Andrew Haldane on the Arms Race in Banking

Regular NC readers have seen us repeatedly invoke the work of Andrew Haldane, the executive director of stability of the Bank of England. His thoughtful and original work on the risks and costs of our financial system have provided serious ammunition for reform advocates.

At the recent INET conference in Berlin, Haldane recapped some of his recent observations under the rubric of an arms race, in which efforts of individual players to improve their own position wind up leaving everyone worse off.

I have one quibble with his presentation. Haldane depicts the increase in returns to global banks post 1990 as due to leverage. That isn’t entirely true. The early 1990s saw the rise of the over-the-counter derivatives business, and big banks had an advantage over securities firms, since it took a big balance sheet and a decent position in the related cash market to be successful. The rise of derivatives gave the behemoth banks a new business they could enter on the ground floor. And while derivatives are leveraged, the real attraction to banks was the opacity, in that dealers could load a lot of margin into the various risk attributes without the customers being able to see what a bad deal they were getting. The exceptional profitability of OTC derivatives provide a big boost to bank bottom lines, and attributing all the increase to leverage misses an important shift in the mix of business at these players.

Print Friendly, PDF & Email


  1. psychohistorian

    Thanks for the Haldane presentation link. Excellent speech.

    The only thing I didn’t hear him talk about in his Race to Safety was the irony of those bailed by the public now wanting public resources as collateral for credit.

    It is interesting to watch our world tiptoe around the private/public money and banking issue. Its like the 99% are bully victims of the 1% and get traumatized saying anything bad about the bully….or even questioning that public money and banking might be better for society than this currently highly dis-functional private money and banking system.

  2. Fiesty

    My master is getting me a quantum computer.

    I can cancel a bizillion trades a pico second and be one rich puppy.

    Then maybe that a-hole will let me have my own Caymen trading account.

  3. F. Beard

    this currently highly dis-functional private money and banking system. psychohistorian

    If only it were private! Instead our banking system is fascist – a government/private sector partnership.

    I doubt banks could exist to any large extent without government privileges. After all, lending money one does not have is gambling.

  4. Norman

    Monday morning quarterbacking, but the inability to remedy the problems. Evolution of how the human element destroys in its quest for greed. Indeed, perhaps this species will go extinct as the others befor them? Perhaps the next go round, perhaps.

  5. Fraud Guy- Also

    Yves describes the history of why the banks got into the derivatives business and were able to stake out a better competitive position relative to securities firms. Another factor, which was critical to the banks motivation for getting into the derivatives business, was that Glass Steagall did not anticipate the existence of derivatives, therefore the statute did not present a wall preventing commercial banks from dealing the instruments. As I understand it, Bankers Trust was the pioneer here, and arbitraging Glass Steagall was explicitly part of the bank’s motivation.

    There are many implications of this history. One important one is that, by the time Congress junked Glass Steagall, it had already been riddled with swiss cheese holes due to the rise of derivatives. If we are to pine for the resurrection of Glass Steagall, we should recognize that what we should want is a NEW Glass Steagall regime, one that is flexible enough to adapt to changing securities markets.

    1. chitown2020

      The financiers can never be allowed ever again to use our signatures as poker chips backed by zero. What Wall Street was allowed to do by the politicians is a disgrace. The U.S.Government does not need to borrow credit from any entity or nation to prosper. Its all an unconstitutional and illegal scam. Globalization and fake money lending is a sham and a fraud the elite are using to rob the people of everything and steal the Sovereignty of nations. The Europeans get it and are rejecting the scam by refusing to participate in this manufactured mess. The bank perps and the politicians are who should be feeling the pain, not the 99% who funded and paid for everything that these crooks did.

    2. Susan the other

      To date there is no effort to rein in “derivatives.” And of course banks will always find a way around the socially beneficial thing because banks themselves historically are not socially beneficial institutions. We need a new paradigm for banking itself – to manage the distribution of money. We should probably get of the word “bank.” So, MBS were probably only a vehicle upon which to trade derivatives. Second and third-hand financial instruments are a good way to get out of any responsibility. A derivative is really an insurance policy, but if it is promoted as an investment, who can tell? So that makes me ask my perennial question: If the pension fund money was not even used to fund new mortgages (because they were just written up without underwriting and the money was provided digitally because the real money was being made in derivatives) where did the pension money go? Why can’t it be refunded in full?

      1. vlade

        Derivatives existed for thousands of years – futures and basic options. But, with those, they always fulfilled real need.

        We, as a civilization, got very good in inventing needs to fulfill. Some are actually even useful, but most of it has trivial if any positive impact on quality of life. Some have rather large negative one.

      2. Paul Johnson

        The pension funds would be happy to restore your 401(k) money in full, since it would be only the amount you and your employer deposited, many times smaller than even the reduced value of your account post-2008. As far as defined-benefit pensions are concerned, the money was never there in the first place, so they only owe you what inadequate reserves were provided by the employer.

    3. nonclassical

      I agree-new version of Glass-Steagal…but what IF demise of Europe is due to international arbitrage=competition, whereby, seeing the Euro about to replace
      the dollar as international monetary system, U.S. banks decided to undercut their much more highly regulated systems….?

