Saturday, August 24, 2013

Repo Market: Shadow Banking=Fullview Crisis...L&C

There are many aspects to every economy that operate differently within it due to culture and other diversified reasons unique to it. One of these is Shadow Banking. Inside the field of shadow banking is another strange contributor called the Repo Market. It provides short-term loans to the banking industry. These are generally over-night loans that institutions use for bond transactions or covering new rule guidelines like the recent Basil Accord which requires banks to have higher capital assets. The new level of safe banking is 5%.
95% at Risk
This means that banks previously had leverage over 95%. They use our money to increase their bonuses and shareholder value. This is not safe in my thinking and the recent situation in Cypress exposes the weakness in the banking industry that is too interrelated. If one gets a cough, the industry catches a virus.
How Affects the Repo Market
In many countries like China, the Repo market is unregulated. In many western nations it is loosely regulated. In addition, Europe is killing the repo market in two ways. One, the EU says banks now need more capital and they have to follow new improved rules. These requirements will cut $883b of assets. The EU has also instituted a new tax called the "FFT(financial transaction tax)". This tax will effect all bonds and derivative trades.
These new rules have caused the spreads on repo loans to jump 72 percentage points to lend money to banks to cover these taxes. This high rate jump will kill the repo market and when, not if,  banks need quick over-night funds, they won't be there. Read trouble and another potential crisis.
There is another aspect to the repo market that is troubling. It is shrinking. In the US it has declined 35% from a peak of $7t in 2008 to $4.6t today. Analysts say the Fed will use it to guide rates higher under the tapering concept of QE.
The Problem
the Fed buys over 60% of treasuries, leaving little investing for the repo market. Richard Comotto of ICMA(International Capital Market Association) says, the new EU tax makes the repo loans unprofitable and this will also effect money market funds. This will surface as rates climb and there won't be a repo market to make the short-term loans that banks will need. Not good.
What I See
there are new rules for capital, but no one is prepared for cyber crime like hacking. There were six major US banks which suffered websites outages in 2012. The KPMG, a UK bank has seen a 12% increase in fraud, especially from hacking. There is at this time the demographic issue. Many older bank executives are retiring and the new, younger replacement hires have no experience. This replacement aspect will effect over 5 large UK banks. Can you say, "I didn't know!"
Liars and Crooks: Obama wins again! His idea to use student loans based on some arbitrary concept of "value" is just a status quo in disguise. The results will be all the established schools getting lower rate loans and all the smaller schools getting screwed. This is very troubling when the student population is shrinking due to demographics.

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