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Wholesale markets have a rich history of serving as vital hubs for financial institutions and corporations to engage in short-term borrowing, lending, and investment activities. These markets have been instrumental in facilitating the efficient flow of funds, enabling participants to meet their funding needs, manage liquidity, and optimize their balance sheets. However, the landscape of wholesale markets has undergone significant transformations in recent years, driven by various factors that have reshaped their operations. One of the primary drivers of change has been the regulatory reforms introduced after the global financial crisis of 2008-2009. These reforms were designed to enhance financial stability, reduce systemic risks, and improve transparency and oversight in the markets. Stricter capital requirements, improved risk management standards, and greater transparency have redefined the way wholesale markets operate. In parallel, rapid technological advancements and the rise of digitization have revolutionized financial markets, including wholesale markets. Digital platforms, electronic trading systems, and algorithmic trading have emerged as powerful tools that streamline processes, improve efficiency, and provide real-time access to market information. The automation of tasks previously performed manually has led to faster execution and settlement of transactions, reducing reliance on traditional intermediaries. Furthermore, major financial crises and market disruptions, such as the global financial crisis and subsequent events like the European sovereign debt crisis, have underscored vulnerabilities within wholesale markets. These events prompted market participants to reevaluate their risk management practices, liquidity provision strategies, and the overall resilience of market structures. The lessons learned from these crises have driven efforts to create more robust and resilient wholesale market frameworks. The impact of these shifting dynamics extends to money market products, which play a crucial role in short-term financing and liquidity management. The evolving wholesale market landscape has influenced the structure, participants, and trading mechanisms of these products. Non-bank financial institutions, including money market funds and hedge funds, have gained prominence as key players alongside traditional banks. Moreover, the rise of technology-driven firms and fintech companies has expanded the range of participants in wholesale markets, injecting innovation and competition. Trading mechanisms and liquidity provision have also been transformed by technological advancements. Electronic trading platforms and algorithmic trading have revolutionized the way money market products are bought and sold. These developments have enhanced transparency, efficiency, and access to liquidity, enabling market participants to execute trades more quickly and efficiently. This shift has improved price discovery and reduced transaction costs, benefitting both buyers and sellers. Additionally, the changing dynamics of wholesale markets have spurred the development of new money market products and platforms. Digital platforms and peer-to-peer lending have emerged as alternative channels for short-term borrowing and lending, providing additional avenues for market participants to access funds. The introduction of innovative securitization and structured money market products has expanded the range of investment opportunities, allowing investors to diversify their portfolios. In conclusion, wholesale markets have experienced a profound transformation in recent years. Regulatory changes, technological advancements, and market disruptions have redefined the way these markets operate, impacting money market products and their associated trading mechanisms. As market participants adapt to these evolving dynamics, understanding the implications and challenges arising from these changes is essential for navigating the wholesale market landscape effectively.

