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UK Shareholders’ Response to Consultation on Capital Requirements and Macroprudential Buffers

On the UK Shareholders website here.

UKSA has submitted a response to the Prudential Regulation Authority’s Consultation Paper CP2/20 on Capital Requirements and Macroprudential Buffers

In a critical submission, UKSA has drawn the Authority’s attention to the lack of clarity and intelligibility of the Consultation Paper and argued that the proposed reduction in Pillar 2A is not contingent on any increase in the countercyclical buffer, leading to the asymmetry of an actual lowering of minimum capital requirements offsetting a hypothetical increase to the buffer.

I have written a few CPs in the past, but for sheer impenetrability this one takes the biscuit.

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Just 2019 Solvency and Financial Condition Report

The Just Group SFCR is out today.  One thing leapt out.  Table S.22.01.22 on page 110 which quantifies the effect of transitionals and matching adjustment, shows a large increase in the effect of TMTP from £1.7bn in 2018 to £2.8 bn in 2019, that more than a £1bn increase. The figure is broadly consistent with the figure for JRL on p.120 and for Partnership Life on p.129 (although, unlike last year, they don’t add up precisely).

If correct, the coverage ratio would have fallen to 82%.

Yet the figure is not consistent with the figures on p.80, which show the effect of transitionals at only £1bn, leaving the capital coverage ratio broadly unchanged at 141%. I have no way of explaining this.

Note also the weird lack of sensitivity to a 100bp changes in credit spreads, given on p.10 as 1% of coverage ratio. The puzzle is resolved on p.62 where it states “Credit Spread Risk: “The 100bps increase in credit spread for corporate bonds (excludes gilts, EIBs, any other government/supranational) assumes that the Fundamental Spread and volatility adjustment remain unchanged”.

More bizarre insurance accounting, in other words. The fundamental spread represents the supposed default risk for the firm, which if unchanged would not impact p/l. The widening of the spread, for example in a crisis period like now, would therefore be attributable to a change in Matching Adjustment, and the fall in asset value be matched by a corresponding fall in obligations.

This is not false accounting at all!

 

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Excess mortality – official

Source: New York Times

There has been endless debate in the, er, Trumpier bits of social media suggesting that the whole virus thing is a hoax, that dying with corona virus is different from dying from it or because of it. The chart above, showing deaths in New York, suggests that people are in fact dying from it. Of course you can’t prove anything, as one acquaintance suggested, but then outside of mathematics and logic you can’t prove anything anyway.

Our British actuarial colleagues found much the same as the New Yorkers, in a report published by the IFoA of all places.  That settles it then.

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Hong Kong suggests no need for total lockdown

Source: John Hopkins University

From the FT:

Hong Kong effectively managed the first wave of coronavirus outbreak through border restrictions, quarantine, isolation and social distancing – without resorting to a total lockdown – according to a new study in The Lancet, the UK medical journal.

The research by the University of Hong Kong showed that border entry restrictions, testing, contract tracing and isolation and population behavioural changes were effective in reducing the transmission of Covid-19 in the territory in early February.

The report also suggested that there were much reduced influenza transmission in February, compared with times of school closures in the past. Therefore, the study concluded, other social distancing measures and avoidance behaviours had a substantial impact.

“By quickly implementing public health measures, Hong Kong has demonstrated that Covid-19 transmission can be effectively contained without resorting to the highly disruptive complete lockdown” adopted by mainland China, the US and western European countries, said Benjamin Cowling, a professor at HKU’s School of Public Health who led the research.

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Liquidity again

Sam Woods was questioned by the Treasury Committee on Wednesday. Transcript below, starting 16:50.

A few odd things. Woods says there have been defaults and downgrades, but soon after claims that ‘blowouts in bond spreads’ are driven by liquidity. He mentions the Matching Adjustment as the ‘piece of machinery that is operating quietly in the background’, and Baldwin asks whether without it there would be actual insolvencies. Woods first says that there wouldn’t, or he thinks there wouldn’t, then says that without it there would be ‘a major problem’.

Why don’t they just state the accounting numbers as they are, i.e. some firms with no net assets at all, or negative assets, adding that this doesn’t make the firms insolvent, because it’s merely a liquidity effect and the spreads will narrow back again? Why falsify the accounting?

More later, I expect.

Continue reading “Liquidity again”

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Off to a good start

April 5 2020  (article by Andrew Bailey in the Financial Times)

Bank of England is not doing ‘monetary financing’

… the Monetary Policy Committee voted last month to increase the bank’s bond holdings by £200bn to support the needs of the British people. Some external commentators are linking this move to fears that it that it may be using “monetary financing”, a permanent expansion of the central bank balance sheet with the aim of funding the government.

This type of reserve creation has been linked in other countries to runaway inflation. That is because it could undermine a central bank’s ability to control monetary conditions over the medium term. Using monetary financing would damage credibility on controlling inflation by eroding operational independence. It would also ultimately result in an unsustainable central bank balance sheet and is incompatible with the pursuit of an inflation target by an independent central bank.

But the UK’s institutional safeguards rule out this approach.

April 9 2020

The UK has become the first country to embrace the monetary financing of government to fund the immediate cost of fighting coronavirus, with the Bank of England to directly finance the state’s spending needs on a temporary basis.  The move would allow the government to bypass the bond market until the Covid-19 pandemic subsides even though it will face criticism it is engaged in Zimbabwe-style policy that has led to hyperinflation where it has persisted.

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No area immune

Source Schroders

 

Banks seem to be missing, so perhaps they are immune? (Hint: I think not).

 

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Coronavirus exposes illusion of UK bank capital strength

A great piece here by Jonathan Ford of the FT. For those on the wrong side of the paywall, his case is as follows.

The Bank intervened last week to stop banks paying out dividends, the official reason being the coronavirus panic. But why didn’t the Bank prevent capital distributions earlier, given the much-heralded capital rebuilding exercise? Ford argues that the official measure of capital strength, CET1, may be illusory, given that it is based on ‘risk weighted assets’, a subjective and hence gameable measure of asset value.

A less gameable measure involves comparing equity not with a RWAs, but simply the total unadjusted asset number. Moreover, because accounting measures of book equity are backward-looking and may conceal losses, it makes sense to use the bank’s market capitalisation in their stead — especially when events are moving fast.

He quotes our own Professor Dowd saying that Barclays’ leverage ratio (equity divided by unadjusted asset value) is now just 1.2 per cent.

Continue reading “Coronavirus exposes illusion of UK bank capital strength”