China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

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Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

Donald Trump has chosen Steven Mnuchin as his Treasury secretary, US media outlets reported on Tuesday, positioning the former Goldman Sachs banker to be the latest Wall Street veteran to receive a top administration post. Mr Mnuchin chairs both Dune Capital Management and Dune Entertainment Partners and has been a longtime business associate of Mr […]

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Financial system more vulnerable after Trump victory, says BoE

The US election outcome has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging. The BoE said on Wednesday that vulnerabilities that were already considered “elevated” have worsened since its last report on financial stability in July, in the […]

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China stock market unfazed by falling renminbi

China’s renminbi slump has companies and individuals alike scrambling to move capital overseas, but it has not damped the enthusiasm of China’s equity investors. The Shanghai Composite, which tracks stocks on the mainland’s biggest exchange, has been gradually rising since May. That is the opposite of what happened in August 2015 after China’s surprise renminbi […]

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Hard-hit online lender CAN Capital makes executive changes

The biggest online lender to small businesses in the US has pulled down the shutters and put its top managers on a leave of absence, in the latest blow to an industry grappling with mounting fears over credit quality. Atlanta-based CAN Capital said on Tuesday that it had replaced a trio of senior executives, after […]

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Archive | November, 2016

Riskier assets sought by the yield-hungry

Posted on 31 August 2012 by

Global investors hungry for higher-yielding assets are flooding into US mutual and exchange traded funds that bet on riskier debt, pushing flow volumes so far this year to their highest on record.

Inflows into US-domiciled high-yield mutual funds and ETFs wrapped up a three-month run in August to reach $32bn, according to EPFR Global.

    The amount is more than double the inflows such funds experienced in the same period of 2011 and the highest since EPFR started to track the data.

    Inflows accelerated in the past couple of weeks as global companies, including General Motors Financial, Sprint Nextel and First Data Corp sold roughly $30bn in junk debt in August, a record for the month.

    The month was also strong for sales by global companies with higher credit quality such as Rio Tinto and Siemens, which sold over $101bn in debt in the past four weeks, according to Dealogic, the data provider.

    The borrowers rushed to sell the bonds before a slowdown in capital markets activity ahead of the US Labor Day holiday and as a slew of data and central bank meetings in Europe and the US loomed.

    While any disappointment with global policy makers’ efforts to boost growth and address a crisis in the eurozone could shut the debt issuance window, Wall Street analysts still estimate an additional $100bn in investment-grade and $30bn in high-yield sales after Labor Day on September 3.

    “If the Fed delivers a QE3 programme and the ECB does not disappoint in its explanation of its proposed bond-buying programme, then the planets would align for another very active month,” said Adrian Miller, a director for global market strategy at GMP Securities.

    The massive sales have been met with strong demand among investors, lured by their higher returns.

    US junk-rated debt, for example, has generated an average return of more than 10 per cent this year compared with 2 per cent on US Treasuries and 7.5 per cent on investment-grade bonds, according to Barclays.

    In Europe, risk appetite has been stoked in recent weeks by Mario Draghi, the European Central Bank president, who announced in late July that the central bank was willing to do “whatever it takes” to support the euro.

    Investors have since been looking forward to next week’s ECB meeting where most expect it to reveal details of a revamped bond-buying programme.

    European companies issued $20bn worth of debt in August, the highest on record and more than double the $8bn worth normally issued over the month, according to Dealogic data going back to 1995.

    “There has been a lot of opportunistic financing in the last few weeks,” said Steve Hussey at AllianceBernstein.

    “However, people are expecting the rest of the year to be more volatile and perhaps less conducive for issuance, ahead of various EU summits and elections in Europe and the US.”

    Swiss launch UBS money-laundering probe

    Posted on 31 August 2012 by

    Switzerland’s attorney general has opened a criminal investigation into UBS, following a complaint that a Malaysian politician had used accounts at the Swiss bank to launder money.

    The Bruno Manser Fund, a Basel-based environmental group which campaigns to protect the world’s rainforests, has complained over alleged laundering of proceeds from corrupt timber logging operations in Borneo through a number of UBS bank accounts in Hong Kong. It raised concerns over UBS’s due diligence procedures.

