YouSaid · the spoken record

Fabio Natalucci

lines on the record: 40
first: 2023-02-09
most recent: 2023-02-09
sittings or episodes: 1
sources: podcast

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“As far as Australia, because people were selling across assets. That's the part that concerned me of missing something and becoming too comfort in this, okay, we got the right matrix with the right vulnerabilities, the right liver model, because a lot of these are created with the lens of the past, right? So the lens of the last crisis. And crisis tends to be different. So I'm reluctant to be too comfortable that we managed to handle financial stability.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“But it is because I am reluctant to embrace this idea that we make the system more resilient and this has worked out smoothly. Maybe it's the case and then we should celebrate. I'm just concerned that I don't know the energy trading firm was an example, that there are corners of the system that I've not paid enough attention, they've grown over time, that they've become systemic either because of size or because they use leverage in forms that they're not apparent or I don't have data or I don't understand the dynamic. So the LDI was a cool example. People knew about LDI. This is not a new thing that was learned, right? It just happened that a combination of that business model with illiquidity in the guilt market, with the policy shock that stirrups no one was difficult to forecast, but the combination of all this factor create a situation where what was going on in the UK had tremors across the globe. Repricing or credit risk in the US, you have repricing of asset-backed security.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“Think of like the banking sector, right? The best ingredient for success of banks is growth, right? Because they have healthy balance sheet, they have healthy capital position, liquidity position. So to me, if without growth, the system is much more fragile. The way we think about financial stability in terms of our framework, abuse financial conditions, we use economic condition, then we try to forecast what the distribution of growth will be. And so we think about financial stability as the left tail, if you on the downside risk. That's for us the link between financial condition, vulnerabilities, and growth. What policymakers are trying to do when they think about financial stability are trying to minimize the downside, the tail. That's to me, it's the link between growth and financial stability. That's the framework we use in the financial stability report.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“So that's where I think it's important for the local. Now, there's another opportunity, actually. They often tend to deepen the liquidity of the local markets, right? So there are benefits. That's where the local regulator, I think they need to play a role in terms of regulation that is appropriate for those kind of flows. Because those investors are not the typical EM dedicated investor that sticks there. Those are investors that moves with global financial risk capital. And we have seen that over the last past few years.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“So, again, this positive is like everything, right? Opportunities and risk, right? So I think opportunities of being added to the risk means that country opens up to capital flows. So capital flows are important for growth, for financial transactions. So there's the possibility of coming with it. The risks are that the behavior of passive investor or benchmark investor is very different from, say, EM delegated funds. EMDEFID fund, it's really about going in and picking the right country, picking the right credit, doing more the credit work, if you want, or sovereign work. Benchmarking is just following index. And what we found is that the behavior of investor that just benchmark are much more linked to global financial conditions. So when financial conditions change and they tie in globally, this guy tends to leave. And so by being in the index, yes, you get more capital, but you are much more exposed than before if you want to the risk appetite change of the global investor. That's the downside of being in the index.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“Of investor concern about these firms, but that was pretty much it, right? No visibility into their leverage position, who they were playing, what market was huge in sense of opacity in terms of where the risk were. That was the big question, I think, the big flag, red flag came up. So we tried to do a better job going forward. I mean, the big gap, again, it's data. Data and honestly, they're not the easiest one to have conversation with.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“So if the matrix I was describing before energy trading were not there obviously, right? So those were not the entities we're following closely for. We didn't. So that was one lesson I think learned during the February episode. I think it's important to follow for a number of reasons. One, because they are important players in the financing of the physical assets. So they provide collateralized lending to shipments of various commodities. So that's one important piece. So they're very much linked to the physical asset. Two, because they are a crucial player in the drill of these markets. The derivative of these markets used by producer as a hedge. And so they play a crucial role in the middle. Obviously, there are banks involved and so on. So they play a function that is important for the smooth operational debt market. Commodities are global markets. The risk from a financial stability perspective, one that we quickly discover is that there were no data. And so if you want to say, okay, I'm going to have a chart. And I don't know what chart to show. Some of these entities have publicly traded bonds, so that's what we were showing. That was for us proxy.