I woke up this morning to see a headline in today’s Globe:Regulator Blames DBRS for ABCP Meltdown, with the opening paragraph:
The head of Canada’s banking regulator suggested credit-rating agency DBRS Ltd. is largely to blame for the chaos in this country’s commercial paper market, along with investors who relied on its ratings without doing their own homework.
There’s only one problem: the story has no basis in fact.
Unfortunately for the credibility of “Canada’s National Newspaper” and its ace reporter, Tara Perkins, the text of the speech is on-line. Julie Dickson in fact noted that:
There were a number of warning signs. Let me highlight four of them:
- Complex Products … The issue discussed by many commentators was whether people really understood the complex products they were selling, and buying. As well, there were questions around whether people were reading the material rating agencies produce, to understand the methodologies used….
- US sub-prime market problems …
- Lack of transparency of asset-based and highly structured securities …
- Uniqueness of the Canadian ABCP market … S&P suggested that liquidity lines that were more readily available in time of need (so-called global style lines) were better for the investor. Others such as DBRS believed that GMD lines were sufficient given the higher level of credit enhancement in Canadian structures compared to international structures. Sophisticated investors and advisors supported the DBRS view….
I have included in the summary the only two mentions of DBRS in the speech.
It appears to me that Dickson’s purpose in making the speech was to deflect criticism from the OSFI – she makes this explicit in the beginning:
One school of thought is that the disruption in the ABCP market was unprecedented and not within the realm of a rational person’s expectations. The second school of thought is that some sort of major disruption was predictable – various warnings were widely reported on in the financial press worldwide. The third is that bodies that have responsibility for regulation and global financial stability were asleep at the switch and are to blame for everything that has happened.
I obviously do not attend school number three. As for schools one and two, they are both interesting.
I’m not going to go much into the details of her defense. It’s basically what any reasonable and informed person knows already: it’s the job of the OSFI to ensure the banks are strong; the banks ARE strong; no problem.
I was most interested, however, in learning the details of the capital charge for the lines of credit:
ABCP vehicles sponsored by Canadian banks had either global style liquidity lines, or market disruption lines in place – it depended on the bank. OSFI applied internationally agreed capital rules. The more risk of a liquidity line being drawn, the more capital a bank had to hold (the charge was 10% for global style lines). Where the risk of a line being drawn was extremely remote, the capital charge was zero. These are international capital rules.
Well, if the charge varies from 0-10% based on some qualitative assessment of the risk of line being used, this goes a long way to explaining why I haven’t heretofore been able to nail down the rate!
Update, 2007-10-3: The National Post version of this story is much better and includes the information:
If market demand dries up, issuers need liquidity — from the financial backer of the notes — to tide over the market until demand returns. If not, the notes are unwound, sometimes at great cost.
What OSFI did was force banks to set aside capital to cover any liquidity needs in this extreme case. But it also offered a choice: Banks could instead offer a limited form of liquidity protection in return for not having to put capital aside. This liquidity aid would only trigger in the case of a “general market disruption,” interpreted to mean a time when the entire ABCP market froze.
“This cornered the banks into being able to make it economical to only offer the ‘general market disruption’ facility,” said one foreign observer of Canada’s financial regulatory system. They inadvertently created this new kind of liquidity facility that never should have been.”
In other markets, there is no need to set aside the capital in case of a liquidity crisis.
[…] I’ve updated the post about the Globe’s reporting of Dickson’s speech with a link and extract from the National Post’s article, which is much more reflective of what was actually said. You almost wonder if the reporters are reporting the same speech! […]
[…] of this is a reprise of the Dickson speech from last fall, but Ace Reporters at Canada’s Business Newspaper thought it would be more fun to whip up […]