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.