I have been curious how Kiva deals with currency risk. Kiva is a great resource for providing micro-lending and the opportunity to engage in choosing who you will lend to. But my transactions are all in US$ and the loans in the field are in the local currency. This creates an issue of what happens when currency values fluctuate. I asked a question on the Kiva LinkedIn group (an excerpt is shown here):
A lender takes out a loan of $100 with 10 months to repay. If the loan is in the local currency, what if the value of that currency during the 10 months declines by 20%? Then the bank has received all their money back but they owe Kiva $100 but they only have $80 worth of the local currency (again ignore that the payments are made monthly – since it doesn’t effect the issue at hand – currency rates). Hows does Kiva deal with this currency risk? Do the local partner banks take the risk…?
I was directed to a great slideshow showing Kiva’s lending policies. It turns out Kiva does have the local banks take the currency risk. So they have to pay back $100, if the local currency value is now $80, they would have a loss, of course the local currency value could also have risen, then the local bank has a gain.
They have a chart showing the cost of capital to local Kiva lenders at 0-1% plus currency exchange risk (which they say some banks choose to hedge and others just take the risk), which is about the lowest cost of capital around. Kiva charges no interest on the loans to the local banks. The costs come from the requirements (the cost of adding a profile – the time of staff of the bank to add the information…) of using the Kiva website.
Curious Cat Kiva connections: Curious Cats Kiva lending team – Curious Cat Kivans - Funding Entrepreneurs in Nicaragua, Ghana, Viet Nam, Togo and Tanzania – Kiva Fellows Blog: Nepalese Entrepreneur Success – Kiva related blog posts
FDIC to double bank fees in face of $40bn loss
About 90 per cent of US banks will see their basic deposit insurance fees double in the first quarter of 2009, from between 5 cents and 7 cents for each $100 of deposits to between 12 cents and 14 cents, according to a plan laid out yesterday by the FDIC, a government-backed agency that insures consumer deposits up to $250,000. From the second quarter that range would widen to from 10 to 14 cents per $100.
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Banks with the riskiest profiles could end up paying fees as high as 77.5 cents for every $100 of insured deposits under the plan, compared with a maximum of 43 cents under the current structure.
The FDIC insures bank deposits with fees charged to banks. The recent increase of the FDIC Limit to $250,000 seems to indicate that taxpayers will now pay for any costs for covering above $100,000 per account-holder (which I think is a mistake – the fund should be self supporting). But this increase in fees is to restore the fund to the minimum capital requirements of the insurance fund.
Related: posts on banking – Avoid Getting Squeezed by Credit Card Companies – Where to Keep Your Emergency Funds?
George Soros published his most recent book in May 2008 – The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means. Yesterday Bill Moyers Interviewed George Soros:
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This current economic disaster is self-generated. It was generated by the market itself, by getting too cocky, using leverage too much, too much credit. And it got excessive.
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The financial system is teetering on the edge of disaster. Hopefully, it will not go over the brink because it very rarely does. It only did in the 1930s. Since then, whenever you had a financial crisis, you were able to resolve it.
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the sort of period where America could actually, for instance, run ever increasing current account deficits. We could consume, at the end, six and a half percent more than we are producing. That has come to an end.
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Right now you already have 10 million homes where you have negative equity. And before you are over, it will be more than 20 million.
Related: Soros Says Credit Crisis Will Worsen Before Improving (April 2008) – Warren Buffett Webcast on the Credit Crisis – Rodgers on the US and Chinese Economies – – Personal Investment Failures
Canada’s banking system kept high and dry by strict regulation: Flaherty
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Some of the fundamentals credited with keeping Canada’s banks in the safe zone were put in place nearly a decade ago by the Liberal government of Jean Chretien, including a refusal to approve any Canadian bank mergers.
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The finance minister said Canada is in a strong position to deal with the global crisis, with a strong banking system, a stable housing market and a federal budget surplus. “Other countries have been increasing their deposit standards, but they’re still for the most part below the high Canadian standard,” he said.
Related: Monopolies and Oligopolies do not a Free Market Make – Too Big to Fail – What Should You Do With Your Government “Stimulus” Check? – The Budget Deficit, the Current Account Deficit and the Saving Deficit – 2nd Largest Bank Failure in USA History
The FDIC limit has been raised to $250,000 which is a good thing. The increased limit is only a temporary measure (through Dec 31, 2009) but hopefully it will be extended before it expires. I don’t see anything magical about $250,000 but something like $200,000 (or more) seems reasonable to me. The coverage level was increased to $100,000 in 1980.
What does federal deposit insurance cover?
FDIC insurance covers funds in deposit accounts, including checking and savings accounts, money market deposit accounts and certificates of deposit (CDs). FDIC insurance does not, however, cover other financial products and services that insured banks may offer, such as stocks, bonds, mutual fund shares, life insurance policies, annuities or municipal securities.
Joint accounts are covered for $250,000 per co-owner. The limit is per person, per institution, so all your accounts at one institution are added together. If you have $200,000 in CDs and $100,000 in savings you would have $50,000 that is not covered.
FDIC is an excellent example of good government in action. The Federal Deposit Insurance Corporation (FDIC) was created in 1933 and serves to stabilize banking by eliminating the need to get ahead of any panic about whether the bank you have funds in is in trouble (which then leads to people creating a run on the bank…)
From an FDIC September 25 2008 news release: the current FDIC balance is $45 billion (that is after a decrease of $7.6 billion in the second quarter). The FDIC is 100% paid for by fees on banks. The FDIC can raise the fees charged banks if the insurance fund needs to get increased funds.
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As I have mentioned previously credit unions do a much better job than any other financial category of providing customer value. Instead of trying to trick you and rip you off, credit unions often just provide services at a reasonable cost. What a sensible idea. Credit Unions Slowly Fill Void As Payday Lenders Leave D.C.
The credit unions’ products vary, but generally they are loans of $300 to $1,000 with an annual percentage rate of up to 18 percent. Unlike payday loans, in which borrowers sign over part of their next paycheck for the cash advance, the credit unions’ new products have longer terms, from thirty days to a year.
It is still an indication of bad personal finances to take the short term loan, but if that is the choice you make, paying a reasonable rate will greatly reduce the damage to your personal financial health.
Related: personal loans – Ohio Acts to Protect Citizens from Payday Loan Practices – Dragged Down by Debt – Don’t Let the Credit Card Companies Play You for a Fool – Sneaky Fees