Thursday, June 14, 2018

BIS: Market Value of OTC Derivatives at 10 Year Low

The Bank for International Settlements (BIS) produces a monthly email update. Below is the most recent issue that features an article on how over the counter derivatives have now fallen to a ten year low


June 2018

Central banking: trending and cycling 

Speaking at Sveriges Riksbank’s 350th anniversary, Agustín Carstens outlines trends and cycles in central banking.

Reducing the risk of wholesale payments fraud 

Central banks urge wide take-up of a strategy to improve wholesale payments security.

Capital treatment for short-term securitisations

The Basel Committee finalises the capital treatment for qualifying securitisations, including asset-backed commercial paper.

Market value of over-the-counter derivatives at 10-year low

The gross market value of outstanding OTC derivatives fell to $11 trillion at end-2017, mainly as interest rate contracts declined.

Challenges for monetary policy from global financial cycles

At a Swiss National Bank-International Monetary Fund conference, Agustín Carstens highlights the role of movements of major funding currencies’ exchange rates for global financial conditions. (0:49:00 - 1:00:00)
More BIS publications 

Publication: Implementation monitoring of PFMI: follow-up Level 3 assessment of CCPs' recovery planning, coverage of financial resources and liquidity stress testing
Most central counterparties have made progress in meeting international standards on financial risk management, liquidity and recovery, but some still lag.

Working Paper: The enduring link between demography and inflation
High shares of young and old push up inflation, while a high share of working age population lowers inflation.

Working Paper: The cross-border credit channel and lending standards surveys
Central banks’ quantitative easing policies bolstered attitudes towards bank lending, but a negative signalling effect undermined their effectiveness and sapped demand for loans.

Tuesday, June 12, 2018

News Note: North Korea - What Just Happened?

By now the world knows that something just happened in Singapore between North Korea and the United States that may impact world events. Exactly what has happened is yet to be determined. Based on the early news reports and comments from President Trump and Chairman Kim, it appears the two nations have at least been willing to start a process to try and end the tense standoff that has existed for decades on the Korean peninsula. Below are a few comments on how this impacts what we watch for here.

At this point in time, much remains unclear as to exactly what North Korea and the US have agreed to. Both leaders are saying that the agreement signed will result in "major change" in the future and imply that major change will be a gradual ramp down of tension and the transition of North Korea into a country that seeks to work with the world rather than against it. One news report even stated the US presented a video to the North Korean delegation on the virtues of using their beaches for condos and hotels rather than weapons testing (view it here).

Only time will tell of course what actually does happen. However, there appears to be enough goodwill on both sides to eliminate the further ramping up of tensions that we had seen up until a few months ago. I doubt North Korea will be doing further nuclear and missile tests. The US has agreed to end war game exercises. These would be concrete first steps to show sincere good faith if they are carried out. 

For our purposes here, I believe these events will remove a lot of geopolitical instability in the world now that could have created systemic risk to the existing global financial system. Removing that risk would be a huge plus for the world and also mean that once again a major change from the existing system based on the US dollar as global reserve is not likely any time soon. We still have remaining potential systemic risks for sure, but taking a big one like this off the table is certainly a good thing. Let's hope it is real and that it lasts.

Friday, June 8, 2018

How is the Petro Yuan Contract Doing?

Not long ago, the so called petro yuan contracts began trading for oil. This allowed traders to buy and sell oil contracts based on yuan rather than US dollars. Many observers are interested to see if this event begins to impact the US dollar in its role as the global reserve currency. 

This article on provides an update on how well yuan based contracts are doing in their startup phase. It looks like that so far the trading volume is still far below the US dollar based contracts, but is picking up some steam as time goes by. Below are a couple of excerpts.

"China’s new oil futures contract is gaining some momentum as a fixture on the global oil market, although hurdles remain before it can become a key benchmark for Asia.

