July 30, 2014

The Swedes are serious about bank regulation:

Sweden will start publishing banks’ individual capital requirements in a step designed to reveal risks investors have so far been unable to measure based on reported buffers.

The Swedish Financial Supervisory Authority is planning to follow its Danish counterpart and disclose so-called Pillar 2 requirements as Scandinavia leads Europe in stepping up efforts to improve transparency. In Denmark, which like Sweden has a bank industry whose assets are four times gross domestic product, lenders can be shut down by the regulator if reserves drop below individual requirements.

Sweden already requires its biggest banks to meet some of the world’s most rigorous capital standards, ranging from 14 percent for Nordea Bank AB (NDA) to 19 percent for Swedbank AB. In May, the FSA said banks should hold a 1 percent counter-cyclical buffer after household debt burdens swelled to a record.

BIS explains pillar 2 requirements:

There are three main areas that might be particularly suited to treatment under Pillar 2: risks considered under Pillar 1 that are not fully captured by the Pillar 1 process (e.g. the proposed operational risk charge in Pillar 1 may not adequately cover all the specific risks of any given institution); those factors not taken into account by the Pillar 1 process (e.g. interest rate risk); and factors external to the bank (e.g. business cycle effects).

Authoritarian governments world-wide are clamping down on housing bubbles:

Singapore and Hong Kong, as a special administrative region of China, have governments with policy-making power over their entire geographic areas, where they are relatively free of political opposition from neighborhood groups or borough councils that stymie directives or mitigate their effectiveness. The Asian cities control the land supply and are the biggest landlords.

That allows them to implement decisive policy measures. For example, in January 2013, the Monetary Authority of Singapore, effectively the central bank and chief regulator, cut the mortgage ratio allowable on purchases of second homes while more than doubling minimum down payments from 10 percent to 25 percent. The banks had no choice but to follow.

Hong Kong and Singapore haven’t shied away from using taxes to discriminate against foreign buyers — something other locales with surging prices have yet to do. Non-permanent residents in both cities are subject to an additional 15 percent tax when they buy property, except in Singapore where Americans are exempted by treaty.

The U.K. government has tried some measures. After it increased the stamp duty to 7 percent on high-value properties in March 2012, price increases for homes valued from 5 million pounds to 10 million pounds ($8.5 million to $17 million) slowed from 9.7 percent to 5.8 percent in the subsequent year, according to broker Knight Frank LLP.

Bank of England Governor Mark Carney announced another set of measures last month, citing concerns over household indebtedness and the threat of a property bubble. They limit mortgages to less than 4.5 times a borrowers’ annual income and require banks to refuse loans to those failing to prove they could afford a 3 percentage-point rise in interest rates.

But France wins the prize:

French President Francois Hollande’s government may have made a housing slump worse, pushing the construction market to its lowest in more than 15 years.

Housing starts fell 19 percent in the second quarter from a year earlier, and permits — a gauge of future construction — dropped 13 percent, the French Housing Ministry said yesterday.

The rout stems from a law this year that seeks to make housing more affordable by capping rents in expensive neighborhoods. To protect home buyers, the law also boosted the number of documents that must be provided by sellers, leading to a decline in home sales and longer transaction times.

Meanwhile, the Bank of England is cracking down on the rule of law:

Miscreant bankers face having their bonuses clawed back for up to seven years after their award under measures set out on Wednesday by the Bank of England, as it tightens its regulatory clampdown on wrongdoing in the financial sector.

Lawyers say enforcing clawbacks is untested in the UK courts if a banker refuses to pay up, and there are also questions over what happens to tax paid on a recovered bonus. But some senior figures in the sector support the idea.

The Bank and the fellow regulator the Financial Conduct Authority (FCA) also proposed in a new consultation that senior managers face clawbacks of up to 10 years if they are being investigated.

“These proposals are tougher than the industry would have liked, but there was a general resignation that they would be implemented whatever the costs and technical difficulties and however far it puts the UK outside international norms,” said Nicholas Stretch of law firm CMS.

Great, huh? Now the regulators can decide after the fact whether or not something was reckless and impose a fine of whatever they like. Untrammelled by parliament or those old fogeys in the courts! Hurrah!

…and there’s more!

Bank regulators have just given the top people in U.K. corporate life another reason to avoid job offers from domestic banks.

Requiring bankers to have annual “MOT”-style tests of their fit and proper status, and bringing in a new, tougher “senior manager regime” sounds good for accountability, post-Libor, and chief executives are used to longer deferral periods for their pay.

But incomers will hesitate about being held responsible, perhaps even criminally, for malpractice somewhere in their hugely complex universal bank.

Moreover, some of the BoE proposals are actively disconcerting. Banning so-called buyout clauses – compensation of new employees for deferred income lost by leaving their old jobs – would prevent some of the more outlandish recent payments made to bank bosses. But they also incentivise candidates to stay put.

Also, the ability to demand repayment of awards already paid will almost certainly make UK banks less inviting places to work, even though the minimum period in which bonuses can be clawed back has been cut by two years to seven years.

