We had the pleasure of speaking with Marc Rubinstein, author of Net Interest, a financial sector newsletter, about his essay, The Policy Triangle.

Marc writes:

When Bernie Sanders wore mittens to the presidential inauguration last month, rather than gloves, he made a trade-off: hand warmth over manual dexterity. It’s the kind of trade-off we all make, every day.

Policy is all about trade-offs, too. The pandemic response is a stark demonstration. For the past year, policymakers have had to trade public health against the economy. For sure, the relationship is not strictly binary, but in order to optimise overall welfare, policymakers need to make choices. This one is a difficult and highly visible trade-off because it straddles multiple domains; policymakers typically have an easier time managing trade-offs within their specific fields. Those who look after the economy, for example, have bags of experience thinking about how inflation trades off against growth.

When financial regulators think about trade-offs, the one they’ve traditionally wrestled with is the trade-off between financial stability and competition. It arises because banks are special: their resilience doesn’t just impact them and their shareholders; it impacts everybody. As financial crises through the ages have shown, if a bank goes down it can have a huge social cost. And if there’s a force that can chip away at resilience, it’s competition. It may start out innocently enough, but competition often leads towards excessive risk-taking. In an effort to remain competitive, banks can be seduced into relaxing credit standards. Their incentive to monitor loans and maintain long-term relationships with borrowers diminishes, credit gets oversupplied and soon enough you have a problem.

Read on or listen to our conversation (recorded on February 15, 2021):

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About This Audio Series:

MOI Global is delighted to engage in illuminating conversations on the financial sector with Marc Rubinstein, whose Net Interest newsletter we have found to be truly exceptional. Our goal is to bring you Marc’s insights into financial services businesses and trends on a regular basis, with Marc’s weekly essays serving as inspiration for our discussions.

About Marc Rubinstein:

Marc is a fellow MOI Global member, managing partner of Fordington Advisors, and author of Net Interest. He is a former analyst and hedge fund manager, most recently at Lansdowne Partners, with more than 25 years of experience in the financial sector. Marc is based in London.

About Net Interest:

Net Interest, authored by Marc Rubinstein, is a newsletter of insight and analysis from the world of finance. Enjoyed by the most senior executives and smartest investors in the industry, it casts light on this important sector in an easy-to-read style. Each post explores a theme trending in the sector. Between fintech, economics and investment cycles—there’s always something to talk about!

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