18/1/17: Bitcoin Demand: It's a Chinese Tale

Bitcoin demand by geographic location of trading activity:

H/T for the chart to Dave Lauer @dlauer

It shows exactly what it says: Bitcoin is currently driven by safe haven instrument (and not as a hedge) against capital controls. Which implies massive expected price and volumes volatility in the future, wider cost margins and artificial support for demand in the near term.

20/4/15: Greece moves in with public sector capital [cash] controls

And... we have first round of [long-expected] capital controls in Greece: http://www.ft.com/intl/fastft/310542/athens-forces-local-governments-send-cash-central-banks. Per Bloomberg report, this covers term deposits: http://www.bloomberg.com/news/articles/2015-04-20/greece-moves-to-seize-local-government-cash-as-imf-payment-looms.

Which means... capital controls and an impact [of unknown magnitude so far] on capital spending and multi-annual spending lines, let alone on current spending.

Update: in response to some questions on the above, here is my view of risks arising from the above move by the Greek Government:

1. This points to a rather desperate situation in terms of cashflow in Greece. With three payments of maturing debt looming, Greek Government is now clearly and openly signaling lack of cash. As such, this move is a potential precondition to a default, although it is not necessarily a signla of such.
2. Transfer of cash into CB accounts means that the central authorities can have a more direct control over expenditure by the local authorities, which can have a negative impact on payments of current liabilities (e.g. wages, salaries, bonuses, pensions etc) and on some contracts, including capital expenditure and procurement contracts. Non-payments and payments delays to contractors are likely to rise as well.
3. Over longer term, such procedures can have adverse impact on local authorities investment plans.
4. Finally, transfer of cash implies reduction in deposits in the commercial banks which are currently experiencing significant private deposits withdrawals. The net impact is to further destabilise banking sector balance sheets. 

30/8/2012: Does Banking & Financial (De)regulation iImpact Income Inequality?

A new paper, titled "Bank Regulations and Income Inequality: Empirical Evidence", by Manthos D. Delis, Iftekhar Hasan and Pantelis Kazakis (Bank of Finland Research Discussion Paper 18/2012, linked here) studied the effects of financial regulations (deregulation) on income inequality in 91 countries over the period of 1973-2005.

The study yields some very interesting results (emphasis is mine):

• "In general, the liberalization policies from the 1970s through the early 2000s have contributed significantly to containing income inequality."
• "... Abolishing credit controls decreases income inequality substantially, and this effect is long- lasting."
• "Interest-rate controls and tighter banking supervision decrease income inequality; however, these effects fade away in the long term."
• "For banking supervision, the negative effect on inequality [higher supervision leads to lower inequality] is reversed in the long run, a pattern associated with stricter capital requirements that tend to lower the availability of credit". 
• "... Abolishing entry barriers and enhancing privatization laws seem to lower income inequality only in developed countries."
• "... The liberalization of securities markets {expanding securitization] increases income inequality." 

What are the policy implications of these findings?

• "Bank regulations and associated reforms aim at enhancing the creditworthiness of banks and at improving the stability of the financial sector. Several studies over the last decade show that regulations do matter in shaping bank risk (e.g., Laeven and Levine, 2009; Agoraki et al., 2009) or in affecting bank efficiency (Barth et al., 2010) and the probability of banking crises (e.g., Barth et al., 2008)."
• "Yet, what if bank regulations have other real effects on the economy besides those associated with banking stability? And, more important, what if these real effects counteract the intended stabilizing effects?"

Two issues should be considered in answering these questions:

1. "The literature on the relationship between bank regulations and financial stability is inconclusive. In fact, different types of regulation may have opposing effects on financial stability, according to the existing research."
2. "... even if we assume that bank regulations like more stringent market-discipline requirements lower banks' risk-taking appetite and enhance stability (Barth et al., 2008), the empirical findings here suggest that these effects are asymmetric and certain liberalization policies (i.e., liberalization of securities markets) or regulation policies (i.e., higher capital requirements) actually increase income inequality. That is, banks pass the increased costs of higher risks (coming from the liberalization of securities markets) and higher capital requirements on to the relatively lower-income population that lacks good credit and collateral. In other words a trade-off between banking stability and inequality may be present" [Note: this trade-off, I would argue, is most certainly a problem for Ireland today, with future borrowers operating in the environment of reduced family wealth due to property bust and financial assets depletion]. 

"Given the contemporary discussion surrounding (i) the rebirth of Glass-Steagall-type regulatory reforms as they relate to securities trading, and (ii) the discussions under Basel III to increase the risk-adjusted capital base of banks, there may be more to think about before taking those steps."

"On the good side, three clear suggestions emerge from this paper and are also consistent with the findings of Beck et al. (2010)": 

1. "... the liberalization of banking markets, primarily through abolition of credit controls, helps the poor get easier access to credit. This in turn allows them to escape the poverty trap and substantially raise their incomes." 
2. "... appropriate prudential regulation should provide less costly incentives to banks to increase regulatory discipline without hurting the relatively poor. Information technologies that would lower the cost of transparency and more effective onsite supervision that would enhance the trust in the banking system may help achieve this goal."
3. "... economies first need a certain level of economic and institutional development to see any positive effect of the abolishment of entry restrictions and privatizations on equality..."

29/7/2012: Financial Markets Repression

In my recent conversation with Carmen Reinhart, we discussed at length various forms of financial repression to be unleashed onto the public with the coming systemic deleveraging in the US, EU and elsewhere. One of the most prominent topics in our discussion were potential capital controls. And we both agreed that most likely, it will be Eurozone that will be first in the races to impose such. Of course, there are signs of softer version of capital controls within the banking system already present. So much so that Mario Draghi had to identify national regulations as barriers to single market in banking under current conditions.

Never mind. The US Fed is not about to fall behind the curve. And in the latest suggestion for policymakers, the Federal Reserve Bank of New York (Staff Report No. 564, July 2012, linked here) puts forward an idea that "for money market fund (MMF) reform [to] mitigate systemic risks arising from these funds by protecting shareholders, such as retail  investors, who do not redeem quickly from distressed funds... a small fraction of each MMF investor’s recent balances, called the “minimum 

balance at risk” (MBR), be demarcated to absorb losses if the fund is liquidated."

Wait, does this mean that fund investors can face some small share loss imposed onto them because they might be quicker than other investors in exiting or more foresightful enough to spot the fund running into trouble ahead of other investors? Yep, that's right.

"The MBR would be a small fraction (for example, 5 percent)  of each shareholder’s recent balances that could be redeemed only with a delay.  The delay would ensure that redeeming investors remain partially invested in the fund long enough (we suggest 30 days) to share in any imminent portfolio losses or costs of their redemptions.  However, as long as an investor’s balance exceeds her MBR, the rule would have no effect on her transactions, and no portion of any redemption would be delayed if her remaining shares exceed her minimum balance."

And the rationale: "to reduce the vulnerability of MMFs to runs and protect investors who do not redeem quickly in crises."


That, folks, is a hell of a capital control proposal.