Under construction – a teaser

Some good things are coming the week after Easter, so be sure to tune in to DEM on Monday week. They are under construction at the moment, but things are progressing well… Due to this building work, though, next week might be a little quiet.

Holding back evolution

Hans asked a good question in comments to a prior post: when you start off with 40 medium size banks, eventually a few will have a better business model than the others. And then the business model gets copied (due to shareholders seeing the return at the more successful banks and wanting the same) which […]

Under the radar?

From MNI: Bank of England Deputy Governor Paul Tucker Saturday said the practice of rehypothecation by primary brokers had fallen “under the radar” and suggested it may merit greater regulation by financial authorities. By using clients money and assets, rehypothecation by primary brokerages means “in economic substance, they are banks,” Tucker said at a Federal […]

That spread is rich

No, not an advertisement for the new chocolate Philadelphia, but rather a comment on the ratio of the default to non-default component of credit spreads. The following is from Citi investment research, via FT alphaville: Now, note that tihs isn’t quite as straightforward as it looks: we are comparing current default rates with compensation for […]

What should be in the fundamental review of the trading book? Part 4: summary

In the first three parts, we saw that the new Basel rules for the trading book should have the following elements: Capital to support losses in a credit crisis, where spreads go out, volatility rises, equity prices fall, and rates either go up or down; plus Capital to support losses due to idiosyncractic risk; plus […]

What should be in the fundamental review of the trading book? Part 3: something consistent

This is another in my continuing series on the upcoming Basel fundamental review of the trading book. Today I want to talk about models, and consistency. Now while I have a lot of sympathy with A foolish consistency is the hobgoblin of little minds, it has to be admitted that perceived lack of consistency between […]

The spam hounds are getting eager

For some reason there are a lot of spam comments around right now; the filter is catching them, but the sheer number means that I don’t have time to check the spam queue for real comments before deleting it, so if by chance yours was incorrectly classified, my apologies.

Break them up

From the final paragraph of a wonderful essay by Harvey Rosenblum, Dallas Fed executive vice president and director of research: The road to prosperity requires recapitalizing the fnancial system as quickly as possible. The safer the individual banks, the safer the fnancial system. Te ultimate destination—an economy relatively free from financial crises—won’t be reached until […]

What should be in the fundamental review of the trading book? Part 2: something illiquid

Yesterday we saw that a major plank of the new Basel trading book regime should be capital against a large systemic shock aka a credit crisis. Today we will look at another element of capital requirements: that for idiosyncratic risk. Now, if we are truely capturing idiosyncractic risk with no systemic component – which is […]

What should be in the fundamental review of the trading book? Part 1: something simple

The long-promised feast, the Basel fundamental review of the capital rules for the trading book, will be upon us soon. (Probably.) So what should be in it? First note that the current Basel trading book rules are an awful mess. VAR plus stressed VAR plus IRC plus CRM plus securitisation carve out plus counterparty credit […]

Stop hunting equilibria (because they are as rare as snarks)

Steve Randy Waldman has a typically intelligent post about partial equilibria and choice. Amongst other things, he quotes Nick Rowe on how rational actors react to change: [P]eople can solve partial equilibrium problems a lot more easily than they can solve general equilibrium problems. When a shock hits, each individual can solve for how his […]

The plot to eliminate golf

I know that ‘the Soros campaign to eliminate golf’ is fictional, but goodness me, what a good idea. Let’s start with South Africa, a country with a serious drinking water shortage, but which nevertheless has 18 golf courses – all requiring precious water – on the Garden route alone. Just because something is a paranoid […]

Not spooked at 21

Greece CDS auction initial market midpoint 21.75, S&P mildly up at a four year high of 1,406. Stay out of the wild wood, kids, if you don’t want to get spooked.

The US output gap

Greg Ip has an interesting post on the Economist website. He explains that there are three puzzles in the US currently; stubbornly high inflation, slow GDP growth, and unemployment falling faster than GDP would suggest it should. There is an unpleasant explanation for all three: both the level and growth rate of American potential output […]

Demanding answers

From The Money Illusion, via Brad DeLong: In late 2008 the markets were telling us that the Fed was making a tragic mistake by allowing NGDP expectations to plunge. But the economics profession didn’t listen, as they view stock investors as being irrational. Economists were obsessed with the notion that the real problem was banking […]

There are no more bargains

Charlie Stross has an interesting insight. He has been trying to buy a used car, and has discovered… …there are no bargains any more. Nor are there any horribly overpriced vehicles, either (unless you want to go to the authorized dealer, in which case you’ll pay over the odds but also get some hand holding). […]

We need a myth

Jonathan Hopkin has an excellent post discussing neoliberalism and why it isn’t a dead idea yet. The final paragraph is especially insightful: The problem is that academic political economists know a lot more about the historical record than the average voter does, and there is no point in assuming that voters are going to come […]

New paper on CCPs and counterparty credit risk

A new paper of mine, The possible impact of OTC derivatives central clearing on counterparty credit risk is available here. As usual, any comments would be much appreciated.

Show me the way to Old R

Back in May last year, I wrote: Greek CDS typically trade under Old R restructuring. That fact could be become rather important soon. In Old R trades there is no limit on the maturity of the deliverable obligation, and no tranching in the auction post credit event. That in turn means the cheapest to deliver […]

Funding Greece

Thank you to a good gentlemen for this. Click it, it’s amusing.