PrefBlog

Menzie Chinn of Econbrowser posted a good piece over the weekend, How Effective Will Monetary Easing Be? The Bank Lending Channel and the Implications of Increasingly Internationalized Banks, reviewing a paper presented at a recent Bundesbank conference:

The results of this paper are consistent with the view that while loosening of US monetary policy might induce greater lending overseas by branches of US banks, thereby tending to support rest-of-world economic activity, they also imply that negative shocks to the assets of US banks will also tend to reduce lending abroad. Hence, deleveraging by domestic banks has global (or at least rest-of-OECD) implications. That means both negative and positive shocks will be propagated abroad. In this sense, I think decoupling of the major developed economies is even less likely to occur.

It seems to me that this in turn will have some effect on currency rates, because whenever the banks deliberately mismatch their balance sheet in different currencies they are, for all intents and purposes, engaged in a carry trade.

It is my guess – as a non-specialist! – that these transactions would incur an additional capital charge equivalent to that of a long dated currency forward, according to the schedule given on page 73 (paragraph 92) of the OSFI Guidelines for Basel II … with the assumption that such loans would be unhedged. Hedging such transactions would largely reduce their point, as long-date FX trades at spot + government yield difference; therefore hedging would destroy the point.

The OSFI guidelines look reasonable to me … if my interpretation is correct … but I’d sure like to see some specialist discussion of the issue!

Every now and then I mention revolving-door regulation on this blog … like, f’rinstance, yesterday. I should emphasize that ill effects stemming from this can arise without anybody having any venal intent, as opined by Willem Buiter:

It is rather rare, I believe, in well-established parliamentary democracies, for the process through which power corrupts to be a direct and conscious one: “I have power. I control this license that you want; I can give you a tax break; I can make sure government procurement favours your company; I can acquit your useless son on manslaughter while DUI charges. Here is the number of my Swiss bank account. ”

It may happen, but more common and possibly more insidious and dangerous is the gradual transformation (I would say, distortion) of both the value system and the world-view or perception of reality that afflicts those elected or appointed to high office. This occurs through a gradual re-socialisation of those in power, which results in them gradually identifying with different peer groups and with different reference groups for benchmarking normal or acceptable behaviour.

A quiet day today on the preferred market, with no real trends evident.

There were nine other index-included $25-pv-equivalent issues trading over 10,000 shares today.

This entry was posted on Tuesday, May 27th, 2008 at 9:08 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.