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“Year, I need that as my insurance. So I don't think the regular should tell you exactly whether you should manage this personally. I think they should provide some guidance. My sense now that it's too much left to the individual manager that does not internalize what the systemic implication of the behaviors are.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“So that was like, there was a time I talked to a few people in the loan market, how they were managing liquidity. One was trying to understand what is your definition of liquidity buffer, what do you use? Is it cash? Is it lines of credit? Is the most liquid leveraged loans? Do you hold treasury securities? How big the buffer is? I mean, there's a trade-off between, yeah, of course, you can hold a huge liquidity buffer, but it's going to hit your return at some point, right? So if I want to invest in leveraged loans, I don't want you to hold 20% in liquidity. So that's one piece. The other one was trying to understand the waterfall, if you went, right? How do you manage this? And I thought it was quite interesting. Then I got two very different response, like from I'm going to start using and selling the, if I have some liquid alike securities after cash, then maybe use my lines of credit, then progressively move to the less liquid stuff. Then others, they would tell you I would never touch it, not even in the future shoot me. That's because I don't know what's next.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“And again, or minimizing the gap between the liquidity that you provide and the liquidity of the underline. One last point. There is another aspect that often is not discussed in the US, but some of these players are made of these open-ended funds, are major players in emerging markets. And when you see this in and out of those flows of those countries, you can break those markets very easily. And so there is, if you want the cross-border systemic aspect to this, that maybe it's not just US focus, but at least for me working at the fund. For some countries, those are large, large movers.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“First of all, it's two times in a century now because it's from the GFC to COVID, right? So it's kind of close to each other. I agree. I don't think you should calibrate to financial disaster every time. But I think there is something in the middle between calibrating like that and what is done now. I think there are steps that can be taken to fix some of this liquidity mismatch. Whether this is swing prices, for example, and utilization of those. So regulator can, for example, provide guidance on the implementation of some of this liquidity tools. They can consider whether some of these liquidity tools should be mandatory. The problem is there's no alignment between the incentives of the individual manager of the funds and the system financial stability objective, right? If you align those, then the system works better. So whether this is, again, guidance, mandatory use of some liquidity tools, whether this is stress testing, whether this is disclosure, I think you can find a combination of this. It's going to be a function country by country, depending on the institutional setup, the legal setup. Some things can work better than others.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“The price, right? The concern that I have there is more the opaque word of the authorized participants. So the dealers that create and redeem shares, particularly in fixed income where in equities I think it's easier if you have the S&P 500, the bucket that you use is more or less the index. With fixed income, the basket you use to create and redeem is way smaller than that. And there is a lot of opacity exactly what's in those baskets, who's provided to whom. If they don't provide that function and it breaks down, then the creation redemption can break. Now, whether that's systemic or not, I don't know. But to me, that's where one question mark is.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“It's just a question about mutual frepended fund or ETFs or both. Let me start with the first one with the open end defense. I think the risk is again what I was describing before the PO, you run for the door because I don't want to come after you and because there are incentives to do that and then by going out you generate a spiral where you get fire sale because they need to liquidate to pay you and the price moves much more than it should have. I would argue if you take 2020 as an example that saying the system didn't break it's a little bit too generous as a view. The system didn't break because in a month the Federal Reserve backstop the entire financial system right so if I give you a counterfactual where instead of that Monday with another month my expectation is that the system will have cracked in a different places. DTFs I think my view have changed over time. I think I was trying to look for places what could go wrong there. I think they provide an important liquidity function. You can get out, you just sell, you share with ETFs and in some sense they do sell.