Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), in the Financial Times, 3 February 2009:
As today’s financial crisis progressively gets resolved, it will be necessary to start the process of preventing future crises. This will require substantial reform of the regulatory framework. Banks will have to strengthen their capital and their liquidity buffers. And financial regulation must have a less pro-cyclical effect. The objective must be to enable the banks to curb the impact of shocks on the economy, rather than to amplify them, as is the case now, where negative spirals are generated between the financial system and the real economy.
The trouble with attempting a counter-cyclical (or less pro-cyclical) regulatory policy is that it requires the authorities to determine what the cycle is – and I don’t believe that they are any smarter or better informed that the rest of the world. It also opens up a greater possibility of political interference in what is a rather dry, technical and confusing area … can’t you just hear What-Debt? as Pooh-Bah of banking regulation? ‘Thanks to my wise tax-cutting, we are all going to be rich forever. It is impossible for a bank to go bankrupt. Therefore …’
I have heard some things about a Spanish model of “Dynamic Provisioning”, but haven’t investigated any of the details.
Michael Pomerleano, Harald Scheule and Andrew Sheng write a nice piece of VoxEU, The devil is in the details, emphasizing the dangers of cliff risk through model homogeneity:
the price of all risky assets may have dropped below their fundamental value. Therefore, leveraged markets are prone to overshoot in booms and underprice in downturns. If this is true, the current losses in the trading book may be overestimated. If policy does not respond well (or is ineffective), the pessimistic view becomes self-reinforcing. Under the present “fair market value” regulatory regime, market risk exposures are marked to market and a large fraction of the losses reported to date relate to market-risk exposures.
…
A little understood problem is that the model provider, financial intermediation, and model auditing industry is highly concentrated, leading to systemic risk. Several examples suffice: the small number of credit rating agencies for bond and structured finance issues, the growing market share of “too big to fail” financial institutions, and joint ventures in model construction designed to reduce costs. The problem is compounded by the use of similar quantitative frameworks and frameworks that are calibrated based on similar loss experiences.An anecdote illustrates this point. Some years ago the chief risk officer of a major U.S. bank presented the asset correlation matrix used by his institution. Another major financial institution at the event confirmed its use of the same matrix. While the institutions were fundamentally different in nature, they shared the same reputable consulting firm. Neither this firm’s model nor any other model has been formally validated. The oligopolistic structure was nurtured by the limited data availability and the propensity of financial institutions to outsource risk modelling. A similar situation prevails in the accounting industry, which is dominated by the “Big Four.” The public sector has abdicated too much authority to vested interests in the private sector.
This behaviour is lauded and encouraged by regulators and large firms, under the twin banners of eliminating regulatory arbitrage and encouraging “best practices”. The authors recommend:
Deconcentration of risk models is another priority. This may involve generating a compulsory global warehouse for financial risk–related data (particularly regarding credit risk) and encouraging alternative modelling techniques. While limited data-sharing initiatives reportedly are being undertaken in Japan, they need to be far more extensive and systematic.
while – in a decision I consider to be inconsistent with their stated thesis – recommending:
Regulatory arbitrage has transferred risks to off-balance-sheet special-purpose vehicles and hedge funds. This practice may have to be limited by homogenising rules across financial instruments and institutions as well as across industries and countries.
The Fed is having difficulty coming to grips with the question of what to do next:
Federal Reserve officials have failed to resolve an internal debate over whether to purchase long-term Treasuries, even as rising yields on the securities threaten to undermine the central bank’s objective of cutting borrowing costs for consumers and businesses.
…
“The Fed will get a lot more bang for its buck by buying mortgages than buying Treasuries,” said John Ryding, founder and chief economist of RDQ Economics LLC in New York and a former Fed economist.
…
Lacker preferred to expand the money supply “by purchasing U.S. Treasury securities rather than through targeted credit programs,” the FOMC statement said.
