Responses of International Central Banks to the COVID-19 Crisis

November 25, 2020

Jacob Haas, Christopher J. Neely, and William R. Emmons in this research paper have a useful timeline of the 4 central banks:

This article reviews and explains the recent policy reactions of the Federal Reserve, the European Central Bank, the Bank of England, and the Bank of Japan to the financial and macroeconomic turmoil caused by the COVID-19 pandemic. The financial and monetary policy actions of major central banks in the most recent crisis have, by some metrics, surpassed their responses to the Global Financial Crisis of 2007-09 in both swiftness and scope. 


Although the cause of the COVID-19 crisis was quite unlike that of the GFC of 2007-09, many symptoms were similar. For example, both crises spawned flights to safety that produced fire sales of risky assets. Many of the policies to alleviate those symptoms were also similar in kind, but central banks responded with unusual speed and vigor as a result of their post-2008 experience with unconventional policies.

The Fed and BOE cut short-term interest rates, while the ECB and BOJ maintained rates that were already at or below zero. All four central banks introduced or expanded broad asset purchases, special bank-lending facilities, and narrow asset purchase facilities. Extraordinarily, the ECB and BOJ are actually paying negative interest rates on bank borrowing. With the USD and euro playing important roles on international financial markets, the Fed and the ECB expanded swap lines and created repo facilities for international monetary authorities. These measures seemed to be largely successful in maintaining the functioning of financial markets.

The crisis has prompted unprecedented cooperation between fiscal and monetary authorities. Congress appropriated $454 billion for Treasury injections of capital to Fed programs, while the U.K. Treasury offered indemnity on BOE asset purchase and CCFF losses (Timiraos and Hilsenrath, 2020, and Bailey 2020a,b). The Fed, BOJ, and BOE have also designed some of their lending programs to support fiscal authority initiatives. For example, the Fed’s PPPLF and BOJ’s Special Funds-Supplying Operations for SMEs provide funding for banks that use government SME lending programs, encouraging banks to use these fiscal policy programs and lend more to SMEs. Such cooperation may make central bankers nervous about retaining their independence. 


What pay ratios in NIFTY50 companies tell us about income inequality in India?

November 24, 2020

Reetika Khera and Meghna Yadav in this ideasforindia research article:

In the wake of the economic crisis triggered by the Covid-19 pandemic and associated lockdowns, demands for relief from the corporate sector were as vocal as those for affected workers. However, the same corporates were simultaneously paying shockingly high salaries to their CEOs. Analysing data from NIFTY50 companies for 2019-20, Khera and Yadav show that large inequalities exist between remuneration of top management vis-à-vis other employees within firms, and there is little diversity among those occupying top positions.


LVB failure: Mirror mirror on the wall, which is the next bank in India to fall?

November 24, 2020

My new article in Mint (good to be writing for Mint after a long gap).

The article discusses failure of Lakshmi Vilas Bank and how some of the Old Private Sector Banks look weak as well.

While I don’t address the mirror question very specifically but there are some pointers.

Regulating Fintech in Europe: Lessons from the collapse of Wirecard

November 23, 2020

Very important research by Giorgio Barba Navaretti, Giacomo Calzolari, Alberto Pozzolo.

Regulators and central banks will soon be dealing with fintechs and their failures. Wirecard gives us some lessons for future:

The default of Wirecard highlights several problems in the regulation and supervision of Fintech companies, with regulatory holes in investor protection, customer protection, and financial stability. This column argues that since Fintech companies can be very complex, their oversight requires understanding their business model and combining regulation and supervision based on both entities and activities. The global reach of Fintechs also calls for better coordination at the European level and beyond, but the authors do not see the need for new regulatory body to oversee Fintechs in Europe.


Gulags, crime, and elite violence: origins and consequences of the Russian mafia

November 23, 2020

Jakub Lonsky of Bank of Finland in this working paper does a lot of mining of references over 100 years :

This paper studies the origins and consequences of the Russian mafia (vory-v-zakone). I web scraped a unique dataset that contains detailed biographies of more than 5,000 mafia leaders operating in 15 countries of the (former) Soviet Union at some point between 1916 and 2017.

