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Hulkenberg replaces Sutil at Force India

Nico Hulkenberg is determined to make the most of his second chance in Formula One after being given one of Force India’s two race seats for 2012.

The 25-year-old will replace fellow German driver Adrian Sutil, who departs after six years at the UK-based team.

Hulkenberg was Force India’s reserve driver this year behind Sutil and Scottish rookie Paul di Resta, who will retain his seat after finishing 13th overall with 27 points in his debut season.

“It wasn’t easy to watch from the sidelines this season, but I did my best to help the team and show what I was capable of,” said Hulkenberg, who was released by Williams in 2010 despite earning his maiden pole position in his rookie season.
I’m extremely motivated for 2012 and would like to thank everyone for believing in me and giving me this chance. I’m keen to get down to work over the winter to develop our new car and help the team build on this year’s achievements. The first test in Jerez can’t come soon enough.”

The 28-year-old Sutil’s future is uncertain despite finishing ninth overall with 42 points. The only teams with seats available are Williams and HRT.

“Our new line-up means we say ‘goodbye’ to Adrian Sutil, who has been with the team since we entered the sport,” said Force India boss Vijay Mallya.

“He has been an integral part of our success over the past four seasons and we wish him well for the future.”

Di Resta hopes to build on his promising first season.

“I’m really excited about 2012 and there is a real sense of belief that we can continue to push the top teams and take another step forward,” the 25-year-old said.

“I’d also like to thank the team for all their hard work this year and for all the support they’ve given me. I’ll take some time out over the next few weeks to recharge my batteries and hopefully come back even stronger in 2012.”

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Macroprudential policy Risky business

 THE new big hope of central banks is called macroprudential policy. During the boom, central banks used the fairly blunt instrument of interest rates as their main weapon. But since inflationary pressures were low, thanks to the deflationary shock stemming from China and eastern Europe, rates were kept low. This led to a splurge of asset-backed lending. Meanwhile, banks found easy ways to exploit the rules of the Basle accords – designed to ensure the system was well-capitalised. As a result, when mortgage-backed securities started to plunge in value in 2007, the banks were much less robust than was previously thought.

The Bank of England has set up a financial policy committee, which is just starting the arduous task of sorting out which principles it should follow and which policy buttons it can push. In a paper out today, it sets out its options. It starts by discussing the potential flaws in financial markets such as

incentive distortions which can, for example, arise from contracts that reward short-term performance excessively

informational distortions such as those linked to buyers doubting the quality of assets (adverse selection) or less than fully rational processing of information

co-ordination problems, where collective action, for example to step away from lending in a boom, may be in the interests of individual banks but there is no way to co-ordinate on this outcome

As the paper points out (and as Hyman Minsky famously noticed) there is a tendency for banks to get overexposed to risk in the upswing of a credit cycle. After all, it is the banks that are driving the cycle. As they become more confident about lending against assets, more funds are available to investors/speculators and asset prices rise, increasing the confidence of all involved. As a proportion of GDP, commercial lending to real estate doubled between 2002 and 2008. In the UK banking system, leverage (as measured by total assets to shareholders’ claims) increased from 20:1 to 50:1 within a decade. Both measures ought to have caused alarm but nothing was done.

There is little new in this, as the paper recognizes. Credit cycles have nearly always been marked by lending against property. But property is an illiquid market and prices fall very sharply when the balance of supply and demand shifts, often wiping out of all of a bank’s collateral. Meanwhile, the duration of bank funding was steadily falling, from an average maturity of 10 years in the early 1980s to four years by 2008 (the US followed a similar trajectory). This left the banks very vulnerable to a run on liquidity.

The FPC says the authorities have, in principle, three types of measure to deal with these risks.

those that affect the balance sheets of financial institutions

those that affect the terms and conditions of loans and other financial transactions

those that influence market structures

For example, balance sheet measures include maximum leverage ratios and liquidity buffers; the second group includes caps on loan-to-value ratios and minimum margins; the third includes requirements for disclosure to reduce uncertainty about the market exposure of individual banks, but also the use of central counterparties to clear trades.

The paper then conducts an excellent and clear-eyed assessment of the pros and cons of these measures, without coming to any definite conclusion (the paper is part of a consultation process). What is clear is that the authorities cannot rely on just one or two measures, esepcially given the proved willingness of banks to game the system. Of course, the authorities cannot prevent all future financial crises, but they can still be a lot more alert than they were in the early 2000s. The paper shows the FPC is making a good start.

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