How banks have adjusted to higher capital requirements

March 23, 2014

Capital regulation reform requires banks to hold a much higher ratio of core capital to risk-weighted assets, taking some toll on lending and economic activity. An empirical analysis by the BIS suggests that the process is well under way. Mathematically, most of the adjustment has been achieved through retained earnings. However, in developed countries also lending spreads have increased, credit growth growth has slowed, trading assets have declined, and the share of higher risk-weighted assets has fallen.

(more…)

Financialization of commodity markets: the basics

March 22, 2014

An academic summary paper shows how the structure of commodity markets has changed, most notably through the growth of commodity index investors. This has raised the correlation of commodities with other asset classes. Moreover, this financialization may impair at times the two key functions of commodity markets: risk sharing and price discovery.

(more…)

How real money funds could destabilize bond markets

March 16, 2014

A paper by Feroli, Kashyap, Schoneholtz and Shin illustrates how unlevered funds can become a source of asset price momentum due to peer pressure and redemptions. Regulatory reforms that impair bank intermediation could compound negative escalatory dynamics. This raises the risk of dislocations in fixed income markets if and when extraordinary monetary accommodation is being withdrawn.

(more…)

The ECB and the option of large-scale asset purchases

March 15, 2014

Large-scale asset purchases have become a plausible policy option for the European Central Bank. A BNP research report suggests that an initial meaningful program could require purchases worth 3-5% of euro area GDP. A program of that size would have to focus on the sovereign bond market, with the acquisition of private-sector assets possibly featuring as a complement.

(more…)

Tracking the history of sovereign defaults

March 8, 2014

Bank of Canada has assembled a new broad database on global public debt default. It shows that after sovereign delinquency had exceeded 5% of outstanding debt in the 1980s, it declined alongside falling interest rates to below 1% in the 2000s and has remained low despite the global financial and euro sovereign crises. In a longer (200 year) context sovereign default ratios have moved in long cycles, each stretching over several decades.

(more…)

Time-varying macroprudential policy

March 2, 2014

Persistent highly accommodative monetary policy in the U.S. raises fears of building systemic vulnerabilities. Federal Reserve board member Tarullo has discussed the use of time-varying macroprudential policy as a means to contain these risks and to allow monetary policy to keep rates low for longer. This policy has many limitations, however.

(more…)

Europe’s bank-sovereign nexus (revisited)

March 1, 2014

A Bank of Italy paper illustrates and explains the rise in European banks’ sovereign debt holding since the great financial crisis. It also reiterates structural causes for bank-sovereign feedback loops. One would conclude that this nexus remains an important factor for market dynamics and monetary policy.

(more…)

The impact of high public debt on economic growth

February 22, 2014

Academic work suggests that public debt above 90% of GDP is a drag for GDP growth. This would apply to the developed world today. However, a new IMF paper based on a broad panel of countries going back to 1875 qualifies this rule. It suggests that high debt does not per se reduce growth. Only if debt levels are both elevated and rising, growth tends to suffer. On its own high debt does often entail greater output volatility, however.

(more…)

Shadow banking and the backstop problem

February 16, 2014

Modern shadow banking provides large-scale risk transformation services that are highly pro-cyclical (view post here). This is a systemic concern mainly for one reason: most shadow banking activities lack formal transparent backstops, i.e. external risk absorption mechanisms that prevent large negative shocks from escalating.

(more…)

How Fed asset purchases reduce yield term premia

February 15, 2014

An updated Federal Reserve paper suggests that there has long been a link between the net supply of government securities and term premia on Treasury yields. A 1%-point reduction in the ratio of Treasuries or MBS (10-year equivalent) to GDP supposedly reduced the 10-year term premium by 10 basis points. A one-year shortening of the average effective duration would lower the ten-year Treasury yield by about 7 basis points. Based on these estimates, the 2008-2011 large scale asset purchase and maturity extension programs of the Federal Reserve could have reduced the 10-year term premium by a total of 150 basis points.

(more…)

Tags

Tags
asset management Asset Purchase Program banks bond returns bond yields bubbles capital regulation carry China collateral commodities credit returns default ECB economic data EM equity returns euro area crisis Fed financial crisis FX FX interventions FX returns government debt government deficits herding inflation information insurances Japan leverage liquidity machine learning market turmoil price factors regulation risk management shadow banking statistical methods term structure trend following variance risk premium VIX volatility ZLB
ABOUT US

Macrosynergy is a London based macroeconomic research and technology company whose founders have developed and employed macro quantamental investment strategies in liquid, tradable asset classes, across many markets and for a variety of different factors to generate competitive, uncorrelated investment returns for institutional investors for two decades. Our quantitative-fundamental (quantamental) computing system tracks a broad range of real-time macroeconomic trends in developed and emerging countries, transforming them into macro systematic quantamental investment strategies. In June 2020 Macrosynergy and J.P. Morgan started a collaboration to scale the quantamental system and to popularize tradable economics across financial markets.

FOLLOW US
Linkedin
LEGAL
Research
Quantamental Academy
About Us