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“I think liquidity is a financial service, and like any other financial service, there's a price. The problem, I think, after 15 years of zero interest rate, zero volatility pre-Fed tightening was that liquidity was not properly priced. That was a big problem. So you got used to a place where liquidity is abundant, it's essentially free, and you don't price the risk, right? Think about price of liquidity, break it down in two pieces, right? The expected liquidity and there is premium. How much you want to pay for insurance or if you're providing it? I think that part, that's where I was mispriced. The liquidity premium was no pay to you or not paying for the, they were not willing to pay for situation where liquidity would go away. And I think with normal interest rate normalizing volatility rising, eventually the hope is that people will start to price liquidity. Liquidity is not free. Liquidity is a financial service.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“To do with transparency of trades, so disclosing trades, and whether you should use central counterparty to net some of these position out and reduce some of the explosion, whether they would free up balance sheet effectively to provide liquidity. I don't think the daily today job or a central bank should be provide liquidity to markets. To me, that's a lender of last resort function that I think is super important. That raises other questions, though, that if you have access to the lender of last resort function of a central bank, where the perimeter of the regulation should be, right? You can't be just receiving a check and then the central bank should comply with the business. I think that's a very uncomfortable business for a central bank to run.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“So, I don't think personally that the central bank should be in the business of managing data liquidity, right? So I can see a role where the central bank is the lender of last resort, of the liquidity provider of last resort. What the standing river facilities meant to do, it's meant to cap income rates, right? So they don't want to see what you saw in September 19 when they were normalizing the balance sheet preparates back. That's what the facility is meant to be. That is not meant to be a day-to-day normal way of providing liquidity. Liquidity is in the market. There are buyers and sellers. That's how the system should work. What has changed in the treasury market is that the underlying structure has changed, right? What the broker dealer used to do now is done by principal trading firms. It's done by firms that are not part of the traditional banking system and they're not within the traditional regulatory perimeter. That is technology evolution. I think the question is where the perimeter should be. There are also other major discussions again.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“The issue with liquidity, I think, has to do with the fact that often also interact with other vulnerabilities. I made the example of leverage, right? That's what we call liquidity spiral, at least in the profession. That's where liquidity and leverage interact with each other. My personal view is getting rid of mark-to-market. It's kind of like hiding a little bit. I want investors to be able to price risk. And non-market to market, and I can see the argument of say, okay, if I can only bridge to there, then the world is going to be in a better place. My view is that you need liquidity, you need to provide disclosure, more disclosure. I'm more in favor of disclosing trade, for example, because in the end, yes, you will take a loss, but you price markets where they are supposed to be. Past experience during the financial crisis or when the pricing of risk in the subprime market was postponed, I don't think that's where we want to be. I think we want to be in a place where you price.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“So, let me start with dealing with the one. I think take the treasury market here or the killed market in the UK, right? The issue was that in some cases it was really hard to sell. You could not find a bid. Even if these are supposed to be the most liquid fund. So you should not see those in the most liquid markets. That's supposed to be the risk-free asset, right? You should be able to sell”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“Another option which is more extreme if you want is to more formally link your ability to exit these vehicles to the liquidity of the underlying. So you mentioned the real estate one there. The liquidity is not daily. You only have a specific period where you can withdraw. If you go into the loan market in the US and you go back decades, there was no daily liquidity. They used to be, if I remember correctly, intermittent funds or there were quarterly or monthly liquidity. You need to give advance and then when it comes time you withdraw. That allows you to, I think, manage liquidity better. I think there's a lot of controversy on whether you should restrict the liquidity that can be given based on the underlying. But that would be in principle the cleanest way to fix the underlying mismatch between the liquidity and the underlying assets.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“That is not helpful for the ex ante incentive to run, right? It doesn't prevent that. Swing prices are mostly used in Europe. Again, swing prices, the ability essentially to correct the price which you take money out based on this transaction cost that you impose on others. The problem is that in principle they are effective to reduce volatility. The problem is that the buffer of the swing factor, if you want, how much of this is used is too small compared to what would be used. And either because of competitive reason or because of stigma, whatever the reason is, they're not calibrated to the way that they should be calibrated during stress time at least.