Group items tagged

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

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

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

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