Using this data, I first show that the Russian mafia originated in the Gulag – the Soviet system of forced labor camps which housed around 18 million prisoners in the 1920s – 1950s period.

Second, I document that the distance to the nearest camp is a strong negative predictor of mafia presence in Russia’s communities in the early post-Soviet period.

Finally, using an instrumental variable approach which exploits the spatial distribution of the gulags, I examine the effects of mafia presence on local crime and elite violence in mid-1990s Russia. In particular, I show that the communities with mafia presence experienced a dramatic rise in crime driven by turf wars which erupted among rival clans around 1993 and persisted for much of the 1990.

Further heterogeneity analysis reveals that mafia presence led to a spike in attacks against businessmen, fellow criminals, as well as law enforcement officers and judges, while politically-motivated violence remained unaffected.


Central Bank of Israel invests forex reserves in equity to boost returns

November 23, 2020

Bank of Israel Deputy Governor Andrew Abir discusses the forex reserve investment strategy of the central bank:

  1. It is important that the investment strategy for the foreign exchange reserves, subject to attaining the security and liquidity targets, generate an average return over time that is at least equal to the cost of financing the reserves (the cost of liabilities on the Bank’s balance sheet).
  2. The Bank of Israel is constantly examining ways to adjust the investment policy and the weight of risk assets in the portfolio to the changing environment.  The guidelines for the investment policy that are set out by the Monetary Committee are updated accordingly from time to time.
  3. The Bank of Israel is currently examining whether to increase the weight of equities in the foreign exchange reserves, and whether to invest in additional assets, such as a low rate of investment in corporate bonds that are below investment grade.  (Currently, investment in corporate bonds is only at investment grade, and is restricted to 7 percent of the reserves.)

    Abir described the revolution in managing the Bank of Israel’s foreign exchange reserves during the past decade.  From a portfolio that was almost entirely invested in government bonds, with a desire to maintain very high liquidity, the Bank of Israel began putting greater emphasis on the portfolio’s yield.  Today, the foreign exchange reserves include more volatile assets such as equities and investment-grade corporate bonds.   In 2012, the Bank of Israel began investing some of the reserves in equities abroad.  The start of such investments, amounting to 3 percent of the reserves, was made possible due to the increase in the reserves, and in view of the new Bank of Israel Law, which enabled investment in a broad variety of financial assets, including equities, that were not permitted under the old law.  As the trend of increasing reserves continued, the Bank of Israel also gradually increased its investments in equities.  Today, equities account for 15 percent of the foreign exchange reserves.

Interesting to note this..

China’s winning CBDC approach

November 23, 2020

Gary Smith has a nice piece in OMFIF on how Chinese recently used lottery approach to push the CBDC:

Will China’s central bank digital currency experiment be a success? Offering 50,000 Shenzhen citizens a wallet containing around $30 in a lottery has created momentum. Banning the prospect of any other form of digital money and adopting a rigorous approach to encouraging retailer acceptance has been helpful. The citizens of Shenzhen were ready for CBDC – 2m applied to participate.

The architecture of money is changing. The pandemic has led to a collapse in the use of cash around the globe. A desire to avoid touching notes and coins has combined with the expanded availability of cashless payment options in shops and a surge in online shopping.

Central banks everywhere have been jolted into action. It seems inevitable that the squeeze on cash will trigger multiple CBDC initiatives. Many will share some of the technological characteristics of cryptocurrencies like bitcoin, but will differ in three important ways. First, CBDC will probably exist on a centralised platform, and therefore will be subject to government oversight. Second, it will be denominated in the local fiat currency at a constant value. Third, CBDC and domestic cash will be interchangeable.

State ownership of banks helps push the CBDC:

Nowhere is resistance to CBDC greater than in the US, and that is in part because the commercial banking lobby is strong. Commercial banks are concerned that their role as deposit takers could be undermined by a CBDC that would be ‘gilt edged’. This would weaken their role in the money creation process. Federal Reserve Governor Jerome Powell has defended the slow pace on CDBC by arguing that the US payments system works effectively.

China does not have private sector banks. All have some degree of state ownership, so there is no comparable lobby pressure. Most Chinese consumers have never known banking that was not via a mobile device, and already have limited expectations of privacy. In short, as evidence from the lottery scheme in Shenzhen suggests, China is an ideal testing ground for CBDC.

