February 2013: Moodys belatedly decided to perform a U-turn on its sovereign rating methodology and to start downgrading sovereigns that try to socialize debt through inflation rather than actively reducing it. Here is Alphaville's background on the UK decision, the first in a series I assume. See my January 2012 Handelsblatt article, english version, in the context of S&Ps decision on France. It argued that the rating agencies general view that sovereigns should be given credit for being able to inflate debt away was de-facto selecting rather than evaluating the impact of macroeconomic strategies on investors.
What we are seeing currently seems to be nothing less than a tectonic shift in rating agency methodology, which in the past had always rejected to consider market risk as a stealth variant of credit risk. In a low-growth environment the message to policy makers is clear: hard debt restructuring decisions can't be avoided, and it doesn't matter much in that regard whether you're inside or outside a currency union.
January 2013: Comment on the Eurozone's bank bondholder bailout policies and how they drove sovereign credit into subordination and even default. Use the term 'bond' as economically equivalent with large uninsured deposits, both are legally pari passu in insolvency. The deeper you analyze the actual bailout outcomes - I look briefly into Ireland, Spain and Greece in the piece - the more clearly you fathom the gap between the pitiful current practices that hit too few, and sometimes even the wrong investors, and the grand designs promised every day by Europe's financial policy elite. I cannot see a banking union coming out of this process that is more than a trivial fiscal transfer mechanism, i.e. truly accepted by Europe's banks as a mutual risk management obligation. Publication in CES-Ifo Forum 4/2012.
December 2012: Presentation given at the Chambre de Notaires de Paris on the German housing market with some reference to the French market. En Francais. Unfortunately, beyond the monodimensional bubble-and-what-can-central-banks-do-about-them discussion we have almost no budget these days to address structural reform issues in housing. Serious housing policy debate in Europe has almost collapsed or never started to begin with when you note that the EU Commission is expressively forbidden by the Treaty to deal with the sector and look around at who sponsors European comparative work. This permits increasingly bizarre tax and fiscal policy distortions affecting the sector, for example my home town Berlin is simultaneously demolishing social housing and starting new social housing programs. The state has more than doubled the property sales tax in the past decade after Germany took the ill-advised decision to regionalize this tax. Increasing policy inconsistencies of this kind seem to be a systemic problem in Europe, adding to systemic banking crisis risk. We finally need a European housing tsar!
November 2012: EBRD asked me to contribute to their 2012 Transition Report. Box 3.6 page 56-57. My key message is that diverging mortgage banking standards and availabilities of rental housing for young and low-income households create hard to overcome obstacle for Banking Union in Europe in the sense of full mutualization. One key free rider problem would be the invitation to simply keep selling variable-rate loans backed by ECB funding to keep pressing these groups into 'private' housing markets. This ignores the imperative to build or maintain social housing stock in a world with increasing income disparities and rising house price to income ratios in the centers of migration.
FEATURED: my colleague Sebastian Schich of OECD has once again hit home on the subject of implicit guarantees for banking arising not just from too-big-to-fail systemic risk threat but also from the currently seen practices of bank resolution. Anybody who has looked up recently Bankia unsecured bond prices knows what he is talking about.
Starting to get ready for the big Jan 2013 Banking Union deadline. As a warm-up, here is why I think that - whatever structure we adopt - we need a mafia hunter at the top of EU banking supervision rather than the product of national or gender quota politics (in German).
Economist quote on the risk of banking crisis amidsts Germany's emerging house price bubble. I have argued elsewhere that German housing market fundamentals are strong, but financial conditions have softened now so much - primarily due to 'Euro angst' as my old colleague at empirica, Rainer Braun, says correctly - that low implied yields become a serious stability risk in some prominent housing market corners. And let's not be fooled by stagnant prices elsewhere: where the turnover is, there is the risk. If this goes on, holding the bag could be once again taxpayers who implicitly guarantee our retail banks that so far - and this in the motherland of Pfandbriefe - refuse to issue long-term bonds to secure low financing cost that could match those low yields. And unfortunately, the Basle III 'Net Stable Funding Ratio' concept is supporting this risk amnesia by assuming that most deposits will roll without repricing risk. Good sleeps over there at the BIS..
October 2012: Why does Germany not take the Polish example and limit mortgage loan maturities to 25 years to stem her house price boom? Ad-hoc commentary (in German). This could be an important precautionary measure, even as German housing lending so far doesn't show much signs of a boom.
EBRD-funded study on Mortgage Regulation in Central and Eastern Europe with an empirical focus on Hungary, Romania, Croatia and Serbia. Here is the presentation held at a seminar in Budapest mid-October.
Comment regarding Why Germany rejected using direct bank recapitalization for Spanish banks (mostly ex-Cajas). I suggest that the German decision to claw back the results of the June eurozone summit come October must be seen in the context of information constraints over the Spanish banking system, of the way Germany's own bank resolution efforts were handled, and of the inconconsistency of direct recapitalization with the overall eurozone bond protection approach focusing on catastrophic risk protection.
Here is the preceding comment of July 2012 in Handelsblatt focusing on the (politically understandable) attempts of the Spanish government to minimize bail-in at former Cajas facing considerable losses at the expense of European taxpayers. Here is the original longer version, journalists tend to heavily cut back. I argued that direct bank recapitalizations through the ESM/Eurozone would have directly substituted capital that Spanish regulators allowed to walk out of the door in the months and years prior to the de-facto insolvency of many banks/Cajas in 2012. I demanded in reaction to this situation in Handelsblatt to proceed with Christian Barnier's bail-in proposals, scheduled for 2018, to immediate implementation and for Spain to remain liable to losses vis-a-vis the ESM.
