Credit markets now a source of safety in global finance | Ratings agencies see veiled danger in loan markets | Surge in junk borrowing largely churn
October 17, 2017
IACPM SmartBrief
Credit Markets
Credit markets now a source of safety in global finance
With central banks focusing on tamping down market volatility while holding borrowing costs low, credit markets are emerging as the new insurers of the financial system, according to Srinivas Thiruvadanthai, research director at the Jerome Levy Forecasting Center in Mt. Kisco, N.Y. In these circumstances, "the real beneficiaries are equity investors and government bond investors," with credit investors "effectively selling a put option to the borrowers [equity holders]."
Bloomberg (free registration) (10/13) 
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Ratings agencies see veiled danger in loan markets
Post-crisis structural changes in leveraged loans are obscuring the danger posed by these markets, which appear healthy due to falling default rates, according to ratings agencies. Moody's says the lower end of the credit spectrum may see a doubling in default rates in the next downturn due to increased use of loan-only deals, aggressive covenant structures and poor documentation.
Reuters (10/13) 
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Surge in junk borrowing largely churn
Junk-rated companies are issuing dollar-denominated bonds at the fastest pace in five years, a scenario conventionally interpreted as one of taking on more leverage at lenders' expense, writes Lisa Abramowicz. But there's more to the situation, which largely amounts to churn with the main beneficiaries being Wall Street's bankers and lawyers.
Bloomberg (free registration) (10/13) 
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As banks pull back, direct lenders adopt new strategies
Pension funds, sovereign wealth funds and others are putting their money in direct lenders and filling a credit need that big banks have largely abandoned. Direct lenders are offering more attractive covenants and pricing as they explore competitive strategies amid tougher competition in the middle market, according to a report by the Alternative Credit Council, which also notes that firms are taking advantage of regulatory changes to get into new markets.
Financial Times (tiered subscription model) (10/12),  Reuters (10/10) 
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Booming corporate credit market sparks product releases
Surging demand in the corporate credit market is prompting investment banks to issue innovative derivatives products such as total return swaps, involving increasingly complex bond combinations.
Financial Times (tiered subscription model) (10/16) 
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Investments & Capital under Stress Testing
In this paper, we formalize risk measures that help organizations make optimal investment decisions and capital deployment under CCAR or DFAST-style stress testing requirements.
Regulatory and Accounting Issues
Fed considers model transparency for stress tests
A proposal floated months ago to publish model-implied losses for a range of hypothetical portfolios is winning over bank supervisors at the Federal Reserve. With this information on hand as part of the Fed's stress tests, banks could adjust their capital models to better accommodate the expectations of regulators.
Risk (subscription required) (10/9) 
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EU, US reach compromise on derivatives trading rules
EU and US negotiators said they have come to an agreement to recognize each other's rules governing derivatives trading, a compromise that heads off a disruption in trading when Europe's revised Markets in Financial Instruments Directive takes effect in January. The mutual recognition of trading rules is likely to be finalized by November.
Reuters (10/13),  Politico Pro (subscription required) (10/13),  The Wall Street Journal (tiered subscription model) (10/13),  Financial Times (tiered subscription model) (10/13) 
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Treasury: ABS should count toward capital requirements
The Treasury Department has called for some asset-backed securities to be among acceptable high-quality liquid assets for the Basel Committee on Banking Supervision's liquidity coverage ratio and net stable funding ratio to make assets such as housing loans more attractive. Industry groups have called for inclusion of private-label residential mortgage-backed securities, rather than limiting the list to assets issued by government-backed housing lenders.
Risk (subscription required) (10/16) 
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Official: Basel III is close to becoming reality
The Basel III banking regulatory reforms are close to being completed and it is "fairly clear what the result will be," William Coen, secretary-general of the Basel Committee on Banking Supervision, said in a speech to the International Monetary Fund. After work on Basel III is finished, the committee plans to take a break before launching any new policy reforms, he said.
Bank for International Settlements (10/13),  Politico Pro (subscription required) (10/13),  Global Investor (subscription required) (10/13) 
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EBA calls for post-Brexit flexibility on bank risk models
The European Banking Authority called on national regulators to take a flexible approach to banks' internal risk models after Brexit. Banks that relocate operations from the UK to the EU because of Brexit should be allowed to rely on UK approvals until there is time for EU regulators to review them, the EBA said.
European Banking Authority (10/12),  Politico Pro (subscription required) (10/12),  Financial News (UK) (tiered subscription model) (10/12) 
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Largest US clearinghouses pass stress test
CME Clearing, ICE Clear US and LCH have passed a stress test to show they can generate enough liquidity to weather a major market disruption, according to the Commodity Futures Trading Commission. The test posed an extreme but plausible scenario in which two major clearinghouse members defaulted.
Reuters (10/16),  The Wall Street Journal (tiered subscription model) (10/16) 
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Oil & Gas: ‘Risk Off’ Phase Established?
The relationship between equity prices and credit risk typically depends on the prevailing risk appetite regime. For asset prices, the 'Risk On' phase is one where high-risk assets are the strongest performers, and vice-versa for 'Risk Off'. Contributed bank data collected by Credit Benchmark suggests that the Oil & Gas industry has moved strongly into the 'Risk Off' phase over the past year. Learn more
Trends in CPM
Extra capital buffers seen as bank protection against asset bubbles
The usual methods of calculating risk are being distorted by price bubbles, and banks should consider additional capital buffers as an offset. That's according to Cornell University academic Robert Jarrow, who says the bubbles suggest a so-far unacknowledged threat.
Risk (subscription required) (10/13) 
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2017 IACPM Annual Fall Conference - Registration is ongoing
The IACPM will keep online registration for both their Educational Seminar, taking place on Monday, Nov. 6 and their Annual Fall Conference, which takes place on Tuesday, Nov. 7 and Wednesday, Nov. 8, open until Nov. 1.

For information regarding both meetings and to view detailed agendas, the IACPM suggests you visit their website at You may also contact Dani Gelband for more information or for help with registrations.
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