Demystifying Repurchase Agreements (Repos): A Primer In the intricate realm of financial transactions, the repurchase agreement, commonly referred to as the "repo," stands as a vital tool for short-term borrowing and lending. It serves both buyers and sellers in enabling smooth financial operations and efficient liquidity management. 1. Basics of a Repo Transaction A repurchase agreement consists of two primary stages: Initial Transaction: Here, the seller offers collateral, typically in the form of bonds or other securities, to the buyer. The buyer then provides an amount equivalent to the market valuation of the collateral, which incorporates any due interest. Maturity: Once the agreed-upon tenure is reached, the buyer gives back the collateral. Concurrently, the seller returns the initial amount received plus an additional interest. This interest, referred to as the "repo rate," is often determined based on money market standards, such as the actual/360 method. The terms, encompassing the type of collateral, transaction's duration (usually short-term, ranging from a day to a few months), the cash amount, and the repo rate, are established when dealers initiate a repo trade. 2. Risk Dynamics Throughout the repo's life, both market and credit risks linked to the collateral persist with the seller. This is due to the seller's commitment to repurchasing the asset at an agreed-upon sum at maturity. Moreover, should there be any coupon payment linked to the collateral during the repo's duration, the buyer is mandated to relay this to the seller. 3. The Motive Behind Repo Trades Repos are popular for two main reasons: Shorting the Market: Dealers might predict a price drop and opt to sell securities they don't possess, aiming to repurchase them later at reduced rates. This strategy, known as "going short," necessitates borrowing the security, thus prompting the dealer to engage in a reverse repo. Liquidity Management: Those possessing bonds can employ them as collateral to borrow funds. Given that the repo rate can sometimes be below standard money market rates, repos can be a strategic instrument for managing liquidity. 4. General vs. Special Collateral Rates The repo rate usually aligns closely with money market rates, known as the general collateral rate. However, in situations where a specific security is in high demand, its repo rate might dip considerably below prevailing rates, earning it the label of a "special rate." 5. Haircuts in the Repo Market To manage the risk associated with volatile bonds, the repo market introduces "haircuts" or margins. For instance, a 2% haircut on a repo deal involving collateral valued at $10 million would mean the seller gets only $9.8 million from the buyer, with the repo interest calculated on this reduced amount. 6. Buy/Sell Back Transactions These transactions mirror repos regarding collateral and cash flow dynamics but differ structurally. Here, the focus is on a spot purchase and a subsequent forward sale of the collateral. This structure pivots on spot and forward prices instead of an interest rate. In conclusion, repurchase agreements form the backbone of short-term financing in financial markets. By providing a framework for borrowing and lending using securities as collateral, repos facilitate liquidity management and efficient capital allocation for both dealers and portfolio managers. Repo start: Repo maturity: Repo used to cover short sale:

Backround When I was running a treasury, repo agreements, or repurchase agreements, were very instrumental in the type of work we were doing. For example, from time to time, we were running short positions, which involved selling bonds that we didn’t own. To facilitate the short position, it meant borrowing a bond to make delivery to the person who had actually bought the bond. However, that’s not the only place where we came across and used repo agreements. We also used them to take advantage of very good rates for borrowing money. How did that work? Well, it worked by taking a bond that we had and lending it out in order to borrow cash. The bond acted as a form of collateral. In return, we sometimes obtained a very low interest rate on the borrowing, predominantly because the bond was in demand in the repo market. When interest rates in the repo market are on special, they are very low and, in some cases, can even be negative. What this means is that you can take your bond, if it’s on special, use it in a repo, give the bond to a second party, and they provide you with cash in return. As a result, you get the cash at a very low, advantageous interest rate. From two points of view, the repo transaction is very important. It allows you to cover short positions and also to borrow money. More recently, we’ve seen repos extensively used by central banks. When banks want to borrow money from the central bank, the central bank requires some form of collateral. The central bank lends money to the commercial bank, and in return, the commercial bank