      I hoped Haldane was going to get at this question; I’ve been asking myself for over a year now…in some sense, he did…

  6. chitown2020

    Beware of the “fixes” for a quadrillion dollars in derivatives fraud. Because there is no monetary or legal correction for the unsustainable debt of these financiers and the fact they don’t own anything at all, just the debt that they created out of thin air. The only correction and the only way for America to remain Sovereign from these fraudsters is for the United States to shut down the banking plutocracy and remove itself from the FED/U.N./NATO tyranny. We must restore the U.S. CONSTITUTION. We must then issue our own currency, U.S. BANK NOTES, backed by our own Natural Resource revenues. The FED is a plutocracy run by oligarchs who got there off of the backs of our wealth. Reject a a World Tax fix or a Vatican/Rothschild gold standard tyranny. This mass monopoly by the elite is a tyranny and would not exist without our participation so, stop participating. When push comes to shove they have no proof they lent us any money because the didn’t. If they don’t have the notes which means the trust agreements and the receipts they must rescind. Period, end of story.

  7. Joe Rebholz

    Arms race = Feedback loop. Going to infinity or zero. Mathmatics can handle these things. The real world cannot. In the real world these processes must stop (crash or change). In the real world these processes will not, cannot continue indefinitely.

  8. Susan the other

    Thank you Yves. Haldane was very good. Quite clear.

    That (investment) finance itself is founded on information asymmetry, making all that return on equity simple looting. His flash crash analysis was the explanation we should have had long ago from our own people. But they want us to still believe that money is time without realizing that money is now basically faster than time. I loved the high-blubber description of the bigs. I wonder if being in a state of high-blubber is directly correlated (across all categories) with being individually rational but socially nuts.

  9. F. Beard


    1) How dare a banker talk about competition? Banks are a government backed/enforced money cartel.

    2) That joke about the American family weighing 6000 lbs was not funny either. But maybe they should weigh 6000 lbs so they can survive banker induced boom-bust cycles?

  10. F. Beard

    3) I see Haldane is bringing up the “Tragedy of the Commons” dilemma. How dare a banker bring that up since the banks specialize in creating that tragedy with “credit” creation.

  11. F. Beard

    “For every order executed, sixty, sixty are canceled.” Andrew Haldane

    WTF (World Tennis Federation)!

    What about the “sanctity of contract”, I hear so much about? If one makes a “bid” then why should he be allowed to cancel it?!

    1. nonclassical

      “over half the trades”..but he didn’t address the “front running” aspect…I would guess (Yves can help us) if you can front run a sale, you can front run a cancellation? Or perhaps there’s a time lag with cancellation?

      1. Fiesty

        My master thinks the high bids are cancelled before the LCDs on Master’s screen even show him the high number he thinks he should bid at.

        Front running is like Bruce Lee getting in fight with elephant seal. Bruce Lee win.

        I do not really know. All I know is sniffing the screen does not work.

  12. craazyman

    I don’t know if the arms race made everybody worse off. It may have been a catalyst of sorts for a mental process we can only barely intuit.

    It’s like if you’re a kid and you think not getting 15 cookies makes you worse off. If there were kid economics, then going from 15 to 10 cookies would be a decline in social utility. Or if you’re a drunk and going from 15 beers to only 8.

    Nobody knows what social utility is. And since they can’t define it, it’s one of those words like “efficiency” or my new favorite “competitiveness”. It just sits out there as a referent that everybody thinks they get. But they don’t.

    Mr. Haldane has nice suit. I need to buy some suits and it’s inspiring to see good threads like that. But I hate shopping so I’ll wait ’till after Labor Day probly. The office goes corporate casual on Memorial Day weekend and I can procrastinate at least that long. Then I can procrastinate over the summer. It makes me smile just to think about it.

    Nobody knows what money is either. I think social utility is bound up with money like a bad hairball. Maybe all the professers can think about it all summer and see where they are with it by Labor Day.

    Mr. Haldane looks too young to me. I was hoping he had white hair like the English astronmer Haldane or like Einstein. How can he know anything at all until he’s at least 65. I just don’t see it, unless he can channel it up, but I don’t get the impression he’s quite there yet.

    If you look around you’ll see Elephant Seals in many cities, working in financial services like trading. They also work for the secret service. If they have a big wallet, many women can live off their fat. There may be social utility here, but it’s hard to say for sure. Not sure what the freqency is for that signal, but it seems to be in all the dna. Makes you wonder.

    1. LeonovaBalletRusse

      c, “nice suit” is Upper Brit specialty: bespoke suits go with bespoke derivatives compounded ad infinitum alchemically backstage. It’s magic. Think JPMorgue and special banking “rights” in the Olde Country.

      Yves thinks more clearly. The logic of the lordly is “different.” Compare John Kay at INET 2012, talking turkey instead of princeling pork.

    2. nonclassical

      CRAZYMAN…good on you for questioning many are so abstract they don’t exist…

      the concept “to BE rational”..referring to human species..BEing requires BEhavior, no BEing…so first, humans must BEhave rationally…

      so it’s just an abstract concept..

Comments are closed.