It’s a Small World: Even in Financial Markets

It’s a Small World: Even in Financial Markets

Proposed changes to technical bank liquidity regulations may give support to the municipal market. It is a small, small world, after all, and very interconnected!

This story does not begin at the World’s Fair in 1964 in New York City, but it did start in New York City more than a generation later with the collapse of Lehman Brothers and Bear Stearns. These brokers found out the hard way that when customers start asking for their money back and there is no liquidity (another name for cash) you are very quickly out of business. You don’t recover from a run on the bank, which is no Disney fun ride.

Regulators took this lesson to heart after the financial crisis and built into bank regulations a ratio test called the Liquidity Coverage Ratio, or “LCR”. It’s a pretty simple ratio. Banks needed to keep cash (or liquid instruments like treasuries, agencies, etc.) on hand to cover 30 days’ worth of withdrawals or payments in a stressed environment.  On its own, passing this test would not have saved Lehman, but in conjunction with stronger capital requirements it should have made a difference.

Last week the House of Representatives passed H.R. 1624, which would allow municipal bonds to be counted as liquid investments under the LCR, with some exceptions. The bill now goes to the Senate for consideration, and if passed in some form would become law no more than three months later.

Related: How Long Will the Current Economic Expansion Last?

We see a number of positive market impacts if this legislation is finally enacted. First, banks would likely buy more municipal bonds. Banks already buy munis for income, and now they would be able to buy them to help comply with liquidity regulations while generating incremental income. More buyers usually mean higher prices, which is good for many individual investors. Lobbyists for this bill are quick to point out cities and towns could use cheaper funding to pay for new infrastructure. Finally, it is speculated very low treasury and agency yields are due, in part, to very high demand from banks and others who need large amounts of high quality liquid assets. We have a hard time seeing any downside to this regulatory update.

Though everyone seems to be a winner with this change in regulation, we all know the political legislative process is no Disneyland ride – so we will just have to hang onto our seat and wait and see. 

Source: GovTrack, Bloomberg, The Financial Times
SNW Asset Management
Fixed Income
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Most Read IRIS Articles of the Week: March 19-23

Most Read IRIS Articles of the Week: March 19-23

Here’s a look at the Top 11 Most Viewed Articles of the Week on, March 19-23, 2018

Click the headline to read the full article.  Enjoy!

1. Multi-Factor or Not Multi-Factor? That Is the Question

Let’s pretend you are a US investor that wants to deploy some of your money overseas.  You think international developed market stocks are attractive relative to US stocks, and you also think the US dollar will decline over the period you intend to hold your investment.  — Chris Shuba

2. The Lies Spread by Bankers About Cryptocurrencies

I had a chat with The Financial Times the other day, and provided lots of background as to why I don’t think cryptocurrencies are the choice of criminals. The comment that was reported was the following ... — Chris Skinner

3. Alternative Investments? You May Need New Shock Absorbers!

During the tumultuous red and green gyrations of the capital markets this year have your clients anxiously called to ask: “What’s going on with my portfolio?” What do you do when the usually smooth ride in your luxury automobile becomes as bumpy as Mr. Toad’s Wild Ride in the Happiest Place on Earth? What does the average investor do? — Ted Parker

4. Why Fear of Inflation Is Rattling Investors

Inflation is a bad thing, right? It make things more expensive, right? For those of us of, let’s say, a certain vintage, we recall the runaway inflation of the late 1970’s and early 1980’s. So why does the Federal Reserve – in charge of managing the country’s currency and value thereof – actually try to create inflation? It’s called the inflation targeting and it matters to your money. — Bill Acheson

5. The Best Retirement Investments for a Steady Stream of Income

As you near your 60’s, your prime earning and saving years will transition into a period of time where you get to enjoy the “fruits of your labor,” a.k.a retirement. We call this segueing from accumulation to decumulation, the period when you will be drawing from your accumulated nest egg. Dana Anspach

6. An Emerging Theme In Thematic Investing

Exchange traded funds (ETFs) are popular vehicles for market participants looking to engage in thematic investing. Thematic investing looks to take advantage of future growth trends, including disruptive technologies. Given that forward-looking approach, stock-picking in the thematic universe is equally as hard, if not harder, than in traditional market segments. — Tom Lydon

7. 8 Winning Questions You Should Be Asking Every Prospect

It’s not enough for your salespeople to be product experts, they also need to be capable of having the kind of conversations that position them as business experts and even strategic resources. — Lisa Rose

8. 10 Steps to Successful Strategic Alliances

Business growth doesn’t come from wishful thinking. As you know, it takes a lot of hard work. The growth of your business is not an option – it is a necessity. Coordinating the right mix of strategies to gain market share and improve client acquisition rates is essential to advance your firm in today’s economy. — Michelle Mosher​​​​​​​

9. Keep It Light: Harnessing Humor for Financial Marketing Success

It’s undoubtedly true that investors’ financial security is no laughing matter, and this is reflected in the stolid, dour, reliable imagery and branding that is, by and large, the industry standard. This is hardly surprising—investors need to believe they’re placing their hard-earned money in the hands of experienced, trustworthy professionals. — Alexandra Levis​​​​​​​

10. Do the Economics of a Move to Independence Really Add Up?

The number one question advisors ask when exploring a move to independence is how the economics compare to accepting a recruiting package from a major firm. It’s certainly a valid concern, because while the recruiting deals being offered by the wirehouses are down, it is still very possible for a top advisor to get a really attractive hard-to-pass-up offer. — Mindy Diamond

11. Four Big Reasons Why Short-Term Muni Bonds Should Excite You

Municipal bonds might not be the first thing that comes to mind when you think of a sexy investment. They don’t typically command news headlines like the stock market or bitcoin. — Frank Holmes

Douglas Heikkinen
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IRIS Co-Founder and Producer of Perspective—a personal look at the industry, and notables who share what they’ve learned, regretted, won, lost and what continues ... Click for full bio