90 seconds at 9 am: Bond standards fall

90 seconds at 9 am: Germans securitising SME debt as 'covered bonds'; TD rates to fall; Draghi worries about USD:EUR; NZ$1 = US$0.845, TWI = 77.0

19th Feb 13, 8:46am by David Chaston

Here's my summary of the key news overnight in 90 seconds at 9 am, including news that the covered bond market is in for a shake-up, one that may affect our banks. A huge German bank is using high yield loans to SMEs to back the securities rather than safer real estate or public-sector debt and there are fears this may devalue all covered bonds as an asset class.

In Australia, there are growing signals that term deposit rates may be about to fall - and the reasons that may happen there apply to New Zealand as well. International wholesale markets are just awash with cheap money and with credit restrictions easing, Aussie banks have funding available offshore at cheaper rates than they are paying for local TDs.

Here, we are somewhat protected by the RBNZ Core Funding Ratio rules, but even so, most NZ banks are so far above those limits they have room to source significant funds offshore and they may do that to replace 'expensive' local TDs.

Adding to the supply/demand imbalance, 'Japanese housewives' are selling out of their AU uridashis at a record rate - the currency gain that made them seem a good investment seems to have run its course.

In Europe, the Spanish central bank reported that bad debts held by the country's banks dropped sharply in December - but only because of the transfer of lower-quality credit portfolios to the "bad bank", which started operations that month.

And the ECB's Mario Draghi sought to take the heat out of the debate about currency wars last night but said the ECB would still have to assess the economic impact of the euro's strength.

The euro hit a 15-month high against the US dollar earlier this month, complicating his policy-making tasks. Draghi said the euro's exchange rate was important for growth and inflation and that it could threaten to pull down inflation too far.

So, instead of taking the heat out, he may have added to it.

The US is on its Presidents Day holiday today. Both gold and oil have stayed in the lower ranges we reported yesterday.

The kiwi dollar is also staying within its recent narrow but high range at 84.5 USc, 82.1 AUc, and the TWI is at 77.0.

No chart with that title exists.

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11 Comments

by Stephen Hulme | 19th Feb 13, 9:13am 1361218401

In Australia, there are growing signals that term deposit rates may be about to fall - and the reasons that may happen there apply to New Zealand as well. International wholesale markets are just awash with cheap money and with credit restrictions easing, Aussie banks have funding available offshore at cheaper rates than they are paying for local TDs.

Here, we are somewhat protected by the RBNZ Core Funding Ratio rules, but even so, most NZ banks are so far above those limits they have room to source significant funds offshore and they may do that to replace 'expensive' local TDs.

If this is the case and the authorities believe the banks will act in an irresponsible manner is it not time to impose restrictions similar to those being comtemplated by Swedish regulators? Read Bloomberg

Sweden’s financial regulator says it’s ready to tighten restrictions on mortgage lending to stop banks feeding household debt loads after a cap imposed during the crisis failed to stem credit growth.

“Swedish households today are among the most indebted in Europe and we cannot have household lending that spirals out of control,” Martin Andersson, the director general of the Financial Supervisory Authority, said in an interview in Stockholm. “If that would happen, we can utilize the two tools we do have again, or look at other alternatives.”

The FSA is ready to enforce a cap limiting home loans relative to property values to less than the 85 percent allowed today, Andersson said. Banks may also be told to raise risk weights on mortgage assets higher than the regulator’s most recent proposal, he said. The watchdog has other measures up its sleeve should these two prove inadequate, he said.

As most of the rest of Europe grapples with austerity and recession, the region’s richer nations, including Sweden, Norway and Switzerland, have been battling credit-fueled housing booms. And with southern Europe sinking into a state of deeper economic decline, the prospect of monetary tightening remains remote. That’s adding to pressure on Swiss and Scandinavian regulators to counter the effect of low interest rates on their markets.

You have to love the "Mrs Watanabes" - such savvy traders.

by Stephen L | 19th Feb 13, 11:41am 1361227265

Stephen, Very good as usual.

You have to love the "Mrs Watanabes" - such savvy traders.

Given their high returns for their Uridashis; who has paid that return. Is it the Aussies, or hedge funds in the middle?

If it were the Aussie banks, would that suggest that what appears to be cheapish money in the first place, doesn't end up being so good?

by Stephen Hulme | 19th Feb 13, 12:00pm 1361228414

It is primarily an open market currency gain from the inception of the uridashi bond purchase rate until the recently devalued AUS/YEN pair level - all other parties are hedged through the cross currency basis swap, including the issuer (most likely a supranational).

by Wolly | 19th Feb 13, 10:59am 1361224798

NZTA bosses have found a new way to grab other people's munny

"From discussions I've had with insurers, it would appear to be a new practice." http://www.stuff.co.nz/the-press/national/8320507/NZTA-bills-crash-victim-1300

by waymad | 19th Feb 13, 11:19am 1361225969

Another way, wolly, relayed by my son-in-law who runs a farm stock truck. RUC's may now only be purchased for the certified GVW - not some lesser tonnage, and even though the certified GVW is never ever reached.

