Yellen: Banking system is safer today – SocGen

Janet Yellen’s speech yesterday was overshadowed by the decision not to have a vote on healthcare reform, though her observation when asked about whether the banking system is safer today than before the financial crisis made headlines, notes Kit Juckes, Research Analyst at Societe Generale.

Key quotes

“Her answer that a repeat of the same kind of financial crisis is unlikely, makes headlines but is reasonable. The banking system is ‘safer’. The belief that credit-financed excess is solely a function of banking sector ‘safety’, and (almost) nothing to do with monetary policy is, however, a recurrent theme. That global monetary policy settings were too loose in 2004-2006 seems to have been airbrushed out of central bank history. As long as the FOMC thinks that the cause of the crisis was bad bank regulation rather than easy money, their bias will be to carry on a pragmatic policy path of very gradual rate hikes, never moving without making sure the market has discounted the move well in advance and always with one eye on an inflation target that they really thing they ought to hit at some point.”

“Fed gradualism is the foundation stone of the search for carry, the appeal of high-yielding currencies and the appeal in G10FX of those where the first rate-hike is slowly coming into view. CAD, AUD and NZD should all continue to benefit.”