In a guest speech prior to introducing a series of panel discussions in the morning session of day 2 at Gaim International, Robert Jenkins (pictured), external member of the financial policy committee, Bank of England, offered three personal observations from what he termed a macro-prudential regulatory perspective. Before doing so he candidly explained his role by recounting a story he told his wife. Said Jenkins anecdotally: “We’re trying to protect the banks from the financial system and the financial system from the banks!”
Jenkins’ first observation, in relation to the Greek situation and market stresses in the eurozone, was that containment was not enough. “The entire premise of the eurozone was that cross-border risk did not exist,” said Jenkins. If that were true, Germany today would happily lend to its counterparty Greece in the south. Unfortunately it’s not. The Greece situation to say the least has introduced a degree of doubt.
The problem, said Jenkins, was that capital was flowing out of countries that need it to countries that don’t need it.
“Containment is not enough. Confidence must be such so as to completely banish cross-border risk and until this is achieved the euro will continue to unravel and economic progress will be constrained,” commented Jenkins.
Jenkins’ second observation was that the numbers involved in the global financial system had become too large, noting that of the USD600trillion in global derivatives outstanding, one third of those contracts are euro-denominated. Billions, said Jenkins, are for babies: “You are the trillion dollar generation.”
Jenkins then went on to quantify the concept of ‘trillion’ by illustrating that if you were to initial a US dollar bill every second it would take 31,708 years to acquire a trillion dollars; an amount equal to 1/600 of the outstanding notional value of global derivatives.
Jenkins’ third and final observation was that the days of unlimited liquidity are over. Many short-term traders, algo traders etc continue to assume that liquidity is freely available and will continue to be so. Bluntly speaking, Jenkins said it would no longer be as regulation causes banks to raise capital requirements and OTCs are moved into a regulated centrally cleared market place.
“Hedge fund strategies will not be able to freely access liquidity – governments will intervene to protect taxpayers. They may not succeed but it’s their right to try and your strategies will not get in their way. Short selling bans in Europe are a mere foretaste of what I expect in the future.”