PrefBlog

The New York Fed has announced (via an eMail alert – I can’t find anything to link):

On Wednesday, May 17 at 10:00 am EDT, the Federal Reserve Bank of New York will launch monthly publication of a new research product that will offer a unified approach to measuring downside risk to real GDP growth, upside risk to the unemployment rate, and two-sided risks to CPI inflation.

Outlook-at-Risk will present estimates of the conditional distribution of the future evolution of these key economic variables based on the relationship with the level of financial conditions.

Following the launch of Outlook-at-Risk, the estimated conditional and unconditional distributions will be updated at or shortly after 10:00 am on the third Wednesday of each month.

In conjunction with the new product, the New York Fed will publish a Liberty Street Economics blog post using the data on conditional distributions to investigate how two-sided risks to inflation and downside risks to real activity have evolved over the current and previous five monetary policy tightening cycles.

Outlook-at-Risk was first introduced through a Liberty Street Economics blog post in February 2023, which was inspired by previous work on “Vulnerable Growth.”

The BoC has released a Staff Analytical Note by Julien Champagne, Christopher Hajzler, Dmitry Matveev, Harlee Melinchuk, Antoine Poulin-Moore, Galip Kemal Ozhan, Youngmin Park and Temel Taskin titled Potential output and the neutral rate in Canada: 2023 assessment:

Our estimate for the nominal neutral rate—ranging between 2% and 3%—suggests no
change with respect to the 2022 assessment (Table 3). However, some of our models imply
small changes that offset each other:

• • On the one hand, the small open-economy overlapping-generations model implies a downward revision of 25 basis points (bps) in the nominal neutral rate range. This is due to the combination of:
  • o a small decline in assumptions on growth in long-run labour input and productivity
  • o the assessment of a smaller net ratio of government debt to gross domestic product (GDP) in the long term
• • On the other hand, the risk-augmented neoclassical growth model implies an upward revision of 25 bps of the nominal neutral rate range. This is due to a small reduction of the estimated incentives for precautionary savings resulting from the milder-thanexpected negative economic impact of the COVID-19 pandemic.

Emerge Canada (last discussed 2023-4-17) has had its license suspended:

Ontario’s securities watchdog has suspended the registration of asset manager Emerge Canada Inc. after finding it failed to comply with working capital requirements and the regulator expects the manager to wind down its funds.

The Ontario Securities Commission announced Thursday it has suspended exchange-traded funds provider Emerge Canada from being an investment fund manager, a portfolio manager and an exempt market dealer after finding the company is essentially insolvent.

The OSC says Emerge Canada’s U.S. parent owes its Canadian subsidiary millions of dollars that the Canadian subsidiary has failed to collect. The OSC says Emerge Canada can’t count that money owed as part of its working capital.

In turn, Emerge Canada owes more than $5-million to its own ETFs – a number far higher than disclosed on its most recent financial statements.

Looks like CI Financial got a fine price for a chunk of its US operation:

Investment giant CI Financial is selling a 20-per-cent stake in its U.S. wealth management business for $1.34-billion to pay down outstanding debt while it pauses plans to take its U.S. division public.
…
CI shares climbed nearly 50 per cent to $18.69 in early trading on the Toronto Stock Exchange. By midday, the shares pulled back, but were still up 25 per cent.

At $1.34-billion for 20 per cent of the U.S. business, the transaction values the equity of the U.S. business at $6.7-billion – nearly three times CI’s entire $2.3-billion market capitalization on the Toronto Stock Exchange at Wednesday’s closing price of $12.50 per share. By retaining 80 per cent of the U.S. business, CI holds a stake valued by the new investment at just under $5.4-billion – or nearly $29 per CI share.

BIS has published a handbook on the offline use of Central Bank Digital Currencies:

The ability to make payments offline means being able to use a CBDC without being connected to the internet, either temporarily or because of coverage limitations. Central banks considering the potential implementation of CBDCs with offline functionality must take into account a complex matrix of issues including security, privacy, likely risks, the types of solution, their maturity and applicability, and operational factors.

The handbook, compiled in partnership with Consult Hyperion, addresses these issues as well as objectives for resilience, inclusion, cash resemblance, accessibility and other desired attributes.

The degree to which CBDCs will be provided or used offline will vary significantly by country, region, demographics and specific contexts, which will also influence the solutions chosen.

