MacroScope

Big news over the weekend was the world’s banks being given an extra four years to build up their cash piles, and given more flexibility about what assets they can throw into the pot. This is a serious loosening of the previously planned regime and could have a significant effect on banks’ willingness to lend and therefore the wider economy.

For over two years, banks have complained that they can’t oil the wheels of business investment and consumer spending while being forced to build up much larger capital reserves to ward off future financial crises. That contradiction has now been broken (a big win for the bank lobbyists) and the impact on economic recovery could be profound.

However, there are no guarantees. Banks, in Europe at least, have also insisted that lending has remained low because there isn’t the demand for credit from business and households. If that’s true, increased willingness to lend might not be snapped up.

The uncertain economic state of play means the European Central Bank and Bank of England are unlikely to act at policy meetings later this week.
Safe haven German Bund futures have opened moderately higher having dropped dramatically last week after Washington navigated its way round the fiscal cliff and U.S. data was markedly upbeat.

The global regulators, meeting in Basel, agreed on Sunday to phase in a rule new rule on minimum holdings of easily sellable assets, known as the liquidity coverage ratio, from 2015 over four years, and widen the range of assets banks can put in the buffer to include shares and retail mortgage-backed securities (RMBS), as well as lower rated company bonds.

Global foreign exchange has always been one of the biggest markets in the world but its exponential growth keeps accelerating. The triennial survey by the Bank for International Settlements shows global foreign exchange market turnover leapt 20 percent to $4 trillion, compared with $3.3 trillion three years ago.

The increase in turnover was driven by growth in spot transactions, which represent 37 percent of FX market turnover.  Turnover was driven by trading activity by “other financial institutions” — a category that includes hedge funds, pension funds and central banks, extending a trend seen in the past several years where buyside firms are increasingly trading currencies themselves, via prime brokerage, rather than turning to interbank dealers.

Also notably, emerging market currencies are gradually increasing their share in the marketplace. Turnover of the Russian rouble has increased its share in total turnover to 0.9 percent of 200 percent (FX is double counted as transaction involves two currencies), up from 0.7 percent three years ago, while the Brazilian real rose to 0.7 percent from 0.4 percent. The Indian rupee’s share rose to 0.9 percent from 0.7 percent. The dollar keeps its dominance, although off its 2001 peak, with its share standing at 84.9 percent.

Having wrapped up the two-day get-together in London, G20 central bankers moved down to the Swiss city of Basel (I counted central bank governors and officials from at least 9 countries onboard the same flight) to discuss more about the global economy for a two-day meeting.

The focus here again is the global economic recovery, which seems to be gathering momentum, and the timing of exit policy — which is essential in the future to avoid inflationary pressure.

The mood is decidedly more positive this time than the last time they met in Basel, where they warned that unprecedented attempts to stimulate economic may fail to bring a sustainable recovery.