APAC Investment Strategy, Animal Spirits Report, Quiddity Advisors

Paul M. Kitney, PhD

APAC Investment Strategy, Animal Spirits Report

Quiddity Advisors

Pan-Asia Catalysts/Events

Macroeconomics

<ul><li>Financial regulation following the Global Financial Crisis (GFC) has intended to lower financial sector systemic risk</li><li>A lapse in macro-prudential oversight led to some well-known excesses in the housing finance market in the United States</li><li>The holdings of mortgage securities by a myriad of interconnected financial institutions, combined with high levels of financial leverage, precipitated the GFC when faced with a sudden “liquidity event”, namely a panic in the mortgage securities market</li><li>The regulatory response via the “Volcker Rule” (part of the Dodd-Frank legislation “Dodd-Frank”) has addressed many of the lessons learned from the GFC to limit certain types of investment bank activities such as proprietary trading</li><li>However, an unintended consequence has been a sharp reduction in corporate bond liquidity, which may be a source of future macro-financial instability by the amplification of real economy shocks via the credit channel ("Financial Accelerator")</li><li>Macro policy makers should consider efforts to improve corporate bond market liquidity, including re-thinking the Volcker rule to exclude corporate bonds and should consider credit spreads as a variable in setting monetary policy, so as to offset some of the potentially negative effects created by diminished liquidity.</li></ul>

Financial regulation following the Global Financial Crisis (GFC) has intended to lower financial sector systemic riskA lapse in macro-prudential oversight led to some well-known excesses in the housing finance market in the United StatesThe holdings of mortgage securities by a myriad of interconnected financial institutions, combined with high levels of financial leverage, precipitated the GFC when faced with a sudden “liquidity event”, namely a panic in the mortgage securities marketThe regulatory response via the “Volcker Rule” (part of the Dodd-Frank legislation “Dodd-Frank”) has addressed many of the lessons learned from the GFC to limit certain types of investment bank activities such as proprietary tradingHowever, an unintended consequence has been a sharp reduction in corporate bond liquidity, which may be a source of future macro-financial instability by the amplification of real economy shocks via the credit channel ("Financial Accelerator")Macro policy makers should consider efforts to improve corporate bond market liquidity, including re-thinking the Volcker rule to exclude corporate bonds and should consider credit spreads as a variable in setting monetary policy, so as to offset some of the potentially negative effects created by diminished liquidity.

Animal Spirits Report: Dodd-Frank, Corporate Bond Market Liquidity & Macro-Financial Stabilization