Archive for January 25th, 2010

Shadow Banking issues

January 25, 2010

Paul Tucker of Bank of England has been taking the issue of financial stability with seriousness. He ahs been speaking on various issues in the past. In this speech, he looks at shadow banking.

He first looks at various kinds of shadow banks/systems developed before this crisis – money market mutual funds; finance companies; Structured Investment Vehicles and Asset Backed Commercial Paper; the prime brokerage services of securities dealers; the use of securities lending as a financing market; and the repo-financing of mortgage-backed securities.

He says we need to bring them in the regulatory ambit and keep looking out for regulatory arbitrage:

For those forms of financial intermediation that are dependent on banks for leverage and liquidity, it may be that we can develop macroprudential instruments that could be deployed to restrain excess by influencing banks’ supply of credit to them. That is another major area of work.

But where a form of shadow banking provides an alternative home for liquid savings, offering de facto deposit and monetary services, then I think we should be ready to bring them into the banking world itself. In the latest episode, constant-Net Asset Value, instant-access money funds and the prime brokerage units of the dealers seem to have been examples of that.

We have not seen the last of regulatory arbitrage. So we need policies and principles that stand in the way of its weakening the resilience of the system, while allowing enterprise and our capital markets to flourish.

An insightful look into the world of shadow banking.

Where did Obama’s Bank Tax/Fee plan come from…from Sweden

January 25, 2010

Yeah, it came from Sweden. NY Times has an article (HT: The Big Picture Blog) explaining the details.

When it comes to rescuing banks, the Swedes are earning a reputation as trendsetters. First they set a standard for recovering from disaster; now they want to export their idea for how to pay for it.

The country went through its own crippling banking crisis during the early 1990s, after the bursting of a domestic credit bubble. It rebounded relatively smoothly through an aggressive bailout policy built around nationalization and carving the troubled assets of banks off into a so-called bad bank.

That blueprint was followed to varying degrees over the last year or so in the United States, Japan, Britain, the Netherlands and other countries.

Now, others are looking at Sweden’s latest idea to protect its lenders, enacted at the end of 2009 — a “stability fee,” or direct tax on banks so that they pay for their own bailouts.

The Swedish idea appears to have resonated in Washington. United States Treasury officials phoned their Swedish counterparts in December, requesting details of the fee. Last week, the Obama administration announced plans for a financial crisis responsibility fee, aimed at its biggest banks and intended to complete the recovery of the cost to taxpayers of the American bank bailout program.

Wow. I wasn’t aware of this. I checked Sweden Finance Ministry website and here is a timeline of the proposal

The Finance Minister said:

During the crisis substantial national resources were put at the disposal of the financial sector to safeguard financial stability. Through the stability fee banks will be paying in savings capital in advance to central government to be used for measures in financial crises. In that way we are ensuring that crisis measures affect taxpayers as little as possible and do not have an adverse effect on the core welfare system,” says Minister for Local Government and Financial Markets Mats Odell.

In connection with last autumn´s stability plan, the Government established a special stability fund to finance measures to counteract the risk of serious disturbance to the financial system in Sweden. The fund is to be built up with fees from banks and other credit institutions. This means that the institutions themselves finance the measures that need to be taken in order to maintain stability in the financial system and safeguard the interests of taxpayers.

The Government proposes that the fee be set at 0.036 per cent of certain parts of the institution´s liabilities according to an approved balance sheet. The fee will be introduced in 2009, but only half the fee will be charged in 2009 and 2010. The Government further proposes that the institutions participating in the guarantee programme will be able to deduct an average of state-guaranteed liabilities from the calculation basis for the stability fee.

Before the start of 2011, the Government intends to present new proposals on the possible design of a risk-differentiated fee in a system combined with the deposit guarantee scheme.

The difference between Sweden’s fee and US fee is the objective. Where Swedes plan to build a future fin crisis fund from the fee proceeds, US wants to use it to recover the money spent by taxpayers on the crisis.

Another interesting thing is the impact of the plan. In Swede small banks were unhappy as they said government would not help them in crisis. In US, large bank were unhappy as being penalised. As Swede plan reaches out to all banks, US one is for banks having assets larger than USD 50 bn.  

According to Swedish officials, the stability fee has been welcomed by the banks that dominate the financial system. Smaller credit and financing companies complained bitterly, though, arguing that they would never be helped by the government in the event of a failure.

In the United States, the reverse is happening. The Securities Industry and Financial Markets Association, representing Wall Street and big banks, is considering a lawsuit against the administration on the grounds that “a tax so narrowly focused would penalize a specific group.”

Sweden again leads from the front. It had valauable lessons to solve a financial crisis, its central bank keeps coming out with new ideas, fiscal consolidation and now this proposal to solve future financial crisis. All from the Swede factory. 

The Swedes now urge the others to follow on the stability fee:

Sweden has learned from some of the mistakes it made during the crisis of the 1990s. At that time, it introduced a levy on transactions, but trading activity then migrated to London, where taxes were more favorable, the Swedish finance minister, Anders Borg, said Tuesday at a meeting in Brussels.

Having established and tested the new policies, Mr. Borg urged his European partners, in a letter released Tuesday, to follow his country’s lead and introduce a similar program.

Finance ministers from the Group of 20 world economic powers are scheduled to meet in February and are expected to discuss the issue. At the request of the G-20, the International Monetary Fund is working on proposals for a crisis levy and it plans to deliver a report to G-20 ministers in April. Leaders will examine the issue in June

Does who chairs the Central Bank matter?

January 25, 2010

I came across this very interesting paper on central banking (HT: Ken Kuttner). There are many interesting facets of central banking – which anchor to choose, politics, independence, communications , legal aspects , monetary policy committees etc.

This paper written by Adam Posen and Kuttner looks at central bank chairs/heads. They evaluate whether markets care who heads the central bank. The abstract says it all:


Rakesh Mohan’s website

January 25, 2010

Former RBI Deputy Governor, Rakesh Mohan has a website now. He has categorised his research work on various Indian economy topics.

 Very very useful stuff.

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