provides collateral, which indeed is a type of repo transaction. The commercial bank gives bonds or assets to the central bank, which then provides cash or a more liquid asset like a treasury bill to the commercial bank. The transaction has a start date, an end date, and a repo rate. In the UK, this repo rate is generally known as the bank base rate, and in Europe, simply as the repo rate. Again, this is very important for lending money to the financial markets and, from time to time, to drain money from the financial markets, where the bank enters into reverse repos. In a reverse repo, the central bank actually takes cash out of the system by providing bonds to commercial banks. In return, the commercial banks provide cash to the central bank. Now, as you’ve probably realised, it's a very simple transaction. It’s really a form of collateralised loan. But it also means that there are a number of risks involved. If you're involved in treasury and financial markets, you'll appreciate that risk is a much bigger subject today than it was a few years ago. So, I decided to write this article, entitled "Exploring the Ins and Outs of Repurchase Agreement Risks", really to give you a little bit of insight into the risks associated with repo transactions. Here's the article: Understanding the Risks of Repurchase Agreements The repurchase agreement, commonly known as a repo, plays a vital role in the money market by facilitating short-term borrowing and lending. Yet, despite its ubiquity and importance, many remain unaware of the underlying risks it poses to both parties involved. This article aims to delve deeper into the intricacies of repo trades, shedding light on the potential hazards for both buyers and sellers. Structure of a Repo Trade At the heart of a repo trade are two parties: the seller and the buyer. The 'seller' is the entity that hands over collateral, usually in the form of securities, and receives cash at the beginning of the trade. Conversely, the 'buyer' receives this collateral and provides the cash. The fundamental understanding is that the seller will eventually repurchase the securities at a predetermined price. Risks Encountered by the Seller Market Risk: The seller commits to repurchasing the securities at a predetermined price. Thus, any market-driven fluctuations in the value of those securities become the seller's responsibility. If the market value drops, the seller incurs a loss. There's also the risk associated with the repo interest rate. Suppose market repo rates decline after sealing the deal. In that case, the seller might end up paying an interest rate higher than the prevailing market rate. Margin Call Risk: In a scenario where the value of the collateral drops significantly, the buyer may issue a margin call to the seller. This means the seller is required to provide additional cash or collateral to the buyer to maintain the agreed-upon levels of collateralisation. Not only does this introduce a sudden liquidity demand for the seller, but it also intensifies the seller's exposure to market fluctuations. Credit Risk: The onus to repurchase the securities also means the seller retains credit risk associated with those securities throughout the repo term. The seller can face credit risk from the buyer, especially if the deal has been over-collateralised due to a 'haircut' or if the collateral's market value has risen. Risks Borne by the Buyer Market Risk: A default by the seller means the buyer must liquidate the collateral to recover the funds. If the collateral's value has decreased, the buyer might face a shortfall. This is why buyers often apply 'haircuts' and require margins to protect themselves. Secondary market risk emerges if the repo rate increases after the deal. The buyer would then receive a rate that's below the current market rate. Credit Risk: The buyer's primary risk is the potential default of the seller, especially concerning the principal and interest of the repo. In such cases, the collateral is the buyer's primary route to repayment, emphasising the importance of assessing the collateral's quality and its credit risk correlation with the seller. Liquidity Risk: Some collateral may be challenging to sell due to its illiquid nature. Such assets are less appealing to buyers, often prompting them to seek larger haircuts to buffer against this risk. Foreign Exchange Risk: When the collateral and the cash in a repo deal are denominated in different currencies, there's a risk tied to currency fluctuations. Should the need arise to rely on the collateral, its value might be inadequate if the exchange rate has moved unfavourably. Conclusion Repos, while essential in maintaining the liquidity and flow in money markets, are not devoid of risks. Both buyers and sellers must be astute in their assessments, ensuring they are well-protected against potential pitfalls. Understanding these risks is the first step towards navigating the intricate world of repurchase agreements safely and effectively.

