Is r/wallstreetbets a populist revolution?
This week in Keeping Tabs: optimum bank capital ratios, and also that other story everyone's been talking about.
The financial industry has found itself in the rare position of being in the limelight without a major crash having occurred. It is quite a novelty.
Fixating on the trading of the so-called meme stocks, the most notable of which is US retailer GameStop, was a niche interest at the beginning of the week, but now everyone has joined in — including politicians — particularly after brokers including Robinhood restricted trading on Thursday.
Why has the episode fascinated so many people, and sparked conversions about purpose, fairness and manipulation in markets? A big reason is the political (with a small p) pose of many of those on the Reddit page r/wallstreetbets and elsewhere on social media celebrating the rise of the meme stocks. They portray this as a fight against not just short sellers and hedge funds, but Wall Street as a whole.
John Authers at Bloomberg wrote this week: "This latest bout of speculation, and especially the extraordinary excitement at GameStop, has a different emotional driver: anger. The people investing today are driven by righteous anger, about generational injustice, about what they see as the corruption and unfairness of the way banks were bailed out in 2008 without having to pay legal penalties later, and about lacerating poverty and inequality. This makes it unlike any of the speculative rallies and crashes that have preceded it. "
Of course, frantically buying up a couple of neglected stocks doesn't seem a particularly effective way of revolting against the financial system. The mania is even less likely to redistribute wealth from rich to poor successfully. How many of the day traders are likely to end up losing out? And how many are not exactly among society's left behind?
It's also unclear the extent to which, behind all the ironic posting, the people buying the stock are actually motivated by matters other than a quick buck, let alone how many meme posters have actually traded.
Jamie Powell at the Financial Times says: "people have found a way to get rich quick, and are doing so. Nothing more, nothing less. Sure, it might be kind of fun that a hedge fund is losing a load of money, but that’s not the motivating factor."
Notebook suggests that the real story of the meme stocks lies somewhere between these opinions. Whether driven by the profit or purpose, the price rises have uncorked a whole lot of excitement and anger about Big Finance and wider society.
GlobalCapital has also had its say, arguing that while investment manias, electronic trading and speculating with derivatives are nothing new, we're seeing a fresh cocktail as they combine with social media to produce the long attack.
Ultimately, the one thing we can all agree on is that it has been entertaining to watch.
And it has also drowned out other news this week. Still, Notebook wanted to highlight an article published by the European Central Bank on bank capital ratios.
It is from Caterina Mendicino and Kalin Nikolov of the ECB, and three others — Juan Rubio-Ramirez, Javier Suarez and Dominik Supera — but the article notes that the views expressed do not necessarily represent those of the ECB or the Eurosystem.
Why is it interesting? Well, they say that the optimum level of capital requirement is around 15%: higher than the minimum under the Basel III framework and the optimum level implied from frameworks that, the researchers say, underestimate how borrower defaults affect bank solvency.
"While our paper does not directly address the Covid-19 crisis, its focus on banking crises driven by borrowers’ defaults makes it very relevant in the current context," the authors write.
"The ongoing severe losses experienced by bank borrowers could, if they result in corporate defaults, spill over to banks and result in severe weakness in the banking sector."
They also say that if the capital ratios are not quite at the optimum level, it is better to err on the side of higher ratios than lower ones, because — shock — a banking crisis is pretty bad.
"It is therefore important to rebuild bank capital buffers once the Covid-19 crisis has softened in order to make sure that banks and the economy remain protected against future adverse economic shocks," they say.