Four state-owned banks will distribute the digital renminbi, known as the digital currency electronic payment. They will therefore be integral to its existence. There are concerns about commercial banks being disintermediated, but there are suggestions that the People’s Bank of China could re-lend DCEP deposits to the commercial banks. This would give the central bank even more oversight (and perhaps control) over the use of DCEP in the Chinese economy.

The fact that the Shenzhen lottery wins could be cancelled if not spent highlights that CBDC could be a useful monetary policy tool. Crisis support payments could be targeted at those citizens in most need, with immediate effect, rather than written on cheques and mailed to citizens (some of whom were dead) as was the case in the US earlier this year.


Bargaining power and the Phillips curve: a micro-macro analysis

November 23, 2020

Marco Jacopo Lombardi, Marianna Riggi and Eliana Viviano of BIS in this paper:

We use a general equilibrium model to show that a decrease in workers’ bargaining power amplifies the relative contribution to the output gap of adjustments along the extensive margin of labour utilization. This mechanism reduces the cyclical movements of marginal cost (and inflation) relative to those of the output gap. We show that the relationship between bargaining power and adjustments along the extensive margin (relative to the intensive margin) is supported by microdata. Our analysis relies on panel data from the Italian survey of industrial firms. The Bayesian estimation of the model using euro-area aggregate data covering the 1970-1990 and 1991-2016 samples confirms that the decline in workers’ bargaining power has weakened the inflation-output gap relationship.


When the Bank of England rescued Midland Bank in early 1990s

November 20, 2020

As we are dealing with several bank failures and rescues in India, good to read about another bank from other country.

Clive Horwood refers to an extract from the book by Prof Harold James – Making a Modern Central Bank – The Bank of England 1979-2003:

It was inherent in the mandate of the Bank of England in the 1980s and 1990s, as overseer of UK financial services, that its successes remained hidden in the shadows, while its failures were exposed to the harshest of lights.

Those two decades saw high-profile collapses, including of the Bank of Credit and Commerce International and Barings, which provoked much criticism of the Bank. This led, in 1997, to a new Labour government handing supervision of UK banking to a newly-created Financial Services Authority under the aegis of HM Treasury.

As Chancellor of the Exchequer Gordon Brown simultaneously granted it independence from the government over monetary policy, 1997 saw the biggest change in the Bank of England’s role in its 300-year history.

These events are central to a fascinating new book by Harold James, Making a Modern Central Bank – The Bank of England 1979-2003. James, professor of history at Princeton University and a leading economic historian, lifts the lid on events that prompted an economic and monetary revolution that still reverberates through global finance today.

The book, the events and issues it covers, and the implications of those events to financial markets today, will be discussed during an OMFIF meeting on Monday 23 November which will feature the participation of many of the leading actors in these dramas. They include Mervyn King, Norman Lamont and Ed Balls.

James, who was granted unprecedented access to the Bank’s archives and spoke to many of the leading Bank officials, uncovers an important bank intervention that has remained out of the public realm, until now.

In an extract from the book below, James tells of how in 1991 Midland Bank was close to collapse and the Bank stepped in quickly, effectively and with the utmost secrecy, to save it.

This was the Bank at its best, using its knowledge, financial firepower and absolute authority to shore up Midland, bring in new leadership (no easy task given the personalities involved) and prevent a collapse. Midland’s failure would have cost the UK billions in bail-outs and lost economic activity, and might have spread to a wider banking crisis as happened in the early 1990s in other European countries. A year later, Midland’s future was secured through its takeover by HSBC – a marriage that Bank officials, including the governor, doubted would ever happen.

These revelations prompt a number of questions that are still relevant today. If Brown and the Labour party had known of the Bank’s success in saving Midland, might that have outweighed their concerns about its failures? But how could Brown have known when even senior government and Treasury officials in 1991 had no knowledge of the intervention? If the Bank had remained in charge of supervision of banks in the run-up to the 2008 financial crisis, might it have foreseen some of the problems building up at the likes of the Royal Bank of Scotland, HBOS and Northern Rock and stepped in, saving taxpayers hundreds of billions?


