Well I reckon that for a 20-year horizon you did a sight better than your client had any right to expect.
It's interesting that the large principal flows associated with FX swaps did get a carve-out from initial margin requirements after all. Bowing to the inevitable, is my view - FX transactions have a way of climbing through the window after you've barred the door. Here is an example, driven by margin reform, that I would not have anticipated before I bumped into it. In Canada, the standard terms for collateral on the inter-bank market are USD cash. Indicative pricing is naturally based on these terms. On the other hand, it will not surprise you to learn that the end customers of Canadian banks often transact mainly in CAD and strongly prefer to post CAD collateral. When a bank hedges these transactions on the inter-dealer market, it is executing an implicit currency swap, and the "funding value adjustment" it applies in these cases is effectively the price of this swap. The amounts involved are comparatively small; it seems that FX swaps remain a low margin business even when not centrally cleared.
thanks! what interests me is how dead wrong I was to highlight LCR as an over-engineered piece of regulation that would end up getting watered down, when it's turned out to be quite the opposite. Unfortunately, the cumulative impact of late nights and scotch whisky have consumed any brain cells which might have contained clues as to why I thought that.
also of course, the biggest swing and miss was the assumption that funding costs would matter a lot, when in fact the Eurocrisis and ZIRP meant that it was a decade in which deposits were absolute trash.
In prospect, I think I would have agreed with you about the LCR. In retrospect, I can see some reasons for its staying power: the simplicity means that to overturn it you have to ask for more leverage, which is a bad look; the Europeans were on side this time because the Crisis was even worse for their banks, the "American capitalism" line wouldn't fly; the belt-and-suspenders approach of limiting leverage AND risk has been successful in as much as there has been no disaster from adverse asset selection.
In Canada, OSFI had a de facto leverage limit pre-crisis. In that connection, I'd note that banks have to turn a profit to survive and the two ways of doing that are taking risks or collecting rents (hi Canada!). You can't really combine the safety of 3-6-3 banking with the innovation, convenience, and pricing of money market mutual funds etc. IMO the American regulators have done a pretty fair job of balancing these considerations.
“Note that this is my long-term view of the global regulatory and political forces at work - it’s not necessarily the view I take when doing equity analysis and looking for the version of the world most relevant for current stock prices.”
and I suspect that the reason those two views are different is so obvious to you as to not even bother describing why, but it’s very not obvious to me and it feels like there are some interesting stories about why those aren’t the same.
And the second is that you predict that another crisis begins about now. Fortunately you did also say that you underestimated how long everything would take, so maybe that’s wrong, but since I don’t know enough to match up what you’re describing with what actually happened… we’re not due another crisis in the near future? Right?
"and I suspect that the reason those two views are different is so obvious to you as to not even bother describing why, but it’s very not obvious to me and it feels like there are some interesting stories about why those aren’t the same."
this is basically a historical artefact of the job I was doing at the time - what I really meant here was "don't give me any crap about whether or not my stock recommendations or those of other members of my team are consistent with these points, regulation is only one of very many moving parts".
With respect to timing, I would say that the Basel process took about five years longer than the timeline assumed here (and of course, I did not predict the Eurocrisis!!!!). But ... if you look at the bits that I'm saying which are relevant to crisis prediction, then I would say that the private credit industry ticks a few boxes for "closed end funds with a lot of leverage" and "innovative economic idea that assets can structurally be bought at a profit from the people who originated them".
That looks mighty prescient! In particular, if I read Matt Levine correctly, the move of lending activity from banks to more lightly regulated institutions is in full swing.
Well I reckon that for a 20-year horizon you did a sight better than your client had any right to expect.
It's interesting that the large principal flows associated with FX swaps did get a carve-out from initial margin requirements after all. Bowing to the inevitable, is my view - FX transactions have a way of climbing through the window after you've barred the door. Here is an example, driven by margin reform, that I would not have anticipated before I bumped into it. In Canada, the standard terms for collateral on the inter-bank market are USD cash. Indicative pricing is naturally based on these terms. On the other hand, it will not surprise you to learn that the end customers of Canadian banks often transact mainly in CAD and strongly prefer to post CAD collateral. When a bank hedges these transactions on the inter-dealer market, it is executing an implicit currency swap, and the "funding value adjustment" it applies in these cases is effectively the price of this swap. The amounts involved are comparatively small; it seems that FX swaps remain a low margin business even when not centrally cleared.
thanks! what interests me is how dead wrong I was to highlight LCR as an over-engineered piece of regulation that would end up getting watered down, when it's turned out to be quite the opposite. Unfortunately, the cumulative impact of late nights and scotch whisky have consumed any brain cells which might have contained clues as to why I thought that.
also of course, the biggest swing and miss was the assumption that funding costs would matter a lot, when in fact the Eurocrisis and ZIRP meant that it was a decade in which deposits were absolute trash.
In prospect, I think I would have agreed with you about the LCR. In retrospect, I can see some reasons for its staying power: the simplicity means that to overturn it you have to ask for more leverage, which is a bad look; the Europeans were on side this time because the Crisis was even worse for their banks, the "American capitalism" line wouldn't fly; the belt-and-suspenders approach of limiting leverage AND risk has been successful in as much as there has been no disaster from adverse asset selection.
In Canada, OSFI had a de facto leverage limit pre-crisis. In that connection, I'd note that banks have to turn a profit to survive and the two ways of doing that are taking risks or collecting rents (hi Canada!). You can't really combine the safety of 3-6-3 banking with the innovation, convenience, and pricing of money market mutual funds etc. IMO the American regulators have done a pretty fair job of balancing these considerations.
Glad to see I'm not the only ex-Bank of England economist who thinks more people should know about the UK secondary banking crisis.
So, two thoughts. The first is that you say:
“Note that this is my long-term view of the global regulatory and political forces at work - it’s not necessarily the view I take when doing equity analysis and looking for the version of the world most relevant for current stock prices.”
and I suspect that the reason those two views are different is so obvious to you as to not even bother describing why, but it’s very not obvious to me and it feels like there are some interesting stories about why those aren’t the same.
And the second is that you predict that another crisis begins about now. Fortunately you did also say that you underestimated how long everything would take, so maybe that’s wrong, but since I don’t know enough to match up what you’re describing with what actually happened… we’re not due another crisis in the near future? Right?
"and I suspect that the reason those two views are different is so obvious to you as to not even bother describing why, but it’s very not obvious to me and it feels like there are some interesting stories about why those aren’t the same."
this is basically a historical artefact of the job I was doing at the time - what I really meant here was "don't give me any crap about whether or not my stock recommendations or those of other members of my team are consistent with these points, regulation is only one of very many moving parts".
With respect to timing, I would say that the Basel process took about five years longer than the timeline assumed here (and of course, I did not predict the Eurocrisis!!!!). But ... if you look at the bits that I'm saying which are relevant to crisis prediction, then I would say that the private credit industry ticks a few boxes for "closed end funds with a lot of leverage" and "innovative economic idea that assets can structurally be bought at a profit from the people who originated them".
That looks mighty prescient! In particular, if I read Matt Levine correctly, the move of lending activity from banks to more lightly regulated institutions is in full swing.
this was sensational!