| SNEAK PEEK |
— Regulators finally catch on to the liquidity vulnerabilities associated with intraday liquidity mismatches brought on by instant payments and mobile apps.
— Why the West’s incoming red-tape “chainsaw massacre” risks creating a two-tier capital market.
— Dario argues that by giving back the Chagos islands, the British risk opening up a destabilizing can of worms with reverberations for many other European colonizers.
Dear subscribers,
Apologies for the late send-out and the briefer-than-usual note. Friday is the day I usually prepare the bulk of this newsletter, but this week everything got shaken up by an unexpected dump of somewhat wonderful, albeit historic, data about Credit Suisse (and, thus, also a lot of unexpected note-taking). More on that when I get the chance to assess it.
The key thing to, erm, note is that all three of the stories we cued up as potentially “revelatory” last week turned out to be somewhat disappointing. As a reminder, we had a bit of an inside scoop on the big Shellenberger UAP “immaculate constellation” reveal but cautioned there was unlikely to be anything very new in it — that was the right call. We also had some insight into the highly publicized HBO Satoshi reveal, noting it was unlikely to deliver a smoking gun, even if some aspects of the new theory were compelling. For those who haven’t seen the doc yet, they named Canadian Peter Todd — who would have been 23 when the white paper was published — as the most likely figure to be Satoshi. Predictably, the community did not accept it.
Indeed, if we learned anything from the episode at all it’s that people continue to see only what they want to see. That includes on Polymarket, which had an active market in who HBO would name. And yet, despite the “other/multiple” category trading as the next most likely prediction to Len Sussaman for most of the week — eventually overtaking all other names after HBO’s private screening on Monday — most news reports failed to spot the category at all. (Probably because it was positioned at the bottom of the list of categories.) So much for market efficiency.
For what it’s worth, we can report that the filmmaker, Cullen Hoback, remains convinced he’s not made a mistake and is getting encouraging signals from some crypto OGs.
As for the Jefferson Morley JFK story, well, we had no inside scoop on that. But the eventual reveal was far less exciting than billed. A CIA whistleblower told Morley that the agency may possess hidden video footage of Lee Harvey Oswald in Mexico City, contradicting the CIA’s long-standing claim that no such material exists and suggesting an effort to mislead investigations into JFK’s assassination.
Fortunately, the catastrophic predictions about Hurricane Milton being so strong it needed a new category of its own proved entirely overdone. In the end, Milton hit Florida as a downgraded category one hurricane. Not to say there wasn’t damage and devastation. But it is curious how the internet narrative took shape largely because a weatherman cried on TV. Seasoned commodity traders attuned to how hurricanes develop in the Gulf barely batted an eyelid in the run-up to the storm.
As usual, this week’s newsletter is brought to you by me Izabella Kaminska and my colleague Dario Garcia Giner.
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| The bIG BLIND SPOT THIS WEEK |
INTRADAY LIQUIDITY ALERT: Global banking regulators, aka the Basel Committee for Banking Supervision, said on Friday they may need to rethink one of the most important parts of the rules they introduced after the global financial crisis, after its shortcomings were exposed by the collapse of Credit Suisse and three regional U.S. banks last year. The report uses the recent collapse of Credit Suisse as a case study, arguing that the bank’s demise was partly due to an underestimation of its intraday liquidity needs.
We’re talking about the LCR of course: The Liquidity Coverage Ratio was a rule drafted to ensure that a bank can cope with rapid deposit outflows without public support and avoid a disorderly collapse such as the one suffered by Lehman Brothers in 2008. Credit Suisse, however, folded last year despite appearing to fulfil all the requirements of the LCR.
What went wrong then? Turns out, a much under-appreciated imposition on liquidity – even at banks that superficially appear to meet all coverage requirements — is the role played both by intraday liquidity needs (used mostly for payments management) and “trapped liquidity” (liquidity positioned in hard to tap areas) in the allocation of such buffers when needed As the BCBS put it: “In the case of CS, during a severe stress event, a large part of its Pillar 1 LCR requirement was needed to cover daily operational/intraday liquidity needs – which are not covered by the LCR – instead of potential outflows over the envisaged 30-day horizon, which raises questions about the design of the LCR, including the scope of risks captured.”
