Credit-channel equilibrium

Brad DeLong puts it better than I could: The economy must possess enough AAA-rated assets suitable to serve as collateral to keep the moral hazard associated with lending your wealth to somebody who knows more about the deal than you do from causing a Minsky meltdown. If not we see a downturn and what we […]

Diversification and the function of banks

Steve Randy Waldman has an interesting post at interfluidity about the role of banks as credit intermediaries and how their existence facilitates risk bearing. It is pretty insightful in places: Financial systems help us overcome a collective action problem. In a world of investment projects whose costs and risks are perfectly transparent, most individuals would […]

The confidence paper is up

Abstract: The solvency/liquidity spiral was a major mode of large financial institution failure during the 2008 financial crisis. Many institutions began the crisis with significant funding liquidity risk. Initially unjustified investor doubts over an institution’s solvency caused a loss of confidence. This in turn caused the price and availability of funding to deteriorate, until in […]

Coming soon…

… a paper on confidence in banks, funding liquidity and solvency uncertainty. This will probably be up tomorrow. For now: a festive picture.

I believe in netting – mostly

FT alphaville has a post on derivatives netting, which is mostly reasonable, although it links to a piece by (self-proclaimed?) expert Das, which isn’t. To begin with, it is important to understand what a properly executed master agreement does. I think of it as glue: it binds up all the contracts between two parties, so […]

Seasonal Greetings

There may perhaps be a post or two more this year – or there might not. In any event, though, I wanted to wish my readers cordial greetings for the season. Thank you for your attention. I’ll leave you for now with a snowy scene:

The backlash begins

The consequences of Cameron’s ‘diplomacy’ are becoming clearer. Bloomberg reports: European Union officials may abandon U.K.-backed safeguards on derivatives legislation, four people familiar with the situation said, a week after Prime Minister David Cameron’s demands to protect London’s financial industry almost wrecked an EU summit. Ambassadors for the EU’s 27 nations, meeting yesterday in Brussels, […]

A Carney’s life is not an easy one

Mark Carney is not a shill: he gives it to us straight. Sadly, what he says is pretty depressing: The market cannot be solely relied upon to discipline leverage. It is not just the stock of debt that matters, but rather, who holds it. Heavy reliance on cross-border flows, particularly when they fund consumption, usually […]

Linkfest: Seat Pagine, regulatory power, Marxist/Leninist cults, and Corzine

A pot pourri today: IFR has an interesting article on the Seat Pagine credit event. My guess, having no particular private knowledge of the situation, is that the release of the hitherto private loan agreement between SEAT and the SPV may have been intended to satisfy the ‘public information’ requirement of the credit event definitions. […]

Capital for risk… or not

Today I want to look at another aspect of the RBS failure: regulatory change since the crisis, and how it measures up given what we know about RBS. As before, the FSA report into the failure of RBS will provide our material. The causes of losses at RBS What caused big losses at RBS? At […]

The anatomy of a solvency/liquidity spiral

I’m reading the FSA report into the RBS failure (so you don’t have to, and because I griped about it not yet being out last week, so I can’t really ignore it). I’ll post in coming days on various aspects of this long and juicy document, but for now let me concentrate on what I […]

Geeky hashtag of the day

#Higgsmas. (The seminar starts in half an hour: see here for a liveblog, or here for even more tweets.) Update. And the answer is… Santa may have brought us a Higgs at around 125GeV, but we won’t know for sure for a year or more.

Two post summit issues

First, is the agreement the 26 have reached a good one? I tend to agree with Foreign Policy on this one: Merkel’s short-sighted, audaciously Germany-first reaction to staunch the eurocrisis is the Germanization of European monetary and fiscal policy, foremost the codification of its obsession with tight money, fiscal purity, and budgetary orthodoxy. In spite […]

Two wonderful shows

Two of the greatest painters of the last few decades have shows within a mile of each other in London. Gerhard Richter is at Tate Modern until 8th January, while Anselm Kiefer has just opened at White Cube Bermondsey. If you have a few hours free in London and you care at all about painting, […]

Planes not bridges

If I had to pick an unconventional member for the financial stability board, I would seriously consider an aircraft safety expert. Let me explain. Civil engineers know about one kind of safety; the safety of bridges and such like. The crucial thing about a bridge for our purposes is that the elements of it don’t […]

David Nicked

Oh dear me. This is very hard. I dislike David Cameron and most things he stands for. I think Britain’s future is in Europe, and I was (wrongly) in favour of the UK joining the Eurozone – so I’m not exactly a Europhobe. But much to my distaste, I have to admit that Cameron might […]

Pros and cons in central bank collateral policy

I am tempted to go after the MF Global rehypo story, but FT Alphaville and Reuters have done it well between them (albeit that the Reuters story is a little histrionic), so let me turn to the ECB, as promised, instead. Specifically I want to look at some choices in central bank repo operations, and […]

Today’s ECB measures

The highlights, from the ECB: To conduct two longer-term refinancing operations (LTROs) with a maturity of 36 months. [3 years. Jeepers, 3 years!] and the option of early repayment after one year. To discontinue for the time being, as of the maintenance period starting on 14 December 2011, the fine-tuning operations carried out on the […]

What are the political consequences of rising inequality?

I don’t know, but I think it is an interesting question. These musing follow from a conversation I had with a man who knows a lot more than I do earlier in the week. Consider: “The rich getting richer while the poor keep getting poorer. This effect in America saw people produce more for less […]

Last week’s intervention and the implied EUR/USD rate

Here’s the simpleton version: FT alphaville has the upmarket version. Q. What happens when Eurozone banks can’t borrow easily in dollars? A. You can make a lot of money from lending them dollars. Q. How do you protect yourself against the credit risk? A. Take collateral. Q. What’s the safest collateral in Euros? A. Bunds, […]