China launched its yuan-denominated oil benchmark in March to much fanfare, after years of planning and delays. The logic of starting up an oil futures contract in China is obvious. China is the largest crude oil importer in the world, and its growing appetite for crude has increased the urgency to establish a contract based on local supply and demand conditions. Importing such heavy volumes at dollar-denominated prices exposes Chinese refiners and consumers to currency risk. A yuan contract mitigates some of that risk.

Beyond those concerns, the yuan contract also augments the global status of the Chinese currency. China is the world’s second largest economy and shifting more global trade into yuan advances Chinese influence.

However, the new contract on the Shanghai International Exchange still has to overcome some hurdles before . . . . . . ."

Added comments: We have noted that there are ongoing efforts by many nations led by China and Russia to reduce the role of the US dollar as the global reserve currency. The process continues all time in slow incremental steps. As we can see from this article on, China is always looking for ways to increase the use of the yuan around the world. Here is a quote from the article illustrating that fact:

"The Chinese yuan comes under the spotlight Tuesday and Wednesday when 17 top central bank and government officials from 14 countries in eastern and southern Africa meet in Harare to discuss its possible use as a reserve currency for the region."

Lately, many are predicting ramping up of sanctions against Iran may force Iran to look for ways to conduct oil trading outside the US dollar which could speed up the process of yuan based oil contracts increasing their share of use in global trade.

This recent article appearing on is interesting. It talks about how gold was used to bypass the sanctions against Iran in the past. It even shows a hand drawn diagram on how to do it.

Sunday, June 3, 2018

Article on the Impact of Falling Mortgage Refinance Market

Since we do watch for any kind of potential "trigger" that could impact systemic stability, this article seems worth noting. It points out how rising interest rates are now starting to have a real impact on the mortgage refinance market. Below are a couple of excerpts and then a few added comments.


Back in the 1990s we did our first cash-out refi. And it was amazing. The bank lowered our monthly mortgage payment AND wrote us a check for $16,000. I told that story to everyone I met for months afterward, and they were, without exception, astounded.

That, in a nutshell, is the refi paradise in which homeowners have been living ever since. By continuously lowering interest rates, the Fed has in effect been cutting our taxes, enabling us to buy furniture, cars, vacations, you name it. Easy money, funneled through the housing ATM, was an amazingly efficient stimulus program.

But now it’s over  . . . . . 

"If being able to refinance your mortgage every few years is like getting a tax cut, no longer being able to refinance – while your property taxes and maintenance expenses are rising – is the opposite. Suddenly, owning a house is an expensive proposition rather than a source of free cash. The result won’t be pretty."   . . . . . .

My added comments: This article is very easy for most people to understand and see how this can impact their life directly. Rising interest rates make everything purchased with a loan more expensive of course. But this situation in the housing and refinance market is especially important to keep an eye on. 

As this article points out, rising mortgage rates not only reduce demand for new housing and first time home buyers, they also directly impact the refinance market that millions of people have been using to access additional spendable funds for years now. So not only does the refi market itself take a hit (this article shows this is now happening), the overall economy takes a hit as people have less money available to spend in general. This along with the potential for trade wars may somewhat offset the boost the US economy has seen from lower taxes and regulation. 

The refinance market is such a large market that I won't be surprised if we see this directly hit GDP fairly substantially eventually. It's just another systemic risk we need to keep an eye on. 

Also, if this does start to play out and the Fed reacts back to monetary easing to try and stave off the problem, we would expect markets to react to that as well. The US dollar could take a pretty big hit under that scenario.

Friday, June 1, 2018

"Slow Motion Civil War" Continues to Ramp Up - Markets Yawn

Earlier I attempted to assess the ongoing political divide in the US with this blog article. In it I tried to make the case that this "slow motion civil war" as some have called it must move to the top of the list of potential threats to systemic stability. Since then, events have only continued to convince that nothing in that earlier article needs to be changed.

