Even if it could identify bubbles, monetary policy is far too blunt a tool for effective use against them.
–Ben Bernanke, October 15, 2002
Policy accommodation—and the expectation that it will persist—is distorting asset prices. Most of this distortion is deliberate and a desirable effect of the stance of policy. We have attempted to lower interest rates below long-term equilibrium rates and to boost asset prices in order to stimulate demand.
–Donald Kohn, March 16, 2004
Kohn’s belief that monetary policy can reinvigorate a weak economy by encouraging people to borrow and spend out of unrealised capital gains is hard to square with Bernanke’s claim that central bankers shouldn’t attempt to restrain excessive risk-taking by raising interest rates. Bernanke reconciles this apparent asymmetry by arguing that “targeted measures…such as financial regulation and supervision” can promote financial stability better than the “blunt” instrument of monetary policy. Read more
Ask most monetary policymakers how they think about their job and the conversation generally goes like this:
- There is “an equilibrium interest rate” that somehow balances out the desires of savers and borrowers
- This “equilibrium rate” can be estimated roughly in real time
- The role of the central bank is to ensure that actual interest rates align with this theoretical ideal
We don’t really buy any of these points, especially 2) — see our earlier post discussing research by BAML’s Ethan Harris and Goldman’s Jan Hatzius, among others, on the difficulty of determining the “equilibrium” rate at any point in time — so naturally we want to highlight some new papers that reinforce our monetary policy nihilism. Read more
So, this weekend, the Bank for International Settlements released a preview of an upcoming report in which they make a connection between financialisation and the oil market.
Tracy’s written it up here.
But, before you get too excited, two things must be pointed out.
The first, of course, is that a BIS admission about financialisation effects on the oil market is pretty unexpected.
You see, as far as we’ve tracked or heard from BIS economists on this matter, they’ve resisted arguments and models pointing to financialisation effects, embracing instead explanations that link price effects to fundamentals.
Which brings us to the second thing. Yes, the BIS is shifting its view on the financialisation argument, but the paper also shows it doing so in a really convoluted and unconvincing way. Definitely the opposite of Occam’s Razor. Read more
For some reason, a lot of people outside the US like to borrow from and lend to each other in dollars.
A new paper from the Bank of International Settlements, which has consistently been producing some of the best research on these flows, describes how the action has shifted from banks to bond investors since 2008. Read more
The big story on Monday is the warning from the BIS that a resurgent dollar could disrupt EM markets due to the fact that collectively the region has three quarters of its $2.6tn debt denominated in the US currency.
Meanwhile, international banks’ cross-border loans to emerging market economies amounted to $3.1tn in mid-2014, mainly in US dollars, the BIS added.
And herein lies the key problem associated with the hypothetical eventuality of no more petrodollars. A major dollar squeeze in foreign eurodollar markets.
Not that the petrodollar is near its death just yet — the US after all is nowhere near energy independent. Read more
On Wednesday we wrote about the growing consensus among scholars and policymakers that unencumbered financial flows are bad, focusing on some recent research from the Bank for International Settlements.
Now we want to draw your attention to a detailed historical account of the interwar and pre-crisis financial systems by Claudio Borio, Harold James, and Hyun Song Shin.
Their aim is to explain which “global imbalances” mattered and which did not. Read more
“It, therefore, agreed that the Fund’s Articles should be amended to make the promotion of capital account liberalization a specific purpose of the Fund…”
– The IMF interim committee of the board of governors… in April, 1997.
We needn’t tell you what happened next.
The free flow of capital across borders was once thought to be a basic requirement of modern civilisation.
Despite the damage caused by excessive lending from Germany and the Netherlands to Spanish, Greek, and Irish borrowers in the 2000s, the European Commission still says that the “free movement of capital” is one of the “four freedoms” underpinning the single market.
The consensus among Western policymakers is beginning to shift, however. The IMF officially changed its tune in 2011 by suggesting how emerging market countries could best limit overabundant inflows.
A trio of recent papers by top officials from the Bank for International Settlements goes further, however, arguing that financial globalisation itself makes booms and busts far more frequent and destabilising than they otherwise would be. Read more
Another good snippet from the BIS quarterly review that’s worth highlighting comes in the observation that banks are losing their raison d’etre due to the erosion of their funding advantages versus non-banks. Which means they’re increasingly resembling listless entities devoid of purpose in a capital shadowland that’s not willing to let them move onto another more deathly plane.
From the survey (our emphasis):
The erosion of banks’ funding advantage limits their effectiveness as intermediaries. There are indications that euro area banks, for instance, passed on some of their relatively high borrowing costs. The average interest rate on euro area bank loans stalled at levels above 3% over the past three years, in spite of falling policy rates. As the cost of funding in bond markets trended downwards, large corporates increasingly faced incentives to bypass banks and tap markets directly (Graph 6, left-hand panel).
The BIS quarterly review came out this weekend, providing some good analysis of the FX and OTC derivative data which was gathered by the Triennial Central Bank survey.
Two notable observations on that front.
One: No mention of virtual currencies.
Two: The BIS’s overview of the ongoing decentralisation of the FX market: Read more
The Basel Committee on Banking Supervision is back with another look at risk-weightings — that is, the risk weighting done by banks using their own models rather than the standardised BIS methods.