The BIS Financial Stability Institute has released a brief by Rodrigo Coelho, Fernando Restoy and Raihan Zamil titled Rising interest rates and implications for banking supervision:

Highlights

• • The recent market turmoil exposed heightened vulnerabilities of banks with material exposures in long-term, fixed rate assets that are fuelled by shorter-term, less stable funding. As interest rates rise, such entities may incur significant declines in asset values, while being exposed to volatile funds providers who may flee at the first sign of trouble, triggering a broader crisis of confidence.
• • While regulatory requirements are fundamental, they cannot, in isolation, address all ways in which higher rates could impact a bank’s solvency and liquidity. Moreover, capital requirements are sensitive to banks’ accounting classification choices, while liquidity rules are premised on assumptions about deposit stickiness and the ability to sell assets at a reasonable cost.
• • The supervisory review process, on the other hand, takes into account bank-specific characteristics and provides supervisors with various tools to address the confluence of risks caused by rising rates, and the ability to act preemptively before risks crystallise.
• • Further guidance that supports supervisors’ ability and will to act may help to provide structureand consistency to supervisory decision-making, while allowing room for judgment.

US inflation news was better than expected:

The Consumer Price Index climbed 4.9 percent in April from a year earlier, less than the 5 percent that economists in a Bloomberg survey had expected. Inflation has come down notably from a peak just above 9 percent last summer, though it has remained far higher than the 2 percent annual gains that were normal before the pandemic.

After stripping out food and fuel to get a sense of the underlying trend in price increases — what economists call a core measure — consumer prices climbed 5.5 percent from a year earlier, a slight drop from 5.6 percent in the previous reading.
…
But underlying trends that could keep inflation persistently high over time have remained intact, including unusually strong wage growth, which could prod companies to try to charge more for products and services
…
The relentless rise in rents might finally be coming to an end.

The price of renting a home was up 8.8 percent in April from a year earlier, the same rate of increase as in February and March. That suggests that rental inflation may finally be leveling off, albeit at a high rate.

The New York Fed has updated the Underlying Inflation Gauge:

• The UIG “full data set” measure for April is currently estimated at 4.0%, a 0.3 percentage point decrease from the current estimate of the previous month.
• The “prices-only” measure for April is currently estimated at 3.4%, a 0.2 percentage point decrease from the current estimate of the previous month.
• The twelve-month change in the April CPI was +4.9%, a 0.1 percentage point decrease from the previous month.
  • -For April 2023, trend CPI inflation is estimated to be in the 3.4% to 4.0% range, a lower and slightly narrower range than March, with a 0.2 percentage point decrease on its lower bound and a 0.3 percentage point decrease on its upper bound.

John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, gave a speech titled This is the Way:

Although short- and medium-term inflation expectations rose during the pandemic, these measures have since come down. Indeed, based on the latest reading of the New York Fed’s Survey of Consumer Expectations, three-year-ahead expectations have returned to a level nearly identical to its average between 2014 and 2020. Although one-year-ahead inflation expectations in the survey remain elevated, they have declined considerably from the peak level reached in June 2022.

To understand why inflation remains too high, it’s instructive to examine inflation developments in various sectors of our economy. So far, inflation has declined in many categories of commodities and goods, which tend to be more sensitive to interest rate increases.

In addition, supply chains, which were severely constrained after the pandemic’s onset, have improved considerably. This is something I hear from business leaders from across the Federal Reserve’s Second District. And the New York Fed’s Global Supply Chain Pressure Index has declined to a level that indicates supply chain pressures are now actually somewhat lower than normal.

At the same time, the March price data indicate some moderation in overall rent inflation. And rents for new leases have been showing slower rates of increases, which should bring down shelter inflation in coming months. This is important because shelter inflation had been a significant driver of higher inflation over the past year.

But the most persistent area of inflation is in core services excluding housing, which has been running around 4-1/2 percent since last August . This is driven by a continued imbalance in overall supply and demand, and it will take the longest to bring down.
…
Because of the lag between policy actions and their effects, it will take time for the FOMC’s actions to restore balance to the economy and return inflation to our 2 percent target. I expect inflation to decline to around 3-1/4 percent this year, before returning to our longer-run goal of 2 percent over the next two years.