Definition of Cash Products in the Context of Money Markets Cash products, within the realm of money markets, encompass a range of short-term financial instruments that provide investors with a secure and liquid avenue for parking their funds for relatively brief periods. These instruments are typically issued by creditworthy entities, such as governments, financial institutions, and corporations, to fulfil their short-term financing needs. Common Types of Cash Products There are several common types of cash products that are actively traded in the money markets, including: Treasury Bills: Treasury bills, or T-bills, are short-term debt securities issued by governments to raise funds for their immediate financing requirements. These highly liquid instruments have maturities ranging from a few days to one year, and they are generally considered to be risk-free as they are backed by the full faith and credit of the issuing government. Commercial Paper: Commercial paper refers to unsecured promissory notes issued by corporations to finance their short-term obligations. These instruments typically have maturities ranging from a few days to several months. Commercial paper is primarily issued by highly creditworthy corporations and is considered to be a relatively safe investment due to the credit quality of the issuers. Certificates of Deposit (CDs): Certificates of deposit are time deposits offered by banks and other financial institutions. They represent a fixed-term investment with a specified maturity date and a predetermined interest rate. CDs typically have maturities ranging from a few days to one year, and they provide a secure and predictable return on investment. Features and Characteristics of Cash Products Cash products exhibit specific features and characteristics that make them attractive to investors in the money markets. Some key features include: Maturity: Cash products have relatively short maturities, typically less than one year. This short-term nature allows investors to have quicker access to their funds and the opportunity to reinvest them in other opportunities. Risk Profile: Cash products are generally considered to have a low-risk profile. Their short-term nature and high-quality issuers, such as governments and financially stable corporations, contribute to their perceived safety. However, it is important to note that no investment is entirely risk-free, and investors should still assess the creditworthiness and associated risks before investing. Liquidity: Cash products are highly liquid, meaning they can be easily bought and sold in the secondary market. This liquidity provides investors with the flexibility to access their funds quickly, should the need arise. Yield: The yield on cash products tends to be lower compared to longer-term investments. This lower yield is primarily due to the short-term nature of these instruments and the lower risk associated with them. However, cash products still provide a reliable source of income for investors seeking stability and capital preservation. Benefits of the Evolving Wholesale Market Dynamics The evolving wholesale market dynamics have brought forth several benefits: Enhanced Efficiency: The integration of technology and digitization has improved the efficiency of wholesale markets. Faster execution, automated processes, and real-time access to market information have streamlined operations and reduced transaction costs. Increased Market Access: The shift in market dynamics has expanded market access, allowing a broader range of participants, including non-bank financial institutions and technology-driven firms, to engage in wholesale market activities. This increased participation has enhanced market liquidity and facilitated a more diverse range of funding and investment options. Improved Risk Management: Regulatory reforms implemented in response to financial crises have bolstered risk management practices in wholesale markets. Stricter capital requirements and enhanced transparency have contributed to a more resilient financial system. Potential Challenges and Risks Associated with the Changes While the evolving wholesale market dynamics bring benefits, they also pose challenges and risks: Technological Risks: Reliance on technology introduces the risk of operational disruptions, cybersecurity threats, and algorithmic trading errors. Market participants must continuously invest in robust technological infrastructure and risk management systems to mitigate these risks. Liquidity Risk: The changing dynamics of wholesale markets may impact the availability and stability of liquidity. Market participants need to ensure they have access to sufficient liquidity during periods of stress or market volatility. Market Fragmentation: The proliferation of new platforms and market participants may lead to market fragmentation, making achieving price transparency and liquidity more challenging across different venues. This fragmentation can potentially hinder efficient price discovery and increase transaction costs. Impact on Market Participants and Their Strategies The evolving wholesale market dynamics have influenced the strategies and operations of market participants: Banks: Banks have had to adapt to changes in market structure and competition. They may need to reassess their business models, adjust their liquidity management strategies, and explore new avenues for revenue generation. Non-Bank Financial Institutions: Non-bank financial institutions, such as money market funds, face evolving regulatory requirements and increased scrutiny. They must navigate changing market conditions while ensuring the preservation of capital and liquidity for their investors. Technology-Driven Firms: Fintech companies and technology-driven firms have capitalized on the evolving dynamics to offer innovative solutions and platforms in wholesale markets. They have the opportunity to disrupt traditional market practices and provide efficient services to market participants. Regulatory