The impact of the pandemic on cultural capital in the finance industry

November 20, 2020

Kevin Stiroh of New York Fed in this speech discusses how and whether the pandemic will impact culture in financial industry:

From the perspective of cultural capital, this sudden and dramatic shift in how we work raises multiple questions. First, how does cultural capital influence outcomes in this new environment? How are we drawing on, or depleting, the cultural capital that already existed? Does this environment pose new challenges regarding behavioral risk? And finally, is it possible to identify new opportunities to build cultural capital in a predominately remote environment?

As we look across the industry, hear the experiences of firms and read the emerging literature, like the recent report by the UK FCA, one can identify factors that are likely to impact, and possibly erode, cultural capital.6 I’ll outline several areas where these dynamics may be at play, including loss of personal interactions, severed networks, uncertainty, and decreased monitoring and oversight.

Details in the speech.

RBI’s Trends and Progress of Banking in India Report available from 1949 onwards

November 20, 2020

The link says these reports have been up since 1997 but somehow I have missed them.

Anyways, just like RBI has put up its Annual Reports, Banking data, RBI’s several Reports, there are Reports on Trends and Progress of Banking in India as well.

  • Goto this link
  • Click on 1997 at the bottom right corner.
  • And there you have all the reports from 1949 onwards

The Report was started from 1949 following Bank Regulation Act (194) which mandates RBI to publish the report. Section 36 (2) of the Act says:

The Reserve Bank shall make an annual report to the Central Government on the trend and progress of banking in the country, with particular reference to its
activities under clause(2) of section 17 of the Reserve Bank of India Act, 1934 (2 of 1934), including in such report its suggestions, if any, for the strengthening of banking business throughout the country.

We now have plenty of stuff on Indian Banking history post RBI. Now the excuse for the researchers will be oh there is just too much info! 🙂

The second wave of central bank policy innovation

November 19, 2020

Pierre Ortlieb of OMFIF in this piece:

As the Covid-19 pandemic began rippling through financial markets and the global economy earlier this year, central banks quickly unveiled a raft of initiatives aimed primarily at easing short-term liquidity conditions. These policy innovations took place across developed and emerging markets, encompassing new assets purchases, lending facilities and institutional relationships.

Many emerging market central banks broke new ground by engaging in large-scale asset purchases. The monetary authorities of Poland, Hungary, Malaysia, Chile and Colombia, among others, established quantitative easing programmes. While relatively small as a share of GDP compared to the asset purchases of developed economy central banks, these programmes are of unprecedented size for many countries.


The further spread of so-called funding for lending programmes is another example underscoring how eager central banks are to expand their toolkits in the interest of the long-term pandemic recovery. The Bank of England introduced a term funding scheme for small- and medium-sized enterprises in March, offering tranches of low-cost funding for lenders depending on the volume of their real economy lending.

These have since been introduced in Australia, Taiwan, and several other jurisdictions, most recently New Zealand. The Reserve Bank of New Zealand scheme is more directly targeted at households, with the initial tranche of funding capped at 4% of banks’ ‘total loans and advances to New Zealand households, private non-financial businesses, and non-profit institutions serving households’ at the central bank’s official cash rate. The diffusion of alternative monetary policy instruments to bolster SMEs at this stage in the pandemic underscores the willingness of central banks to keep experimenting and adding to their toolkits.

Central banks have shown a continued willingness to reinvent their monetary policy toolkits, both in the interest of small-scale market functioning and of broader, more substantial economic policy issues.

Not sure whether critiques would term these innovations..

Kenya’s digital transformation journey

November 18, 2020

Dr. Patrick Njoroge, Governor, Central Bank of Kenya in this speech:

Digitalization, the theme I have been asked to focus on, has seen us through this difficult period. In the context of the COVID-19 containment measures—and particularly movement restrictions and curfews—digital platforms have enabled our citizens to access financial, health, education and medical services, entertainment, and shop online. In Kenya, the digital rails built over the last fifteen years have been a saving grace as we have battled COVID-19.

