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Kevin Mao

Definitions - 12 views

Interest - "1. The charge for the privilege of borrowing money, typically expressed as an annual percentage rate. 2. The amount of ownership a stockholder has in a company, usually expressed as a...

Kostya Golovan

Banking regulations cost more than they deliver | Mail Online - 2 views

  • One should never underestimate the depths to which politicians will go to seek popularity
  • It must be the evil capitalists, they suggested, and not Labour's appalling spending record that was to blame for Britain's struggling response to the recession.
  • worrying tendency to meet recession with excessive regulatory response to banks, in order to justify taxpayer-funded bailouts.
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  • Where banks are concerned, regulatory responses are often commercially restricting, difficult to comply with, and ineffective in lowering commercial risk.
  • Not unjustified, of course - if you believe in bank bailouts.
  • This is often done by shifting business towards high-risk products in the battle for survival.
  • Apart from restricting credit through profit loss on regulatory compliance, it may also result in the shift of risk to general credit transactions, as banks seek to recoup profits lost from overregulated areas such as hedging products.
  • On the back of the J.P. Morgan's billion dollar losses, there is now a temptation in the EU to pass a measure similar to the Volcker rule in the U.S Dodds-Franck Act.
  • The Volcker rule, in the U.S., prevents banks from using additional profits on deposits for a high-risk bet strategy
  • Banks have made it clear that this sort of regulation is difficult to comply with, as bet-style transactions and a pure hedge are very difficult to distinguish
  • These seek to distinguish between retail and other banking operations, and to increase reserves in banks to protect the taxpayer.
  • One might observe that the inflationary costs of low interest rates to encourage lending, and over-regulation that effectively reduces it (and also comes with public-sector administrative costs) are not exactly compatible on principle.
  • Long-term growth will also suffer, and with it, jobs - especially as we are in a recession.
  • It would be better for banks to crash and burn where they deserve to, and for governments not to get involved in second-guessing market risk, through unworkable regulation, for political gain.
  • Further, politicians ought to realise that the best way to protect the taxpayer is not to get involved in bailouts at all.
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    The banks are apparently being over-blamed in the causation of the worldwide economic crisis by politicians. They are using the hype of the economic crisis in their favor and assigning all the blame to the banks which is in turn now leading to increases in regulations over the banking industry. Over-regulation will hurt the banking industry by reducing the number of option and easy with which they can utilize their money.
Kevin Mao

JP Morgan (JPM) and Systemic Risk - 0 views

  • On Thursday we learned that JP Morgan has lost over $2 billion in the space of two weeks
  • stock price fell by 9.3%, wiping out $14.4 billion of the company’s value
  • How do you lose so much money so quickly? The short answer is, leverage.
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  • 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
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    An article about JP Morgan and how it lost so much money in so little time.
Kostya Golovan

TEXT-S&P: U.S. shadow banking supervisory framework is emerging | Reuters - 2 views

  • Shadow banking encompasses a wide variety and complex set of financial entities and products that may still present an important systemic risk, but it hasn't yet filled the void traditional banking has left
  • The term "shadow banking" first became prevalent in the aftermath of the financial crisis, and it lacks a universally consistent definition.
  • Shadow banking encompasses not only special-purpose vehicles that are beyond the Federal Reserve's supervision
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  • but also specific instruments such as swaps, repurchase agreements, and asset securitizations.
  • However, the term can oversimplify investment vehicles and products that are complex and interact very differently with the formal banking system.
  • "Investors seem to be asking two key questions about shadow banking,
  • The first is to what extent shadow banking might replace traditional banking in the U.S. financial sector.
  • The second question is whether banking regulators will effectively and quickly implement a supervisory framework that can contain systemic risk by eliminating regulatory arbitrage and providing greater transparency.
  • will continue to operate outside the reach of regulators once the economic recovery firms up.
  • Shadow banking mimics traditional banking, though it doesn't have the protection, implicit or explicit, of a government guarantee that is available to depository institutions.
  • regulators are attempting to establish better oversight over the shadow banking sector to lower the possibility of future interventions, to reduce contagion to the formal banking sector, and to eliminate reliance on government support,
  • In fact, many of the proposed regulatory reforms aim to increase investors' risk sensitivity and better align incentives among investors, originators, and intermediaries."
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    Shadow banking is explained in this article and it is put into question whether shadow banking has the ability to replace the traditional banking system. The question of regulations regarding shadow banking is also asked and whether such regulations can be quickly and efficiently implemented. Shadow banking mimics traditional banking but it lacks the protection of a government guarantee that is available to depository institutions.
stefan ayache

