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.’