These are the glory days of the financial markets. They are bigger, richer and more powerful than they have ever been. Yet it is that very position at the heart of global economic life that makes this year’s credit squeeze a threat. Already, fairly or unfairly, a pantomime cast of predatory lenders, bankrupt bankers and teenage money managers has been lined up to take the blame. There are calls – some justified – for stricter regulation of financial markets. But before writing new rules, we should remember the financial world of 40 years ago, and where liberalisation has got us.
In the US 40 years ago, commercial banking and securities trading were strictly separated by the Glass-Steagall Act, and banks were unable to expand across state boundaries. On Wall Street and in the City of London, there were fixed commissions for share trades, and a closed circle of underwriting banks. Home mortgages came from building societies or a savings and loan and there was little competition on interest rates. Banks held a lot of reserves, but before the first Basel agreement on capital adequacy, reserves often bore little relation to a bank’s risk. Exchange rates were fixed under the Bretton Woods regime and the international mobility of capital was restricted.
The liberalisation of these restrictions, mainly in the 1970s and 1980s, brought great benefits. The deregulation of financial markets led to a surge of competition and innovation. The cost of trading securities has collapsed. Banks have become bigger – and so in one sense more secure – and brought the techniques of the securities business to bear on banking. As a result of liberalisation, financial intermediation is cheaper, and we have a more complete and efficient set of markets.
Whereas 40 years ago many millions of young people may have wanted to borrow against their future income, in order to go to university or to buy a home, they struggled to do so. The liberalisation of consumer finance has eased credit constraints on many.
With the free international movement of capital has come a surge in direct and portfolio investment across borders. Not only has capital been allocated more efficiently as a result, but foreign investment has been a channel for the transfer of technology and management skills, and so increased growth. The wave of globalisation in recent decades would have travelled more slowly without financial liberalisation.
But for all this gain, there is a cost. Any relaxation in controls on banks’ capital and activities makes it easier for them to take risks – and so increase profit – in the knowledge that the state cannot afford to let them fail. There is no simple answer, but a system of bank rescues in which shareholders lose all of their money creates the right incentives. Shareholders walked away from this year’s bailouts of Northern Rock and Germany’s IKB .
Consumer credit liberalisation also leads to a trade-off. Subprime mortgages made home ownership possible for hundreds of thousands of people who would otherwise have been tenants. Yet incompetent and fraudulent misuse of subprime mortgages has caused tens of thousands of those people to lose their homes as well as a shock to the financial markets. Regulation should be directed at the misuse and mis-selling of these products and not at the products themselves.
The greatest effect of financial liberalisation, however, has been to bind markets more closely together. A shock in the US mortgage market really can affect the availability of credit for a European consumer. To those consumers this is hard to explain, and feels like a threat, yet while the scope for financial shocks is now greater, there is little evidence that they have increased in frequency or in magnitude. Financial regulation, especially on bank liquidity and consumer lending, should be tweaked in response to the credit squeeze. But its liberal direction, which has brought great benefits, must remain
http://www.ft.com/cms/s/0/8f082324-b579-11dc-896e-0000779fd2ac.html
Saturday, December 29, 2007
Blog: Knol, BNZ's banking pledge, best of the web
Google's announcement that it will develop a rival to Wikipedia, but one where by-lined articles by experts in their field dominate, has had a mixed reception in the blogosphere.
TechCrunch argues that Google's planned online encyclopaedia, named Knol, puts Google further than ever in the content-generation space - away from its core business of content aggregation.
But who really cares? Google already acts as a major content generation platform in the form of its Blogger free weblog system.
If Google's Knol starts creating better articles than Wikipedia I'll be visiting the former more. I like the idea of more authoritative articles being featured and having more than one big collaborative online encyclopaedia will give all the players more of an incentive to get the content right.
Back home, a decent dose of good sense has been administered to the banking sector with the BNZ's pledge to cover the losses of customers who are defrauded due to having their passwords or PINs stolen online. It follows a move by Westpac to make the same pledge.
As we discussed earlier in the year, the New Zealand Bankers' Association's Code of Banking Practice release in July, included a subclause which said you could be liable for online banking losses as a result of e-crime if "you have failed to take reasonable steps to ensure that the protective systems such as virus scanning, firewall, antispyware, operating system and anti-spam software on your computer are up to date".
That little paragraph created potential for nightmare scenarios where oniline banking customers thought they were protected, but turned out not to be well-protected enough, and therefore were left out of pocket.
Everyone should use antivirus and firewall, identity protection and secure web browsers to keep their online financial transactions safe. But moves by the banking sector to wash their hands of responsibility for losses will do nothing but discourage people from using online banking services.
Instead the strategy should be to provide easy-to-use, two-factor authentication systems, such as random key generators and text message-based authorisation. Both are currently on offer from some banks.
The BNZ will in fact make two-factor authentication compulsory from next March. This stance by the BNZ and Westpac, puts them on the same footing as Australian banks which take responsibility for the losses of customers caught in online banking scams. That's a good thing. We'll all have to get used to two-factor security measures, but that's a relatively small price to pay given the possible alternative.
http://www.nzherald.co.nz/section/story.cfm?c_id=5&objectid=10482872
TechCrunch argues that Google's planned online encyclopaedia, named Knol, puts Google further than ever in the content-generation space - away from its core business of content aggregation.
But who really cares? Google already acts as a major content generation platform in the form of its Blogger free weblog system.
If Google's Knol starts creating better articles than Wikipedia I'll be visiting the former more. I like the idea of more authoritative articles being featured and having more than one big collaborative online encyclopaedia will give all the players more of an incentive to get the content right.
