CFS strives to be a resource for journalists. For media inquiries, please contact media@the-cfs.org or 212.626.2660.

News Releases and Media Alerts

The Sovereign Crisis: When Debt is No Longer Risk Free
January 30, 2012

I highlight four key points made at a recent presentation in Washington, DC.

Distortions in the policy arena and financial markets dominate the global macro landscape:

• Policy matters more than ever for advanced economies, as they now embody traits of emerging markets (pages 5 - 9).
• The appetite for Treasury debt is weakening. The refunding of US Treasury debt presents an equal challenge to the oft-discussed budget deficits. Fiscal policy is poorly understood in the US (pages 15 - 22).
• The role of the US dollar as a reserve currency is changing (page 24).
• European officials should prioritize future growth via a three-pronged strategy to reduce debt, remove the threat of contagion, and limit the use of official resources (pages 11 - 14).

View the presentation.

Federal Liquidity Options: Containing Runs on Deposit-Like Assets without Bailouts and Moral Hazard
January 24, 2012

CFS Director of Financial Markets Research Bruce Tuckman proposes a bold and innovative approach for the US Government to contain runs on deposit-like assets, such as repo and money market funds, without resorting to ad hoc liquidity facilities and bailouts.

Specifically, Bruce advocates that the Fed auction new instruments called Federal Liquidity Options (FLOs) as the exclusive means of providing liquidity to nonbanks in a crisis.

Having issued FLOs that encompass a sufficient quantity and breadth of collateral, authorities will be able to claim, with credibility, that no additional emergency lending programs or bailouts will be required to safeguard the viability of solvent nonbanks. Consequently, moral hazard will drop significantly.

View the full report.

Argentina Could Halt Capital Flight Easily
January 20, 2012

The Wall Street Journal this morning printed the following letter written at the CFS:

Mary Anastasia O'Grady's “Argentina's Capital Flight” (Americas, Jan. 9) highlights fragilities associated with “hot money” outflows. Capital is already leaving Argentina at half the rate experienced during the depths of the peso crisis—a whopping $5.5 billion between January and November 2011.

Many emerging economies can reverse capital flight via investment-promoting policies...

View the full letter.

Click here for the CFS calculation of capital flight (or reversal) from 1991 to 2011.

View the similarities and differences between the US and Argentina.

Tuckman’s Fixed Income Securities: Tools for Today’s Markets
December 23, 2011

CFS Director of Financial Markets Research Bruce Tuckman (and Angel Serrat) completed the third edition of Fixed Income Securities: Tools for Today’s Markets published by John Wiley & Sons.

The book describes major fixed income markets and securities around the world, together with modern pricing and hedging methodologies. While the subject matter is inherently quantitative, Fixed Income Securities presents ideas intuitively and with a minimum of mathematics, and profusely illustrates concepts with market data, realistic examples, applications, and case studies.

Those interested in policy will find much of interest in this third edition.

• The new opening chapter is a particularly accessible global overview of who borrows, who lends, and through which markets, with particular attention to both the absolute and relative sizes of significant players and markets.
• The revised chapter on repurchase agreements discusses the role of secured financing in the financial crisis of 2007-2009, and the revised chapter on swaps assesses recent legislation to clear over-the-counter derivatives.
• A new chapter on credit markets highlights the role of the rating agencies and how trading in credit default swaps has evolved through the recent crisis.

Click here for more information about the book.

Does Math Support Euro Survival?
December 5, 2011

Persistent pressure in both sovereign debt markets and funding spreads in Europe naturally raises questions regarding the risk of a serious currency crisis and sustainability of the euro.

A quantitative approach to evaluate the relative competitiveness of nations participating in the euro is essential for gauging whether the unified currency can survive.

Based on CFS currency valuation models for eleven of the legacy currencies of nations that joined the euro, our view is "yes." The euro can survive.

However, euro membership should be restructured. Failures to reorganize euro membership and resolve the debt overhang in Italy could unravel into an unneeded and unnecessary currency crisis.

Click here for the full report.

Click here for the euro component currency data.

Goodhart's The Basel Committee for Banking Supervision
November 29, 2011

CFS Advisory Board Member Charles Goodhart's latest book - The Basel Committee for Banking Supervision - has been published by Cambridge University Press.

Based on special access to the archives of the Basel Committee for Banking Supervision (BCBS) and interviews with many of its key players, Goodhart tells the story of the early years of the Committee from its foundation in 1974/5 right through until 1997 - the year that marks the watershed between the Basel I Accord on Capital Adequacy and the start of work on Basel II.

