Posts tagged 'financial regulation'

I, for one, welcome our new AI-regulator overlords

Most people aren’t terribly excited about teaching computers how to do their jobs, but multi-million-dollar settlements after regulatory investigations seem like a pretty good motivator.

IBM announced today that it’s buying Promontory Financial, a consultancy that came to represent some of the problems raised by the revolving door between regulators and Wall Street banks (it was founded by Eugene Ludwig, comptroller of the currency for the Clinton Administration). The company says it’ll build a machine-learning compliance platform, with Promontory’s staff training its Watson technology.

Promontory’s recent regulatory history is the main reason this looks like a pretty good deal for them. Last year, the company was almost suspended indefinitely from consulting for New York-licensed banks suspected of wrongdoing. (It ended up getting cut to six months, with a $15 million fine.)  Read more

Central banking: just when you understand it, it changes

Ask most monetary policymakers how they think about their job and the conversation generally goes like this:

  1. There is “an equilibrium interest rate” that somehow balances out the desires of savers and borrowers
  2. This “equilibrium rate” can be estimated roughly in real time
  3. 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

“People want money”

“Money,” we were once told, “is whatever you can use to pay your debts.”

That definition is both precise and slippery, since much of what can be used as “money” during good times is prone to losing its money-ness precisely when the need to repay debt is greatest.

Think of someone in the days before deposit insurance trying to pull cash from a failed bank to cover expenses after losing a job — or, for a more recent example, a hedge fund attempting to cover redemptions from panicked investors only to find that the prime broker responsible for holding its cash had blown up and the collateral it had provided was worthless.

The only kinds of money that reliably hold their value are the ones explicitly backed by a strong government*. Unfortunately, there isn’t nearly enough available to satiate the total demand for cash. Financial firms fill the gap by creating products that often offer many of the conveniences of money but that lack government guarantees, thereby rendering them inherently unstable and prone to crises.

These products are “mostly money” in the way that Westley was only “mostly dead.” They were also the topic of the “Workshop on the Risks of Wholesale Funding,” which we attended last week at the Federal Reserve Bank of New York. Read more

The Volcker Rule riddle

There’s no shortage of concerns about the impact that new regulations will have. Basel 2.5 hitting the bond market, the prohibition of ratings under Dodd-Frank hurting the beleaguered mortgage market, and the restrictions on prop trading by the Volcker Rule — which may lead to a giant sucking sound where the liquidity of several markets used to be.

The concern surrounding this last one is so great that the EU is planning to complain to US Treasury Secretary Tim Geithner about it next month. Read more

Suspicious pre-deal trades fall sharply

The level of suspicious trading ahead of UK mergers and acquisitions fell sharply last year to 21 per cent, the lowest level since 2003, the FT reports. Last year, timely trades – defined as abnormally large share price movements in a company in the two days before a regulatory announcement – preceded 25 of 118 UK-announced deals. That was down almost one-third from the past four years, when the level hovered around 30 per cent. The fall comes as the FSA has increased its efforts to detect, prosecute and punish such trades.

Geithner warns on light-touch oversight

Tim Geithner, US Treasury secretary, warned overseas markets against undercutting American financial regulations, urging them to avoid following the “tragic” example that the UK set in light-touch oversight, writes the FT. In outspoken remarks that outlined the US position on a range of international regulatory issues, Mr Geithner called for a global deal on derivatives and endorsed forcing the largest banks to hold more equity capital. But such a surcharge need not be “excessive”.

The where and what of regulatory arbitrage

Get the little flags at the ready: on Tuesday JP Morgan Cazenove published the final installment of its trio of reports on regulatory arbitrage.

It is stirring patriotic sentiment up on Capitol Hill, with some lawmakers worried that the US’s comparative advantage will be blunted, according to PoliticoRead more

Dodd-Frank vs Damien Hirst

Remember magic-eye pictures?

You know, the ones where you would stare, squint, relax your eye muscles and hey presto, a 3D picture emerges from a 2D psychedelic fuzz. Read more

S&P says new rules will hit big bank profits

The new regime of financial regulation will hit annual profits at the US’s eight biggest banks by between $19.5bn and $22bn, according to one of the first assessments of the new law. Standard & Poor’s analysts say there will be a noticeable loss of income as a result of restrictions on proprietary trading, credit card fees and derivatives activity at Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, PNC Financial, US Bancorp and Wells Fargo, the FT reports. “We think that these banks will eventually be able to offset these deficits by making smaller additions to loan-loss reserves and raising prices for some products and services,” the report said. “A return to more typical banking conditions would, in our view, mitigate most, or even all, of the financial costs of Dodd-Frank for these banks.”

‘Capital requirements increase systemic risk.’ Discuss.

Is this what went wrong with Basel II?

Is this what will go wrong with Basel III? Read more

The banking ‘miracle’ – debunked [updated]

The Bank of England’s executive director of financial stability has a refreshingly straight-forward answer to his self-imposed question “The Contribution of the Financial Sector: Miracle or Mirage?”

His response: Read more

JPM wishes the adults were in charge of financial reform [UPDATED]

FT Alphaville has only one thing to say about the following note from JP Morgan economist James Glassman: ouch. In the note, Glassman deplored US lawmakers’ “unnerving ignorance of fundamental principles of market economics”, among other criticisms.  Read more