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Mar 7, 2021Liked by Marc Rubinstein

Fantastic as ever Marc. What fascinates me is how all the watchdogs, bs detectors, risk management strategies that should be operating at a regulatory, institutional and private risk management level repeatedly go on the blink. We don't seem to learn. What else is out there that is happening right now, and what are the red flags we are all missing ?

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🤷🏻‍♂️

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Good post.

Since you mentioned PMC Bank and that "rapid growth of financial institutions isn't always great", I touched upon this when covering shadow banking in India.

https://do-marlay-ka-moonh.medium.com/amazing-rise-and-spectacular-fall-of-shadow-banking-in-india-b74e15f87ea

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Mar 7, 2021Liked by Marc Rubinstein

Marc. You note that deposit insurance is good for banks but, if I read you correctly, suggest that it also means that banks do not need to care as much about the quality of their assets.

I would be interested to read a longer analysis from you on this question including the way that deposit preference interacts with deposit insurance. I had a go at this question here for the Australian banking system

https://from-the-outside.com/primers/bank-deposit-protection/

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Hey Tony, my point was that depositors don’t have to care as much - assuming they are covered by the insurance scheme, which several municipalities in Germany have realised they aren’t. Banks (and their shareholders) most certainly do have to care!

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Mar 7, 2021Liked by Marc Rubinstein

Marc. Thanks for clarifying. I often see this point made in the context of depositors not caring is a bad thing (moral hazard argument). Have you read the Gary Gorton and George Pennacchi paper “Financial Intermediaries and Liquidity Creation” which argues that bank deposits need to be information insensitive because they function as money. That argument makes sense to me though I also like deposit preference because it reduces the cost of deposit insurance while pushing the risk onto stakeholders who should monitor bank risk

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