Daily Archives: September 13, 2010

Robin Harding

The New York Fed announced today that it expects to buy $27bn of Treasuries between mid-September and mid-October as it starts reinvesting the principal from mortgage-backed securities that are paid back early.

That number is no surprise. In his Jackson Hole speech, Ben Bernanke said that the Fed now expects about $400bn worth of MBS repayments by the end of 2011. Divide $400bn by the sixteen months between now and then and you get about $25bn.

I think the Fed should go a lot further with transparency on its MBS repayments, however. An important reason that the markets did not expect the August decision to start reinvesting MBS repurchases – leading to sharp moves and fears about the Fed’s economic outlook – is that they did not know the Fed had revised up its forecast for MBS repayments. Read more

Fed reinvestments – last month’s policy change that gave a nod toward easing, or rather took a step away from unintended tightening – will be $27bn in the coming month. Between mid-August and mid-September, reinvestments totalled $18bn.

Once again, there will be nine purchases, spread over the month, and over maturities stretching out to 2040 in some cases. One purchase is lined up as TIPS; the rest are outright Treasury purchases. Read more

Proposals to wean eastern Europe off the euro may be misguided.

Plans are afoot to foster local currency wholesale funding: by giving banks local currency credit, the theory goes, they will be able to pass local currency loans on to consumers. Doing this would reduce FX risks for homeowners, who earn in local currencies but often pay back debts in the euro or swiss franc. Read more

Yes. As Angela Knight, chief executive of the British Bankers’ Association says:

“A bank is like any other business – if its fixed operating costs go up then so does the price of its product. All the changes are good from a stability perspective but add billions to the fixed operating cost of a bank. The consequence is that inevitably the cost of credit – the price the borrower pays for money – will rise. The cheap money era is over.”

But I am sure Ms Knight, as a skilled lobbyist, knows that being strictly correct can happily coexist with being seriously misleading. The impression she gives is that tighter capital and liquidity standards will hit households hard through dearer credit and it is all the fault of pesky regulators. There are two big problems with this: first, the costs of tighter capital standards are only important relative to the benefits; second, the scale of the costs is more important than their existence.

Costs and benefits Read more

Basel III

Other news

‘Unsustainable growth in credit’ has prompted the Peruvian central bank to raise its reserve requirements. Banks will need to hold funds equivalent to 75 per cent of borrowings abroad maturing in less than two years, up from 65 per cent, reports Bloomberg.

The economy shows some signs of overheating, with rising inflation and a strengthening currency that consistent recent forex interventions have slowed but not reversed (see chart; source). The Reserve bank has increased its reference rate steadily during 2010, the most recent rise taking the rate to 3 per cent.