While the book is primarily a record of the history of the BCBS, it also provides an assessment of its actions and efficacy.

Click here for more information.

New Rule of Law Index (RLI)
November 15, 2011

The strength of sovereign institutions is vital for attracting and maintaining foreign and domestic capital alike. Fragile institutions coupled with faulty fundamentals present a recipe for volatile growth or excessively deep recessions.

Well before the most recent crisis, Larry Summers highlighted the need to “put in place an institutional environment in which contracts can be enforced and property rights can be established,” as an imperative for growth.

The CFS has developed a powerful web-based educational tool to evaluate the “Rule of Law” across nations.

Click here to view the tool.

Forum on Bank Capital and Liquidity
November 11, 2011

Earlier this week, the Center for Financial Stability (CFS) hosted a private roundtable discussion on the prospects for European and US banks. To be sure, any regulations on bank capital and liquidity will prove critical for institutions now and in the future.

Likewise, a recent Op-Ed by Steve Hanke, re-distributed by CFS, generated strong feelings among the our readership. Hanke’s Op-Ed was critical of international efforts to strengthen capital regulations, calling the implementation of Basel III “...a deadly cocktail to ingest in the middle of an economic slump.” Dissent on the critical issue of bank capital is not unique to the CFS - as evidenced by the public skirmish between JP Morgan Chairman Jamie Dimon and Bank of Canada Governor Mark Carney. But bank capital issues are deeper and more complex than headlines suggest.

The CFS values balanced presentation of views. We therefore asked Senior Fellow Robin Lumsdaine to moderate an in-depth web-based forum discussion to debate issues associated with bank capital regulations. Previously Associate Director at the Federal Reserve Board, Lumsdaine participated in numerous discussions with bank executives and international regulators during negotiations over the US version of Basel II.

Acknowledging that there are many viewpoints, we encourage you to submit yours. We seek comment with the objective of developing a synthesis of views and identifying the most critical factors for officials to strengthen the financial system, while facilitating the formation of credit, investment and growth.

Click here to view the new Bank Capital and Liquidity Rules Forum.

Insights and arguments can be sent to BankCapital@the-cfs.org.

Urgent Course Correction: Lessons for Argentina and the US
November 2, 2011

Perhaps odd at first glance, comparisons between the United States and Argentina more frequently surface. Today, the respective relevance of each nation for the other is no accident. Emerging market nations such as Argentina provide critical economic policy case studies for advanced economies and vice-versa. Many advanced economies now confront challenges once witnessed largely in less developed countries, such as a dramatic expansion in government spending in excess of revenues, an unusually large creation of money, and specter of default on sovereign obligations.

So, there are unfortunately many parallels between the US and Argentina. Each nation confronts a serious growth challenge. Fortunately, examination of history over a nearly four decade period offers actionable solutions to the growth quandary for each nation.

Click here for the full report.

MetLife and “Why Systemic Risk Considerations Affect the Market for Long-Term Care Insurance”
October 26, 2011

The announcement yesterday that the Federal Reserve had denied MetLife’s request for approval of its capital distribution plan does not come as a surprise to us at the Center for Financial Stability (CFS).

It has been nearly a year since MetLife announced its decision to exit the long-term care insurance market. On January 14, 2011, CFS Senior Fellow Robin Lumsdaine highlighted in a report how that decision related to the debate on capital requirements for systemically-important institutions.

In a new report, Dr. Lumsdaine highlights the potential threat to the long-term care insurance market from an unexpected source: financial regulation aimed at mitigating systemic risk.

The work is timely and critical as HHS Secretary Sebelius noted in an October 14 letter to Congress that “despite our best analytical efforts, I do not see a viable path forward for CLASS [Community Living Assistance Services and Supports Act] implementation at this time.” Sebelius’ comment highlights challenges in devising a public sector solution to the projected strain associated with future long-term care costs. Private sector solutions are proving equally elusive.

Click here to see Robin Lumsdaine’s Economists’ Voice article.

Press Alert – Fed Denies MetLife Request...
October 25, 2011

Today's Federal Reserve denial of MetLife‘s request for approval of its capital distribution plan does not come as a surprise to us at the Center for Financial Stability (CFS).

It has been nearly a year since MetLife announced its decision to exit the long-term care insurance market.

