A whole bag of questions to see us through the weekend.
Continue reading “From the postbag – CDS spreads, racing certainty”
Boris clashes with the Bank of England chief
Mr Johnson insisted Britain would be allowed to use world trade laws to enjoy a period without any changes to tariffs that would endanger exports, something the Bank Governor and many others have stressed would be impossible to demand without agreement in Brussels.
But you saw it here first.
Capital punishment
The AGM presentation by Just Group (13 June 2019) fell into the usual trap of confusing capital with capital requirement. Chris Gibson Smith:
As you will be well aware, new regulatory guidance released by the PRA in December – Policy Statement 31/18 (“PS31/18”) – imposed increased capital requirements for lifetime mortgage writers, particularly in relation to business written since January 2016.
[…]The strength of our customer offering has enabled us to adapt new business pricing to the increased capital requirements
David Richardson:
It is very clear that the capital requirements for this business have increased
Etc.
From the postbag – Network Rail bonds
Earlier this week, Golden Retriever (who is a bit of a dog) asks
Would also be great to get any thoughts you have on why Network Rail bonds yield more [20bp] than gilts even though they are guaranteed by the UK government
This is an objection to my earlier observation that illiquid spreads amount to a matter of basis points. Continue reading “From the postbag – Network Rail bonds”
Yet more from the postbag – Leland toft model, covered bonds
A busy day at the Post Office. K9.dogs is still intrigued by our earlier suggestion that the illiquidity premium is only c.5bps. Could we have a blog on that? Indeed, but that will have to wait until next week. Illiquidity premia require patience (unless you are an insurance company).
Max LikeyHood (sic) at maximumlikeyhood@gmail.com asks if we can make our implementation of the Bank’s structural model available. Yes, in the interests of transparency, public disclosure etc, here it is. The usual disclaimers apply – at your own risk, no representation is made etc. There is an additional bonus in that we have included the Basel IRB model at the bottom. Any questions, please ask in the usual way.
And keep up with the weird email addresses!
From the postbag – Merton model part II
K9 asks whether I believe some or all of the following.
1) the Merton model is inappropriate here;
2) that the BoE has parameterised the Merton model incorrectly; or
3) that this “residual” bit of the spread is accounted for something other than credit and liquidity.
All three as it happens.
From the postbag – Merton model
The Retriever has found another juicy bone. He (or she?) writes in raising a number of points about credit spreads, questioning my suggestion (following John Vickers’ assertion) that credit spreads rose in 2018 ‘Largely, if not wholly, because corporate credit risk has gone up’.
Retriever raises a number of interesting points. For the moment (and in a subsequent post) I will focus on the challenge presented to our case by the Bank of England’s structural credit model. As Retriever points out, Chart E of this 2016 inflation report (page 13 of the PDF, and copied above) suggests that the Bank of England thinks that the illiquidity premium is something like 50% of the corporate bond spread.
Presumably you must think that either 1) the Merton model is inappropriate here; 2) that the BoE has parameterised the Merton model incorrectly; or 3) that this “residual” bit of the spread is accounted for something other than credit and liquidity.
On the Actuarial Treatment of Equity Release Mortgages
Craig Turnbull (Author, A History of British Actuarial Thought with day job as Investment Director at Aberdeen Standard Investments) has just published this piece on the valuation of equity release mortgages.
Continue reading “On the Actuarial Treatment of Equity Release Mortgages”
From the postbag – various
‘Golden Retriever’ @k9.dog asks ‘What makes you conclude that corporate credit risk increased during 2018?’, presumably referring to my report of John Vickers speech the other day.
Well “average bond spread increased by c.41bps in 2018” should be a clue, taken from the Just Group 2018 regulatory report. May not be correct, but other insurers reported the same thing. Indeed, total spread widening in 2018 caused a fall in asset values of around £7bn – according to another source. Fortunately MA was there to mop up the losses, so there weren’t really any losses at all.
Another actuary, referring to this post reported proudly that he had managed to listen to 18 minutes 50 seconds of the Wii Shop Channel. Look mate, the whole purpose of that music was to act as a deterrent, and to encourage actuaries to mend their ways. Not an endurance competition. There is some more above (2 hour loop).
Have a good weekend everyone.
Stress tests apply not only to banks
Sir John Vickers kindly mentioned us last week (6 June 2019) in his keynote address to the 19th Annual International Conference on Policy Challenges for the Financial Sector in Washington. Most of the speech is about bank stress tests – he has long insisted that market-based measures should play a greater role in regulatory assessment than is current practice – but he mentions the insurance stress tests towards the end, citing the PRA’s current consultation on its stress test for insurers.
For the valuation of pension scheme liabilities, firms should assume that the discount rate would change by the level of any change in the risk-free rate plus 50% of the change in spread on AA rated corporate bonds. Under the proposed stress the risk-free rate decreases by 100bps and 50% of the spread on AA rated corporate bonds is an increase of 85bps. Therefore, both elements combined result in a 15bps fall at all tenors to the discount rate.1