      The Swiss attorney general’s office confirmed that an investigation had been opened on August 29 in connection with anti-money-laundering provisions in Switzerland’s penal code but declined to comment further, citing the continuing investigations.

      Under Swiss law, it is possible for a company to be held responsible for crimes committed in the course of its business activites, if the company’s lack of organisation means that the offences cannot be attributed to any particular individual.

      UBS said in a statement that would co-operate fully with the Swiss authorities and that it applied “the highest standards worldwide in the fight against money laundering and corruption”, noting that it is obliged to report the discovery of criminal proceeds and suspicious activities to anti-money laundering authorities.

      “In this matter, UBS has complied with these obligations already several years ago in several countries, prior to the commencement of various investigations. Ever since, UBS has been fully co-operating in a number of investigations relating to this matter. We understand that UBS itself has not been the subject of such investigations,” the bank said.

      Shares in UBS closed up 1.23 per cent at SFr10.68 in Zürich.

      Spain gives Bankia urgent cash boost

      Posted on 31 August 2012 by

      Spain has been forced to inject emergency liquidity into Bankia after the nationalised lender announced a €4.4bn loss for the first six months of the year.

      Spain’s state bank rescue fund, the Frob, said on Friday that it would provide capital to Bankia before the arrival of €100bn in European rescue money requested in June, but which has still not been provided by Brussels.

        The Frob did not specify how much it would inject into the bank, which had earlier said it needed €19.5bn in new capital in what will be Spain’s largest bank nationalisation.

        The move came as the government of Mariano Rajoy announced the fifth attempt at reforming its banking sector in only three years, giving the state the power to close failing lenders and establishing a “bad bank” as Madrid implements the conditions imposed under the terms of its European bank bailout.

        Hailed as “the authentic reform” by Luis de Guindos, finance minister, the new proposals will allow the government for the first time to intervene before a bank gets into difficulty, and to liquidate banks judged as unviable.

        A property management company for soured real estate assets, or “bad bank”, will also be created to allow lenders to rid themselves of the burden of repossessed homes.

        Investors in bank preference shares and subordinated debt will be forced to take losses before any state aid can be given to financial institutions.

        Many small savers were sold savings products linked to preference shares by Spain’s four now nationalised banks, and under the reform they will be offered by lenders the market value of their shares, which often trade at less than half their original value.

        “If we had had instruments like these before, this banking crisis could have been addressed in a different way, but we must now look to the future,” said Mr de Guindos, adding that the reform had been drawn up in consultation with the European Central Bank and the International Monetary Fund.

        With mounting concern at the possibility of a rescue, a further €55.6bn of capital left Spain in June, following a €41.3bn outflow in May, according to data released by the Bank of Spain, taking the total outflow for the year past €200bn.

        The government has failed to gain the confidence of the international investors Spain needs to lend it money, with high borrowing costs and a shrinking economy raising expectations that it will be forced to accept a full-scale rescue later this year – with further conditions attached.

        The Eurogroup of eurozone finance ministers welcomed the recapitalisation of Bankia on Friday, “pending the full recapitalisation and restructuring process which is ongoing under the terms of the financial assistance programme”.

        Mr de Guindos said the “bad bank” would last for a period of between 10 and 15 years, and predicted that it would make a profit by the end of its life to avoid taxpayers backstopping more of the sectors’ losses.

        The capital for the new entity would come from the Frob, with only a small part from the bailout money, Mr de Guindos said, with a plan to sell some of the shares in the bad bank to private investors in the future.

        Spain was forced to accept conditions on the oversight and regulation of its banks, and new austerity measures, as a result of its June request for €100bn in European aid to clean up a banking sector saddled with €180bn of bad property loans after a decade-long housing bubble.

        Old news can be good for canny investors

        Posted on 31 August 2012 by

        Can you see the wood for the trees? If so, you have a rare ability not shared by many investors, and you can make money from it.

          Prices of stocks, bonds and commodities bounce around in response to new information. But there is hard evidence that so many investors do not pay full attention that significant and predictable profits can be made from the release of old news.

          Modern disclosure rules require companies to be transparent, which in practice means unloading a lot of data. That makes it hard, and expensive, to dig up your own market-moving information. But it also makes it hard to make sense of the information already out there.

