article 1-5
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article_1-5.docxArticle 1
Authors: Christian Ewerhart, Nuno Cassola, Steen Ejerskov, Natacha Valla
Title of the article: Manipulation in money markets
Journal Name: International Journal of Central Banking, March 2007
Summary
The article talks about the impact of manipulation in the implementation of the monetary policy. The authors claim that as a result of the impulsive reactions to the fundamental index of interbank interest rates, manipulation has turned out to be a major challenge for the operational enactment of the monetary policy. Therefore, to address the issue, the authors have focused on a microstructure model whereby a commercial bank can have a strategic alternative to the standing facilities of the central bank. They typify equilibrium where market rates are positively manipulated. The findings of the study prove that manipulation can be lucrative for a commercial bank with appropriate ex-ante features. And so, manipulation will continue to be a characteristic of equilibrium albeit stakeholders in the derivatives market create rational prospects regarding potential manipulation. The authors conclude by recognizing that the monetary authority has controlling techniques to fight manipulation and that further vigilance is required to ascertain that there is no operational manipulation (Ewerhart, Cassola, Ejerskov, & Valla, 2007).
Key points
The principal ideas discussed in the article regarding manipulation in the money markets include:
· Manipulation is a potential concern in money markets, particularly when a commercial bank holds a profitable position in which it can gain from may be an increase in interest rates.
· From an operational viewpoint, manipulation can increase volatility to the immediate interest rate thereby complicating the liquidity control of both the central bank and the commercial banks.
· Manipulation can have an impact on the market's confidence during a smooth execution of monetary policy, which will in turn affect the long-term refinancing conditions thereby upsetting the effectiveness of the monetary policy.
· The decision to manipulate a market by a commercial bank is contingent on factors such as the bank's general trading and deposit capacities, its readiness to take premeditated measures in search of profitable frontiers as well as the internal distribution of its risk budget between money markets.
· Competition amongst potential manipulators cannot impede the likelihood of manipulation.
· The immediate reaction by the central bank can help in reducing the volatility in the money markets caused by manipulations.
Reaction to the article
The microstructure model used in the study to show that manipulation can be lucrative for a commercial bank is efficient to illustrate the nature of financial markets. The model implies that investors can benefit from insider information and use it to change the nature of financial markets. In the financial stock market, insider information may lead to trading of stocks between investors rather than directly from the company to investors (Hillier, Grinblatt, & Titman, 2011). As a result, the company will not gain from the trade since the money will be exchanged between two investors. This is similar to the manipulative nature of the commercial bank that ultimately leads to money market volatility making it difficult for the central bank to control the money markets.
Furthermore, the authors stress that the manipulation by the commercial bank can only be reduced through the immediate reaction by the central bank (Ewerhart, Cassola, Ejerskov, & Valla, 2007). This will reduce the likelihood of market volatility or changes in interest rates that would be profitable for the manipulators. Interest rates can be altered by many factors including inflation, the liquidity premium and risk-free rate, which in turn affect the value of money (Saunders & Cornett, 2012). According to the study, manipulation may result in interest rate volatility. Therefore, regulators of financial markets need to respond immediately to any anomalies in the market such as insider trading to prevent unplanned alterations to the market interest rates. In conclusion, the study clearly gives an illustration of the consequences of inadvertent change in interest rates on the financial markets.
Article 2
An economy should have a stable financial system. It is observed that after the Great Depression in the financial system, several regulatory measures were implemented. The regulatory policies that were enacted have been seen to be successful in creating a safer financial system than it was before. However, it is imperative to note that despite the fact that the measures achieved their goal in solving the problem of the Great Depression, it is still not adequate for addressing the risk in the financial system. The economic environment is changing gradually therefore calling for a need to use more efficient measures to ensure that financial stability is maintained. This essay is going to do a review on the article concerning the major elements of creating a road to financial security.
The financial system can be said to comprise of two parts. The markets where the resources exist, and prices determined and the institutions such as the banks that have the balance sheets to monitor and screen. These two elements have to work in cooperation so as to create stability and balance of the financial system. Banking regulation aim at minimizing all forms of risk that the individual institutions may incur. Liquidity requirement is meant to constrain any liquid liabilities that may result in funding illiquid assets. It is brought into effect by the liquidity coverage ratio and the net stable funding ratio. They aim at limiting liquidity transformation and controlling the level of maturity transformation respectively. Moreover, they seek in ensuring that banks have an adequate stock of high-quality liquid assets. It ensures that it can be converted easily into cash to meet liquidity needs in case of a stress scenario (Cecchetti & others, 2015).
