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How ‘payment banks’ can prevent the next bank crash

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At the heart of Silicon Valley Bank’s collapse were uninsured savers — specifically start-ups that have much more than the $250,000 insured limit and can’t get paid without access to their accounts. This is tempting given SVB’s inability to suggest that the insured deposit limit needs to be raised, but this decision creates new problems. The best approach for the US would be to follow the example of other countries and create “payment banks” that are virtually risk-free, highly regulated, and have access to the payment network. They will be a place where companies can place funds – such as venture capital investments meant to pay wages – without exposing themselves to the risks that conventional banks create.

The failure of Silicon Valley Bank highlighted the underestimated weaknesses of the US banking system. While banking crises have historically been linked to credit risk, the recent crisis of confidence has arisen from unrealized losses on safe-haven securities that have left savers anxiously seeking liquidity. The liquidation of these securities resulted in losses in current market prices and heightened the fears of these depositors, leading to a bank run.

While insured savers have little to worry about, the recent crisis has highlighted the critical role of large uninsured savers who are understandably prone to worry. They make up more $8 trillion — or about 40% of all US deposits.

And one concern in particular stands out: the prospect of many companies inability to pay wages was a critical aspect of this crisis, as it became clear that some uninsured depositors were business customers who could not pay their employees without access to their accounts.

The problem of uninsured deposits

As an emergency response, the FDIC needed to effectively remove the deposit insurance limit and declare troubled banks systemically important to restoring calm. This solution is problematic for many reasons. In the absence of many new rules, unlimited deposit insurance gives banks a terrible incentive. And the rules needed to dampen those dire stimuli could stifle risk in the economy as a whole.

A deeper solution to this problem lies in understanding the dilemma of uninsured savers and addressing their needs more directly. It is easy to portray the uninsured saver as a reckless risk seeker. who flutters between banks in search of profitability. This caricature does not deserve saving or much sympathy. But the reality is that many uninsured savers face a huge dilemma.

Consider the problem of wages in the private sector, which is more than $9 trillion in annual cash flows in the US only. Large sums of money must be deposited on a regular basis, and this money must be placed in a bank in order to access the payment system. These deposits simply have no alternative other than banks, and are therefore susceptible to banks lending or buying assets. with these large deposits. In this process, all of our paychecks are dependent on the decisions of the bankers, who can take these large, unstable deposits, risk them, and then socialize the losses when we are forced to withdraw deposit insurance.

The case of “payment banks”

The problem of uninsured savers is really a problem of access to the payment system – a system monopolized by central banks and then delegated to banks. The problem of wages is a prime example of this problem, since wage funds must necessarily be kept in banks, where they are exposed to the risks mentioned above.

happy, other countries began to look for ways to solve this problem. V Great Britain, AustraliaAnd Singapore everyone has been innovating and we can learn a useful lesson from their efforts. Basically, there are two possible solutions: allow non-banks access to the payment system, as the UK and other countries have allowed, or create banks that do nothing more than solve this “wage problem”. We prefer the latter.

To solve the problem of uninsured creditors without distorting incentives to take risks, the US should create a special class of banks called a “payment bank” that does nothing but process payments. Their deposit base will be large and potentially volatile, they will be highly regulated (even more so than money market funds), and they will not be able to take on credit or repayment risk. In short, they will accept payroll deposits and other such large B2B transactions and facilitate access to the payment system.

What will be the business model for these payment banks? There are two possibilities: they can make a safe profit by investing these deposits in the Federal Reserve at the federal funds rate, or they can charge their clients a very small fee for facilitating these large payments. Investing large amounts of these deposits for very short periods without risk can generate significant returns, especially in the current environment, and it is possible that some of this income may even be returned to depositors.

While we have characterized this as a wage problem, there are many other economic agents with large, unstable deposits who are just looking to get into the payment system. Consider a $100 million business that has $70 million in annual costs and prudently keeps cash equivalent to monthly expenses in the bank to cover payments. Alternatively, consider starting a venture capital or private equity fund that seeks to raise capital or use capital to acquire companies.

