Posts tagged ECB

European Systemic Risk Board for better supervision

The European central bank’s (ECB) President Jean-Claude Trichet, delivered a speech today in which he said that the central bank will continue its open and transparent debate with the main stakeholders concerned with economic and financial policies related to their competences. This speech apart from addressing many national initiatives to implement macroprudential supervision was important for one more reason as it addressed the need for set up of European Systemic Risk Board (ESRB) which will start its operation in January next year

  • ESRB is a body designed to deal with risks that precisely develop and interact in a way that can endanger the financial system (recent european debt crisis)
  • The ESRB includes all EU national central banks, the heads of the three new European Supervisory Authorities (ESAs) and the European Commission, national supervisory authorities and the chair of the Economic and Financial Committee
  • The ESRB and its macroprudential policies have been inundated with broadly three main tasks which covers right from the origination to the solution of the problem
  • They are to identify and prioritise systemic risks; to issue early warnings when significant systemic risks emerge and to issue policy recommendations for remedial action in response to the risks it identifies
  • This new set up will not change in any way the mandate and the functioning of the ECB’s statutory role
  • The ECB as an EU institution will be entrusted with the task of supporting the new body – analytically, statistically, administratively and logistically
  • The central bank will as well draw on technical advice from national central banks and supervisors and in close cooperation with all ESRB members
  • The core of the ECB’s policy support will be undertaken by a new unit to be established, the ESRB Secretariat which will be closely connected with the ECB, the Directorate General Financial Stability and other business areas
  • Since ESRB does not replace the functions of any existing institution therefore, it is part of the European System of Financial Supervision (ESFS), together with the new ESAs and the national supervisory authorities
  • The European System of Central Banks (ESCB), another set up, has been created by the EU central banks which showcases their research effort
  • The ESCB has launched a macroprudential research network, called MaRs in which many researchers from all EU central banks will contribute to its main work areas over the next two years and will report its main result in 2012

 

Analysis:

The set up of the new body to analyze systematic risk to the economy highlights the fact that the government is taking every required step to avert any possible crisis in the future and is also preparing hands-on solution from before to implement in case of one.

Author:Rahul Sonthalia, Research Head, Kredent

European Central Bank (ECB) in 2008 = RBI in 2010

I am sure that the subject of my article would be very confusing for some of you or may be strange for a lot of you. What I am trying to convey with this one is again some graduation level economics which I studied during my Macroeconomics paper in 2005, which I believe the world central bank’s heads are forgetting or trying to overlook over more complex understandings.

The core objective of any Central Bank is to do a through analysis of the forthcoming economic situation of an economy (growth and inflation) and accordingly adjust the liquidity flow into the system. It also involves taking into account any major local or global events that could shape up the economic situation in the country and hence being prepared for the same.

Thus, in nut shell I would say that the core objective of any monetary policy is to manage liquidity into the system so that the economy grows (with minimal inflation), but this decision should be based on ex-ante analysis and not ex-post analysis.

This precise mistake I believe ECB committed in July 2008. In July 2008, when the global credit crisis was almost about to reach its peak, the global growth outlook was bleak and most of the central bank’s around the world were either growing through rate cuts or on the verge of doing so, ECB announced a rate hike of 25 bps, which as per experts is one of the many important reasons of the current EU turmoils. The move as said by Mr. Trichet was” mainly on account of “heightened concerns at the ECB about inflation in Europe”.
 

The inflation which was just a temporary phenomenon in EU because of the high commodity prices, made ECB think beyond the US Sub-prime and Global credit crisis and took a rate hike decision, saying that “the crisis was one belonging to US and will not have impact on EU”. Thus in October when the US crisis started spreading wide the EU was down of out because of the decision in July.

The same is what RBI has done on Friday, going by its ex-post and probably present rate hike analogy has gone ahead with a rate hike. Its done probably at a time when the Indian banking system is already crunched for liquidity because of 3G and BWA auctions, can have a long repercussion. The RBI also said like EU said in 2008 that“Inflation is a bigger concern than EU Crisis”.

Thus going further, I strongly believe that if this EU crisis spreads more (which has high chances) Indian economic growth and more importantly the stock indices could see a blood bath. The Indian markets as of now is quite insulated from the global turmoil, but like EU in 2008 this move by RBI on Friday could lay the foundation for a big Index correction.

Author:Rahul Sonthalia, Research Head, Kredent

Trading Nifty as global liquidity dries up…

This Could Evaporate Liquidity From Markets...

Yesterday the European Central Bank (ECB) announced the key rates and as the streets expected, they were unchanged.

There was no positive out of the press conference from Trichet, the only thing he did was subtly pleading to the world that “EURO is a stable currency’ and reiterated again the same things that the ECB would leave no stone unturned to save the real economy. This lead to over 200 points rally in Dow Jones and more than an 1.5% gain in Euro. I believe that it is more of a short covering bounce back and the only direction the Euro is headed is southwards.

I expected July to be a calm month for the markets, and the biggest reason is that the China AG Bank is coming up with the world’s biggest IPO of all time. On July 16th it is coming up with an IPO of $30 billion and this could really suck huge liquidity from the markets even if it is just fully subscribed. One should wonder what if, the issue gets oversubscribed by two times and three times. It could evaporate the liquidity of the size of two times Reliance Industries total market capitalization which is around Rs 3 lakh crores.

In history too IPOs of high magnitude from good companies have lead to a dearth of liquidity in the Secondary Markets and this time also I expect the same Ag Bank, whose 350 million customer base is bigger than the population of the United States, had $US7.1 trillion in assets as of 2008, its last public financial filing, is a bank which even the institution would love to own and hence the liquidity could dry up.

Hence a good trading strategy for Traders could be to establish position in put options in Nifty expiring in the month of July, as the VIX has also come down significantly. For Investors the best is to stay out of any extravagant short term positions and continue their SIP.

Happy Investing…!!

Author:Rahul Sonthalia, Research Head, Kredent