John Kay

John reviews the interim report of the Independent Banking Commission. The direction of travel is right but the devil is in the detail

The share of financial services in national income has increased. Should we be pleased, or concerned, by this development?

The suggestion that we might partially turn back the clock has been described as a call for “Hovis banking”, referring to an advertisement that plays on nostalgia. The commercial succeeds because we believe the bread our grandparents ate, before innovations in technology and marketing, was nicer and more wholesome. Perhaps that is true in banking as in baking.

John explains (again) why structural reform is preferable to behavioural regulation in the banking sector, and applauds Sir John Vickers’ observations on the work of the Banking Commission.

The value of Modigliani-Miller – like any good model in physics or economics – lies as much in the questions it raises as in the truths it reveals.

The theory that the right answer to the gap in information and knowledge between the investment bank’s structured products division and the person in the street is to give the person in the street more information is absurd.

Internal rates of return conflate rewards for risk with returns for patience.  That is why they are often misleading indicators of the profitability of alternative investments.
Students of corporate finance are taught the dangers of judging projects by their internal rate of return. The problem is that the attractiveness of a project depends not just on [...]

At the medieval courts Shakespeare described, the exercise of power was not a means to an end, it was itself the end. The political and economic environment has been transformed. But human nature has not, and the factors that drive powerful men today are little different from those that drove them five centuries ago.

Shamefully, the purpose of current stress tests in the financial sector is not to ensure that depositors’ money is safe or that taxpayers will not be called on again, but to reassure banks and their shareholders that they will not be required to provide significant additional capital.

Wherever there is uncertainty, market prices reflect the beliefs of those who are more than averagely sanguine. The result is a reserve of illusory value, constantly depleted by events and replenished by fresh uncertainties.