Back when the Basel III regulations were being debated in the wake of the crisis, it was common to hear dire warnings that rules limiting how much banks can borrow would constrict lending and lower real output. Even some who ostensibly support higher equity capital requirements think there are “trade-offs” between a safer financial system and economic growth. New research from Leonardo Gambacorta and Hyun Song Shin of the Bank for International Settlements suggests this thinking is backwards: “both the macro objective of unlocking bank lending and the supervisory objective of sound banks are better served when bank equity is high.”
So you thought bearer securities weren’t a thing any more. And that jurisdictions left, right and centre were banning the bearer structure (much depended on in the past by the eurobond markets) precisely because of its association with tax-efficient offshore dealings. Except, as we outlined on Monday, one of the things revealed by the Panama Paper leaks is the extent to which bearer securities were depended upon by the offshore finance network. And yet, as we also noted, it’s not like bearer securities have entirely gone away either. We referenced as an example the Bank of England’s series of $2bn dollar-denominated bearer bonds paying a coupon of 1.25 per cent, which take the form of the so-called “New Global Note (NGN)” structure.
You may have come across this story about Barclays partnering up with a “Goldman-backed” bitcoin payments app called Circle International Financial, which uses bitcoin to transfer central bank currencies as digital money increasingly moves into mainstream finance, and thought “wow” that sounds innovative and exciting. But is it? Is it really all that innovative? Let’s break down some of the key claims being made.
Nick Rowe is the latest to try and define a helicopter drop. Cutting through the faff, it comes down to the idea that helicopter money is permanent. Which is problematic since we’ve recently been told nothing is permanent and have basically bought that argument. So, yeah, how are we going to know a helicopter drop when we see it? Take this for example:
The prime minister needs to show his mettle on British steel, Tui has a sunny view of summer bookings, AO World has beaten expectations. FT Opening Quote, with commentary by City Editor Jonathan Guthrie, is your early Square Mile briefing. You can sign up for the full newsletter here.
German Chancellor Angela Merkel said she had no “Plan B” for solving the refugee crisis and insisted there was nothing that would make her change course during an interview on Sunday. Ms Merkel said she could understand a recent poll that showed 81 per cent believed her government had lost control of the migrant crisis, but rejected the proposal backed by many in Germany to introduce an upper limit on migration. However, she admitted that the refugee crisis was the worst she had faced in her 10 years as chancellor, dwarfing even the eurozone debt problem. (FT)
A qualified defense of negative rates effects on banks’ net interest margins, you say? Go on then. From Andrew Garthwaite and team at Credit Suisse…
By David Beckworth An increasing number of observers believe that the United State is inching closer to a recession. They see the stock market rout, plummeting oil prices, and falling inflation expectations as an ominous sign for the economy. Some also worry that the Fed’s raising of interest rates in December may have gotten ahead of the recovery. They fear this tightening of monetary policy could intensify these other dire developments and be the tipping point that pushes the economy into recession.
Imagine someone told you about a country where real output per person is at an all-time high and growing at an increasingly rapid pace, its employment rate is at the highest level in decades, the country’s housing sector is on fire, and its current account surplus is about 6 per cent of GDP. In the absence of other information, would you say this country should be: If you answered yes to the above questions, congratulations! You’ve just described the behaviour of the Sveriges Riksbank. From their policy announcement on Thursday (our emphasis):
Craig Pirrong of the University of Houston has been concerned about CCPs concentrating risk for a very long time. But, as it turns out, he is also concerned about the role being played in system risk creation by real-time gross settlement systems. Following up on FT Alphaville’s piece on RTGS last week — in which we broke down the connection between the shift towards a real-time gross settlement system, central banks’ fear of netting risks, liquidity sacrifices and general collateral abuse — Pirrong adds some extremely worthwhile points to the conversation.
Smith & Nephew says its CEO has a “highly treatable” form of cancer, BT is reshaping itself following its EE acquisition. FT Opening Quote, with commentary by City Editor Jonathan Guthrie, is your early Square Mile briefing. You can sign up for the full newsletter here.
Unilever is looking to innovate to ride out volatile markets in 2016, Chinese GDP growth for 2o15 was its lowest since 1990. FT Opening Quote, with commentary by City Editor Jonathan Guthrie, is your early Square Mile briefing. You can sign up for the full newsletter here.
History never repeats and most analogies are wrong, but there are some intriguing parallels between the global macro environment in 1997-8 and today. Back then, the Federal Reserve controversially chose to ease policy, first by refraining from rate hikes anticipated by the markets and then by cutting its target for Fed funds by 75 basis points. Many believe this choice inflated equity prices and encouraged excessive business investment at a time when America’s economy was already running hot. Despite the subsequent fillips of tax cuts, a boom in defence spending, and a housing bubble, the aftermath was a massive decline in employment and painfully slow recovery.
