Why Banks offering attractive FD promotions now? (July 2014)

Once again, we came back to this topic again. The Fixed Deposit promotion offered by various banks lately. Since FD seems to be a form of liability to banks (because banks need to pay depositors interest rate no matter rainy or shiny days), why they still launching FD promotions? What's the rationale behind?

Exposing the mystery ...

1. Implementation of Basel series:
   The main objective of these series was to strengthen the existing capital and liquidity standard of banks as set and governed by Bank Negara Malaysia. With these series, banks would need to have more capital and liquidity to continue their main business in disbursing loans. So, they need our money being locked for a longer period via FD.
   
   
2. In anticipation of higher interest rate:
   Yes. This is another main reason why banks offering attractive FD rate to tie up your money. Because they foresee that BNM will raise the OPR rate, hence FD rate in the future will rise in tandem. What's wrong if I offer you effective 9 months FD rate of 3.60% when I foresee that same tenure rate may went up to 3.50% eventually ?

At least, banks already lock in your money now and loan it out according to current BLR which will increase in tandem with OPR also. Do you know that BLR increasing with 25 basis points in mid-July, and average FD rate increasing with a lesser extend? So, which side is better off? Depositors or bankers? Another OPR hike in November 2014 ?

Some example of FD promotions by various banks:

Admati on Banker's New Clothes

Below is TED talk by Anat Admati based on her book The Banker's New Clothes, which is a must-read for anyone interested in understanding how banking works and how it can be reformed. Admati argues that bankers need more 'skin in the game', but she is somewhat sceptical that reform of the banking system is possible. In my new book, Banking in Crisis, I share Admati's scepticism regarding reform and I also agree with her that bankers need more 'skin in the game'. 

Banking in Crisis Talk at the Bank of England

Yesterday I had the privilege of giving a talk on my book Banking in Crisis to a packed audience at the Bank of England. The Bank has always taken banking history seriously. For example, it has commissioned several histories over the past 70 years - the most recent being Forrest Capie's Bank of England. The Bank is also holding a series of roundtables on past banking crises. I attended the first one of these yesterday, which was on the City of Glasgow crash. Charles Goodhart, Forrest Capie and I sat as external contributors to the roundtable and we were very impressed by the work done by the four economists who spoke about the City of Glasgow crisis.

Endorsements of Banking in Crisis

Three esteemed academics kindly provided endorsements on the back cover of my new book Banking in Crisis. Here is what they say:

Richard S. Grossman (Wesleyan Univerity):

"Banking in Crisis combines the very best of serious academic scholarship and keen policy analysis. It should be required reading for anyone - expert and non-expert alike - who is interested in the past, present and future of British banking."

Avner Offer (University of Oxford):

"What makes for stable banking? Bankers are prone to gamble with depositors' money. What keeps them honest is a personal stake, or tight regulation. Turner shows that since 1825, stability required either one or the other, and that relaxation of discipline, whatever its advantages, has placed the financial system at risk. The past worked for a long time and the present doesn't."

Kent Matthews (Cardiff University):

"John Turner has done the community of banking scholars, regulators and policy makers a great service by writing an account of two centuries of British banking. It is timely, scholarly and most of all highly readable. History is contextualised in the economic theory of banking, making it a must-read for students at all levels. Highly recommended."

Banking in Crisis: A Summary

Can the lessons of the past help us to prevent another banking collapse in the future? This is the first book to tell the story of the rise and fall of British banking stability in the past two centuries, and it sheds new light on why banking systems crash and the factors underpinning banking stability. John Turner shows that there were only two major banking crises in Britain during this time: the crisis of 1825–6 and the Great Crash of 2007–8. Although there were episodic bouts of instability in the interim, the banking system was crisis-free. Why was the British banking system stable for such a long time and why did the British banking system implode in 2008? In answering these questions, the book explores the long-run evolution of bank regulation, the role of the Bank of England, bank rescues and the need to hold shareholders to account.

MH17 : Insurance Cover or Not ?