Today’s FOMC statement is moderately positive:

The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting against was Charles I. Plosser who objected to the guidance indicating that it likely will be appropriate to maintain the current target range for the federal funds rate for “a considerable time after the asset purchase program ends,” because such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee’s goals.

Jeff Kearns of Bloomberg notes:

Since meeting in mid-June, the committee has come closer to achieving its goals for stable prices and full employment. Employers added 288,000 jobs last month, helping push down unemployment to 6.1 percent, the lowest in almost six years.

Today’s Commerce Department report showed gross domestic product expanded at a 4 percent annual pace in the second quarter, confirming the Fed’s view that a first-quarter contraction was transitory.

Yellen told lawmakers this month that while her view of the economy has turned “more positive,” she’s concerned about signs of job-market “slack” such as low participation in the labor force.

“We need to be careful to make sure that the economy is on a solid trajectory before we consider raising interest rates,” she said in her semi-annual testimony. “There are mixed signals.”

Among them: average hourly earnings fell or were stagnant in the past four months, after adjusting for inflation.

Simon Kennedy of Bloomberg reports on an interesting difference between UK and US mortgage debt:

While investors bet the U.K. central bank will raise its benchmark interest rate as soon as the end of this year, with its U.S. counterpart following six months later, economists at London-based Fathom Consulting aren’t so sure.

While the International Monetary Fund has called the U.K. the fastest-growing rich economy this year, Fathom says the U.S. household sector may be better placed than that of the U.K. to stomach higher interest rates. No one expects Yellen’s Fed to act on interest rates when policy makers meet today.

A key measure of how vulnerable households are to increased rates is their exposure to variable-rate home loans, known as adjustable rate mortgages or ARMs in the U.S.

In the U.S., the share of mortgage applications based on such loans has declined to fewer than 20 percent from about 50 percent before the financial crisis, according to Fathom’s July 28 report.

By contrast, about 70 percent of outstanding British mortgages are at a variable rate, meaning the BOE will try to keep increases to a minimum, they said.

After all that we need some comic relief, so let’s mock an unsigned article that came to my attention today:

s we have discussed previously, the Portfolio Turnover Ratio (PTR) for any given mutual or exchange-traded fund is a quick and easy tool to use when you’re trying to figure out which is the better investment for your savings. A fund’s PTR gives you a way to judge how much activity and risk the professional money managers are taking on to generate their investment returns.

As you can clearly see from the PTRs listed above, and despite the same investment objectives and risk profiles, each fund’s manager has a completely different trading strategy! The PTRs for TD points to a serious disconnect between their managers’ actual trading strategy and their fund’s stated investment objective and risk profile, whereas the PTRs for the RBC managers fits aptly with their stated investment objective and risk profile.

OK, so maybe you bought the TD fund in 2008 and still hold it today thinking that you were staying true to your conservative buy and hold investment strategy. But unfortunately someone forgot to tell the fund’s investment managers at TD what kind of investor you are because, unbeknownst to you, they bought and sold every investment in the fund more than 14 times! Yes, that’s right! On average, they’ve traded your savings over and over again 2.82 times every year since 2008, which appears to be in contrast to the fund’s stated investment objective and risk profile!

Some of you may want to argue with me that your investment in the TD fund did fine in terms of your over-all rate of returns, and for some investors that’s all that matters – how much did I make? Some investors don’t care about the risks they have to take to get results, and in good markets even risky investments go up in value. But ignoring an investment’s risks can be dangerous when markets are not so good. These particular mutual funds are a good case in point. Look at the difference in losses between these two funds in the 2009 downturn in market: the TD Canadian Equity fund lost 46% in the 12 months ending February 2009 compared to a 23% decline for RBC Canadian Equity Fund. So, what we can learn from this particular case study is that when you take the time to study a fund’s PTR to make more informed investment choices, taking into account good and bad market cycles, you’ll come out the real winner.

Equating portfolio turnover to risk, without examining what those trades actually were, implying that TD’s underperformance in the twelve month’s ending February, 2009, was due to portfolio turnover, and completely ignoring benchmarks is the height of ignorance. According to one source (I can’t be bothered to look it up):

•By comparison, the Toronto Stock Exchange lost money almost 30% of the time. The worst 1 year return was -38% (ending February 2009).

This leads to a suspicion that the RBC fund got very lucky on its market timing, while TD underperformed by what would be a gigantic amount in normal times, but is somewhat less surprising considering the time period. But, of course, it’s only a suspicion. Only a complete idiot would draw any conclusions at all based solely on these numbers; but properly supported investment conclusions – even when it’s only a question of categorization – require a bit of work.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 2bp, FixedResets off 11bp and DeemedRetractibles gaining 1bp. Volatility was minimal, but Assiduous Reader thom4kat will be gratified to see the table includes GWO.PR.N! The issue had 25 trades timestamped after 3:05pm, nothing very big, but it looks like they just kept chip-chip-chipping away at the bid and wore it out. It made the Wide Spreads Table, too, which tells you that … um … it made the Wide Spreads Table. Volume was average.