The battlefronts in this war are now so numerous and confusing that I doubt any average citizen can keep up with it all and most likely don't even try. At this point I think the best approach is to try and keep things a simple as possible so I'll try to do that below.

This is my take on this situation in terms of trying to assess the impact on systemic stability and then of course on everyday people. We are seeing all kinds of information pouring out from both sides of the civil war and the intensity only seems to ramp up. Clearly, those directly involved in this conflict who have the most to lose are engaged in intense fighting that does not appear to be coming to an end any time soon.

With all this going on, here is what I focus on. I just watch these three signals:

1- US and global stock markets

2- the US dollar index 

3- the price of gold (and silver)

Even with all kinds of breaking news potentially implicating powerful US officials or former officials on almost a daily basis, so far these markets just observe the proceedings and yawn. We see no indications at all that markets are concerned that systemic stability is at risk for now.

Until I see at least one and more probably all three of these markets signal some kind of distress, I will assume that they don't see the "civil war" threatening systemic stability or that the current President is in any real legal trouble.

If we see a sharp and deep drop in stock markets, a sharp and deep decline in the US dollar, and/or a sharp rise in the price of gold (and silver), then I think we need to pay close attention to systemic stability. As long as these markets seem unfazed, I will assume either the "civil war" is ultimately not going to result in any significant changes or that it is locked in a stalemate that neither side can win any time soon.

Update to readers on the status of blog articles here:

If nothing arises to suggest major change is on the horizon any time soon, I will proceed with my plan to cut way back on blog articles. I may cut back to just one a week or less starting in June or July and then even less after that. At some point in the fall if nothing is changing, I will probably just go into "monitor" mode and only produce an article if I see something truly important in terms of systemic stability or of such worthwhile educational value to readers that I feel I should add it to the blog. 

If readers send article links or other information, I would likely feature that type of information since I know there is reader interest enough for someone to send me the information.

Wednesday, May 30, 2018

North Korea News Note

Business Insider runs this article which, if true, may signal that some important change might really be underway inside North Korea. With the history associated with North Korea, we must take just about everything we see and hear with a grain of salt. However, we certainly hope this news is accurate and that it means North Korea may be ready to work with the world to make things better for everyone. A couple of excerpts are below.


"A video of North Korean leader Kim Jong Un crying about his country's terrible economy while surveying its coast has reportedly made the rounds in the country's leadership — and it could be a sign he's ready to cave in to President Donald Trump in negotiations."

In the alleged video, which Japan's Asahi Shinbum quoted a defector with contacts inside the country as describing, a narrator explains Kim is crying that he can't improve North Korea's economy.

The defector said the video surfaced in April and high ranking members of North Korea's ruling party viewed it, possibly in an official message from Kim to the party."   . . . .

Added comments: Our purpose here is not to try and get involved with the politics involved  in any of these geopolitical events around the world. Instead, we are trying to assess if any of these events (or a combination of events) might be able to impact the stability of the overall global financial and monetary system. Obviously, any armed conflict involving North Korea could create such instability so it is an important situation to monitor.

In this case, we simply hope this news is accurate and indicates a sincere desire on the part of all parties involved to work for lasting peace and prosperity for all of Korea. That certainly makes the world a safer place and a better place. If it were to happen, it takes war with North Korea off the table as a major systemic risk factor. Something we can all be happy about.

Sunday, May 27, 2018

Fitch Describes Emerging Markets as "Vulnerable" to Debt Load

News note:

Bloomberg runs this article  which states that Fitch is warning that emerging markets are vulnerable to debt that has grown now to over $19 Trillion. Just ten years ago the number was $5 Trillion. Below is an excerpt.


"Outstanding debt securities from developing nations have ballooned to $19 trillion from $5 trillion a decade earlier, the credit-rating company (Fitch Ratings) said in a report. Despite the development of local-currency bond markets, borrowers will be hobbled by higher external borrowing costs, a stronger dollar and slowdown of capital inflows, it said."

