The last resort

Last week Reuters reported that French Economy Minister Christine Lagarde said … that a capital surcharge was not a “panacea” for addressing the risk of systemically important banks, and she favored resolution mechanisms and tighter regulation In contrast yesterday it reported Financial Stability Board (FSB) chief Mario Draghi said there had been “unanimous” agreement among […]

Pensions and the deficit

I didn’t catch this, but Jonathan Hopkin did. Julie Finch has the original suggestion in the Observer. Hopkin comments on her article high earners in Britain receive enormous tax relief on their private pensions, estimated by Richard Murphy to be worth £38 billion per year, about a quarter of the deficit. [Julie] suggests that ‘we […]

What is a bank worth?

Or, to be accurate, what does ‘worth’ really mean? Bloomberg has a story that at first glance seems to indicate a persistent lack of confidence in banks: Two years after the collapse of Lehman Brothers Holdings Inc., investors still aren’t willing to pay more than liquidation value for banks in developed nations. The KBW Bank […]

Naked repo

Repeat after me, dear reader, repo is about liquidity. Yves Smith fails to learn that lesson on Naked Capitalism. She comments on the crisis, saying that there was a fear that dealers would start accepting lower quality collateral for repos …And they did, with that collateral including complex securitized products that banks were obligingly creating… […]

Ken – winning is not everything

Ken Livingstone has won the election to be Labour candidate for Mayor of London. Thank goodness. Ken actually believes in something. His opponent was a modern, what-do-the-electorate-want? polician, someone whose main claim to our attention was that she thought that she was more electable than Ken. The tendency for politicians to promote themselves not for […]

When in America, I am clearly eating breakfast in the wrong places

Quote of the day

“We need to … recognise, that in finance and economics, ill-designed policy is a more powerful force for harm than individual greed or error.” Adair Turner, Chairman of FSA.

Contemptible supervision

The Economics of Contempt has an interesting post on supervising large banks: First, significantly expand the dedicated supervisory teams for the dealer banks that qualify as Tier 1 FHCs. It’s not enough to have a 5-10 person supervisory team for dealer banks like JPMorgan, BofA-Merrill Lynch, Morgan Stanley, etc… The supervisory team for each Tier […]

The biggest arbs need liquidity

This article from FT alphaville is interesting – go there if you want the details of the arb. What it illustrates, though, is an important truism of the market: if you want to make a lot of money, find an arbitrage in a liquid market. Funky things in illiquid markets aren’t that interesting because you […]

If any tells you they know what Basel III means…

… don’t believe them. There has already been a flurry of analysis: see for instance here, here or here. Those who thought that the international supervisory consensus might break (myself included) were proved wrong: the Accord continues. So why can’t the results be known yet? There are two main reasons. The first is that Basel […]

Sovereign default does not imply bank default

A careless journalist says: If you’re a bank and the country you’re based in goes bust, then you’re going to go bust too. Nope. Or, more precisely, if a sovereign defaults on foreign currency debt, then banks incorporated in that country do not have to default on their foreign currency debt too, and even more […]

Basel III calibration reality

Apologies for the dearth of posts, I have been away. As we all now know, the reality is: Tier 1 ratio 6% Capital conservation buffer 2.5% (to be met with common equity) Countercyclical capital buffer 2.5% (to be met with common equity) Common equity ratio 4.5% There are transition and grandfathering arrangements: commentary in the […]

Basel III calibration rumour

From Die Zeit: Tier 1 ratio 6% Capital conservation buffer 3% (of Tier 1) Countercyclical capital buffer 3% (of Tier 1) Core tier 1 ratio 5% Capital conservation buffer 2.5% (of core tier 1) Countercyclical capital buffer another 2.5% If this is true, you should think about selling bank stock and selling it now

What responsibility do economists have to be realistic?

It struck me over the weekend that there is a spectrum of views on the responsibilities of economists. At one end, you could claim that it is like mathematics: the economist announces the rules at the start of their work, and derives some results from those rules. As long as the results mathematically follow from […]

What is a capital standard?

Let’s imagine a conversation between banker Bob and a regulator Reg. Reg: OK Bob. You screwed up big in 08. This time, I’m gonna make sure that your bank is safe. Damn safe. Bob: Very well, Reg, I see your point. But what exactly do you mean by safe? Reg: I mean that you have […]

CDS Shenanigans

Rajiv Sethi is a clever guy and I have respected his work in the past, but I think that he is materially mistaken about naked CDS. In a recent paper with Yeon-Koo Che he writes: Those who are most pessimistic about the future prospects of the borrower will be inclined to buy naked protection, while […]