On January 14, 2011, CFS Senior Fellow Robin Lumsdaine highlighted in a report how that decision related to the debate on systemically -important institutions. Dr. Lumsdaine is available for discussion and comment.

The CFS report noted:

• MetLife is a Bank Holding Company (BHC).
• MetLife‘s size lumps it into the group of systemically-important financial institutions — therefore subjecting it to more stringent capital regulations than many of its insurance-industry peers.
• As a large insurance company, MetLife‘s business model differs from that of most BHCs. In particular, it relies extensively on the use of derivatives contracts to hedge its long-dated liabilities.
• The report emphasized that new capital requirements could deal a destabilizing blow to the viability of the long-term care insurance market.

Since then, MetLife has announced plans to sell its depository with an eye toward eventually ceasing to be a BHC.

On October 14, HHS Secretary Sebelius noted in her letter to Congress that she did not see “...a viable path forward for CLASS [Community Living Assistance Services and Supports, the public sector long-term care program] Implementation at this time”.

Today‘s Federal Reserve ruling further underscores this important topic.

Senior Fellow Robin Lumsdaine, can be reached here.

Math for Europe: Lessons from Greece
October 4, 2011

Although equity markets rallied immediately after a political show of support for Europe, I found discussions coincident with the IMF / World Bank meetings disappointing. Officials in Europe and abroad must now shift from politics to math for successful resolution to the present crisis.

Click here for the full report.

The Chattering Classes’ Deadly Cocktail
September 29, 2011

The international push to implement Basel III, which mandates increases in bank capital-asset ratios, is a deadly cocktail to ingest in the middle of an economic slump. Risk assets in the United States have all declined since May 2008, while banks’ holdings of “risk-free” government securities and cash have soared.

Click here for the full report.

Emerging Markets, Argentina and Lessons for the US
September 16, 2011

Stress on sovereigns will remain in coming days-to-months as many “risk-free rates” in advanced economies are no longer “risk-free.” The associated uncertainty among sovereign credits rightfully prompts observers to seek lessons from other nations or history – as witnessed by the resurgence of interest in the Great Depression.

To be sure, emerging markets also offer vital lessons and useful blueprints for solving debt and solvency problems.

Unfortunately, some reports are highly misguided.

Click here for the full report.

Historical Financial Statistics Marks First Year:
More Than 70 countries, 1 Million Data Points, 50 Researchers
July 28, 2011

Historical Financial Statistics, a free online data set at the Center for Financial Stability, is completing its first year. During that time it has expanded coverage to more than 70 countries and more than 1 million data points. Historical Financial Statistics focuses on the period 1492 to 1950, before most other economic databases start, although it includes data as far back as the 10th century (for China) and as recent as this year. Historical Financial Statistics contains data series that are hard or impossible to find elsewhere in spreadsheet form, including:

• Bond yields for more than 50 countries from 1880 to 1944.
• Exchange controls for more than 100 countries from 1950 to 2004.
• Market exchange rates of certain currencies twice a week from 1698 to 1873.
• Gold and silver prices twice a week from 1698 to 1873.

Historical Financial Statistics documents the sources and other important characteristics of its data. It also offers tools that will be useful to many researchers, such as a list of key dates in financial history and a conversion spreadsheet for ten major calendars.

Historical Financial Statistics includes data gathered by official sources and by more than 50 researchers from around the world, listed below. We welcome data and suggestions from researchers and other readers. Full Press Release

Click here to go to the Historical Financial Statistics.

Changing Inflation Won‘t Solve Budget Woes
July 26, 2011

With the debt ceiling deadline fast approaching, suggestions as to how to resolve the budget deadlock in the US are being offered at a frenzied pace. One such suggestion has been to alter the index that determines cost-of-living adjustments for entitlement programs such as social security and Medicare as well as the rates at which tax brackets are adjusted.

Desperation is rarely a setting through which good policy can be achieved.

In this note, Robin Lumsdaine argues that proposals to address the near-term budgetary woes by changing the way inflation is measured are misguided.

Click here to read the full report.

Straight Talk from a Practitioner: Notes from Under the Wall
July 22, 2011

Steven Lofchie writes "Straight Talk from a Practitioner: Notes from Under the Wall." The report covers his thoughts on Dodd-Frank one year after passage and was just published in the Harvard Business Law Review Online.

Click here to read the full report.

