Regulation / banks

Money market reform focused on safety rather than term premium

Time is pressing – that is the unanimous opinion of the working group for a risk-free reference interest rate in the Eurozone. The current overnight reference interest rate in the Eurozone, the Eonia (Euro OvernIight Index Average), may only be used for new contracts until the end of 2019 and after that for existing contracts, if need be. The ECB considers ESTER (Euro Short-TErm Rate) to be the hottest succession candidate, even if the decision on this has yet to be passed. However, ESTER is trading at an average nine basis points lower than the Eonia which could hamper the transition. While a spread on ESTER that, for example, declines over time would ease the reference interest rate transition, conceptual simplicity and the tight time frame argue for a clean cut. Unlike Eonia, Euribor (Euro InterBank Offered Rate) could continue as a benchmark beyond 2019, but this does not mean…

German banks tightening credit guidelines for corporate customers

As revealed in the current Bank Lending Survey evaluation for July, a small majority of the institutions surveyed would like to introduce stricter guidelines for granting loans to corporate customers in the months ahead. This will affect both small and medium-sized enterprises as well as large enterprises. By tightening their credit guidelines for the first time since April 2015, banks are responding to the current economic slowdown. The deceleration in economic growth to be feared for this year and next can be largely attributed to the international trade disputes as well as other geopolitical risks. The strongly exporting German SMEs and large-scale corporates would be particularly affected by a further escalation of protectionist measures. However, there is no reason at this juncture to fear a slump in loan granting to corporate customers: on the one hand, only a small majority of banks have so far planned to tighten their credit…

Fed Chairman confirms current monetary course

Yesterday’s hearing of Fed Chairman Jerome Powell as part of the six-monthly monetary policy report before the Senate’s banking committee was eagerly awaited. In his opening speech, Powell was optimistic about the economic development. He believes that the solid growth rate this year so far is attributable to several factors: robust job growth, rising after-tax incomes and optimism among private households. Backed by a strong labour market, inflation close to the two percent target and balanced risks for the growth outlook, the FOMC considers further interest rate hikes to be the best monetary course – at least for now. Powell’s parenthetical „for now” can be interpreted to mean that the course of monetary policy has not been switched to autopilot. In other words, key interest rates will not be raised as a matter of course but in consideration of the current underlying conditions. More interesting than the prepared opening speech…

Protectionist policies at the cost of growth and prosperity

More and more countries throughout the world are pursuing a protectionist policy. If this development prevails, it would put an end to globalisation. The era of low interest rates would come to an end and inflation would accelerate. In short: protectionist policies are at the cost of growth and prosperity. World-wide we are currently witnessing a revival of protectionist forces. Populist movements are gaining influence in many countries, often relying on nationalist ideologies and propagating economic and social isolationism. The battle against globalisation is a central theme shared by populists from different countries. US President Donald Trump is a prime example in this regard, but he is by no means alone. In large parts of Europe similar positions are also gaining ground. And where populists are not yet already part of government, they are often setting the parameters of political debate. Yet it was globalisation that decisively shaped the economic…

The Fed embarks on a steeper rate-hike path according to the “trial and error” principle

The Fed remained yesterday evening on the monetary-policy tack which it has been pursuing in recent months, raising the fed funds target range by 25 basis points. At the same time, the expectations for the rate-hike trajectory going forward were revised upwards: the new median forecast by FOMC members sees the Fed tightening monetary policy twice more over the remainder of the year. And for the coming year a total of three tightening steps can be expected. As a result, the Fed’s overall tenor has shifted in the direction of a slightly more restrictive monetary-policy stance. FOMC members’ individual projections for GDP growth reflect confidence about the future trend of cyclical momentum while their prediction for inflation is that the rate of change is destined to remain moderate at only marginally in excess of 2%. The verdict was reached unanimously. By and large, the Federal Reserve has acted in accordance…

Are European zombie companies facing a wave of bankruptcies after the increase in interest rates?

Corporate bankruptcies have eased in most European countries in recent years, helped by the economic recovery and extremely low lending rates. Although the resultant cost-savings are welcome on the corporate front, there is a danger that the prolonged low interest rate environment might favour the emergence of zombie companies. The concerns are directed at the time when interest rates will rise again significantly. This is likely to overextend many zombie companies and could trigger a wave of bankruptcies. There is little risk in Germany and France that a significant rise in interest rates could lead to a wave of bankruptcies. Companies here mainly use medium and long-term fixed interest rates that secure low interest rates over a longer period of time. The low non-performing loans ratio for corporate loans in particular demonstrates a lack of zombie companies. On the other hand, Portugal, Italy and Ireland would have to be worried…

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