Were the minutes of May’s Monetary Policy Committee meeting, out today, dovish or hawkish?
The vote, which left David Miles as the sole member voting in favour of more money printing for the second month in a row, was more hawkish than most had expected. Read more
Just how big a difference did European Central Bank action make after the collapse of Lehman Brothers in 2008?
ECB researchers have come up with some new, flattering numbers on the economic impact of the ECB’s decision to offer unlimited liquidity to eurozone banks. That step – taken under Jean-Claude Trichet, then ECB president – foreshadowed the decision in December by Mario Draghi, his successor, to extend the maximum loan term from one to three years.
The authors’ key conclusion, in a discussion paper from the London-based Centre for Economic Policy Research, is that eurozone industrial production two years after Lehman Brothers was 2 per cent higher than would otherwise have been the case and unemployment about 0.6 per cent lower. Read more
Walter Bagehot. Image by Getty.
Walter Bagehot would be turning in his grave.
A research note published by the Bank of Canada on Thursday has dared to challenge the 19th Century economist’s rule that monetary authorities should lend only at a penalty rate against good collateral in times of a liquidity squeeze.
Instead, the Bank of Canada suggests that it would perhaps be wiser for the rate charged to be cut, by lowering the haircuts set on collateral exchanged for central bank cash on signs of liquidity shortages. Read more
Central banks are usually the most conservative of lenders, accepting only the safest assets in return for their cash.
However, many have been willing to lower their standards since the crisis began in order to counter liquidity shortages.
Even so, what the National Bank of Denmark has done today is drastic. Read more
External MPC member David Miles said last week he was a lot more concerned about getting capital requirements right than liquidity buffers.
This is odd. Few would deny that banks needed more and better quality capital. But, as Andy Haldane, the Bank of England’s executive director for financial stability, said on Monday, liquidity droughts were perhaps the defining feature of the crisis during 2007 and 2008.
Maybe Mr Miles was reluctant to address what has become one of the most controversial aspects of the Basel III regulatory framework.
But not Mr Haldane. He has suggested haircuts on collateral as a means to avoid systemic liquidity crises.
European stress tests will be held in the first half of this year and published in the summer, the European Banking Association* has announced. They will be accompanied by a review of liquidity funding risks:
The EBA will, as part of its regular cycle of risk assessments, initiate a separate thematic review of liquidity funding risks across the EU banking sector in the first quarter of 2011. The EBA will use this internal review to inform supervisory authorities about areas of vulnerability in relation to liquidity risk.
It looks as though the liquidity assessment will remain private, though the stress tests will be published. We’ve asked the EBA for confirmation and will update you.
No mention of the sovereign holdings part being scrapped; perhaps, in light of current shenanigans in Europe, the EBA felt they might be needed. Read more
Liquidity measures are given their own paragraph in today’s monetary policy announcement from the Reserve Bank of India, as tempering inflation allowed the central bank to hold rates. The (temporary) end to the Bank’s rate normalisation programme was expected after the governor gave a strong hint last month.
“The extent of [liquidity] tightness has been beyond the comfort level of the Reserve Bank,” said the statement, which announced two liquidity injection measures. There has been a cash crunch in the banking sector since at least early November, when the RBI extended temporary easing measures.
The first measure, which has been used temporarily before, is to reduce the amount banks have to keep with the central bank. The statutory liquidity ratio will be permanently reduced from 25 to 24 per cent with effect from December 18. The last time this was done, one estimate equated the reduction to an additional 45,000 crore Rs ($10bn) liquidity.
The second measure Read more
In today’s forecasts for the 2011 UK housing market, the Council of Mortgage Lenders worries that banks and building societies will not be able to lend much next year, partly because they will have to refinance large amounts of wholesale lending and pay back £130bn to the Bank of England in respect of the 2008 Special Liquidity Scheme which will expire in January 2012.
It says prospects have improved, but still implies that borrowers will be the main losers of the Bank’s demands to be repaid:
“The big issue for lenders next year will be to re-finance existing wholesale borrowing and begin to pay back the very large amounts of funding advanced through official support schemes. However, the prospects of them being able to do this without adversely affecting the market have improved. The amount due to be repaid under the special liquidity scheme by January 2012 has declined from about £180 billion to around £130 billion currently.
Rumour has it that certain European investors are no longer willing to provide Irish banks with overnight funding. If true, this could trigger the much-discussed bail-out (for it’s unlikely to end in default). A bail-out might still impose losses on bondholders, though, after recent discussions at the EU.
Until now, Ireland didn’t need any extra funding till mid-2011. Shenanigans in the secondary (resale) bond market were troubling, then, but did not need to affect the country’s cost of debt. Just as long as debt auctions took place once things had calmed down. Read more
More on that China rumour (which is no longer a rumour). The People’s Bank does plan to raise the deposit reserve requirement by 50bp, broadening and making permanent a temporary measure introduced almost exactly a month ago. The move, which takes effect on November 16, is expected to reduce liquidity by $45bn.
Back then, the measure affected six large commercial banks for two months. Four of those six banks will now see their deposit reserve requirement ratio (ratio) rise to 18 per cent. Other large deposit-taking institutions will see their ratio rise to 17.5 per cent, while small- and medium- sized banks will have a ratio of 15.5 per cent. Read more