John A Morrison's blog
What is the Central Bank thinking?
Below is a review of recent central bank literature in the area of macro prudential supervision, this review is intended to elucidate why it is that a banking crisis crosses the line between free market private individual economics and public sector control, in a sense why the banking system is “different” in that executive officers of a financial institution have a higher order responsibility (ironically) to the general welfare of the population which flows form their interrelatio
The asymptotic Basel II Tier One Capital formula
The Basel II Capital Accord seeks to improve on the existing rules by aligning regulatory capital requirements more closely to the underlying risks that banks face. One of the risk types described in the Capital Accord is credit risk. Banks need to hold capital to cover the credit risk on their credit portfolio.
Back in the mists of time (about 10 years ago) it must have been; that was the question I was asked to answer; I did a lot of work so the client must have been seriously interested;-
What the bloody hell is this Basel Thing Anyway?
What we have to realize is that ‘capital has transitioned to the state’; through the bail-outs and bail-ins, QE’s & SLS’s, LTRO’s & EFSFs; TARPs & twists; capital has transitioned to the state; it has happened, it is ‘what it is’; de-facto (not de-jure); capital has crossed the great libertarian 'blood brain barrier' and it did it @ a ridiculously low price with the greatest irony of all, no central planning!
I have been reviewing the papers from a recent conference;-
The ESRB at 1
& I think there is a crystallisation of a theme at that conference reflected in one particular presentation which articulates a narrative that we have been developing here on asymptotix in regard to Stress testing over the last 2 or 3 years.
When asymptotix first developed a European Stabilization Bank proposal, our thinking was just “common sense”, maybe driven a little by some experience not only of capital markets but of Public Sector policy development and specifically of the EU. It is possible that when I myself first wrote “The Lunatix are on the Grass: A new Bretton Woods proposition for Europe” I was thinking in a sort of “Kydland & Prescott” / “Political Economics”  way. I was schooled in all that stuff way back when in the Adam Smith School in Glasgow. That blog led us into the Stabilization Bank (SB) paper; but really we were driven by only one method; Structured Common Sense! And with the blogs we are always in a hurry; “it’s just a blog after all” !?! In fact a lot of this blog post here, I have said before in summer 2010 or summer 2011; it is GroundHog Day every day in Van Rompuy space! But in blog-land I have no editor!
Liquidity Risk is a confused topic (from a supervisory or B2 perspective)
because it has not been clear whether this is a risk type to be treated qualitatively or quantitatively through the development of the Basel II (B2) accords. In the initial months after the first Basel Accords were published most European regulators discussed the challenge of Liquidity Risk in qualitative terms. Latterly however the emphasis has been on the need for regulated financial institutions (FI) to stress test this aspect of Market Risk. This stress testing requirement demands that Liquidity Risk be treated quantitatively, from the perspective of a methodological approach to capturing how the FI’s exposure to this risk may fluctuate under extreme conditions.
Market update SNS REAAL / Friday, July 13, 2012
SNS REAAL repeats that in line with its strategic priorities it focuses on the run off of property finance loans and the strengthening of its capital position. In doing so, SNS REAAL is exploring various possibilities together with advisors. The sale of parts of its business activities is one of the options that is being explored. No decision has been made on any of the various possibilities.
In December 2008 financial market liquidity (in Europe) disappeared altogether, vanished according to the ECB FSR June 2010 . For monetarists like me this massive disappearance precedes & probably causes the massive GNP collapse of 3 quarters later; visually the 2 collapses have close to identical shapes.
In the midst of this LIBOR / EURIBOR scandal I thought I would share some references to LIBOR & its role in world capital markets from asymptotix. One would not generally reference LIBOR or EURIBOR explicitly since that would be far too arcane even for us!! Most of my references to LIBOR are in “asymptotix papers” which are long pdf documents; developed with the sole purpose of boring you to death!
About this running LIBOR rigging story, unravelling this weekend; a ‘friend’ said
“What they've caught onto is barely the tip of the iceberg. Eventually, the part below the surface might be revealed...”
Why are LIBOR & EURIBOR so important? They are the foundations, the technical-basis of the TERM STRUCTURE of interest rates; a crucial concept in Macroeconomics (& in banking risk management); in summary the 'term structure' is the PIVOT between MONEY & (real economic) ACTIVITY. LIBOR (or EURIBOR for Euro demoninated transactions) is the base, the lowest value of the 'term structure' vector (what is sometimes called the 'ratchet'). The technical phrase ‘Yield Curve’ can be used interchangeably with ‘Term Structure’. I give some colorful articulation of that relationship between Monetary conditions and the real economy in the references here on this page (but particularly in the paper below);-
The Spanish authorities present the results of this excercise as two stress test reports (by Oliver Wyman & Roland Berger) & one independent assessment of those ST excercises by Promontory Group.
Further in the Spanish authorities statement is a presentation of the process for the detailed audit of the Spanish banking sector's overall exposure.
Conceptual Foundations of a TOM (Target Operating Model) for an ICU (Internal Capital Unit)
The ICU is that applicable, particularly in Pillar 2 of Basel II, Basel III or Solvency II; development of a TOM is no easy task but is fundamental to the success of technology and process or competence change when implementing an ICU successfully. Clear demonstration of an effective and operational ICU is fundamental to financial institution supervision today. Development of a TOM needs a great deal of thinking and we at asymptotix have done some of that over the years. The foundations of our thinking about ICU-TOM is the SAP B2P2 white paper, vintage 2006 here but the clear development of our thinking is the peer-group validated, challenged and socialised approach to development of a TOM for an ICU is given in John Morrison's consolidated presentation of thinking in this space for the academic conference circuit of 2009 / 2010 and it is here Below in 5 brief pictures we present a summary of these ideas underlying a TOM-ICU; this is just a beginning, a conceptual foundation but presents some elements for consideration which are 'sine qua non';-
Gillian Tett put me onto this topic in this article in the Financial Times; she set me thinking as she usually does and a google search turned up some interesting stuff. As I do on some pages here on asymptotix & over on my technical blog on Analytic Bridge, I share the benefits with you of my experienced filter and select the best of the material as references for you to use but this process also creates a repository of useful references for me! Anyway here are some references to some people doing some important thinking about the uses of Big Data and thus the Analytics thereof in the future of Financial Services supervision and regulation; all progressing towards that ‘Transparency’ nirvana.
Progressive Credit Risk Management (CRM) transparently presents “own credit risk” to improve Asset-Backed transaction terms. When the CRM output is combined with insurance and funding methodologies, the financial benefits are striking. This is because banks rarely offer funding terms based on a due diligence process as thorough as the company themselves can execute daily.
Policymakers are keen for banks to lend. However, the banking model is broken. Many of the methodologies developed to intermediate credit are no longer cost effective or trusted by investors. Banks have responded by tightening credit issuance and de-leveraging. Alongside tougher Basel and domestic regulation, fee-earning has been hit. Banks are using general de-leveraging to cleanse their exposure to individuals, companies, other banks/ Financial Institutions and sovereigns who they believe will not only be unable or unwilling to repay debt but also unable to afford the cost of re-priced risk.
Think about it, as LTRO triggers on the leap day TODAY, why is the Central Bank being forced to do this against its will? The European monetary transmission mechanism doesn't have an IMF-Equivalent; so not only is the euro a political mishmash at the concept level its a stool (sic) on two legs at the practical institutional level.
EU Money supply is at rock bottom, the pump at the 'heart' of European money supply is on life support.
That 'life support' is LTRO from the Central Bank, right? The Central Bank should be independent right? It shouldn't be pumping up the very thing that it is chartered to control, that is perversity by definition right?