Research November 2008
29 Nov-08: The Global Derivatives Market An Introduction
by Deutsche Börse Group, Eurex
The derivatives market has successfully developed under an effective regulatory regime. All three prerequisites for a well-functioning market – safety, effi ciency and innovation – are fulfi lled. While there is no need for structural changes in the framework under which OTC players and exchanges operate today, Improvements are possible. Particularly in the OTC segment, increasing operating effi ciency, market transparency and enhancing counterparty risk mitigation Could help the global derivatives market to function even more effectively.
29 Nov-08: EU banks' liquidity stress testing and contingency funding plans
by European Central Bank
This report carried out by the Banking Supervision Committee (BSC) with the help of its Task Force on Liquidity Stress Testing and Contingency Funding Plans (hereinafter referred to as the “Task Force”) contains insights into the range of bank practices in these areas and assesses their adequacy in the light of recent fi nancial market stresses. It is mainly based on four sources: a literature review, two workshops with market participants, a survey of relevant practices among 84 EU banks and the experience of supervisory authorities and central banks.
29 Nov-08: Liquidity and the dynamic pattern of price adjustment: a global view
by Deutsche Bundesbank
Global liquidity expansion has been very dynamic since 2001. Contrary to conventional wisdom, high money growth rates have not coincided with a concurrent rise in goods prices. At the same time, however, asset prices have increased sharply, significantly outpacing the subdued development in consumer prices. This paper examines the interactions between money, goods and asset prices at the global level. Using aggregated data for major OECD countries, our VAR results support the view that different price elasticities on asset and goods markets explain the recently observed relative price change between asset classes and consumer goods.
29 Nov-08: How might the current financial crisis shape financial sector regulation and structure?
Keynote address by Már Gudmundsson, Deputy Head of the Monetary and Economic Department of the BIS, at the Financial Technology Congress 2008, Boston, 23 September 2008
The current financial crisis was triggered by increasing defaults on subprime mortgages and the turn of the housing cycle in the United States. However, it had deeper causes in the under-pricing of risk and debt accumulation in several countries during the period of low real interest rates and easy access to credit. The financial industry has responded by raising capital and reducing leverage. The public sector has provided massive liquidity support, injected capital and improved deposit insurance. Looking further ahead, wide-ranging reforms are underway aimed at increasing market and institutional resilience. It is an open question how wide the financial safety net will be cast. The future financial sector can be expected to be smaller and operate with higher capital and liquidity buffers than before the crisis.
29 Nov-08: Supervisory guidance for assessing banks' financial instrument fair value practices through the Pillar 2 supervisory review process
by Bank for International Settlements
The application of fair value accounting to a wider range of financial instruments, together with experiences from the recent market turmoil, have emphasized the critical importance of robust risk management and control processes around fair value measurements. Moreover, given the significance of fair value measurements for regulatory capital adequacy and internal bank risk management it is equally important that supervisors assess the soundness of banks' valuation practices through the Pillar 2 supervisory review process under the Basel II Framework.
29 Nov-08: Forecasts for the UK economy - A comparison of independent forecasts
by HM Treasury
This edition of the comparison contains 32 new forecasts, all of which were received between October 28th and November 6th, 2008. The tables summarise the average and range of independent forecasts for 2008 and 2009 and show the average of this month’s new forecasts. Averages of new forecasts shows a contraction of 1.1 percent of GDP in 2009.
28 Nov-08: UK takes 58 percent RBS stake as investors shun deal
Britain bought a 58 percent stake in Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz) on Friday as the state picked up 15 billion pounds ($23 billion) of shares in the lender after investors shunned a rescue plan.
28 Nov-08: The World's largest consultancy is now hiring!
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27 Nov-08: An easy solution in Ireland?
by Robert Mcdowell
An Irish-led consortium has entered into preliminary due diligence with Bank of Ireland and could buy a 60 percent stake if a deal is struck, the Irish Independent reported on Wednesday. The Irish Independent, which did not cite any sources, said the consortium called Mallabraca had a 5 bn euro ($6.5bn) fund. Mallabraca, headed by Irish investment company Cardinal Asset Management and including U.S. private equity groups, had met with Bank of Ireland's management team, the report said. Cardinal Asset Management was not immediately available for comment. The Irish Independent said the consortium had told the Irish government during separate talks it was looking at a five to 10 year potential investment.