Considerations and the Role of Central Banks Regulatory considerations play a crucial role in shaping the evolving wholesale market dynamics. Regulatory reforms aim to promote stability, transparency, and fairness in wholesale markets. Regulators focus on enhancing risk management practices, reducing systemic risks, and fostering market integrity. Central banks play a significant role in wholesale markets, particularly in times of financial stress or crisis. They provide liquidity support, conduct open market operations, and implement monetary policy measures to stabilize markets and ensure the smooth functioning of the financial system. Additionally, central banks and regulators collaborate to oversee market participants, monitor systemic risks, and address any potential threats to financial stability. Summary Throughout this article, we have explored the world of money market products and the evolving dynamics of wholesale markets. Here's a recap of the key points discussed: Money market products are short-term financial instruments used for borrowing and lending in wholesale markets. They have a maturity of typically less than one year and offer features such as low risk, high liquidity, and lower yields compared to longer-term investments. Wholesale markets play a crucial role in facilitating short-term borrowing, lending, and investment activities for financial institutions and corporations. Traditionally, they operated through established networks and manual processes, but the landscape has transformed with regulatory changes, technological advancements, and market disruptions. The shift in wholesale market dynamics has led to changes in market structure, trading mechanisms, and the introduction of new products and platforms. Non-bank financial institutions and technology-driven firms have become more prominent participants, and electronic trading systems have enhanced efficiency and transparency. The evolving wholesale market dynamics bring benefits such as enhanced efficiency, increased market access, and improved risk management. However, challenges and risks, including technological risks and market fragmentation, must be carefully managed. Market participants, including banks, non-bank financial institutions, and technology-driven firms, have had to adapt their strategies and operations to navigate the changing landscape. Regulatory considerations and the role of central banks are essential in shaping wholesale market dynamics and ensuring stability, transparency, and fairness.

Can GPT-4 Assist in Making Electric Vehicle Purchase Decisions? Purchasing a new car is undeniably a significant financial commitment, often ranking as one of the heftiest expenditures in a household's annual budget. In recent times, there's been a growing shift towards environmentally friendly transportation alternatives, with electric vehicles (EVs) leading the charge. This begs the question: Is it financially sound to make the switch to an EV from an older, conventional vehicle? Here, we'll delve into a personal exploration of this question using the capabilities of GPT-4, OpenAI's advanced language model. Understanding the Model's Calculations: For those eager to know the answer jump to the conclusion below. However, understanding the journey to that answer provides a deeper comprehension of the intricacies of such models. When initially tasked with calculating the cost comparison between a traditional car and an EV, GPT-4, despite its prowess, made notable miscalculations. For instance, it erroneously combined the initial purchase cost of the vehicle with its depreciation value. In another instance, it misjudged the petrol cost calculation. Such errors underline the importance of constructing clear and connected prompts for the model. After refining the prompt, here's a summarised look at the findings: Without Tax Incentives: Keeping the older vehicle proved more cost-effective when solely considering basic expenses. With Tax Incentives (Method 1): After incorporating available tax reliefs for EVs, the financial difference between retaining the old car and purchasing a new EV became marginal. With Tax Incentives (Method 2): A different approach to applying tax incentives tipped the scales in favour of the EV, highlighting the substantial impact of government policies on such decisions. Here's the discussion: Here are the key takeaways from the discussion: Prompt Design: Crafting concise, interconnected prompts improves the accuracy of GPT-4's outputs. For instance, mentioning fuel consumption followed immediately by its cost can guide the model better. Model Reliability: While GPT-4 can occasionally err, it undeniably offers a valuable tool for dissecting complex financial scenarios. However, it's prudent to possess some foundational knowledge about the subject matter to discern the model's accuracy. Accuracy versus approximation: GPT- 4 is convincingly accurate but it's better to take its answers here as approximations that shed light on what is a complex interplay of issues. Nevertheless, it acts as a good guide. As an Aside - Government Policies: Government incentives, especially tax reliefs, can play a pivotal role in making EVs a more viable financial option for individuals who can claim tax relief, for those who can't the numbers aren't so good. Conclusion: The transition from relying on conventional wisdom to harnessing advanced AI models for complex decision-making is already underway. As more individuals realise the potential of tools like GPT-4, questions once deemed too intricate to tackle might soon become commonplace inquiries. Still, it's essential to approach such models with a critical mind and to ensure that the prompts provided are clear and connected. With the right approach, GPT-4 can indeed offer insightful perspectives, making it easier for consumers to make informed choices about their next vehicle purchase. This is a democratisation of information putting power in the hands of those who can use it.