The Boston Fed has released a Research Department Working Paper By Claire Greene, Oz Shy, and Joanna Stavins titled Personality Traits and Financial Outcomes:

Surveys indicate that about 4.5 percent of US households do not have a bank account, about one-quarter do not own any credit cards, and among credit cardholders, revolving credit card debt (carrying unpaid balances) is common. Using data from the 2021 Survey and Diary of Consumer Payment Choice and the University of Southern California Understanding America Study, this paper looks at whether self-reported personality traits have a significant effect on these financial outcomes when the analysis takes into account consumers’ income, demographics, and financial literacy. Specifically, it studies which if any of the Big Five personality traits—openness to experience, conscientiousness, extroversion, agreeableness, and neuroticism—influence consumers’ decisions to be unbanked, adopt a credit card, or revolve credit card debt.

Lucrezia Reichlin, professor of economics at the London Business School, was interviewed by F&D Magazine:

If a bank is failing, the regulator can seek resolution with a bail-in or a bailout. A bail-in in theory is a good option to protect taxpayers, but in some cases a bailout may be wiser. The way to think about the choice is that a bail-in may cause financial instability while a bailout causes moral hazard and is an implicit subsidy to the banking sector.

In many cases, the crisis of one bank is addressed by a national regulator facilitating a merger with a national bank, either by moral suasion, subsidy, or both. This was the case in Switzerland, where UBS was encouraged by the regulator to absorb Credit Suisse at a very unfavorable exchange for Credit Suisse shareholders. Such a solution is not always feasible. In the case of Switzerland, another merger would not be possible since UBS is now the only national bank, and a cross-border merger would involve authorities with different national interests.
…
There are also questions about the EU resolution rules. The Banking Recovery and Resolution Directive prevents any bailout before 8 percent of the unweighted balance sheet of a troubled bank has been bailed in. As Mathias Dewatripont, André Sapir, and I have pointed out, the problem is that many of the smaller and midsize banks cannot satisfy the 8 percent bail-in rule without hitting depositors, as they do not hold enough debt that can be bailed in. For such banks, the US approach to Silicon Valley Bank would be illegal. Under these circumstances, if a banking crisis were to strike today, there would be a risk of financial instability.

Another concern is that deposit insurance is low in the EU, at only 100,000 euros, and there is no systemic risk exemption, unlike in the US, where depositors can expect to be protected in cases where a bank’s collapse would pose a risk to the entire financial system. This, combined with the fact that the banking union doesn’t involve common deposit insurance at the EU level, makes the system fragile. When there is tension in the market, nonresident deposits flow toward countries which are safer from the public finance standpoint, while banks hold bonds of their own sovereign on the asset side. This creates market segmentation and a vicious cycle of risks between banks and sovereigns.

PerpetualDiscounts now yield 6.27%, equivalent to 8.15% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.98% on 2023-5-5 and since then the closing price has changed from 15.21 to 15.19, a decline of 13bp in price, with a Duration of 12.32 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies an inccrease in yield of about 1bp since 5/5 to 4.99%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to about 315bp from the 330bp reported May 3.

The Fed has released its Financial Stability Report for May 2023:

Large banks that were subject to the liquidity coverage ratio (LCR) continued to maintain levels of high-quality liquid assets (HQLA) that suggested that their liquid resources would be sufficient to withstand expected short-term cash outflows.

Prime MMFs and other cash-investment vehicles remain vulnerable to runs and, hence, contribute to the fragility of short-term funding markets. In addition, some cash management vehicles, including retail prime MMFs, government MMFs, and short-term investment funds, maintain stable net asset values (NAVs) that make them susceptible to sharp increases in interest rates. The market capitalization of the stablecoin sector continued to decline, and the sector remains vulnerable to liquidity risks like those of cash-like vehicles. Some open-end bond mutual funds continued to be susceptible to large redemptions because they must allow shareholders to redeem every day even though the funds hold assets that can face losses and become illiquid amid stress. Liquidity risks at central counterparties (CCPs) remained low, while liquidity risks at life insurers appeared elevated.
…
The amount of HQLA decreased across all types of banks over the past year, driven by decreases in reserves and reductions in market values of securities portfolios due to rising interest rates (figure 4.2).
…
Some banks increased their reliance on wholesale funding sources, though banks’ overall reliance on short-term wholesale funding remained near historically low levels (figure 4.3). Even with the declines in HQLA, U.S. G-SIBs’ LCRs—the requirement that banks must hold enough HQLA to fund estimated cash outflows during a hypothetical stress event for 30 days—remained well above requirements.

