Prediction markets offer good clean fun, ethical headaches

Prediction markets
Prediction markets really are a hornets nest of conflicts of interest, misaligned incentives, and insider trading. They encourage people to do pretty anti-social things like bet on whether foreign leaders will get killed, or bet on natural disasters (53% bet a meteor will hit the Earth before 2030), or to leverage private information they have, otherwise known as insider trading. 

For banks, the problem is that the emergence of prediction markets essentially creates a loophole in their ethics policies, our Catherine Leffert reports, for the simple fact that all of those ethics guidelines were created before prediction markets existed. In other words, there is no specific language preventing bank employees from using information they gained at their jobs to make bets on Kalshi or Polymarket.

Now, it seems pretty obvious that any broad ethics stipulation that an employee can't use information they gained through their job for personal gain should cover prediction markets. And Kalshi makes a big deal of being regulated by the CFTC and has prohibitions against people with inside information betting on its site, for any contract. The company has a long, long, long list (715 pages) of organizations where the employees of that organization are banned from making bets related to its business. It includes Kalshi itself, but also things like the San Francisco school district (I guess some of the kids might have inside info on their parents' jobs at Google and Anthropic?), Google, Anthropic and Apple, FIFA, the NFL, the NFL's players union, the people at the Golden Globes, the CFPB, the Secretary of State's office, dozens of banks including JPMorganChase, the Federal Reserve – even American Banker made the list. It's not clear, of course, how well Kalshi can enforce those bans but they are at least ostensibly there.

it seems the pretty obvious solution for banks is to add a line to the employee handbook that says "don't use prediction markets for anything possibly related to our bank." But bans from either Kalshi or Polymarket or a bank doesn't mean some people won't try to slip through the cracks and hope nobody notices their bets. Prediction markets are their own Pandora's Box, and that box has been opened. Good luck trying to get everything back in and the lid shut.

Basil doesn't like Basel
The absurd irony of the long process of fixing banking regulations known as Basel III — created as a solution to the problems that led to the 2008 financial meltdown — would be if the new rules ended up recreating the conditions that led to the 2008 financial meltdown in the first place. But that is exactly what some critics of the latest set of proposals are warning, our Ebrima Santos Sanneh writes. 

Regulators released a new framework for calculating how much money the largest banks must hold as a buffer against losses. The new framework is an attempt to correct criticisms of the last framework, which was said to be too cumbersome, especially for smaller banks. But the new framework actually ends up recreating some of the incentives that led to the kinds of risk-taking that caused the Panic of 2008.

"They're going back to the capital levels that they had in 2007," said Phillip Basil, a director at Better Markets. He feels the new rules will encourage banks to seek out profits in areas like trading rather than the sort of boring, regular, retail banking services. The capitalization will fall on the regular boring side; the exciting, frothy, trading side will be undercapitalized; and the incentive will be there to juice that side for all it's worth. "The proposal really misses the mark in terms of what its original intent was," Basil said.

That's just one voice, of course. Others are far more sanguine about the new rules. But it would not really be all that surprising if the new rules ended up by some circuitous route just recreating the old incentives.