Finance-Banking-and-the-Shadow-Banking-System-Resources

It probably won’t last; I expect Wall Street to be back to its usual arrogance within weeks if not days.

As far as we can tell, it used the market for derivatives — complex financial instruments — to make a huge bet on the safety of corporate debt, something like the bets that the insurer A.I.G. made on housing debt a few years ago.

This system gave us half a century of relative financial stability. Eventually, however, the lessons of history were forgotten.

No loopholes, no exemptions, no exceptions, no compromise, no ambiguous language. Until Congress reinstates it, moral hazard governs and the losers will be the Americans taxpayers. History will keep repeating itself unless politics and money are taken out of the equation.

Standard Chartered said developers’ concerns over the property market were reflected in data showing residential investment hitting the wall in April, growing just 4% during the month, compared to a 15.1% year-on-year rise in March.

“Fiscal consolidation in the United States and Europe, flexible exchange rates and structural policies to stimulate domestic demand in the emerging-market economies of Asia,

Delays, meanwhile, could have “severe negative consequences,” leading to “a significantly weaker global economy” and a less stable global financial system.

world economic activity would be 7 per cent lower in 2015.

The clear message here is both sides of this delicate dance not only need to do their part but, just as crucial, they need to co-ordinate their efforts.

A lot of this will sound familiar to anyone who follows global economics from the point of view of the Bank of Canada. Governor Mark Carney also chairs the Financial Stability Board, a G20-linked body tasked with making international finance less of a threat to the wider economy, so he has spoken on these issues many times and outlined the potential benefits of adopting stricter banking rules. But the message about global co-ordination is still ti

mely.

Chinese imports barely grew in April, causing the country's trade surplus to balloon to $18.4-billion (U.S.) from $5.3-billion the previous month, indicating that consumers and businesses in the faster-growing emerging markets are still not ready to pick up

China, until recently, had made strides in narrowing its current-account surplus (which reflects the country’s over-reliance on exports as opposed to domestic spending).

U.S. trade deficit that grew 14 per cent in March

The U.S. itself is now a more balanced economy that relies less on debt-fuelled spending.

But it is smaller and weaker than it was at its pre-crisis peak, and will probably never regain that past form. So its ability to drive global growth is limited

work together and get this right, or both will suffer.

Cash flooded into Britain; more than 140 billion euros was deposited in four big banks alone. The UK benefits from its position outside the eurozone and its Asia-focused banks HSBC and Standard Chartered are seen as particular safe-havens. Other banks to see big inflows included Barclays, Germany’s Deutsche Bank, Switzerland’s Credit Suisse and UBS and Russia’s Sberbank and VTB.

Bankia SA, the country's fourth-largest lender, saw its shares fall as much as 27 percent during trading in Madrid after the El Mundo newspaper reported the bank was hit with more than €1 billion ($1.27 billion) of withdrawals since the government announced the takeover.

Greek president Karolos Papoulias warned party leaders during unsuccessful coalition talks that about €700 million ($898 million) in deposits have flown out of Greek banks since the May 6 elections, according to a report from Greece's central bank governor, George Provopoulos

the interest rate on Spanish 10-year bonds stood at a worryingly high 6.29 percent. It has risen sharply from below 5 percent in March and is edging toward the 7 percent mark that is considered unsustainable in the longer term.

Finance Minister Jim Flaherty has tightened mortgage rules three times and put the federal housing agency’s books under regulator oversight

Bank of Canada Governor Mark Carney has repeatedly warned household debt is the economy’s biggest domestic risk.

Canadian housing starts rose to the highest since September 2007 last month

“How many new lending ‘guidelines’ can the market bear before it breaks?”

“The market may break because the fundamentals are not sound (i.e. overvaluation of homes), not because of OSFI guidance,” Melessanakis wrote in response.

Canadian existing home sales rose 0.8% in April from the previous month and 11.5% from a year earlier

The average home price rose 0.9% from April 2011,

Four Canadian banks were among the world’s six strongest in Bloomberg’s second annual rankings.