Brief Thoughts on Debt Proposal for Greece
July 22, 2011

The EU and private sector offering for Greece will likely fall short of providing requisite relief and lifting pressures on neighboring nations. Our recent piece Solving the Greek Crisis was designed to identify specific steps to solve the Greek crisis as well as provide a path toward regional stability.1 In this piece we re-examine these thoughts within the context of the recent proposal.

The present program falls short, due to:

• The debt relief offered by the private sector is only 21%. This is on the low end of the 20% to 40% reduction we previously identified as requisite for success. In order for relief on the lower end of the spectrum to spark success, a more active reform and privatization program by the Greek authorities should be put into action.
• The program envisions that 90% of private sector institutions with Greek exposure will participate in the proposed plan. This will likely prove a bit of a stretch, as many of the largest banks in the world with Greek exposure have yet to support the private sector offer.2 Additionally, a portion of the bank debt was likely already sold into the secondary market to participants less willing to voluntarily restructure claims.
• The program contemplates the purchase of 30-year zero coupon bonds to collateralize restructured bonds. This approach mimics a scheme used in many Brady Plan debt restructuring agreements. Unfortunately, the cost of purchasing zero-coupon bonds today is substantially higher, due to low global interest rates. In other words, the cost of securitizing a bond 30 years into the future increases, as interest rates fall. Today, the cost of purchasing a 30-year EU zero-coupon bond is roughly 35 cents for every EUR. In contrast, the price of collateral during the Brady days was a relatively scant 7 to 9.5 cents. Likewise, resources spent on the purchase of collateral divert funds from addressing Greece‘s overall financing need.
• The plan contemplates a EUR20.6 billion loss for European banks. This is slightly low based on our original estimate of a EUR23.2 to EUR46.4 billion loss depending on the extent of debt reduction.

Click here to read the full report.

¹ Goodman, Lawrence, "Solving the Greek Crisis" - Center for Financial Stability, Inc., June 24, 2011.
² See "Financial Institutions in Support" in Greece Financing Offer - Institute of International Finance, July 21, 2011

Budget Solutions: Then and Now
July 19, 2011

The stakes for the U.S. economy are growing with each passing day of inaction on the fiscal front. Europe‘s deep distress is a wake-up call for America. The time is now for a meaningful and lasting solution to unchecked fiscal deficits.

Susan Hering and I evaluate history to uncover the most successful strategies to tame unchecked deficits. We draw the following conclusions.

• First, although both “discretionary” and “mandatory” spending have fueled the U.S. deficit explosion, entitlement spending is the primary source of future deficit expansion. A budget deal that does not contain “mandatory” spending will fail.
• Second, the lesson from previous deficit reduction efforts - Gramm-Rudman-Hollings (GRH) and the Budget Enforcement Act (BEA) – is that BEA‘s budget rules provided more effective fiscal discipline than GRH‘s deficit targets. Such rules will face a greater challenge this time around, though. The deficit is deeper now. Mitigating factors that enhanced rules‘ success in the 1990s are absent now. Most critically, it will be harder to design and enforce rules to control entitlements than to contain discretionary outlays.
• Third, the greatest deficit reduction historically has been achieved not by rules, but by bipartisan agreements to permanently reform spending and taxes.

Click here to read the full report.

Solving the Greek Crisis
June 24, 2011

A solution to the Greek debt dilemma exists.

• The Economic Subcommittee (ESC) to Bank Advisory Committees during the Brady Debt restructuring era provides a blueprint for identifying common ground, deepening communication, and paving the way for the benefit of creditors and debtors alike.
• Greece must reverse an economic slide - already in its third year. Greece is now ripe for a "Brady" moment.
• A Vienna Initiative approach will likely prove woefully insufficient, as the relief falls short of providing what is needed and incentives differ between Greece‘s creditors and those participating in the Vienna Initiative.
• History shows how debt reduction coupled with significant reform can spark growth. Brady Plan recipients all demonstrated superior growth in the five years after plan implementation - with the exception of Ecuador.
• Preliminary calculations based on limited publicly available data suggest that Greece could achieve 2% to 3% growth on an annual basis with a 20% to 40% reduction of debt, principal payment re-profiling, and a meaningful reform effort. The European banking system would likely experience a manageable loss of EUR23.2 to EUR46.4 billion.
• Today, the Greek situation is vastly more complex. Yet, principles from the ESC provide a framework for an honest assessment of the present situation as well as a potential pathway for resolution to the Greek debt dilemma.

Click here to read the full report.