Friday, May 25, 2018

BIS: Identifying Oil Price Shocks and their Consquences

The Bank for International Settlements (BIS) has released a study that attempts to identify the impact of oil price shocks on the global energy market. Below I have pasted in the summary abstract of this study. You can read the full study here. Further below are a few added comments.


"This paper proposes a simple but comprehensive structural vector autoregressive (SVAR) model to examine the underlying factors of oil price dynamics. The distinguishing feature is to explicitly assess the role of expectations on future aggregate demand and oil supply in addition to the traditional realized aggregate demand and supply factors. Our empirical analysis shows that identified future demand and supply shocks explain about 30-35 percent of historical oil price fluctuations. In particular, future oil supply shocks are more than twice as important as realized and future demand shocks in accounting for oil price developments. The empirical result indicates that the influence of oil price shocks on global output varies according to the nature of each shock. We also show that the financial factors and the development of shale-oil technology are additional relevant sources of oil price fluctuations."
My added comments: Having worked in the oil and gas production industry my entire life (as an accountant), I have seen a lot of major ups and downs in oil and gas prices over the years. There is no doubt that the price of energy has a big impact on the global economy and pretty much affects almost everyone.

Predicting prices is not an easy task. There are many variables that come into play such as:

- basic supply and demand
- the cost of finding and producing reserves
- market expectations of future supply and demand
- unexpected geo political events that arise from time to time
- politics
- taxation policies

and more.

From the perspective of most oil producing companies that I am aware of, the hope is that prices stay high enough to maintain production, fund finding costs to replenish reserves as they are depleted, and generate enough profit margin to maintain the incentive to continue to search for new reserves. On the flip side, most companies really do not want to see prices get too high for too long because it puts a large burden on the overall economy and makes energy costs high for some who can barely afford it. 

For the long term, the general forecasts I have seen (assuming no major global crisis that craters global energy demand) project that the world will need as much oil and gas production as possible to meet expected future energy demands alongside the expansion of renewable energy sources. The growth in global demand (especially in developing nations) would almost certainly exceed the available oil and gas supplies sometime in the next 20 years so we will need other forms of energy to take on more the load over time.

For our purposes here, oil prices are just one other factor we should keep an eye on that can create systemic risk if they get too high or too low for too long a period of time. For now, a price range between $50 and $75 per bbl is probably in the "sweet spot" to maintain investment to continue exploration while hopefully keeping energy costs contained as best we can. Long term prices below $40 or above $100 need to be watched carefully for their potential for systemic risk.

Monday, May 21, 2018

Dr. Judy Shelton Calls on Trump to promote monetary system reform "linked in some way to gold"

Dr. Judy Shelton was an adviser to the Trump campaign back in 2016 and at one point was suggested as a possible appointee to the Federal Reserve. Instead, she has accepted the position of US Executive Director for the European Bank for Reconstruction and Development. 

Dr. Shelton has long been an advocate for monetary system reform based on linking it in some way to gold, but perhaps in a more modern way. She repeats this call in a new paper published in the Spring edition of the Cato Journal. Below are a few excerpts. You can read the full paper here.


"How often do we hear references to the notion that we live in a rules-based global trading system? Addressing the World Economic Forum at Davos in January 2017, British Prime Minister Theresa May praised liberalism, free trade, and globalization as “the forces that underpin the rules-based international system that is key to our global prosperity and security” (Martin 2017). Chinese President Xi Jinping likewise extolled the virtues of a rules-based economic order at Davos, winning widespread praise for defending free trade and globalization (Fidler, Chen, and Wei 2017). But could someone please explain: 

What exactly are those rules?  . . . . ."

. . . . .

"Today there are compelling reasons—political, economic, and strategic—for President Trump to initiate the establishment of a new international monetary system."

. . . . .

"The new approach that emerged in the vacuum left by the dissolution of Bretton Woods was to have no international monetary system—that is, no rules or coherent mechanism for maintaining exchange-rate stability among national currencies."