Back home, a decent dose of good sense has been administered to the banking sector with the BNZ's pledge to cover the losses of customers who are defrauded due to having their passwords or PINs stolen online. It follows a move by Westpac to make the same pledge.
As we discussed earlier in the year, the New Zealand Bankers' Association's Code of Banking Practice release in July, included a subclause which said you could be liable for online banking losses as a result of e-crime if "you have failed to take reasonable steps to ensure that the protective systems such as virus scanning, firewall, antispyware, operating system and anti-spam software on your computer are up to date".
That little paragraph created potential for nightmare scenarios where oniline banking customers thought they were protected, but turned out not to be well-protected enough, and therefore were left out of pocket.
Everyone should use antivirus and firewall, identity protection and secure web browsers to keep their online financial transactions safe. But moves by the banking sector to wash their hands of responsibility for losses will do nothing but discourage people from using online banking services.
Instead the strategy should be to provide easy-to-use, two-factor authentication systems, such as random key generators and text message-based authorisation. Both are currently on offer from some banks.
The BNZ will in fact make two-factor authentication compulsory from next March. This stance by the BNZ and Westpac, puts them on the same footing as Australian banks which take responsibility for the losses of customers caught in online banking scams. That's a good thing. We'll all have to get used to two-factor security measures, but that's a relatively small price to pay given the possible alternative.
http://www.nzherald.co.nz/section/story.cfm?c_id=5&objectid=10482872
Sunday, December 16, 2007
Blog: Knol, BNZ's banking pledge, best of the web
Google's announcement that it will develop a rival to Wikipedia, but one where by-lined articles by experts in their field dominate, has had a mixed reception in the blogosphere.
TechCrunch argues that Google's planned online encyclopaedia, named Knol, puts Google further than ever in the content-generation space - away from its core business of content aggregation.
But who really cares? Google already acts as a major content generation platform in the form of its Blogger free weblog system.
If Google's Knol starts creating better articles than Wikipedia I'll be visiting the former more. I like the idea of more authoritative articles being featured and having more than one big collaborative online encyclopaedia will give all the players more of an incentive to get the content right.
Advertisement
Advertisement
Back home, a decent dose of good sense has been administered to the banking sector with the BNZ's pledge to cover the losses of customers who are defrauded due to having their passwords or PINs stolen online. It follows a move by Westpac to make the same pledge.
As we discussed earlier in the year, the New Zealand Bankers' Association's Code of Banking Practice release in July, included a subclause which said you could be liable for online banking losses as a result of e-crime if "you have failed to take reasonable steps to ensure that the protective systems such as virus scanning, firewall, antispyware, operating system and anti-spam software on your computer are up to date".
That little paragraph created potential for nightmare scenarios where oniline banking customers thought they were protected, but turned out not to be well-protected enough, and therefore were left out of pocket.
Everyone should use antivirus and firewall, identity protection and secure web browsers to keep their online financial transactions safe. But moves by the banking sector to wash their hands of responsibility for losses will do nothing but discourage people from using online banking services.
Instead the strategy should be to provide easy-to-use, two-factor authentication systems, such as random key generators and text message-based authorisation. Both are currently on offer from some banks.
The BNZ will in fact make two-factor authentication compulsory from next March. This stance by the BNZ and Westpac, puts them on the same footing as Australian banks which take responsibility for the losses of customers caught in online banking scams. That's a good thing. We'll all have to get used to two-factor security measures, but that's a relatively small price to pay given the possible alternative.
Finally, it's worth checking out Kiwi Web 2.0 expert Richard MacManus' votes for the best web companies of the year and Twitter and his pick for what will be big next year - open source web technologies.
http://www.nzherald.co.nz/section/story.cfm?c_id=5&objectid=10482872
TechCrunch argues that Google's planned online encyclopaedia, named Knol, puts Google further than ever in the content-generation space - away from its core business of content aggregation.
But who really cares? Google already acts as a major content generation platform in the form of its Blogger free weblog system.
If Google's Knol starts creating better articles than Wikipedia I'll be visiting the former more. I like the idea of more authoritative articles being featured and having more than one big collaborative online encyclopaedia will give all the players more of an incentive to get the content right.
Advertisement
Advertisement
Back home, a decent dose of good sense has been administered to the banking sector with the BNZ's pledge to cover the losses of customers who are defrauded due to having their passwords or PINs stolen online. It follows a move by Westpac to make the same pledge.
As we discussed earlier in the year, the New Zealand Bankers' Association's Code of Banking Practice release in July, included a subclause which said you could be liable for online banking losses as a result of e-crime if "you have failed to take reasonable steps to ensure that the protective systems such as virus scanning, firewall, antispyware, operating system and anti-spam software on your computer are up to date".
That little paragraph created potential for nightmare scenarios where oniline banking customers thought they were protected, but turned out not to be well-protected enough, and therefore were left out of pocket.
Everyone should use antivirus and firewall, identity protection and secure web browsers to keep their online financial transactions safe. But moves by the banking sector to wash their hands of responsibility for losses will do nothing but discourage people from using online banking services.
Instead the strategy should be to provide easy-to-use, two-factor authentication systems, such as random key generators and text message-based authorisation. Both are currently on offer from some banks.
The BNZ will in fact make two-factor authentication compulsory from next March. This stance by the BNZ and Westpac, puts them on the same footing as Australian banks which take responsibility for the losses of customers caught in online banking scams. That's a good thing. We'll all have to get used to two-factor security measures, but that's a relatively small price to pay given the possible alternative.
Finally, it's worth checking out Kiwi Web 2.0 expert Richard MacManus' votes for the best web companies of the year and Twitter and his pick for what will be big next year - open source web technologies.
http://www.nzherald.co.nz/section/story.cfm?c_id=5&objectid=10482872
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