I was struck by how much the holdings of HQLA have diverged (by size of bank) since the Credit Crunch:

The BoC has announced:

is launching an online public consultation on the features that could be included in a digital Canadian dollar.

The consultation opened today and runs until June 19.

The way Canadians pay for everything from the daily necessities to major purchases is evolving rapidly. As the world becomes increasingly digital, the Bank—like many other central banks—is exploring a digital version of Canada’s national currency.

“As Canada’s central bank, we want to make sure everyone can always take part in our country’s economy. That means being ready for whatever the future holds,” said Senior Deputy Governor Carolyn Rogers.

At this time, a digital Canadian dollar is not needed. And any decision to issue one rests with Parliament and the Government of Canada.

A digital Canadian dollar issued by the Bank would have to be designed to serve Canadians’ needs. That’s why the Bank is holding this online consultation: to understand which features are most important to Canadians. The Bank is also seeking opinions about topics related to a digital dollar, such as:

• how people would likely use it
• what security features are important
• what concerns you have about accessibility and privacy

“We want to hear from Canadians about what they value most in the design of a digital dollar. This will help us make design choices and ensure that it is secure, reliable and meets the needs of Canadians,” Rogers said.

The Bank has been providing bank notes to Canadians for more than 85 years. Cash is a safe, accessible and trusted method of payment that anyone can use, including people who don’t have a bank account, a credit score or official identification documents.

If a digital Canadian dollar is issued in the future, the Bank will continue to provide bank notes for those who want them. Cash isn’t going anywhere.

However, there may come a time when bank notes are not widely used in day-to-day transactions, which could risk excluding many Canadians from taking part in the economy.

It’s also possible that private cryptocurrencies or central bank digital currencies issued by other countries could become widely used in Canada in the future. This could compromise the role of an official, centrally issued currency—the Canadian dollar—in our economy and pose a risk to the stability of our financial system.

A digital Canadian dollar would ensure Canadians always have an official, safe, and stable digital payment option issued by Canada’s central bank.

The Bank will publish a report summarizing this consultation later this year.

For the latest updates on the process, follow us on Twitter, Facebook and Instagram.

Notes for editors

• The following link to the consultation page can be embedded in your stories: https://bit.ly/429uV0M.
• For more information on the Bank of Canada’s work on a digital Canadian dollar, see https://www.bankofcanada.ca/digitaldollar/.
• The public consultation will be accessible on the Bank’s website until June 19, 2023, at 23:59 Pacific time.
• A broadcast-quality video clip of the Senior Deputy Governor is available for download upon request.

Mark Rendell comments in the Globe:

Eleven countries have launched digital dollars, including the Bahamas and Nigeria. Other countries, such as China and India, are conducting large-scale pilot programs.

The idea of CBDCs is not without controversy. Some commercial banks worry that the ability to keep digital money directly at the central bank could undercut commercial bank deposits. The Canadian Bankers Association issued a warning about CBDCs last year, arguing that they could undermine commercial bank funding and decrease competitiveness in the financial system.

Some politicians have also raised concerns about privacy, with electronic money being inherently less anonymous than physical cash. Conservative Party leader Pierre Poilievre has said he would not allow the launch of a CBDC.

I don’t see why a digital dollar would necessarily be held by individuals at the BoC. That sounds like a lot of paperwork for the Bank to me: they’re not set up for it and I don’t see why they should be. I think that direct holdings should be limited to ‘wholesalers’ including, not limited to, the banks. Of course, the banks already issue a pseudo-digital currency with Interac cards and e-Transfers at $1 per transaction with half an hour’s delay, which basically negates all the good that may be brought by the miracles of modern electronics. But if some fintechs and foreign players could be brought in …

What I really want is an extension to my browser, so if I want to read something on the Internet for fifteen cents I can click a button, bang, done. And I want to charge a dollar for access to my publications on the web. And I want to do all this without a $1 interac fee or a 2.5% credit card fee. And no damn fuss, either. Click the button!

