Enrico Perotti & Javier Suarez write a piece on VoxEU, Liquidity Insurance for Systemic Crises, proposing:
to establish a mandatory liquidity charge, to be paid continuously to a regulator who is able to provide emergency liquidity (and perhaps capital) during systemic crisis. The charge should be increasing in the maturity mismatch of assets and liabilities, and would be applicable to all institutions with access to safety net guarantees. Its effect should be to make short and medium term (up to one year) bank funding comparable in cost. Retail deposits would be exempted, as they are more stable thanks to their own separate insurance.
Revenues would go into an Emergency Liquidity Insurance Fund (ELIF), with legal autonomy and pre-packaged access to central bank liquidity and government funds backing. Upon significant aggregate liquidity runs (not concerning single banks), the payment of insurance would be triggered by the relevant supervisor, resulting in immediate liquidity support, guarantees on uninsured wholesale funding, and some automatic capital injections. Specific conditions may be attached, such as restrictions on compensation and dividends, as well as on some strategic choices.
The insurance charges could be thought of as prepayment for future rescue costs.
Restrictions on compensation have certainly become fashionable!
I don’t want to dismiss the idea out of hand; I will certainly agree that the next Basel Accord should address the degree of maturity transformation in some way. But:
- Liquidity crunches are black swan events. Any level of insurance premium will be a guess.
- It is the job of the central bank to address liquidity crunches, by making funds available against good collateral at a punitive rate of interest. A liquidity crunch, per se, is profitable for the central bank
From Across the Curve via PrefBlog’s Liquidity is Valuable Department comes another reminder:
One unintended consequence of the Fed [Agency] purchases is that the purchases have been concentrated in the large liquid issues. That has led to a substantial gulf between that paper and some smaller older illiquid paper. The illiquid securities now trading as much as 50 basis points cheap to the more liquid stuff.
PerpetualDiscounts eked out a small gain today to close with a pre-tax bid-YTW of 6.95%, equivalent to 9.73% interest at the standard conversion factor of 1.4x. Long corporates continue to yield 7.6%, so the spread remains fairly constant at 213bp. A fairly unexciting day, with volumes continuing normal, with pockets of frantic activity from recent Fixed-Reset issues.
However, today’s excitement was the downgrade of the BCE Prefs, which had no real effect on prices, but does mean that the HIMIPref™ Ratchet and Fixed-Floater sub-indices are about to disappear.
| 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 | 5.29 % | 3.76 % | 24,240 | 17.83 | 2 | -0.1524 % | 861.7 |
| FixedFloater | 7.23 % | 6.86 % | 65,562 | 14.10 | 7 | 0.9867 % | 1,388.3 |
| Floater | 5.21 % | 4.29 % | 29,507 | 16.83 | 4 | 1.6133 % | 1,008.2 |
| OpRet | 5.24 % | 4.77 % | 146,337 | 4.00 | 15 | 0.3090 % | 2,051.1 |
| SplitShare | 6.23 % | 9.24 % | 68,453 | 4.06 | 15 | -0.0343 % | 1,788.3 |
| Interest-Bearing | 7.13 % | 8.77 % | 32,590 | 0.85 | 2 | -0.5787 % | 1,983.9 |
| Perpetual-Premium | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0768 % | 1,565.3 |
| Perpetual-Discount | 6.87 % | 6.95 % | 200,117 | 12.62 | 71 | 0.0768 % | 1,441.6 |
| FixedReset | 6.08 % | 5.73 % | 626,979 | 13.94 | 27 | 0.0918 % | 1,811.0 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| DFN.PR.A | SplitShare | -1.71 % | Asset coverage of 1.6-: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 : 8.60 Bid-YTW : 8.45 % |
| MFC.PR.C | Perpetual-Discount | -1.68 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-11 Maturity Price : 16.95 Evaluated at bid price : 16.95 Bid-YTW : 6.77 % |
| NA.PR.K | Perpetual-Discount | -1.63 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-11 Maturity Price : 20.56 Evaluated at bid price : 20.56 Bid-YTW : 7.17 % |
| BCE.PR.Z | FixedFloater | -1.56 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-11 Maturity Price : 25.00 Evaluated at bid price : 15.74 Bid-YTW : 6.80 % |
| GWO.PR.H | Perpetual-Discount | -1.24 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-11 Maturity Price : 16.66 Evaluated at bid price : 16.66 Bid-YTW : 7.42 % |
