This section introduces credit spreads from a bond pricing perspective. Looking at bonds is not completely inappropriate, as banks do hold bonds in their liquidity portfolio. The illiquid loans on bank balance sheets can be analysed in the same way, albeit bankers might use different terminology.
I have returned from an unplanned trip, caught some kind of virus, have a new consulting project, and half the main floor of my house is being refitted. As such, I have been even less on top of current economic events than usual. I am just putting this article up to let readers know that I am still around and thinking of them. My main concern is finishing off the next section of my banking manuscript. Once the dust (literally) settles on my house, I will take a look at the inflation manuscript.
Wholesale payments systems are the glue that ties the banking system together. These systems allow banks to make monetary transfers to each other – either on their own account, or on the behalf of clients – quickly and more importantly, safely. The payments system allows bank clients to transfer money electronically to one another without worrying about the exact mechanism for the transfer.
The focus of this book is on how bank lending and liquidity flows interact with the wider economy. So long as credit losses remain at acceptable levels, they do not interrupt those flows. Given that the focus is elsewhere, this section will just offer a high-level perspective on how banks manage credit risk, without attempting to discuss what strategies individual banks use to analyse credit risk. Although this section will mainly refer to lending decisions, liquidity provision to capital markets participants also requires credit risk analysis.
To repeat once again my monotonous point: financial crises generally need some form of credit event to make them interesting. Risk assets losing value will cause some leveraged players to blow up. (Pretty much any exciting market movement can ultimately be traced to one or more hedge funds shifting off this mortal coil.) Although a hedge fund blowing up will cause some credit concerns with its counterparties, in most cases there will be enough unscathed market participants to step into liquidations, and once the dust settles, people go back to whatever they were doing.
I have a need to rant as a result of recent discussion of yet another Universal Basic Income (UBI) study on Twitter. Rather than deal with the ugly political realities of a UBI, UBI proponents insist on doing studies on a tangential topic (how do people spend regular cash grants?).
I use a standard definition of a UBI where all living adult citizens receive a fixed monthly payment from the government. The idea is that the fixed monthly payment provides a guaranteed minimal standard of living without any other income sources needed.
This article is a draft section from my banking manuscript. It fits into a chapter on bank risk management. This article is an introduction to basic bankruptcy procedures, which needs to be understood before worrying about how banks manage the risk of their customers defaulting. This version of the section includes some text about bank resolution procedures that was previously published (but modified here).
