Weekend Reading February 6th 2015
Thanks to a subscriber for this list of mostly academic reports which we can reasonably assume represents at least some of what policy makers consume. There are a number of reports from the Bank of International Settlements in this week’s list which may of particular interest.
BIS: “Understanding the role of debt in the financial system”
The paper presents a perspective on the logic of credit markets and the structure of debt contracts that highlights the information insensitivity of debt. This perspective explains among other things why opacity often enhances liquidity in credit markets and therefore why all financial panics involve debt.
BIS: “Credit booms: implications for the public and the private sector”
How do credit booms affect incentives? In the case of the government sector, credit booms may affect the incentives of different interest groups to agree on policies for reform or fiscal stabilisation. In the case of the private sector, it may change the incentives of originators to produce good assets.
BIS: “Global dollar credit: links to US monetary policy and leverage”
We find that prior to the crisis, banks drew on low funding rates and low-cost leverage to extend dollar credit to non-US borrowers. After the Federal Reserve announced its large-scale bond purchases in 2008, however, bond investors responded to compressed long-term rates by buying dollar bonds from non-US borrowers. The balance of dollar credit transmission has shifted from global banks to global bond investors.
Bob Hall: “Changes in US Household Labor-Force Participation by Household Income”
BoE: “Do contractionary monetary policy shocks expand shadow banking?”
DnB: “Global liquidity regulation - Why did it take so long?”
It appears that crisis-related supervisory momentum is an important factor behind most agreements on regulatory harmonization. In line with that, the drying up of funding and the subsequent liquidity problems during the 2007-08 financial crisis played a large role in the development of the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).
IMF: “The Global Trade Slowdown: Cyclical or Structural?”
These results suggest that trade is growing slowly not only because of slow growth of Gross Domestic Product (GDP), but also because of a structural change in the trade-GDP relationship in recent years. The available evidence suggests that the explanation may lie in the slowing pace of international vertical specialization rather than increasing protection or the changing composition of trade and GDP.