PrefBlog

Jon Danielsson, Hyun Song Shin & Jean-Pierre Zigrand (there’s a multicultural author’s list for you!) write a piece in VoxEU, Modelling financial turmoil through endogenous risk, based on their Risk Appetite and Endogenous Risk, in which they show that regulating individual banks and trading institutions according to the same template leads to cliff risk:If the purpose of financial regulation is to shield the financial system from collapse, then basing regulation on individually optimal risk management may not be enough.

The bane of quants and the downfall of pseudo-quants is the fact that different things are important at different times; these effects are best minimized by ensuring that datasets are as homogeneous as meaningfully possible. But it’s particularly aggravating when the authorities change relationships on purpose:

Trichet is allowing the ECB’s deposit rate, which lenders earn on overnight deposits with the central bank, to usurp the benchmark refinancing rate and become the main driver of short- term borrowing costs. At just 0.5 percent, the deposit rate matches the Bank of England’s key setting and is only a step away from the zero-to-0.25-percent range the Federal Reserve uses.
…
The deposit rate is “very, very low,” Trichet said three times in an hour at a press conference on March 5.

He “is implicitly admitting that the deposit rate has now become the key barometer of the ECB’s policy,” said Nick Kounis, chief European economist at Fortis in Amsterdam. “The ECB has become more and more comfortable in pointing that out, not least because it’s been accused of keeping interest rates too high.”

There’s some excitement in ABCP-land! The Master Asset Vehicles (I & II) are the successors to Canadian Non-Bank ABCP … and now CIBC has delivered a collateral call:

DBRS has today commented on the recent series of trigger event notices delivered by Canadian Imperial Bank of Commerce (CIBC) to Master Asset Vehicle I (MAVI) and Master Asset Vehicle II (MAVII; collectively, the MAVs) requesting additional collateral.

As described in the DBRS Canadian Structured Finance Newsletter dated February 19, 2009, CIBC is the swap counterparty for four leveraged credit default swaps (CDS) collateralized by the MAVs that are not subject to the 18-month moratorium period applicable to all other CDS transactions entered into by the MAVs. The collateralization triggers on these transactions were breached on March 3, 2009, prompting CIBC to deliver trigger event notices to the MAVs requesting additional collateral. On March 6, 2009, and March 9, 2009, CIBC delivered subsequent trigger event notices to the MAVs with respect to subsequent trigger breaches. The additional collateral demanded under the March 9, 2009, trigger event notice was withdrawn on March 11, 2009. The total amount of additional collateral demanded by CIBC now stands at $95.4 million for MAVI and $19.3 million for MAVII. CIBC has stated that the deadline for providing additional collateral is 5:00 p.m. on March 13, 2009.

At the time of issuance of this press release, DBRS had not been informed of the posting of additional collateral. As noted in the March 3, 2009, Canadian Structured Finance Newsletter, the failure of the MAVs to post additional collateral will result in a partial or total unwind of the CIBC transactions with the MAVs. For MAVII, the resulting reduction in collateral supporting the notes is capped at $107,742,597 (or approximately 1.1% of the assets of MAVII).

Canadian equities had a great day, led by financials:

Canadian stocks notched their best three-day gain since November as financial and energy shares soared after better-than-estimated U.S. retail sales fanned speculation that the worst of the credit crisis may have passed.

Royal Bank of Canada climbed 4.3 percent, sending financial shares to their steepest three-day gain in 21 years after Bank of America Corp. became the latest U.S. bank to say it made a profit in the past two months. Suncor Energy Inc. rallied to the highest price since October as crude oil rose more than $4 a barrel.

The Standard & Poor’s/TSX Composite Index added 3.4 percent to 8,282.27 in Toronto, its highest close in three weeks, as six stocks rose for each that fell.
…
Royal Bank, Canada’s biggest lender, added C$1.43 to C$35. Bank of Montreal, the fourth-largest, rose 6.1 percent to C$31.93. Canadian Imperial Bank of Commerce, the fifth-biggest, advanced 4.9 percent to C$43.96. Manulife Financial Corp., the country’s biggest insurance company, rose 13 percent to C$12.70. Sun Life Financial Inc. soared 11 percent to C$19.96.

U.S. stocks rallied, led by financial companies, after General Electric Co. said that the loss today of its top credit rating from Standard & Poor’s won’t hurt its business or that of its finance arm.

Financial shares in the S&P/TSX added 5.6 percent, pacing gains in eight of the index’s 10 industries. The gauge rose 20 percent in three days, the best such rally since at least 1987.

XFN, the capped financial index fund, is now back to where it was on February 13, but PerpetualDiscounts are down 7.56% from that date. So go figure.

Still, a few more days like this could be fun!

This entry was posted on Thursday, March 12th, 2009 at 8:08 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.