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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

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

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.

“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.