Accrued Interest comments on pending revisions to TARP, which he states will include FDIC insured 10-year covered bonds. The source WSJ article does not reference covered bonds, but the idea has been floating around for a few weeks. As yet there is nothing on the FDIC website regarding such a guarantee – the last mention was a policy statement cleaning up legal loose ends in August.
The market ticked up today on reasonable volume bolstered by all the recent new issues.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 5.31 % | 3.79 % | 24,095 | 17.76 | 2 | 0.1275 % | 861.0 |
| FixedFloater | 7.34 % | 7.00 % | 65,988 | 13.85 | 7 | -0.4060 % | 1,368.4 |
| Floater | 5.33 % | 4.40 % | 31,097 | 16.57 | 4 | 1.0778 % | 985.2 |
| OpRet | 5.26 % | 4.68 % | 153,334 | 4.01 | 15 | 0.1355 % | 2,042.4 |
| SplitShare | 6.20 % | 9.74 % | 71,094 | 4.07 | 15 | 0.1503 % | 1,798.5 |
| Interest-Bearing | 7.02 % | 8.47 % | 34,181 | 0.85 | 2 | 0.4028 % | 2,015.1 |
| Perpetual-Premium | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.3763 % | 1,562.5 |
| Perpetual-Discount | 6.88 % | 6.96 % | 204,598 | 12.60 | 71 | 0.3763 % | 1,439.1 |
| FixedReset | 6.11 % | 5.73 % | 658,001 | 13.94 | 27 | 0.4675 % | 1,802.4 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| FFN.PR.A | SplitShare | -2.67 % | Asset coverage of 1.1-:1 as of January 30 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2014-12-01 Maturity Price : 10.00 Evaluated at bid price : 7.30 Bid-YTW : 11.97 % |
| PWF.PR.L | Perpetual-Discount | -2.48 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 17.27 Evaluated at bid price : 17.27 Bid-YTW : 7.47 % |
| BAM.PR.J | OpRet | -1.89 % | YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2018-03-30 Maturity Price : 25.00 Evaluated at bid price : 18.20 Bid-YTW : 10.22 % |
| BCE.PR.F | FixedFloater | -1.76 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 25.00 Evaluated at bid price : 14.55 Bid-YTW : 7.27 % |
| HSB.PR.D | Perpetual-Discount | -1.41 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 17.42 Evaluated at bid price : 17.42 Bid-YTW : 7.31 % |
| BCE.PR.G | FixedFloater | -1.29 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 25.00 Evaluated at bid price : 14.56 Bid-YTW : 7.35 % |
| CM.PR.G | Perpetual-Discount | 1.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 18.80 Evaluated at bid price : 18.80 Bid-YTW : 7.27 % |
| GWO.PR.I | Perpetual-Discount | 1.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 15.59 Evaluated at bid price : 15.59 Bid-YTW : 7.35 % |
| SLF.PR.C | Perpetual-Discount | 1.05 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 15.47 Evaluated at bid price : 15.47 Bid-YTW : 7.32 % |
| ENB.PR.A | Perpetual-Discount | 1.05 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 23.68 Evaluated at bid price : 23.95 Bid-YTW : 5.85 % |
| CM.PR.H | Perpetual-Discount | 1.07 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 16.94 Evaluated at bid price : 16.94 Bid-YTW : 7.17 % |
| RY.PR.G | Perpetual-Discount | 1.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 17.55 Evaluated at bid price : 17.55 Bid-YTW : 6.45 % |
| CM.PR.D | Perpetual-Discount | 1.10 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 20.31 Evaluated at bid price : 20.31 Bid-YTW : 7.16 % |
| RY.PR.I | FixedReset | 1.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 22.21 Evaluated at bid price : 22.25 Bid-YTW : 4.68 % |
| PWF.PR.I | Perpetual-Discount | 1.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 21.80 Evaluated at bid price : 22.10 Bid-YTW : 6.85 % |
| CM.PR.K | FixedReset | 1.16 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 21.48 Evaluated at bid price : 21.80 Bid-YTW : 5.17 % |
| NA.PR.N | FixedReset | 1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 22.51 Evaluated at bid price : 22.57 Bid-YTW : 4.80 % |
