No Failure Vs Orderly Failure

With all the Ukraine stuff, Missing Malaysia Airlines flight MH370, World’s biggest democracy getting ready for the exaggerate blogMelodrama and some procrastination from my side , some things got lost in my spindle.  Time to catch up 🙂

In the banking sector, which features leveraged institutions operating in a principal capacity, capital requirements are designed with the goal of enhancing safety and soundness, both for individual banks and for the banking system as a whole. Bank capital requirements serve as an important cushion against unexpected losses.

They incentivize banks to operate in a prudent manner by placing the bank owners’ equity at risk in the event of a failure. They serve; in short, to reduce risk and protect against failure and they reduce the potential that taxpayers will be required to backstop the bank in a time of stress.

Continue reading “No Failure Vs Orderly Failure”

An invitation to Systemic risk : The Collateral Concentraion Risk

3/52 : Dommages collatéraux - Collateral damage

I did this post last year but the essence is clearly visible now so posting it again under new rules and regulations.

Deja vu all over again, the over-reliance on ‘shaky’ collateral and concentration of risk is building once more – this time in the $648 trillion derivatives market. New Clearing House rules (a la Dodd-Frank) mean derivatives counterparties are required to pledge high quality collateral with the clearing houses (or exchanges) in a more formalized manner to cover potential losses.  Continue reading “An invitation to Systemic risk : The Collateral Concentraion Risk”

Term structure of Interest rates

As I posted yesterday on the Inverted Yield curve, as the future yield is a function of the expected spot rate and the term premium, either of imageswhich could go up or down separately or together. The talented RBI researchers should come out with their interpretation of the current yield trends of gilts in the forthcoming Annual Report of the Bank. So let’s try to build analogy on Term structure moving forward.
The “term structure” of interest rates refers to the relationship between bonds of different terms. When interest rates of bonds are plotted against their terms, this is called the “yield curve”. Economists and investors believe that the shape of the yield curve reflects the market’s future expectation for interest rates and the conditions for monetary policy.  Continue reading “Term structure of Interest rates”

Collateral Concentration Risks : Are we inviting the Systemic risk ?

I did this post last year but the essence is clearly visible now so posting it again under new rules and regulations :-images

Deja vu all over again, the over-reliance on ‘shaky’ collateral and concentration of risk is building once more – this time in the $648 trillion derivatives market. New Clearing House rules (a la Dodd-Frank) mean derivatives counterparties are required to pledge high quality collateral with the clearing houses (or exchanges) in a more formalized manner to cover potential losses.

However, the safety bid combined with Central Banks monetization of every sovereign risk asset onto their balance sheet has reduced the amount of quality collateral available; this scarcity of quality collateral creates liquidity problems. Continue reading “Collateral Concentration Risks : Are we inviting the Systemic risk ?”

Market Efficieny : Anomaly from CDS and Loan CDS

There was a unique study done recently paper titled “MARKET EFFICIENCY AND DEFAULT RISK: EVIDENCE OF AN imagesANOMALY FROM THE CDS AND LOAN CDS MARKETS” by Lawrence Kryzanowski, Stylianos Perrakis and Rui Zhong.

The findings where significantly positive pricing-parity deviations from a simulated portfolio that simultaneously participates in opposite legs of the undervalued and overvalued contracts in the CDS and LCDS markets for exactly the same underlying firm, maturity, currency and restructure clauses. These deviations cannot be accounted for by trading costs, illiquidity or imperfect data about recovery rates in the event of default, suggesting segmentation between CDS and LCDS markets. Continue reading “Market Efficieny : Anomaly from CDS and Loan CDS”