Dear SAP Banking community members,
As you know, Standard and Poors evaluation of long-term sovereign credit rating on the United States of America is not AAA anymore.
What are the consequences?
First of all there’re many investment funds which are only allowed to buy AAA bonds and consequently will have to close their exposures in US debt, with likely impact in the spread curve.
But I don’t think this is going to be the main impact.
As you probably know, just after the Lehman Brothers collapse, the Economic Stabilization Act and other initiatives tried to push down interest rates for stimulating the economy.
With the long period of low (even negative) real interest rates getting liquidity from the retail market has been a very difficult challenge for banks, many clients (both corporate and retail) concerned about the economic environment and 2008/2009 credit crunch are keeping high liquidity levels and reluctant to any kind of investment. This could be just the first symptoms of a liquidity trap as Japanese economy has been suffering during its lost decade. Very good paper about this available at http://www.esri.go.jp/jp/workshop/050914/050914Svensson.pdf
On the other hand banks playing its role in this model require collateral in order of getting liquidity from the Central Bank, and this is the weak point of the construction. Downgrading US treasury bonds will make good quality collateral more and more scarce and it will speed the process. The more liquidity is injected in the system QE3, QE4, … QE20, the more liquidity will be drained by the trap.
Making a visual example, imagine a black-hole which grows eating any mater around it and growing bigger and bigger in the process.
Rumors and panic in the stock-market with some European banks this week seem to be a good example of this. (Lehman brothers collapse is another scary example).
At the same time economic agents losing their faith in an economy recovery they avoid any kind of risky asset moving the system deeper into the liquidity trap.
For those interested in the topic, let me recommend you the following paper http://web.mit.edu/krugman/www/trioshrt.html
As I’ve commented several times in this forum, in my opinion we’re facing a solvency problem; liquidity trap and lack of good quality collateral are just side effects of the problem.
On a liquidity trap, low interests rates fail in stimulate the economy because the expectations of economic growth are so low that economic agents are unwilling to invest. In other words, the key factor for triggering a liquidity trap situation is not only the monetary policy but the economic agents’ expectations of growth (confidence in future economic events, solvency).
That’s another example of the necessity of building an Information System for banks which manages from an integrated perspective Liquidity, Solvency and Profit.
SAP Bank Analyzer has been build following these premises, that’s the foundation of the Integrated Financial and Risk Architecture, integrating in the same data model the three dimensions of Financial Planning; Risk, Liquidity and Valuation.
Looking forward to read your opinions.
Kindest Regards.
Ferran.
As you know, Standard and Poors evaluation of long-term sovereign credit rating on the United States of America is not AAA anymore.
What are the consequences?
First of all there’re many investment funds which are only allowed to buy AAA bonds and consequently will have to close their exposures in US debt, with likely impact in the spread curve.
But I don’t think this is going to be the main impact.
As you probably know, just after the Lehman Brothers collapse, the Economic Stabilization Act and other initiatives tried to push down interest rates for stimulating the economy.
With the long period of low (even negative) real interest rates getting liquidity from the retail market has been a very difficult challenge for banks, many clients (both corporate and retail) concerned about the economic environment and 2008/2009 credit crunch are keeping high liquidity levels and reluctant to any kind of investment. This could be just the first symptoms of a liquidity trap as Japanese economy has been suffering during its lost decade. Very good paper about this available at http://www.esri.go.jp/jp/workshop/050914/050914Svensson.pdf
On the other hand banks playing its role in this model require collateral in order of getting liquidity from the Central Bank, and this is the weak point of the construction. Downgrading US treasury bonds will make good quality collateral more and more scarce and it will speed the process. The more liquidity is injected in the system QE3, QE4, … QE20, the more liquidity will be drained by the trap.
Making a visual example, imagine a black-hole which grows eating any mater around it and growing bigger and bigger in the process.
Rumors and panic in the stock-market with some European banks this week seem to be a good example of this. (Lehman brothers collapse is another scary example).
At the same time economic agents losing their faith in an economy recovery they avoid any kind of risky asset moving the system deeper into the liquidity trap.
For those interested in the topic, let me recommend you the following paper http://web.mit.edu/krugman/www/trioshrt.html
As I’ve commented several times in this forum, in my opinion we’re facing a solvency problem; liquidity trap and lack of good quality collateral are just side effects of the problem.
On a liquidity trap, low interests rates fail in stimulate the economy because the expectations of economic growth are so low that economic agents are unwilling to invest. In other words, the key factor for triggering a liquidity trap situation is not only the monetary policy but the economic agents’ expectations of growth (confidence in future economic events, solvency).
That’s another example of the necessity of building an Information System for banks which manages from an integrated perspective Liquidity, Solvency and Profit.
SAP Bank Analyzer has been build following these premises, that’s the foundation of the Integrated Financial and Risk Architecture, integrating in the same data model the three dimensions of Financial Planning; Risk, Liquidity and Valuation.
Looking forward to read your opinions.
Kindest Regards.
Ferran.
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