GE Technology Infrastructure, NBC Universal and GE Home & Business Solutions

Through these businesses, GE participates in a wide variety of markets including the generation, transmission and distribution of electricity (e.g. nuclear, gas and solar), lighting, industrial automation, medical imaging equipment, motors, railway locomotives, aircraft jet engines, and aviation services. It co-owns NBC Universal with Vivendi. Through GE Commercial Finance, GE Consumer Finance, GE Equipment Services, and GE Insurance it offers a range of financial services as well. It has a presence in over 100 countries. GE gauges to control a railway locomotive[21]

Since over half of GE's revenue is derived from financial services, it is arguably a financial company with a manufacturing arm. It is also one of the largest lenders in countries other than the United States, such as Japan. Even though the first wave of conglomerates (such as ITT Corporation, Ling-Temco-Vought, Tenneco, etc.) fell by the wayside by the mid-1980s, in the late 1990s, another wave (consisting of Westinghouse, Tyco, and others) tried and failed to emulate GE's success.

So, is Siemens also going to morph into "a financial corporation with a manufacturing arm"?

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Wed Jun 30th, 2010 at 03:58:05 AM EST
no, they will not copy GE, the CFO said as much and so do most articles...
by crankykarsten (cranky (where?) gmx dot organisation) on Wed Jun 30th, 2010 at 04:05:30 AM EST
[ Parent ]
Siemens seeks banking licence to manage risk | Reuters

Siemens, Europe's biggest engineering company, said it had applied for the licence to German financial regulator Bafin, which is now reviewing the application.

"With the help of a licensed credit institution Siemens aims to expand the product portfolio of its financial services unit, particularly in the sales finance area, add flexibility to group financing and optimise its risk management," the company said in a statement.

The financial services unit normally provides financing to customers buying Siemens' products.



By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Wed Jun 30th, 2010 at 04:01:58 AM EST
like I said at the beginng, look beyond the marketing blah blah of offering services to customers, etc... My diary is about phantasizing about a world in which a central bank takes care of the important utility functions of banking...

Again, this article has nothing to do with Siemens! It was just the thing to get my thoughts rolling...

by crankykarsten (cranky (where?) gmx dot organisation) on Wed Jun 30th, 2010 at 04:08:24 AM EST
[ Parent ]
European Tribune - Bye Bye Banking
licence liteTM in place to "only" have a central bank account but no right to engage in lending???
You mean non-bank corporations don't engage in lending all the time?

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Wed Jun 30th, 2010 at 04:03:06 AM EST
well, at least lending as is defined by whatever law applies in your jurisdiction. Payment terms of x days are not lending in that sense
by crankykarsten (cranky (where?) gmx dot organisation) on Wed Jun 30th, 2010 at 04:09:24 AM EST
[ Parent ]
Some time ago, I wrote
I think the biggest barrier to entry is not capital but regulatory compliance.

Basically, I think you would have to run a business for a few years which would not be a "bank" and after accumulating a number of operational records for maybe 5 years you could become a "bank".

The easiest way to start a new bank is to buy a failing one, possbly.

This Siemens thing should be interesting to watch...

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Wed Jun 30th, 2010 at 04:29:18 AM EST
This is interesting, since it is Siemens doing it, and is part of the continuing transformation of banking.

In the US, Walmart were looking to get into banking big time, and in the UK the Tesco Bank is likewise gearing up. In Africa and elsewhere, where banking systems are rudimentary at best, Telecom companies are getting into mobile payments by either buying banks or partnering with them in one way or another.

There will be no banking system as we know it in the developing world, and they will leapfrog straight past us.

Banking in its current form is dead on its feet, being terminally starved of capital. The logic of the internet is for a transition to service provision, and this has the attraction of this for banks is that the only capital they would require is that necessary to cover operating costs.

Note that there is a fundamental difference between the requirement for clearing of the credit based upon the capacity of individuals and enterprises to provide goods and services  - which does not require deposits - and credit secured against completed property or productive assets, which does.

I believe that the end game is Peer to Peer Finance. During the transition to this architecture there may be other transitional architectures - but nothing based upon deficit (and credit intermediation) will in the long term be sustainable.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Jun 30th, 2010 at 05:09:00 AM EST
Going with my own obsession ...

There's a difference in the Epistemological Cycle Time Steps of financial industry "players" and the people who provide the funds for the industry players to play with and the players in the Real Economy.

Currency traders sit at their desks with Real Time data pouring in.  They use this minute-by-minute data to abstract Information which they use to preform Actions affecting the Real Economy.  In contrast those in the Real Economy are looking at data that is at best 15 minutes old and more likely hours to days old.  

It used to be banks across the industry were able to staff their Currency Trading desks with the best "talent" available.  No more.  The major Money Market Banks, major Financial Institutions, e.g., Goldman Sachs, and hedge funds can now scoop the lot.  This provides the list with the "talent" to make more money faster thus enabling the list to absorb - through take-overs or bankruptcies - an ever greater share of the Financial Industry as a whole.

So fewer players are making more money, more quickly through pure Financial Market transactions while starving the Real Economy of investment capital as those funds are diverted from 4-6% ROI to a 12 - who knows what% ROI.  Even when a modicum of amount of capital is invested in the Real Economy it is the last investor who scoops the majority of the 'take.'  (Silicon Valley Rule of Thumb)

Also the Time Horizon to Return is severely out of whack.  It takes two to four years to bring a new product to market in the Real Economy.  The Financial Industry can produce - if that's the word I want - a new product in a couple of weeks and it can become mature in a couple of months.

Perhaps I haven't been paying attention, enough, to your posts and writings but I don't see how a Peer-to-Peer financial system can get-going in this climate.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sat Jul 3rd, 2010 at 01:51:32 PM EST
[ Parent ]
ATinNM:
Perhaps I haven't been paying attention, enough, to your posts and writings but I don't see how a Peer-to-Peer financial system can get-going in this climate.

It's about 'what works' for the users of finance, and the providers of finance. P2P finance, whether credit or investment, works for both.

For banks the value proposition is that the only capital they need is that necessary to cover operating costs. At a time when banks are terminally starved of capital the banks that get in early will be at a competitive advantage to the rest.

Applied to Iceland it could be Simply the Best :-)

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Jul 3rd, 2010 at 05:37:04 PM EST
[ Parent ]


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