Financial Services Intermediation

Traditionally, non-commercial banking (i.e., everything except savings deposits and consumer loans) was about one of two things:

1. Tax arbitrage or
2. Regulatory arbitrage

   The rest is window dressing; that is, it was basic financial intermediation, usually for the purpose of helping Corporate and/or High Net Worth clients.*

   That was until the late 1990s and the Noughts, when the third level came to liquidity-prominence:

3. Credit rating arbitrage

The third is the most chimerical of all, becausemdash;unless you’re selling to or buying from the company that is involved (which has correlation issues, as I noted long ago)—neither party (in theory) has control over the outcome of events. It’s asymmetric information on both sides: not so much gambling against the house as shooting craps in the alley, not certain whether there is a bobby down the block.

All of which is an indirect way of saying: Go Read Kash Mansori. Especially if you think US institutions are managing better than the EU is. (Hint: it may be true on the governance level, but the financial institutions’s exposure appears to tell another story.)

*Think corporate deposits, lines of credit, commercial loans, IPOs that are often used in part to pay off debt, and the like. Normal course of business options, with the selection influenced by tax or regulatory considerations.