Survey of Two Dodd-Frank Problems: the Effective Date and the Definitions
June 14, 2011

A memorandum by Steven Lofchie* first explains the July 16, 2011 problem that will arise because the Dodd-Frank derivatives legislation (Title VII of the statute) goes into effect without either a ready regulatory plan or an operating market structure.

• The effective date problem is made worse because of drafting problems in Dodd-Frank, including the flawed definition of the single most important term in all of the statute: “swap.”
• The effective date problems will not be resolved on July 16, 2011. July 16, 2012 will bring another set of problems due to a deadline that cannot be achieved and should not be targeted.

At best, we will be operating, from July 16, under a law that is far from being implemented, if it can be implemented at all, on the basis of likely-incomplete regulatory exemptions the effectiveness of which depends on statutory language that is itself uncertain.

At the Center for Financial Stability (CFS), we seek to offer a nonpartisan and independent forum to discuss the implementation of Title VII in Dodd-Frank. Input from practitioners, academics, and officials is essential. Hence, we seek comment on the following questions:

1. One of the problems coming up is that a law giving swaps their legal status is expiring before DF is ready. Should that law be extended and, if so, until when?
2. Should Congress push off the effective date of DF and, if so, until when?
3. What would be a reasonable length of time to adopt implementing rules, given the need to seek comment and to coordinate between regulators?
4. How much and what type of legal staffing would the regulators require?
5. How would one form estimates of the above?
6. How much time would industry require to implement the rules?
7. How much staffing and what type would be required?
8. How would one form estimates of the above?

You may email your response to slofchie@the-cfs.org.

Read the Full CFS Report:

Read the Full Memorandum:

* Steven Lofchie is a Senior Fellow / Legal Studies at the CFS and the Co-Chairman of the Financial Services Department at Cadwalader, Wickersham & Taft LLP.

Update: The Clearing Mandate in Dodd-Frank, Systemic Risk, and Competition
June 1, 2011

Bruce Tuckman (Director of Financial Markets Research) writes that regulatory rule making is often poised on a knife-edge: insufficiently restrictive rules do not fully fulfill the intent of underlying legislation, while overly-restrictive rules spawn a host of unintended consequences. Implementation of the clearing mandate in Dodd-Frank (DF) is no exception:

• Clearing unsuitable products, i.e., products with prices that are difficult to ascertain and risks that are difficult to assess, could endanger the viability of central counterparties (CCPs). Therefore, regulators will sensibly err on the side of caution and mandate clearing only for the very most liquid swaps. Ironically, this means that clearing itself will not do much to reduce systemic risk.
• Rules on CCP governance and procedures are intended both to limit systemic risks arising from the expanded role of the CCPs and to foster competition in swaps markets. As safeguarding the CCPs will again be the dominant motivation, regulators will not, as some have hoped, use clearing to level the competitive playing field at the expense of the dealers.
• Regulators will use margin requirements to limit systemic risk in markets for non-cleared swaps. This will be a significant challenge. Furthermore, setting margin too low will do little to mitigate systemic risk while setting margin too high will unleash unintended consequences that might very well increase systemic risk.

Click here to read the full report.

Fact Sheet: A Historic New 5Y TIPS Auction
April 20, 2011

Senior Fellow Robin Lumsdaine illustrates how the Treasury auction of new 5Y Treasury Inflation-Protected Securities (TIPS), scheduled for Thursday, April 21, 2011, will be historic for a number of reasons. For one thing, the $14bn offering amount is the largest ever for a TIPS auction.

Many attributes render the TIPS market significantly more complex than nominal Treasuries. Factors such as inflation uncertainty, the optionality embedded in the deflation floor, and tax considerations associated with principal accretion are unique to the TIPS arena. But the mechanics of this particular auction have been made even more complex due to Treasury‘s amendment that adds new layer of uncertainty.

Click here to read the full report.

Treasury Maturities: The Other Fiscal Problem
March 10, 2011

The US fiscal situation is in even worse shape than conventional analysis suggests. Unfortunately, the deficit is only part of the fiscal problem.

Despite legitimate concerns regarding the budget deficit, large refinancings of debt represent an equally severe - yet lesser known challenge. The experience of Emerging Markets and some advanced economies suggests that as budget deficits widen, it is the repayment of principal that often triggers a crisis rather than simply the size of the debt or deficit.

The US Government is now more reliant than ever on domestic and international market participants.

