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
Markets anticipate further easing from the Reserve Bank of India. Twelve-year bond prices are climbing, apparently on speculation that the central bank will intervene to buy the securities to ease the cash crunch facing banks. Bloomberg reports:
The yield on the most-traded 2022 note fell after the Reserve Bank of India last week bought bonds through an open- market auction for the first time since September 2009. The central bank on Nov. 4 bought back 83.5 billion rupees ($1.9 billion) of debt, after offering to purchase as much as 120 billion rupees.
Temporary measures designed to ease a cash crunch in the banking sector over the weekend have been extended to run till Thursday. Additional liquidity will be provided to banks through an extra daily auction, since the Bank’s “liquidity adjustment facility window … has been in … deficit … recent[ly]“. Extra auctions were initially set for October 29, 30 and November 1. Now, auctions will also take place on November 2, 3 and 4.
Banks can also avail themselves of a temporary reduction in the statutory liquidity ratio: they will be allowed to hold 24 per cent rather than 25 per cent with the central bank. By one estimate, this small reduction is equivalent to an additional $10bn liquidity. Read more
Rates have been held today by Poland’s central bank, but some additional liquidity will be drained from the system by the decision to increase the amount of capital banks have to keep with the central bank. The reserve ratio will be increased from 3 to 3.5 per cent, the bank said, via Google translate.
No further information was given as the press conference hasn’t happened yet.
China has temporarily increased the reserve ratio required from six large commercial banks banks. For two months, the banks will need to keep 17.5 per cent of depositors’ balances on hand, instead of 17 per cent. With banks hoarding more cash, money supply and credit availability will fall in China. In two months’ time, the reserve ratio is expected to return to 17 per cent.
The surprise move, reported by Reuters from four unnamed sources, may be a response to rising capital flows, rather than a prelude to monetary tightening. It could also be intended as a warning to banks rumoured to have stepped up their lending in September, above government targets. Read more
The International Monetary Fund is already the world economy’s fire fighting team (as well as police force). Does it need even more powerful tools to do its job?
Not according to Germany’s Bundesbank. It has today signalled strong opposition to the idea of a “global stabilisation mechanism” (GSM) that would allow the IMF to offer unlimited credit without conditions to several countries at once.
The idea of equipping the IMF to prevent an economic crisis on one country spreading to others, has been floated by South Korea, and has apparently been received sympathetically in France and the UK. But ahead of this weekend’s IMF meetings in Washington, the Bundesbank is warning that the plan could have the opposite of the desired effect. Read more
As eurozone leaders cheered Ireland’s attempts to bring its crisis under control, banks across the 16-country region provided a separate display of reviving financial market confidence. The European Central Bank reported it had rolled over much less than expected of €225bn in three-to-12 month loans to banks that expired on Thursday.
The news was a boost for the ECB, marking a significantly reduced reliance on the unlimited liquidity it has been pumping into the banking system since the collapse two years ago of Lehman Brothers investment bank. Read more
The health of eurozone banks faces a fresh test this week when they are due to roll over €225bn in loans, the largest amount at the ECB since early July, when €442bn of one-year loans matured.
The return of liquidity could put upward pressure on market interest rates, while the volumes that are converted into new loans will be an important guide to levels of financial market confidence within Europe’s monetary union. The results could help determine the pace at which the ECB pursues its “exit strategy” to unwind exceptional measures. Read more
Jean-Claude Trichet, European Central Bank president, said yesterday’s decisions on future liquidity operations had been reached by “consensus”. To some ears, that might sound like there was a big split. In an Anglo-Saxon context, a consensus might be seen as simply “more than half”.
I think that is wrong. When Mr Trichet talks about a decision being made by “consensus,” my understanding is that that means there was some initial resistance but in the end everyone was able to support the final decision. It is a notch or two weaker than a decision agreed “unanimously”. Read more
August’s news lull has just been rudely broken by an extraordinary interview Axel Weber, Bundesbank president, gave to Bloomberg Television. In it, Mr Weber set out what he thought should happen in the next few months with the ECB’s liquidity operations – something that was only supposed to be discussed behind closed doors ahead of the ECB meeting on September 2. For good measure, Mr Weber dismissed the ECB’s controversial bond purchasing programme, which he opposed, as having had “a minor role only”.
I suspect all this will not go down well at all with other ECB governing council members. Hitherto, Jean-Claude Trichet, ECB president, has generally kept everyone in line, and announced the big decisions himself. If Mr Weber is allowed to speak out publicly, why not everyone else? The lack of verbal discipline is all the more telling as Mr Weber is a possible candidate to succeed Mr Trichet next year.
Will it help or hinder Mr Weber’s chances? Read more
Central banks in the east Asia Pacific region are planning closer co-operation managing their liquidity requirements, as each bank’s ability to provide liquidity “may be limited”. Some banks lack confidence that their liquidity management procedures could cope with renewed stress in the money markets. This from a study presented at last week’s EMEAP meeting, which ended on Friday.
That some of the 11 central banks lack confidence in their liquidity management is implied in the study’s executive summary: Read more