PerpetualDiscounts now yield 5.16%, equivalent to 6.71% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.2%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 250bp, a significant widening from the 240bp reported July 23.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
(at bid)
Mod Dur
Issues Day’s Perf. Index Value
Ratchet 3.07 % 3.04 % 20,209 19.59 1 0.9080 % 2,596.9
FixedFloater 4.17 % 3.40 % 28,121 18.63 1 0.0000 % 4,163.9
Floater 2.87 % 2.96 % 45,044 19.82 4 -0.6121 % 2,759.4
OpRet 4.01 % -4.29 % 75,401 0.08 1 -0.0391 % 2,724.3
SplitShare 4.25 % 3.78 % 54,003 3.99 6 0.0730 % 3,123.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0391 % 2,491.1
Perpetual-Premium 5.52 % -6.83 % 81,677 0.08 17 0.0346 % 2,432.3
Perpetual-Discount 5.23 % 5.16 % 104,392 15.22 20 0.0192 % 2,583.0
FixedReset 4.40 % 3.61 % 195,245 8.58 78 -0.1087 % 2,556.5
Deemed-Retractible 4.98 % -2.11 % 117,265 0.09 42 0.0094 % 2,556.4
FloatingReset 2.68 % 2.15 % 87,250 3.86 6 0.1247 % 2,515.3
Performance Highlights
Issue Index Change Notes
GWO.PR.N FixedReset -1.55 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.02
Bid-YTW : 4.95 %
BAM.PR.Z FixedReset -1.04 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.80
Bid-YTW : 3.94 %
Volume Highlights
Issue Index Shares
BMO.PR.W FixedReset 1,311,855 New issue settled today.
Maturity Type : Limit Maturity
Maturity Date : 2044-07-30
Maturity Price : 23.13
Evaluated at bid price : 24.96
Bid-YTW : 3.61 %
BAM.PF.F FixedReset 181,250 Nesbitt crossed 176,000 at 25.41.
Maturity Type : Limit Maturity
Maturity Date : 2044-07-30
Maturity Price : 23.28
Evaluated at bid price : 25.41
Bid-YTW : 4.23 %
ENB.PF.E FixedReset 141,973 Recent new issue.
Maturity Type : Limit Maturity
Maturity Date : 2044-07-30
Maturity Price : 23.11
Evaluated at bid price : 24.99
Bid-YTW : 4.12 %
ENB.PR.N FixedReset 125,515 Scotia crossed two blocks of 25,000 each and one of 50,000, all at 24.87.
Maturity Type : Limit Maturity
Maturity Date : 2044-07-30
Maturity Price : 23.15
Evaluated at bid price : 24.82
Bid-YTW : 4.07 %
TRP.PR.D FixedReset 100,717 RBC crossed 34,500 at 25.24; Nesbitt crossed 38,400 at the same price.
Maturity Type : Limit Maturity
Maturity Date : 2044-07-30
Maturity Price : 23.22
Evaluated at bid price : 25.13
Bid-YTW : 3.75 %
ENB.PF.C FixedReset 93,510 Scotia crossed two blocks of 25,000 each, both at 25.10 and bought 14,400 from Instinet at 25.11.
Maturity Type : Limit Maturity
Maturity Date : 2044-07-30
Maturity Price : 23.16
Evaluated at bid price : 25.10
Bid-YTW : 4.12 %
There were 35 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
CIU.PR.A Perpetual-Discount Quote: 22.91 – 23.91
Spot Rate : 1.0000
Average : 0.6580

Maturity Type : Limit Maturity
Maturity Date : 2044-07-30
Maturity Price : 22.63
Evaluated at bid price : 22.91
Bid-YTW : 5.09 %

GWO.PR.N FixedReset Quote: 21.02 – 21.37
Spot Rate : 0.3500
Average : 0.2400

Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.02
Bid-YTW : 4.95 %

TRP.PR.A FixedReset Quote: 23.26 – 23.50
Spot Rate : 0.2400
Average : 0.1540

Maturity Type : Limit Maturity
Maturity Date : 2044-07-30
Maturity Price : 22.40
Evaluated at bid price : 23.26
Bid-YTW : 3.66 %

IAG.PR.F Deemed-Retractible Quote: 26.14 – 26.49
Spot Rate : 0.3500
Average : 0.2673

Maturity Type : Call
Maturity Date : 2018-03-31
Maturity Price : 25.25
Evaluated at bid price : 26.14
Bid-YTW : 4.96 %

ELF.PR.F Perpetual-Discount Quote: 24.10 – 24.38
Spot Rate : 0.2800
Average : 0.2025

Maturity Type : Limit Maturity
Maturity Date : 2044-07-30
Maturity Price : 23.85
Evaluated at bid price : 24.10
Bid-YTW : 5.53 %

MFC.PR.F FixedReset Quote: 23.01 – 23.74
Spot Rate : 0.7300
Average : 0.6545

Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.01
Bid-YTW : 4.16 %

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