Tag: Banking

Money Out of Thin Air

Promises only bind those who believe them

Photo by engin akyurt on Unsplash

The saying goes like this,

Loans create deposits

It might not sound like much, but this is how money is actually created. You’d think it would be printed as paper bills by a central bank or minted into coins. Not anymore, to a large extent. Paper money and coins are indeed “money”, but they make up only a small percentage of the reserves available in the economy. Let me try to break it down to you in a simple example.

I Promise to bay the bearer, etc.

When a bank grants you a loan, it basically credits your bank account with the loan amount, 10 000 dollars for example, and records a liability of the same amount on its balance sheet. You can withdraw this amount in cash or use it to buy a car. Or a piano. Or groceries. It is real money.

Now you might be a dreamer and believe in equilibrium, that in the grand scheme of things, banks use only the cash deposited by people, as loans to debtors. Well not really.

Banks are allowed to lend much more than the liquidity or capital at their disposal. That’s a net creation of money.

Out of thin air.

And don’t bother with the liability side, the minus amount in dollars recorded on the bank balance sheet. It cannot be used to fund anything. It cannot be withdrawn in cash. It is just an accounting entry on a balance sheet account. A reminder of the debt you own the bank. Nothing more. A promise if you will.

The bet at hand

The bet at the heart of the game is that loans will allow debtors to create enough value in due time to pay them back, through their hard work or the rise in value of their property or investments.

This bet kind of works out when the economy is fine, but not so much when banks lend money without decent credit controls, to people they know damn well cannot repay the loans.

It works even less when bankers are convinced that dot com compagnies of the early 2000s or the real estate market of the late 2000s have more value in them than what they are truly worth, and end up massively lending to people who are investing in such assets.

The bet is off in this case, quite obviously, since the debtors cannot create value out of thin air, be it called dot com or sub-primes.

The promise

In the end, this is how most of the money circulating in the economy is created. Legally. A number credited on an account, which retains its value as long as the promise behind it trustworthy.

And as we say in France, in a tongue in cheek expression, promises only bind those who believe them.

Can you believe that?

Let the board sound

Rabih

On that moment when you start walking on water

One of the major traps in fintech is implementing the requirements of a financial institution without questioning the value it is expecting from them. Many times, the client would be describing how he or she operates a given business process in the system being replaced rather than the functional value expected from that process regardless of the platform. Many times, what the client does in a system is actually a workaround for a gap in functionality and you don’t want to be implementing workarounds and accumulating technical debt in the platform you are delivering to him.

Many years ago, I found myself in a meeting room somewhere in the UK, surrounded by representatives of the treasury, operations and finance departments of a humongous financial institution, trying to come up with a proper design for their treasury business processes to implement and automate in our platform. At some point, we stumbled on a concept we had never encountered before, the FTP, or Fund Transfer Pricing, which only started gathering interest by the end of the 2000s, after the sub-prime crisis had washed international finance ashore, a very recent topic back then. It felt like the client was speaking a different language and the meeting was reaching a dead-end when the senior architect suddenly rose to the challenge. He asked a simple question with his typical French accent.

“Why do you do it?”

Sometimes the most basic question can yield the most effective answers and this one proved it right. The client ended up explaining what he actually wanted to do rather than how he wanted it to be done. For the less experienced consultant that I was back then, it felt like magic. A very complex business requirement was unraveling, bit by bit, with every question the senior architect was asking. The guy was walking on water that day, and even the client was amazed by his magic: He went into the meeting not knowing a thing about FTP but still managed to save the day and get out of it with a clearly described business requirement which we could design into the platform. And all he did was ask questions. The right questions. That was my first true lesson into requirement gathering and design, my Fintech 101 moment if you will. It was very humbling, and I remembered thinking I could never pull off something like that.

I would however get a shot at it, some years later, when I found myself in a meeting room somewhere in northern Europe, in the middle of winter, surrounded by half the treasury department of one of my clients, trying to come up with an elegant design for their banking book accrual P&L reports. Fintech 101 was far away in time and I had done enough mistakes by then to have learnt a few tricks of the craft. It felt like walking on water to me and I like to think the client felt the same magic. But nothing is less sure…

Photo by Kristopher Roller

Let the board sound

Rabih

On FinTech and people

Or how it looks from the inside.

