PrefBlog

Japan is rumoured to be considering a capital surcharge on systemically important banks, but details and confirmations are scarce:

Japan’s financial regulator is considering forcing the country’s largest banks to hold more capital than required under Basel III rules, a person with direct knowledge of the matter said.

The Financial Services Agency will start internal discussions soon on whether to apply a capital surcharge to systemically important lenders such as Mitsubishi UFJ Financial Group Inc., the person said, declining to be identified because the matter is confidential.
…
The Swiss panel said UBS AG and Credit Suisse should hold almost double the capital required under the Basel III proposals announced last month. By 2019, the lenders would need to hold at least 10 percent of capital in common equity, compared with 7 percent required under Basel.

The possibility of a global capital surcharge of around 2 percent for the world’s most important banks “cannot be ruled out,” Shinichi Ina, a Tokyo-based analyst at Credit Suisse, wrote in a report this week.

This is regulation in a nut’s hell. I support a progressive surcharge on Risk Weighted Assets. I am quite aware that RWA is, at best, an imperfect measure of a bank’s systemic importance; but I assert that singling out a group of “Top Tier” banks is worse.

Bad news for Ireland:

Ireland got an unwelcome jolt Wednesday as Fitch Ratings cut its sovereign credit rating to the lowest level of any of the major agencies, citing the heavy burden of bailing out the country’s banking sector.

Fitch cut Ireland’s long-term foreign- and local-currency ratings to A+ from AA-. Moody’s Investors Service, which warned Tuesday that it was reviewing the country for a possible downgrade, and Standard & Poor’s both rate Irish debt higher.

The move “reflects the exceptional and greater-than-expected fiscal cost associated with the government’s recapitalization of the Irish banks, especially Anglo Irish Bank,” Chris Pryce, Fitch’s director of sovereign ratings said in a statement.

The Bank of Canada has released a Working Paper by James Chapman, Jonathan Chiu, and Miguel Molico titled Central Bank Haircut Policy:

We present a model of central bank collateralized lending to study the optimal choice of the haircut policy. We show that a lending facility provides a bundle of two types of insurance: insurance against liquidity risk as well as insurance against downside risk of the collateral. Setting a haircut therefore involves balancing the trade-off between relaxing the liquidity constraints of agents on one hand, and increasing potential inflation risk and distorting the portfolio choices of agents on the other. We argue that the optimal haircut is higher when the central bank is unable to lend exclusively to agents who actually need liquidity. Finally, for an unexpected drop in the haircut, the central bank can be more aggressive than when setting a permanent level of the haircut.

The TMX has a new page showing Bond Market Data. The data from today (labelled July 19, 2010), showing $20.04-billion face nominal Canadas being traded vs. $0.01-billion face RRBs, should illustrate the points I have made at various time regarding the relative liquidity of the latter! I presume – but do not know – that they get their trading statistics from the same data set used for their prices, which are major Canadian dealers.

The Canadian preferred share market showed continued strength on continued high volume, with PerpetualDiscounts gaining 17bp and FixedResets up 10bp.

PerpetualDiscounts now yield 5.47%, equivalent to 7.66% interest at the standard conversion factor of 1.4x. Long corporates now yield 5.2% so the pre-tax interest-equivalent spread (also called the Seniority Spread) now stands at about 245bp, a sharp decline from the 260bp reported on September 30.

This entry was posted on Wednesday, October 6th, 2010 at 10:46 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.