The financial landscape is comprised of various instruments and markets that facilitate the movement of capital and financing. Among these, money market products play a pivotal role in enabling short-term borrowing and lending in wholesale markets. In this article, we will explore the nature of money market products, the significance of short-term transactions in wholesale markets, and provide an overview of cash products and their characteristics. Definition of Money Market Products Money market products refer to a class of financial instruments that are characterized by their short-term maturity and high liquidity. These products are typically issued and traded by various entities, including governments, financial institutions, and corporations, to meet their short-term funding needs. Money market instruments include Treasury bills, commercial paper, certificates of deposit, repurchase agreements, and short-term bonds. The primary objective of money market products is to provide participants with a secure and efficient means of borrowing and lending funds over short periods, usually less than one year. These instruments offer a relatively low-risk investment option while ensuring liquidity and capital preservation for investors. Importance of Short-Term Borrowing and Lending in Wholesale Markets Wholesale markets serve as the backbone of the financial system, facilitating the flow of funds between institutions and providing essential liquidity management tools. In these markets, banks and other financial institutions engage in short-term borrowing and lending activities to meet their funding requirements and manage their day-to-day operations. Short-term borrowing and lending are crucial for banks as they allow them to maintain liquidity, bridge temporary funding gaps, and manage fluctuations in their balance sheets. By borrowing funds in the wholesale market, banks can access capital quickly to meet their immediate obligations. Conversely, lending in the wholesale market enables banks to invest their excess funds and earn a return while maintaining a short-term investment horizon. Overview of Cash Products and Their Characteristics Cash products form a significant portion of money market instruments. These products are characterized by their high liquidity and short-term nature. They are typically issued by highly creditworthy entities such as governments, financial institutions, and blue-chip corporations. Some common examples of cash products include Treasury bills, which are short-term debt obligations issued by governments to raise funds for their short-term financing needs. Commercial paper, on the other hand, represents unsecured promissory notes issued by corporations to meet their short-term funding requirements. Cash products are attractive to investors due to their relatively low risk and ease of buying and selling in the secondary market. They provide an opportunity to park surplus funds temporarily and earn interest income without tying up capital for an extended period. In conclusion, money market products serve as essential instruments in wholesale markets, enabling short-term borrowing and lending. Cash products, with their short maturities and high liquidity, play a vital role within the money market landscape. In the following sections, we will delve deeper into the dynamics of wholesale markets, the characteristics of cash products, and the evolving nature of these markets. The Participants in Wholesale Markets Wholesale markets attract a diverse range of participants who engage in short-term borrowing and lending activities. The main participants in these markets include: Banks: Banks are prominent players in wholesale markets, actively involved in both borrowing and lending. They utilize these markets to obtain funds for their daily operations, manage liquidity, and meet regulatory requirements. Banks also lend funds to other institutions and corporations seeking short-term financing. Institutional Investors: Various institutional investors, such as pension funds, mutual funds, and insurance companies, participate in wholesale markets. They seek short-term investment opportunities with relatively low risk to optimize their portfolio returns and ensure liquidity management. Corporations: Large corporations with significant financial resources also participate in wholesale markets. They may borrow funds to cover short-term cash flow gaps or invest their excess funds in short-term instruments to earn a return. Central Banks: Central banks play a crucial role in wholesale markets by providing liquidity to financial institutions during times of market stress or crisis. They conduct open market operations, such as repurchase agreements (repos), to