Unter-Tilney: The pirate sector

Lighter, in some sense, and appealing all the same, piracy and Chicago economics:

'...On-board democracy was not some 'quasi-socialist pirate ideology', but instead was designed to foster a feeling of solidarity, which enhanced each pirate's self interest in getting as much loot as possible...'

Rogoff reiterates sovereign debt crises follow financial crises

The cruel irony of the euro area’s predicament is that, in many ways, the whole exercise was designed to produce the very credit explosion that bedevils it today. After all, one of the driving motivations of the euro was to enable member states to compete with the US for a share of the global reserve currency business. Reserve currency status, in turn, is the essence of America’s “exorbitant privilege” (a term coined by Valéry Giscard d’Estaing, the former French president). The most important perk the US gets is the ability to issue debt at a lower interest rate than would otherwise be the case. Indeed, recent research suggests that simply by enhancing the size and liquidity of financial markets, the euro may have helped to lower real interest rates across Europe, and not just for government borrowers...

Oakley on tight credit, counterparty risk around Europe's sovereign crises

...Banks are now more reluctant to lend to each other than at any point since the problems of Greece first blew up last October, according to analysts at Tullett Prebon and Icap, the interdealer brokers.

Deteriorating conditions in interbank money markets are leading some analysts to predict the next crisis will be among the banks. Even Europe's biggest banks, such as Deutsche Bank, Barclays, BNP Paribas and Société Générale, are suffering as the cost of insuring these banks against default rises.

A key measure of bank risk, the overnight index swap (OIS) spread on futures contracts in the eurozone, rose to an all-time high this week. This measures the premium over "risk-free" overnight rates of three-month rates, which carry greater credit risk.

Another warning sign is a significant shift to overnight lending by banks, particularly within troubled areas of the eurozone. Of the €450bn ($589bn) in daily turnover in the European money markets, 90 per cent is now in overnight lending, according to interdealer brokers...

Tett: Bear Sterns in Greece

Plender on US UK public liabilities

As Pogoff says, sovereign crises wash up a lot of implicit obligations...

Good run through of how higher discount rates lower future liabilities, and the reverse for the California's three biggest public pension funds, Calpers, Calstrs and the University of California Retirement System...

"On this basis, the funding shortfall of the three funds at July 2008 would be $450bn rather than the disclosed figure of $55bn.

The Stanford academics estimate the current deficit at more than $500bn, which, on my calculation, amounts to five times the total tax revenues of the state of California..."

Donhue on OTC ground rules

This article by the chairman of the Deposittory Trust & Clearing Corp. summarizes comments made by CME and ISDA representatives at the breakout panel discussion on derivatives at 2010 Booth Management conference: that regulated clearing must work through pricing and margining nuts and bolts faced by clearing houses:

:The necessary components of the solution are clear in proposals on both sides of the Atlantic. Standardise OTC derivatives, where possible. Where there is sufficient standardisation and liquidity, require the use of central counterparties to collect margin and guarantee trades. Ensurethat all OTC derivative trades are centrally reported to provide appropriate transparency to supervisors and to markets generally...

The value of a trade repository is that it has all the relevant trading data, including more detailed information that supports a thorough understanding of the net open interest relating to reference entities. It does this on a market-wide basis that allows it to provide the markets and regulators with a single view of risk from a central vantage point. Fulfilling these different perspectives in a global market is only achievable with a global source, regardless of the asset class involved.

Recognition of the importance of a single trade repository for each asset class has grown in Europe and the US. But some legislative proposals still stop short of recognising the full value of such repositories because these proposals only require a subset of data to be reported to them, in contrast to current market practice of reporting both cleared and uncleared trades to a repository.

If these proposals go ahead, they will fragment reporting and have the unintended consequence of preventing a comprehensive view of risk for regulators.

Global policymakers must be assured that the markets have access to a solution that addresses systemic risk concerns..."

Masters: Basel chief says bank tax premature

Summary of reforms

The Basel committee has proposed global reforms it expects to refine in July and adopt formally by the end of this year. The proposals include:

● Tighter rules for core tier-one capital, the building block of a bank’s reserves
● Raising the minimum ratio of tier-one capital to risk-weighted assets to a determined level. This is the main measure of bank safety
● Increasing capital requirements for trading books. This will make trading with the bank’s own money more expensive
● A new leverage ratio that would cap the size of a bank’s overall assets relative to its tier-one capital
● Two more liquidity rules. One would require banks to have enough easy-to-sell assets to survive 30 days of market chaos. The second, a “net stable funding ratio”, would require each bank to keep a minimum level of long-term funding relative to its assets
● Countercyclical capital buffers that would increase capital requirements at the height of a boom and limit a bank’s abilities to pay dividends and bonuses if its capital ratios became too low