. . . . .

"Just as the United States rose to the challenge of providing inspiration to desperate nations (at Bretton Woods) with a promise to establish stable and trustworthy monetary rules to undergird international commerce in compliance with free trade principles, the needed initiative falls once again to America. And just as then, the advantages of a sound money approach to ensure a level playing field that maximizes the rewards from true competition—by preventing currency manipulation through government intervention—will serve our own best interests."

. . . . .

"If the United States does nothing to restore a rules-based approach to international monetary relations, our values come into question. We lose credibility by failing to challenge an international monetary anti-system that condones cheating by governments and central banks. We acquiesce to the fiction that enforceable rules exist to ensure against currency manipulation—even as we complain about trade imbalances contrived through exchange-rate targeting."

. . . . .

"President Trump’s economic imperative now is to initiate reform both at the Federal Reserve and in conjunction with the international community to redefine monetary relations."

. . . . .

"What’s needed is a comprehensive approach for linking the money supply to increases in productive output—the restoration of sound money principles for economic growth. It’s time to reassert the primary functions of money as (1) a medium of exchange, (2) a unit of account, and (3) a store of value."

My added comments: When President Trump was first elected and Dr. Shelton was mentionned as a potential appointee to the Federal Reserve, it seemed as though Trump might have some interest in a return to gold in the monetary system. As time passed, it seemed as though nothing along those lines was in his mind.

Now we have Dr. Shelton once again calling on President Trump to think about monetary system reform "linked in some way to gold" (see page 387). This time she is speaking as a voice working inside the Administration. So I felt this paper should be featured to make readers aware of this. 

As I follow this situation over time, it feels like that I see a number of proposals for monetary system reform out there sort of competing for attention in the event that something comes along to disrupt the current system. So my goal is to make readers aware of the serious proposals I see out there that could be put forward at some point in the future. I'll add the link to this paper to the page of monetary system reform ideas that I keep archived here on the blog.

Friday, May 18, 2018

BIS May Newsletter - How Technology is Impacting the Nature of Money

Below I have pasted in the monthly email newsletter I get from the Bank for International Settlements. This month a video with BIS General Manager Agustin Carstens on the impact of technology on money and central banks is featured. The video is a panel discussion on central bank digital currencies held at the Brookings Institution. Here is link to the text of the panel discussion.


May 2018

The market risk framework: 25 years in the making

Basel Committee Secretary General William Coen outlines the steps needed to finalise the Basel III market risk framework.

International bank lending gains momentum

BIS international banking statistics show that banks’ cross-border claims rose by $123 billion in the course of Q4 2017, led by intragroup activity.

Stress testing of central counterparties

New framework helps authorities design and implement macroprudential stress tests for central counterparties.

How is technology affecting the nature of money and the role of central banks?

General Manager Agustín Carstens argues that technology cannot substitute for central banks when it comes to issuing currencies.

Dollar credit to emerging markets jumps

BIS global liquidity indicators show that US dollar-denominated bonds issued by emerging market borrowers grew a record 22% in the year to end-2017.

Debt securities drove growth in US dollar credit to EMEs

Sunday, May 13, 2018

Warren Coats - Free Banking in the Digital Age

Discussion of digital currencies is all the rage these days. Central banks are studying the idea of issuing central bank digital currencies. The former head of the SDR Division at the IMF (Dr. Warren Coats) has followed all this and offers his thoughts on what might be a viable option for the future in this new blog post. Below are a couple of excerpts.