The Canaccord management buy-out has stumbled:

Citing an “ongoing regulatory matter” involving one of its foreign subsidiaries, the company said early Monday that required approvals for the $11.25 per share all-cash bid would likely not be received before the bid expires on June 13. Approvals might not even come before the management group’s financing commitments – $825-million from New York-based HPS Investment Partners LLC – expire on August 9, the company said.

More than 50 members of Canaccord’s management team, including chief executive Dan Daviau and board chair David Kassie, comprising the group seeking to take the company private, responded in a separate statement that said “there can be no assurance” that the deal will be completed as a result of the latest developments. If completed, the management group said, new terms and conditions may be required.

The development represents a surprising setback for a deal that was believed to have reached its end game nearly two months ago. In March, all four members of the special committee of Canaccord’s board of directors that was reviewing the buyout offer resigned under pressure from Skky Capital Corp. Ltd., which owns an 8.8-per-cent stake in Canaccord.

I continue to have no faith in the governance of this company, as noted on March 13.

BIS has released a Working Paper by Xiang Fang, Bryan Hardy and Karen K Lewis titled Who holds sovereign debt and why it matters:

Summary
Focus
Sovereign borrowing can help buffer the economy from macroeconomic shocks. This indebtedness can also make a country vulnerable to financial distress. The sharp increase in government spending and debt issuance with the Covid-19 pandemic has brought more urgency to understanding how a government can borrow. Answering this question requires knowledge of who invests in sovereign debt and how these investors may influence sovereign borrowing costs.

Contribution
We construct an aggregate data set of sovereign debt holdings by foreign and domestic bank, non-bank private, and official investors for 95 countries over 20 years. We use this database to identify which types of investor increase their holdings of sovereign debt when the sovereign borrows more (and reduce their holdings when the sovereign borrows less). We then examine how the sovereign debt holdings of these investors respond to the yield on that debt. Lastly, we combine these results to show how the composition of investors affects the sovereign’s borrowing costs.

Findings
Private non-bank investors, mainly investment funds, increase their holdings of sovereign debt by more than other investors as the sovereign’s total debt expands. They fund nearly 70% of increases in sovereign debt. Further, non-bank investors are the most responsive to changes in sovereign yields. Accordingly, as a sovereign increases its debt, its costs increase faster if non-bank investors are not present.

Abstract
This paper studies the impact of investor composition on the sovereign debt market. We construct a data set of sovereign debt holdings by foreign and domestic bank, non-bank private, and official investors for 95 countries over 20 years. Private non-bank investors absorb disproportionately more sovereign debt supply than other investors. Moreover, non-bank investor demand is most responsive to the yield. Counterfactual analysis of emerging market sovereigns shows a 10% increase in debt leads to a 6.7% increase in costs, but an outsize 9% increase if non-bank investors are absent. We conclude that these sovereigns are vulnerable to losing non-bank investors.

The Cleveland Fed has released an Economic Commentary by Ina Hajdini, Edward S. Knotek II, John Leer, Mathieu Pedemonte, Robert W. Rich and Raphael S. Schoenle:

Surveys often measure consumers’ inflation expectations by asking directly about prices in general or overall inflation, concepts that may not be well-defined for some individuals. In this Commentary, we propose a new, indirect way of measuring consumer inflation expectations: Given consumers’ expectations about developments in prices of goods and services during the next 12 months, we ask them how their incomes would have to change to make them equally well-off relative to their current situation such that they could buy the same amount of goods and services as they can today. Using a massive number of survey responses at a high frequency, we show that this measure of indirect consumer inflation expectations has risen sharply since early 2021. Higher inflation experiences correlate with higher indirect consumer inflation expectations across US cities and around the world.

Jobs, jobs, jobs!

Employers added 253,000 jobs in April, the Labor Department reported Friday, in a reversal of the cooling trend that had marked the first quarter and was expected to continue.

The unemployment rate was 3.4 percent, down from 3.5 percent in March, and matched the level in January, which was the lowest since 1969.
…
All of that has benefited groups that have historically been at a disadvantage in the labor market. The unemployment rate for Black Americans reached its lowest point on record in April, at 4.7 percent, and the gap between the unemployment rates of white and Black people was also the smallest ever measured. The share of working-age people participating in the labor market reached 83.3 percent, matching a level not seen since 2008.
…
Average hourly earnings climbed by 4.4 percent in the year through April. That compared with 4.3 percent in the previous month, and was more than the 4.2 percent that economists had expected.
…
More than four out of every five people in their prime working ages between 25 and 54 are now in the labor force. That rate has jumped in recent months — and it continues to rise above prepandemic levels.

