Daily Archives: April 20, 2010

Simone Baribeau

As the Senate prepares to vote on the financial regulation bill, Ben Bernanke, Fed chairman, Mary Schapiro, SEC chairman and Timothy Geithner, Treasury Secretary, appeared before the House Financial Services Committee to dissect what went wrong with Lehman.

Lots went wrong, of course, but the regulators (Mr Geithner was head of the NY Fed, at the time of the Lehman bankruptcy) shed little fresh light on their response (or lack there of) to Lehman’s ‘bad behaviour’. The Fed said it had no authority to regulate. The SEC, according to Ms Schapiro, didn’t have the ‘staff’, ‘resources’ or ‘mindset’ to be a prudential regulator. Lehman repeatedly failed stress tests, even those that did not exclude real estate, and the market was left blissfully unaware of the impending catastrophe. Read more

Ralph Atkins

A new headache for Jean-Claude Trichet, European Central Bank president: Another “hawk” on the ECB’s governing council has broken ranks over the risks to the eurozone inflation outlook. I noted in a post last week how Jürgen Stark, executive board member, saw them “tilted to the upside” – contradicting the official position that they were broadly balanced. Now Axel Weber, another German who sits on the council as Bundesbank president, has made a similar comment in a speech in Mannheim. Inflation risks were “to be sure small, but directed upwards,” he said. At the moment, there is no sense that ECB ultra-loose monetary policy is going to change any time soon. But the impression is growing of discord or frustration within Frankfurt’s Eurotower.

A major difference between mainstream and Islamic debt looks set to be removed. There will be significant winners and losers – consumers and investors, respectively – but also, possibly, a structural shift within debt markets.

Malaysia’s central bank is drafting rules to regulate the use of ibra*, Islamic rebate, which will affect $95bn Islamic finance assets (a fifth of total banking assets or roughly half of GDP).

In Western banking, someone taking a loan is liable for the principal and the interest as it is accrued. If the loan ends early – through default or early payment – that person is typically liable for the interest accrued to date.

Not so in Islamic financing. Read more

By Bernard Simon

The Bank of Canada has signalled it is likely to raise interest rates in the next few months in response to unexpectedly strong domestic growth, including a housing boom that has shown signs of developing into a speculative bubble. Read more

Before the Bank of England went into election hibernation, Mervyn King came as close as any official I have heard to saying that now is the time for complacency over rising inflation. Will he persist with complacency now that inflation has jumped back up to 3.4 per cent in March? Probably not.

In January and February, Mr King argued time and again that Britain’s inflation had risen above 3 per cent twice before in recent years and, as the Monetary Policy Committee had said at the time, it would come down and it did. One good example was in his February letter of explanation for inflation’s overshoot.

“This is the third episode when inflation has moved above the target by more than one percentage point. As was the case on previous occasions, the Committee expects this to be a temporary deviation of inflation from the target”

While not strictly false, as so often with Bank arguments, the statement is not strictly true either. Read more

Robin Harding

A little more interest from the back-and-forth about deflation that regularly attends hearings of the finance committee of Japan’s lower house. According to Bloomberg/BusinessWeek:

“I think inflation targeting is an attractive policy,” [finance minister Naoto Kan] said at parliament in Tokyo today. “We could have a goal of 1 percent or something a little higher, like 2 percent, and work with the BOJ until that goal is met.”

That takes Mr Kan a little closer to substantive disagreement with the BOJ. The BOJ is (a) opposed to an explicit inflation target and (b) happy with its existing ‘understanding of price stability’ of a 0-2 per cent positive range centred on 1 per cent. Read more

The Reserve Bank of India has raised rates for the second consecutive month, but by less than some economists had forecast. The repo rate now stands at 5.25 per cent and the reverse repo is up to 3.75 per cent: both changes are immediate. The central bank has also increased the amount of cash its banks have to hold with the central bank, relative to deposits – its cash reserve ratio – by 25bp to 6 per cent. This will be effective April 24. The last rise was a month ago, a 25bp increase decided at an unscheduled meeting of the board. High inflation is the main motivation behind the rises.