Audit Notes: The Sovereign Risk Genie, Regulatory Complexity, Wal-Mart and Bank Fees

The Economist’s Greg Ip says the European crisis, at its core, is not about Silvio Berlusconi or even Italian debt levels, which haven’t risen that much. It’s about the introduction of the sovereign-risk calculation in markets that investors had been giving an EU free ride:

What changed is not Italy’s political or economic fundamentals but how investors perceive Italian debt. For most of the euro era, investors considered euro-zone sovereign bonds to be risk free. Prices and yields would fluctuate but anyone who held an Italian bond to maturity assumed they would get back 100 cents on the dollar (or euro), as they would for a US Treasury or British gilt. This was always something of an illusion. Risk-free can only apply to the debt of country that controls the currency in which it borrows. A holder of its bond knows he can always sell it to someone else, in the last resort the central bank. As Chris Sims of Princeton points out, such bonds may have inflation risk but not counterparty risk.

That has never been true of a euro-zone member country, but investors happily ignored the fact, thanks in part to the European Central Bank which treated all sovereign bonds equally in its refinancing operations. (See our analysis here.) It no longer can. Investors who once classified their sovereign bonds as risk free must now treat them the way they might a bond issued by a railway company or an electric utility (i.e. as “credit”) and have concluded they own too much.

— Kevin Drum makes a good point about regulation and complexity, which businesses bemoan: It’s that way largely because business interests lobby to make regulation complicated:

The “Volcker rule” is a simple thing. Basically, it says that if you’re a bank that takes deposits and benefits from federal deposit insurance, you can’t also make risky trades that might blow up your bank and cost the taxpayers a bundle…

Last month regulators unveiled their first take on the actual implementation of the Volcker rule, and it had become a monster. “Only in today’s regulatory climate could such a simple idea become so complex, generating a rule whose preamble alone is 215 pages, with 381 footnotes to boot,” complained American Bankers Association Chief Executive Frank Keating.

Poor banks! But step back for a moment. How did Paul Volcker’s baby get so bloated? Keating’s crocodile tears aside, the answer is: banks. When it comes to financial regulation, fighting against new laws is merely their first line of defense. When they lose, as they did in the Dodd-Frank battle, the action simply moves to the regulatory agency charged with implementing the law.

The New York Times reported earlier this week that “Wal-Mart Benefits From Anger Over Banking Fees.” And maybe it does.

But the Times doesn’t really show it. Here’s as close as it gets to evidence:

Now newcomers to the ranks of the banking disaffected are helping to swell the numbers, Wal-Mart officials said.


Wal-Mart officials declined to provide details on how much money it makes from financial services, or how many customers it serves. However, company officials and outsiders both said Wal-Mart’s financial products are gaining share.

That’s pretty nebulous. Gaining share from whom? Check cashers? Is there no data from them, either? Have bank deposits been declining?

The NYT also quotes an analyst saying Wal-Mart’s check cashing business is growing fast, which helps. But this is the same analyst who says, “I think it’s brought in a lot of traffic that they normally wouldn’t see, meaning the lower-end demographics that typically use check-cashing services at rival stores.”

The only real data we get is that Wal-Mart has 1,000 Money Centers in its stores now, which is good to know, but doesn’t necessarily prove anything beyond the fact that Wal-Mart is using its heft to get into financial services.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,