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“For sure. And even in Europe, in some sense, they're voluntary. And then this is the open debate what do you do with the liquidity buffer? Do they work or not? So what we find there is that the liquidity buffer, there seems to be some relationship between the liquidity of the underlying and liquidity buffer. That is, if you hold more illiquid asset, you generally on average tend to have higher liquidity buffer. The results that's more interesting though is that one, there is very widespread use of this liquidity buffer. When you talk to people in markets, some tend to actually use them actively. So I'm going to sell the most liquid stuff, use my credit lines, and hope for the best if you want. Others don't want to touch it because they don't know what's coming next. And so they start selling the less liquid stuff. So there's a very different use of this liquidity buffer. But on average, at least what we find is that during stress, the average fund, if you want, tends to grow the liquidity buffer. They just don't want to use it. They don't know what is coming. So if that's the case,”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“When you get out the way this is designed. And so I want to get out first before the markets price are going down essentially the NAV. So that generates that run dynamics that has important systemic implication because you go into fire sale. And that social cost of the first mover is not addressed by the way the design of these fissures are now. So when we look at a bunch of possible solutions there or measure and we did some work across countries, usually what the most common tools in terms of liquidity risk management tools are either suspension obviously or redemption gates or redemption fees. Those are pretty much widespread. What is much less common is either what we call swing prices, so essentially the ability to incorporate in the price you pay to exit of the externality or if you want the transaction costs that you impose of those stay in the fund. Those are not common, not in the U.S.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“So, my personal view is that if you want to live in a world where every X number of years the central banks needs to step in and backstop the financial system and every time push the line one more, I think you need to rethink the regulatory perimeter then. If you want to be on the receiving end of the financial sector backstop, then the perimeter needs to be different. So you need to be within the perimeter. They're not outside the perimeter, obviously, but there's a different way of thinking about financial stability risk because it's systemic risk at that point, right? So the issue here is that you're providing debt illiquidity when there is underlying illiquid asset. Now, of course, they all liquidity buffer and so on. So there's a threshold for period of non-stress. Perhaps the system is fine. People can have different views. The problem is during stress, if you eat through the liquidity buffer, therefore sull asset, right? You face redemption, you sell, you generate higher sale. And because of the structure, there is an incentive to run first because you're not bearing the transaction.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“Just QE or supporters, but backstop in credit market would have been a much larger decline in asset prices, right? So what we're showing that chapter, it's one that there is a link between the illiquidity of the funds and what they hold, right? So assets that are held by liquid funds tend to drop in prices much more and that there are much more volatility in return. So for example, one standard deviation shock in the liquidity, so some sort of what you saw in March 2020 increase volatility of return by 20%, which is a large, significantly large number. And that's where I think you need to think about what do we need to fit in terms of policy agenda. Is there a whole do we need to think about the regulatory perimeter? What tools do we need?”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“I have no doubt that was successful. I mean, the alternative would have been falling to a crater of growth, right? In the great recession, sorry. The issue is that that response and the easing of financial condition and the build-up of some of this vulnerability highlighted some of the reform agenda that you mentioned before has now been addressed though. So the chapter that we pulled out in last October was about open-ended investment fund. And that's an example, I think, a sector where there are liquidity mismatch, particularly those operand investment fund that have daily redemption for illiquid asset, right? Think about high yield corporate bond, for example. That's where I think the risk is, and that's what we have seen in March 2020, the outflows from those open-ended funds was about 5% of assets. That was larger than during the financial crisis. And the counterfactual of the Fed not stepping in very quickly and starting to backstop.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“Go. Now, of course, if you do this pace on which this is done, financial condition tighten. If anything now, the puzzle is why... Otherwise, right? Any model that you run, if you say, okay, the freeze free rate moves by 450 basis point, I think ex-ante at least, based on historical relationship, will tell you the financial condition should be weight either.