Given the relative cost-less-ness of guaranteeing bank deposits the Irish Government should be unlikely to allow the sale of the core banking system to US equity funds or any other buyer that may not “pass muster” with the regulator never mind the Government - political suicide or otherwise! Next year the regulator will effectively be European anyway with the headmaster in New York at the IMF. One would think that ‘logically’ the IE government in a context of ever intensifying supervision and transparency in financial services worldwide, would not consider facilitating the wholesale transfer of Irish Banking assets to a Private Equity fund which in its terms of reference is by definition opaque. One would think! The problem is Capital, in other words cash! The sale of Bank of Ireland has been on the blocks as a current publicly revealed prospect.
http://www.bankofireland.com/includes/investor/pdfs/interim_nov08.pdf, this probably applies to the others. The point is that there is a windmill here which David McWilliams has been tilting at.
Read the whole White Paper here
26 Nov-08: Lessons from Citigroup rescue
by Financial Times
Another weekend, another bank rescue. On Sunday night, the US Treasury moved to shore up Citigroup (NYSE:C) . There was no choice - the banking giant could not be allowed to keep stumbling. The rescue seems to have been generous to Citi¬group, but the insurance scheme it uses is a model that deserves wider consideration. Shaken by the announcement by Hank Paulson, the US Treasury secretary, that the troubled asset relief programme would not buy distressed mortgage assets, investors gave Citigroup a wide berth. Last week, its share price fell by more than 60 per cent.
A loss of confidence in a vast bank with retail and investment banking businesses is dangerous; Citigroup is systemically important several times over. The US Treasury acted in similar fashion to the Swiss government's rescue of UBS. It injected $20bn of capital from the Tarp into the bank - on top of an earlier $25bn - and insured a tranche of its assets.
The terms of the Citigroup rescue seem lenient but the insurance scheme is a good innovation. The government is guaranteeing the bank against losses greater than $29bn on a $306bn portfolio, mostly of distressed mortgage-related assets. The bank paid a fee for this guarantee in preference shares.
Insurance on the value of illiquid securities has been proposed on the Economists' Forum on FT.com by Professors Perry Mehrling, Laurence Kotlikoff and Alistair Milne. It has several desirable attributes.
Underwriting insurance on the value of toxic assets would solve the problems they cause by putting a floor under their value. This would create enormous contingent liabilities that some governments would not be able to bear. The US Tarp would not be able to fund both recapitalisation and insurance. But an insurance model would be cheaper and easier than trying to buy enough of these securities to allow price discovery. Governments would only need to make good falls in values of insured assets below the agreed limit.
There are, however, practical obstacles. A credible scheme would need measures to prevent banks from holding back on writedowns until they had insurance. Governments would also need to find ways to prevent the banks that use the insurance from engaging in yet-riskier behaviour. The authorities would find it near-impossible to write a tariff for insuring the price of an unpriceable security.
There are no easy answers to this crisis. But governments should consider whether they ought to become the insurer of last resort.
25 Nov-08: REvolution Computing Joins with Columbia University to Host Conference on Computational Finance with R
REvolution Computing, the leading commercial provider of software and support for the open source statistical computing language, "R," will sponsor and co-host a conference and workshop about using statistical computing with R in finance, Computational Finance with R, at Columbia University on Thursday, December 4, 2008.
The conference will bring together academics and practitioners in computational finance to showcase the efficacy of statistical computing with R in many areas of investment finance. The panel of experts will also discuss the advantages of using R for modeling commodity rates, quantitative trading, volatility estimation, and portfolio performance analysis.
25 Nov-08: Interview with Prince Al-Waleed bin Talal bin Abdul Aziz Al Saud
by Maria Bartiromo of business TV channel CNBC US
In an interview with the CNBC news channel yesterday Prince Al-Waleed (5% shareholder in Citigroup) said he believed the $20 billion cash injection was way beyond what the bank needed.
The Prince, who endorsed the group last Wednesday in an unsuccessful attempt to halt its declining share price, reiterated that he stood behind Vikram Pandit, the chief executive, who he said was “doing the right thing” but needed more time.
He added that the blame for Citigroup's predicament lay with the previous management, and said that Sandy Weill, who headed the bank until 2003, had apologised to him for appointing Charles Prince to succeed him. Mr Prince was replaced by Mr Pandit at the end of last year.
23 Nov-08: Speeches or papers (3) related to Banking Supervision and Risk Management published in 2008
by Mr Timothy F Geithner, (currently) President and Chief Executive Officer of the Federal Reserve Bank of New York and now President Barrack Obama’s nominee for Treasury Secretary
22 Nov-08: NY Times Articles: Rubinomics Recalculated in New Economic Team; Citigroup Saw No Red Flags Even as It Made Bolder Bets
by the NY Times
It is testament to former Treasury Secretary Robert E. Rubin’s star power among many Democrats that as President-elect Barack Obama fills out his economic team, a virtual Rubin constellation is taking shape.
