The Future of Finance: A New Model for Banking and Investment

Foreword xi

Preface xiii

Introduction xix

Market Instability xx

Derivatives and Mathematical Modeling xxi

Senior Management and Staying in the Game xxiii

Macroprudential Financial Regulation and Cycle-Proof Regulation xxiii

The Way Forward xxv

Conclusion xxvi

Part One A Review of the Financial Crash 1

Chapter 1 Globalization, Emerging Markets, and the Savings Glut 3

Globalization 3

A Series of Emerging-Market Crises 5

Low-Yield Environment Due to New Players in the Financial Markets 8

Artificially Low Exchange Rates 15

Recommendations and Solutions for Global Imbalances 16

Chapter 2 The Rise of Derivatives and Systemic Risk 22

Systemic Risk 23

Derivative Market Systemic Risk: Solutions for Improvement 30

Chapter 3 The Too-Big-to-Fail Bank, Moral Hazard, and Macroprudential Regulation 37

Banks and Moral Hazard 37

Addressing Too-Big-to-Fail: Mitigating Moral Hazard Risk 42

Macroprudential Regulation: Regulating Bank Systemic Risk 53

Conclusion 58

Chapter 4 Corporate Governance and Remuneration in the Banking Industry 60

Bonuses and a Moral Dilemma 60

A Distorted Remuneration Model 61

Unsuitable Personal Behavior 64

Conclusion 65

Chapter 5 Bank Capital Safeguards: Additional Capital Buffers and Reverse Convertibles 67

Capital Issues in a Bear Market 67

Looking for New Capital Instruments 69

Chapter 6 Economic Theories under Attack 76

A Belief in Free and Self-Adjusting Markets 76

Modigliani and Miller 85

Markowitz and Diversification Tested 85

Minsky Once Again 88

Lessons to Be Learned by Central Banks 89

Conclusion 92

Part Two New Models for Banking and Investment 93

Chapter 7 Long-Term Sustainable Investment Guidelines 95

The Investment Landscape after the Crisis 95

Government Debt and Demographics 97

A New Economic Environment 103

The Inflation Dragon 105

Currencies and a Changing Geopolitical Landscape 115

Exchange-Traded Funds: A Flexible Asset Class 118

Conclusion 121

Chapter 8 Bank Asset-Liability and Liquidity Risk Management 123

Basic Concepts of Bank Asset-Liability Management 123

Asset and Liability Management: The ALCO 134

ALCO Reporting 137

Principles of Banking Liquidity Risk Management 142

Measuring Bank Liquidity Risk: Key Metrics 145

Internal Funding Rate Policy 151

Conclusion 157

Chapter 9 A Sustainable Bank Business Model: Capital, Liquidity, and Leverage 158

The New Bank Business Model 158

Corporate Governance 167

Liquidity Risk Management 168

The Liquid Asset Buffer 175

Conclusion 177

Notes 179

References 187

About the Authors 189

Index 191