This is a guest post by Manmohan Singh, a senior economist at the IMF. Views expressed are his own and not those of the IMF. This is the second part of a series looking at the role of pledged collateral in an IS/LM framework.
Price of money and Price of collateral
In some countries like the US and the UK, the price of money and money market rates are not market-determined due to IOER (interest on excess reserves), and this affects other short end rates. In the US, for example, Fannie Mae and Freddie Mac and other non-depository institutions are not eligible for IOER. This leads to market segmentation and forms a wedge in the money market rates. Read more
This is a guest post by Manmohan Singh, a senior economist at the IMF. Views expressed are his own and not those of the IMF.
The concept of financial collateral (or pledged collateral that can be re-used in the markets) was not fully developed in academia in the late 1990s. Activities such as securities lending, repo, OTC derivatives and rehypothecation were still in their infancy—both in volume and sophistication. Read more
There’s been a lot of speculation about what really drove the volatile gold price move this month. Some are still defiantly searching for conspiracies or under-handed activities by authorities.
But it’s probably Nouriel Roubini who has provided one of the best and most logical explanations. In his opinion every bit of the gold move can be explained by shifting inflation expectations. Read more
We just saw this post from Pragmatic Capitalism’s Cullen Roche on the supply of assets.
It offers a nice chart showing net issuance of “safe” assets, from Citi’s research team:
Starring A. European Banker as the Cookie Monster and Mario Draghi as Ernie:
Ernie gets Cookie Monster to eat a carrot Read more
Eurobank recently lowered the over-collateralisation (OC) of its second covered bond programme to the bare minimum allowed by Greece’s covered bond law. Avid covered bond-watchers (there must be a handful of you out there) will know of course, that specially designed legal frameworks are one of the big perks of the covered bond structure – along with juicy benefits like an overstuffing of assets and the dual recourse nature of the centuries-old debt instruments. Read more
Philip K. Verleger, veteran independent energy consultant, has been doing some sleuthing concerning some of the more opaque areas of the oil market.
What he’s unearthed is interesting, to say the least. Read more
Further dispatches from the Danish Institute for International Studies’ conference in Copenhagen on “Central Banking at a crossroads”.
Today we focus on the new age of collateral-based finance and the presentation given by Manmohan Singh (speaking in an independent capacity rather than as a representative of the IMF). Read more
Are you a bank agonising over whether to keep your triple A-rated covered bonds as part of your liquidity buffer or send them to the European Central Bank? Not sure what to do with your AA-rated non-financial euro corporate debt?
Then you need this handy table from BofAML’s structured finance guru, Alexander Batchvarov. Read more
Ready for pop quiz? Don’t worry, it’s only one question and it involves pictures. Ready?
In the below picture, a pension fund governed under the Employee Retirement Income Security Act (Erisa) has a trading relationship with a bank… Read more
So much for the one sided debate about the Swiss National Bank’s bond purchases. JP Morgan’s Flows and Liquidity team argued over the weekend that while it is true that FX reserves are absorbing a significant part of the supply of high-quality AAA/AA bonds , they are still taking up less than half of the issue. And significantly reserves managers are big participants in securities lending… which includes the SNB.
Fact du jour on collateral accepted at European Central Bank liquidity ops, via Benoît Cœuré, ECB executive board member:
...non-marketable assets and above all, credit claims (i.e. normal bank loans) have become the largest single asset class in our collateral portfolio. Read more
US money market funds are still cautious about building up exposure to European banks.
However, according to Fitch’s latest Macro Credit Research report on Friday, they seem much more confident about building up exposure on secured terms. As a result, repos as a percentage of exposure to European banks is on the rise to new post-crisis levels: Read more
Okay, who’d forgotten that FDIC deposit insurance for non-interest-bearing transaction accounts expires at the end of December?
We confess, it did slip our minds – momentarily. Read more
Here are the full ‘technical features’, which Mario Draghi read out at Thursday’s press conference. Three big things stick out:
- The ECB will apparently make a ‘legal act’ to confirm that its bond holdings under “Outright Monetary Transactions” are pari passu, not senior. Legislation signals a welcome precommitment, but a nasty fudge here: 200 billion euros of bonds held under the SMP (which programme has now been terminated) will not come under the pari passu rule. Read more
Click to enlarge.
A word of caution in advance: the optimal structure is deeply complex, which itself should raise concern in the minds of investors… Read more
There was a seemingly minor item in the FOMC minutes released yesterday that didn’t get much attention but that, naturally, interested us quite a bit.
The participants noted that the Fed staff had presented an analysis showing “substantial capacity for additional purchases without disrupting market functioning”. But the staff part of the minutes offered no details of this analysis. Read more
James Sweeney, Jonathan Wilmot and the rest of the Credit Suisse gang that brought you the excellent King Collateral paper in April are back with a short follow-up note.
It’s a sharp contrast between the state of the global economy five years ago — when the first warning signs of an unusually serious crisis began to emerge — and where we are now. The framework of risk purging versus risk accumulation used by the authors is especially interesting, though they don’t get into as much detail as found in some of their previous notes. Read more
A survey of financial market participants most likely to be negatively affected by new regulations on uncleared swap trades revealed that they don’t like this new-fangled way of doing things at all. No, no, they really don’t.
The completely predictable result was published in an article in Risk on Wednesday: Read more
The European Repo Council’s latest survey on changing collateral trends in the bilateral repo market:
There seems to have been a modest shift out of core Eurozone collateral. Read more
FT Alphaville has already referred to the weird phenomenon of unsecured funds trading through secured funds in the UK this week, as reported by ICAP.
By definition, secured borrowing should be cheaper than than unsecured. Read more
We wrote about Kenya’s M-pesa mobile money model on Wednesday, which we think is a really innovative and encouraging development in the world of money supply.
The point we were trying to make at the time is that there are some interesting parallels between Safaricom’s role in the M-pesa e-money market and the role of central banks in conventional money markets. Read more
Fresh from being debated in an extraordinary session of the Finnish parliament…
Spain’s banks really are providing Finland’s collateral for the EFSF/ESM bailout of Spain’s (weaker) banks.
The Finnish finance minister announced a deal on Tuesday. Here’s the presentation (in Finnish, hat-tip Aleksi Moisio) Read more
At an ungodly hour of Tuesday morning, eurozone ministers agreed that the EFSF will lend Spain €30bn for its banks by the end of July.
Two weeks. Read more
It relates to government-guaranteed bank bonds. In plain English — this appears to be tightening banks’ future use of them as collateral but with exceptions for some banks.
From Tuesday’s decision: Read more
The world’s 81st-biggest island fell off the European Central Bank’s collateral lists on Tuesday. At least its sovereign debt did.
Isn’t it annoying when particular clients insist on being treated differently to everyone else? Like, just because your client is well, England, or Italy, or some other sovereign nation, doesn’t make them ‘special’. It’s also kind of annoying when they make regulations that make business tougher for banks and then still expect to be treated differently.
Interestingly though, the Bank of England just stopped asking for one such special exception when it comes to certain derivatives that it enters into on behalf of the nation in order to best manage its balance sheet and the Treasury’s foreign exchange reserves. Read more