Ugo Lagrotta’s Post

The ECB document highlights the critical role of Repos and FX Swaps as funding and monetary policy transmission instruments. As the Eurosystem gradually withdrew from Euro area government bond markets and excess liquidity is being reabsorbed, the role of Repos (and FX Swaps) has become even more critical in the liquidity and funding planning of banks and financial institutions. Key takeaways: Banks should have less “mechanical” and more managerial approach to funding and liquidity. Liquidity management and planning involve examining a bank's operations and its liquidity requirements under “alternative scenarios”, including changes in minimum reserves requirements. Liquidity planning involves also preparing to tap multiple and alternative sources of liquidity, not only the HQLAs, including some that have not been used for a long time. 

FED Balance Sheet Normalisation: The FX-OIS Basis metric The article from St. Louis Fed highlights the key metrics that are monitored for determining when the FED Balance Sheet normalisation should end. The fact that reserves are "abundant", well above the minimum level required to maintain adequate liquidity, credit risk premia are compressed, helps to explain why the FOMC does not feel compelled to cut interest rates. The paper analyses the dynamics of the Repo rate and its relationship with the Interest Rate on Reserve Balances (IORB) to identify situations of stress in the funding market, as occurred in September 2019. In that occasion, an additional indicator of stress in USD funding market was the widening of the FX-OIS basis (>300bps), with many traders/treasurers using FX Swaps as instruments for USD funding purposes getting burnt. The FX-OIS basis measures the interest rate differential implied in FX Swap prices versus the OIS rates differential. Currently, both the IORB versus Repo rate and the FX-OIS basis differentials are tiny and relatively stable, signalling that Quantitative Tightening may end soon. As soon as the reserves reach the FOMC "desired" level, they will feel more comfortable to reduce interest rates. (Thanks to Amalia Estenssoro and  Kevin L. Kliesen)

Private Assets Investments: The Crucial Ability to Be “Selective” and the Alignment of Interests Given that private equity investments bring fruits in the long run, it is absolutely important that interests are “aligned” not only with the current owners of the private company, but also with the heirs, the next generations. #pictet #privateequity

La scelta di UBS di espandersi in Italia è "azzeccata" e perfettamente allineata con gli obiettivi di leadership strategica nel core business Global Wealth Management. Si stima che in Italia il segmento HNWI (individui con ricchezza >$1m) possa crescere di circa il 40% nei prossimi anni (800'000 unità) mentre il segmento UHNW potrebbe crescere del 9-10%. UBS, integrando ed utilizzando al meglio la struttura di CS Italia, può incrementare la propria quota di mercato generando utili considerevoli con un consumo di risorse finanziarie (RWAs) limitato. #ilsole24ore

SNB reduces Policy Rates to 1.5% The SNB is the first mover in cutting interest rates amongst the various Central Banks. In the past, the SNB has followed the decisions of FED and ECB to keep the interest rate differential between CHF and other CCYs (EUR and USD primarily) within a corridor. Not this time! From the attached press release, the decision to lower the rate to 1.5% stems from lower inflationary pressures in Switzerland (even if the cost of mandatory health insurance has risen sharply, but that cost is not included in the basket of goods and services used to compute the inflation metrics) and from the CHF strength. Post decision, the CHF lost nearly 1% against EUR and USD, but the depreciation is nearly 5% if compared with levels at the end of 2023. This will have a positive impact on the financial accounts for the Swiss Wealth Managers (reporting in CHF) which earn commissions on the Assets under Management in USD and EUR, via the so called FX "translation risk".

The attempt to crackdown on window dressing using "average values" rather than end of period snapshots may end up reducing transparency on risk exposures. I expect the major banks to challenge the proposal. In my opinion, they should enhance better alignment between accounting treatments and the real "economic" exposures

UniCredit Issues EUR1bn Tier 2 Bond While the Republic of Italy BTP record issuance is grabbing the headlines for the sovereign debt market, it is Unicredit #Unicredit with a EUR1bn Tier 2 bond with 10 year maturity (non callable before 5 years) that dominated the scene of corporate issuances today.  The bond was massively oversubscribed with orders in excess of EUR2.75bn, driving down the spread from 315bps to 280bps over the midswap rate. The spread is quite tight, for the following reasons: 1) The subordinated nature of the notes versus senior notes and the fact that they rank above the AT1 bonds, which are equity-like capital instruments. 2) The spread is reasonably close to that of notes with better credit rating (Unicredit subordinated debt rating has been cut by Moodys to Ba1 from Baa3, while BBVA and HSBC equivalent ratings are Baa2 and Baa1 ). UniCredit has not issued Tier2 bonds since 2020 and today's issuance can be considered as ordinary funding activity aimed at optimising the banking group liabilities structure.

Why Banks Failed in 2023 Dear Network, I share with you a documentary from FT #financialtimes I allow myself to summarise a 20mins video in a few main points: - Poor Financial Risk Management (particularly in Treasury and ALM areas) - Accounting Rules not always aligned to the true "economic" profile of the transactions (e.g. AFS and HTM bonds). - After the financial crisis, Regulation focused on "banks solvency" increasing capital requirements, but insufficient focus was given on liquidity risk management. - Higher capital requirements for banks lead to the proliferation of the unregulated "shadow banking" system. Excessive financial leverage re-entered the banking system via highly leveraged bets which caused losses to the banks worldwide. - Banking ultimately is a confidence game, based on trust. When trust goes missing, it is game over! Finally, thanks to you all for the valuable comments to my articles and posts throughout the year 🙏 Best wishes for a peaceful and prosperous 2024