covered bonds

This Bloomberg article about accounting differences between the US and Europe for derivative-y things comes down pretty squarely on the side of Europe, which is to be expected: European (well, IFRS) standards tend to gross up the size of bank balance sheets, compared to US GAAP standards. Grossing up bank balance sheets makes for bigger numbers and scarier banks, and “US banks are scarier than they seem” is more newsworthy than “European banks are less scary than they seem.” Also intuitively truer. As Bloomberg puts it:

U.S. accounting rules allow banks to record a smaller portion of their derivatives than European peers and keep most mortgage-linked bonds off their books. That can underestimate the risks firms face and affect how much capital they need.

Or it can overestimate the risk European firms face. Or any estimating of risks based on any measure of balance-sheet size is necessarily indeterminate. Risk happens tomorrow, not yesterday.

Anyway though some of these accounting differences are puzzling insofar as they are not accounting differences. Here is the mortgage bond one: Read more »

  • 09 Jul 2008 at 10:15 AM

Will Paulson’s Proposal Revitalize Subprime Lending?

It’s often said that regulators are always solving the last problem while the next one creeps up on the markets unaware. That notion was certainly tempting yesterday as everyone who’s anyone in market regulation gathered at that conference near Washington, DC. But we couldn’t help thinking that despite speeches from the Fed’s Ben Bernanke, Treasury’s Hank Paulson and JP Morgan’s Jamie Dimon, the folks there didn’t even get as far as addressing what led us to the current financial crisis.
Let’s take Paulson’s proposal that covered bonds could restart the mortgage market. Ensuring that mortgage originators and those securitizing the problems have ongoing skin in the game may in fact improve the quality of those bonds. But Paulson made his proposal in the context of talking about reviving loans for subprime market. Will covered bonds restart interest there?
Not very likely.

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