Keeping an eye on things
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.
Kevin Dowd 25 June 2019
Governor Carney is up to his old tricks again. To quote Friday’s Financial Times:
Mark Carney, the Bank of England governor, has dismissed Boris Johnson’s claim that Britain’s exporters would avoid facing EU tariffs after a no-deal Brexit.
In an interview with the BBC’s Today programme on Friday, Mr Carney said tariffs would be applied “automatically” if there was no agreement with the bloc because the EU would need to follow World Trade Organization rules. These require that all members apply the same tariffs to all of their trading partners with whom they do not have a free trade agreement
Continue reading “More (Project) Fear Mongering from the Guv’nor”
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.
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.
Last week’s Private Eye article questioned, as we have done, why it took the PRA so long to decide on how to value a series of simple European put options. Also, Kevin asked in the original Asleep at the Wheel report, there is also a bit of a mystery about the timing.
Geeks only. As promised earlier, a chart showing the hypothetical return on a 10Y gilt, versus the total return on a portfolio of FTSE stocks.
I have so far dwelt on the positive aspects of PS 31/18. It is a landmark paper by the PRA in that for the first time it settles, with great authority and a wealth of cogent reasoning, how life insurers should correctly value a portfolio of simple European put options. Other non-insurance institutions have valued them correctly for a long time, but never mind that, it is an important breakthrough notwithstanding. In his letter of 10 December, David Rule stresses the importance of not valuing options in a way that assumes future house price growth (and by implication any asset growth) in excess of the risk-free rate.
But all is not well.
The final PRA policy statement on equity release mortgages has too much to review in one post, so I will start with the tricky subject of Brownian motion.
Kevin Dowd, 5 December 2018
Dean wrote positively yesterday about Jonathan Ford’s Financial Times piece “The Illusion of UK bank capital strength,” published on 2 December 2018.
Jonathan is right to warn about UK banks being under-capitalised and it’s good to see a journalist of his standing picking up on this issue.
It is however disheartening to see some of the disgraceful abuse made in the ‘comments’ section underneath his article. “Please keep comments respectful,” the guidelines say. “By commenting, you agree to abide by our community guidelines and … terms and conditions.”
Maybe the FT should consider introducing a moderation process to filter out such abuse in future.
Turning to the subject at hand:
Continue reading “More on Jonathan Ford on the UK’s Undercapitalised Banks”
Jonathan Ford’s recent article in the FT 1 prompted some extraordinary comments. It’s great to know that ordinary working people are still stressed up by financial stability. But what’s all the fuss about?