I hate banking, just like the banks do

The inspiration here comes from an article with a great title by Jim Jubak: Why Big Banks Hate Banking (via the big picture). I would make the argument slightly differently… Retail banking can be reasonably profitable, but the ROE can suck, especially in a downturn. You can’t do much about that as the capital is […]

Changes to the Capital Requirements Directive 2 – VAR and Stressed VAR

I have blogged before about most of the proposals in this document from the commission, including the incremental risk charge in the trading book and the revised treatment of resecuritisation (CDO squared) positions, but I have not said much about stressed VAR. So without further ado: Each institution must meet, on a daily basis, a […]

Equity/debt tax asymmetry

Interest on debt is usually an allowable expense for tax purposes. Dividends on equity are not. As John Plender points out in the FT, this amounts to a big incentive to use leverage where you can, rather than safer equity funding. Fixing this would be helpful: Policymakers should think about the tax treatment of debt. […]

Changes to the Capital Requirements Directive 1

Continuing a long line of dry posts about regulatory capital, a summary of some of the most recently proposed changes to the CRD: … credit institutions should… build up through-the-cycle expected loss provisions for credit risks during good times … and use these provisions during a downturn to cover (some) of the incurred losses. Through-the-cycle […]

Credit derivatives and insurance

The standard argument that credit derivatives are not insurance runs in brief: They require no insurable interest; They require no proof of loss; and in particular The payout is independent of the counterparty All of this is standard, and goes back to an opinion of Robin Potts. Now, with ill-advised US action to regulate some […]

Food and clothing

Are pigs or lingerie better than parmesan? Better collateral that is…

Turner Review Nuggets

A few interesting observations from FSA’s discussion paper on A regulatory response to the global banking crisis: Pure narrow banking, whereby deposit takers buy gilts with deposits, and lending is separated from deposit taking, is not possible at the moment. There are not enough gilts out (c. £800B) there to soak up all the deposits […]

Never mind the quality, feel the funding

From the FT: [Credit] spreads have collapsed for both risky and investment grade credit. Emerging market spreads have shrunk too. Meanwhile, publicly traded real estate markets (the EPRA index) have soared some 70 per cent… No doubt many brokers would like to attribute this to fundamentals… Yet, if you talk at length to traders – […]

New UK Liquidity Rules

Let’s (grit our teeth and) read the text of the new UK rules on liquidity. What follows is from the FSA’s PS09_16: 12.2.1 R (1) A firm must at all times maintain liquidity resources which are adequate, both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot […]

Cleave them asunder

According to Bloomberg: Bank of England Governor Mervyn King stepped up his call for governments to tackle the dangers posed by banks that are “too important to fail,” saying new capital rules won’t shield taxpayers from funding any future bailouts. So far, so reasonable. From here it gets interesting though: He added it is “hard […]

Goldman Sachs Is Too Big to Tell It Straight?

Jonathan Weil has an suitably skeptical take on Goldman’s latest media posturing in Bloomberg here. This article is of course just another in a string of negative stories. Goldman’s previously impeccable media profile has clearly taken a turn for the worse. Matt Taibbi might have kicked off matters in Rolling Stone, but many others have […]

Capital currency

The usual asset liability orthodoxy is that assets should be funded in the currency they are denominated in, so if you make a Hong Kong dollar loan, you fund it using a HKD liability. There is no comparable orthodoxy for capital. This is usually held in the firm’s home currency only. It occurred to me […]

Convertible remorse

Bloomberg has an interesting (if hard to parse) story on the consequences of the bout of CB issuance earlier in the year: CEOs Showing Remorse on Shares Stifle Convertibles. The basic gig is that vols were high in the first couple of quarters, so corporates monetised that by blowing out CBs. The equity markets went […]

They call them peepers

Leaf peepers that is. But you can see their point: Maine in the Fall is very pretty.

Analysis of the new trading book capital requirements

The Quantitative Impact Study from the BCBS is here. Broad brush conclusions: Trading book capital roughly doubles, overall capital up c. 11% Three components are of very roughly the same size: the incremental capital charge; stressed VAR; and the new specific risk charges. The stressed VAR is on average 2.6x the unstressed VAR. More analysis […]

Out of town

I just wanted an excuse to post this picture really.

Taxing Tracey

That most self-promoting and least deep of YBA artists, Tracey Emin, has threatened to leave the UK in protest at the forthcoming 50p tax rate on income over £150,000. My first reaction is to join many in promising the stand on the quay at Dover to wave good bye and good riddance, since her absence […]

Strike me down

The British postal system is a mess. It does not work very well in places thanks to chronic under funding. Queues in post offices are often long, especially in cities; too much post is lost; and rural post offices are being closed. To make matters even worse, a nationwide postal strike is threatened. A large […]

Tranche discount factors

In the bad mad days of 2005 and 2006, some people valued ABS by estimating the future cashflows and then discounting them back at Libor flat. In situations with significant prepayment risk, they might well have option adjusted this value to account for interest rate convexity based on some prepayment model. That process does not […]

Subsidising religion

It often pays to take a dispassionate look at entities. Before the great junk downgrade of 2005, for instance, an analyst pointed out that Ford was a great credit company with a mediocre car manufacturer bolted on the side: most of Ford’s profitability came from financing car purchases rather than making cars. Similarly BA is […]