The starting point of Kenya’s digital rails in March 2007 was in using mobile phones to serve a need to transfer money from urban workers back to their families in the rural areas. These P2P transfers were supported by a network of agents who facilitated cash withdrawals and cashing in. Shortly thereafter, Kenya’s long-term development plan, Vision 2030, was rolled out in 2008 with the overarching objective of improving the livelihood of all Kenyans through shared prosperity. Financial services were identified as a key enabler, but requiring a dramatic transformation as only 26 percent of adult Kenyans could access the formal financial system in 2006.

This transformative imperative supported the growth of mobile phone financial services from payments to an elaborate ecosystem that includes other financial services such as savings, credit, insurance, pensions and capital markets. At the same time, the percentage of Kenyans accessing financial services had tripled from 26 percent in 2006 to 82 percent in 2019. Pushing further ahead, our vision is the democratization of financial services, which customers can access anytime anywhere.

Three pillars of Kenya’s digital push:

  • First, it is not about the technology but the problem at hand. Focus on needs of people and how can tech serve that need.  
  • Second, it takes collaboration to build an ecosystem.
  • Third, is our regulatory philosophy towards innovation which focuses on testing and learning long before sandboxes came into being. 

Perhaps a more interesting story is how M-Pesa was digitising transactions while the State was sleeping.

India’s Inflation Process Before and After Flexible Inflation Targeting

November 18, 2020

Patrick Blagrave and Weicheng Lian in their new IMF research:

We study the inflation process in India, focusing on the periods before and after the adoption of flexible inflation-forecast targeting (FIT) in India. Our analysis uses several approaches including standard Phillips curve estimation for headline and core inflation, an examination of the sensitivity of medium-term inflation expectations to inflation surprises, and the properties of convergence between headline and core inflation. Results indicate an important role for domestic factors in driving the inflation process, and there is evidence that expectations have become more anchored since 2015. This result could be attributable to FIT adoption, or to persistently low food prices which dominate the post-FIT-adoption period. The policy implications of these structural changes in the inflation process are investigated using a semi-structural model calibrated to the Indian economy.

One caveat for our analysis is that we do not rule out a possibility that subdued food price inflation caused by persistent supply shocks stood behind the patterns we document. Nevertheless, our findings support the notion that FIT is performing well in India.


Monetary policy response in emerging market economies: why was it different this time?

November 18, 2020

In 2020 crisis, EME central banks were able to cut policy rates despite fears over currency depreciation and capital outflows.

Ana Aguilar and Carlos Cantú of BIS in this short paper point how EME central banks could do so:

  • During the Covid-19-induced financial stress in March 2020, central banks in emerging market economies (EMEs) departed from their monetary policy playbook by cutting rates even in the face of sharp currency depreciations and massive capital outflows.
  • Two factors were at play. First, the cyclical position of EMEs gave more room for easing of monetary policy, while structural changes improved the anchoring of inflation expectations and kept a lid on exchange rate pass-through. Second, the swift monetary policy easing by the Federal Reserve and other advanced economy central banks calmed global financial conditions. These policies capped the appreciation pressures on the US dollar, an EME risk factor, and gave EMEs greater room to cut interest rates.
  • Monetary easing and asset purchases helped cushion the impact of portfolio outflows on local currency sovereign bond markets. Synchronised monetary and fiscal policies supported one another.

Both monetary and fiscal policy across the world seems to be synchronising on easy policies. Will it sow the seeds for the next crisis?



Crouching Beliefs, Hidden Biases: The Rise and Fall of Growth Narratives

November 18, 2020

Interesting IMF paper by  Reda Cherif ,Marc Engher and Fuad Hasanov. HT: Manas Chakravarty who reviews the paper in his typical style (link corrected; Thanks Anantha for the pointer).

The authors track how and why certain growth terms/factors become fashionable over time:

The debate among economists about an optimal growth recipe has been the subject of competing “narratives.” We identify four major growth narratives using the text analytics of IMF country reports over 1978-2019. The narrative “Economic Structure”—services, manufacturing, and agriculture—has been on a secular decline overshadowed by the “Structural Reforms”—competitiveness, transparency, and governance. We observe the rise and fall of the “Washington Consensus”—privatization and liberalization— and the rise to dominance of the “Washington Constellation,” a collection of many disparate terms such as productivity, tourism, and inequality. Growth theory concepts such as innovation, technology, and export policy have been marginal while industrial policy, which was once perceived positively, is making a comeback.

