PrefBlog

On May 11 I unwisely remarked on the “fine price” CI got for a chunk of its US operation. Oops! I forgot that when the Bay Street Smiley Boys start bragging, it’s time to run:

In a regulatory filing Thursday, CI said that if a future IPO doesn’t meet certain conditions, including size, the company has guaranteed the buyers of the preferred shares a new, higher value for them.

That value increases over time, giving CI an incentive to take the U.S. wealth business public sooner. In three years, the new “stated” price of the preferred shares will jump to 150 per cent of their original price – or a total of $2-billion. It will continue to grow after that, and in six years, it will be 225 per cent of the original price, or $3-billion.

That means the new capital could cost CI at least 14 per cent annually, each year it remains in place.

The buyers of the debt also have the right to force an IPO or sale of the U.S. wealth business within five years and nine months after the closing.

So, people are running:

As Thursday’s trading continued, however, the share price began to slide, and it collapsed Friday to nearly the predeal levels. The swoon in CI’s share price has left its shares shockingly cheap: According to S&P Global Market Intelligence, the stock trades at less than four times the estimate of the company’s next 12 months’ earnings per share, and a little more than six times its EBITDA, or earnings before interest, taxes, depreciation and amortization.

I don’t have an interest, even at three times EBITDA. When a company starts crap like this, you know their back’s up against the wall.

Real estate has started bubbling again:

National home sales jumped by 11.3 per cent between March and April as the real estate market picked up again, but supply remained at a 20 year-low, the Canadian Real Estate Association said Monday.

Seasonally-adjusted sales for the month totalled 38,164 compared with 34,277 in March.

The actual number of homes sold last month amounted to 44,059, down 19.5 per cent from a year prior.

The year-over-year sales decline was markedly smaller than the drops reported in recent months, the association said, attributing the return of sales to home prices, which many feel have bottomed out in recent months as interest rates climbed eight times over the last year.
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Those who waded into the market last month found last month’s seasonally-adjusted average price hit $695,887, up 5.7 per cent from March.

The actual average home price was roughly $716,000 in April, down 3.9 per cent from April 2022, but up $103,500 from January 2023.

CREA attributed the gains seen since January to “outsized sales rebounds” in the Greater Toronto Area (GTA) and B.C.’s Lower Mainland, which tend to be hot markets.

Excluding the GTA and Greater Vancouver from the calculation cuts more than $144,000 from the actual national average price, CREA said.

The BoC has released a Staff Discussion Paper by Toni Gravelle, Ron Morrow and Jonathan Witmer titled (deep breath) Reviewing Canada’s Monetary Policy Implementation System: Does the Evolving Environment Support Maintaining a Floor System?:

At the onset of the pandemic, the Bank of Canada transitioned its framework for monetary policy implementation from a corridor system to a floor system, which it has since decided to maintain. This decision was informed by the analysis and assessment of the two frameworks in this paper. We provide a comprehensive analysis of both frameworks and assess their relative merits based on five key criteria that define a sound framework. Our evaluation includes a discussion of how these relative merits have changed since the pandemic began. Specifically, we examine the evolving regulatory landscape, changes in payment systems, and the Bank’s quantitative easing program to understand their implications for the relative strengths of the two frameworks for monetary policy implementation.
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Engert, Gravelle and Howard (2008) describe the corridor system used by the Bank.

In a corridor system, the central bank needs to carefully judge the amount reserves needed to incentivize trading near its target for the overnight interest rate. This can be seen in Figure 1 (panel a), where the demand curve is inelastic around the target interest rate. That is, relatively small changes in the supply of reserves (or small shifts in the demand curve, holding supply constant) can cause a large change in the overnight market rate, given the steepness of the demand curve near the target interest rate. Because of this, the effective implementation of a corridor system (i.e., overnight rate trading near target) requires a central bank to have a good ability to forecast demand and the capacity to adjust the supply of reserves in a precise and timely way. The central bank adjusts the supply of reserves in a corridor system through its fine-tuning operations. In Canada, before the COVID-19 pandemic, the amount of settlement balances needed to keep the overnight market rate near the target rate was quite low, roughly $250 million.