A new BIS/Basel paper focuses on the banking book, whereas a study published in January looked at the trading book. Read more
The Bank for International Settlements says there’s a problem. Governments, by and large, haven’t done enough to address the issues that have emerged during/since the financial crisis. Some monetary policymakers have done rather a lot, but much of it is in unchartered territory and carries risks. So, says BIS, monetary policymakers should just stop it henceforth.
From the latest BIS annual report: Read more
Frances Coppola has whipped up an absolutely fabulous commentary on the BIS paper on safe assets, which cuts straight to the point:
“the purpose of government debt is not to fund government spending. It is to provide safe assets.” Read more
Basel catches European bank capital legislation letting big cross-border lenders play a bit too fast and loose with zero risk-weighting of government bonds for its taste, the FT says.
Well, here’s the key para… Read more
The trauma and cost of a public rescue must surely teach the bank management concerned to behave in a more prudent manner, right?
Wrong, according to a recent Bank of International Settlements paper. Read more
In 2010, when the BIS first revealed that it held gold swap agreements worth SDR8.16bn (representing 346 tonnes of gold) the revelation knocked the gold market.
That’s because rather than making money (or yield) from lending out its gold — as the BIS usually did — it had become cost effective for the BIS to lend out currency against gold collateral instead. Read more
The BIS Annual report released this Sunday is jam-packed with data, charts, observations and analysis. Joseph has already stuck up some of the most compelling…
But one of the other key points to emerge is in its chapter on the “limits of monetary policy”. There is, it appears, a marked admission that central banks may be losing control. Read more
Just when someone’s gone and put a decent dataset together, someone has to go and mess it up. Thanks, Spain and Australia. Really, thank you. None of us really cared that much anyway about the data being comparable from one period to the next. Whatevs.
– FT Alphaville’s Internal Monologue Read more
Many banks in the eurozone have a significant international presence. The diversification is a positive if the home market is suffering disproportionately. That being the case, perhaps one could expect further investment in less sickly markets abroad?
Maybe. Read more
Hopefully that headline gets your attention for the Basel Committee on Banking Supervision’s latest review of capital rules for banks’ trading books.
There is a lot in it — the Committee has been tinkering with trading books since the crisis exposed serious mismatches between the capital that banks’ models said they needed for trading structured credit, and the losses they ended up experiencing. In fact this review follows up on the 2009 rule-set dubbed ‘Basel 2.5′. Read more
Time for more BIS-timates of international banking activity — this time looking at developments in the deleveraging turn among eurozone lenders in late 2011.
These stats from the Bank for International Settlements go up to the end of December. Predictably they show a massive pullback in credit throughout the banking system with Europe and the eurozone leading the way. Read more
A year ago, Nicholas Vause of the Bank of International Settlements wrote about “Counterparty risk and contract volumes in the credit default swap market” and pointed out the relative increase in shorter maturity contracts.
Using a couple more surveys than he had then, we get (click to expand): Read more
It’s a well understood fact that credit derivatives markets are primarily dealer-to-dealer. We do, however, hear that there are clients, or “end-users”, hiding somewhere. The Bank of International Settlements’ Quarterly Review, out on Monday, invites us to take a closer look.
Introducing Nicholas Vause, who put the section of the Review together, and his informative graphs (click to enlarge): Read more
Depending on which way you want to look at it, over-the-counter derivatives either increased or decreased in size, as of mid-2011.
That’s according to Bank for International Settlements statistics that were released back in mid-November. Further discussion of the results came out on Monday as part of the BIS’s bigger quarterly review though. Read more
Can we really know anything about US banks exposure to Europe?
A familiar epistemological question, which is being asked again in the wake of MF Global’s demise and Jefferies’ circuit-breaking slide. Read more
From the ivory tower of academia has come a novel idea: why not just net away all those troublesome debt exposures?
For example, say Spain held Irish debt to the tune of €12bn and Ireland held €20bn of Spanish debt, then the two exposures could be netted out such that Spain owes Ireland €8 billion. The end result would be a reduced debt burden for both. Read more
The importance of inflation expectations to central bank policy is well-understood.
Equally well-known is that there are different, sometimes conflicting measures of these expectations. Surveys of households will show different expectations than surveys of professional economists, and markets-derived inflation expectations (from inflation-indexed debt and the like) will show different results than these survey-based measures. Such subtleties as how a question is framed can change the result. Read more
Central banks have pulled 635 tonnes of gold from the Bank for International Settlements in the past year, the largest withdrawal in more than a decade, the FT writes. The move, disclosed in the BIS’s annual report, marks a sharp reversal from the previous year when central banks added to deposits of gold at the so-called “bank for central banks” rather than lending it directly to the private sector amid growing concerns over counterparty risk. Central banks and other official institutions collectively hold about 30,000 tonnes of bullion in their reserves, and many seek to earn an income on their gold by lending it out, just as any other currency. However, demand to borrow gold has fallen sharply in the past decade, driving interest rates on gold lending to record lows. Hedging by gold miners, which is typically structured to involve borrowing gold, was traditionally the largest source of demand. But since miners have cut back their hedging programmes to almost zero, the gold lending market, which is mediated by large bullion-dealing banks, has dwindled.