IS LIBRA FOR LIBERTE?

If to ignore #Libra functionality, it offers the same as Central Banks - centralisation, surveillance, inflation (= proxy inflation of underlying basket of currencies). That's why CB's are worried so much. Last year they discussed, postponed and finally avoided the issuance of own sovereign digital money but were afraid to destroy banking industry.

Now, Libra will damage this strategy, because from user's perspective it will have the same properties. Yet, Libra will be global and will compete even with forex exchange. For example, cuban FB-user from Spain can send money to her mom in Cuba without the need to pay for currency exchange and high transaction fee. Still, the same can be done with #Bitcoin but transaction fee is much higher (use then #LightningNetwork !).

All in all, this creates a mess and will push CB's to get defensive. It will be very hard, taking into account that #crypto provides the average desire of money customers (we all are):

- to avoid intermediary risk taker

- to avoid inflation of monetary base

- to be in control of own deposit (digged under "crypto-tree" in the "crypto-garden")

.

PS. Remember the old: "Liberte, Fraternite, Egalite". Missing FrereCoin and EgalCoin. 

Stress testing

Some thoughts aloud.:

Bank employ rich set of scenarios to test resilience of portfolio and to deliver various measures of risk. These models span from

• Type-I: scenarios with attached probabilities (weights), like it is used in Value-at-Risk (VaR) or Monte Carlo (MC) type of models or
• Type-II: stress test based models, where possible market states are scanned in wide range, portfolio performance is inter-/extrapolated and the worse case scenarios are used as risk measure.

hashtagHowever, thinking more about stress tests they should serve as a model independent addition to the usual probability hashtagmeasure *) based tools (type-I).

Another method is to reverse engineer the risk factors of portfolio in terms of weakest points (no likelihood/probability is attached), but that will serve the purpose to some extent, because this exercise will depend on the specific in-house (pricing) model. Some model independence can be achieved by building market-wide (AI?) model which can be used to detect pockets of instability (~singularity) which scenarios have to be injected into pricing of portfolio.

Discrepancy or consistency between measures used in pricing and risk modelling is similar topic, because if singularity becomes certain (realises) it changes/shifts all pricing (via price of risk, e.g. optionality or hashtagXVA type of modelling items).

Libor replacement - 2

Due to directions from FED, ECB, BoE etc there is a hype on #LiborReplacement which is due in 2021. Some argue that this will flow "by itself", similar to the change from national currencies to EURO in 1999-2002, some think that it will be "major disaster".

Indeed, many banking systems are relying on Libor. It starts from pricing and risk models which may use Libor as a core rate. Although such approach has changed since ~2007 when OIS rate was introduced as central rate for modelling, still there might be some entities who use Libor as a central quote.

Libor is often used as a reference rate, e.g. Libor+X%, to price commercial products towards corporate and retail (mortgage) markets. After 2021, all these contracts must be rolled. The change of Libor to the new rate perhaps will be done under zero-profit condition. That has to be calculated. Those who will do the calculations, remember, to account "in-arrears" settlement condition during transition period.

To add few words about causes of #Libor problem and possible solutions:

• Libor was quoted by few closely-related banks. It was tempting for them to manipulate the rate, so they did.
• One of the solutions to avoid manipulation is to invite a #thirdparty who will honestly and independently monitor the market and quote it. However, there are famous negative examples, when rating agencies were part of the deal too.
• Governments take the role into their hands and say that the publicly traded Short-rates will be the new Libor. This is regarded as not the most optimal solution and might turn to be the new handle for corruption or market manipulation when they tried to safe those who are "too big to fail".
• Another solution can be in hands of #CCP's. By definition, many banks today are obliged to process large portion of vanilla IR-contracts through CCP. Hence, these CCP are able to calculate the all-balancing rate out from the inherent cash flows. For the sake of stability of the market it would be useful to publish aggregated distributions of cash flows within financial system. By the way, CCP is also able to calculate implied contractual rates from these flows, hence it is possible to construct more reliable "new Libor" rate. That will embed an useful informational feedback. 
• Yet another possibility, is to build a distributed (blockchained) register for quotes which will be delivered by all participants. The open-source algorithm will calculate and publish the rate based on the information delivered by participants. The readonly-backdoor can be given to regulators for audit purposes. The design of such system can be elaborated further to ensure stability and avoid manipulations.