Specifically: Credit Suisse had set aside a large portion of its high-quality liquid assets (HQLA) – the assets banks are required to hold to withstand a sudden loss of funding – to cover routine daily operations and intraday liquidity needs, rather than for a potential 30-day stress scenario as envisioned by the Liquidity Coverage Ratio (LCR).
100% payments factor: The report shows that regulators have belatedly realized the degree to which increased intraday requirements drove CS’ liquidity needs during the stress period. During the stress period, incoming payments are said to have been delayed due to counterparty hesitation. But CS, wishing to appear solvent and robust, wanted to maintain normal outgoing payments despite the growing shortfall. The paper strikingly notes that 100 percent of the LCR net outflows for the operating parent bank, during March 2023, resulted from such factors.
New considerations: The turmoil, thus, calls into question, “the scope of risks covered by the LCR (eg intraday liquidity risk, trapped liquidity and the necessity to preposition liquidity to cover for operational needs) and the outflows rates currently assumed in the LCR.”
“Supervisors should also take into account possible limitations to the free transferability of capital and liquidity resources within banking groups that may arise (eg from national laws, supervisory approaches or banks’ internal managerial practices), as these can limit or restrict actions by banks or supervisors in stress,” they added.
Hold-to-maturity exception: In associated learnings from the SVB crisis, the regulators said, held-to-maturity (HTM) assets should possibly not be eligible as HQLA for the purpose of the LCR and NSFR. Here too SVB’s liquidity position was miscast by the fact that its HTM assets could not be easily liquefied without materializing major losses.
In cases like Credit Suisse, the bank needed to access significant liquidity within a much shorter time frame, highlighting a potential flaw in the averaging methodology of the LCR.
“In a similar vein, the speed and scale of deposit outflows for the distressed banks suggests that banks may not always be able to rely on an extended (eg 30-day) window of time to address their liquidity problems,” the report states.
As we’ve long argued, compounding this challenge is the growing mismatch between the real-time settlement of instant payments and the traditional settlement cycles of other financial market transactions, such as those in the repo market.
Instant payments require immediate settlement, 24 hours a day, 7 days a week. However, the repo market, which banks often rely on for short-term funding, typically operates only during business hours and follows traditional settlement schedules. This discrepancy can create significant liquidity strains for banks, as they may need to access large sums of liquidity outside of normal market operating hours to cover instant payment obligations.
In June this year, participants in the ECB’s Money Market Contact Group, comprised of representatives from major banks and financial institutions, highlighted the need for banks to hold even larger liquidity buffers to manage the unpredictability of instant payments. They also expressed worries about the potential for liquidity to be locked out of the market as banks prioritize holding reserves for instant payment settlements, potentially hindering other financial activities.
The BIS stops short of recommending specific policy changes but stresses the urgent need for a reassessment of existing liquidity regulations. The report suggests a greater focus on real-time liquidity monitoring and the potential development of new tools that can better address the specific risks of instant payments. It also highlights the need for greater clarity regarding the accounting treatment and valuation of HQLA, particularly those assets held at amortized cost, which may be more difficult to monetize quickly during a stress scenario.
But the key thing to note, we think, is that the system’s intraday liquidity shortcomings — and how they relate to real-time-gross settlement systems — may finally be about to get the attention they deserve. For more on our views on this, see our spotlight edition.
| reGULATION |
RED-TAPE SLASHING COMES TO BRITAIN: Argentinian President Javier Milei may have been the first to openly link his election campaign to the promise of slashing red tape and bureaucracy if he came to power (famously, with a chainsaw in hand). But he’s far from a lone crusader on that political mission anymore.