And in the frozen North:

The Canadian economy gained 41,400 jobs in April, exceeding expectations for an increase of 20,000, while the jobless rate stayed near a record low.
…
Money markets are still expecting an interest rate cut by the BoC this year, but chances of a cut as soon as October fell to about 30% from 70% before the data.
…
Canadian government bond yields were higher across a flatter curve. The 2-year rose 16.1 basis points to 3.728%, while the 10-year was up 12.3 basis points at 2.923%.

BIS has released a Working Paper by Mathias Drehmann, Mikael Juselius and Anton Korinek, titled Long-term debt propagation and real reversals:

Summary
Focus
Economic propagation mechanisms that capture how disturbances systematically feed through the economy over time are central to macroeconomic models. Such mechanisms allow us to understand the behaviour of key macroeconomic variables and help us make more reliable forecasts. Unfortunately, many macro models lack strong propagation based on understandable economic behaviour and instead rely on mechanisms for which there is no economic rationale.

Contribution
We describe a natural propagation mechanism through which new borrowing can systematically affect future output and lead to reversals in activity. The starting point is simple: the majority of debt contracts are long-term and imply regular future debt service payments (consisting of interest and amortisations). These payments pile up during a credit boom and, as time progresses, eventually outweigh the flow of borrowing. When this happens, the positive output effect from the credit boom reverses and output falls. We confirm this pattern using data from many countries over the last four decades.

Findings
Using a novel multi-country data set of debt flows, we find that the prevalence of long-term debt leads to predictable patterns in the data. In the short term, an increase in new household borrowing is associated with higher output growth. Over time, as the stock of debt increases, debt service payments place an increasing drag on output. Eventually the negative debt service effect outweighs the positive effect from borrowing, leading to a real reversal. We find that this mechanism largely accounts for the well documented fact that growth tends to systematically slow for several years after a credit boom.

Abstract
We examine a propagation mechanism that arises from households’ long-term borrowing and show empirically that it has sizable real effects. The mechanism recognises that when there is long-term debt, an impulse to new borrowing generates a predictable hump-shaped path of future debt service. We confirm this pattern using a novel multi-country dataset of debt flows. Whereas new borrowing boosts output contemporaneously, debt service depresses output. Credit booms thus lead to predictable reversals in real economic activity several years later. This long-term debt propagation channel is the main reason for why indicators of credit cycles have predictive power for future economic activity.

In addition BIS released a Working Paper by Katharina Bergant, Francesco Grigoli, Niels-Jakob Hansen and Damiano Sandri titled Dampening global financial shocks: can macroprudential regulation help (more than capital controls)?:

Summary
Focus
Fluctuations in global financial markets can severely destabilise emerging market economies (EMEs). The academic and policy debate on enhancing their resilience has focused on the role of capital controls and foreign exchange intervention because these tools directly target international financial transactions. In this paper, we provide a different perspective by asking whether EMEs might also rely on macroprudential regulation to protect themselves against global financial shocks.

Contribution
To tackle this question, we assemble a rich data set for 38 EMEs between 2000 and 2019. The econometric analysis examines whether a more stringent level of macroprudential regulation reduces the effects of global financial shocks on EMEs’ economic activity. We also investigate whether stricter macroprudential regulation allows for a more countercyclical monetary policy response in EMEs vis-à-vis global financial shocks. Finally, we compare the results with those associated with the use of capital controls.

Findings
We find that macroprudential regulation can significantly enhance the resilience of economic activity in EMEs to global financial shocks. A broad set of macroprudential tools contributes to this result, including measures targeting bank capital and liquidity, foreign currency mismatches and risky credit. We also find that macroprudential regulation enhances monetary independence by allowing for a more countercyclical response to global financial shocks. The strength of these results is remarkable since we do not find evidence that capital controls provide similar benefits. Hence, macroprudential regulation emerges as a key instrument for bolstering the resilience of EMEs against the ebb and flows of the global financial cycle.