August 2012: Keith Mullin at IFR Thompson has picked up the amortizing bond proposal here and here, as Ireland has announced amortizing bond issues to fund her National Treasury Management Agency. Also, Chris Whalen has covered the issue in his Institutional Risk Analytics newsletter in August.
Starting to get tired of Eurozone proposals? Here is another one, addressing incentive problems of the European Redemption Fund (ERF) proposal by the Sachverstaendigenrat. In this I call for scheduled amortization for all government debt (the June version is here) issued in the Eurozone, which is the standard practice in finance for other debt funding long-term investment, for instance mortgages. Obviously those that think that governments do not die and debt should be perpetual will not like it. Please read it together with my proposal for a catastrophic / tail risk Eurozone bond insurance scheme run by the ESM, which clearly should impose limits on bond instruments covered. One of the issues I see with the ERF as proposed is a distorted pricing structure, with absolutely no incentive for high-debt beneficiaries to amortize other than Eurozone-imposed law. Or would you voluntarily amortize your cheapest loan? Good luck with enforcing that.
June 2012: Short Zerohedge post on some of the issues facing investors regarding the construction of the Spanish covered bond law. See also my earlier paper on the German Pfandbrief system (German).
Presentation given at IMFs MCM Department on Housing Finance Specialists - Reform or Unwind, as we are faced with dozens of dysfunctional housing finance systems in the overdeveloped world.
April 2012: Short article looking into German house price risk, potential mortgage default drivers and their joint financial determinants, written on behalf of Genopace (B2B platform). There are obviously mitigants, such as Germany's high rental sector share. Problematic however is the impact of low rates on house prices, and in combination with long-term fixing of those rates the high duration gap taken by German banks and accepted by bank regulators (Deutsch).
March 2012: Final version of a paper on Transatlantic Mortgage Credit Boom and Bust – the Impact of Market Structure and Regulation sponsored by the Korean Development Institute KDI. In the paper I look into how the increasingly risky setup of Western mortgage markets - where borrower and lender leverage as well as mismatches have increased over decades as a result of liberalization - has weakened the resilience against global credit booms. Short of returning to special banking I recommend a Volcker Rule for mortgage finance, which would minimize the cross-subsidization of credit through interest rate risk. The paper is part of a forthcoming KDI book publication on housing finance reform.
January 2012: Handelsblatt comment on the rating agencies' sovereign credit rating approach that systematically ignores inflation and devaluation risk for investors, hence creates a policy bias against low-inflation currency zones. Deutsch as published, and slightly longer English version.
December 2011: Presentation given at the Korean Development Institute international conference on 'A New Paradigm for Housing Policy', Seoul Dec 12-13, on the transatlantic mortgage crisis.
November 2011: release of a January 2011 (in empirical substance early 2010) paper on the causes, consequences and ideas for the regulation of foreign currency mortgage lending in Central and Eastern Europe. We analyzed 4 countries in somewhat greater depth than usual: Poland, Hungary, Latvia and Ukraine. Our key point is that - in long-term mortgages - some countries cannot avoid doing FX lending, while others can and should. Those who can't should focus on developing material protections against downside risk for both borrowers and banks rather than doing stop and go with FX product bans.
September 2011: Comment on the U.S. interagency conflict that broke the monetary policy transmission channel for mortgages. Essentially, until the summer of 2011 Federal Reserve zero interest rate policies, sponsored by savers, have recapitalized the former Government-sponsored Enterprises Fannie Mae and Freddie Mac as well as U.S. banks holding mortgage bonds, rather than benefiting U.S. consumers. By the fall of 2001 a consensus seems to be emerging that - even as consumer debt levels remain way too high - at least lower policy rates should be passed through directly to consumers, allowing for indirect positive feedback effects on the industry.
An indirect exchange in Handelsblatt with Allianz SE on EFSF partial sovereign bond insurance: my suggestion to focus on a catastrophic loss instead of first loss insurance here, reaction by Allianz followed a week later.
August 2011: CEPS paper calling for a Eurozone Partial Sovereign Bond Insurance Scheme instead of blue ('Euro') bonds. Partial bond insurance builds on principles already agreed on during recent rescue operations, such as catastrophic risk protection for investors, while reducing the moral hazard contained in the full insurance provided by blue bonds. It strikes a compromise between moderating fiscal cost for net guarantee sponsors and reducing marginal cost of funds for net guarantee beneficiaries to economically sustainable levels.
FT Alphaville post on below paper highlighting the challenge for central banks, courtesy Tracy Alloway.
June 2011: Paper for CEPS Brussels regarding a new European Retail Mortgage Credit regime in consumer protection. The paper takes a transatlantic perspective of the retail mortgage sector crisis we are currently facing, an approach which was not possible to take under the EU DG Markt study below. The launch of the paper was on June 23 at CEPS, with EU parlamentarians Antolin Sanchez-Presedo (Spain), Vicky Ford (United Kingdom) and Sven Giegold (Germany) present and commenting. My brief presentation during the event is here.
March 2011: EU DG Markt launch of the Study on the Costs and Benefits of Different Policy Options for Mortgage Credit, co-authored by Finpolconsult/Achim Dübel with London Economics. The study already had been submitted by the authors in Fall 2009. DG Markt decided to publish it only together with her Proposal for a Directive on credit agreement related to residential property and the associated Impact Asssessment. Visit the DG Markt mortgage credit website. The site has also our extensive legal baseline annex.
I have separated the section of the above study on Early Repayment, which is of potential interest for anybody looking into fixed-rate mortgage lending regulation regimes. Download here.
Other consulting work, e.g. on Brazilian and Mexican housing finance (not to be published).
Jan 2011 Paper analyzing the excessive borrower leverage problem in U.S. mortgage finance and suggesting to address it (inter alia) via contract savings for housing (Bausparen)