Positive signs for US economy, says NewOak

NewOak Risk Advisory and Financial Services

The US Labor Department’s June non-farm payroll report beat expectations with 195,000 jobs created. The stronger-than-expected report was fueled further with the significant revisions to the last two months of data that added another 70,000 jobs to the total, which brought both April and March to nearly 200,000 jobs created.

Adding perspective, James Frischling, president and co-founder of NewOak Risk Advisory and Financial Services, commented, “While the second quarter jobs creation was slightly lower than the first quarter (monthly averages of 196K and 207K, respectively), the growth adds a great deal of fuel to the fire that the Fed will begin to taper its $85 billion in monthly bond purchases in the coming months. Despite the better than expected results, the unemployment rate remained unchanged at 7.6% as a result of the increase in the number of people that returned looking for work, a positive sign that things are getting better on the jobs front.”

He continued, “Chairman Bernanke has said the central bank could begin pulling back on stimulus efforts later this year if the jobs market continued to show signs of strength. The jobs created thus far this year are certainly good news, but the unemployment rate still remains well above the 6.5% level the chairman set as the threshold level for pulling back. With confidence that the jobs market will continue to improve, expect the Fed to announce the reduction in its bond buying in September or December. The counter-balance to this pullback will be the consumers, who are more positive on the economy than at any time since early 2008. With the stock markets at or near all time highs and with the strong recovery in housing, the wealth effect should help consumers spend more when the Fed starts to spend less.”

Bank capital rules: Loopholes closing?

Despite all the talks of tightening bank capital requirements globally, specific loopholes with regard to internal ratings based (IRB) approach to credit risk and risk-based capital will not be identified and closed anytime soon, said Ron D’Vari, CEO and co-founder of NewOak Capital Advisors.

D’Vari noted, “The latest study through Regulatory Assessment Consistency Programme (RCAP) by Basel Committee has identified that there is about 20% variation in the internal ratings-based approaches in estimating credit risk across various investments among various banks. RCAP’s study was based on information from over 100 banks around the world and 32 large international banks. RCAP’s study results indicated a potential structural bias toward underestimating risks and overstating capital ratios in certain jurisdictions, more so in certain asset classes.

“The degree of flexibility permitted in implementing risk-weighted capital rules using internal models in various jurisdictions has been criticized, particularly in Europe. While the study indicates that US banks were in general above standardized approach, the banks from the rest of the world were dispersed on both sides. The sovereign exposures seem to be a key area with significant variations. Some of the larger banks in Europe may be holding less capital against certain asset classes than the American banks.”

D’Vari added, “While the discrepancies among banks’ internal rating-based models have been suspected by market participants and regulators, RCAP’s latest report puts additional pressure on regulators to impose fresh new rules and tighten the existing ones. No doubt the rule setting committee is searching for finding ways to narrow the deviations and reduce use of loopholes to artificially look stronger on capital adequacy. Some have suggested instituting a minimum risk-weighted capital as way of fixing the inconsistency. However the latest report doesn’t hint at any clear solutions.”

He concluded, “Given the current state of the European economy, policy makers have been simultaneously worried that imposition of any new rules may by itself cause further credit-squeeze and economic issues. We expect further discussions among key policy makers starting in September, but see no real changes in sight until a gradual healing of the economy is in real motion.”

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