RD News 30Nov11

• Glenn Stevens (Gov, Reserve Bank of Australia): On the use of forecasts
• Weather forecasters know they are dealing with a very complex, non-linear system, and are careful to present their forecasts accordingly.
• The big difference in economics is that some decisions based on forecasts may alter the outcomes – whereas our response to a weather forecast will not actually alter the weather.
• It would be vastly preferable for discussions of forecasts to be couched in more probabilistic language, and for there to be more explicit recognition that the particular numbers quoted are conditional on various assumptions.
• A big change in any of the variables subject to assumptions would quite easily push outcomes away, and maybe a long way away, from the forecast.
• We have to recognise the limits on our capacity to predict their net impact with any precision.
• Ultimately, policymakers have to make a judgement call, based partly on what the central forecast says but conditioned also by the degree of confidence they have in it.

• BoE: Coordinated central bank action to address pressures in global money markets
• The Bank of Canada, Bank of England, Bank of Japan, ECB, Fed Reserve, and the Swiss National Bank announce coordinated actions to enhance their capacity to provide liquidity support to the global financial system.
• These central banks have agreed to lower the pricing on existing temporary U.S. dollar liquidity swap arrangements by 50 bps so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 bps.
• As a contingency measure, they have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant.
• The introduction of the network of temporary swap lines will enable the BoE to provide sterling to the other central banks if required, as well as enabling the BoE to provide liquidity, should it be needed, in Japanese yen, euro, Swiss francs and Canadian dollars (in addition to the existing operations in U.S. dollars).

•  Bloomberg: EU Resolution Plans May Give Preference to Short-term Creditors
• Owners of long-term unsecured debt in a collapsing bank would be first in line to take losses under draft plans from the EC to protect taxpayers’ money from future bailouts.
• Short-term debt, with a less than one-year maturity, and derivatives should only be written down by regulators as a last resort if losses from longer-term debt aren’t “sufficient to restore the capital of the institution and enable it to operate as a going concern,” according to a draft EC proposal.
• The plan would help “maintain the supply of liquidity and minimize the negative externalities on the interbank market and derivatives market” in the event of a bank failure.
• As a consequence, banks will be required to hold minimum levels of longer-term debt of 10% of their liabilities.

• Fed: Michael Gibson appointed Director, Banking Supervision and Regulation
• Gibson is a deputy director in the Board's Division of Research and Statistics with an expertise in risk management and financial markets.
• He represents the Basel Committee as co-chair of working group developing a proposal for globally consistent margin requirements on uncleared derivatives.

• EC: Mandatory rotation of auditors Provisional regulation & Provisional directive
• Auditors of “public-interest entities,” including banks and insurance firms, face mandatory rotation requirements after six years with a four year “cooling off” period.
• Firms which perform joint audits, will face a rotation period of nine years. This incentive for joint audits is a significant step back from previous suggestions that joint audits would be mandatory for all firms.
• Audit firms will be prohibited from providing non-audit services to clients, and large firms will have to separate audit and non-audit activities.
• ESMA is to be given powers of supervision.
• The rules also propose the creation of a single market for the auditor profession, to operate through a passport regime.

• Bloomberg: China Reduces Reserve Ratios to Spur Bank Loans
• Reserve ratios will decline by 50 bps on Dec 5th, the level has been a record 21.5% for the biggest lenders.
• “The move will help ease liquidity after previous tightening measures cooled credit growth too much and may have added to the risks of a hard landing for China,” - Shen Jianguang, Mizuho Securities Asia.
• Exports rose by the least in almost two years in October and inflation eased to 5.5%, the smallest gain in five months.
• Premier Wen Jiabao last month the government will fine-tune economic policies as needed to sustain growth while pledging to maintain curbs on real estate. Economic growth cooled to 9.1% in the third quarter from a year earlier, the slowest pace in two years.

RD News 29Nov11

•  Bundesbank 2011 Financial Stability Review 
• Euro zone sovereign debt crisis biggest risk at the moment.
• Other potential problems for financial stability:
• exposures to commercial real estate
• structured financial products
• rise of high-frequency trading.
• Recommendations:
• flow-of-funds statistics should be improved
• reporting requirements for shadow banks must be rigorously implemented
• the use of macroprudential policy instruments should be developed further.
• Liquidity ‘will be the dominant issue in banking regulation over the years to come’.

• Andreas Dombret (Bundesbank): Local currency bond markets and international capital flows
• Developing local currency bond markets in emerging markets and developing countries has been one of the main agenda items during the French G20 presidency in 2011.
• The main focus has been on the relationship between developed LCBMs and the volatility of international capital flows.
• The development of LCBMs enhances the resilience of national financial systems and, therefore, global financial stability.
• Deeper LCBMs reduce the vulnerability of relevant EMEs to fluctuating interest rates and exchange rates.
• LCBMs make the financial system more diversified, and make it easier for enterprises to access finance on international credit markets in times of tension.
• Developed LCBMs help dampen the volatility of international capital flows.
• Outstanding local currency bonds of EMEs are concentrated on just a few countries:
• Five countries (China, Brazil, South Korea, India and Mexico) account for around three-quarters of overall market volume.
• Of those, China is the biggest market with more than one-third.

• José Manuel González-Páramo (ECB): Sovereign contagion in Europe 
• Though spillovers are to be expected in an interconnected financial system, contagion is distinct in that it often reflects a market failure and a dangerously amplified transmission of instability.
• The underlying market failure consists of the fact that contagion often involves externalities (the private costs of the initial financial market failure, that is the costs to the actor triggering contagion, are lower than the social costs).
• Starting from the collapse of Lehman Brothers in mid-September 2008, a regime switch in the pricing of sovereign credit risk could be observed, from a pre-crisis situation of almost complete compression of spreads to one of extreme market sensitivity to adverse country developments.
• Mastering the current crisis situation requires that all parties first of all honour their previous commitments. Governments need to ensure, under any circumstances, the achievement of announced fiscal targets and deliver the envisaged institutional and structural reform programmes. This is of utmost importance for improving market confidence and regaining macroeconomic and financial stability in the euro area.