The president-elect’s choices for his top economic advisers — Timothy F. Geithner as Treasury secretary, Lawrence H. Summers as senior White House economics adviser and Peter R. Orszag as budget director — are past protégés of Mr. Rubin, who held two of those jobs under President Bill Clinton. Even the headhunters for Mr. Obama have Rubin ties: Michael Froman, Mr. Rubin’s chief of staff in the Treasury Department who followed him to Citigroup, and James P. Rubin, Mr. Rubin’s son.
All three advisers — whom Mr. Obama will officially name on Monday and Tuesday — have been followers of the economic formula that came to be called Rubinomics: balanced budgets, free trade and financial deregulation, a combination that was credited with fueling the prosperity of the 1990s.
“Our job is to set a tone at the top to incent people to do the right thing and to set up safety nets to catch people who make mistakes or do the wrong thing and correct those as quickly as possible. And it is working. It is working.” - Charles O. Prince III, Citigroup’s chief executive, in 2006
In September 2007, with Wall Street confronting a crisis caused by too many souring mortgages, Citigroup executives gathered in a wood-paneled library to assess their own well-being. There, Citigroup’s chief executive, Charles O. Prince III, learned for the first time that the bank owned about $43 billion in mortgage-related assets. He asked Thomas G. Maheras, who oversaw trading at the bank, whether everything was O.K. Mr. Maheras told his boss that no big losses were looming, according to people briefed on the meeting who would speak only on the condition that they not be named.
21 Nov-08: Financial Culloden!
by Robert McDowell
Independent Thinker but member of the Asymptotix EcoSystem Robert McDowell beats the chest of the Scottish Nation on the biggest English victory since the Battle of Culloden! Deconstructing the deal he points out some of the grim realities which some readers may find a bit “on the edge”. This is one of the strong views in Edinburgh of the result.
21 Nov-08: Equity group declares interest as Lenihan expects banks to merge
by the Irish Times
A MULTIBILLION euro consortium of US-led private investment firms has expressed an interest to the Government in taking a large stake in Bank of Ireland (BoI) and possibly a merged group comprising BoI and Irish Life Permanent (ILP). The interest emerges as Mr Lenihan signalled in discussions with the chief executives and chairmen of the six guaranteed banks and building societies that he expects mergers between institutions in a move that will dramatically reshape the Irish financial sector. A plan to inject fresh cash into the banks, involving private investments and possibly State funds, is thought to be imminent. It is likely to take place in tandem with mergers leading to two enlarged banks based around the sector's two biggest players - AIB and Bank of Ireland. The smaller institutions are likely to resist attempts to be "shoe-horned" into mergers with larger banks that would lead to a duopoly in the sector and reduced competition. A marriage between BoI and ILP would be alter the banking market radically and a deal would give a private equity consortium - described as "a fund of funds" - a large share of the financial services market. The merged entity would control more than 50 per cent of the Irish life insurance market and 40 per cent of the mortgage market. Bank of Ireland employs 16,000, while ILP has a staff of 5,000. Private equity firms tend to seek a substantial return on their investments over three to seven years. The consortium, named Maulabracka, comprises US private equity firms JC Flowers and the Carlyle Group but could involve other international investors given both firms' connections and depending on the size of bank stake it seeks to acquire. The Maulabracka consortium, named after a townland near Dunmanway in Co Cork , was assembled by investment managers Nick Corcoran and Nigel McDermott, directors of Dublin firm Cardinal Asset Management. New York-based investment bank Sandler O'Neill is also advising the consortium. The group has been in discussions with the Government about taking a substantial stake in BoI, possibly more than 40 per cent, and has also expressed an interest in buying into a merged entity of BoI and ILP. Bank shares closed down amid growing concerns among investors about a potential recapitalisation through private equity firms. Existing shareholders could see the value of their stake fall as a result. Minister for Finance Brian Lenihan said he raised reform measures with the banks in a bid to shore up the supply of credit to businesses but he declined to comment on any potential recapitalisation. "The Government is determined, on foot of the guarantee which has stabilised the banking sector, to reform the banking sector," Mr Lenihan said.