          The human brain has difficulty putting together data to see a bigger picture. That creates opportunities, as is shown by fascinating research into a situation where stale and new information can easily be separated.

          The Leading Economic Indicators (LEI), published monthly by the US Conference Board, offer a perfect test. LEIs have over time been great leading indicators of economic growth and of stock markets (as the chart below shows).

          They are compiled from 10 separate streams of data, such as average weekly hours worked, manufacturers’ new orders and the money supply. These are condensed into one index number, set so that its 2004 level was 100.

          Longview: Leading the Market

          Crucially, the formulas for doing this are public on the Conference Board’s website and do not require great computational capacity. All 10 LEI data points are published at least 24 hours before the official LEI is published.

          So if people pay attention, the LEI itself should be a complete non-event. It is a predictable compilation of news that is already known.

          Yet LEIs move markets. When a team of academics looked at the S&P 500’s movements in the days before and after an LEI announcement*, they found that the market gained ahead of positive LEIs (when alert investors already knew what the LEI would be), but then gained even more after the announcement. Those latter gains would then be reversed the next day. The exact reverse happened when the LEI was negative.

          A strategy of buying or selling the S&P just after the last LEI constituent data came out (according to whether the data were positive or negative), and then reversing that trade just before the correction, would have made an average of 0.65 per cent each month, enough to make almost 8 per cent for the year. That is serious money – better than an average year for the entire stock market.

          Plainly there is money to be made by exploiting the mistakes people make when they fail to pay attention.

          A growing literature has found other examples. Investors will not respond enough to genuinely new news when it comes out on a Friday, or when it comes out on a day when many companies are publishing results, for example.

          This failing might refer to the difficulty we all have in assimilating more than one piece of information at once. Information is readily available. These numbers make clear that many investors have too much of it for their own good.

          Perhaps regulators should stop forcing the publication of ever more data. Rather, aggregating data as it comes in, making sense of it, and understanding the big picture, could on its own be enough to beat the market. And that is far harder than it sounds.

          The next month could be a classic. After a deeper summer torpor than usual, September brings critical announcements by the European Central Bank on how it will support the eurozone’s bond markets; a decision from the Federal Reserve on whether it will resort to more bond purchases; a “troika” report on whether Greece can keep up with its debt repayments; an election in the Netherlands; and maybe even a plea for a second bailout from Spain. After all that, November brings a divisive and close US election.

          These events could easily combine to force the market either upwards or downwards. To make money, it will be necessary to sort out exactly what is new, and to join the dots to see the bigger picture that is taking shape.

          How to do that? First, maybe we should heed the message of the LEIs. The news may be stale, but many have not noticed that the US economy is in decent, strengthening shape. US stocks are a tad ahead of themselves, but not by much.

          The US may not be strong enough to withstand a true disaster in Europe, and it may not be weak enough to force the Fed into the bond purchases that many want, but this is an important truth to hold on to.

          Beyond that, it is no surprise that information aggregator services – modern advances on LEIs – are popular. And maybe a financial newspaper can be a good investment.

          *Investor Inattention and the Market Impact of Summary Statistics by Thomas Gilbert, Shimon Kogan, Lars Lochstoer and Ataman Ozyildirim. Available at

          Ulster Bank to pay €35m over IT glitch

          Posted on 31 August 2012 by

          Ulster Bank customers affected by a month-long computer systems failure have been offered a compensation payment of €25, under package expected to cost the bank €35m in total.

          The bank, which is owned by Royal Bank of Scotland, also said that it would waive certain fees and interest charges for three months – and, from Monday, will start reimbursing “reasonable” out of pocket expenses incurred by customers as a result of the IT glitch.

            Millions of the banks’ customers were plunged into chaos in June when an upgrade to the technology used to process day-to-day payments at RBS malfunctioned.

            The IT failure meant the balances of millions of customers were not updated, leaving them unable to meet payments or make purchases, with many incurring extra charges as a result. Within a few days, the banking group had a backlog of 100m unprocessed payments.

