NEW TOOLS FOR SUPPLYING LIQUIDITY TO FINANCIAL MARKETS

The following essay is not intended nor aimed to scholars. Since it is written from the perspective of a practioner to whom you might call financial engineer, financial geek, financial alchemist and so on.

Due to the realism and pragmatism demmanded by the matter in question I will leave conventional theories aside by outlining the current flaws, pitfalls and blunders featured all over first floor banks.

 

Facts and practices caused by several loopholes surrounding Basel Agreements. Then solutions with a minimum inflationary effect or punishment to taxpayers.

 

-Under the current regulation a bank or financial institution allowed to perform passive operations (borrowing from everybody) may eventually employ a financial leverage with a factor equal to 12 against its equity.

 

-Under the old regulation such a leverage was equal to 8, maximum. Both factors are quite wide and they could lead to moral hazard by making legal Ponzi Games, Pyramid Building and Multilevel barters when a bank has no true refund/reimbursement ability since long ago, actually.

 

-When a financial corporation fails and files for bankruptcy the local government or the central bank shoot in a lot of funds belonging to taxpayers by this way substracting resources budgeted for welfare benefits, increasing the amount of monetary base in the financial markets and not increasing the purchasing power of the people. Outcome: Wealth in a few hands and a later inflation phenomenon.

 

-Embedded Investments. The funds not available for anything other than to guarantee payback to savers and creditors. In some countries might cause a constraint against the market cash flow.

 

-Contingencies for Unretrievable Account's Receivables. Such provisions are excellent but do they really have a cash warranty in the corporation's equity?

 

How to supply liquidity by solving the above outlined features?

 

Over The Counter (OTC) operations and Underground Economy. If the stock traded is listed on a market, the forward or warrant contracts must be exercised at such a bourse.

 

The latter matter has to be solved through crime enforcement law against hoax, embezzlement and tax evation. Moral hazard and its arising damage should be deemed with imprisonment.

 

The savings and loans business should behave in the same way a future contract does. There is leverage but it is narrower than that allowed to banks currently. So, the leverage factor should be decreased to 6 as a maximum. Likewise, Shareholders or Owners of Financial Corporations will must supply performance bonds in order to keep grabbing other's people money.

 

If a bank fails to provide performance bonds to guarantee creditors and savers money. It has to be locked or forbidden to accept further cash out of third party hands.

 

If the bankruptcy feature shows up. The pattern to follow has to be equal to that with Mutual Investment Funds. The broke bank has to be acquired or merged with one in good operability situation.

No rescue. No ransom. From either the Central Bank or the National Government.

Embedded Investments. They should be in a range between >> 0 and <<0.15. Linked to daily cash needs in any given financial corporation. Not as a warranty measure.

 

Contingencies for Unretrievable Account's Receivables. They should be covered with economic capital belonging to real taxable equity rather than as an expense in advance merely for accountability procedures.

 

Opening borders to final customers so they can get loans from abroad with no noisy costs, levies, tariffs or fines set up by the local authority. As well as, handling with personal foreign currency accounts overseas.

Surveillance over bank spreads. In some countries a given reference spread is as wide as 20 points, a felony in an efficient, competitive market.

 

The Country's Central Bank buying foreign currencies, Bonds and other debt issued by its National Government. An equivalent maneuver is perfomed through Open Market Operations.

 

The National Government performing a buy-back on old issued bonds and debt in general.

BIS, IMF, WB suggesting Central Banks all over the world to decrease overnight funds rate. It is preferable a low unemployment rate with a moderate inflation and not the opposite fact.