influence short-term interest rates and stabilize the financial system. Mechanisms of Short-Term Borrowing and Lending in Wholesale Markets Short-term borrowing and lending in wholesale markets occur through various mechanisms, including: Interbank Market: Banks borrow and lend funds to each other in the interbank market. This market facilitates short-term transactions between banks to manage their liquidity needs, adjust their reserve requirements, and optimize their balance sheets. Money Market Instruments: Money market instruments, such as Treasury bills, commercial paper, and certificates of deposit, are bought and sold in wholesale markets. These instruments provide avenues for investors to lend funds to issuers in exchange for interest income over a short period. Repurchase Agreements (Repos): Repos involve the sale of securities by one party to another with an agreement to repurchase them at a later date. This mechanism allows institutions to borrow funds against collateral, such as government bonds, for short periods. Importance of Wholesale Markets for Banks and Their Liquidity Management Wholesale markets are of utmost importance to banks, serving as a vital source of short-term funding and liquidity management. Banks heavily rely on these markets to access funds quickly, ensuring they can meet their daily operational requirements, honor deposit withdrawals, and fulfill regulatory obligations. The ability to borrow funds in wholesale markets provides banks with the flexibility to manage their liquidity needs efficiently. During times of increased demand for cash, banks can access funds rapidly, reducing the risk of liquidity shortages. Conversely, during periods of excess liquidity, banks can lend funds in wholesale markets to earn income and optimize their balance sheets. Furthermore, wholesale markets enable banks to diversify their funding sources and reduce their reliance on specific types of deposits or long-term borrowing. This diversification improves their overall resilience and reduces funding risks.

It takes a bit of thought. When you lend money you take a haircut. That’s what negative rates mean. It’s supposed to stop banks redepositing, lending money to the real economy instead. But it’s not well thought through. Sub-zero rates lead to unanticipated problems. It sends out a very confusing message. We want banks to lend more but at the same time want their capital ratios to improve. The two things aren’t compatible.  The bankers’ unenviable choice is lower margins or more risk. No wonder bank stocks wobble. It’s also sending a strange message to public and private sectors alike; borrow more because debt servicing just got a lot easier. It doesn’t look at where the money goes. Does it finance consumption or investment? The real problem is that monetary policy isn’t having the desired inflationary effects. Too many banks have too many problems on their balance sheet already. Perhaps central bankers should toy with another idea. Instead of lowering rates further why not offer a “capital facility” and permanently exchange cocos for government debt on a par par basis? It’s a helicopter drop right on target and its bound to lead to inflation as bad debt is absorbed by the authorities who monetise it. Mad yes, but so is everything else that’s going on………………………………..

Last week the Bank of England defended its position on bank capital after it had been urged to rethink by Sir John Vickers. It’s quite unusual to see this type of spat in public. From a taxpayer’s perspective it is worrying. After all a dysfunctional banking system has and is costing us dear. The question of how much capital a bank should hold is not straight forward. What counts as capital and exactly what risk weightings apply has become alchemy. What we do know is that leveraged businesses risk failure and banks are highly leveraged. In their letter to the FT, Andrew Bailey and Sir Jon Cunliffe draw heavily on data to defend their view. Stating “…our banks are now 10 times more resilient than before the crisis”. How can top regulators be so definitive? Does it mean we are ten times safer? It’s nonsense. It’s all subjective. The trouble is that if the BoE is wrong (and let’s face it the track record isn’t good) easing back on bank capital ratios and relying on complexity echoes the light touch approach that got us into trouble in the first place. Until we know exactly what’s on balance sheets and have gone through the resolution process at least once a “margin of safety” would be in order. In this respect Vickers is right. Unfortunately there are few people who have the skill and knowledge to challenge the BoE which appears to be driven increasingly by “political” considerations.