In order to maintain and bolster the confidence of financial markets, officials must:

• Reduce the near-term budget deficit.
• Prioritize a bipartisan program to put the budget deficit on a long-term path toward sustainable levels.
• Slowly extend maturing US Treasury debt with a move over time to the more prudent US maturity profile of 1946.

Click here to read the full report.

Schuler Reviews Reinhart and Rogoff
March 3, 2011

Kurt Schuler, Senior Fellow in Financial History, reviews Carmen Reinhart and Kenneth Rogoff‘s “This Time Is Different: Eight Centuries of Financial Folly” in the latest issue of the Cato Journal.

The book has received deserved recognition for the wide-ranging data the authors gathered in support of their analysis. Schuler discusses why gathering the data was so important; identifies some remaining gaps; and explains why the absence of overt financial crises is misleading as an indicator of the financial stability of centrally planned economies.

Readers who wish to find statistics on the effects of financial crises will want to look at our Historical Financial Statistics data set, which Schuler edits and to which academics from around the world graciously contribute.

Click here to read the full review.

Senator Bill Bradley joins the Advisory Board of the Center for Financial Stability
February 9, 2011

NEW YORK, Feb. 9 / The Center for Financial Stability Inc. (CFS) is honored to announce that Senator Bill Bradley joins its Advisory Board.

Senator William W. Bradley is a Managing Director of Allen & Company LLC. He served in the U.S. Senate from 1979 - 1997 representing the state of New Jersey. In 2000, he was a candidate for the Democratic nomination for President of the United States. Prior to serving in the Senate, he was an Olympic gold medalist and a professional basketball player with the New York Knicks. Senator Bradley holds a BA degree in American History from Princeton University and an MA degree from Oxford University where he was a Rhodes Scholar. He has authored six books on American politics, culture and economy. In 2005, he was awarded Outstanding Director by the Outstanding Directors Institute. Read full bio.

The wealth of experience and expertise of our Advisory Board members is critical for the CFS to fulfill its mission as thought leaders on complex financial market issues. The Advisory Board provides the Center with balanced and reasoned guidance on research, policy, and strategic focus.

Senator Bradley joins the eight distinguished Founding Members of the CFS Advisory Board including Eduardo Aninat, Ph.D.; The Honorable Carole Brookins; Charles Goodhart, CBE, FBA; Henry Kaufman, Ph.D.; Judge Richard A. Posner; The Honorable Randal Quarles; Richard L. Sandor, Ph.D., Dr.Sc.h.c.; and Nobel Laureate Myron Scholes, Ph.D.

About the Center for Financial Stability
The Center for Financial Stability is a nonprofit, nonpartisan, and independent think tank dedicated to financial markets for the benefit of investors, officials, and the public. The CFS integrates finance, law, and economics to promote a stronger and more stable global financial system. The organization is unique, as it focuses on market mechanics and linkages while serving as a private sector check and balance on government actions. The CFS is staffed with leading experts and counseled by a distinguished Board of Advisors. Research, policy papers, and events are supplemented by a practitioner-led community of public officials and academics.

The New “International Currency System”
Lawrence Goodman
January 21, 2011

Chinese President Hu Jintao remarks that “the current international currency system is the product of the past.” We agree. In fact, market participants including central banks are already building the new international currency system.

Unfortunately, the health of this new system is fraught with the same serious threats as the old system.

• The Chinese yuan is the most undervalued currency in the world. Chinas heavy management of the currency creates distortions and obstructs development of a new strong and stable international currency system.
• China is reaching limits in its ability to control inflation - due in part to inflows of hot money and trade surpluses.
• Fiscal and monetary policies in the US undermine confidence in the dollar.

The Market for LTC Insurance and Systemic Risk
Robin L. Lumsdaine
January 14, 2011

Center for Financial Stability Senior Fellow Robin Lumsdaine discusses why the private long-term care (LTC) insurance market may be under serious threat and relevant for the systemic risk debate.

In addition to an aging population and rising LTC inflation, new capital requirements and financial regulation could discourage insurance company participation in this important market and deprive individuals of affordable policies.

Click here to view the report.

A Strategic Approach to QE: A Bad Trade
Lawrence Goodman
December 9, 2010

The move to further QE appears to be a “bad trade” based on assessment of risks and rewards over the longer term. Although the economy remains weak and inflation low, QE risks economic volatility.

We explore various unintended consequences in “A Strategic Approach to QE: A Bad Trade.”

Click here to view the report.

Risk Management and Derivatives Symposium
October 19, 2010

The Center for Financial Stability (CFS) recently hosted a derivatives and risk management symposium and dinner.

