
The Never-Ending Story: Europe’s Banks Face a Frightening Future - T-A
http://www.bloomberg.com/news/features/2016-02-16/european-bank-nightmare-far-from-over-as-fines-and-fintech-loom
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sandworm101
>> While American banks appear to have turned the corner since that gut-
churning autumn nearly eight years ago, European institutions are girding yet
again for another round of restructuring.

The world should not work for the banks. The fact that American banks are now
bigger than ever before is not a good thing. We need more banks, more
competition in the marketplace. For that to happen the big banks have to first
shrink and/or be manually broken apart. Europe's banks may not be happy, but
Europeans should be. They are doing what American and the UK want but have so
far failed to accomplish.

>> there’s once again a flight to simplicity. That’s what regulators are
demanding. And that’s what legions of customers are expecting as startups
deliver financial services at the tap of an app.

I wouldn't go that far. The answer to the too-big banks isn't necessarily a
new paradigm. A larger number of smaller and more traditional banks offering
very traditional services is also an answer. I'm not sure I want any of my
banking to ever be "at the tap of an app". I don't take money so casually.
Online yes, app tapping no.

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lmm
The core business of a bank is taking a global view on risk. The very idea of
maturity transformation (at the heart of what a bank does) relies
fundamentally on being big enough that the laws of large numbers come into
play.

If we're saying we don't want big banks then we're saying we don't want banks.
Maybe you want that - maybe mortgages should be sold directly to investors on
the same maturity terms - but it would be a radical change to the way finance
works for everyone.

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mathattack
I'm not sure I follow you on taking a global view on risk. The core business
of banks is connecting people with money to people who need it. Risk
management is vital, but they're in the connecting business, not the risk
business. (Hedge funds should get paid to hold risk, banks should get paid for
brokering connections)

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liamconnell
Making a connection inherits risk. On a small scale, a bank loans money to
people and then packages those investments into financial assets which it
sells to investors who want to buy it. The mortgages HAVE to be packaged
otherwise the investor wouldn't have incentive to buy it from the bank rather
than directly lending. And the packaging itself has some level of risk since
the actions of the buyers or sellers are unpredictable.

I'm not saying its a great thing, just that its the modern accepted role for
big banks. If we take them away no one would be able to ACT on their global
view of risk. You can have a global view but be too small to act rationally
based on it. But that might not be a bad thing, its not like the current big
banks are developing the right financial tools...

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mathattack
Ahh - got it. Basically for the real systemic international risks, only global
banks can handle them. There is a bid of a tragedy of the commons with
independent central banks too. I'm not sure I agree with it in practice though
- did the large banks really attack risk systemically? Or did they just line
up their bets all in the same direction?

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liamconnell
> did the large banks really attack risk systemically? Or did they just line
> up their bets all in the same direction?

Again they're banks so they don't really line up their bets at all. Like you
said, they are mostly making connections. I'm like 75% sure that I'm using the
term right if I call them "market makers" when they do their job of making
connections. And as market makers, they make money by brokering transactions,
even in the abstract sense of the word.

So they can make good markets or stupid inflated markets. A good market is
loaning to businesses that want a little boost in growth and packaging that
risk for investors. A bad market is lending huge amounts to people while using
the house that they are paying off as collateral (sub-prime) and then
packaging those assets in a hundred ways and telling your salesmen to push it,
making the whole system so complicated that no one knows whats really going
on. Most banking actions live in the middle of that.

begin_rant{ Speaking of global risk again. I need to look into it more but the
biggest banks play a huge role in making the market in foreign investment
especially the relatively new area of "emerging markets". I really think this
ends up fucking over small developing economies on so many fronts. * The
American/European money crowds out domestic investment, but then at the end of
the day when the small country's currency starts inflating (it always does),
the debtors owe their debt in dollars which is a terrible situation. *
American/Euro money might suddenly disappear when there is an American market
scare. Small countries are so small that a blip on the American market can
rock them into a crisis. That's why things that only temporarily shocked large
companies and banks in the US changed entire political regimes in Argentina
and Indonesia in 2001. Can you imagine an entire country (big ones!) more
vulnerable to the market than a single US corporation thats actually being
publicly traded? * Politicians are humans. What inevitably happens is one
political party in a country gets tons of under-the-table (with 21st century
nuance of course) money by opening their country up to US investment. Monsanto
and Rio Tinto and Starbucks move in and no local companies will ever compete
again. History has not been written yet but I have a bad feeling this is what
Mauricio Macri wants to do all over again with Argentina. Argentina will
become a more favored subject nation to the global powers while the Macri
family gets rich. He will deal with a few short-term economic problems while
sacrificing the future of the nation to exist without the tyranny of
globalization. } end_rant (excuse me)

