Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 15th of January.
The recent softening of liquidity-coverage-ratio by the Basel Committee on Banking Supervision elicited strong reaction from both sides of the Atlantic. Before we discus why it should worry you, let’s take a look what it means and what the Basel Committee does.
The Basel Committee on Banking Supervision is a congregation of bank regulators from across the world that meets at the Bank for International Settlements in Switzerland, an organisation that acts as a bank for central banks and promotes financial and monetary cooperation. The Basel Committee promulgates rules on bank capital, solvency, liquidity and other aspects of banking operation. The first Basel Accord, issued in 1988 and known as Basel I, was replaced by a new set of rules, the Basel II, in 2004.
The revised standards however, proved grossly insufficient during the financial crisis, prompting regulators to go back to the drawing board. The outlines of Basel III were finalised by the end of 2010 and global banks have lobbied tireless against the proposed stringent standards since then. Their efforts seem to have paid off as the final rules appear much weaker with the rollout deferred by four years.
Liquidity is the ability to pay off short term obligations and is important for banks since they can’t control the timing of their needs for cash. Staple textbook example is unexpected withdrawal by depositors or a run on the bank, while other contingencies may include cash requirement to honour credit lines or the sudden unavailability of interbank loans. Cash reserves and liquid assets provide the first line of defence. As they become depleted, banks may be forced to sell less liquid assets at a loss to meet demand.
During a liquidity crisis, the spiral may spread from weak to strong banks. A few weak banks may be forced to dump assets in “fire sale” price, bringing down prices of assets and destabilising stronger banks. Healthy banks soon witness holes in their balance sheets and come under stress. The US subprime mortgage market triggered such a crisis in the fall of 2008 that spiralled out of control and spread financial crisis across the globe.
The Basel III Accord had proposed a liquidity coverage ratio where in a bank could survive a 30-day stress period, hoped to be good enough for recapitalization or orderly wind up. This rule required measuring the liquidity of various kinds of assets and liabilities. To do so, weights are incorporated to final regulations. Higher weights can give real teeth to rules while lower weights can make them toothless.
Bankers, it seems, to have succeeded on the final weights for assets and liabilities, which are close to what they had always wanted.
You may wonder why that should bother you at all? In the past, when banks failed, losses were quickly transferred to taxpayers by politically-strong and crafty bankers; socialise the losses and privatise the profits. It seems we are yet to learn the lesson from the last crisis and are going to let the foxes guard the hen houses again.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2037
GBP/US$ – 1.6068
GBP/CHF – 1.4829
GBP/CAN$ – 1.5822
GBP/AUS$ – 1.5230
GBP/ZAR – 14.0520
GBP/JPY – 142.70
GBP/HKD – 12.4481
GBP/NZD – 1.9099
GBP/SEK – 10.3648
EUR: The single currency remained strong against the US dollar despite European industrial production data coming in weaker than anticipated, down 0.3 percent in November over the previous month. The positive effects of Mario Draghi’s announcement last week are still being felt and the euro is likely to coast on the positive sentiments for some more time. The economic data calendar is weak on the ground today with little or no influential data being released. Sterling has also weakened against the euro overnight and the GBP/EUR pair opens at 1.2031 this morning.
USD: The US dollar had a mixed day yesterday, strengthening against the pound and touching a near two-year high against the yen, but slipping against other rivals as traders continued to bet ahead chairman of Ben Bernanke’s speech that the US Fed will not wind down its bond purchase program in 2013. GBP/USD dropped below the 1.6100 level to touch a low of 1.6040 as improving risk sentiments diminished the allure of GBP as a safe haven asset. Increasing speculation that the UK current account deficit has widened to 3.5 percent of GDP also contributed to the cable’s weakness. Sterling has recovered slightly overnight helped in small part by slightly better than expected UK RICS house price data. We have the US retail sales, Producer Price Index and CPI reading out in the afternoon today along with the UK CPI data. The GBP/USD opens at 1.6070 this morning.
Have a great day!