Abstract
We show that macroprudential regulation significantly dampens the impact of global financial shocks on emerging markets. Specifically, a tighter level of regulation reduces the sensitivity of GDP growth to capital flow shocks and movements in the VIX. A broad set of macroprudential tools contributes to this result, including measures targeting bank capital and liquidity, foreign currency mismatches, and risky credit. We also find that tighter macroprudential regulation allows monetary policy to respond more countercyclically to global financial shocks. This could be an important channel through which macroprudential regulation enhances macroeconomic stability. We do not find evidence that capital controls provide similar benefits.

The BoC released a fascinating Staff Working Paper by Rodney J. Garratt, Zhentong Lu and Phoebe Tian titled How Banks Create Gridlock to Save Liquidity in Canada’s Large Value Payment System:

Using detailed data from Canada’s new high-value payment system (HVPS), we show how participants of the system save liquidity by exploiting the new gridlock resolution arrangement. These observed behaviors are consistent with the equilibrium of a “gridlock game” that captures the key incentives that participants face in the system. The findings have important implications for the design of HVPSs and shed light on financial institutions’ liquidity preference.
…
In this paper, we examine the launch of a new HVPS [High Value Payment System] in Canada called Lynx that substantially alters financial institutions’ incentives to provide liquidity.2 Whereas the previous system adopted liquidity pooling and risk sharing mechanisms to reduce banks’ liquidity needs, the new system requires banks to provide liquidity up front for all payments, with an exception for banks that have insufficient liquidity available in the designated payment stream to make the payment. In this case, payments are queued and settled on a net basis, a process called gridlock resolution. Participants would like to save liquidity by queuing payments (which will be resolved by the gridlock resolution mechanism). However, now they cannot queue payments directly and can only do this indirectly by keeping their liquidity low, so this is a ”friction” for them to access the queuing/gridlock resolution process.

The ”voluntary” queuing would give them direct control. The new system has two payment streams. Both are what payments professionals call real-time gross settlement streams (RTGS), because payments are made on a gross basis and are final and irrevocable once processed. However, one stream includes a gridlock resolution mechanism (we denote this stream by RTGSG thereafter) that has added functionality, and thereby dominates the pure RTGS stream. FIs quickly figured out a clever way to use both streams to their advantage.

In the Lynx system, gridlock resolution is activated only if there is insufficient liquidity in the payment stream to settle payments on a gross basis. Participants cannot voluntarily put payments into the gridlock queue. Hence, the only way for FIs to obtain the liquidity savings associated with netting in the gridlock resolution mechanism queue is to starve that stream of liquidity. By submitting more payments than liquidity to the RTGS stream with a gridlock resolution mechanism, FIs are able to trigger gridlock resolution and settle payments on a net basis.
…
Recognizing an opportunity to save liquidity, on September 16, all the major participants jointly reduced their liquidity allocations to the RTGSG. As expected, this joint action created more gridlocks and queued payments, and activation of the gridlock resolution algorithm led to settling queued payments on a net basis, thus achieving the desired liquidity savings. Engaging the gridlock mechanism lead to delay in settlement of some payments. However, our calculations show that this shift in behavior brought down the system-wide liquidity level by about 76% and caused only about 30 minutes’ delay to the system.

The New York Fed updated the Global Supply Chain Pressure Index:

• Global supply chain pressures decreased again in April, falling to 1.32 standard deviations below the index’s historical average. The March value was revised downward from 1.06 to 1.15 standard deviations below the index’s historical average.
• There were significant downward contributions from Euro Area delivery times, Euro Area stocks of purchases, and Korean delivery times. While the overall index declined, there was a notable upward contribution from Taiwan stocks of purchases.
• Looking at the underlying data, the GSCPI’s recent downward trend has been consistently driven by improvements in Euro Area delivery times.

The TD takeover of First Horizon has been terminated:

Toronto-Dominion Bank and First Horizon Corp. have terminated TD’s proposed US$13.4-billion takeover of the Memphis, Tenn.-based bank, killing the Canadian lender’s expansion in the southeast United States.
…
First Horizon’s share price fell sharply when markets opened, and was down 36 per cent to US$9.60 in early trading. TD’s share price rose 1.7 per cent to $82.89 on the Toronto Stock Exchange.