            But while processes were restored within days for the vast majority of the 3.5m RBS and 11.5m NatWest customers, hundreds of thousands of Ulster Bank’s 1.9m customers continued to experience problems for another month – and some customers are still complaining of delays today.

            This longer delay for Ulster Bank customers came as a result of the systems relying in part on functions at NatWest. As the NatWest systems had to be fixed first, a more severe backlog of transactions developed at the Irish bank.

            RBS has put aside £125m across the group to pay compensation to customers hit by the glitch, of which €35m has been designated to customers of Ulster Bank. However, analysts say the total compensation cost is likely to be millions more.

            “We recognise that we have work to do to restore our customers’ trust in us and we believe that this is the first step in that direction,” said Jim Brown, chief executive of Ulster Bank.

            Under the compensation package, the Irish bank said it would start processing claims from Monday for reasonable out of pocket expenses incurred by those who had to visit branches more frequently than usual between June 19 and July 18. It said it would also pay an additional 20 per cent on top of these expenses – up to a maximum of €120 – to personal and small business customers.

            It has asked customers to support their claims with paperwork such as phone bills, bus tickets, travel receipts, bills or invoices. The bank has already started to refund any fees, charges and interest that customers may have incurred as a result of the payment problems.

            However, Ulster Bank account holders have flocked to the social networking site Twitter to complain about the compensation offered. One customer said that she was experiencing more problems with her account on Friday and, despite three phone calls, had not received a response.

            Greek police protest at pay cut plans

            Posted on 31 August 2012 by

            Hundreds of police, fire and coastguard officers protested outside the Greek parliament on Friday against unprecedented wage cuts for “workers in uniform”.

            Members of the armed forces will also be included in a 5-10 per cent across-the-board salary reductions for state security employees, along with deep cuts in special allowances.

              The moves are part of a new €11.9bn austerity package, aimed at ensuring that Greece can remain a member of the eurozone, which will be presented next week to visiting officials from the EU and International Monetary Fund.

              Friday’s protest highlighted a last-minute dispute between the finance ministry and the defence and public order ministries over €900m of spending cuts in 2013-14.

              The latest measures, agreed under Greece’s second €174bn bailout, target parts of the public sector excluded from previous efforts at fiscal consolidation because of fears about the potential political cost.

              “We are already living below the poverty line. . . We’re only getting by because of the special allowances,” said Christos Fotopoulos, president of the police officers’ association.

              A senior government official said that alternative cost-cutting measures proposed by the defence and public order ministers to avoid wage reductions were unlikely to be accepted by the “troika” of EU, European Central Bank and IMF officials as sufficiently “permanent” reductions in expenditure.

              “We face a very difficult choice,” the official added. “If we don’t cut uniformed workers’ salaries we will have to extend pension cuts to the lower end of the scale where people are already enduring hardship.”

              Cuts to pensions, healthcare, public sector wages and social benefits will make up almost €8bn of the new package, with €2.2bn of savings to come from the abolition of extra Christmas and Easter payments to pensioners.

              Details of the measures were leaked to Greek journalists on Friday, following their approval in principal by leaders of the three-party coalition government. Final decisions will be taken next week following consultation with the troika, before the package goes to parliament for approval.

              Dimitris Kyriazides, a former police officer and conservative lawmaker, said he expected defections from the conservative New Democracy party, the senior coalition partner, if wage cuts for the military and police went ahead.

              “Given the long hours and tough working conditions in law enforcement, it is hard to justify these proposals,” said Mr Kyriazides.

              Some lawmakers in the Panhellenic Socialist Movement and the Democratic Left – the other two parties of government – have threatened to vote against the package if pensions below €1,400 monthly are cut.

              Antonis Samaras, the prime minister, has pledged that the latest package will mark the final round of public sector spending cuts to be imposed under the current reform programme.

              “People simply can‘t take any more,” he said, after five years of recession and a series of increasingly harsh austerity measures over the past 18 months.

              A senior finance ministry official said the focus would switch next year to boosting revenues through privatisation, a renewed crackdown on tax evasion and measures to restore growth after 2013. Greece loses about €28-€30bn annually in uncollected taxes, according to finance ministry surveys.

              “There has to be social justice on the revenue side,” the official said. “That means expediting court cases for alleged tax evaders and ending the practice of suspending sentences for convicted offenders.”