Highlights included:

CFS Advisory Board Member and Nobel Laureate Myron Scholes discussed the future of risk management with emphasis on best practices for financial institutions as well as areas for new research.

Bruce Tuckman (Director of Financial Markets Research) discussed practical and easy-to-implement policy changes that will make derivatives markets more robust.

Steven Lofchie (Non-Resident Senior Fellow) evaluated the impact of the Dodd-Frank on financial institutions as well as potential international tensions on the regulatory front.

To view presentations click:

Amending Safe Harbors to Reduce Systemic Risk in OTC Derivatives Markets, Bruce Tuckman (Director of Financial Markets Research)

The Dodd-Frank Act: From a U.S. Economy Perspective, Steven Lofchie (Non-Resident Senior Fellow)

Uneven, Uncertain and Unusual Recovery
Lawrence Goodman and Yubo Wang
July 29, 2010

The future course of the US economy warrants much attention.

Fear regarding the state of the economy is high especially as the steepest slide since the Great Depression is fresh in the minds of many.

Much uncertainty deservedly remains, as the present recovery is the most unusual since the Korean War. The recent economic cycle demonstrates highly uneven interactions among the components of US GDP and forceful government stimulus is rapidly losing steam.

The risk of a future of lower growth marked by more violent fluctuations is high.

To see "Uneven, Uncertain and Unusual Recovery," click here.

New Perspective on Financial History
Kurt Schuler and Lawrence Goodman
July 22, 2010

The Center for Financial Stability (CFS) is pleased to present Historical Financial Statistics.

The Historical Financial Statistics is a free, noncommercial dataset for academics, students, practitioners, or anyone interested in long-term trends in economics, finance, and history. Until now, obtaining long-term statistics on economic and financial cycles around the world has required a substantial expense of time or money. The Historical Financial Statistics offering immediately centralizes and makes increasingly accessible vital information for deeper study of finance and economics.

Historical Financial Statistics currently includes data on more than 40 countries extending back over hundreds of years and to the tenth century in the case of China. Historical Financial Statistics coverage includes exchange rates, money, banking, interest rates, prices, employment, the balance of payments, government finance, and GDP. Data range from annual to daily with expansion of the number of countries and data already in process.

The editor of Historical Financial Statistics is Kurt Schuler, Non-Resident Senior Fellow at the Center for Financial Stability. He developed the framework for the product as well as assembled and scrutinized the data, with the cooperation of many researchers who have generously shared their work. Jeff van den Noort, CFS‘s Chief Technology Officer, provides Web design and technical support. Alan Freeman, an economist at Greater London Authority Economics, offered a number of ideas that shaped the presentation of the data.

In the near future, Freeman, van den Noort, and Schuler will work to deepen the offerings and flexibility of the Historical Financial Statistics. Comments and input are welcome and should be directed to Kurt Schuler at kschuler@the-cfs.org.

To see Historical Financial Statistics, click here.

Financial Overhaul Is Politics in Worst Sense: Richard A. Posner
Richard A. Posner
June 29, 2010

Advisory Board Member Richard A. Posner writes "Financial Overhaul is Politics in Worst Sense."

The most sensible legislative response to the financial collapse of September 2008 would have been to do nothing until the causes of the collapse were fully understood.

There is no urgency about legislating financial regulatory reform. The existing regulatory agencies have virtually total authority over the financial industry. And because they were asleep at the switch when disaster struck, they are now hyper-alert to prevent a repetition of it. Indeed, bank examiners have become so fearful of condoning risky practices that they are making it difficult for banks to lend to small businesses and consumers and thus are retarding the economic recovery.

For the principal factors in the recent economic collapse and more: Link to full opinion piece on Bloomberg

A Note to the Federal Reserve Bank of New York (FRBNY)
Comment on Tri-Party Repo Infrastructure Reform
Bruce Tuckman
June 15, 2010

Bruce Tuckman, Director of Financial Markets Research, has submitted a note to the Federal Reserve Bank of New York (FRBNY) in response to their requests for comments on the Tri-Party Repo Infrastructure Task Force Report and the accompanying FRBNY white paper. His note can be found on the Fed's website or on the CFS website.

Bruce first commends the work of the task force with respect to the "practical elimination" of the daily unwind. See his earlier paper calling for such changes, "Systemic Risk and the Tri-Party Repo Clearing Banks".