Dr. Coats

"A number of central banks are considering issuing digital currency either in place of the paper currency they now issue or in parallel with it.  The advantages of central bank digital currency (CBDC) over paper currency for the issuer is the much lower cost of supplying and maintaining the currency (printing, storing, transporting, safekeeping and replacing old and damaged notes). For the users, there are the benefits of much greater speed and lower cost of making payments of currency across distances.  The use of paper currency (cash) in economies with proliferating electronic means of payment (Visa, PayPal, Zella, popmoney, etc.) has been and will continue to fall.  In addition, digital currencies can and do extend digital payment services to the unbanked.  This note explores some of the policy issues raised by CBDC, by which I mean digital claims on the currency issued by the official monetary authority, whether directly or indirectly."

. . . .  

"Should central bank digital currency be provided retail or wholesale?  A central bank could issue its digital currency to anyone who signed up (registered, i.e. opened an account directly with the central bank). As all uses of this digital currency would be between participants in the system, transfer would be simple and instantaneous.  It would be essentially the same as logging into your current bank account and transferring money to another depositor in the same bank.

In addition to the above advantages of speed and simplicity, this central bank retail approach carries the burden of an enormous expansion of central bank staff to interface with the general public in establishing and managing this new digital currency. Equally troublesome is the likelihood, if not certainty of a “digital run” from bank deposits to the central bank’s digital currency.  . . . . .

. . . .


My conclusion from the above considerations is that . . . . .

Added note: Regarding this question raised in the article:
Should central bank digital currency be provided retail or wholesale?
Retail would mean allowing individual private citizens to open a direct account with their central bank to hold the central bank digital currency. Wholesale would mean only large financial institutions would be able to have such an account.

Friday, May 11, 2018

Forbes Article: US Fed Paper Says Central Bank Cryptocurrencies are Missing the Point

Here is an interesting article that recently appeared in Forbes that notes that the US Federal Reserve is far from sold on the idea of central bank digital currencies based on blockchain technology. Below is an excerpt.


. . . . 

"The reason these central banks are keen to adopt Bitcoin-like technology is to improve existing systems of payment (and for good reason—  but the Fed's Reserve Bank of St Louis recent paper says this misses the point of cryptocurrencies.

The Fed's report authors, Aleksander Berentsen and Fabian Schar, write:  . . . . ."

Added note: Here is link to the recent blog post by the St. Louis Fed on this topic.

Also, Bloomberg runs this article which points out that central banks around the world are far from in agreement on central bank digital currencies and that no major central bank in a developed nation seems close to moving in that direction for now. The Bloomberg article opens with this statement:

"The joke doing the rounds at last week’s spring meetings of the International Monetary Fund and the World Bank in Washington was that central banks are looking into cryptocurrencies so that their governors have something to say when they go to conferences and are asked about Bitcoin."

Meanwhile, some involved in the process do think some central banks might try a "wholesale" version of a central bank digital currency sometime in 2018. Wholesale would mean that individual citizens could not open central bank accounts and hold the currency directly with the central bank. The concern is that in a financial crisis people would likely move all their funds into their central bank account creating a run on private bank accounts. Some have discussed the idea of limiting the amount anyone could hold in a central bank account as another way to deal with the issue.

Additional note: Dr. Warren Coats sent me this link to a Reuters article that notes that even the disbtributed ledger technology is far from proving worth implementing at central banks. Here is the last paragraph from that article:

"Other technologies are also being explored to enable instantaneous settlements. The European Central Bank is planning to launch a new settlement system in November which it says will allow transactions to be conducted in real-time, but does not use distributive ledger technology."

One global payments system expert I have been hearing from for years told me some time ago that blockchain (or DLT) is not any real "breakthrough" technology in his view and as time goes by, his comments seem more and more in tune with what is happening as people try to make this technology work in the real world. Even Facebook has expressed frustration with the current state of blockchain technology as they look into their own cryptocurrency. Here is the conclusion of their blockchain guru:

"During an interview at a conference in February, Marcus said Facebook didn’t have plans to integrate cryptocurrency into its apps anytime soon.

"Payments using crypto right now is just very expensive, super slow, so the various communities running the different blockchains and the different assets need to fix all the issues, and then when we get there someday, maybe we'll do something,” Marcus said."