Big insurers will be relieved the Bank of England has accepted their internal capital models as they count the cost of Storm Desmond. FT Opening Quote, with commentary by City Editor Jonathan Guthrie, is your early Square Mile briefing. You can sign up for the full newsletter here.
One common explanation why Europe had a worse crisis and weaker recovery than America: its companies depend far more on banks for financing than the capital markets. Those banks have been in perpetually worse shape than US lenders, mostly because of bad decisions from officials in national governments and the European Central Bank. The critics point hammer home their point with charts like this:
When Nixon’s treasury secretary told his European counterparts the dollar was “our currency, but it’s your problem”, he was referring to the tendency of foreigners to borrow and lend to each other using American money. The importance of these so-called eurodollars in other countries’ financial systems inadvertently gave American policymakers significant influence over credit flows outside their borders. (This is still true: a rising dollar tightens financial conditions abroad, while a falling dollar encourages foreigners to lever up.) Some Europeans wrongly thought this was deliberate and determined to rectify the situation by creating a competitor currency capable of functioning as a “global reserve”. A few even dreamed the euro would supplant the dollar.
More miners in trouble this morning, with Lonmin’s rights issue, BHP Billiton reviewing production targets and Nyrstar considering a complete exit. FT Opening Quote, with commentary by City Editor Jonathan Guthrie, is your early Square Mile briefing. You can sign up for the full newsletter here.
Debt-bound Glencore has found a source of cash in a Peruvian silver mine while M&S is managing to avoid Blouse-a-geddon. FT Opening Quote, with commentary by City Editor Jonathan Guthrie, is your early Square Mile briefing. You can sign up for the full newsletter here.
We missed this earlier this month, but it is worth a reprise. How do you create a global reserve currency? Some clues by way of a speech by Benoît Cœuré, ECB board member, earlier this month: At constant exchange rates, the euro’s share of global foreign exchange reserves has remained broadly unchanged since 2007-08. The decline in 2014 in the share of the euro at market exchange rates was a reflection of the depreciation of the euro. There is therefore no evidence that global foreign exchange reserve managers actively rebalanced their portfolios away from the euro in 2014, or in 2011-2012 for that matter. This year the euro has been increasingly used as a funding currency by international borrowers, owing to the historically low interest rates in the euro area. Investment-grade corporations in advanced economies, mainly the United States, were particularly active issuers of international bonds denominated in euro, whose proceeds are swapped back into dollars. In April 2015 Mexico became the first sovereign state to issue a bond denominated in euro with a maturity of 100 years. Moreover, the share of the euro as an invoicing or settlement currency for extra-euro area trade remained broadly stable again last year. Finally, the euro is used as a reference currency for the anchoring of exchange rates, mainly in countries neighbouring the euro area and countries that have established special institutional arrangements with the EU or its Member States.
Help the aged is today’s theme, with retirement home builder McCarthy & Stone planning a float and a smartypants invention from Japan. FT Opening Quote, with commentary by City Editor Jonathan Guthrie, is your early Square Mile briefing. You can sign up for the full newsletter here.
We hosted our New York Pub Quiz on Wednesday night. Congrats to the winning team, Lower Expectations, who defended their title from last year’s event by answering 53 out of 70 questions correctly, eking out a win over the team Paul Volcker Rules, William Miller Drools by just a single answer. We had a blast producing the event and were honoured to have been joined by former Fed chair Paul Volcker, who co-hosted the economics and history section of the quiz and even submitted a few questions of his own. For more on the night’s activity, you can scroll down through the #FTPubQuiz hashtag on Twitter, and be sure to listen to the vox-pop segment of this week’s Alphachat, in which producer Aimee Keane asked attendees for their views on the Fed and the likelihood of a China crash. First up are the questions alone (for those who want to test themselves), and halfway down begins the same set of questions with the answers provided. ROUND 1 NAME THAT FINANCE MINISTER
Daniel Stewart’s shares have been suspended again, but Numis is bucking the gloomy trend for mid-cap brokers. FT Opening Quote, with commentary by City Editor Jonathan Guthrie, is your early Square Mile briefing. You can sign up for the full newsletter here. Asian marketsNikkei 225 up +334.27 (+1.92%) at 17,722Topix up +31.58 (+2.24%) at 1,443Hang Seng up +289.70 (+1.41%) at 20,846
Who leads whom in the interest rate market? Or as Eugene Fama asked it in a paper in 2013, does the Fed really control interest rates? The University of Chicago economist’s work concluded that there are a lot of forces affecting rates, where the Fed is only one small part. In fact — as this Chicago Booth comic illustration of the entire debate neatly summarises – his research concluded that up to 83 per cent of the Fed’s target rate is influenced by other short-term rates in the market.