Bruce then argues that regulators should encourage or require the complete separation of tri-party repo operations from other banking activities, i.e., from the clearing banks. Put another way, tri-party repo clearing should be organized like all other major clearing houses, that is, as a stand-alone, regulated entity. This change would reduce systemic risk, eliminate conflicts of interest in the clearing of tri-party repo, and improve incentives of repo investors with respect to counterparty risk management.

Even IMF Lacks This Much Money (A letter in the Wall Street Journal)
Lawrence Goodman
May 21, 2010

Peter Eavis is correct to question the capacity of the International Monetary Fund to serve as the "last lender of last resort," especially in a world characterized by increasingly extreme economic and financial events ("The IMF's Big Wager On Europe," Heard on the Street, May 13).

However, a critical point is that the IMF may actually have insufficient resources to fully finance its portion of the program. Within the European Financial Stabilization Package, the IMF has committed $320 billion. However, the IMF's one-year forward commitment capacity is only $239.5 billion, as of the latest data available for January 2010. This includes $340.6 billion in uncommitted usable resources less a prudent reserve balance of $103.5.

The alternative for the IMF would be to tap member governments for additional resources - as contemplated by the fund and G-20 nations. However, delivery might be tough in an environment of already stretched sovereigns.

Limited resources may go further with debt restructuring, which is what we learned in the transition from the Baker Plan to the Brady Plan.

Lawrence Goodman
President
Center for Financial Stability
New York

Printed in The Wall Street Journal, page A14.
Link to "The IMF's Big Wager on Europe"
Link to "Even IMF Lacks This Much Money"

Hidden Risks from Expanding Governments
Lawrence Goodman and Yubo Wang
May 11, 2010

The debt crisis in Greece and waves of unprecedented public spending designed to minimize the impact of the financial crisis present new vulnerabilities for officials and market participants. Sizable government spending helped foster a "man-made" recovery in many parts of the world. However, recent public action unleashes hidden and visible risks.

A Center for Financial Stability (CFS) study of 37 countries reveals how enlarged government spending meaningfully dents the efficiency of investment and potential for future growth.

In response to the financial crisis, Greece, the UK, and Spain implemented the loosest fiscal policies during the 2008-2010 period, among 37 nations evaluated. The US and Portugal are not far behind. The study includes policy recommendations for the IMF and US. Despite the focus on China's fiscal stimulus, the expansion was reasonably contained - representing only 5.4% of GDP during the identified period and substantially less than 24.2% in the US.

Based on our analysis, the IMF is underestimating the risk of promoting the formalization of countercyclical fiscal policy or automatic mechanisms to expand spending during periods of economic weakness and contract during strength.

Lastly, the debt crisis in Greece and findings in our study represent calls to action for the US government to develop a serious long term fiscal program to help steer the economy toward stronger growth, job creation, and financial stability. Read More

Some Concerns with the Derivatives Legislation
Steven Lofchie
May 05, 2010

Steven Lofchie (Non-Resident Senior Fellow) releases a new paper entitled "Some Concerns with the Derivatives Legislation". Steve is critical of the absence of procedures relating to regulated entities and is fearful of unintended ill consequences from the legislation. He poses questions for legislators and regulators as well as recommendations for improving the legislation. We encourage and welcome comment.  Read More

Amending Safe Harbors to Reduce Systemic Risk in OTC Derivatives Markets
Bruce Tuckman
April 22, 2010

Read this paper for a practical and easy-to-implement policy change that will make derivatives markets more robust. The key is that all derivatives markets are not the same and the right incentives can motivate market participants to improve transparency and safety.  Read More

A Path for the FCIC
Lawrence Goodman
April 7, 2010

The Financial Crisis Inquiry Commission (FCIC) hearings this week represent a critical opportunity to understand how stress in the subprime mortgage market mushroomed into the most severe financial crisis since the Depression. Unfortunately, the opportunity will likely be squandered. The FCIC is myopically focused on the role of institutions rather than markets and the need to score political points versus engaging in a real investigation. Read More

Systemic Risk and the Tri-Party Repo Clearing Banks
Press Release
Bruce Tuckman
Feb 3, 2010

The Center for Financial Stability (CFS) - a new think tank on finance and markets - releases today the attached paper, “Systemic Risk and the Tri-Party Repo Clearing Banks.” The paper shows how the system through which broker-dealers fund a sizeable portion of their assets has the potential to 1) wreck the financial health of a large clearing bank or 2) lead to the demise of yet another broker-dealer...  Read More

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