Banking System

Bank Hackers, Electronic Money, and the War on Cash

In the aftermath of the bank heist targeting Bangladesh’s central bank, international financial network operator SWIFT has warned that its networks were compromised. Hackers have apparently accessed the network and used it to send a number of fraudulent payment orders. Why do hackers do this? In the apocryphal words of Willie Sutton: “Because that’s where the money is.” Why bother hacking individual bank accounts when you can instead hack an entire bank or even the backbone of the financial system?

Wells Fargo Is Now A Primary Dealer: Why?

The New York Fed’s list of primary dealers gained a new member yesterday: Wells Fargo. For those who aren’t familiar with primary dealers, those are the banks who have a special relationship with the Federal Reserve System and the US Treasury. They are required to bid at Treasury’s auctions of new federal debt, they are required to engage in open market operations, and they are required to provide information to the Fed’s trading desk. Much of the mainstream coverage of Wells Fargo’s admission to the list has focused on its being a major player in bond markets. But is that really why Wells Fargo was added to the list?

Patrick Byrne and the Blockchain

The Cato Institute yesterday held a cryptocurrency conference whose keynote speaker was Patrick Byrne, the CEO of Overstock.com. His speech came in the wake of his announcement that he is stepping down as CEO for an indefinite leave of absence due to health reasons. Byrne looked a little disheveled, had a noticeable cough at times, and mentioned that this speech marked the end of his professional career. It would be a shame, because his talk focused on settlement systems, an important aspect of any sort of trading. It isn’t the sexiest topic, but it has relevance to money and banking.

Postal Savings Banks: Not Just a Bernie Sanders Idea

Those who have been following the presidential campaign in the United States are undoubtedly familiar with the proposal by Democratic candidate Sen. Bernie Sanders (I-VT) to allow the United States Postal Service to offer banking services at its post office branches. What many are not familiar with is that this idea was already tried in the past and failed miserably, ending in 1967. It is inconceivable how anyone could argue that postal banks make any sense in the United States. Everyone who has had to deal with the Post Office knows how awful it is. It is an independent federal agency that no longer receives appropriated funds and therefore tries to pretend that it is a private corporation. Yet it is run by a Presidentially-appointed board of governors that is responsible for all business decisions. The results are predictable. Costs are high, revenues are low, Post Offices are understaffed, customer service is lacking, and lines and wait times are often long. Ask anyone who has ever had to do business with both a bank and a Post Office which they would rather deal with and you’ll almost universally hear that it’s the bank.

The Skyscraper Index Meets the Supertanker Index

Many people familiar with Austrian economics are familiar with the Skyscraper Index, popularized by Mark Thornton. And while there may not be a perfect correlation between the building of large skyscrapers and business cycles, it is still the case that the same conditions that lead to the building of mega-skyscrapers are those that lead to the boom and bust of the business cycle. Easy central bank money makes long-term, capital-intensive projects cheaper and incentivizes the misallocation of resources into those projects. Of course, it isn’t just skyscrapers that can be indicative of a central bank-induced business cycle. The same can be said of other sectors as well.

United States Maintains Banking Sanctions Against Iran

Despite the lifting of international sanctions against Iran earlier this year, the United States government intends to continue denying Iranian companies access to the US financial system. This highlights how the US financial system is viewed not as a market-based system in which private companies are free to do what they want, but rather as a tool of the federal government used to carry out the government’s policy aims. For the banks, it’s a mixed bag. On the one hand, US banks have to comply with the federal government’s edicts, now matter how draconian. On the other hand, they continue to benefit from high barriers to entry that keep out competitors, as well as from subsidies such as deposit insurance and access to the Federal Reserve’s discount window and bailout facilities. But this continued refusal to allow Iranian access to the US financial system also does just as much to hamper US trade abroad as it does to harm Iranian industry. Even dollar-denominated trades made in Europe could not be made through European subsidiaries of US banks, but would have to be made wholly through European banks. That is of course harmful to US banks, who stand to lose out on potential business with Iranian firms.

These continued banking sanctions against Iran do nothing to foster rapprochement with Iran, harm the business of US banks’ foreign operations, and continue to isolate the US banking system from the rest of the world. There is a reason foreign banks and financial institutions are dropping American customers, closing both personal and business accounts, and trying to minimize their exposure to the United States. Because of the US government’s heavy-handed use of the financial system as a cudgel to ensure international compliance, American citizens, companies, and banks are becoming pariahs within the international financial system. The US financial system will not always be the world’s largest, freest, or most indispensable to international trade. As the rest of the world works to develop closer ties, the US government seems intent on isolating itself. If the US government continues with heavy-handed sanctions, it will get its wish.

And So It Begins… Negative Interest Rates Trickle Down in Japan

The negative interest rates imposed by the Bank of Japan have begun to make their way into the Japanese banking system. Japanese trust banks have begun to impose negative interest rates on accounts held by institutional investors. It shouldn’t be surprising that Japanese banks are trying to pass on the costs imposed by the central bank’s policy of negative interest rates. It happened in Switzerland, it is happening in Japan, and it will happen in Europe. And as it becomes more widespread, investors will begun to withdraw their funds from the banking system.

It’s Normal, All Central Banks Do This

“It’s normal, all central banks do this.” – Nelson Merentes, President, Central Bank of Venezuela

Debasing their currencies? Monetizing government debt? Impoverishing the common man while enriching the politically well-connected? Well, they do that too, but what Mr. Merentes was referring to was the common practice of central banks engaging in gold swaps. Venezuela has exported $456 million of its gold reserves, most of which was recently repatriated from the New York Fed’s gold vault, to Switzerland in order to gain some cash due to the dire effects of the government’s monetary policy. Venezuela is a basket case, for sure, but the comment that “all central banks do this” bears some looking into. There have been rumors over the years of central banks, including the Federal Reserve, swapping or loaning out their gold reserves, but relatively little hard evidence. This is especially true in the case of the Fed, which does not publicize much surrounding the gold it holds on behalf of the US Treasury and foreign governments, nor is the Government Accountability Office (GAO) allowed to audit much of the New York Fed’s gold holdings. Shouldn’t the American people know whether the gold held by the US government and the Federal Reserve is used to engage in gold swaps, loans, or attempts to manipulate the market price of gold?

German Response to Negative Interest Rates: Safe Deposit Boxes

Image: -JvL-

Image: -JvL-

The Japanese response to negative interest rates was to buy personal safes. The German response is to pull money out of bank accounts and stick it in safe deposit boxes. Both are perfectly understandable reactions to the prospect of having to pay interest to a bank for holding deposits. It is particularly interesting in Germany, where the Bundesbank a few years ago admitted that the average real rate of return on savings deposits has been negative for nearly the past 40 years. Now that nominal rates have turned negative too, the facade of savings accounts as a safe place to park money to earn a little bit of income has finally been ripped away.