| FIG.PR.A | Interest-Bearing | -1.21 % | Asset coverage of 1.1-:1 as of February 10, based on Capital units at $1.29 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 : 7.36 Bid-YTW : 13.11 % |
| LFE.PR.A | SplitShare | -1.19 % | Asset coverage of 1.3+:1 as of January 30 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2012-12-01 Maturity Price : 10.00 Evaluated at bid price : 9.10 Bid-YTW : 8.15 % |
| HSB.PR.D | Perpetual-Discount | -1.07 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-11 Maturity Price : 17.56 Evaluated at bid price : 17.56 Bid-YTW : 7.25 % |
| TD.PR.R | Perpetual-Discount | -1.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-11 Maturity Price : 20.70 Evaluated at bid price : 20.70 Bid-YTW : 6.84 % |
| CM.PR.P | Perpetual-Discount | 1.01 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-11 Maturity Price : 19.91 Evaluated at bid price : 19.91 Bid-YTW : 6.99 % |
| GWO.PR.G | Perpetual-Discount | 1.05 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-11 Maturity Price : 18.26 Evaluated at bid price : 18.26 Bid-YTW : 7.25 % |
| BNS.PR.Q | FixedReset | 1.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-11 Maturity Price : 22.20 Evaluated at bid price : 22.24 Bid-YTW : 4.48 % |
| BAM.PR.H | OpRet | 1.16 % | YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2012-03-30 Maturity Price : 25.00 Evaluated at bid price : 22.76 Bid-YTW : 9.44 % |
| 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 : 8.01 Bid-YTW : 9.38 % |
| W.PR.H | Perpetual-Discount | 1.28 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-11 Maturity Price : 19.75 Evaluated at bid price : 19.75 Bid-YTW : 7.07 % |
| BAM.PR.O | OpRet | 1.46 % | YTW SCENARIO Maturity Type : Option Certainty Maturity Date : 2013-06-30 Maturity Price : 25.00 Evaluated at bid price : 20.90 Bid-YTW : 9.94 % |
| CL.PR.B | Perpetual-Discount | 1.61 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-11 Maturity Price : 21.45 Evaluated at bid price : 21.45 Bid-YTW : 7.42 % |
| ELF.PR.G | Perpetual-Discount | 2.26 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-11 Maturity Price : 14.00 Evaluated at bid price : 14.00 Bid-YTW : 8.63 % |
| BAM.PR.I | OpRet | 2.57 % | YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2013-12-30 Maturity Price : 25.00 Evaluated at bid price : 21.55 Bid-YTW : 9.31 % |
| TRI.PR.B | Floater | 2.85 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-11 Maturity Price : 12.65 Evaluated at bid price : 12.65 Bid-YTW : 4.19 % |
| BCE.PR.G | FixedFloater | 2.88 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-11 Maturity Price : 25.00 Evaluated at bid price : 15.00 Bid-YTW : 7.10 % |
| BAM.PR.K | Floater | 3.22 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-11 Maturity Price : 7.70 Evaluated at bid price : 7.70 Bid-YTW : 6.93 % |
| BCE.PR.F | FixedFloater | 7.07 % | Catching up in price to the other fixed floaters on slightly below average volume. Traded 1800 shares in a range of 14.25-15.50 before closing at 15.00-50, 1×15. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-11 Maturity Price : 25.00 Evaluated at bid price : 15.00 Bid-YTW : 7.01 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| TD.PR.G | FixedReset | 266,723 | Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-30 Maturity Price : 25.00 Evaluated at bid price : 25.10 Bid-YTW : 6.26 % |
| RY.PR.R | FixedReset | 102,142 | Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 25.15 Bid-YTW : 6.21 % |
| BNS.PR.X | FixedReset | 80,971 | Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-25 Maturity Price : 25.00 Evaluated at bid price : 25.12 Bid-YTW : 6.24 % |
| BAM.PR.B | Floater | 67,039 | Nesbitt bought 44,800 from Desjardins at 7.75. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-11 Maturity Price : 7.71 Evaluated at bid price : 7.71 Bid-YTW : 6.92 % |
| BNS.PR.T | FixedReset | 66,130 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-11 Maturity Price : 25.06 Evaluated at bid price : 25.11 Bid-YTW : 6.16 % |
| WFS.PR.A | SplitShare | 58,900 | Asset coverage of 1.1+:1 as of February 5 according to Mulvihill. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2011-06-30 Maturity Price : 10.00 Evaluated at bid price : 8.57 Bid-YTW : 12.80 % |
| There were 25 other index-included issues trading in excess of 10,000 shares. | |||