Banks & Interest Rates Archives - Page 50 of 61

November 12, 2012

UK: Bank break-up an option if ring-fence fails | Vickers

Matt Scuffham and Steve Slater write:

Britain could force banks to fully separate their retail operations from riskier areas if lenders fail to implement a “ring-fence” that sufficiently safeguards taxpayers or improves behavior, the architect of the plan said on Monday.

The Independent Commission on Banking, chaired by Sir John Vickers, recommends that UK banks “ring-fence” their retail operations to protect customers from riskier investment banking activities.

Andy Haldane, the Bank of England’s financial stability director, commented last week that ring-fencing would only work if the retail operations have a separate management, pay structure and balance sheet.

via Bank break-up an option if ring-fence fails: Vickers | Reuters.

November 6, 2012

Australia: Hard or soft landing?

Browsing the latest charts from the RBA.

Despite record low 10-year bond yields…..

Housing Finances

Credit growth is subdued and likely to remain so for some time.

Credit Growth by Sector

After a massive credit bubble lasting more than a decade.

Housing Finances

Households are saving close to 10 percent of Disposable Income in anticipation of a contraction.

Housing Finances

While banks are reluctant to lend when their margins are being squeezed.

Housing Finances

Borrowing offshore is not an option. That is how we got into such a fix in the first place.

Housing Finances

Makes me believe we are unlikely to see another housing boom for some time.

There are two possible outcomes: a soft landing and a hard landing.

It all depends on whether Wayne Swan and the RBA know their jobs.

November 6, 2012

Is the Fed finally listening to Scott Sumner?

Brendan Greely writes of Scott Sumner.

Sumner who holds a Ph.D. from the University of Chicago, made a suggestion in the late 1980s to the New York Federal Reserve. He proposed that the Fed set a target for nominal GDP—real growth in GDP plus the rate of inflation. He felt that this would induce the correct level of business investment better than targeting either inflation or growth in real GDP by themselves. The response at the New York Fed, says Sumner, was, “Thanks, but no thanks.”

Targeting nominal GDP (NGDP) growth eliminates reliance on inexact measures of inflation which can mis-direct monetary policy. The advantage is that NGDP can be accurately measured. NGDP targeting would help to eliminate bubbles in the long term by restricting debt growth. And in the short-term would encourage the Fed to expand money supply in response to private sector deleveraging, avoiding deflationary pressure.

The announcement by the Fed’s rate-setting committee in mid-September doesn’t contain any mention of targeting nominal GDP. But its open-ended nature and clear goals—pump up the money supply until hiring rises strongly—resembles Sumner’s nominal GDP model, which would have a central bank do all in its power to achieve an agreed-upon nominal rate of growth.

It has taken Sumner almost 3 decades, but in the end he is likely to get there.

via The Blog That Got Bernanke to Go Big – Businessweek.

November 5, 2012

Bank of England should leave forecasting to Ladbrokes « The Market Monetarist

The Market Monetarist makes a novel suggestion as to how to avoid central banks from making biased forecasts:

“…..even better as I have suggested numerous times that the central bank simply set-up a prediction market. In Britain that would be extremely easy – I don’t think there is a country in the world with so many bookmakers. The Bank of England could simply ask a company like Ladbrokes or a similar company to set-up betting markets for key macro economic variables – such as inflation and nominal GDP. It would be extremely cheap and the forecast created from such prediction market would likely be at least as good as what is presently produced by the otherwise clever staff at the BoE.”

That could work …..until punters learn that the bets they place indirectly influence central bank monetary policy. It might pay market participants to place large bets on low or high inflation if they stand to benefit from the central bank response.

via Bank of England should leave forecasting to Ladbrokes « The Market Monetarist.

November 5, 2012

Treasury yields warn more of the same

Inflation has fallen over the last quarter-century, so one would expect to find Treasury yields have fallen, but there is more than just benign inflation at work. The Fed has also been suppressing long-term interest rates, with QE1, QE2, Operation Twist and now QE3.

10-year Treasury Yields

The yield on 10-year Treasuries is now below the Fed’s long-term inflation target of 2 percent, offering savers a negative return on investment unless they are prepared to take on risk. The Fed’s aim is to induce investors to take on more risk, in the hope that increased capital spending will stimulate employment and lead to a recovery. But they risk leading savers into another disaster, with falling earnings or rising yields ending in capital losses.

Corporations are reluctant to expand and will remain so until they see a sustainable increase in consumption. Fueled by new jobs — not short-term credit. Low interest rates without job growth could cause another speculative bubble, with too much money chasing too few opportunities.

Without jobs, no monetary policy is likely to succeed.

November 4, 2012

Nationalbanken Defends Sub-Zero Bemoaned by Banks | Bloomberg

Peter Levring and Frances Schwartzkopff write that Denmark’s central bank has taken an unusual step to defend the krone from capital inflows similar to those experienced earlier by Switzerland.

The central bank has kept its deposit rate at minus 0.2 percent since July, in an effort to fight off a capital influx and maintain the krone’s peg to the euro.

Deposits held at the central bank are charged a fee of 0.2%, rather than paid interest as in the US.

At the same time, the industry is still paying its customers to hold their deposits in an effort to attract stable funding and reduce reliance on wholesale financing. That’s turned deposit banking in Denmark into a losing business.

The measure would encourage banks to increase lending, loosening credit standards to avoid the charge on excess reserves. It would also reduce the rate paid on call deposits, while increasing bank competition for more stable time deposits.

via Nationalbanken Defends Sub-Zero Bemoaned by Banks: Nordic Credit – Bloomberg.