• IMA: Beware of "tidal wave" of financial regulation
• Tsunami of European regulation flowing from the financial crisis may prove ultimately damaging to the region’s economy.
• 35 separate legislative measures coming out of the European Commission that will affect the financial services industry.
• Speed at which the commission is drafting new legislation is problematic as there is insufficient time devoted to ensuring regulations are “right”.
• Potential for numerous unintended consequences.

• WSJ: Barney Frank to leave Congress in Jan 2013
• May make it easier for Republicans to water down the financial-regulation overhaul that bears his name (Dodd-Frank).
• ‘He was always the strongest defender of the financial-reform law, so losing him opens the door for making changes’.
• Far more significant for the chances of weakening Dodd-Frank will be whether President Barack Obama is reelected in 2012, as he would likely veto any attempt to roll back the law.

• Reuters: MMFs primed to recoup waived fees
• Several companies in the MMF industry, which has waived several billion dollars of fees over the past two years, are primed to recapture lost revenue from investors at a future date.
• Charles Schwab Corp said it could potentially recover $878.2 million in previously waived fees from investors. The fee recapture, could take place over a three-year period that ends in 2014.
• ‘This recapture could negatively affect the funds' future yield,’ Schwab said in the recent SEC filing.
• In a near-zero interest rate environment, the funds are not in position to recapture previously waived fees just yet. But funds are drawing a line in the sand to let investors know that fee recapture is coming.
• Without the current benefit of fee waivers from the MMF industry, many investors would have experienced negative yields.
• Peter Crane (Crane data): fee recapture won't be an issue until the U.S. Federal Reserve raises its Fed Funds rate to 0.50%, which could be anywhere from mid-2013 to early in 2014.
• MMFs are waiving about half of their fees currently, charging 0.18% of average assets, compared with 0.36% a couple of years ago.
• ‘Fidelity has a policy that we may only recoup previously waived or reimbursed fees if we do so within the fund's fiscal year,’ Fidelity spokesman Vincent Loporchio said. ‘If these waived fees are not recouped by the funds prior to the fund's fiscal year-end, shareholders would pay less in annual fees than the disclosed fees.’

 

RD News 28Nov11

• IASB to revise accounting standard:
• Ch Hans Hoogervorst’s Speech
• IFRS 9, the international accounting standard set to replace the existing “fair value” rule, IAS 39 ( the mark-to-market rule which governs when and how banks in over 100 countries must price assets on their books at the going rate), is to be revised, despite the fact that a number of jurisdictions have already adopted it.
• We gradually came to the conclusion that we could make a lot of progress on insurance and convergence by adapting IFRS 9 in a limited way.’
• It was not an easy decision to make. Most importantly because we knew that our constituents that have already adopted might not be very happy.’
• Reuters report: 
• Policymakers in the EU and elsewhere said at the time the existing rule forced banks to price assets at depressed values causing more volatility when markets were already fragile.
• The changes would make IFRS 9 fit better with a separate reform of insurance accounting and help bridge a gap with a U.S. fair value accounting rule reform.

• BoE: Martin Weale: Monetary policy in a weak economy
• Productivity has recovered, but not regained its previous path; and household consumption has been unusually weak.
• Worsened productivity growth is one factor contributing to the weakness in consumption.
• Even if weak consumption is an important factor behind the poor performance of the economy, that does not mean that rapid growth in consumption is the only way of sustaining the recovery.
• Asset purchases, which support current consumption, probably impede the rebalancing of the economy.
• But unless the economic situation improves, there is likely to be a strong case for extending the asset purchase programme after the current one comes to an end.

• Andrew Sheng: The audacity of hedge funds and their lack of righteousness
• It may not be illegal (at least under existing law) to do a trade that tips a nation into abject poverty because there were tragic policy mistakes, but is it morally right to take home billions by accelerating the process of “creative destruction”?
• Hedge funds thrive because of regulatory and information arbitrage. The more the regular banking system is regulated, the more business drifts to the under-regulated shadow banking institutions.
• While hedge funds are not of public concern if they remain small, their herd like effect becomes a real problem when the momentum play can drive even mid-sized nations over the brink. Europe today is a live experiment of gigantic proportions. If someone makes tens of billions through speculation from the failure of some European countries and millions become unemployed, it is no longer a regulatory issue 

• ICFR: Usha Thorat and Margaret Cole join International Advisory Council

• MMF reform: ‘Leave MMFs alone! (John Hawke, Arnold & Porter)
• The ultimate loss to Reserve Primary Fund shareholders when it broke the buck in 08 was less than one cent per share.
• Neither subordinated capital nor a floating NAV will stop runs. Only ready liquidity can deter and allow MMFs to cope with runs, and the proposals that have been suggested do not address liquidity.
• In June and July 11, investors redeemed over 10% of their prime MMF shares, a total in excess of $​167 billion. Some MMFs experienced redemptions of between 20% and 45% of their assets. Yet no MMF broke a buck, and none was unable to meet redemptions.
• The SEC continues to refine its methods from experience and careful analysis of financial data. Its record with MMFs is far better than the record of bank regulators in maintaining the solvency of banks.
• Despite the events of 2008, not a penny of taxpayer money has been lost in the support of MMFs, and the likelihood of losses to taxpayers in the future is extremely remote. The emergency liquidity facilities that were put into place by Treasury and the Fed after the Reserve Fund breakdown did not cost the government anything -- indeed, they made a profit.