A Trove of Data on Currency Boards

With Nicholas Krus, I have written a book-length working paper called Currency Board Financial Statements. Spreadsheets accompanying the paper contain the digitized balance sheet data of currency boards from dozens of countries, both as raw data and in standardized form similar to what the International Monetary Fund does in its International Financial Statistics database. The paper itself gives information necessary to understand the balance sheets and some other aspects of the operations of the currency boards. (Fair warning: the details are often dull, and most readers will want to treat the working paper as they would an encyclopedia, dipping in here and there rather reading cover to cover.)

Data extend from as far back as the mid 1800s to as recently as 2013. For a number of currency boards we have monthly data on currency in circulation as well as annual balance sheet data. The paper fills a large gap in world monetary history. Currency boards have been widespread, existing in more than 70 countries, but their data have not hitherto been available in machine-readable form except for a few recently established cases. Our paper, while not complete, contains data on most of the major currency boards and many of the minor ones. We intend to update the paper as we accumulate further data.

The paper is jointly issued by the CFS and  the Johns Hopkins University Institute for Applied Economics, Global Health, and the Study of Business Enterprise, one of whose directors is CFS Special Counselor Steve H. Hanke. Nick Krus, my coathor, has twin interests in music and economics. While doing much of the work on the paper as an undergraduate student at Johns Hopkins and a researcher at the Institute, he was also in a band that was good enough to go on tour. Currently he combines his interests in his work as an Associate Analyst at Warner Music Group in New York.

CPMI and IOSCO Issue Assessment Methodology for Oversight Expectations Applicable to Critical Service Providers

The Committee on Payments and Market Infrastructures (“CPMI”) and IOSCO published an assessment methodology for the oversight expectations applicable to financial market infrastructure’s (“FMI”) critical service providers.

See: Assessment Methodology for Oversight Expectations Applicable to Critical Service Providers; IOSCO Press Release.

GAO Report Examines Regulatory Analyses and Coordination Efforts Conducted by Federal Financial Regulators

The U.S. Government Accountability Office (“GAO”) issued a study describing the extent to which regulators responsible for adopting rules under Dodd-Frank conducted economic analysis of various rulemakings and the extent to which the regulators coordinated their rulemakings. The study also attempted to determine the benefits of Dodd-Frank.

GAO found that regulators coordinated on 34 of the 54 Dodd-Frank rulemakings reviewed. According to GAO, regulators face data and modeling challenges in their consideration of the costs and benefits of their rulemakings, particularly for more complex rules intended to address systemic risk or market stability.

Regarding the the Volcker Rule, GAO found that interagency coordination led regulators to adopt a common rule, and that regulators voluntarily coordinated efforts during the rule’s implementation. For swaps rulemakings, GAO found that regulators coordinated domestically and internationally; however, such coordination did not always result in harmonized rules, and key differences among some of the rules raised compliance and market efficiency concerns among market participants.

The report found that some updates in indicators suggest that large U.S. bank holding companies’ leverage decreased and liquidity improved since Dodd-Frank’s passage. Additionally, GAO’s updated regression analysis suggested that Dodd-Frank continued to have little effect on the funding costs of these companies, and may be associated with improvement in their “safety and soundness.”

Furthermore, the report found that although the margin rules for uncleared swaps have not been finalized, indicators suggest that holding companies have been requiring their counterparties to post a greater amount of collateral against derivatives contracts.

Lofchie Comment: The report contains good data, though there is a limited amount of useful information. For example, the report indicates that a regulator conducted a particular study, but does not discuss whether the study served a specific purpose. It is, therefore, difficult to assess whether the study represents anything more than a nod to a statutory obligation.

Generally, the GAO was able to combine a high degree of honesty with a gentle tone in critiquing the various regulators whose work it audited. The supporters of Dodd-Frank will find little in the report to suggest that the statute has been successful. The report indicates that the capital leverage ratio at banks improved for a variety of reasons, but it does not address whether the Dodd-Frank’s requirements (as opposed to just the presence of higher ratios) are sound economically. More negatively, the report suggests that the swaps regulations fragmented capital markets, to the detriment of both the United States and Europe. Likewise, the report suggests that the general level of economic analysis supporting Dodd-Frank rulemaking is fairly weak.

See: GAO Full Report; Highlights of the Report.