Capital regulation is another means of ensuring financial stability. It is masked with implementing of discretionary time-varying capital requirements and maintaining a steady state level of capital. Notably, any changes to the capital requirements can lead to influence on the computation of the related risks and the capital itself or the ratio between these two. It is observed that on an unweight basis capital should be in the range of ten percent. On the other hand, risk-weighted capital requirements should be in the range of ten to twelve percent. Banks should ensure to maintain a measure of risk sensitivity. It will necessitate the avoidance of loading up on risky assets. One monetary policy that can bring this into effect is the use of rules that are based on the changes in the economic activity. It will be more efficient than the standards based on the level of economic activity.
Markedly, time-varying capital requirements is seen to affect the economic activity similarly. It influences asset prices, changing loan supply, financial conditions and borrowers net worth. Macroprudential policy is observed to affect political resistance and governance (Cecchetti & others, 2015). Moreover, time-varying capital requirements concerns itself with the ability of decision makers to make timely decisions and responses. Information and recognition flags are set to indicate the level of vulnerability of the financial system. On the other hand, the implementation and transmission lags are essential in determining the duration it will take for the policy makers to increase the capital requirements and the rate of impact it will have on the financial system. It is worthy to note that a higher capital requirement than the one that is currently in place is needed to promote a stable financial system. Time-varying discretion policies should be avoided to prevent any form of risks.
References
Cecchetti, S. G., & others. (2015). The Road to Financial Stability: Capital Regulation, Liquidity Regulation, and Resolution. International Journal of Central Banking, 11(3), 127–139.
Article 3
In this case, we look at the primary issue of article review to get the message in a detailed form. The paper will focus on “Manipulation in Money Markets” by Christian Ewerhart(2007). In the main currency areas, interest rates derivatives are among the most actively traded financial instruments. Manipulation challenge has increased for the operational implementation of monetary policy, with figures of positions reacting instantly to the underlying index of daily interbank rates. In this case, interest rates are manipulated positively following strict probability. In the monetary policy implementation, a large number of central banks globally have paid attention to increasing some short-term money market rates of interest. Various financial institutions would increase policy rates to attract more revenues since market rates are expected to rise. The strategy this banks use to achieve this is borrowing money from local banks and later deposit the money with the central bank. The manipulator net position will increase since the rates rise temporarily (Ewerhart et al., 2007).
In this case, manipulation took place in several episodes. The first episode was between may24-June 23, 2000.During this period, the policy rates rose from 3.75 percent to 4.25%. There were several speculations on the policy switch and tie scale. In the year 2000 the prices doubled, and the impact was felt on the bank system changing. Ahead of a crucial part of maintenance changed the liquidity conditions recourse, and there was an immediate increase of the EONIA. However, the second episode of money market manipulation took place in April 24-May 23, 2003. During this period, there was a fall in the policies by 50. EONIA rose beyond the people expectations or rather a minimum point. Following this reaction, a response was put forward and borrowing a large amount of money was the response. The act had immense impacts since EONIA fell immediately.
For two reasons manipulation is undesirable mainly for a central bank. Manipulation has the likelihood to add capriciousness to the overnight rates and to obfuscate the liquidity management of commercial and central banks, from an operational perspective. In a smooth implementation of monetary policy manipulation may impact the market’s confidence, which may affect refinancing conditions on long-term and, therefore, monetary policy effectiveness (Ewerhart et al., 2007). Having sufficient information is important in this case for traders (participants) to avoid any manipulation. In the money market, there is various ways manipulation takes place.
In case of high money circulation in the market, the central bank will correct the situation with increasing borrowing rates, and this encourages savings. People will save more and borrow less and this in turn lowers money circulation. However, with small money distribution the central bank corrects this case through reducing interest rates to increase borrowing and discourage savings. The additional value for her derivatives position and cost of taking control of the market prices are the challenges the manipulator faces. The trader will be induced to leverage her derivatives position and to in turn manipulate the money market, as it turns out that the tradeoff will sometimes, but not always affect the trader. A public good lowers individual incentives for manipulation, yet the problem is not entirely. Apparently, this problem (manipulation) requires solutions, and there are a number that have been proposed. Fine tuning and limiting of the path set by the firm facilities are some of the corrective policies.