In September, Donald Trump made a high-profile promise to appoint Elon Musk as the head of a government efficiency commission if he wins in November, aiming to cut red tape and audit the entire federal government.
Roughly the same time, Mario Draghi pinned much of the blame for Europe’s stagnation on self-harming bureaucracy and over-regulation, arguing in his highly publicized European competitiveness report that the legislative chain must be simplified, with overlaps and inconsistencies removed, especially in those economic sectors where Europe is particularly exposed to international competition. As part of that effort, he even proposed a new “Commission Vice President for Simplification” to oversee the process, drawing praise from Elon Musk.
All about RIO! What the press is yet to pick up on at large, is that Britain too has got on the red-tape-slashing bandwagon. And for once, it seems, Britain may have even been ahead of the curve: The deregulatory push officially began when Labour unveiled its idea for a “Regulatory Innovation Office” in its original manifesto back in October 2023.
That body — or RIO as it is being dubbed — launched formally last week, albeit with very little fanfare despite grandiose promises to “cut red tape” for startups and “frontier” high-growth technologies.
RIO will sit within the Department for Science, Innovation and Tech (DSIT) where it will be overseen directly by Science Minister Patrick Vallance, who we understand is already touring the country looking for promising start-ups to support.
Anointed industries: As per the government’s announcement “RIO will reduce the burden for businesses hoping to bring new products and services to the market in some of the UK’s fastest-growing sectors through innovations like AI training software for surgeons to deliver more accurate surgical treatments for patients and drones which can improve business efficiency and quickly send critical deliveries to remote parts of the country.”
But it’s also likely to help them get networked up with entities like the newly empowered British Business Bank, which now boasts not one but six equity-finance-based programs, expanding its original “national security strategic investment fund” to a list that also includes “the long-term investment for technology and science fund”, “the enterprise capital funds program”, “the British patient capital — future fund: breakthrough”, the “British patient capital — Life sciences investment program” and the “the British patient capital — core funds and co-investment program”.
RIO support is set to focus on key strategic areas like engineering biology, space, autonomous technology and AI and digital in healthcare.
But what does it mean in practice? A big area of opportunity, claims Labour, is in pushing ahead with clinical trials more quickly for key drug development. In areas like drones, meanwhile, it’s expected to help providers scale up more quickly by tearing up rulebooks that currently prohibit operators from flying devices beyond a specific line of sight.
What’s not to like? Regulatory sandboxes might be able to mobilize investment in key industries, but based on the sorts of industries that are currently being prioritized they are also likely to empower dual-use capabilities and surveillance more broadly. While the push to cut red tape is likely to be welcomed by free-market fans, it’s also fair to say: be careful what you wish for. This is unlikely to emulate the Thatcherite-style deregulation of the 1980s.
The keywords to consider are “conditional” and “selective”. The RIO will only apply to industries that government officials (not markets) deem strategic for stimulating U.K. growth. If your sector is not on the approved list but, on the contrary, sits firmly on the naughty list (think fossil fuel-related or old-school tech deemed nonstrategic) not only will you not be getting a visit from Lord Vallance or benefiting from any deregulation or state-funding support, you’re likely to see regulation and taxes on your services go up.
Laissez-faire fans should also remember that “crowding in” funding is just another way of saying “state-supported”. In this case, for the noble cause of competing with China.
Capital Issues Committee all over? As investment adviser and acolyte of financial history, Russell Napier, warned in the June edition of the Blind Spot newsletter, in rejecting Truss, the U.K. inevitably had to go down the financial repression pathway. This, he predicted, would likely take a similar form to what it took during World War I and World War II, when the U.K.’s capital markets were forcefully subjected to the Capital Issues Committee. While this body officially regulated and controlled the issuance of new securities (such as stocks and bonds), its primary function was to ensure that capital was being directed toward the war effort and essential industries rather than non-essential businesses.