Currently, these funds must be accessed by traditional banks in order to access payment features. Indeed, this is precisely the business model for both Silicon Valley Bank and Bank of the First Republic. But every bank has such clients. Indeed, the broader scope of card payments is Where 9 trillion dollars in card payments must be routed to merchant bank accounts through merchant acquirers – has similar features.

By creating payment banks, large unstable deposits that far exceed any reasonable deposit insurance limit will find a suitable place in a highly regulated bank that carries virtually no credit or repayment risk and can facilitate their transactions. More importantly, the entire banking system will no longer bear the burden of these uninsured deposits and will be able to return to its core function of retail deposits and making sound lending and asset management decisions. And we can avoid lifting the limit on deposit insurance and turning all banks into systemic ones. In some ways, this solution is less ambitious and far more realistic than using stablecoins or central bank digital currency to facilitate B2B payments on alternative payment rails. In many ways, this idea reflects the principles of industrial power. clearing and settlement applied in financial markets to a wider range of payments.

The reality is that the US banking system has become much less dynamic since the global financial crisis. Almost no entrance. while number of US banks may be high compared to many other countries, the truth is that we do not need more traditional banks – we need different types of banks. Crises are terrible things to wasteand it could lead us to a much safer banking system by recognizing the problem of uninsured depositors and creating a home for them.

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BUSINESS

Barney Frank was right about Signature Bank

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A man walks past the Signature Bank in New York on March 20.


Photo:

Sarah Enesel/Shutterstock

We never thought that we would write such a headline. But on Sunday, the Federal Deposit Insurance Corporation. announced that the New York Community BankX

Flagstar Bank to take over all Signature BankX

cash deposits, excluding deposits of crypto companies. This confirms Mr. Frank’s suspicions – and ours – that the confiscation of Signature was motivated by regulators’ hostile attitude towards cryptocurrency.

Mr. Frank said last week that regulators took over Signature, on whose board he served, “to send a message to distract people from cryptocurrencies.” Increasingly it seems that way. Reuters reported last week that the FDIC is requiring any purchaser of Signature to relinquish all crypto business at the bank, but the FDIC denies this.

But the agency said in a statement that “Flagstar Bank’s filing did not include approximately $4 billion in deposits related to the former Signature Bank’s digital asset banking business.” This means that crypto companies will have to find another bank to protect their deposits. Many say that government warnings to banks about doing business with crypto clients make this difficult.

CoinDesk reported last week that crypto firms are looking for offshore bank accounts such as FV Bank in Puerto Rico, Jewel Bank in Bermuda, and FTX-linked Tether and Deltec in the Bahamas. Moving dollar deposits of U.S. crypto companies and their offshore clients would make them less secure and potentially more vulnerable to money laundering.

In other words, regulators are undermining their ostensible goals. Their crackdown on cryptocurrencies will cost other banks and their customers. The FDIC states that it “estimates the damage from the failure of Signature Bank to its Deposit Insurance Fund at approximately $2.5 billion.” If Flagstar accepted crypto deposits, the insurance fund would not need to guarantee them.

As usual, financial regulators shoot first and make others pay later.

Wonderland: How is it that the US Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation could be spooked by a premature bailout of all depositors after a social media hysteria? Images: Shutterstock/Zuma Press Composite: Mark Kelly

Copyright © 2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8

Appeared in the March 21, 2023 print edition titled Barney Frank Was Right.

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On post-Brexit Britain and the future of conservatism

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The message of the end of austerity has certainly reached the Center for Policy Studies (CPS). On June 10, the CPS launched Post-Brexit Britain, a new collection of essays edited by George Freeman, written largely by his fellow 2010 MP recruiters. CPS rented the largest room at 1 George Street, a huge hall adorned with gilding and portraits of bearded Victorians, and treated guests not only to decent sandwiches, but also to champagne and scones with cream and strawberries. Several leadership candidates such as Sajid Javid and Dominic Raab made speeches. Penny Mordaunt cackled like a mother hen (I wonder if her decision not to run in this leadership election could prove that she is the most sensitive student in the class of 2010). Mr. Freeman loudly declared that his book gives the party “a new conservatism for a new generation” and the intellectual tools it needs to fight the resurgent far left.