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mathattack
You are using the therm "Market Makers" correctly. The key is the banks don't
really set the price when they do this. They lend at a price just below what
they can sell on the other side. (They can't make money by bucking the
markets)

The challenge happens when banks veer from these activities, and start acting
like hedge funds. It starts with banks carrying inventory. The slope gets
slippery when traders start making proprietary bets on the inventory. Then
proprietary desks get created, with Chinese Walls separating them from market
makers. And then banks start investing their treasury in AAA securities that
seem "risk free" according to ratings agencies....

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legulere
> Startups are reinventing the business of retail banking.

Sorry but this is complete bullshit. Both cooperative banks and public savings
banks are both bigger in retail than the private banks. Then you still have
some special banks like the federal KfW that offers cheap loans for things the
government wants to promote.

The whole article actually only concentrates on the private banks and ignores
the existence of public and cooperative banks that had significantly less
problems in the crisis.

[https://en.wikipedia.org/wiki/Banking_in_Germany#Market_over...](https://en.wikipedia.org/wiki/Banking_in_Germany#Market_overview)

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cm2187
Big banks have horribly dated systems and are bureaucratic to the extreme, but
I doubt peer to peer lending will make more than a small dent in the consumer
lending market. For a simple reason: banks can lend that much money that
cheaply only thanks to a large, cheap and stable source of funding: bank
deposits. And there are two types of deposits: current account and savings
account.

Current accounts come with the capacity to make payments, and for that you
need to be a bank. So the only way the p2p lenders will access this source of
funding is by becoming big bureaucratic and highly regulated banks themselves.

Then you have savings account. It sounds like an investment but it's not. It's
really a risk free, lazy investment. If the bank makes a loss on its loans, it
is not passed on to the depositors. Even if the bank goes bust, and unless you
have a very large deposit, your deposit is insured by the State. People who
keep money on savings accounts aren't the type who are looking for risk and
high returns.

P2p relies on investors actively investing in these vehicles. I don't see how
this will be nowhere as large as the deposit base in a country.

On the wholesale funding market, things are different. Investors are active
investors and it is much easier to shortcircuit banks and lend to corporations
directly. Initially the banks were arranging the transaction, but I expect the
investors to increasingly cut the middle man.

And all these articles miss what makes the biggest barrier to entry to the
banking market: regulations. A bank would typically employ dozens of people
just to read and follow all the regulations that apply to them. Regulations
kill their profitability (they have to operate with 3 times the capital base
they had in 2007), but also shields them from competition.

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trgn
I think the whole point of a savings account is that it's not an investment.
Thankfully.

Banks don't use deposits when lending out money. They create the loan amount
out of thin air. There are regulations as to how much they can do that
relative to their assets. Thankfully.

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cm2187
No they do lend the proceeds of the deposits.

What the economists mean by "creating money" is that people treat deposits as
cash, and therefore have the feeling they have cash when they have a positive
balance on their bank account, where in reality all they have is an IOY from a
bank. But their cash is not in the bank anymore.

~~~
smaddox
This is a common misconception. The reality is that banks lend money at
interest rates above what the central bank offers them, meaning they can lend
as much as they want irrespective of deposits, and then borrow reserves from
the central bank at a lower rate.

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pjg
This article has a strong sideline of Banks fear of fintech startups eating
their lunch and goes on to cite 2 specific examples of large banks doing
things the disruptive way: Chase disbursing loans thru ondeck.com and Deutsche
Bank sending its COO to built a totally Digital "startup bank". In reality the
culture hasn't changed at all - both in my personal experience as well as
others I've talked to. Dealing with mid-level Bank managers is till pretty
much a "closed club" game. The attitude seems to be (1) either you get to
Series A/B before we talk to you - at which time its too late because the
business model for a fintech startup is defined early on -well before Series A
or (2) Sorry we just don't deal with startups (and cite some regulatory "grey
area" as an excuse). Unless the _culture_ changes down to mid-level ranks
Banks will loose big time

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guard-of-terra
"But Christensen says no large organization in any industry has ever been
successful in building disruptive technology on its own"

Counter example: an iPhone.

There are a lot of examples like this.

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randomgyatwork
I want to read this article but the colours and white text on black background
is too painful. Does anyone know how to read this in normal colours?

