After a hiatus resulting from various disturbances, I am back with another book manuscript section. I just reworked this section, and hopefully did not introduce major issues into it. However, I wanted to get this out before next week. Right now, my main concern in life is getting my kitchen sink back. This section introduces credit spreads from a bond pricing perspective. Looking at bonds is not completely inappropriate, as banks do hold bonds in their liquidity portfolio. The illiquid loans on bank balance sheets can be analysed in the same way, albeit bankers might use different terminol ..read more

The Fed started what might develop into a rate cut campaign by reducing the target rate by 50 basis points. It looks like Chairman Powell has decided to take “Gradualism” behind the barn and put it out of its misery. I have returned from an unplanned trip, caught some kind of virus, have a new consulting project, and half the main floor of my house is being refitted. As such, I have been even less on top of current economic events than usual. I am just putting this article up to let readers know that I am still around and thinking of them. My main concern is finishing off the next section o ..read more

Status update. I had to take an unplanned trip, while at the same time starting a new consulting project. I focussed on the project before I left, and I now have some time to do some writing while away from home. This is the latest instalment of my draft manuscript, which is a brief discussion of wholesale payments systems. I might beef up the discussions further. International payments is another variant topic, but I may shy away from opening that can of worms. Wholesale payments systems are the glue that ties the banking system together. These systems allow banks to make monetary transfer ..read more

This article is an unedited draft section from my banking manuscript. It finishes off the chapter on risk management. The focus of this book is on how bank lending and liquidity flows interact with the wider economy. So long as credit losses remain at acceptable levels, they do not interrupt those flows. Given that the focus is elsewhere, this section will just offer a high-level perspective on how banks manage credit risk, without attempting to discuss what strategies individual banks use to analyse credit risk. Although this section will mainly refer to lending decisions, liquidity provis ..read more

I realise that I have tempted fate with my article headline, but I am just referring to a current popular meme on Twitter (“nothing happens”). In this case, I am referring to the drop in panic with regards to the yen carry trade (and whatever else people were worrying about, like “repo pods”). To repeat once again my monotonous point: financial crises generally need some form of credit event to make them interesting. Risk assets losing value will cause some leveraged players to blow up. (Pretty much any exciting market movement can ultimately be traced to one or more hedge funds shifting of ..read more

I have a need to rant as a result of recent discussion of yet another Universal Basic Income (UBI) study on Twitter. Rather than deal with the ugly political realities of a UBI, UBI proponents insist on doing studies on a tangential topic (how do people spend regular cash grants?). I use a standard definition of a UBI where all living adult citizens receive a fixed monthly payment from the government. The idea is that the fixed monthly payment provides a guaranteed minimal standard of living without any other income sources needed. The Only UBI Study You Need The only UBI study you need to do ..read more

This article is a draft section from my banking manuscript. It fits into a chapter on bank risk management. This article is an introduction to basic bankruptcy procedures, which needs to be understood before worrying about how banks manage the risk of their customers defaulting. This version of the section includes some text about bank resolution procedures that was previously published (but modified here). Before discussing credit risk management, we need to give some background on credit risk itself. In most cases, credit losses will result from restructurings or bankruptcy procedures. This ..read more

I imagine that innumerable newsletters are writing the equivalent of “the markets are being roiled by volatility.” (When things are being roiled, you know it’s bad.) With the immediate disclaimer that I do not have much in the way of useful market data, I do not see anything that the Fed should immediately care about. What matters to the central bank is that credit is available to finance capitalist activity. This means that the trip wire for a crisis that it will care about is disruptions to core funding markets. These are money markets, interbank markets, and wacky things like cross-curren ..read more

I am catching up on things post-vacation (new consulting project dropped). I just wanted to make some comments on topics I have run into recently before getting back to some banking texts that I had finished up earlier. Fed! The Most Important Fed Meeting Ever happened today, and the Fed remained on hold. Since I am focussing on writing books that are supposed to be somewhat timeless, I do not spend much time on central bank watching. With the disclaimer that I had no forecast, I do not think it is inherently surprising that the Fed did not cut. The big inflation miss in recent years was poli ..read more

Michael T. Kiley published an interesting term premium paper “Why Have Long-term Treasury Yields Fallen Since the 1980s? Expected Short Rates and Term Premiums in (Quasi-) Real Time.” (OK, it’s interesting for those of us who read term premium papers.) I am currently on a trip and am not in a position to dig too deeply into the paper, but it discusses the implications of some of the academic term premium modelling strategies. Term Premium I have written fairly extensively about the term premium elsewhere, but I will give a minimal potted summary of the concept here. We can take U.S. Treasury ..read more