              Jenkins takes Barclays at the right time

              Posted on 31 August 2012 by

              On the day that Antony Jenkins was appointed chief executive of Barclays this week, the “Q” word most associated with the venerable UK high street bank was Qatar, not Quaker.

              It says something about the changed nature of the bank that his immediate task is to navigate a Serious Fraud Office inquiry into payments made to Middle Eastern officials rather than to visit some branches in Norfolk. Barclays, like most other banks, isn’t quite the place it used to be.

                The appointment of Mr Jenkins, a career-long commercial banker at Barclays, is the product of a profound nostalgia on the part of governments, regulators and benighted taxpayers. They are eager to get rid of the investment banking culture that came to dominate many banks in the 1990s and 2000s, and return to them the safer world of the cautious, stuffy Quaker families who founded Barclays.

                At some level, this is an illusion. Not only are retail banks entirely capable of losing billions on property lending without help from bonus-hungry traders, but deregulation and new technology mean banks can never entirely regain their former oligopolies. The banker cannot be on the golf course at three, having lent money at 6 per cent that he borrowed at 3 per cent.

                These days, bankers lend money at 3 per cent that they raised at near-zero, thanks to accommodating central banks, and have zero time to spend on the links. So does that make the Jenkins of the world outmoded – unable to navigate safely through the derivatives-infested waters of global finance?

                That has been the assumption until now, as investment bankers such as Bob Diamond of Barclays, Stuart Gulliver of HSBC and Stephen Hester of Royal Bank of Scotland have risen to the top of banks with trading divisions. Mr Jenkins has found himself in the right place at the right time – in the top ranks of a bank that needed a new face.

                In another era, he might not have made it. Solid, unpretentious, hard-working, dedicated are the sort of words people use to describe him. Charismatic is not. He lacks the star-power of present-day bankers such as Jamie Dimon of JPMorgan Chase, or historical figures such as Walter Wriston of Citibank.

                Yet there is no reason why Mr Jenkins should not succeed. For the challenge he faces, while seeming fiendishly complex and difficult, is essentially simple. The things he has to accomplish are obvious, there are no enormous obstacles in his way and he has plenty of time.

                Although it sounds technical, Mr Jenkins’ first act on taking office was significant – he ditched the return on equity target of Mr Diamond, his loquacious predecessor, who was doomed by the Libor-rigging scandal. Instead, his modest aim will merely be to make for his investors a decent margin over the bank’s cost of equity.

                Barclays, in other words, will aim to return to being a financial utility from its go-go years of global expansion. This leaves room for manoeuvre, reducing the pressures to leverage the bank’s balance sheet or to take on lending and trading risks for short-term profits.

                Although the SFO inquiry into its relationship with Qatar is unpredictable, he should be able to fix Barclays’ other scandals. The Libor-rigging affair has largely been settled, and the worst of the mis-selling of payment protection insurance on loans in the UK has probably emerged.

                Mr Diamond had such a torrid relationship with Barclays’ regulators that it will not be difficult to improve on it, especially given that the bank’s new chairman is Sir David Walker, a former Treasury official and City regulator, and a senior member of the City of London’s great and good.

                Mr Jenkins may find Sir David – a man of strong opinions expressed loudly – less amenable than Mr Diamond found Marcus Agius, the emollient former chairman of the bank. If he handles him tactfully, however, there is no reason why they cannot rub along.

                As for Barclays Capital, the investment bank that has become a headache, that problem may solve itself. Regulators are making it set aside more capital against trading, and the ringfencing of retail deposits forced on Barclays by the Vickers commission will make it costlier to fund its operations.

                Its size relative to the rest of Barclays is therefore likely to shrink naturally, along with the bonuses that Mr Diamond used not only to receive but to hand out. Mr Jenkins need not tussle with an expanding division like John Varley, the former chief executive, who had to share power with Mr Diamond.

                Indeed, if anything more goes wrong at Barclays Capital, Mr Jenkins could always sell it. For the moment, he insists that Barclays will remain a universal bank. It has broken up an investment bank before, however – the dismemberment of BZW in 1997 led to the creation of Barclays Capital. It could easily change its mind again.