In recent months, TD investors had expressed concerns about the valuation and timing of the First Horizon deal because the banking sector is struggling and share prices have dropped. There were also questions about TD’s ability to turn around a business that was generating subpar growth and that had faced integration issues of its own [from] a prior merger, according to National Bank Financial analyst Gabriel Dechaine.

Charlotte Gerken, Executive Director of Insurance Supervision of the Bank of England, gave a speech titled Moderation in all things:

From historic lows of 0.1% in December 2021, the UK Bank rate rose to 4.25% in March 2023. While it could hardly be described as plain sailing for pension schemes or their sponsors, the rise in interest rates has generally reduced the value of their liabilities and boosted funding ratios (see chart 1). This has greatly improved the affordability of buy-outs for many pension schemes.

At the same time, trustees of pension schemes are reported to be increasingly viewing buy-outs as a long-term target[4]. Increased affordability and a decreased appetite to retain this risk have led to a growing appetite for schemes to transact in one go, rather than perform staged buy-ins spread over several years[5]. So called ‘jumbo’ schemes may also present exciting opportunities for the insurers. This all points to a material increase in pension schemes’ demand for BPA in 2023. But I’d note that this is an acceleration of the existing demand for BPA in a large but finite market in run-off (see chart 2 and 3).
…
Secondly, the disruption in the UK gilt market last autumn resulted in some pension schemes being overweight in illiquid assets[7] as gilt values fell significantly, and schemes sought to reduce their leverage under liability driven investment strategies[8]. We see insurers increasingly developing solutions to accept illiquid assets as part of the BPA premium, as pension schemes may be reluctant to dispose of these assets in the open market, potentially at a large discount. This requires significant due diligence, and we are seeing insurers seeking more advice from third party specialists such as property valuation experts both for illiquid asset valuation and to calibrate adequate market value haircuts. Alternatively, we have seen deferrals of premiums incorporated in deals giving pension schemes time to dispose of such assets in an orderly fashion[9]. These premium arrangements can be complex and potentially capital intensive due to the increased uncertainty they can create.
…
Related to that point, the third area I would like to touch on is a key aspect of the changing pensions and insurance landscape. One industry estimate, suggests that the UK life insurance industry could onboard more than £500bn of pension liabilities – and associated assets – over the coming decade[13] [14]. This is a big structural change in the control of long-term investments in the UK, and the decisions that insurers make now will have long term consequences for the performance and development of the broader economy.

The Fed released its FOMC Statement on schedule:

Economic activity expanded at a modest pace in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.

The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 5 to 5-1/4 percent. The Committee will closely monitor incoming information and assess the implications for monetary policy. In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Lorie K. Logan; and Christopher J. Waller.

For media inquiries, please email media@frb.gov or call 202-452-2955.

The NYT points out:

But in their statement announcing the decision, policymakers also indicated that they will watch to see whether future rate moves are necessary. That marks a shift in stance: For months, they had assumed that additional changes would be needed.

The change opens the door to a possible pause in Fed interest rate increases, but it also leaves central bankers with options. Officials could raise rates by more if the economy and inflation prove hot.
…
Investor bets on where interest rates go from here are firmly tilted toward a pause and then lower interest rates later in the year. One calculation put the likelihood the Fed holds off changing interest rates when it next meets in June at 80 percent.
…
Stocks rose after the Fed raised rates and omitted previous language in its statement that signaled more rate increases to come, ushering in the pause investors had hoped for. The S&P 500 rose 0.4 percent.
…
The yield on two-year government bonds, which are sensitive to changes in interest rates, latched on to the potential pause, falling to 3.93 percent.
…
Cutting interest rates this year is “not in our forecast” says Powell, in response to a question about investors already pricing in swift cuts to interest rates as soon as September.
…
The S&P 500 skidded at the end of Powell’s press conference, down 0.5 percent, having initially reacted to the Fed’s policy announcement positively. Investors appeared to react to Powell repeating that the central bank does not expect to cut interest rates this year, with interest rates remaining higher for longer weighing on the market.

PerpetualDiscounts now yield 6.24%, equivalent to 8.11% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.87% on 2023-4-28 and since then the closing price has changed from 15.38 to 15.47, an increase of 59bp in price, with a Duration of 12.42 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies a decrease in yield of about 5bp since 4/28 to 4.82%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to about 330bp from the 315bp reported April 26.