New! Hyperinflation Book by CFS…

Despite the recent slip in inflation, many ponder a future of unexpectedly higher or more volatile inflation in the wake of extraordinary monetary measures over the last six years. While the Center for Financial Stability (CFS) is clearly NOT anticipating a return to runaway inflation, analysis of hyperinflation reveals lessons worth active study for public officials, investors, and the interested public.

CFS is delighted to release “Studies in Hyperinflation & Stabilization” by Professor Gail Makinen with a foreward by Thomas J. Sargent, co-recipient of the 2011 Nobel Prize in Economics.

Hyperinflation imposes heavy economic costs and undermines political and social stability – especially in emerging and frontier markets. Similarly, study of the evolution and stabilization of hyperinflation offers lessons to strengthen monetary and financial stability in advanced economies (For specific lessons)

Despite fears over the last few years regarding a surprise increase of inflation, CFS has warned against these concerns – based on the results of our Divisia monetary and financial data developed under the leadership of Professor William A. Barnett.

Best wishes into the holiday season and 2015.

Lawrence Goodman

Group of Thirty Publishes Latest Paper on Financial Services and Technology

The Group of Thirty published the latest installment in its Occasional Paper series. Titled “The Digital Revolution in Banking,” the new paper reviews the developing relationship between financial services and technology.

Lofchie Comment: This is a well-written paper in plain English. It makes good reading for anyone who is interested in either finance or technology (assuming there’s still a distinction between the two).

See: The Digital Revolution in Banking,” by G30 Member Gail Kelly.


State Regulators Propose Model Regulatory Framework for Virtual Currency Activities

The Conference of State Bank Supervisors (“CSBS”) issued a Draft Model Regulatory Framework (“Framework”) for virtual currency activities. 

The Framework includes licensing, consumer protection, market stability, anti-money laundering and cybersecurity requirements for state licensed virtual currency firms. 

The CSBS is soliciting public comment on the Framework together with a list of questions. All comments are due by February 16, 2015. 

See: Draft Model Regulatory Framework; CSBS Press Release.


CFS Monetary Measures for November 2014

Today we release CFS monetary and financial measures for November 2014. CFS Divisia M4, which is the broadest and most important measure of money, grew by 1.7% in November 2014 on a year-over-year basis versus 1.7% in October.

Bloomberg terminal users can access our monetary and financial statistics by any of the four options:

3) {ECST} –> ‘Monetary Sector’ –> ‘Money Supply’ –> Change Source in top right to ‘Center for Financial Stability’
4) {ECST S US MONEY SUPPLY} –> From source list on left, select ‘Center for Financial Stability’

CFS Divisia indices can also be found on our website at http://www.centerforfinancialstability.org/amfm_data.php. Broad aggregates are available in spreadsheet, tabular and chart form. Narrow aggregates can be found in spreadsheet form.

For Monetary and Financial Data Release Report:

Historical Economic Data of South-Eastern Europe

The South-Eastern European Monetary History Network is a group of financial and monetary historians, economists, and statisticians established in April 2006 on the initiative of the Bulgarian National Bank and the Bank of Greece. It has just issued a big study, South-Eastern European Monetary and Economic Statistics from the Nineteenth Century to World War II.  The study supplies data for Austria-Hungary, the Ottoman Empire/Turkey, and the Balkans. Data include (1) monetary variables, (2) interest rates, (3) exchange rates, (4) government finances, (5) prices, production and labor, and (6) national accounts and population. There is also some narrative economic history of each country. Most of the countries in the region previously had little historical data readily available. What had been nearly inaccessible in old books, newspapers, and archives, mostly in local languages, is now a click away on the Internet in English and in machine-readable form. Bravo!

Senate Approves Appropriations Bill Amending Swaps Push-Out Rule

After narrowly passing the House of Representatives on Thursday, the Consolidated and Further Continuing Appropriations Act of 2015 (the “Act”) was passed by the Senate on Saturday.

Preliminary bills leading up to the Act contained various financial regulatory reforms, including exemptions for small banks from both mortgage-underwriting standards and the Volcker rule, as well as a provision that would have subjected the Consumer Financial Protection Bureau to the Congressional appropriations process. Most of these reforms were omitted from the final text. The Act (Section 630 at page 615) amends Section 716 of Dodd-Frank (the “Swaps Push-Out Rule”), which requires insured depository institutions to “push out” certain swaps trading activities into legally separate, non-insured entities. As amended by the Act, the Swaps Push-Out Rule is limited to swaps based on asset-backed securities (and related indices) that are not used for hedging purposes (and are not otherwise permitted by prudential regulators).

