Banks & Interest Rates Archives - Page 42 of 61

April 29, 2013

Deutsche Bank Plans Capital Boost | WSJ.com

A welcome development reported by LAURA STEVENS , DAVID ENRICH and ULRIKE DAUER at the Wall Street Journal:

FRANKFURT–Deutsche Bank AG [DBK.XE] said Monday it will raise €2.8 billion ($3.65 billion) in fresh capital in a dramatic about-face for the bank, which has repeatedly said it won’t turn to shareholders for help boosting its capital cushion.

The bank, Europe’s second-largest by assets, has long faced doubts from investors and analysts about whether it has enough capital to absorb potential future losses and to meet increasingly stringent regulatory requirements……

Deutsche Bank has long been considered thinly capitalized but have always countered with the argument that the leverage is justified by the quality of the assets on their balance sheet. Low risk-weightings provided a false sense of security, with Greek and other PIIGS government bonds rated as zero-risk in the past, encouraging banks to leverage up on precisely the wrong kind of assets. It is time for risk weightings to be removed from bank capital ratios. The bipartisan bill sponsored by US senators Sherrod Brown and David Vitter is a step in the right direction.

April 29, 2013

S&P 500 at key resistance while Treasury yields fall

10-Year Treasury yields broke through support at 1.70%. Prior to 2012, the 1945 low of 1.70% was the lowest level in the 200 year history of the US Treasury. Expect a test of primary support at 1.40%.

Falling Treasury yields generally indicate a flight from stocks to the safety of bonds. The S&P 500, however, is consolidating below resistance at 1600. Breakout would suggest an advance to 1650, while reversal below 1540 would indicate a correction to the rising trendline at 1475. Recent weakness on 13-week Twiggs Money Flow favors a correction, but oscillation above zero indicates a healthy primary up-trend. A June quarter-end below 1500 would present a strong long-term bear signal.

S&P 500 Index

* Target calculation: 1475 + ( 1475 – 1350 ) = 1600

The Nasdaq 100 index is testing resistance at 2900. Breakout would offer a target of 3400*, but bearish divergence on 13-week Twiggs Money Flow favors a break of 2800 and test of the rising trendline at 2700.

* Target calculation: 2900 + ( 2900 – 2500 ) = 3400

Gold rallied to test resistance at $1500/ounce. Breakout would suggest a bear trap and a rally to $1600, but respect of resistance is likely and would signal another test of support at $1330/1350. A gold bear market indicates falling inflation expectations, but that could also translate into lower growth in earnings and higher Price Earnings ratios.
Gold

Structural flaws in the US economy have not been addressed and uncertainty remains high, despite low values reflected on the VIX.

April 28, 2013

Capital Regulation after the Crisis: Business as Usual? | Martin Hellwig

This abstract from a 2010 paper by Martin Hellwig sums up the debate about overhauling the financial system:

Whereas the Basel Committee on Banking Supervision seems to go for marginal changes here and there, the paper calls for a thorough overhaul, moving away from risk calibration and raising capital requirements very substantially. The argument is based on the observation that the current system of risk-calibrated capital requirements, in particular under the model-based approach, played a key role in allowing banks to be undercapitalized prior to the crisis, with strong systemic effects for deleveraging multipliers and for the functioning of interbank markets. The argument is also based on the observation that the current system has no theoretical foundation, its objectives are ill-specified, and its effects have not been thought through, either for the individual bank or for the system as a whole. Objections to substantial increases in capital requirements rest on arguments that run counter to economic logic or are themselves evidence of moral hazard and a need for regulation.

The bipartisan bill, Terminating Bailouts for Taxpayer Fairness Act, sponsored by senators Sherrod Brown, an Ohio Democrat, and David Vitter, a Louisiana Republican, is a courageous attempt to address the undercapitalization that led to the global financial crisis. Abruptly raising bank capital requirements would lead to a credit contraction if introduced in isolation, but the Fed is quite capable of adjusting monetary policy to offset this and a suitable phase-in period would give banks time to adjust. What is important is that we get to the point where banks are properly capitalized to deal with any future instability.

Read the full paper at Capital Regulation after the Crisis: Business as Usual? | Martin Hellwig, July 2010.

April 28, 2013

Richard Koo: Why government has to act as “borrower of last resort” during a financial crisis [video]

Richard Koo is the first speaker on this video

Click [ ] to view full screen.

April 28, 2013

Two Senators Try to Slam the Door on Bank Bailouts – NYTimes.com

This is a show-down between Wall Street and the voting public. Gretchen Morgenson at NY Times writes:

THERE’S a lot to like, if you’re a taxpayer, in the new bipartisan bill from two concerned senators hoping to end the peril of big bank bailouts. But if you’re a large and powerful financial institution that’s too big to fail, you won’t like this bill one bit.

The legislation, called the Terminating Bailouts for Taxpayer Fairness Act, emerged last Wednesday; its co-sponsors are Sherrod Brown, an Ohio Democrat, and David Vitter, a Louisiana Republican. It is a smart, simple and tough piece of work that would protect taxpayers from costly rescues in the future.

