Nuts

By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.

Vaughan Ontario – a suburb of Toronto – is becoming the hotbed of a major issue that is threatening the well-being of Canadians.  The threat is oak trees.

It seems that some parents (well, maybe one parent) is concerned about the health effects for nut sensitive students who may be exposed to dropped nuts onto the property of a school.  They (well, maybe she) wants the oak tree cut down.

I do not want to make light of those with sensitivity to nuts.  I cannot imagine the issues that having anaphylaxis allergies cause.  However I think there are also some arguments to be made about common sense for the bigger picture.

Reading the story in the newspaper, along with the follow-up letter to the editors made me think of some of the similar policies that we put in place at organizations.  In the utopian ideal of eliminating all risks, we may also be eliminating all of the positive upside risks.  I suspect few people truly long for getting a package of peanuts on the plane anymore.  However Canada would be a much poorer country without our oak trees.  How many oak trees have we already cut down in the corporation in the name of risk management?

Global Liquidity and Financial Stability

By Don Alexander, MBA
Associate, RSD Solutions Inc.
Mr. Alexander also lectures at NYU and SunySB

In the wake of the global financial crisis, global liquidity has become a key focus of international policy debates, yet the term continues to be used in a variety of ways. For the purposes of this analysis, the focus is primarily on the financial stability implications of global liquidity conditions; it should be understood as the “ease of financing” in the international financial system.

Experience shows that very low-cost funding in global financial markets can contribute to the build-up of financial system vulnerabilities in the form of leverage, regional imbalances and large mismatches across currencies and maturities.  These are some of the issues that by Jaime Caruana, of the BIS, Assessing global liquidity from a financial stability perspective in a recent speech (Nov. 22^nd) and summarized in this column.

So, what creates global liquidity? Ultimately, it is trust, the root meaning of credit, expressed through private sector activity in which central banks play an important role.

The monetary policy stance, whether implemented by conventional or unconventional means, is best understood as the precursor of private liquidity creation. The central bank influences financing conditions by determining benchmark interest rates and the amount of funds available to settle payments. Ultimately, the generation of private liquidity depends on the capacity and willingness of market participants to supply funding or to trade in securities markets. This activity hinges on their perceptions of risk, risk appetite and broader macroeconomic conditions. Ex post, any build-up of vulnerabilities therefore arises from interactions of market participants within the private sector and with monetary authorities.

The key questions when assessing global liquidity assessments are therefore: how tight are ex-ante financing conditions, do they spur credit creation and how are they transmitted internationally? These considerations suggest that measures of global liquidity should capture actions by central banks and the private sector, particularly by bank and non-bank financial institutions and their cross-border and/or cross-currency operations.

In addition, it is important to distinguish between indicators for the ease of funding conditions per se and for their materialization in bank financing and other forms of credit. Indicators for ease of funding include broad measures of investor risk appetite and the availability of funding for financial institutions. Indicators for results include private sector credit growth, which, when rapid, can signal the emergence of financial vulnerabilities.

This suggests that no single indicator can capture all the various dimensions of global liquidity. Instead, the monitoring of global liquidity requires a mix of measures, such as global credit aggregates and price- and quantity-based indicators that capture the monetary policy stance, financial conditions and risk appetite.

Growth in international credit seems to indicate more benign global liquidity conditions in comparison to past

Imprudent Managers?

By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.

“They argue that ratings are merely opinions and protected by constitutional safeguards on free speech, and that only imprudent investors would take decisions based on them.”

                                    Economist, November 10, 2012

The above is a quote from an Economist article that is discussing a case in Australia that found Standard and Poor’s liable for losses suffered by an investor in a Constant Proportion Debt Obligation.

As the above quote points out, Standard and Poor’s tried to defend itself by saying that its ratings are “merely opinions”, and that only “imprudent investors” would make decisions based on them. 

Ignoring the fact that Standard and Poor’s does not make a good sales pitch for their services, perhaps we as risk managers can (should) adopt a similar approach.  For instance, have every risk report submitted with a statement such as “This risk advice is only an opinion and only imprudent managers would take decisions based on it.”  I am not too sure that would work too well – or would it?