
Funding fears

Asian institutions appear to have had relatively low exposure to the latest dramatic development on Wall Street - the blow-up of investments managed by Bernard Madoff, now indicted for allegedly running a $50 billion ponzi scheme, which pays old investors with money raised from new ones.
There are exceptions. HSBC says it has exposures of up to $1 billion to clients that invested in Madoff funds, and Nomura unveiled credit and derivatives trading losses from Madoff exposures of Yen32.3 billion ($360 million) for the third quarter. Great Eastern, the insurance arm of Singapore's OCBC Bank, meanwhile, said it had an indirect exposure of about S$64 million ($44 million) to Madoff funds.
By this reckoning, Asian institutions look set to be able to comfortably manage their exposures to Madoff, as they did with their positions with Lehman Brothers. Again, the biggest negative affect looks likely to centre on the distribution of now-worthless investments to investors. For example, Lion Fairfield Capital Management, a joint venture between Great Eastern's fund management arm and Fairfield Greenwich, sold $45 million worth of funds with exposure to Madoff.
The scandal will fuel controversy as to the extent institutions choose, or - with the possible introduction of new rules - are permitted, to expose themselves and their clients to investments that lack transparency. Which may, in turn, put further pressure on the beleaguered hedge fund industry, as well as the structured product business.
But the ability for Asian institutions to continue to ride out the financial crisis relatively unscathed is still very much in the balance. The biggest immediate challenge is linked with the ability of companies to refinance their short- and medium-term debt. With offshore capital markets remaining closed to all but the most highly rated corporates and foreign banks unwilling - or unable - to lend, the weight of the refinancing burden looks set to fall on local banks.
Some government agencies are moving to head off problems in this area. The Bank of Japan (BoJ), for example, plans to buy up to Yen3 trillion of outstanding commercial paper (CP) to help ease the funding pressure suffered by Japanese corporates. Total outstanding CP underwritten by banks in Japan fell 15% year-on-year to Yen13.5 trillion in the last quarter of 2008, according to the BoJ.
This and other similar moves to bolster liquidity should help ease the pressure on banks. But more will be needed throughout the region, as domestic financial institutions look set to take further defensive measures by serving only their existing clients. Corporates beware.
Christopher Jeffery.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Regulation
Markets worry EU’s reporting simplification will add to burden
Rather than reducing firms’ obligations, market participants fear it could end up increasing requirements
EU banks show basic instinct for credit valuation adjustments
Simpler approach to CVA appeals even to some already using more complex models for counterparty risk
Bank of England wants dynamic Emir for UK clearing houses
Review won’t just photocopy EU legislation, as BoE seeks to make rules simpler and adaptable
Big banks could be sidelined from future rescue deals – FSB
Exacerbation of too-big-to-fail means G-Sibs could already be too large to take extra assets
More guidance, less enforcement: the SEC under Paul Atkins
Current and former insiders expect clearer crypto rules and an end to regulatory violation sweeps
During Trump turbulence, value-at-risk may go pop
Trading risk models have been trained in quiet markets, and volatility is now looming
Bank of England mustering unit to model system-wide stresses
Permanent team at UK supervisor will work on buy- and sell-side interactions
Regis-TR and the Emir Refit blame game
Reporting overhaul was marred by problems at repositories, prompting calls to stagger future go-live dates