This means that the bill will come under fierce attack from the big banks that almost wrecked our economy and stand to lose the most if it becomes law.

For starters, the bill would create an entirely new, transparent and ungameable set of capital rules for the nation’s banks — in other words, a meaningful rainy-day fund. Enormous institutions, like JPMorgan Chase and Citibank, would have to hold common stockholder equity of at least 15 percent of their consolidated assets to protect against large losses. That’s almost double the 8 percent of risk-weighted assets required under the capital rules established by Basel III, the latest version of the byzantine international system created by regulators and central bankers.

This change, by itself, would eliminate a raft of problems posed by the risk-weighted Basel approach……

The outcome is far from clear. The financial muscle of Wall Street can buy a lot of influence on the Hill. But my guess is that they are too smart to incense voters by meeting the bill head-on. Instead they will attempt to delay with amendments and eventually turn it into an unwieldy 1000-page unenforcable monstrosity that no one understands. Much as they did with Dodd-Frank.

If they win, the country as a whole will suffer. Maybe not today, but in the inevitable next financial crisis if this bill does not pass.

April 24, 2013

The Grave Evil of Unemployment, Bryan Caplan | EconLog | Library of Economics and Liberty

Bryan Caplan makes the case for a fresh approach from free-market economists:

At the level of high theory, free-market economists love market-clearing models. If there’s surplus wheat, the price of wheat will fall to clear the market. If there’s surplus labor, similarly, the wage will fall to eliminate unemployment. What about nominal wage rigidity? Most free-market economists concede that nominal wage rigidity exists to some degree, but think the problem is mild and short-lived……..The high theory’s wrong: Nominal wage rigidity is both strong and durable.

Rather than treat unemployment as a necessary but temporary affliction, Caplan suggests that free-market economists should be attacking the “vast array of employment-destroying regulations” imposed by government — and tight monetary policy by central banks, where they should be advocating nominal GDP targeting as an alternative.

April 24, 2013

TheMoneyIllusion

TheMoneyIllusion highlights this common mistake by central banks:

Despite the fact that our mainstream textbooks tell us that low rates don’t mean easy money, most central bankers cannot shake the suspicion that low rates do mean easy money, and that the current relatively low rates are a danger to the economy. This irrational bias is driving policy failure in much of the world. Even central banks at the zero bound (like the Fed) are inhibited in their push for unconventional stimulus by this cognitive illusion.

Fed Watch: Monetary Policy and Financial Stability

Tim Duty quotes Minneapolis Federal Reserve President Narayana Kocherlakota, speaking at the 22nd Annual Hyman P. Minsky conference:

….unusually low real interest rates should be expected to be linked with inflated asset prices, high asset return volatility and heightened merger activity. All of these financial market outcomes are often interpreted as signifying financial market instability. And this observation brings me to a key conclusion. I’ve suggested that it is likely that, for a number of years to come, the FOMC will only achieve its dual mandate of maximum employment and price stability if it keeps real interest rates unusually low. I’ve also argued that when real interest rates are low, we are likely to see financial market outcomes that signify instability. It follows that, for a considerable period of time, the FOMC may only be to achieve its macroeconomic objectives in association with signs of instability in financial markets.

Unusually low interest rates will only cause an asset price bubble when they encourage excessive borrowing by consumers. In the current environment where increased savings are being channeled into repaying debt, the risks of excessive credit growth are low. But the Fed has to maintain a fine balancing act, reacting quickly to any increase in asset prices which would encourage speculative demand for credit — and raising interest rates in order to discourage this.

April 21, 2013

Richard Koo: Quantitative and Qualitative Easing

Richard Koo in his latest report makes that the point that central banks in the US and UK have not cured their economies of deflationary pressures, they have merely kicked the can down the road:

Central bank officials in the US and the UK claim quantitative easing has been a success because it prevented a Japan-like deflation. But as I noted in my last report (2 April 2013), the rate of Japanese wage growth four to five years after the bubble collapsed was roughly equal to the levels now being observed in the US. Deflation took root in Japan only after 1997, when the nation fell off the fiscal cliff following the Hashimoto administration’s ill-fated experiment with fiscal consolidation. That was seven to eight years after the bubble burst.

April 20, 2013

“Fragile by design” – the political causes of banking crisis | The Market Monetarist

Lars Christensen discusses a soon-to-be-released book by Charles Calomiris and Stephen Haber: “Fragile by Design: Banking Crises, Scarce Credit,and Political Bargains.”

Calomiris and Haber conclude that the root cause of banking crisis has to be found in what political institutions different countries have. Said in another way the main cause banking crisis is one of “political design”…….The differences between USA and Canada seem to be particularly interesting……..since 1840 the US have had 14 banking crisis, while Canada have had none and this despite the fact that credit has been as abundant in Canada as in the US.