Author: kd

Posted on

More Market Value Nonsense from the Bank

In his opening remarks to the Treasury Committee on May 20th, Governor Bailey made an interesting observation point about market values:

 … had you done a stress test in the run-up the financial crisis on the market value, you would have been doing it on the market values that were trading well in excess of book values, so … that would of course have severely misled you. You would have concluded there was no problem and you would obviously have been badly wrong. (Our emphasis)

Mr. Bailey isn’t the first Bank spokesman to make this claim. The Bank’s head of financial stability Alex Brazier said as much in almost the same words back in January 2017:

… if you had [relied on market cap values] before the crisis, you would have been led completely astray … You would have been led to the conclusion that the British banking system was remarkably resilient, and, as forecasting errors go, that would have been quite a good one. 1

It’s an important point, but it is wrong. Flat out wrong.

It’s a shame that none of the MPs challenged it.

Continue reading “More Market Value Nonsense from the Bank”

Posted on

Another Gem from the PRA

Capillamentum? Haudquaquam conieci esse! – A wig? I never would have guessed!  PRA meeting, believed to be not later than 79 AD

“It seems an unaccountable thing how one soothsayer can refrain from laughing when he sees another,” remarked Cicero in De Natura Deorum, I. 71. His point is that while the profession demands a certain gravitas in front of the ordinary public, its members have a jolly good laugh in private, because they all know they are frauds.

Which point takes us to this stunningly absurd speech by Charlotte Gerken (PRA director of life insurance). It is written by an impressive collection of individuals and expressed with utmost dignity, yet we imagine that they must have had a few giggles when they gathered in the halls of the PRA to write this impressive piece of tosh.

Continue reading “Another Gem from the PRA”

Posted on

To Be or Not to Be, L&G’s £10 Billion Question

L&G have been much in the news recently, so too has our own Dean Buckner, with star appearances in the Financial Times, the Times and the Daily Mail (see also here) and all in two days.

The fur continues to fly over L&G’s planned June 4th dividend, but the attention is shifting subtly from the dividend itself to the underlying valuation methodology and the central issue is (one again) the Matching Adjustment.

There is also the issue of the firm’s ‘virus spread’ losses or, more precisely, Dean’s estimate that these could be up to £10.3 billion. Dean has stirred up a right hornets’ nest this time.

Here is my take.

Continue reading “To Be or Not to Be, L&G’s £10 Billion Question”

Posted on

Can UK Banks Pass the COVID-19 Stress Test?

Source: Positive Money

Eumaeus is pleased to release our report Can UK Banks Pass the COVID-19 Stress Test? on the dire state of the UK banking system.

In his final remarks as Governor, Mark Carney reiterated the same upbeat message that he has always given, that the UK banking system is superstrong:

Some watching will recall the financial crisis a little more than a decade ago. Then, the financial system was the core of the problem. Now, it can be part of the solution.

Over the past decade, the UK financial system has been transformed. We didn’t build this strength for its own sake.

This is prudence with a purpose.

Resilience with a reason.

Deputy governor Sam Woods said much the same to the Treasury Committee on Wednesday April 15th:

We go into this with a well capitalised banking sector.

We don’t think so. Our report explains why.

Continue reading “Can UK Banks Pass the COVID-19 Stress Test?”

Posted on

Hegel on an Off Day: Kevin’s Response to CP 2 20

Last week Eumaeus posted Dean’s response to the PRA’s Consultation Paper CP 2 20.

Here is mine.

My first impression about CP 2/20 is one of overwhelming bafflement. The PRA has a statutory duty to consult when proposing new rules, but there is also an implied obligation to consult clearly and intelligibly.

It is one thing for the Regulatory ‘Will’ to be inscrutable, but it is quite another when that Will becomes inscrutable to the point of unintelligible. CP 2/20 reads as if it could have been written by Hegel on an off day.”

Continue reading

Posted on

UK Police Exceeding their Legal Authority

Kevin Dowd 31 March 2020

The political blog Guido Fawkes wrote yesterday: “Since the lockdown came into force last week, along with the emergency powers act being passed, it’s not gone unnoticed by the public that the police have gone ever so slightly maniacal with power.” Guido is right. He continued: a number of police forces are “allowing newly-received powers to go to their heads [and] going far beyond their legislated-for powers.”

Examples include:

  • South Wales Police attempted to shame MP Stephen Kinnock for dropping off essential supplies for his parents on his father’s 78th birthday, before having a brief, socially-distanced chat, singing him Happy Birthday and then going off;
  • Dyeing a beautiful local lake black to deter tourists;
  • Dictating to shop owners what are the essential items they can sell;
  • Telling off shop owners for chalking two-meter lines outside their shops to enforce customer social-distancing; and
  • Claiming outdoor exercise is limited to one hour.

Continue reading “UK Police Exceeding their Legal Authority”

Posted on

Still Searching for Phlogiston

Phlogiston isn’t the ostrich.

The IFoA working party on equity release mortgages chaired by our friend Craig Turnbull has just issued an interesting ‘discussion note’ about equity release valuation. You might have thought that the WP might have had something to say about some of the rude things we have said about the subject, or about the IFoA or even about the WP itself, but no.

At one level, the WP’s non response is admirable. From a scientific perspective, however, it isn’t helpful to ignore research that gives conclusions they might not like. Better to confront and rebut, otherwise people might be tempted to draw their own conclusions.

There is also nothing about the ostrich elephant in the room, which is whether the industry are getting it wrong, like getting NNEG valuation an order of magnitude wrong.

Continue reading “Still Searching for Phlogiston”

Posted on

CBDX – A Workhorse Mortality Model

(Mortality geeks only)

David Blake, Andrew Cairns and yours truly have just finished an article outlining a new(ish) mortality, model, CBDX. The purpose of the model is to offer a workhorse model that spans middle age as well as old age.

To recap: our original Cairns-Blake-Dowd (CBD) mortality model was specifically designed to capture the mortality behaviour of older people, e.g., people over 50. We were thinking of annuitants but equally it could apply to equity release borrowers, who must be at least 55.

Our original model had only two period (or passage of time) effects, the second of which enters the model through a coefficient that is a linear function of age. We then generalised then it to a CBD family consisting of 3 related models: M5, which is equivalent to a reconfigured CBD; M6, which is M5 plus a cohort (year of birth) effect; and M7, which is M6 plus a further period effect, which enters the model through a coefficient that is a quadratic function of age. More details on these models can be found here.

In subsequent work we discovered (to our surprise) that M7 performed robustly well across a number of different data sets. We had not expected a model with a quadratic function to perform as well as it did.

However, these models do not tend to perform well over age ranges that include younger ages. So one would not use the CBD family for, say, a model of a DC pension started at a youngish age. Andrew, David and I have long felt the need to remedy that limitation.

Continue reading “CBDX – A Workhorse Mortality Model”

Posted on

What to Expect from the 2019 Bank of England Stress Tests

The sixth set of Bank of England stress tests for the UK banking system will be released on December 10th.

So what to expect? UK banks’ CET1 ratios better than ever, long march to higher capital is long over, UK banks are now so strong that they can undergo a crisis that is worse than the last one and still come out in good shape.

I am confident about these predictions because that’s what the Bank always says.
Continue reading “What to Expect from the 2019 Bank of England Stress Tests”