His enthusiasm is infectious. But he asks too much. His book is more like a priest’s egg than a Viagra pill capable of resurrecting a flagging conservative philosophy, not to mention a hand grenade aimed at the headquarters of Corbinism. In his preface, Mr. Freeman rightly argues that the Conservative Party is facing a crisis of the same magnitude as it faced in 1848, 1901, and 1945. to the fact that Thatcherism offers no obvious solution to pressing problems like overcrowded suburban trains. Various participants are also addressing issues that conservatives have shied away from, such as the importance of devolution.

However, much of the book demonstrates how difficult it is for a party to get intellectual refueling while still in government. Matt Hancock’s head of health secretary is startlingly bad: predictable praise for technological innovation, devoid of interesting examples, and written in a string of clichés. (One well-read Tory quipped that the fact that the chapter was so bad proved that it was written by its supposed author and not by an assistant.) The book as a whole is noticeably free from detailed discussion of such topics as social assistance. (the issue that killed the party in the last election) or corporate reform. The Conservative Party as a whole will have to do more than that if it is to make a strong case against the resurgent far-left Labor Party.

****

Great cover pack this week New statesman to “Closing the Conservative Mind” (with the promise of more!). Robert Saunders argues that the Conservative Party has always been a party of ideas much more than it wants to pretend: its resurgence in the 1940s and especially in the 1980s was due to its willingness to embrace radical new thinking about the basic building blocks of society. . But now, instead of ideas, the party has nothing but the ideology of kamikaze (“Brexit or crash”) and empty faith in markets and technologies (see above). Theresa May was an idea-free zone (compare her to Lord Salisbury or Arthur Balfour). Boris Johnson, her almost certain successor, is no longer an intellectual, despite his ability to quote Latin tags. There are some interesting thinkers in the party, like Jesse Norman and Rory Stewart (both sadly old Etonians), but it’s much more the party of Gavin Williamson, a former fireplace salesman who boasts of a lack of interest in political theory. than a party of these eccentric “reading men”.

The job is well done. But can’t this apply equally well to liberal thinking or Labor thinking – or perhaps to Western thinking in general? The Blair-Cameron-Clinton liberalism that dominated politics in the 1990s and early 2000s has run its course. This liberalism was based on a simple formula: just add social liberalism to economic liberalism and you have the ingredients of a good society. More astute observers of politics have always known that this is too good to be true: Daniel Bell, in his book The Cultural Contradictions of Capitalism, demonstrated that social liberalism can destroy the moral capital that forms the basis of economic liberalism.

But over the past few years, we have learned that Mr. Bell rather underestimated the contradictions of his position. The biggest problems that most capitalist societies currently face stem from the extremes of both forms of liberalism. The excesses of economic liberalism have given us giant corporations that stifle competition and, in the case of Internet companies, develop a sinister form of surveillance capitalism. The excesses of social liberalism have given us various forms of social breakdown that can be seen in the most extreme manifestations in America: a record number of broken families; an epidemic of drugs, especially opioids; millions of men who have dropped out of the labor force and lead a life of petty crime and binge watching TV. It is unfair to blame only social liberalism for these problems. They have a lot to do with the destruction of manufacturing jobs and the legacy of slavery. But social liberalism clearly has something to do with it: loosening inhibitions on self-destructive behavior leads people to make decisions that, in the long run, may leave them either addicted to drugs or lacking the skills or self-discipline to become productive members of society. A prime example of the collapse of dual liberalism is San Francisco, where hundreds of homeless drug addicts live on the streets, and tech billionaires and would-be billionaires must dodge piles of human feces as they go to the latest sushi craze. compound.