Every experience is unique and different people can have different accounts on a career in FinTech. Here’s mine.

I got in FinTech by chance. I received a call I was not expecting. Until that moment, finance did not ring a bell. Trading floors seemed like movie stuff. The Wolf of Wall Street was not out yet so none of the people I knew whom had embraced this career could explain it to me with a simple example. But it struck some strings: the job required extensive travel and I would be expected to become autonomous fairly quick. I was in for both.

I had to learn quite a few things in little time, and this was a major motivator. Learning how a financial platform is operated, learning the operating model of investment banks, funds and treasuries. Learning finance. Bonds, foreign exchange, rates, equities, derivatives, valuation models. Learning how an operations department works, how a front office desk operates, how risk is managed and what is risk for a financial institution. I am still learning 15 years later.

I started on support but was soon entrusted with high stakes decisions and started looking after much larger accounts. I worked on delivery projects around the world. I got to manage senior and less senior people and I thrived to give them opportunities to grow and that place in the sun at which everyone deserves a shot. That was probably the most rewarding part of the ride.

Although many in the field usually come from engineering, computer science or finance backgrounds, I found out later that many of the fintech professionals I would meet, and not the least impressive ones, came from backgrounds as far from banks and finance as can be. I met business architects who graduated with a BA in geography. Traders who studied history. A project manager who was a commissioned officer in a previous life, honorably discharged after having served his country well and lead battalions on many theaters of operations. Another one who was in the navy and an expert on submarine propulsion. And a legendary developer, trained in chemical engineering and a collector of rare minerals.

I also got to work with people from all around the world. French, Italians, Germans, Spanish, English, Welsh, Scots, Icelanders, Swedes, Americans, Brazilians, Lebanese, Syrians, Emirati, Indians, Iranians, Australians, Romanians, Russians, Pakistani, Egyptians, Jordanians, Iraqi, Algerians, Moroccans, Tunisians, Senegalese, South Africans, Ivorians, Belgians, Chinese, Pilipino, Indonesians, Malaysians, Japanese, Singaporeans, Kazakh, Turkish, Greeks, Canadians, Polish, Irish, Omani, Kuwaiti, Palestinians, Columbians, Czech, Dutch, and Bulgarians, to name a few. I faced cultural challenges at times, but it was an enriching experience every time.

I got to travel a lot. There were years I would spend most of my time on business trips, in between the airplane, the hotel and the trading floor. Projects took me to the UK, Italy, Spain, Germany, Sweden, Poland, Iceland, The Netherlands, The United Arab Emirates, Hong Kong, Russia and Turkey, many times over, and I have more stories of nearly missed planes and last minute miracles, of 2AM naps on a random couch on a trading floor somewhere in the world and all night celebrations when the fight is finally over, of epic fails and even more epic successes than I can count.

Photo by Christine Renard

I have had Borscht in Moscow, duck tongues in Hong Kong and donkey meat in Milan. I have been challenged to the hottest curries by Indian colleagues and to the most treacherous vodkas by Polish ones. I have laughed my head out countless times cracking jokes around a beer with the same clients who had cornered me in a workshop earlier in the day.

I’ve lost many hours of sleep across the globe but won so many good memories along the way. I also gained a few friends for life. Folks, I hope you are reading this, you will recognize yourselves.

Make no mistake, the job is not for the faint hearted. The pressure is tremendous, the working hours long and the clients very demanding. Nerve wrecking situations are the norm, especially if you work in delivery. You get humbled quite a few times, but on the bright side, you are surrounded by extremely bright people and the rewards are at the level of the challenge.

I hope my colleagues and fellow professionals will recognize themselves in these stories, that it will bring a smile on their faces in these dire times and wish that readers see the job for what it really is, a people job. And no amount of Work from Home will change that.

Let the board sound

Rabih