October 31, 2012

Why the Fed should not target inflation

Scott Sumner, Professor of Economics at Bentley University, proposes that the Fed target nominal growth in GDP (“NGDP”) rather than inflation as Ben Bernanke has long advocated:

“Even he [Bernanke] must be surprised and disappointed with how poorly [inflation targeting] worked during the recent crisis.”

The primary problem, Sumner points out, is that measures of inflation are highly subjective and often inaccurate.

“The problem seems to be that, according to the Bureau of Labor Statistics, housing prices did not fall. On the contrary, their data shows housing prices actually rising between mid-2008 and mid-2009, despite one of the greatest housing market crashes in history. And prices did not rise only in nominal terms; they rose in relative terms as well, that is, faster than the overall core CPI. If we take the longer view, the Bureau of Labor Statistics finds that house prices have risen about 8 percent over the past six years, whereas the famous Case-Shiller house price index shows them falling by nearly 35 percent. That is a serious discrepancy, especially given that housing is 39 percent of core CPI……..

There are errors in the measurement of both inflation and NGDP growth. But to an important extent, the NGDP is a more objectively measured concept. The revenue earned by a computer company (which is a part of NGDP) is a fairly objective concept, whereas the price increase over time in personal computers (which is a part of the CPI) is a highly subjective concept that involves judgments about quality differences in highly dissimilar products.”

Inflation targeting also encourages policymakers to think in terms of monetary policy affecting inflation and fiscal policy affecting real growth — “a perception that is both inaccurate and potentially counterproductive”.

“Advocates like Bernanke see [inflation targeting] as a tool for stabilizing aggregate demand and, hence, reducing the severity of the business cycle. This is understandable, as demand shocks tend to cause fluctuations in both inflation and output. So a policy that avoids them should also stabilize output. I have already discussed one problem with this view: The economy might get hit by supply shocks, as when oil prices soared during the 2008 recession……..”

Linking monetary policy (and the money supply) to nominal GDP growth would offer a far more stable growth path than the present system of inflation targeting.

via THE CASE FOR NOMINAL GDP TARGETING | Scott Sumner (pdf)

October 31, 2012

Global QE

Observation made by Philip Lowe, RBA Deputy Governor:

Since mid 2008, four of the world’s major central banks – the Federal Reserve, the ECB, the Bank of Japan and the Bank of England – have all expanded their balance sheets very significantly, and further increases have been announced in a couple of cases. In total, the assets of these four central banks have already increased by the equivalent of around $US5 trillion, or around 15 per cent of the combined GDP of the relevant economies. We have not seen this type of planned simultaneous very large expansion of central bank balance sheets before. So in that sense, it is very unusual, and its implications are not yet fully understood……

via RBA: Australia and the World.

October 29, 2012

Five steps to fix Wall Street

Some more thoughts on the five steps former FDIC chair Sheila Bair suggested to reform the financial system.

Break up the “too big to fail” banks
My take is that breaking up may be difficult to achieve politically, but raising capital ratios for banks above a certain threshold would discourage further growth and encourage splintering over time.
Publicly commit to end bailouts
Just because the bailouts were profitable isn’t a good reason to give Wall Street an indefinite option to “put” its losses to the Treasury and to taxpayers.

As Joseph Stiglitz points out: the UK did a far better job of making shareholders and management suffer the consequences of their actions. Sweden in the early 1990s, similarly demanded large equity stakes in return for rescuing banks from the financial, leading some to raise capital through the markets rather than accept onerous bailout conditions.
Cap leverage at large financial institutions
I support Barry Ritholz’ call for a maximum leverage ratio of 10. That should include off-balance sheet and derivative exposure. Currently the Fed only requires a leverage ratio of 20 (5%) for well-capitalized banks — and that excludes off-balance-sheet assets.
End speculation in the credit derivatives market
Bair pointed out that we don’t get to buy fire insurance on someone else’s house, for a very good reason. How is speculating using credit derivatives any different?

Again Ritholz makes a good suggestion: regulate credit default swaps (CDS) as insurance products, where buyers are required to demonstrate an insurable interest.
End the revolving door between regulators and banks
When regulators are conscious that, with one push of the door, they could end up working for the organizations they are today regulating – or vice versa – “it corrupts the mindset”

A similar revolving door corrupts the relationship between politicians and lobbyists. Enforcing lengthy “restraint of trade” periods between the two roles would restrict this.

via 5 Steps Obama or Romney Must Take to Fix Wall Street.

October 25, 2012

Australia: RBA running out of options

The Reserve Bank of Australia must be viewing the end of the mining boom with some trepidation. Cutting interest rates to stimulate new home construction may cushion the impact, but comes at a price. Consumers may benefit from lower interest rates but that is merely a side-effect: the real objective of monetary policy is debt expansion. And Australia is already in a precarious position.

Further increases in the ratio of household debt to disposable income would expand the housing bubble — with inevitable long-term consequences.

Housing Finances

While debt expansion is not in the country’s interests, neither is debt contraction (with growth below zero), which would risk a deflationary spiral. The RBA needs to maintain debt growth below the nominal growth rate in GDP — forecast at 4.0% for 2012-13 and 5.5% for 2013-2014 according to MYEFO — to gradually restore household debt/income ratios to respectable levels.

Credit Growth by Sector

If the RBA’s hands are tied, similar restraint has to be applied to fiscal policy. First home buyer incentives would also re-ignite debt growth. The focus may have to shift to state and local government in order to accelerate land release and reduce other impediments — both financial and regulatory — to new home development. Lowering residential property development costs while increasing competition would encourage developers to cut prices to attract more buyers into the market. While this would still increase demand for new home finance, lower prices would cool speculative demand fueled by low interest rates.