On industrial policy read this other paper by the same IMF econs: The Return of the Policy That Shall Not Be Named: Principles of Industrial Policy. Industrial policy is almost like saying Lord Voldemort!


Laxmi Vilas Bank joins list of failed banks

November 18, 2020

Lakshmi Vilas Bank (LVB) has been under trouble for quite some time now. It has been in talks with Clix Capital for raising capital but nothing seemed to have worked.

At the end, Lakshmi Vilas Bank (LVB) has failed and RBI had to impose a moratorium.

The financial position of The Lakshmi Vilas Bank Ltd. (the bank) has undergone a steady decline with the bank incurring continuous losses over the last three years, eroding its net-worth. In absence of any viable strategic plan, declining advances and mounting non-performing assets (NPAs), the losses are expected to continue. The bank has not been able to raise adequate capital to address issues around its negative net-worth and continuing losses. Further, the bank is also experiencing continuous withdrawal of deposits and low levels of liquidity. It has also experienced serious governance issues and practices in the recent years which have led to deterioration in its performance. The bank was placed under the Prompt Corrective Action (PCA) framework in September 2019 considering the breach of PCA thresholds as on March 31, 2019.

The Reserve Bank had been continually engaging with the bank’s management to find ways to augment the capital funds to comply with the capital adequacy norms. The bank management had indicated to the Reserve Bank that it was in talks with certain investors. However, it failed to submit any concrete proposal to Reserve Bank and the bank’s efforts to enhance its capital through amalgamation of a Non-Banking Financial Company (NBFC) with itself appears to have reached a dead end. As such, the bank- led efforts through market mechanisms have not fructified. As bank-led and market-led revival efforts are a preferred option over a regulatory resolution, the Reserve Bank had made all possible efforts to facilitate such a process and gave enough opportunities to the bank’s management to draw up a credible revival plan, or an amalgamation scheme, which did not materialise. In the meantime, the bank was facing regular outflow of liquidity.

After taking into consideration these developments, the Reserve Bank has come to the conclusion that in the absence of a credible revival plan, with a view to protect depositors’ interest and in the interest of financial and banking stability, there is no alternative but to apply to the Central Government for imposing a moratorium under section 45 of the Banking Regulation Act, 1949. Accordingly, after considering the Reserve Bank’s request, the Central Government has imposed moratorium for thirty days effective from today.

RBI has also quickly identified DBS Bank as an amalgamating bank.

The Reserve Bank of India has today placed in public domain a draft scheme of amalgamation of The Lakshmi Vilas Bank Ltd. (LVB) with DBS Bank India Ltd. (DBIL), a banking company incorporated in India under Companies Act, 2013, and having its Registered Office at New Delhi.

DBIL is a wholly owned subsidiary of DBS Bank Ltd, Singapore (“DBS”), which in turn is a subsidiary of Asia’s leading financial services group, DBS Group Holdings Limited and has the advantage of a strong parentage. It has been issued a banking license to operate as banking company under Section 22 (1) of the B R Act, on October 4, 2018. DBIL has a healthy balance sheet, with strong capital support. As on June 30, 2020, its total Regulatory Capital was ₹7,109 crore (against Capital of ₹7,023 crore as on March 31, 2020). As on June 30, 2020, its GNPAs and NNPAs were low at 2.7% and 0.5% respectively; Capital to Risk Weighted Assets Ratio (CRAR) was comfortable at 15.99% (against requirement of 9%); and Common Equity Tier-1 (CET-1) capital at 12.84% was well above the requirement of 5.5%. Although the DBIL is well capitalised, it will bring in additional capital of ₹2500 crore upfront, to support credit growth of the merged entity. Owing to comfortable level of capital, the combined balance sheet of DBIL would remain healthy after the proposed amalgamation, with CRAR at 12.51% and CET-1 capital at 9.61%, without taking into account the infusion of additional capital.

The Reserve Bank invites suggestions and objections, if any, from members, depositors and other creditors of transferor bank (LVB) and transferee bank (DBIL), on the draft scheme, which may be sent to the address mentioned in the “Notice”. 