In addition, the Act:

  • Requires the Director of the Office of Management and Budget to submit a report concerning the implementation costs of Dodd-Frank (Section 202 at page 540);
  • Provides that funds allocated to the Securities and Exchange Commission (the “SEC”) and the Commodity Futures Trading Commission (the “CFTC”) may be used to fund a joint, inter-agency advisory committee (Section 617 at page 609); and
  • Establishes a budget of $1.5 billion for the SEC (up $150 million from the prior fiscal year) (at page 594) and $250 million for the CFTC (up $35 million from the prior fiscal year) (at page 565).

Lofchie Comment: Section 716 (commonly known as the Swaps Push-Out Rule or the Lincoln Amendment) was, by all reports, inserted into Dodd-Frank in opposition to the views of even the most enthusiastic supporters of the legislation at the insistence of then Senator from Arkansas, Blanche Lincoln, as the price of gaining her support. She appeared to believe that the provision would help her in her upcoming election. She lost the election but her provision survived, in spite of the fact that it had neither support nor the least evidence provided for its usefulness. By largely striking Section 716, Congress deleted what was arguably the single worst provision in Dodd-Frank (although there remains lots of fixes that should be made), one that would have been quite damaging to the U.S. economy, and that did not even help Senator Lincoln win her election.

See: Consolidated and Further Continuing Appropriations Act, 2015.
See also: Streetwise Professor: The Height of Absurdity: The Operation of the Government Hinges on Blanche Lincoln’s Brainchild
Related news: Congress to Vote on Bill to Repeal Swaps Push-out Requirements (December 11, 2014).


Regulators Note Disappearance of Liquidity in Markets

In a blog post titled “Regulators, Finally Getting a Clue,” University of Houston finance professor Craig Pirrong discussed the disappearance of liquidity in the bond and stock markets. 

According to Mr. Pirrong, global regulators are “concerned, and apparently mystified,” by this phenomenon and worry “that banks are scaling back costly market making functions” that could leave investors stranded. Mr. Pirrong quotes IOSCO Secretary General David Wright as saying that there has been a “Houdini” disappearance of market makers in general and that “it’s partly caused by some regulation.” 

According to Mr. Pirrong, between the impending Volcker Rule and more stringent capital rules and limitations on off-exchange dealing in stocks, regulators have increased restrictions on market-making activities. It is therefore obvious, he said, that liquidity would dry up. Additionally, Mr. Pirrong stated that regulators are “finally coming to recognize the unintended consequences of their actions”; by attempting to make the system less risky, they have created new risks.

Lofchie Comment:  As Professor Pirrong suggests, the negative consequences from the new capital rules were and should have been obvious. Indeed, note my commentary (below) from August 13 regarding a speech given by the President of the Federal Reserve Bank of Boston Eric S. Rosengren.  Simply put, regulators should not be surprised when burdensome rules imposed on the financial industry flow through to the “real economy.”

August 13 Excerpt: 

Mr. Rosengren states that an increase in capital requirements would result in a reduction of the profitability of broker-dealers (or bank holding companies). He does not make explicit the consequences of that. Any reduction in profitability (meaning any increase in expenses) will inevitably reduce the level of activity and increase the cost that others (such as market participants) must pay to justify the expense of the activity. If Mr. Rosengren’s concern is that broker-dealers are not reliable providers of liquidity to the credit markets, then it is hard to see how increasing their capital requirements improves liquidity in those markets. Rather, his proposal should result in a material reduction of liquidity in the credit markets, which (in theory) should result in a material increase in corporate borrowing costs. . . .

Higher capital charges advocated by Mr. Rosengren are already coming into effect, which will have the (negative) consequence of reducing liquidity in the credit markets. Recent reports demonstrate that broker-dealers are beginning to withdraw significant amounts of money from the lending markets as a result of the more punitive capital regulations imposed by the bank regulators (who have authority over the capital held by the holding companies that own the broker-dealers).

See: Regulators, Finally Getting a Clue” by Craig Pirrong.