First of all, condolences to all family members of passengers and crew members boarding the ill-fated flight MH17. This is a tragic all of us also don't want or expecting it to happen. Justice must be found and those responsible for this tragedy must be punished.

Come back to the question.

Does this MH17 event covered by insurance ?

For MH370 flight which went missing few months ago, insurance companies were already paying out monies to beneficiaries of those passengers involved within one month. However, this may not be the case for MH17, said industry practitioners as reported in China Press Daily.

Unlike MH370 which was still missing, what causing the mishap of MH17 was due to violence or war. According to insurance industry experts, if MH17 was confirmed being shot down by missiles, insurance companies can discharge their responsibilities to pay the claim. Because under the insurance contract's terms and conditions, whatever risks related to war will be excluded. Is this true ?

Let's have a look at the below two examples snapshot from two different policies:

Hmmm... If this is the case, all insurance claims, whether life insurance or personal accident or travel insurance coverage, will not be honored by insurers. Then, the decision made by insurers will be based on how kind or generous or sympathy they are. We believe all Malaysian insurers are kind enough to help. Correct ?

Banking in Crisis Hits the Shelves

My new book Banking in Crisis has just hit the shelves. It can be ordered from Amazon and Cambridge University Press.

YSLM was another Pyramid Scheme? How it Works?

It was so hot that it appeared in major daily newspaper recently on this YSLM scheme. After a brief checked on it, there are a few funny facts that come across Finance Malaysia mind. For a mere RM300, anyone can start to jump into this so-called business (business of get conned and conning people?).

Let's have a read below:

1. The "Future Richest Person in the World" !!!
   This would be one of the funniest advertisement in the world. Yes. The founder successfully garner the interest of public and now the authorities as well. Lol. Although he may not become the richest person, he already become the "shameless" person, at least, in Malaysia currently. How to describe him? Brave or over-confident? Did anyone seen Li Ka Shing called himself the "future" richest Chinese before he really achieve it?
   
   
2. People or Product oriented scheme?
   For RM300, you can join them as member and every member he recruits, he will be paid RM50 per person until the 6th level. Beyond the 6th level, the member will have to top up his membership fee to a maximum of RM30,000 to continue enjoying the benefits. Any products involved here? NO... It's all about recruiting people and you got the rewards. This is the fundamental of pyramid scheme !!!
   
   
3. BMWs and Cash within a short period?
   If cash money doesn't attractive to you, then how about BMWs? This is the tactic used to lure investors simply for 2 reasons. Once a member joined the scheme, within a short period, he/she may get a BMW (depending on how many people he/she successfully conned into the scheme). With this luxury car, it will create a huge effects implicating that the scheme was actually works and many people joined are making big bucks.
   
   

So, how does it works actually?

Please refer to diagram below:

Anyway, the said scheme already banned in China. Local authorities is going to take down all the billboards. And, where is the founder?

Bowling for Hitler

Many economists believe that social capital provides substantial economic benefits and some political scientists argue that social capital plays an important role in civic society by underpinning stable democracies. Notably, Robert Putnam in Bowling Alone: America's Declining Social Capital argues that declining social capital in the United States is undermining democracy. 

Shanker Satyanath, Nico Voigtlander and Hans-Joachim Voth in their recent working paper entitled "Bowling for Fascism: Social Capital and the Rise of the Nazi Party in Weimar Germany, 1919-33" consider the dark side of social capital by looking at how networks of civic associations (e.g., bowling clubs, choirs, and animal breeders) contributed to the rise of the Nazi Party and the downfall of democracy in interwar Germany. There is a good review of this paper over at the NEP-HIS Blog by Ronan McCarry (a final-year BSc Economics student at Queen's University). Congratulations are due to Chris Colvin and Bernardo Batiz-Lazo for encouraging students to write these reviews.   

Graduation 2014

I'm just back from Queen's graduation (commencement) ceremony. Well done to the Class of 2014! In particular, well done to Cillian McCotter who graduated top of his class and to Zoe McBride who came top on my Corporate Finance module and received the Ulster Bank Prize. 

Emma Watson's Graduation Selfie