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Future of Money May Involve Cash After All; LIBOR Reform

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Money Market Funds: Luis Aguilar, a Democratic member of the Securities and Exchange Commission who usually sides with its chairman, Mary Schapiro, tells the Journal in an interview that he’s wary of her proposal to tighten regulation of money market funds. He doesn’t quite come out and say he’d vote against it, but if he did, it’s likely to fail: The five-member commission consists of Schapiro, Aguilar, one other Democrat and two Republicans, neither of whom is expected to support the chairman’s plan. Meanwhile, the Journal’s “Heard on the Street” column says that of two reforms she’s pushing, the one to make money funds trade at a floating share price rather than a fixed $1 per share is eminently more sensible. The other idea, to require the funds to hold capital buffers, sounds great in theory except that “capital is a regulatory construct” that can create a false sense of security. Such a false sense of safety is the problem with money funds to begin with. “New regulations should dispel the myth that these funds can't suffer losses and are akin to bank accounts, a fallacy that could turn them into a systemic threat.”

Blow to Swiss Secrecy: The Swiss parliament approved legislation to amend a treaty with the U.S. so as to make it easier for Washington to detect tax dodgers with undeclared Swiss bank accounts. According to the FT, the move “marks a significant further dilution of Switzerland’s hallowed bank secrecy, but may help to bridge differences between Washington and Bern that last month prompted the US to formally indict a Swiss private bank for alleged assistance in tax evasion.” Wall Street Journal, Financial Times

LIBOR Reform: Following worldwide investigations of potential bank manipulation of the interest rate index, the British Bankers Association, which publishes LIBOR, is talking to regulators about revamping the way the benchmark is calculated, the FT reports. The paper’s “Lombard” column says that if the trade group cannot restore confidence in LIBOR, U.K. regulators should be prepared to take over the job of overseeing the index, which influences the pricing of loans and other financial instruments around the globe.

The Future of Money: This month, MIT’s Technology Review is running a series of articles on this timely topic. Two have been published so far. One of them profiles Dwolla, a young alternative payments company that allows users to bypass the major card networks and has introduced software to speed up ACH transfers. The other piece, by payments consultant Ignacio Mas, warns that a lack of imaginative thinking will make traditional banks vulnerable to challenges from nonbank innovators. Interestingly, unlike those who forecast (and welcome) an eventually cashless society, Mas proposes instead creating “smart banknotes.” These “would allow you to do a cash deposit by transferring money from banknote to bank account, directly from your mobile phone. Cash withdrawals would entail the reverse: transferring money from your bank account to a banknote. The banknotes would go on and off as a result, and the on/off status would be immediately visible — say, through digital ink that appears and disappears. You could then transport cash around cheaply in its deactivated form (sorry, Brinks!), and your mobile phone would become an ATM (sorry, NCR!).” The virtues of cash, Mas writes, are that it “has a fixed denomination (do you really want to be exposing your full bank account every time you make a payment?) and always works, even without an acceptance device. Rather than cheering for digital technology to put an end to cash, as some do, it seems smarter to reconcile the benefits of both.” MIT is promising more stories in this vein over the next few weeks, and you can see the coming line-up here. Mas, by the way, is one of the monetary futurists who appear in David Wolman’s fascinating new book “The End of Money,” which we’re about halfway through reading and plan to write more about when we’re finished. As you can tell, we really geek out on this stuff, which is why we’re looking forward to a discussion on the future of money tomorrow afternoon at SWIFT’s Operation Forum in New York. But hey, at least we managed to write 340 words on this without mentioning Bitcoin.

Wall Street Journal

Here are two names you never used to hear in the same breath: “American Express, which is trying to expand beyond the affluent customers it normally lends to, is testing the sale of prepaid cards in some Wal-Mart stores.”

Financial Times

Following yesterday’s news articles about global banks’ slow progress drafting living wills for themselves, an FT editorial urges those countries that have yet to release guidance on the wind-down plans to do so, quick snap. “Prompt publication of these would not just help the banks. It would also facilitate the harmonisation of the different regulatory frameworks. This is needed to ensure that clashing bankruptcy regimes are not a new source of uncertainty for creditors.” Incomplete instructions to one side, banks may be dragging their feet because they “have an incentive to keep their operations ‘too obscure to fail.’”

New York Times

A study by the New York Fed of Equifax data suggests that a staggering 27% of student loans are at least 30 days delinquent. A pundit quoted in the article seizes the opportunity to remind readers that “borrowers of private student loans, which tend to have higher interest rates and fewer protections than federal loans, could now call the Consumer Financial Protection Bureau to register complaints.”

Defending JPMorgan’s compensation-to-revenues ratio, Jamie Dimon recently teased reporters that the figure is similarly high at the media companies they work for, and “worse than that, you don’t even make any money!” The subsequent backlash — hundreds of angry comments on HuffPo and outraged Tweets — shows that “in a post-crisis age, it’s no longer acceptable for bank chiefs to make offhand jokes that once passed unnoticed,” according to the Times’ “DealBook.” “Main Street’s anger is still too raw to laugh at the kinds of humor from bank executives that it gladly accepts from late-night hosts, and fairly or not, the threshold for outrage is much lower for jokes told by people overseeing the nation’s financial system.” The article gives the earlier example of Lloyd Blankfein’s much-maligned quote about Goldman Sachs doing “God’s work,” which was a self-deprecating crack, not a serious claim.

 

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Comments (1)
British Bankers' Association here. We need to make an important factual correction right away: the BBA does not set LIBOR. The LIBOR benchmarks are calculated daily from submissions made to Thomson Reuters: it publishes the benchmarks daily, along with all of the submissions from individual banks which are used to calculate it. Thanks for letting us set the record straight.
Posted by Brian M | Tuesday, March 06 2012 at 11:58AM ET
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