In a floor system, the overnight market rate trades at or close to the central bank’s deposit rate (the interest rate for deposited reserves at the central bank). This is because the supply of reserves is more than enough to satisfy financial institutions’ demand for these reserves. Figure 1 (panel b) illustrates how a sufficiently large supply of reserves will cross the lower, elastic part of the demand curve, causing the overnight market rate to be equal to the deposit rate. Financial institutions that participate in the wholesale payments system (i.e., they can earn the deposit rate on their excess reserves) lend out their excess reserves, which lowers the overnight market rate until it is at or near the deposit rate—the so-called floor of the corridor.2 The simple demand curve above assumes that access to the central bank deposit facility is broad and that overnight trading is unsecured. We explain in section 4.1 how these factors may result in a leaky floor where the overnight market rate trades below the deposit rate.
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Bindseil (2016) and others have advanced several criteria for evaluating different operational frameworks
for monetary policy. Drawing on this work, we believe the following criteria capture the key characteristics
that are desirable in an operational framework:

• • Effective control of the target interest rate—The framework should achieve the target interest rate for monetary policy with a high degree of certainty and limited variability. To this end, systematic deviations of the overnight rate from the target should be within the desired tolerance level.
• • Operational simplicity—Implementation of the framework should require a small number of simple tools. In addition, simplicity means that operations should rely primarily on rules rather than on discretion. The framework should function effectively with a high degree of operational transparency and be easily understood by market participants.
• • Robustness across different operating environments—The framework should function effectively regardless of whether the central bank is implementing conventional or unconventional monetary policy measures. Further, the framework should operate effectively when the central bank is taking policy actions to support financial stability (e.g., exceptional market-wide liquidity operations or emergency lending assistance).
• • Resilience to the evolution of market infrastructure—The framework should be able to accommodate new payment, clearing and settlement systems as well as changes to existing systems that settle in central bank money and that can affect the central bank’s balance sheet.
• • Minimal distortion of market functioning and relative prices—The framework should minimize the extent to which it distorts markets (e.g., creating disincentives for trading or price discovery) or relative prices

Michelle W Bowman, Member of the Board of Governors of the Federal Reserve System, gave a speech titled The Evolving Nature of Banking, Bank Culture, and Bank Runs:

On Thursday, March 9, SVB experienced a deposit outflow of more than $40 billion, and more than $100 billion was anticipated in queue for outflow on Friday, March 10. Let’s consider this in comparison to past bank failures and the pace and size of deposit outflows. Prior to SVB, the largest bank failure in U.S. history was the failure of Washington Mutual, which experienced two periods of large deposit outflows, the first lasted 23 days with outflows of $9.1 billion, and the second $18.7 billion over 16 days. In other bank failures resulting from deposit runs, deposits flowed out of the bank in significantly smaller volumes and over much longer time horizons than SVB experienced on March 9 and 10.
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Back-end money transfer systems have been gradually shifting to real-time payments, which are immediately available to customers upon transfer, rather than being subject to a waiting period while it is processed between financial institutions. Many bank websites provide capabilities that appear to allow customers to initiate funds transfers in real time. Sophisticated customers that hold uninsured deposits also have tools at their disposal—like the ability to initiate wire transfers between financial institutions—that allow faster transfers of funds. The capacity to initiate transfers, and even the changed perceptions of customers that they can move their funds at any time of day or night, have caused important structural shifts. Large depositors may have less incentive to act as a force for market discipline, even for banks where they hold large uninsured deposits in their operational accounts. These depositors have a cheaper and more efficient mechanism at their disposal to protect against credit risk—they can pull their money out in banking’s new normal. These changes have exacerbated the potential flight risks of uninsured deposits, while changing some of the incentives for depositors imposing market discipline.

The BoC has released highlights from the 2023 Financial System Survey:

• Respondents believe the risk of a shock that could impair the Canadian financial system has decreased since the last survey. Their confidence in the resilience of the Canadian financial system is at its highest since the first FSS in 2018.
• Cyber incidents remain the top risk that organizations face. Geopolitical risks are the second most important risk. In addition to posing risks to individual organizations, these risks are relevant for the broader Canadian financial system:
  • A successful cyber attack on a financial institution or a major financial market infrastructure could result in system-wide disruptions.
  • Geopolitical tensions could weigh on the pricing of risk assets globally, affecting a range of investors and issuers.
• For many of their non-centrally cleared derivatives agreements, respondents indicated that they can pledge both cash and a range of securities to meet their initial and variation margin requirements.
• Many respondents conduct stress tests to assess their ability to meet increases in margin requirements using a range of both historical and hypothetical scenarios.
• Respondents would meet increases in margin requirements smaller than those anticipated in stress tests primarily by pledging assets and cash on hand. If increases in margin requirements were larger than those produced from stress tests, respondents would rely more on other funding sources to raise cash in addition to pledging assets and cash on hand. These funding sources include asset sales, securities financing markets and lines of credit. The 2021 Financial System Review discusses how such increases in margin requirements could contribute to scenarios where the demand for cash exceeds the supply provided by banks, adding to strains on market liquidity.

TXPR closed at 535.65, down 0.64% on the day after setting a new 52-week low. Volume today was 825,140, below the median of the past 21 trading days.

