I am a banking nerd I fear but the mechanics of payment systems is actually more interesting and important than I think is widely understood. I for one am regularly learning new insights on how the payment systems we take for granted actually works.
— Read on http://www.moneyness.ca/2025/03/trump-proofing-canada-means-ditching.html
Tony – From the Outside
We seem to take it for granted but this post by JP Koning on his Moneyness blog is a useful reminder that the reliance on Central Bank independence and interest rates as our main tool of monetary policy is a relatively new phenomenon.
The post discusses some economic policy experiments undertaken by some European countries post WW2 that took a radically different path. He also identifies some interesting parallels with the challenges we faced as we emerged from the COVID lockdowns.
Here is a flavour of the post
“In times past, central banks tended to lean heavily on changes in the supply of money, which may explain why in 1945, their main response — in Europe at least — was to obliterate the public’s money balances rather than to jack up interest rates to 25% or 50%.”
Read the whole post here
http://jpkoning.blogspot.com/2024/11/setelinleikkaus-when-finns-snipped.html
In the interests of full disclosure, I am an avowed fan of economic history but this is worth reading.
Tony – From the Outside
Not a fan of crypto but this Odd Lots podcast offers a concise update on the use case for stablecoins.
Also concludes with an interesting summary of three things that crypto tends to mis about conventional finance, banking and money
omny.fm/shows/odd-lots/the-booming-crypto-use-case-thats-happening-right
Tony – From the Outside
JP Koning is a regular source of interesting insights into the history of money. Here he delves into the history of currency debasement as a form of taxation and how rulers figured out better ways to extract the revenue they wanted. The analogy with the Mafia is a nice touch.
— Read on jpkoning.blogspot.com/2024/05/monetagium.html
Tony – From the Outside
One for the banking and finance tragics I suspect but I thought this is a pretty good list. In the author’s own words
I have my own opinions about what are more and less convincing answers to these questions. But my goal is not to convince you, or my students, of the answers. My goal is to convince you that these are real questions.
— Read on jwmason.substack.com/p/thirteen-questions-about-money
Tony – From the outside
… arguably too complicated.
Interesting post here by JP Koning exploring the differences between the way PayPal’s two forms of payment mechanisms are regulated. His conclusion might surprise you.
Here is a link to his post
jpkoning.blogspot.com/2023/09/there-are-now-two-types-of-paypal.html
This is the short version if you are time poor
Which type of PayPal dollar is safer for the public to use? If you listen to Congresswoman Maxine Waters, who in response to PayPal’s announcement fretted that PayPal’s crypto-based dollars would not able to “guarantee consumer protections,” you’d assume the traditional non-crypto version is the safer one. And I think that fits with most peoples’ preconceptions of crypto. Not so, oddly enough. It’s the PayPal dollars hosted on crypto databases that are the safer of the two, if not along every dimension, at least in terms of the degree to which customers are protected by: 1) the quality of underlying assets; 2) their seniority (or ranking relative to other creditors); and 3) transparency.
Let me know what I (and JP) might be missing
Tony – From the Outside
JP Koning offers an interesting post here speculating on the reason why Wise can pay interest to its USD users but USDC can or does not. The extract below captures his main argument …
It’s possible that some USDC users might be willing to give up their ID in order to receive the interest and protection from Circle’s bank. But that would interfere with the usefulness of USDC. One reason why USDC is popular is because it can be plugged into various pseudonymous financial machines (like Uniswap or Curve). If a user chooses to collect interest from an underlying bank, that means giving up the ability to put their USDC into these machines.
This may represent a permanent stablecoin tradeoff. Users of stablecoins such as USDC can get either native interest or no-ID services from financial machines, but they can’t get both no-ID services and interest.
Let me know what I am missing
Tony – From the Outside
Admittedly I only managed a skim read of the FDIC report dated 1 May 2023 on “Options for Deposit Insurance Reform” but I was a bit underwhelmed given the important role deposit insurance plays in the banking system. I think the conclusion that some form of increased but “targeted” coverage makes sense but I was disappointed by the discussion of the consequences for market discipline and moral hazard that might flow from such a move.
The Report considers three options for increasing deposit insurance:
The report:
What I thought was interesting was that the Report seemed to struggle to make up its mind on the role of bank depositors in market discipline. On the one hand the Report states
“Monitoring bank solvency involves fixed costs, making it both impractical and inefficient for small depositors to conduct due diligence. Monitoring banks is also time consuming and requires financial, regulatory, and legal expertise that cannot be expected of small depositors”
Executive Summary, Page 1
… and yet there are repeated references to the ways in which increasing coverage will reduce depositor discipline. The discussion of the pros and cons of Targeted Coverage, for example, states
“The primary drawbacks to providing greater or unlimited coverage to specific account types are the potential loss in depositor discipline and resulting implications for bank-risk taking”
Section6: Options for Increased Deposit Coverage”, Page 58
I am not in favour of unlimited deposit insurance coverage but if you accept that certain types of depositors can’t be expected to monitor bank solvency (and liquidity) then I can’t see the point of saying that reduced depositor discipline is a consequence of changing deposit insurance for these groups or that the “burden” of monitoring is shifted to other stakeholders.
What would have been useful I think is a discussion of which stakeholders are best suited to monitor their bank and apply market discipline. Here again I found the Report disappointing. The Report states “… other creditors and shareholders may continue to play an important role in constraining bank risk-taking …” but does not explore the issue in any real detail.
I also found it confusing that ideas like placing limits on the reliance on uninsured deposits or requirements to increase the level of junior forms of funding (equity and subordinated debt), that were listed as “Potential Complementary Tools” for Limited Coverage and Unlimited Coverage, were not considered relevant in the Targeted Coverage option (See Table 1.1, page 5).
This ties into a broader point about the role of deposit preference. Most discussions about bank deposits focus on regulation, supervision and deposit insurance as the key elements that mitigate the inherent risk that deposits will run. Arguably, the only part of this that depositors understand and care about is the deposit insurance.
I would argue that deposit preference also has an important role to play for two reasons
I did a post here which discussed the moral hazard question in more depth but the short version is that the best source of market discipline probably lies in the space between senior debt and common equity i.e. Additional Tier 1 and Tier 2 subordinated debt. Common equity clearly has some role to play but the “skin in the game” argument just does not cut it for me. The fact that shareholders benefit from risk taking tends to work against their incentive to provide risk discipline and more capital can have the perverse effect of creating pressure to look for higher returns.
Tony – From the Outside
One of the mysteries of life is why a country as advanced as the USA seems to be so far behind in its payment system. JP Koning suggests that the answer lies in part in the large number of banks that is a feature of the US system.
— Read on jpkoning.blogspot.com/2023/04/zelle-vs-interac-e-transfer-or-why-its.html
Tony – From The Outside
Marc Rubinstein offers a nice summary of the history of deposit insurance in the USA. The post is short and worth reading but the short version is captured in his conclusion…
Deposit insurance was never meant to preserve wealth … It was meant to preserve the functioning of the banking system. What the correct number is to accomplish that is a guess, but it’s going up.
From the outside 