Banking industry faces calls for tougher regulation after massive loss at JPMorgan - Wi... - 0 views

  • JPMorgan Chase faced intense criticism Friday for claiming that a surprise $2 billion loss
  • the colossal misfire was cited as proof that big banks still do not understand the threats posed by their own speculation
  • It just shows they can't manage risk
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  • if JPMorgan can't, no one can
  • JPMorgan is the largest bank in the United States and was the only major bank to remain profitable during the 2008 financial crisis
  • the $2 billion loss came from a hedging strategy that backfired, not an opportunistic bet with the bank's own money
  • the trades were instead a "major bet" on the direction of the economy
  • he did not know whether JPMorgan had broken any laws or regulatory rules
  • the bank was "totally open" to regulators
  • recharged a debate about how to ensure that banks are strong and competitive without allowing them to become so big and complex that they threaten the financial system
  • The JPMorgan loss did not cause anything close to the panic that followed the September 2008 failure of the Lehman Brothers
  • Within minutes after trading began on Wall Street, JPMorgan stock had lost almost 10 per cent
  • about $15 billion in market value
  • It closed down 9.3 per cent
  • Fitch Ratings also downgraded the bank's credit rating by one notch
  • The broader stock market was down only slightly for the day
  • they involved "synthetic credit positions," a type of the complex financial instruments known as derivatives
  • Enhanced oversight of derivatives was a pillar of the 2010 financial overhaul law
  • the implementation has been delayed repeatedly
  • the derivatives market remains too opaque for regulators to oversee
  • Corker, a leader of a failed effort last year to block a Federal Reserve rule that slashed bank profits from debit cards, called for a hearing "as expeditiously as possible"
  • imposible to legislate or regulate risk out of the financial system
  • A mistake was made. Money is going to be lost. It's not customer money. It's not government money. It's JPMorgan's money, the shareholders of JPMorgan
  • No one seemed to suggest Friday that JPMorgan had broken a law
  • changes promoted by the Obama administration were in many cases similar to what the financial industry had sought before the crisis
  • Regulators are still drafting hundreds of rules
  • One is the so-called Volcker rule, which will prohibit banks from trading for their own profit
  • Dimon conceded that the strategy was "egregious" and poorly monitored
  • the trades probably crossed that line because they were making money for JPMorgan
  • At some point it goes from being a hedge to being a moneymaker
  • the only big bank to escape relatively unscathed
  • Dimon said that Paul Volcker, the former Federal Reserve chairman for whom the rule is named "doesn't understand capital markets."
  • "Acting like everyone who's been successful is bad and that everyone who is rich is bad — I just don't get it," he said at a conference earlier this yea
  • sent an email to JPMorgan's 270,000 worldwide employees assuring them that the company was "very strong."
stefan ayache

Hedge Funds Are Shadow Banks in Need of Regulation, Bafin Says - Bloomberg - 1 views