                Above all, the best asset any bank chief executive has is timing. Those appointed at the bottom of the cycle, when everything is in a mess and the only way is up, tend to do well. Those appointed when economies are booming, and are about to suffer a crash, become victims.

                On this scale, Mr Jenkins is a lucky man. Not only does he have a nice background but he has been chosen at the right time. Although banks face more competition than before, high-street outfits such as Barclays are formidable franchises that can pump out profits for years before lending standards fall and they wander astray.

                Unlike the technology industry, in which companies face constant upheaval and change, banking is best done steadily and soberly, an approach that suits Mr Jenkins. The most important decision he will ever have to make – to put on the brakes when things are going well – is probably years away.

                We do not know if he will make a good leader for Barclays. But he stands a decent chance.

                Waiting on the central banks

                Posted on 31 August 2012 by

                The story for markets and investors during August has been “the calm before the storm”.

                Investors on both sides of the Atlantic are betting on more stimulus from central banks this month that can maintain this summer’s powerful rally in equities, corporate bonds and commodities.

                  Equities climb on easing expectationsClick to enlarge

                  Traditionally, September marks the return of many financiers from holidays and market activity kicks into a higher gear. This year, flows and sentiment in the coming two weeks will be dictated by a calendar bristling with events that includes central bank meetings, European elections, court rulings and crucial economic data.

                  With key markets in the US and Europe firmly higher on the year, the paramount risk is that the Federal Reserve and more importantly the European Central Bank and eurozone governments disappoint markets.

                  “Our bias at the moment is that there is scope for at least mild disappointment in September, if not something more extreme,” says Neil McLeish, head of fixed income research at Morgan Stanley.

                  A sense of this was conveyed on Friday as Ben Bernanke indicated the Fed could embark on large-scale asset purchases, or QE3, should the economy warrant further help at the yearly symposium of central bankers in Jackson Hole.

                  “While he did not give an explicit nod for QE3 in September, he made a strong case for QE as a tool for generating growth,” says Millan Mulraine, strategist at TD Securities. “This is a clear indication that this remains the key approach under consideration, and reaffirms the bias for large scale asset purchases among other Federal Open Market Committee members.”

                  In the wake of Mr Bernanke’s speech, government bond and equity markets across Europe and the US briefly trimmed their early gains, as investors expressed disappointment at the lack of a definitive start date for QE3.

                  “After the Bernanke speech, the QE decision remains very data dependent, but it seems the economy needs to show signs of acceleration if another round of QE is to be averted,” says Alan Ruskin, strategist at Deutsche Bank. “I think the US equity market has either the benefit of stronger US data coming down the pike, or QE3, and is relatively well protected, so this is good for macro risk.”

                  There are plenty of reasons for the Fed to sit back and watch with policy makers and investors left eyeing next week’s US jobs data and the ECB governing council meeting. This is followed a week later by a ruling by Germany’s constitutional court on Europe’s new bailout fund, while the Fed concludes a two-day meeting on September 13.

                  Moreover as central bankers were set to discuss ideas over the weekend against the backdrop of the Teton Mountains, the most acute topic remains that of the eurozone and what role will be played by the ECB in the coming weeks.

                  Among the issues Mario Draghi, president, has still to resolve are the terms of the ECB’s engagement in bond markets – and how the ECB will react if eurozone governments renege on reform pledges.

                  While attention has focused on the ECB’s theoretically unlimited firepower, investor optimism of an imminent breakthrough in the eurozone debt crisis has waned.

                  Mr McLeish warns: “In Japan we saw cycles of crisis, then a response, followed by an improvement and then complacency. We have had similar cycles in the eurozone in the past few years. It doesn’t mean you get no progress, but you only make progress after going through this cycle.”

                  Mr Draghi has said the launch of an enhanced bond-buying programme would be conditional on relevant governments accepting conditions set out by the European Financial Stability Facility or its permanent successor, the European Stability Mechanism.

                  But Germany’s constitutional court in Karlsruhe could throw a spanner in the works on September 12, when it will rule on the ESM’s legality. While the court is not expected to block the ESM’s launch, it could insist on greater safeguards for German sovereignty.