CPD closed at 10.69, down 0.09% on the day after setting a new 52-week low. Volume was 140,400, second-highest of the past 21 trading days.

ZPR closed at 8.74, down 0.68% on the day. Volume was 165,350, fourth-highest of the past 21 trading days.

Five-year Canada yields up a bit to 3.03% today.

I’ve been following the Stateview fiasco, (first discussed April 26) with great interest (published April 28):

More lenders of Ontario builder StateView Homes are demanding it repay close to $200-million in loans, casting doubt on its ability to cover its debts, according to new court documents.

Filings from KingSett Mortgage Corp. – part of KingSett Capital’s $17-billion portfolio – challenge StateViews’s recent claims that it will finish a half-dozen townhouse projects that include hundreds of future homes, making insolvency and liquidation more likely.
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The lenders are demanding repayment of $167.8-million and $4-million that was advanced to StateView for a variety of residential and commercial properties. They are also asking the court to appoint a third-party receiver to manage a sales process on StateView’s remaining assets.

StateView declined to comment on the latest filings, but issued a statement Wednesday promising the company was still solvent enough to complete its projects.

The latest legal action comes days after Atrium Mortgage Investment Company jointly filed with Dorr to recoup $24.4-million loaned to StateView for one project in Markham. With KingSett’s filing, lenders are seeking close to $200-million in payments, leaving the bulk of the Vaughan-based builder’s active projects subject of court proceedings.

… and on May 10:

A fourth lender has demanded repayment of millions in loans from troubled Toronto-area land developer StateView Homes.

On May 5, Meridian Credit Union Ltd. filed an application to appoint a receiver for StateView Homes (Elm&Co) Inc., which was planning to build 206 townhouses on raw land at 12942 York Durham Line in Stouffville, Ont., near a GO Transit station. Meridian is seeking repayment of $17.8-million it loaned StateView on Dec. 5, 2022. In its filing, it warns the court that three other lenders subsequently loaned the Elm site another $27-million, but that a $20.8-million charge registered by Bergo Investment Inc., MCO Management Inc. and Tony Karamitsos on Dec. 16, 2022 was unauthorized.
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Property records show StateView’s financial situation was precarious long before the cheque-kiting scheme came to light. In the case of BEA Towns in Barrie, Ont., property records show StateView paid $25.6-million in April, 2022 for the land and registered a $37.5-million loan on the property from Dorr Capital at the same time. On Dec. 16, 2022, StateView registered a loan of $20.8-million from Bergo, MCO and Mr. Karamitsos – the same day it registered a $20-million loan on the Elm&Co land in Stouffville. Neither Bergo or MCO responded to requests for comment. Only initial excavation work appears to have been started at the BEA Towns site.

Ida Wolden Bache, Governor of Norges Bank gave an introductory statement:

The Bank’s forecasts in March indicate that inflation will move down towards 2 percent over the coming years. If developments turn out as projected, inflation will return to target with little rise in unemployment.

There is substantial uncertainty about the outlook. The future policy rate path will depend on economic developments.

Problems in some US and Swiss banks have led to large movements in global financial markets over the spring. The authorities in these two countries have intervened to reduce the risk of contagion to other institutions and markets.

The turmoil has had only a limited impact on funding costs for Norwegian banks and mortgage finance companies. Norwegian banks are profitable, solid, and have ample liquidity. They are well positioned to cope with higher losses and market stress. In 2022, Norges Bank decided to raise the countercyclical capital buffer rate for banks to 2.5 percent, effective from March 2023, which brings the rate back to its pre-pandemic level.

Norges Bank continuously and closely monitors financial market developments and has a contingency framework for taking measures required to safeguard financial stability if needed.

Let me conclude.

The current high rate of inflation follows a long period of low and stable inflation in our part of the world. Some of the driving forces that kept inflation low in the decades before the pandemic may be going into reverse.

Globalisation has been met with gradually growing opposition. Demographic trends are changing. Combined, this could make the job of keeping inflation low more demanding.

The global economy will increasingly be impacted by climate change and the need to reduce emissions. Understanding the economic effects of climate change and the energy transition is essential for making forecasts and the right trade-offs in the conduct of monetary policy. This is therefore defined as a focus area in Norges Bank’s Strategy 2025.

The main contribution monetary policy can make to the transition is to ensure low and stable inflation. A flexible and forward-looking inflation targeting regime, where we look through short-term inflation fluctuations, is a good basis for addressing the structural changes we are facing.

A small open economy like Norway will be exposed to shocks, as we have acutely experienced in recent years. Economic policy cannot shield the economy totally from shocks that may arise, but can dampen their impact. A framework that provides monetary policy predictability makes it easier to succeed.

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.
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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.
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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
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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.
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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.
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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.
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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).
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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.