References
Ewerhart, C., Cassola, N., Ejerskov, S., & Valla, N. (2007). Manipulation in money markets. Swiss Finance Institute Research Paper, (29). Retrieved from http://www.ijcb.org/journal/ijcb07q1a4.pdf
Article 4
Author of Article: Ricardo Sanchez Serrano _____________________
Title of Article :_ Issues Affecting the Banking Industry ____________________
Journal/ Newspaper/ Web site—Name and date: _____ http://www.thebanker.com January 2010 ____________________
Summary of Article:
The article is about the banking industry and financial institutions. The banking industry has a major role to play in the market development and how they operate. They help countries and communities by lending and raising money as well as getting involved in the development. Their involvement in the development sector helps because the banks institutions tend to face some challenges at times. Some of the specific financial issues faced include the ethical issue. The financial institutions that include all sort of banks, pension funds, credit agencies, insurance, private firms among others are all sources of wealth. How financial institutions perform is based on how well they can maximize their financial assets, how well their investment decisions are and the return they get from them, the profits they get from loans, credits, issued equity and the bonds. Financial institutions are now sophisticated and complex on how they run their operations, their services, and products. Everything tends to be a big puzzle with these banking institutions as time progresses like how they invest their resources and promote their credit facilities.
Key Points:
The key points derived from this article are:
· Banks today cannot give full details about their clients/customers like where, when and how they operate. This is because they do not follow up as much, and the customers change and keep changing as the banks also do.
· Banks are intermediaries of money, and so it is important to understand how the bank handles it. The individual investors own the money that the bank invests and, therefore, have a right to follow up with the specific banking institution. The financial institutions supply and move the money. In case anything goes wrong, the banking sector is responsible and not the individual investor.
· Banks are a source of generating wealth for its shareholders. They do this by charging interest rates on loans and other activities that do need financing.
· The current events that affect these financial issues include usury whereby, banks charge unreasonable and unfair interests and tend to take extra benefits from their customers. They encourage customers into taking credits that in turn have very high-interest rates hence going into huge debts.
· Engaging in speculative investments is yet another issue. The banks practice investments and credit lending practices that cannot be trusted. They take an unnecessary risk that in turn can cost the banking institution. This can also lead to losses for the customers, and their wealth destroyed completely. Financial professionals and bankers should be responsible and take responsible action when lending and investing their clients’ money.
· Banks give loans to companies and individuals and them in turn use the money to market. Some of the companies financed use the money to run illegal businesses like selling illegal firearms and investing in weapons and arms or financing illegal groups or cartels in different countries. This is possible because no regulation(s) prevents the financial institutions from lending money to companies or to invest in them.
Your Reaction to Article:
The article gives an insight of how the bank and financial institutions run as well as the things that go on and helps the people understand that as customers and individual shareholders, they should be involved and understand how their money is being used. The institutions should always do a background on the companies involved in investing or giving loans. It encourages the individual investors and helps them understand that they have a duty to pressure the banks and regulators and know how their resources are being used.
Article 5
Author of Article: Ricardo Caballero and Arvind Krishnamurthy.
Title of Article: Exchange Rate Volatility and the Credit Channel in Emerging Markets: A Vertical Perspective.
Journal/ Newspaper/ Web site—Name and date: http://www.ijcb.org: 19th May 2005.
Summary of Article:
The article evaluates how foreign exchange volatility affects the ability of financial institutions to provide credit in emerging markets. The author notes that volatility in exchange rates leads to a sudden decrease in capital flows. They note that during the moderate crisis, monetary expansion will solve the problem. However, during a severe crisis, the policy effects significantly vanishes. The higher exchange rate reduces the dollar value of domestic collateral to an equilibrium point with domestic financial markets and the external constraint. In such a context, the expansionary monetary policy increases the value of internal collateral but exacerbates the depreciation of exchange rates. Therefore, the policy has minimal effect on the aggregate financial activities.
Key Points:
· The credit constraints in emerging markets originate from the country level or the market level.
· The paper evaluates the insurance effects of monetary policy.
· The paper also assesses whether contractionary or expansionary monetary policy is the best in offsetting foreign exchange volatility.
Your Reaction to Article:
One would agree with the author’s conclusion that monetary expansion policy have minimal effects during the severe crisis as witnessed in Greece crisis. However, in stable economies where the change in the exchange rate is sudden, expanding the money market serves to shift the equilibrium position in a firm’s credit (Devereux, 2003). Expansion policies increase a company’s lending capacity due to the increased liquidity. However, the increase in cash means the firm will have to offer loans at a lower interest rates. Engel (2003) also arrives at the conclusion by noting that during the crisis, the dollarized balance sheets undo the benefits of lowering interest rates.
Secondly, one would concur with the authors’ view of how monetary policy affects a firm’s insurance decisions. An individual monetary rule influences a company’s ex-ante decisions due to the relative price of domestic to international liquidity (Caballero, 2004). If a corporation foresees a dogged defense of exchange rates, it also anticipates a decline in the value of domestic and international liquidity value. For instance, if the Yen depreciates against the dollar, the government may initiate expansionary policy by lowering the interest rates. However, most financial institutions will prefer to buy more dollars while withholding their foreign exchange reserves as they fear the Yen will continue to depreciate.