                  Germany’s Bundesbank is, meanwhile, voicing public opposition to bond buying by the ECB, which it fears will generate long term inflation risks. Mr Draghi, however, will be able to put that potential problem to one side this weekend. Jens Weidmann, Bundesbank president, is one of the few ECB governing council members who will be in Jackson Hole.

                  The topic of Europe and its consequences for global trade and markets was mentioned by Mr Bernanke in his remarks on Friday.

                  “Some recent policy proposals in Europe have been quite constructive, in my view, and I urge our European colleagues to press ahead with policy initiatives to resolve the crisis,” noted the Fed chairman.

                  Against that uncertainty, it would appear Mr Bernanke and the FOMC have QE3 parked on the runway.

                  “The European financial crisis remains the single largest threat to both the domestic and global economy,” says John Brady, senior vice-president at RJ O’Brien. “Using the QE3 bullet too early has more downside than upside, and the Fed needs the flexibility to react to events in the coming months.”

                  Haldane calls for rethink of Basel III

                  Posted on 31 August 2012 by

                  Andrew Haldane

                  Bank regulators should tear up the overly complicated Basel III rule book and return to a few simple standards on capital and total borrowing, a senior Bank of England official has said.

                  In a radical speech to central bankers at Jackson Hole in Wyoming on Friday, Andy Haldane, executive director for financial stability at the BoE, warned that the complexity of current regulation is preventing authorities from spotting and averting financial crises.

                    “Modern finance is complex, perhaps too complex . . . As you do not fight fire with fire, you do not fight complexity with complexity. Because complexity generates uncertainty, not risk, it requires a regulatory response grounded in simplicity. Less may be more,” Mr Haldane said.

                    The annual gathering, sponsored by the Federal Reserve Bank of Kansas City, is considered one of the prime intellectual events worldwide for central bankers, making it the ideal audience for Mr Haldane’s bold call for a radical rewrite of the rules. Mr Haldane’s boss at the BoE, Sir Mervyn King, is chairman of the global body that approves updates to the Basel global standards for bank safety.

                    Mr Haldane called for regulators to simplify the way banks calculate their capital requirements as a first step. He pointed out that the Basel rules have grown from 30 pages in the 1980s to 616 pages in the Basel III version approved in 2010.

                    The rules now rely heavily on banks’ internal models to make millions of calculations about the risk levels of individual loans, making it almost impossible to compare banks with their peers. Investors have also grown increasingly sceptical of bankers’ ability to measure risk in the wake of the financial crisis and JPMorgan Chase’s recent multibillion-dollar trading loss. Mr Haldane said their concerns had merit.

                    “With thousands of parameters calibrated from short samples, these models are unlikely to be robust for many decades,” he said, calling for regulators to consider “simplified, standardised approaches to measuring credit and market risk, on a broad asset class basis” instead.

                    A second step would be to impose tighter curbs on banks’ total borrowing, known as a “leverage ratio”. The Basel III rules require banks to have equity equal to 3 per cent of their total assets as a backstop measure to prevent them from understating the risk levels of their assets when calculating their capital requirements. But Mr Haldane advocated much higher requirements, of 4-7 per cent, saying it would do more to prevent bank failures.

                    Both ideas have some support. The Basel Committee on Banking Supervision has raised the possibility of using standardised risk weights in its consultation on capital requirements for bank trading books, and some academics have argued for a much tougher leverage ratio.

                    Noting that the BoE had a chance to put some of his ideas into practice when it took over bank supervision next year, Mr Haldane called on bank regulators to be “brave enough to allow less to deliver more”. In practice, that would mean “fewer, perhaps far fewer, more, ideally much more, experienced supervisors operating to a smaller, less detailed rule book”, he said.

                    Mr Haldane acknowledged that adopting his ideas “would require an about-turn from the regulatory community from the path followed for the better part of the past 50 years”, but he likened the situation to trying to catch a Frisbee. “To ask today’s regulators to save us from tomorrow’s crisis using yesterday’s toolbox is to ask a border collie to catch a Frisbee by first applying Newton’s law of gravity,” he said.

                    Charity steps up for vulnerable runaways

                    Posted on 31 August 2012 by

                    The girl outside the train station hunches her shoulders as commuters ebb and flow around her. She fiddles with her phone. She does not see Peter Middleton watching her from a distance.