What’s the Blind Spot? Chancellor Rachel Reeves is expected to present further details of her National Wealth Fund idea — which has so far been long on promotion but short on specifics — sometime in October. What role the Regulatory Innovation Office plays in this will be key. If you’re interested in applying for the role of Regulatory Innovation Office chair, by the way, the application form is here.
U.K. DEFENSE PROCUREMENT: POLITICO reported that the U.K. government will use artificial intelligence to help put together its landmark review of Britain’s armed forces in what amounts to a radical shakeup of how Whitehall functions. As part of the plans, Britain’s Ministry of Defence will deploy a custom-built AI program to sift through submissions for a comprehensive review of the nation’s defense capabilities, the department confirmed to POLITICO. The AI model was created by Palantir which won the government contract over the summer.
It’s the first time the British government has used AI to help publish a major review and comes as part of a broader push to integrate new tech into Whitehall departments.
What’s the Blind Spot? Who’s really making the decisions here? One defense expert told POLITICO AI could be a “trojan horse” for rogue actors attempting to hack into the British government.
| GEOPOLITICAL HOT SPOTS |
ISRAEL ATTACKS ITALIAN UN BASE: A UN bunker with Italian and Indonesian UN soldiers along the demarcation line between southern Lebanon and Israel was “intentionally targeted” by Israeli tank fire on Thursday, UN sources claim. After an Israeli drone repeatedly flew over the base, Israeli artillery fire also shelled the entrance of the bunker, damaging communications systems at the base and injuring two UN peacekeepers.
This isn’t the first time that Israeli fire has hit UN bases in Lebanon. In 2015, Israeli mortar fire killed a Spanish peacekeeper, with a confidential Spanish military report on the affair strongly suggesting Israeli fire had deliberately targeted the UN base. But despite repeated Israeli claims of outsized accuracy in its ability to target Hamas and Hezbollah infrastructure in densely populated civilian areas, it has claimed on both occasions that this fire on UN bases was accidental.
BRITAIN RETURNS THE CHAGOS ISLANDS: Keir Starmer’s Labour government has royally upset the Tory opposition after agreeing to return the Chagos Islands to Mauritius after over 60 years of litigation by the Mauritius and other international organizations including the United Nations and the ICJ. The longstanding government line described the Chagos Islands as strategically critical to Britain due to their ability to oversee supply routes through the Indian Ocean, and both the Cape of Good Hope and the Suez Canal. Crucially, however, this agreement doesn’t change the strategic facts on the ground: Diego Garcia, the major US/UK military base in the Chagos island chain, will remain under British lease for 99 years.
DARIO COMMENT: An excellent piece on this topic was written by Simon Jenkins for The Guardian. Titled “Britain needs to abandon its delusions of empire — giving up the Chagos Islands is a good start”, Jenkins convincingly argues that returning the Chagos Islands was a win-win. Not only is the upkeep of these territories prohibitive for the British treasury, but their remaining within British sovereignty soured relations with the Mauritian government.
Jenkins then expands the argument to other problematic British enclaves around the world, notably Gibraltar and the Falkland Islands.
For instance, Britain spends over £60 million defending the 3,600 inhabitants of the mostly strategically irrelevant Falkland Islands, while they remain a perennial thorn in the side of Argentine-British relations. Is the cost worth it? The same could be argued for Gibraltar, where Britain’s hold over the rocky enclave rises from the ashes to damage Spanish-British relations every half-decade. Most recently this week when over-zealous Spanish officials caused mass upset by temporarily reintroducing passport checks for cross-border commuters, for unclear reasons.
But this analysis misses the problematic debacle returning Gibraltar could mean for the Spanish. While the return of Gibraltar is an ostensible objective of the Spanish hard-right, and its unique tax status also sours Britain’s relationship with the Spanish left, its return would open a hornet’s nest. That’s because Spain has two enclaves in Morocco, Ceuta and Melilla. Unlike Gibraltar, neither Melilla nor Ceuta are considered colonies since they pre-dated the Kingdom of Morocco. But that doesn’t stop Morocco from considering these cities to be rightfully theirs.
