Fed issues banks' "stress capital buffer" requirements | Financial firms in Hong Kong assess impact of US sanctions | Connection grows between economics, epidemiology
August 11, 2020
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The Federal Reserve has unveiled the amount of extra capital required of each major bank included in the 2020 stress test. The requirement, dubbed the "stress capital buffer," applies starting Oct. 1 and marks the first time the Fed has imposed bespoke capital requirements.
Full Story: Reuters (8/10) 
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Financial firms are considering their potential exposure to top Hong Kong officials who are the subject of US sanctions announced Friday. The Hong Kong Securities and Futures Commission said it is "not aware of any aspect of the [law] or the US sanctions ... that would affect the way in which firms carry on their normal operations in Hong Kong."
Full Story: Reuters (8/8) 
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The coronavirus pandemic has brought emphasis to the interactions between epidemiological and economic models under a new discipline called epi-macro. "While these early efforts to capture the complex interplay of epidemiology and macroeconomics focus on the short run, there are many more important questions to answer -- the longer-term effects of the pandemic on productivity, unemployment dynamics, and monetary and fiscal policy being chief among them," according to researchers at the Bank of England.
Full Story: Bank Underground (Bank of England) (8/7) 
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Bloomberg Insights
Inadequate LIBOR fallbacks in Hong Kong mean a scramble for BOCHK and Hang Seng banks. Banks have been slow to adopt the Hong Kong Dollar Overnight Index Average.
Full Story: Bloomberg Professional Services (8/6) 
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Corporate debt issuance connected with the coronavirus pandemic has enabled companies to tap capital markets for financing. With funding in place, corporate treasurers are examining risk factors associated with suppliers, customers and banking counterparties.
Full Story: Bloomberg Professional Services (8/6) 
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Low demand is an ongoing obstacle for price appreciation in oil, especially given production increases expected from Russia and Saudi Arabia. "All of these figures paint a picture of crude being squeezed between rising supply and a stagnating demand recovery," writes Julian Lee of Bloomberg First Word.
Full Story: Bloomberg Professional Services (8/10) 
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Trading Trends
A buy-side risk survey found that the coronavirus disruption caused 87% of investors to turn to creative stress-testing, using custom scenarios to get through the selloff in March. Only 67% said the value-at-risk statistical method was useful during the crisis.
Full Story: Risk (subscription required) (8/10) 
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Many euro swaptions market users do not want to participate in a proposed voluntary compensation exchange to handle changes caused by a discounting switch to €STR by clearinghouses last month. Banks say that unless there is a consensus among all the participants, they are reluctant to participate.
Full Story: Risk (subscription required) (8/11) 
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Statistical analysis tells us that the recent investment successes chalked up by day traders are more down to pure chance than skill, writes Mark Hulbert. "For most investors, deviations from an index fund are essentially all luck," says UCLA emeritus statistics professor Bradford Cornell.
Full Story: The Wall Street Journal (tiered subscription model) (8/9) 
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SmartBrief Originals
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Operational Efficiencies
Banks are rethinking technology priorities based on their recent remote working experience, with a particular focus on their trading and sales desks. Many banks have found that traders working from home were more productive, prompting executives to consider downsizing physical office spaces.
Full Story: Risk (subscription required) (8/11) 
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Facebook has created an internal group, dubbed Facebook Financial, to cultivate payment and commerce opportunities with an emphasis on Facebook Pay, which it plans on building for its apps. The group will be led by David Marcus, who is the co-creator of Facebook's Libra cryptocurrency project.
Full Story: BNN Bloomberg (Canada) (8/10),  Social Media Today (8/10) 
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Regulatory Review
Providing banks regulatory relief is an essential policy response to the COVID-19 crisis but one that creates a number of prudential oversight challenges, warns the Financial Stability Institute. This paper notes the most pressing of these challenges will be managing the withdrawal from these support measures.
Full Story: Bank for International Settlements (8/10) 
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The Bank of Japan is seeking feedback on a consultation paper on fallbacks for cash products using JPY Libor. The BOJ has proposed calculating the spread adjustment using a "historical median approach over a five-year lookback period" as well as halt Libor-linked loans and bonds by mid-2021.
Full Story: Regulation Asia (subscription required) (8/10) 
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The Financial Conduct Authority has no mechanism for supervising the racial and ethnic composition of the firms it supervises, despite having a policy priority of promoting diversity. "We recognize there remains much to do to ensure the financial services sector truly reflects the population it serves," the FCA said in a statement.
Full Story: Bloomberg (tiered subscription model) (8/4) 
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Research & Analysis
The coronavirus' disruption of US businesses has been severe and will be felt for the remainder of 2020, though the severity of the disruption varies across industries. Businesses that were heavily leveraged before the pandemic, could fall behind on their debts.
Full Story: Liberty Street Economics (Federal Reserve Bank of New York) (8/10) 
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