Linkfest November 17, 2011 at 8:38 am
I am out of town so this will be brief, but there are a lot of good things around today:
- Zoltan Pozsar has a nice paper on VoxEU, ‘Can shadow banking be addressed without the balance sheet of the sovereign?’. One of his main points, which we have made before, is that the demand for safe assets was an important contributor towards the crisis. As he says, Seeing the shadow banking system from the perspective of the safe asset demands of institutional cash investors is crucial for drafting the right policies for shadow banking.
- A lovely piece from FT alphaville on the interaction between CVA hedging and sovereign CDS. Amusingly, they use data from the EBA stress tests to show how big this problem is for European banks.
- Another good piece from Alphaville (these guys are on fire this week) about the impact of the IRC on European sovereign bond prices. They kindly refer back to an old point of mine about the IRC creating pressure to move bonds to the banking book, as ask
All the other factors now driving the crisis speak against holding sovereign debt in banking books as well, increasingly. No?
They are of course right about that. But if the TB/BB boundary is flexible, in other words you can just move sovereign bonds that you had in the TB into the BB with no impact on strategy and a big saving on capital, why wouldn’t you. A great question in this context is where is sovereign bond repo booked: TB or BB.
- Finally, a Dealbook piece by Jesse Eisinger that quotes me as saying that ‘I’m pretty certain that clearing is being imposed without anyone actually knowing whether it actually reduces counterparty risk or not.’ Just to be clear, what I mean by that specifically is that the problem of whether the multilateral netting benefits of clearing (clearable OTC trades with A and B are now both with the CCP, resulting in risk reduction) outweigh the disadvantage of splitting netting sets (trades with A are split into clearable ones, now with the CCP, and unclearable ones, now still with A) is still open. So far as I know, there is no study of this that makes remotely plausible assumptions about the multiplicity of CCPs for multi-currency, multi-asset portfolios.