For now, one of the best arguments against Moroccan claims is the Spanish can point to Gibraltar. And to protect Gibraltar the British, and by extension, the Americans, have a vested interest in defending the status of these Spanish domains in Africa.
If Gibraltar were returned, Moroccan claims to Ceuta and Melilla would effectively be validated by proxy. But since these territories are not colonies, unlike Gibraltar, their return would cause a much greater debacle in Spanish society than any prospective British decolonization. It is not unforeseeable that such conflict could lead to a new Spanish-Moroccan war, as another small island called the Perejil almost did in 2002.
So please, Britain, I — as a Spaniard — hope you keep (some) of your imperial pretensions for now.
| BUSINESS, ECON, FINANCE ETC… |
LINING SPACE WITH SOLAR PANELS: Baji Bhatt, the billionaire co-founder of trading app Robinhood, announced plans this week by way of new venture Aetherflux to build a large constellation of satellites capable of beaming renewable solar energy to the surface using lasers. This solution, while currently not cost-effective, appears promising: land is free in space and solar power is more plentiful. The issue has always been how to get the energy back to earth — a problem that has crippled previous efforts by NASA and other government agencies to do the same. Aetherflux plans to use infrared lasers to beam power back to earth, a method that Bhatt says will be more scalable in the long run.
HOW APPLE SELLS OUT ON PRIVACY: Apple markets itself as a company that cares about privacy. This often takes the shape of key executives loudly protesting attempts by police authorities to get the company to help them crack the phones of bad guys. But many have long speculated this is merely a ruse. That in reality Apple is and always has been happy to work with law enforcement, and it does this by purposefully luring criminals onto its networks under false privacy pretenses.
Well, that hunch may have been more right than wrong. This week Forbes revealed that Apple regularly hosts a secretive Global Police Summit at their Cupertino headquarters, where police forces from seven countries are taught how to use Apple products for surveillance and police work. While the summit is focused on how to use Apple products for surveillance, rather than on infiltrating other individuals’ Apple products, that Apple “has kept its work with cops largely under wraps indicates the company is aware that providing tech for police surveillance operations is inherently at odds with its pro-privacy marketing”, Matthew Guariglia, the senior policy analyst at Electronic Frontier Foundation, told Forbes.
JUSTICE DEPT SAYS WE WILL BREAK UP GOOGLE: The American Justice Department is considering asking a federal judge to force Google to sell parts of its business to eliminate its online search monopoly. This break-up would force Google to provide the data underlying its search engine and AI products to other competitors. While Google’s VP for regulatory affairs has claimed this is “government overreach” that will have “negative unintended consequences for American innovation”, the spread of Google and other tech giants’ “walled gardens” is increasingly under scrutiny from regulators and tech competitors worldwide.
| crypto |
FAKETOSHI’s £911BN CLAIM: Having been charged with perjury and ruled by a U.K. judge not to be Satoshi Nakamoto, you would have thought there wasn’t an awful lot more Craig Steven Wright could do to convince the world otherwise. But you’d be wrong.
Just as HBO’s new Money Electric documentary homed in on Canadian developer Peter Todd being Satoshi, CSW — never one to leave a room quietly — put everything he’s still got left of his reputation on red and filed a legal claim in the U.K. High Court for £911 billion in damages against Bitcoin Core developers for ‘wrongful passing off of BTC as Bitcoin’.”
Part of that drama relates to the blocksize war, which primarily took place between 2015 and 2017, a time when Peter Todd himself was a prominent and early contributor to Bitcoin Core development, and, as it happens, a vocal supporter of “small blocks” in contrast to CSW’s support for “big blocks”. Oh the suspense!
| CURIOS |
COLUMBUS DNA DAY: The Guardian reports that a 20-year genetic investigation of the remains of Christopher Columbus has “turned conventional historical wisdom on its head by concluding that the explorer whose voyage to the New World changed the course of global history may have been a Spanish Jew rather than a son of Genoa”.
