All Articles Finance Modern Money ICYMI - September 6

ICYMI – September 6

3 min read

Modern Money

A collection of stories from SmartBrief publications and around the web…

Regulators move to soften Dodd-Frank rule on mortgages makes waves: The decision by U.S. regulators to soften a proposed rule regarding the kinds of loans banks can parcel out to investors without having to keep any ‘skin in the game’ has sparked a good amount of chatter. The Washington Post is clearly not a fan of the regulators’ move. However, the FT reports that the change is likely to make one group very happy: the securitization industry. If regulators soften rules affecting the securitization market, then an uptick in securitizations isn’t all that surprising.

Jumbo mortgage rates dip below conforming rates: The market dynamics that have spurred this unprecedented inversion of interest rates are fascinating. However, quotes like the following sound a lot like the kind of “advice” lenders offered circa 2006: “I’ve had situations where I’ve told clients, ‘You don’t need to borrow within the [conforming] limit. I can get you a lower rate if you borrow a little more,’ ” said Rolan Shnayder, director of new-development lending at H.O.M.E. Mortgage Bankers in New York. It also stands to reason that the above news item regarding the softening of qualified-mortgage rules is also playing a role in the interest rate inversion.

Systemically Important Financial Institution vs. Systemically Important Counterparty: While the debate about which companies should and shouldn’t be designated systemically important financial institutions has progressed, relatively little regulatory attention has been paid to sovereigns. This Risk paper from Federal Reserve senior economist Michael Pykhtin and CompatibL CEO Alexander Sokol takes a look at how portfolios should be managed in order to diminish the effects of a failed counterparty. The authors suggest portfolio managers expand their area of concern to “systemically important counterparties.” They define systemically important counterparty as “any institution the default of which is likely to have a significant impact on financial markets, taking in sovereigns as well as ‘large financial institutions.'” Considering the damage done by the Argentine and Russian defaults, the paper makes a very good point.

Italy begins taxing HFT and equity derivatives: Italy has rolled out a tax on high-frequency trading.  In what is expected to become a test ground for other nations considering following suit, the program levies a 0.02 percent tax on market transactions lasting less than half a second. The HFT crowd will surely threaten to flee Italian jurisdiction, but 11 eurozone countries have already backed a similar proposal from the European Commission.

An ominous warning from China’s central bank: “The rapidly expanding interbank market has brought new challenges for implementing monetary policy and avoiding financial risks. … For example, some banks have been using the interbank market to transfer loans off their balance sheet,” said Hu Xiaolian, vice governor of the People’s Bank of China, according to the Wall Street Journal. “The main risk lies in the close connections between the banking system, the money market, the credit market, the capital market and the insurance market.”

Dumbest Headline of the Week: And the winner is this Bloomberg piece. Apparently the CEO of Home Depot thinks the housing recovery will boost sales at his big, orange stores. Really? You don’t say…