Lenders have been increasingly skeptical of the need for new rules to cool the housing market

Flaherty reduced the amortization period on mortgages backed by the government to 30 years from 35, the third time since 2008 he has tightened rules for home loans

Flaherty introduced legislation April 26 that includes measures to strengthen oversight of Canada Mortgage & Housing Corp.

The law allows OSFI to review CMHC’s books at least once a year, and prohibits banks from using insured mortgages to back covered bonds,

Canadian banks should not be “lulled into a false sense of security” by steps policy makers are taking to prevent another financial crisis

“Are the banks equipped to handle a 40% drop (what occurred in Toronto market in early 1990’s)?

in some places like Vancouver, maybe Toronto, obviously you’re going to have greater risk there of price volatility,”

OSFI’s guidelines suggest lenders limit home-equity lines of credit to 65% of the property’s value.

last financial institution failure in Canada occurred in 1996, when Security Home Mortgage Corp. collapsed

Security Home Mortgage had assets of $65-million the year before it failed.

Eighteen financial institutions failed in the 1990s, including Confederation Life Insurance Co., which had $19.2-billion in assets at the end of 1993. There were 23 failures in the 1980s, including Northland Bank, which had $1-billion in assets

average personal savings rate in the U.S. slipped to 3.9 percent in the first quarter of 2012 -- the lowest level in over four years

With savings account interest rates near zero, people are left with little incentive to save.

With interest rates running well below the rate of inflation, money in a savings account or other deposit vehicle is actually losing purchasing power with each passing day

you have to consider one additional factor: inflation.

Bond yields are not much higher, and stocks haven't been very rewarding so far in the 21st century either

However, getting the most for your money is only one consideration. Having resources to support your retirement is also an important function of saving, and in this respect people with low savings rates are not behaving rationally.

while low interest rates may seem to discourage saving money, they actually make it more imperative.

other important point of this context is that outside of the government, most people no longer have an employer pension plan to fall back on.

shift from defined benefit to defined contribution retirement plans put the responsibility for saving solely on the employees

people seem to have responded to this trend by saving less rather than more

by choosing more immediate consumption over saving for retirement, people are supporting their current lifestyles at the expense of the future.

this is a decision that many will regret once that future arrives

might even be a shift to the capital markets to raise funds and banks could move into the less regulated areas of finance, known as "shadow banking"

Banks need to meet the new capital requirements, known as Basel III and being implemented as a result of the 2008 banking crisis, by the end of 2018,

The impact of holding extra capital – about 23% more than their current holding of $2.5tn – could reduce returns on equity to 8.5% from the 10.8% average of the 29 banks during the period 2005-2011

in an effort to entice investors the banks may be encouraged to take bigger risks

29 banks will in total need to find $566bn on the assumption that these crucial banks need a 10% capital cushion

need for extra capital will reduce the return on equity

If the banks did not raise equity it would take them three years to raise the extra capital

one likely scenario ([1], [2]) involves derivatives constructed from the riskier components of some European corporate bonds.

Whale’s notional exposure in one index was speculated to have been $100 billion

total notional exposure of all of JP Morgan’s trades has been estimated to be $79 trillion.

JP Morgan “was just engaging in financial tricks of little or no social value”.

Is JP Morgan “too big to fail”? I think so

recent paper by Stanford Professor Darrell Duffie highlights an unresolved weakness in the U.S. financial system

Each day something like $100 billion in such short-term lending is intermediated by two clearing banks

Duffie believes the system is inherently unstable, as dealer banks depend crucially on the ability and willingness of the clearing banks to provide short-term financing each new day

Here is Duffie’s recommendation for how to make the tri-party clearing system more stable: Given the systemic importance of tri-party clearing agents, and given their high fixed costs and additional economies of scale, tri-party repo clearing services for U.S. dealers and cash investors should probably operate through a dedicated regulated utility. Although this would likely increase operating costs for market participants, it would enable investment in more advanced clearing technology and financial expertise, allowing greater resilience of the tri-party repo market in the face of financial shocks such as the default of a major dealer. The moral hazard associated with lending of last resort to a dedicated utility is much reduced relative to the case of a financial institution with a wide scope of risk-taking activities.

this week’s news should remind us that more needs to be done to ensure financial stability and that the incentives of private participants align with the public’s best interests