The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Tuesday, November 22, 2011

A very good speech by Dr Guy Debelle on bank funding (+ chart)

The RBA's Guy Debelle has given a great speech on bank funding. He gives another one today on the RBA's bail-out liquidity scheme. I hope he talks about the murky differences between illiquidity and insolvency. I have pulled out one of his charts, which is fascinating, on central bank balance-sheet changes, and some cracking quotes...

"The strong motivation for the current preference of investors for secured issuance is about repositioning themselves towards the front of the creditor queue. That is the fundamental point of differentiation between the various forms of funding. But ultimately, everyone can't be at the front of the queue.

In theory, or in a less risk-averse environment than the current one, pricing should equalise the incentives to issue and purchase the various forms of funding. Investors should be compensated for their risk of being further down the creditor queue with a higher risk premium. But in today's environment, there are plenty of examples where market pricing is not always sending the most accurate signal. In due course, investors in bank paper might again come to the realisation that there is not as stark a difference between secured and unsecured issuance, as current pricing would suggest. Investors need to heed the seminal words of The Saints: ‘Know Your Product’ and do the necessary due diligence.

So in the end, I think we should return to a world where banks access all five of the sources of funding I outlined at the beginning of my talk. It is useful to have a diverse range of funding instruments at hand, as at various points in time, some markets are more functional than others. A world where the only source of funding available is secured is just not sustainable."