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“So there's the risk here, and I think that's why price stability is so important inflation now. So if you don't let prevent inflationary pressure from becoming entrenched into the inflation dynamics, so core inflation wages, and you let inflation expectation earn more from the target, it's going to be way more expensive to bring inflation down. So sometimes personally, I think there is an asymmetry in COSI, right? So if you say, okay, well, it's the cost higher if I am tightening not enough, I'm tightening too much. Very soon I think the cost is higher if you not aggressively approach this. If you think of the late 70s, early 80s in the US, it took a lot of high tightening monetary policy for Paul Volcker to bring inflation down, right? So being proactive and preventing the entrenchment and increasing inflation expectation, I think is crucial because you can control it, then you can bring eventually, you can bring rates down to the supposed to.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“A community in general, policymaker, maybe markets too. We have been slow to recognize the inflation problem. So because growth was going fast and because fiscal policy hadn't been using that size for a while, that's where I think the concern is now. And this is why we went into the tightening monetary policy and so on. So the flip side of that fast growth has been inflation at levels that we haven't seen since the late 70s, early 80s.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“So usually in the one this is how we used to look at the Fed grow to me it's a precondition for financial stability right you cannot have financial stability without growth you need growth so growth is really important and so that growth that came of the if you want the recession if you want that way of the COVID was in part because central bank stepped in majorly right so the Fed here at a major central bank and ended up backstopping the full financial system If you compare that with 2008, backstopping was faster, more aggressive and wider. The other difference with 2007-2008 was fiscal policy. So if you remember the size of the Obama administration fiscal plan and think about the number of fiscal measures that have been taken in the US during COVID and the size of those. The combination of the two easy financial conditions plus fiscal policy as turbo charge essentially the economy. Now the downside of that is I think perhaps we”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“Was that that was provided by banks, right? And so there was an entry point into the banking sector. That's where I think you need to be super careful because for a lot of these financing structure or liquidity provision, somehow it touches a balance sheet of a bank in some form or shape somewhere along the chain hits the balance sheet of the bank. Part of it, it's a risk, but it's also an opportunity for the regulator to be able to see it once they touch the balance of the bank.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“So this two aspects of this, right? So, one has to do with if you want to call it like price misalignment or financial condition are too easy compared to the fundamental values, however you measure fundamental values. That's one piece. I think that per se, if there is no leverage employed, if there is no major liquidity mismatch, it's not necessarily systemic per se. Someone will lose money, someone will make money, but that's not part of my job. The concern is when that unwinding of financial condition interact with vulnerabilities. Liquidity or in case of archigos, it's financial leverage, right? Because then that vulnerability becomes a major amplifier. So it's not just that risk asset price reprice is that deleveraging in that case becoming an amplifier of the reprice. And I fire sale and all the deleveraging that we saw during the financial crisis. There was that component there. I think there was financial aid employed through derivatives, through prime brokerage, then the other weak link there.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“Just financial regulation. Activity has moved away from the banks to the non bank financial intermediation sector also because of technology. So some changing market structure are conducive to being done outside of the bank's balance sheet to structure, they are not nimble enough. There are also conjunctural aspects. So for example, when you are at zero interest rate for all 10 plus years, it's normal that some of the risk reshuffles around the way from the banking sector. And then last one perhaps. Especially in advanced economies, central banks have played an important role. People may say too large of a role in a number of markets. So that an impact on pricing itself. So there's a number of factors I think that contributed to this. Some are positive. Some are still, I think, open for assessment.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, in some sense. And then the other part is there a feedback though into the banking sector that we have not considered. So Archigos, I think the example there was yes the NTV per se perhaps was not systemic, but there was so much feedback into the back door of the banking sector to prime brokerage, for example. So that's kind of how we think about it. I think the reform, there are some unfinished business in the non-bank financial intermediation reform agenda. Some of it holds have not been covered by the reform agenda, some of it's with implementation. I don't want to just say that it's all bad though. There are advantage and positive of activity and risk moving to the non-bank financial intermediation. They have, again, different risk profile, different lending funding structure, different investment horizon, and they provide to growth to the financial system, provide lending, provide financial services. So that part is good.