                    “It takes a while, but once you get in tune with it, you can just see the person in the crowd,” he says. “People hide in crowds – they will find a way of standing there so they don’t feel vulnerable.”

                      Mr Middleton, an Irishman who used to drive trains on the London Underground, is searching the city’s King’s Cross station for children who might have run away from home. He makes a mental note to check in 20 minutes if the girl is still there.

                      Viviane DaSilva, his fellow outreach worker, says the two of them are not the only ones on the look out. “Young people, whatever you want to do with them, whatever abuse you want to carry out, stations are a brilliant place [to find them]. Exploiters know there’s something not quite right if you’re hanging around a station.”

                      Mr Middleton and Ms DaSilva are working on a new project funded by Railway Children, the charity that helps runaways in India, East Africa and the UK, whose work the Financial Times is highlighting as part of its Summer Spotlight series.

                      Railway Children encountered bemusement when it started to work in the UK. “Quite often when I spoke to people they said, ‘Well, we don’t have a problem in this country of children on the streets, keep doing what you’re doing overseas [but] it doesn’t apply here’,” says Terina Keene, Railway Children’s chief executive.

                      It does apply here, she says, but it is much harder to see, let alone try to fix. The Children’s Society, a charity that does extensive surveys of school children, estimates conservatively that 84,000 children under 16 ran away from home last year for a night or more. About one in six slept rough or stayed with someone they had just met. A similar proportion stayed away for more than four weeks.

                      But seven in every 10 runaways in the UK are never reported missing by their families or care homes. “If they’re not reporting themselves to any kind of state department and they’ve not been reported as missing, no one’s looking for them and they don’t want to be found,” Ms Keene says. “That’s why the critical part of [our model] is “detached street work” – we go looking for them.”

                      Railway Children’s model also includes preventative education and support for children who return home. But the street work is particularly intensive because runaways can so easily slip into society’s shadows. “The cost per child is perhaps more than the cost per child is in India or East Africa, where you haven’t got to build up street intelligence because you’re just falling over them,” Ms Keene says. Aviva, the insurer, has given the charity £2m over four years to help support its work.

                      New Horizon, a youth centre sandwiched between King’s Cross and Euston train stations, has started doing street work for the charity in London. Mr Middleton and Ms DaSilva, who have worked at the centre for more than a decade, spend hours every day walking through the two stations and the surrounding areas, chatting to the young people who hang out on the streets and housing estates.

                      They know how easily young runaways’ lives can spin out of control. Louise, for example, started running away from home when she was 14. She would ride around on night buses if she did not have a place to stay. Sometimes she and a friend would go to a derelict building site at night and light a fire to keep warm.

                      She started drinking and taking drugs and at some point she stopped eating. “There was bones everywhere, it was like looking at a skeleton with a sheet draped over it,” she says. Some older women from the streets took her under their collective wing. “They was looking after me but they was looking after me the wrong way. They should’ve told me to go home to my mum but they wasn’t.”

                      When she was 17 the women brought her to New Horizon. There she could eat, shower, wash her clothes and get help with housing and work experience, though she still struggled with her addictions. At 20, she is trying to get back on track.

                      “I’ve thrown six years of my life down the drain already and it’s like, if I ever have kids they’re going to ask me what I was doing when I was younger. I’ve got to tell them what I was doing and it’s not going to be nice to say that,” she says. “That’s why I want to fix myself up.”

                      LACK OF MONEY CLOSES REFUGES

                      Britain’s local governments have to provide emergency accommodation to children under 16 who cannot go home. But many young runaways, especially those fleeing domestic violence, do not want to contact the police or the social services. Recognising this, the Children Act law of 1989 allowed organisations to set up short-term refuges where children could stay in safety for up to 14 days.

                      Yet there are only two refuges left in the UK with five beds between them, the lowest number since the law was passed. Railway Children helps to fund both of them. It would like to reopen the London Refuge, closed for financial reasons two years ago by the charity that ran it, but it does not have the money. “I don’t know anyone who does, really,” says Ms Keene. “We ask most people but it is so cost-intensive.”