  • Hedge funds act as shadow banks and should be added to the list of organizations in need of regulation
  • Germany’s financial regulator Bafin.
  • Shadow-banking definitions by the Financial Stability Board
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  • are too narrow
  • Bafin is working on its own proposals to regulate the sector
  • make dodging rules more tedious and expensive
  • So-called shadow banking that takes place outside the scope of regulators is being targeted by financial watchdogs on concern that it may be used to evade a global clampdown on excessive risk-taking
  • The FSB
  • established a list of shadow-banking activities that may warrant tougher oversight
  • will seek agreement on the rules by the end of 2012
  • Authorities should know why money is deposited offshore
  • need for additional rules for derivatives
  • credit-default swaps
  • who should be allowed to sell CDS
  • purchase of the instruments should be restricted
  • the CDS market still isn’t transparent
  • tripling how much core capital lenders must hold to at least 7 percent of assets
  • how much freedom national regulators should have to go beyond minimum EU capital rules
  • Finance ministers are set to discuss the rules again at a meeting in Brussels
  • German banks that lend to local economies dominated by medium-sized companies are seeking to loosen standards for risk weighting of these loans
  • The current crises were caused by subprime and government bonds
  • force banks to hold Tier 1 capital equivalent to 3 percent of their total assets
  • would prevent lenders from accumulating assets worth more than 33 times their reserves
  • The measure is needed to stop banks from evading other capital rules
  • considering how to expand the range of assets that qualify as highly liquid
  • concerns that the current list is too narrowly focused on government debt
  • survive a 30-day credit squeeze
  • set to take effect in 2015
  • We, for example, have a huge government bond market; others don’t
Kevin Mao

Canadian banks not immune to housing bubble: OSFI official | Mortgages | Personal Finan... - 0 views

  • Canada’s banks, ranked the soundest on the planet by the World Economic Forum, aren’t immune to collapses triggered by falling housing prices
  • Previous failures of Canadian financial institutions were due to bad real estate lending and sharp falls in housing prices, and these can happen again
  • “Just because nothing happened in Canada in 2008 (a U.S.-centered crisis), does not mean that Canada is not vulnerable to a housing correction now.”
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  • 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
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    An article about how Canadian banks are not impervious to a housing bubble.
Kevin Mao

Banking rules may encourage riskier trading, warns ratings agency | Business | The Guar... - 0 views

  • 29 biggest banks in the world could be encouraged to embark on riskier trading activities
  • The 29 banks are deemed to be global systemically important financial institutions
  • agency also warned that borrowing costs for customers could rise as banks try to maintain their profitability
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  • 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
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    This article is about new banking rules that may encourage riskier trading.
stefan ayache

JPMorgan Chase's 'Jamie the Great': tap dancing with derivatives | Opinion | The Seattl... - 2 views

  • Jamie Dimon calls it "a doozy." And it was
  • $2 billion credit derivatives trading bungle that could mushroom to a $4 billion loss
  • tougher regulations may be needed
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  • his talk about not lumping in "good banks" with "bad banks" has fallen off his pedestal
  • everyone is capable of disastrous stupidity
  • Dimon doesn't buy the argument that bosses of big, complex companies can never make mistakes
  • Three top executives of British firms were sacked in revolts of shareholders, who also rose up against giving new executives millions in "golden hellos."
  • With CEO pay going stratospheric as workers' pay grew stagnant, anger was bound to erupt
  • there wasn't much ire at the JPMorgan Chase annual shareholders meeting
  • Dimon's admission on "Meet the Press" that his team was "sloppy" and "stupid" and used "bad judgment" in incurring the loss
  • led to the rolling of three heads at the bank, an FBI investigation, and a congressional ramp-up for more chiding hearings
  • While the trade was "poorly vetted and poorly executed," he said it wouldn't make a dent in the "fortress balance sheet."
  • hould our company really be spending shareholder funds on, some $7 million last year alone, on lobbying efforts to thwart the Dodd-Frank legislation and the work of regulators to write the rules stemming from that legislation?"
  • hareholders, "weary of mistakes" and pledges to reform
  • the group endorsed Dimon's pay package of $23 million and let him keep his dual titles of chairman and CEO
  • he's known as the favorite banker of the president, who called Dimon "one of the smartest bankers we got"
  • checking account at JPMorgan worth $500,000 to $1 million
  • New York City's chief audit officer is urging Dimon to "claw back" salary and bonuses paid to the top executives who dragged the bank into the excessive risk
  • loathe to "act like a judge and jury" with Ina Drew, the head of the investment office who resigned on Monday, given that she lost $2 billion on that deal while she was making $9 billion on others
  • You have to earn respect every day. It's never how great we are. It's always the good, the bad and the ugly
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