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“Whether this has to do with leverage, for example, perhaps that's the most difficult one, or even liquidity. The other question is, are they systemic enough?”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“So, I think that's certainly an aspect to that, right? So, the financial post financial crisis regulation, in my view, most certainly made the system, the core of the system so the banking sector more resilient, the more liquidity, the more capital, there's a resolution plan, there's a bunch of features that may, like if you want the fortress of the financial system safer. There is a move away from there and they move to what we call the NBFI or non-bank financial institution. I think of that as hedge funds, investment funds, sovereign wealth fund, pension insurance. And part of it, I think it's okay because they have different risk profile, different investment horizon, different investment funding structure. Part of it is fine. The question is, one, whether we have visibility into this corner of the financial system, right? So do I, can I actually assess the same way I would assess a bank? And I think the answer is no, because there is a number of data gaps that have to do with this institution.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“And we track them over time. So liquidity is one of them. Again, there were examples like the dash for cash in 2020 was a good example that involved a specific NTV in the non-bank financial intermediation sector. There was the LDI in the UK. It's a combination of liquidity and leverage. There was Harkigos. It's another example, I think, more of financial leverage, perhaps interconnectedness. So those are the things we are looking at. But again, the thing to me, the biggest puzzle now is financial leverage. There's a lot of talks of leverage position being unwound and rates move higher, volatility rises, but you don't really see the system breaking. So again, it's either because it's been the financial regulators have done a great job post-financial crisis, or maybe we are missing something. They're like, think of the LDI in the UK. Maybe this is like a tremor that it's under the surface and we don't see it, but something else may break. That's the biggest concern at this point, that we are missing something and we're not looking in the right place.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“So the way, if I may, for a second, think about how we think about financial stability at the fund, right? So we don't try to forecast what the next shock could be. So I think I wouldn't miss all of them, right? If you think about COVID, that's not what probably was my top list, the war. So I don't want to be in that business. I think what we can do, we try to do is to figure out what are the vulnerabilities. So think of vulnerability as an amplifier, right? So there's any shock, the hit, whatever that is. And then there are fragilities in the financial system that make the shock bigger. And so we have some sort of like matrix where we look at different sectors. So the sovereign debt, for example, household corporations, banks, and then what we call non-bank financial institutions. And then we look at different vulnerabilities. So liquidity is one of them or lack of liquidity. Leverage, financial leverage is another one, FX exposure, interconnectedness between the system. And then we try to fill the matrix based on the data that we have. And we do this for the 29 systemic important countries.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“Pretty smoothly, which if you work on the other side, you need to worry about risk, then the question is, did I miss something or the system is really more resilient and I should feel comfortable? And it's always uncomfortable to feel comfortable.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“So, this is the big question, right? So, if you work in financial stability now and you say, okay, if someone told you a year ago that the Federal Reserve would raise interest rate 450 basis 0.500 basis points, do you think it would have worked smoothly or what would have broken? And I think the answer you would be looking for placing things that something didn't work, right? Now, there were some instances, I think. LDI, I think in the UK was a good example of a liquidity problem, interacting with leverage problem. So that's a combination of two vulnerabilities that amplify each other. Of course, the trigger of that shock was very unique. It was a fiscal policy shock that's kind of idiosyncratic, if you want. There were some other example like Korean asset-backed securities market, but generally speaking, particularly focused in the US, I think things have gone.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“So, liquidity, and I think we talk about market liquidity here, not liquidity on the balance sheet with banks, but essentially it's the ability to liquefy and position at market prices at a price that doesn't move or the overall prices significantly. So you can do it quickly, you can do without much market impact. So you can essentially liquefy a position without having major impact on the overall market.”
2023-02-09 · Odd Lots · Fabio Natalucci on How to Think About Financial Risk Right Now · IDENTIFIED FROM THE TRANSCRIPT · source