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”

What factors lead to overheating episodes in credit markets ?

The recent speech by Jeremy Stein a Federal Reserve Governor brought on board just last year,received a lot of for its suggestion that monetary tools might be used in addressing credit market-overheating. That is an interesting argument, but I don’t want to deal with that today. Rather, I want to look at Stein’s comments on collateral transformation:

Collateral transformation is best explained with an example.

Imagine an insurance company that wants to engage in a derivatives transaction. To do so, it is required to post collateral with a clearinghouse, and, because the clearinghouse has high standards, the collateral must Continue reading “What factors lead to overheating episodes in credit markets ?”