BPInsights: August 9, 2019

BPInsights: August 9, 2019


With Congress in recess and summer in full swing, our banking aficionados took a break from BPInsights to bring you a curated list of beach reads, geek reads, and poolside podcasts. Pairs well with the perfect summer getaway.

Enjoy responsibly.

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Beach Reads

Huffington Post
FYI, Your Credit Card May Be Dirtier Than A New York City Subway Pole

We’re typically more concerned about where our money goes than where it has been ― but new findings posted by financial education website LendEDU might make you reconsider.The company on Tuesday released the results of an experiment testing more 40 debit and credit cards, 27 different bill denominations, and 10 coins for germs. Each payment method was swabbed with a handheld germ testing device and assigned a “germ score” to rank the item on the disgusting scale. The higher the score, the dirtier the item. And spoiler alert: Our money, like pretty much everything else in the world, is pretty dirty. Read More >>
Robots Are Solving Banks’ Very Expensive Research Problem

As lawmakers in Brasilia debated a controversial pension overhaul for months, a robot more than 5,000 miles away in London kept a close eye on all 513 of them. The algorithm, designed by technology startup Arkera Inc., tracked their comments in Brazilian newspapers and government web pages each day to predict the likelihood the bill would pass.Weeks before the legislation cleared its biggest obstacle in July, the machine’s data crunching allowed Arkera analysts to predict the result almost to the letter, giving hedge fund clients in New York and London the insight to buy the Brazilian real near eight-month lows in May. It’s since rallied more than 8%. Read More >>
The Economist
Digital Technology Will Strengthen America’s Biggest Retail Banks

By almost any measure, America’s biggest banks are behemoths. JPMorgan Chase’s balance-sheet weighs in at $2.7trn, Bank of America’s (bofa) at $2.4trn. Citigroup tips the scales at almost $2trn and Wells Fargo at $1.9trn. Their combined market value is nearly $1trn. Last year they raked in over $100bn after tax.Yet by one gauge, the titans are curiously tiny. Together that quartet holds only about a third of Americans’ deposits (see chart). The biggest names in other rich countries, from Canada to Sweden, have far larger shares. Perhaps only Germany’s market, with its hundreds of municipal and co-operative banks, is similarly fragmented. Read More >>

Geek Reads

Office of Financial Research Working Paper
The Effects of the Volcker Rule on Corporate Bond Trading: Evidence from the Underwriting Exemption 

The Volcker Rule, part of the Dodd-Frank Act passed in response to the financial crisis, bars commercial banks from engaging in certain kinds of proprietary trading. This paper uses dealer-identified data to study the impact of the rule on covered firms’ corporate bond trading, finding no evidence that the rule reduces the riskiness of these trades as intended. Instead, the paper finds that the Volcker Rule has increased the cost of liquidity provided by covered firms and decreased those firms’ market share. Read More >>
Vox CEPR’s Policy Portal
Central Banks and Reputation Risk 

In response to the 2008 crisis, central banks have been granted a variety of new regulatory powers. This column tells the story of the Central Bank of Iceland’s 2012 enforcement action against the country’s largest exporter, Samherji, in which the Bank organized a police raid of the firm that led to a media backlash, a Supreme Court decision against the Bank, and criticism of the Bank’s decision by the parliament ombudsman. The author uses this story to illustrate the risks that widening authority poses to both central bank independence and effectiveness. Read More >>
Federal Reserve
CECL and the Credit Cycle  

This paper studies the impact of the soon-to-be-implemented Current Expected Credit Loss (CECL) standard on bank lending over the economic cycle. By estimating historical loss allowances under CECL and modeling how the impact on accounting variables would have affected banks’ lending and capital distributions, the authors find that CECL would have dampened fluctuations in lending. In particular, they estimate that lending would have grown more slowly before the financial crisis and more quickly after. Read More >>

Poolside Podcasts

NPR’s ‘Planet Money’
Episode 553: The Dollar At The Center Of The World

As World War 2 was ending, world leaders realized they had a problem. Countries no longer knew how to trade with each other. Their economies were devastated. So representatives from 44 nations gathered in the small town of Bretton Woods, New Hampshire to come up with the solution.It came down to two different plans put forward by two very different men. One was the most famous economist in the world. A British aristocrat. The other was an American that no one remembers. But it was the American that won the day and put the U.S. dollar right in the middle of world trade.Today on the show, how the US won. The story involves a carefully laid trap, late night dancing and copious amounts of alcohol. Listen >>
NPR’s ‘How I Built This
Stripe: Patrick and John Collison

Brothers Patrick and John Collison founded and sold their first company before they turned 20. They created software to help eBay users manage inventory online, which set them on a path to help make e-commerce frictionless. Today, John and Patrick are the founders of Stripe, a software company that uses just a few lines of code to power the payment system of companies like Lyft, Warby Parker and Target. Plus, for our postscript “How You Built That,” how Robert Armstrong turned his grandma’s cookie recipe into “G Mommas,” buttery, bite-sized pecan-chocolate-chip cookies that are now sold in stores across the Southeast U.S. Listen >>
‘Exchanges’ at Goldman Sachs
Episode 125: Why Do Smaller Companies Receive Higher Valuations for New Initiatives?
In this episode, Steve Strongin of Goldman Sachs Research discusses a new report from Goldman Sachs’ Global Markets Institute, titled “What the Market Pays For.” One of the main findings is that equity investors tend to pay for persistence or what is sometimes called “visibility.” Strongin also discusses why large corporations often feel that they aren’t rewarded for innovation the way small firms are. The reason for this, Strongin explains, is how the market perceives the “deep pocket risk” involved. Investors worry that large firms may overspend on failing projects because they have the resources to do so. Smaller companies, however, don’t have as much money to be able to do the same. Strongin also discusses how corporate reporting can be managed to improve firms’ valuations.
YouTube video


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