21 Nov-08: Deloitte: The Path to IFRS Conversion - Considerations for the Banking and Capital Markets Industry
Information Technology: IFRS is expected to have wide-ranging effects at different levels of the IT systems architecture. The realignment of an institution’s information systems will pose a real challenge for IT (along with the rest of the organization). Virtually all applications and interfaces in the system architecture can be affected, from the upstream or source of data to the farthest end of the reporting tools. As such, time and resource needs may be significant. As you plan changes to your IT systems, you will need to take into account external factors such as local and international regulations, financial consolidation of subsidiaries, stock markets, and external auditors. This business transformation should not be considered as a one-step project. It may be necessary to implement short-term initiatives strategically designed to institute an effective long-term solution for your institution.
20 Nov-08: Northern Rock Mortgage-Backed Bond Risk Jumps on Rule Breach
The cost of protecting Northern Rock Plc’s mortgage-backed bonds from default jumped after the U.K. lender breached terms governing the debt, delaying repayments to some noteholders.
“We weren’t expecting this,” said Attilio di Mattia, who helps manage 3 billion euros ($3.75 billion), including Northern Rock asset-backed securities, at Aurelius Capital Management in Vienna. “The sense we had got from management was that they would not let this happen.”
20 Nov-08: IBM Cognos 8 Banking Risk Performance—Credit Risk - New Product Launched Today
Cognos Credit Risk Performance has industry-leading credit risk insight in standard reporting formats—enabling banks to measure and manage the right credit risk information confidently. Designed for use by business users across functional groups to facilitate seamless business decisions and effective risk management across business units, geographies and products in areas such as:
Originations—Volume and characteristics of new loan originations, such as credit scores and loan-to-value calculations across the portfolio.
Front-end performance—Delinquencies, 2+ delinquencies, delinquency roll-rates and vintage information.
Back-end performance—Gross and net charge-offs, repossessions, foreclosures and bankruptcies.
Financial and profitability—Risk-adjusted return on capital (RAROC), net interest margin and forecast vs. actual comparisons for metrics, including receivables, delinquencies and charge-offs.
Basel II—Management reporting on key Basel II measures including probability of default, loss given default, expected loss, exposure at default and capital ratios.
20 Nov-08: Comprehensive strategy to address the lessons of the banking crisis announced by the Basel Committee
by the Bank for International Settlements
The Basel Committee on Banking Supervision today announced a comprehensive strategy to address the fundamental weaknesses revealed by the financial market crisis related to the regulation, supervision and risk management of internationally-active banks. Nout Wellink, Chairman of the Basel Committee said that "the Basel Committee's work programme is well advanced and provides practical responses to the financial stability concerns raised by policy makers related to the banking sector." Mr Wellink added that "the primary objective of the Committee's strategy is to strengthen capital buffers and help contain leverage in the banking system arising from both on- and off-balance sheet activities." It will also promote stronger risk management and governance practices to limit risk concentrations at banks. "Ultimately, our goal is to help ensure that the banking sector serves its traditional role as a shock absorber to the financial system, rather than an amplifier of risk between the financial sector and the real economy," Mr Wellink said.
The key building blocks of the Committee's strategy are the following:
strengthening the risk capture of the Basel II framework (in particular for trading book and off-balance sheet exposures);
enhancing the quality of Tier 1 capital;
building additional shock absorbers into the capital framework that can be drawn upon during periods of stress and dampen procyclicality;
evaluating the need to supplement risk-based measures with simple gross measures of exposure in both prudential and risk management frameworks to help contain leverage in the banking system;
strengthening supervisory frameworks to assess funding liquidity at cross-border banks;
leveraging Basel II to strengthen risk management and governance practices at banks;
strengthening counterparty credit risk capital, risk management and disclosure at banks; and
promoting globally coordinated supervisory follow-up exercises to ensure implementation of supervisory and industry sound principles.
19 Nov-08: BusinessObjects Integration with SAP NetWeaver BI - Technical Material
by ingo Hilgefort, Business Objects
"After 4 weeks of abstinence it feels good to be back on the blogging train and the first I would like to do here (as promised a long time ago), is to share all the material that I have used at the SDN Community Day in Las Vegas and Berlin."
17 Nov-08: REvolution Computing Integrates Their R Distribution into Microsoft's New High Performance Computing Server
REvolution Computing today announced that it is working with Microsoft to bring the "R" statistical language to Microsoft's new Windows HPC Server 2008. REvolution's RPro is an optimized, validated, and commercially supported distribution of R. RPro programs can now utilize the multiple microprocessors inside Microsoft computer clusters.