According to the FT the government has borrowed £74.2bn for the financial year to date. With the population of the UK circa 64 million that’s over £1,150 per person. In Q1 2015 UK government debt was £1.56 trillion or about £24,300 per person. The annual servicing cost of this debt was £43bn or 3% of GDP. These figures ignore off balance sheet items like public sector pensions, private finance schemes, guarantees and contingent obligations. We know off-balance sheet items need to be added back in order to paint a more accurate view of what’s going on. The trouble is the accounts are so fudged that there is no consensus. Estimates of total UK debt including these items range from £1.8 trillion to £4 trillion. A mid-range figure gives you £45,000 per person or about 1.75 times average earnings. When the rate of growth in debt appears to be slowing but the absolute level of debt continues to rise there comes a point when lenders say “no more”. This is where the Bank of England has a dilemma. Keeping rates low is not entirely within its control. Instead of listening to the Governor you have to get into the mind of Mr. Market that well known manic depressive. Does he think Gilts are a safe place to be?

How much does it cost you to save? Take someone who saves £5,000 per annum for 30 years in a tax free environment like a pension or ISA. What’s the maturity value? It depends. Excluding all fees and commissions compounding at 4% gives £280,424. At 8% it’s £566,416. But that’s not the real world. Our investor pays fees and commissions. Let’s assume they are 1%. Deduct these from the investment and £280,424 becomes £237,877 that’s a £42,547 difference. And £566,416 becomes £472,303 a £94,113 difference. Hardly trivial sums and it gets worse. Whilst some low cost trackers and ETFs charge less than 0.30% per annum many managed funds charge an awful lot more. Total fees and expenses can run north of 2.5%. In the 8% example above that’s a cost to our investor of £204,238. What’s more I’m not certain what it’s for. After all it’s well known that most active fund managers can’t consistently outperform trackers. With this in mind the fund management industry needs to come clean. The information provided to investors needs to be absolutely clear. That’s why every annual statement needs to state how much has been deducted in terms we understand. That’s cash. The asset management industry says it’s too complex. It isn’t. They just don’t want you to find out the true cost of saving. That's when a 2.5% cost becomes a 36% deduction from your pie (£204,238/£566,416).

If you’ve bought flat pack furniture you will recognise its advantages. But it has its downsides too. It’s heavy and has instructions. They need reading. Assembly in the right order helps. The panels look similar but the holes are in different places. You end up doing the work. Personal finance is similar. Savings, loans and investments are on the web and you end up with the admin. The process is far from fool proof. Hit a problem when opening an account or accessing your money and trial and error won’t get you through. Why? Because there’s a still a lot of paperwork and manual processes. Talking to someone who can help is difficult. The customer ends up doing a lot of the work whilst banks keep costs down. For big firms these savings add up. No wonder we are all being pushed in the same direction. Whilst the Competition and Markets Authority has looked at current account switching anecdotal and personal experience tells me this is relatively straight forward. However if you want to open an account or just deal with your money the process is much harder. The flat pack approach to banking means much of the burden around regulation and security is passed back to the customer. With the inability to talk with anyone who can resolve things is it no wonder that the public is disengaged? Of course not. The benefits will continue to accrue in back books.

Talking with a group this week I was reminded about the paradox between monetary policy and regulation. Cutting the repo rate to almost nothing cheapens money for commercial banks. Cheap loans encourage customers to borrow and spend. Similarly QE injects money into the financial system. Banks awash with cash lend it out and consumption stimulates growth. Savers too are encouraged to spend. Better a new kitchen than a fraction of one percent on deposit. And it doesn’t stop there. Low rates increase asset prices. We feel better off and spending ensues. So why is monetary policy less effective than it used to be? Because in the new world of bank regulation the supply chain is damaged. Banks are being encouraged to cut their balance sheets and redeposit cash with the authorities. Are there any solutions to this inconsistency? The new leader of the opposition thinks so - People’s QE, where the central bank finances spending (via a state owned bank). It would be simpler to scale back regulation and let banks lend. Where you stand on the efficacies of these two approaches depends on whether you believe in markets or central planning. The end game will be the same -  inflation - an old solution to an old problem. However People's QE may get there faster.