Summary of Cypriot capital controls

From a number of sources (CNN, USAToday, FT)

No Eurozone country, since the creation of the Euro, has ever instituted capital controls. It’s not really allowed, except in exceptional circumstances. Which goes to show the value of rules with exceptions for “exceptional circumstances”. Which is to say, not much.

The cost to large depositors

Deposits above 100,000 euros have been frozen at both banks. They could be wiped out entirely at Popular. At Bank of Cyprus, about 40% will be converted into equity.

So that is an absolute bank failure, no two ways about it.

The capital controls

depositors would be able to withdraw no more than €300 in cash each day, said people familiar with the move. Transfers over €5,000 would require permission of the central bank.

Overseas credit card transactions would be limited to €5,000 per month, but unrestricted in Cyprus. And there would be a ban on people taking more than €3,000 of bank notes out of the country per trip.

These rules will expire in 7 days. Oh, unless they’re renewed. Prediction – they will be renewed.

SAM Risk-free Rate Workshop

The Technical Provisions Task Group and KPMG ran a workshop for industry participation on risk-free rates recently. The idea was to see whether we could improve the extent and quality of industry comment on key, controversial areas of the proposed SAM regime.

Turnout was good, but not great, but the discussion and points raised were all fantastic. Plenty more to do from here onwards, but I thought it might be useful to include the presentations somewhere publicly available.

Some of the concepts that were on the agenda

  • Swaps vs Bonds, the theory as well as practical implications for insurers, banks and the capital markets
  • Extrapolation methods and what challenges this creates for practitioners
  • Identifying and measuring illiquidity premiums, credit spreads and the difference between Expected Default Loss and Credit Risk Premiums
  • European developments on Matching Adjustments and Countercyclical Premiums. Should we follow their path? Is bottom-up or top-down more practical?
  • Do we need a methodology for nominal and/or real yield curves?
  • Non-South African countries – what is the practical answer to requiring multiple yield curves?
  • Reducing regulatory arbitrage between banks and insurers for credit and market risk on swaps and bonds

Panel Members:

  • David Kirk
  • Ian Marshall
  • Philip Harrison
  • Brian Kipps
  • Lance Osburn
  • Lindy Schmaman
  • Louis Scheepers

Presentations (reproduced with permission from the authors)

Risk free rate workshop outline November 2012

Position Paper 40 (v 3)

Philip Harrison – Risk Free SAM Workshop

Risk free yield curves Brian Kipps

Risk-free rate workshop_LSchmaman

SAM Risk Free 29 Nov012 Louis Scheepers

SAM Workshop 20121129 Lance Osburn


Life insurer placed into curatorship

All I can say is financial reinsurance that is just smoke and mirrors is just smoke and mirrors. More small insurers should take advice from someone other than their reinsurers when evaluating financial reinsurance in terms of its financial, regulatory and capital implications. Financial reinsurance doesn’t typically cause financial problems but it can gloss over and hide genuine problems.

Moneyweb article.

Systematic risk in insurance

Lots on this topic to come over the next few months.

Swazi King not sure he wants the conditions attached to the loan

This is really fantastic news.  The Swazi King is apparently reluctant to accept the loan from South Africa because of the conditions imposed in the agreement. I was quite harsh in criticising the granting of the loan with only conditions for improvement far down the line.  (I still believe the first condition should be an immediate unbanning of political parties.)

Hearing that the conditions are sufficiently onerous that the borrower may not want it is great news. At the very least this reflects a balanced package rather than one heavily in favour of the undemocratic absolute monarchy of our neighbour.

I wonder how many of these conditions were added or modified after the initial public announcement. Cosatu, amongst other powerful groups, has also been very outspoken against the loan.

Clear, Simple and Wrong

The reason opinions are so cheap is that everyone has one and nobody wants to buy anyone else’s. I’m no different.

I’m not going to try to sell you mine. I would like to present you with some ideas to think about before you overpay for someone else’s though.

Jon commented on a recent post of mine and, guessing I’d be interested, directed me to a fascinating opinion piece by Mark Gilbert on Bloomberg covering a range of current economic issues. I suggest you read it now. It’s ok, I’ll wait.

Right, some pretty compelling points are made there. I disagree with many of them, but they are pretty compelling at first read. Here’s my rebuttal to those I’ve heard discussed most commonly in recent times (typically with head nodding all around).

Gold is not the answer to all our currency problems

All of a sudden it’s popular to talk about how fiat currencies are not worth the paper they’re printed on, how it’s a scam, how we’d be better off with a metal-backed currency. They’re wrong. This is a complex area so I’ll only touch on the points rather than try to explain each of them in detail.

Broken promises and speculator spectacles

A metal-backed currency is only as good as the government’s promise to stick to the standard. History shows this promise has been broken regularly. By attempting to stick to a standard, it’s like waving a red, pheromone-doused flag to an amorous bull (a.k.a. currency speculators. The Bank of England was hit by this in the 1930s and again, albeit with a different kind of peg, in the early 1990s by Soros). Continue reading “Clear, Simple and Wrong”

Junk bonds in place of an IPO

The 30 second intro to Junk Bonds

Junk Bonds, also known as High Yield Bonds, are debt instruments issued by companies with poor credit ratings, or are the debt instruments of companies that were issued as high quality bonds from strong companies that have since fallen on hard times (“Fallen Angels”).

Typically these are any bonds that are not classified as Investment Grade (BBB rated or better).

Junk Bonds behave very differently from Investment Grade bonds. Their value depends only marginally on market interest rates and far more on the underlying economic strength and operational performance of the issuing company.

Junk Bond return characteristics

They don’t often the unlimited upside of ordinary equity, but with the high starting yield (10% to 25% depending on the circumstances) it can provide a very healthy return if the company doesn’t default. There is also a chance for rerating where if the strength of the company improves dramatically, the bond may be repriced to a lower market yield, resulting in a significant capital gain.

Founders keeping control

So company founders can issue junk bonds rather than diluting themselves by issuing equity and still provide attractive returns to investors and an opportunity for savvy investors (and those who just think they are savvy) to “pick” their company with the prospect of fantastic returns if it performs really well. Continue reading “Junk bonds in place of an IPO”

Too Small To Succeed

According to a Fin24 story this morning, the FSB is probing smaller unit trusts.

The economics of a fund manager depends entirely on growing funds under management so that revenues (based on assets under management) grow to be larger than costs (significantly fixed and at most semi-variable). Details of performance fees and the second order impact of investment performance aside, a successful fund manager must attract positive net client cashflow, and lots of it.

Half the 960 available unit trusts have less than R100m in AUM. Some of these may be rapidly growing new funds, but many have been stagnant with slow growth for several years.

The FSB’s attention presents opportunities for consolidation between funds and should place larger funds in a stronger position competitively. Total Expense Ratios (TER) for these funds with significant scale should already be lower than smaller funds. Maybe it’s time the larger funds made more if their size and cost efficiencies. If they are going to take the heat for being too large to be nimble, they might as well reap the benefits too.

It will be interesting to see what this means for white labelled funds and whether the economics of these convince the regulator that they should survive.

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