Timothy Ryan, president and CEO of the Securities Industry and Financial Markets Association (SIFMA), scrutinized legislation passed by the Senate that would overhaul financial regulation. “While we continue to support financial-reform legislation that responsibly guards against systemic risk, protects investors and increases regulatory transparency and oversight of all markets, there are several provisions in the current legislation that would undermine the original goals for reform by creating unintended consequences that could have a negative impact on our economy,” Ryan said. In addition, Standard & Poors, one of the credit rating agencies targeted in S. 3217, the Restoring American Financial Stability Act of 2010, warned that the financial reform bill could result in a number of unintended consequences and might give credit rating agencies less incentive to compete with each other.
Highest on the list of provisions that could have a “negative impact,” according to SIFMA is the bill’s implementation of the so-called “Volcker Rule,” which would ban banks from buying or selling investments for their own accounts, independent of customer needs. SIFMA opposes the sweeping new restrictions on the size and activities banks “that were not a cause of the financial crisis.”
Also of concern is a section of the bill, drafted by Senate Agriculture Committee Chair Blanche Lincoln, D-Ark., that would require derivatives businesses to be separated from commercial banking businesses. This would limit banks’ ability to hedge their risks, Ryan said, and deplete institutions of capital. This also would raise mortgage and credit costs, he said.
Further, a requirement that institutions that enter into swap contracts with state governments, pension funds or endowments also act as fiduciaries for their clients is “legally unworkable,” he said, and “would limit these clients’ ability to access to vital risk management tools.”
Standard & Poors takes issue with an amendment to the bill drafted by Sen. Al Franken, D-Minn., which would among other items, require the Securities and Exchange Commission (SEC) to establish a self-regulatory Credit Rating Agencies Board to select rating agencies to perform initial ratings of structured finance products. “Credit rating firms would have less incentive to compete with one another, pursue innovation and improve their models, criteria and methodologies,” Standard & Poor’s vice president of corporate communications Chris Atkins charged. “This could lead to more homogenized rating opinions and, ultimately, deprive investors of valuable, differentiated opinions on credit risk.” (While I’m not a proponent of the Senate bill, I have to wonder, where were the “valuable, differentiated opinions on credit risk” before the financial crisis? On this point, I think the credit rating agencies have only themselves to blame for the coming regulation of their industry.)
Speaking of credit ratings, the Wall Street Journal warns that the Senate bill would weaken implicit government support for banks deemed “too big to fail” and also curtail their risk taking and, arguably, their profitability. If the final version of the bill includes these provisions, credit rating agencies might downgrade the ratings of the largest financial institutions. Items like these are what have investors walking on egg-shells recently.
The Senate bill still needs to be reconciled with the House version passed in December 2009 (H.R. 4173). This creates the opportunity for even more confusion. The Associated Press has put together a good article identifying the major parts of the bill and how the reconciliation process might evolve. Click the following link for the AP article: New financial rules might not prevent next crisis.
Gregg D. Killoren
victoria1014
Germany Approves EU Bailout Package, But Credit Spreads Leap Higher
German lawmakers have approved their country’s share of a $1 trillion euro-region bailout. The lower house of parliament voted 319 to 73 in favor of lending as much as 148 billion euros ($184 billion) to indebted European states to backstop the euro. The upper house, or Bundesrat, is set to pass the measure later today before the German president signs it into law.
“Every other alternative is much worse and much more dangerous, so we have to do this,” Finance Minister Wolfgang Schaeuble told lawmakers in the lower house, or Bundestag, in Berlin before the vote. “We’re not doing this for others, we’re doing it for ourselves and for future generations.”
The credit markets have taken notice that the alternatives are “much worse and much more dangerous.” Credit spreads are now running back towards the extremes seen in the wake of the investment bank failures of 2008. While there is still a long way to go before spreads reach the credit crisis peaks, this is a strong sign that credit markets are extremely concerned about the health of the financial system in light of Europe’s sovereign debt woes. Until this condition eases, global equity markets will likely continue their declines.
The LIBOR-OIS spread is used by economists and financial analysts as a measure of the availability of cash among banks. The higher the spread, the fewer available dollars. The London Inter-Bank Offered Rate (LIBOR) is the interest rate that banks charge each other for three-month loans in U.S. dollars. The rate is set by a panel of banks in a survey by the British Bankers’ Association each day around noon in London. LIBOR is also used as a benchmark for approximately $360 trillion of financial products across the globe. The overnight indexed swap (OIS) rate is an interest rate swap transaction in which the overnight rate is exchanged for a certain fixed rate.
The spread has improved dramatically from the height of the credit crisis. However, with the recent turmoil in Europe, the spread has spiked up again. As of May 17, 2010, the spread was .24 percent.
TED Spread
The TED spread, which is the difference between what the government and companies pay for three-month loans. It recently dropped below its historical average since hitting a record high of 464 basis points (4.64 percent) on Oct. 10, 2008. The gap averaged 27 basis points (0.27 percent) from 2002 through 2006, before the credit crisis began in 2007. Since hitting lows in March, the TED spread has spiked upward a bit due to the turmoil in Europe. As of May 17, 2010, the spread is at 30.887 basis points, just slightly above the historic norm.
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Posted in Banking, Central Banks, Credit Crisis, Credit Spreads, Economy, European Union, Investing, Market Commentary, Monetary Policy, Personal Finance, Stocks
Tagged Credit Spreads, Economy, Equity Markets, European Union, Investing, Market Commentary