If it moves, tax it....

by Kate | 19th Feb 13, 11:54am 1361228057

Gotta pay the head honcho career bureaucrat his upwards of $500k salary somehow;

http://www.stuff.co.nz/national/politics/3131163/10-000-a-week-for-civil-servant

I assume the man has never worked outside the civil service given his first job looks to have been with the Ministry of Works.

by Gareth Vaughan | 19th Feb 13, 11:21am 1361226090

On covered bonds, the RBNZ wants to let NZ banks use loans secured by commercial, development or agricultural property as security for covered bonds - http://www.interest.co.nz/bonds/61819/rbnz-wants-let-banks-use-commerci…

by Stephen Hulme | 19th Feb 13, 1:37pm 1361234235

Gareth, further reading materials might include:

Re: Covered Bonds:

The liquidity noose gets tighter and tighter as banks continue to exhaust funding avenues for simply maintaining their existing bank books.

Since they can barely fund what they have now, expanding lending not just in the Eurozone (euro banks are/were heavy marginal lenders in dollar credit assets through the eurodollar market) is completely impossible - the "broken transmission mechanism" of monetary policy. Speaking in terms of liquidity, it is possible that as we reach this upper limit in covered bonds that the liquidity crisis will renew right where it left off before the LTRO’s (which renders a failing grade on the LTRO’s in terms of what they were supposed to accomplish, just ask CIF).

That might force the ECB to loosen collateral restrictions further (restrictions were adjusted not that long ago on June 22), but in the covered bond space such a move might further upset the marketplace since covered bond investors will not take kindly to losing collateral protections and covenants. As it was, the potential "bail in" solution for Spain floated earlier in the year coupled with the various bonds that have ended up at the ECB threaten to diminish the seniority of the covered bonds since the ECB refuses to take losses (the precedent set in the Greek PSI earlier this year).

The more bonds pledged to the ECB the greater the potential for ECB erosion of overcollateralization and then cramming down losses, pushing covered bond investors down the capital structure to par with unsecured senior debtholders. The ECB and its dependents are painting themselves into a smaller and smaller corner. Read Article

Re-hypothecation of any bonds:

Requirement on re-hypothecation

“Re-hypothecation” and “re-use” of securities are terms that are often used interchangeably; they do not have distinct legal interpretations. WS5 finds it useful to define “re-use” as any use of securities delivered in one transaction in order to collateralise another transaction; and “re-hypothecation” more narrowly as re-use of client assets.

Re-use of securities can be used to facilitate leverage. WS5 notes that if re-used assets are used as collateral for financing transactions, they would be subject to the proposals on minimum haircuts in section 3.1 intended to limit the build-up of excessive leverage, subject to decisions taken on the counterparty scope and collateral type (sections 3.1.4 (ii) and 3.1.4 (iii), respectively).

WS5 believes more safeguards are needed on re-hypothecation of client assets:

Financial intermediaries should provide sufficient disclosure to clients in relation to re-hypothecation of assets so that clients can understand their exposures in the event of a failure of the intermediary. This could include, daily, the cash value of: the maximum amount of assets that can be re-hypothecated, assets that have been re-hypothecated and assets that cannot be re-hypothecated, i.e. they are held in safe custody accounts.
Client assets may be re-hypothecated by an intermediary for the purpose of financing client long positions and covering short positions, but they should not be re-hypothecated for the purpose of financing the intermediary’s own-account activities.
Only entities subject to adequate regulation of liquidity risk should be allowed to engage in the re-hypothecation of client assets.

Harmonisation of client asset rules with respect to re-hypothecation is, in principle, desirable from a financial stability perspective in order to limit the potential for regulatory arbitrage across jurisdictions [ZH: ahem UK]. Such harmonised rules could set a limit on re-hypothecation in relation to client indebtedness. WS5 thinks that it was not in a position to agree on more detailed standards on re-hypothecation from the perspective of client asset protection. Client asset regimes are technically and legally complex and further work in this area will need to be taken forward by expert groups. Read article

by Stephen L | 19th Feb 13, 11:44am 1361227455

David,

You summarise the currencies:

The kiwi dollar is also staying within its recent narrow but high range at 84.5 USc, 82.1 AUc, and the TWI is at 77.0.

An alternative summary might have gone:

"The TWI hits an all time record since we started charting it."

At least that's what your chart looks like to me.

With John Key cheering the NZD on, its hard to see that stopping any time soon.

by Gareth Vaughan | 19th Feb 13, 2:09pm 1361236140

For those interested here's the Deputy Auditor General's report on the Govt-SkyCity convention centre negotiations - http://www.oag.govt.nz/2013/skycity

"We have seen no evidence to suggest that the final decision to negotiate with SkyCity was influenced by any inappropriate considerations.

However, we found a range of deficiencies in the advice that the Ministry of Economic Development provided and the steps that officials and Ministers took leading up to that decision. The quality of support that was provided fell short of what we would have expected from the lead government agency on commercial and procurement matters."

by moa man | 19th Feb 13, 4:17pm 1361243837

Casino exec's must emit a chemical which causes polititions to have memory problems.

From the report

3.5

The Prime Minister’s diary includes a meeting with SkyCity’s Chief Executive on 14 May 2009, which was one of a series of meetings that day with Auckland business leaders. SkyCity confirmed that this meeting took place. Neither participant can recall the discussion, and think that it was probably just an opportunity for them to meet rather than for any particular purpose.

and

The police investigation also established Mr Banks met with SkyCity chief executive Nigel Morrison, where he “received a sealed envelope containing a $15,000 cheque”.

When 3 News confronted Mr Banks at the time, he claimed he was unable to recall this donation either.

“It was one of the numerous, anonymous donations,” he said.

http://www.3news.co.nz/Banks-off-on-a-technicality---Shearer/tabid/1607…