As this scheme is debated and so on, RBI has superseded the Board:

In exercise of the powers conferred under Sub-section (1) of Section 36 A C A of the Banking Regulation Act 1949, the Reserve Bank has, in consultation with Central Government, superseded the Board of Directors of The Lakshmi Vilas Bank Ltd. for a period of 30 days owing to serious deterioration in the financial position of the bank. This has been done to protect the depositors’ interest. Shri T. N. Manoharan, former Non Executive Chairman of Canara Bank has been appointed as the Administrator under Sub-section (2) of Section 36 A C A of the Act.

The other Old Private Sector Sector Banks should wake up.

Making a Modern Central Bank and Six Days in September – Britain’s progressive estrangement

November 17, 2020

David Marsh of OMFIF reviews two books which discuss how the seeds of Brexit were sowed in 1992 currency crisis:

Currency dramas linking the UK and continental Europe are tangled tales of confusion, intrigue and progressive estrangement. Harold James’ book on the 1979-2003 history of the Bank of England, to be launched by OMFIF on 23 November, acts as a powerful companion volume to Six Days in September: Black Wednesday, Brexit and the making of Europe, by William Keegan, David Marsh and the late Richard Roberts. The book, published by OMFIF Press in September 2017, marked the 25th anniversary of Britain’s 1992 departure from the exchange rate mechanism of the European Monetary System.

Both books provide important information about events leading up to the 2008 financial crisis and Britain’s June 2016 referendum vote to leave the European Union. As the Financial Times wrote in its review of Six Days in September – which the paper called ‘a tale told with verve, drawing on once-secret Whitehall documents and contacts with key players further afield’ – an almost straight line joins 16 September 1992 and 23 June 2016. ‘Black Wednesday was the moment when Tory antipathy towards the EU curdled into the eurosceptic uprising that eventually led [British Prime Minister David] Cameron to surrender to demands for a plebiscite.’



Building a Green Yield Curve

November 17, 2020

SO far, the coloour of finance was seen as either black or red as in profits or loss.

Dr Sabine Mauderer of the Deutsche Bundesbank in this speech points that Germany is planning to build a Green yield curve:

Germany issued a green bond with a 10-year term for the first time in September, followed by another green bond with a 5-year term last week. Both issues, with a total outstanding volume of € 11.5 billion, attracted huge interest among investors.

Looking back at these successful issuances, I can conclude that it was worth entering the market a little later, but with a tailored approach.

Germany entered the market with the innovative “twin bond” concept meeting market’s liquidity needs: Each of these “Green Bunds” is twinned with a pre-existing conventional bond with identical features in terms of its coupon structure and maturity.

The twin bond concept means that the “green premium” is immediately apparent. Notably, the yield discount of the 10-year Green Bund is around 2 basis points and around 1 basis point for the 5-year Green Bobl.

Looking ahead, the Federal Government is going to build a “green curve” over the entire maturity range of Federal securities from 2 to 30 years. A detailed issuance preview for 2021 will be provided in December.

Building a green yield curve will help private sector price their green bonds as well.

Further, other German players taking interest in Green bonds:

Apart from the Federal Government, there are other public issuers in Germany who are already active in the market:

At the state level, North Rhine-Westphalia has issued a number of sustainable bonds with a total volume of € 13.3 billion, making it the top issuer in this segment.

State-owned development banks are also a vehicle which can be used in this market. Germany’s largest promotional bank, KfW, is the country’s number one issuer of green bonds with an issuance volume of € 28 billion.

On a side note: Green promissory notes, also known as “Schuldschein”, are quite a niche product due to their characteristics, but might be an alternative worth considering for communities and bigger cities.

This clearly underpins Germany’s goal of becoming one of the global leaders in sustainable finance.


Comparing economics news driven indicators with macroeconomic indicators

November 16, 2020

Jon Ellingsen, Vegard H. Larsen and Leif Anders Thorsrud in this Norges Bank research paper:

Using a unique dataset of 22.5 million news articles from the Dow Jones Newswires Archive, we perform an in depth real-time out-of-sample forecasting comparison study with one of the most widely used data sets in the newer forecasting literature, namely the FRED-MD dataset. Focusing on U.S. GDP, consumption and investment growth, our results suggest that the news data contains information not captured by the hard economic indicators, and that the news-based data are particularly informative for forecasting consumption developments.


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