| NA.PR.K | Perpetual-Discount | 1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 20.80 Evaluated at bid price : 20.80 Bid-YTW : 7.09 % |
| TCA.PR.Y | Perpetual-Discount | 1.19 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 44.92 Evaluated at bid price : 46.71 Bid-YTW : 6.00 % |
| FIG.PR.A | Interest-Bearing | 1.20 % | Asset coverage of 1.1-:1 as of February 6, based on Capital units at $1.49 and 0.53 Capital Units per preferred.. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2014-12-31 Maturity Price : 10.00 Evaluated at bid price : 7.61 Bid-YTW : 12.34 % |
| FTN.PR.A | SplitShare | 1.26 % | Asset coverage of 1.2+:1 as of January 30 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2015-12-01 Maturity Price : 10.00 Evaluated at bid price : 8.02 Bid-YTW : 9.35 % |
| TD.PR.P | Perpetual-Discount | 1.27 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 20.01 Evaluated at bid price : 20.01 Bid-YTW : 6.63 % |
| TD.PR.C | FixedReset | 1.50 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 23.66 Evaluated at bid price : 23.70 Bid-YTW : 5.23 % |
| ELF.PR.F | Perpetual-Discount | 1.56 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 15.65 Evaluated at bid price : 15.65 Bid-YTW : 8.61 % |
| BNS.PR.R | FixedReset | 1.57 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 21.91 Evaluated at bid price : 21.95 Bid-YTW : 4.72 % |
| BAM.PR.B | Floater | 1.59 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 7.67 Evaluated at bid price : 7.67 Bid-YTW : 6.96 % |
| CM.PR.I | Perpetual-Discount | 1.71 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 16.69 Evaluated at bid price : 16.69 Bid-YTW : 7.12 % |
| BAM.PR.K | Floater | 1.89 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 7.55 Evaluated at bid price : 7.55 Bid-YTW : 7.07 % |
| NA.PR.L | Perpetual-Discount | 1.93 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 17.98 Evaluated at bid price : 17.98 Bid-YTW : 6.79 % |
| NA.PR.M | Perpetual-Discount | 2.03 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 21.30 Evaluated at bid price : 21.60 Bid-YTW : 6.98 % |
| TD.PR.A | FixedReset | 2.27 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 22.46 Evaluated at bid price : 22.50 Bid-YTW : 4.67 % |
| BAM.PR.I | OpRet | 2.44 % | YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2013-12-30 Maturity Price : 25.00 Evaluated at bid price : 21.00 Bid-YTW : 9.94 % |
| BNA.PR.C | SplitShare | 3.55 % | Asset coverage of 1.9-:1 as of January 30 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2019-01-10 Maturity Price : 25.00 Evaluated at bid price : 12.26 Bid-YTW : 14.37 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| TD.PR.G | FixedReset | 171,279 | Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-30 Maturity Price : 25.00 Evaluated at bid price : 25.00 Bid-YTW : 6.34 % |
| CM.PR.L | FixedReset | 122,334 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 24.95 Evaluated at bid price : 25.00 Bid-YTW : 6.56 % |
| TD.PR.M | OpRet | 101,700 | Desjardins crossed 90,000 at 25.76. YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2013-10-30 Maturity Price : 25.00 Evaluated at bid price : 25.76 Bid-YTW : 4.04 % |
| RY.PR.R | FixedReset | 89,460 | Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 25.00 Bid-YTW : 6.34 % |
| BNS.PR.X | FixedReset | 70,149 | Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-25 Maturity Price : 25.00 Evaluated at bid price : 25.08 Bid-YTW : 6.27 % |
| SLF.PR.E | Perpetual-Discount | 54,445 | Nesbitt bought 19,600 from RBC at 15.72. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-09 Maturity Price : 15.45 Evaluated at bid price : 15.45 Bid-YTW : 7.42 % |
| There were 29 other index-included issues trading in excess of 10,000 shares. | |||