The Future of Finance A New Model for Banking and Investment

by Choudhry, Moorad; Landuyt, Gino

• ISBN13: 9780470572290
• ISBN10: 0470572299
• Edition: 1st
• Format: Hardcover
• Copyright: 2010-11-02
• Publisher: Wiley

Summary

The financial crisis of 2007-2008 has discredited business models in the banking and fund management and industries. In The Future of Finance, Moorad Choudhry argues that banks must re-align their business models, targeting a lower return-on-equity, diversifying their funding sources, increasing liquidity reserves. Banks no longer can rely entirely on funding long-dated assets with short-dated funds, as that practice has proven to be unsustainable over market and business cycles. On the investment side, the financial crisis has discredited tenets of Modern Portfolio Theory. Diversification did not reduce risks and stabilize returns. Indeed, diversification across asset classes and geographical regions amplified, rather than reduced, risk. The only way to have added value in the bear market of 2007-2009 was to short the market, but that was a directional strategy that is inconsistent with MPT and the notion of diversification. Choudhry concludes that the clear lesson from the crisis is to "know one's risk" -- a lesson and that is best served by concentrating on assets and sectors that one understands. Moreover, he argues investment managers should reduce the utilization of short-term maturities to meet funding requirements and restrict the leveraging of the capital base to no more than fifteen times. The Future of Finance will provide a guidebook to bankers and investment managers seeking to re-align their businesses to prosper in the post-crisis financial markets.

Author Biography

Moorad Choudhry has over twenty-one years experience in investment banking and was latterly head of treasury at Europe Arab Bank. He was previously head of treasury at KBC Financial Products and vice president in structured finance services at JPMorgan Chase Bank. Dr. Choudhry is Visiting Professor at the Department of Economics, London Metropolitan University, and Senior Research Fellow at the ICMA Centre, University of Reading. He is a Fellow of the ifs-School of Finance and a Fellow of the Chartered Institute for Securities and Investment. He is on the Editorial Board of the Journal of Structured Finance and the Editorial Advisory Board of American Securitization.

Gino Landuyt is Head of Sales at Conduit Capital in London. Prior to that, he was head of insti-tutional structured sales at ING Bank in Brussels, and worked with KBC Bank N.V. in their Brussels, Frankfurt, New York, and London offices. Landuyt has an MA in applied economic sciences from the State University of Antwerp and an MBA from the Catholic University of Antwerp.

Table of Contents

Foreword	p. xi
Preface	p. xiii
Introduction	p. xix
Market Instability	p. xx
Derivatives and Mathematical Modeling	p. xxi
Senior Management and Staying in the Game	p. xxiii
Macroprudential Financial Regulation and Cycle-Proof Regulation	p. xxiii
The Way Forward	p. xxv
Conclusion	p. xxvi
A Review of the Financial Crash	p. 1
Globalization, Emerging Markets, and the Savings Glut	p. 3
Globalization	p. 3
A Series of Emerging-Market Crises	p. 5
Low-Yield Environment Due to New Players in the Financial Markets	p. 8
Artificially Low Exchange Rates	p. 15
Recommendations and Solutions for Global Imbalances	p. 16
The Rise of Derivatives and Systemic Risk	p. 22
Systemic Risk	p. 23
Derivative Market Systemic Risk: Solutions for Improvement	p. 30
The Too-Big-to-Fail Bank, Moral Hazard, and Macroprudential Regulation	p. 37
Banks and Moral Hazard	p. 37
Addressing Too-Big-to-Fail: Mitigating Moral Hazard Risk	p. 42
Macroprudential Regulation: Regulating Bank Systemic Risk	p. 53
Conclusion	p. 58
Corporate Governance and Remuneration in the Banking Industry	p. 60
Bonuses and a Moral Dilemma	p. 60
A Distorted Remuneration Model	p. 61
Unsuitable Personal Behavior	p. 64
Conclusion	p. 65
Bank Capital Safeguards: Additional Capital Buffers and Reverse Convertibles	p. 67
Capital Issues in a Bear Market	p. 67
Looking for New Capital Instruments	p. 69
Economic Theories under Attack	p. 76
A Belief in Free and Self-Adjusting Markets	p. 76
Modigliani and Miller	p. 85
Markowitz and Diversification Tested	p. 85
Minsky Once Again	p. 88
Lessons to Be Learned by Central Banks	p. 89
Conclusion	p. 92
New Models for Banking and Investment	p. 93
Long-Term Sustainable Investment Guidelines	p. 95
The Investment Landscape after the Crisis	p. 95
Government Debt and Demographics	p. 97
A New Economic Environment	p. 103
The Inflation Dragon	p. 105
Currencies and a Changing Geopolitical Landscape	p. 115
Exchange-Traded Funds: A Flexible Asset Class	p. 118
Conclusion	p. 121
Rank Asset-Liability and Liquidity Risk Management	p. 123
Basic Concepts of Bank Asset-Liability Management	p. 123
Asset and Liability Management: The ALCO	p. 134
ALCO Reporting	p. 137
Principles of Banking Liquidity Risk Management	p. 142
Measuring Bank Liquidity Risk: Key Metrics	p. 145
Internal Funding Rate Policy	p. 151
Conclusion	p. 157
A Sustainable Bank Business Model: Capital, Liquidity, and Leverage	p. 158
The New Bank Business Model	p. 158
Corporate Governance	p. 167
Liquidity Risk Management	p. 168
The Liquid Asset Buffer	p. 175
Conclusion	p. 177
Notes	p. 179
References	p. 187
About the Authors	p. 189
Index	p. 191
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