And then there is Labor thinking. The Labor Party responded to the collapse of neoliberalism not by trying to create a new progressive synthesis, but by re-embracing one of the bloodiest ideologies of the 20th century. Jeremy Corbyn, the man who makes Theresa May look like an intellectual, has surrounded himself with hardline Marxists like Andrew Murray and Seamus Milne. pages of David Kot’s book “Companion Travelers”. John McDonnell, the Shadow Chancellor, is undoubtedly one of the smartest men in Parliament, inclined to reinforce his Trotskyism with ideas borrowed from other traditions, especially the cooperative one, and able to use new ideas (such as taking 10% of the shares into state ownership) for old purposes. But the fact that he is such an energetic walker should not hide from us the fact that he is going in the wrong direction and is trying to bring his country off the cliff. As long as this gang is in power, Labor’s mind is not so much closed as dead.

****

V New statesman the cover more or less coincides with the publication of George Will’s new great work, a 640-page study of conservatism called “Conservative Sensibility” (Mr. Will says he chose “sensibility” over “reason” because “reason” was already occupied by Russell Kirk). The “Conservative Sensibility” – a stream of philosophical reflection on the great American and European conservative traditions – is proof that at least one conservative mind is still open. Mr. Will still surpasses all his rivals in his ability to combine high thinking with a shrewd ability to understand everyday American politics. The reception of the book is also evidence that it was not only conservative minds that were closed: when, as a Princeton graduate, he recently approached a group of Princeton students, these privileged children decided to turn their backs on him for various unknown intellectual sins. But Mr. Will’s book also implicitly supports the thesis of closing the conservative mind: it’s hard to imagine any of today’s embittered young conservatives of the “movement” who would have lasted fifty years in journalism like Mr. Will, and still have enough strength. to, let’s say, release a big book at 78 years old.

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Amazon to lay off 9,000 more employees

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NEW YORK (AP) — Amazon plans to cut another 9,000 jobs in the next few weeks, CEO Andy Jassi said in a memo to employees on Monday.

The job cuts marked the second-largest round of layoffs in the company’s history. 18,000 employees the company said it would lay off in January. However, during the pandemic, the company’s staff doubled. hiring surge in virtually the entire technology sector.

In a memo, Yassy said the second phase of the company’s annual planning process, which determined which business areas to cut, ended this month and resulted in additional job cuts. He said that Amazon will still be hiring in some strategic areas.

“Some may ask why we didn’t announce these cuts that we announced a couple of months ago. The short answer is that not all teams completed their analysis in late fall; and instead of rushing through these assessments without due diligence, we decided to share these decisions as we made them so that people get informed as soon as possible,” said Yassi.

This time, the job cuts will affect the company’s profitable areas, including its AWS cloud computing division and its growing advertising business. Twitch, the gaming platform owned by Amazon, will also face layoffs, as will the Amazon PXT organizations that handle human resources and other functions.

Previous layoffs have also affected PXT, the company’s store division that covers its e-commerce business, as well as the company’s brick-and-mortar stores like Amazon Fresh and Amazon Go, and other departments like the one that runs the virtual assistant. Alexa

Amazon is also cutting costs in other areas. Earlier this month, the company announced that suspend construction at its headquarters building in northern Virginia, although the first phase of this project will open this June with 8,000 employees.

Like other technology companies, including Facebook Parent Meta another Google parent alphabetAmazon has ramped up recruitment during the pandemic to meet demand from home-bound Americans who are increasingly shopping online to protect themselves from the virus. Its workforce, which includes warehouse workers as well as corporate positions, has doubled to over 1.6 million people in about two years. But demand has slowed as the effects of the pandemic have eased, and last year the company began to pause or cancel its warehouse expansion plans to avoid wasting unnecessary cash.

As fears of a possible recession began to grow, he also began to make other adjustments in some areas. Over the past few months, it has shut down a subsidiary that has been selling fabrics for nearly 30 years and closed its Amazon Care hybrid virtual home care service, among other cost-cutting moves.

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