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

New banking and investment business models to navigate the post-financial crisis environment The financial crisis of 2007-2008 has discredited business models in the banking and fund management industries. In The Future of Finance, Moorad Choudhry and Gino Landuyt argue that banks must realign their business models, implying a lower return-on-equity; diversifying their funding sources; and increasing liquidity reserves. On the investment side, the authors discuss how diversification did not reduce risk, but rather amplified it, and failed to stabilize returns. The authors conclude that the clear lesson from the crisis is to know one's risk. A lesson that is best served by concentrating on assets and sectors that you understand. Examines the weaknesses in the business models of many institutions, as well as the theoretical foundation for professionals in the field of finance Identifies the shortcomings of Modern Portfolio Theory Addresses how investment managers can find new strategies for creating "alpha" and why they need to re-vamp their fee structures Filled with in-depth insights and practical advice, The Future of Finance will provide bankers and investment managers with a guide to realigning their businesses in order to prosper in the post-crisis financial markets. The Future of Finance: A New Model for Banking and Investment 5 Contents 9 Foreword 13 Preface 15 Introduction 21 MARKET INSTABILITY 22 DERIVATIVES AND MATHEMATICAL MODELING 23 SENIOR MANAGEMENT AND STAYING IN THE GAME 25 MACROPRUDENTIAL FINANCIAL REGULATION AND CYCLE-PROOF REGULATION 25 THE WAY FORWARD 27 CONCLUSION 28 Part One: A Review of the Financial Crash 29 Chapter 1: Globalization, Emerging Markets, and the Savings Glut 31 GLOBALIZATION 31 A SERIES OF EMERGING-MARKET CRISES 33 LOW-YIELD ENVIRONMENT DUE TO NEW PLAYERS IN THE FINANCIAL MARKETS 36 ARTIFICIALLY LOW EXCHANGE RATES 43 RECOMMENDATIONS AND SOLUTIONS FOR GLOBAL IMBALANCES 44 Chapter 2: The Rise of Derivatives and Systemic Risk 50 SYSTEMIC RISK 51 DERIVATIVE MARKET SYSTEMIC RISK: SOLUTIONS FOR IMPROVEMENT 58 Chapter 3: The Too-Big-to-Fail Bank, Moral Hazard, and Macroprudential Regulation 65 BANKS AND MORAL HAZARD 65 ADDRESSING TOO-BIG-TO-FAIL: MITIGATING MORAL HAZARD RISK 70 MACROPRUDENTIAL REGULATION: REGULATING BANK SYSTEMIC RISK 81 CONCLUSION 86 Chapter 4: Corporate Governance and Remuneration in the Banking Industry 88 BONUSES AND A MORAL DILEMMA 88 A DISTORTED REMUNERATION MODEL 89 UNSUITABLE PERSONAL BEHAVIOR 92 CONCLUSION 93 Chapter 5: Bank Capital Safeguards: Additional Capital Buffers and Reverse Convertibles 95 CAPITAL ISSUES IN A BEAR MARKET 95 LOOKING FOR NEW CAPITAL INSTRUMENTS 97 Chapter 6: Economic Theories under Attack 104 A BELIEF IN FREE AND SELF-ADJUSTING MARKETS 104 MODIGLIANI AND MILLER 113 MARKOWITZ AND DIVERSIFICATION TESTED 113 MINSKY ONCE AGAIN 116 LESSONS TO BE LEARNED BY CENTRAL BANKS 117 CONCLUSION 120 Part Two: New Models for Banking and Investment 121 Chapter 7: Long-Term Sustainable Investment Guidelines 123 THE INVESTMENT LANDSCAPE AFTER THE CRISIS 123 GOVERNMENT DEBT AND DEMOGRAPHICS 125 A NEW ECONOMIC ENVIRONMENT 131 THE INFLATION DRAGON 133 CURRENCIES AND A CHANGING GEOPOLITICAL LANDSCAPE 143 EXCHANGE-TRADED FUNDS: A FLEXIBLE ASSET CLASS 146 CONCLUSION 149 Chapter 8: Bank Asset-Liability and Liquidity Risk Management 151 BASIC CONCEPTS OF BANK ASSET-LIABILITY MANAGEMENT 151 ASSET AND LIABILITY MANAGEMENT: THE ALCO 162 ALCO REPORTING 165 PRINCIPLES OF BANKING LIQUIDITY RISK MANAGEMENT 170 MEASURING BANK LIQUIDITY RISK: KEY METRICS 173 INTERNAL FUNDING RATE POLICY 179 CONCLUSION 185 Chapter 9: A Sustainable Bank Business Model: Capital, Liquidity, and Leverage 186 THE NEW BANK BUSINESS MODEL 186 CORPORATE GOVERNANCE 195 LIQUIDITY RISK MANAGEMENT 196 THE LIQUID ASSET BUFFER 203 CONCLUSIONS 205 Notes 207 References 215 About the Authors 217 Index 219 "New banking and investment business models to navigate the post-financial crisis environment. The financial crisis of 2007-2008 has discredited business models in the banking and fund management industries. In The Future of Finance, Moorad Choudhry and Gino Landuyt argue that banks must realign their business models, implying a lower return-on-equity; diversifying their funding sources; and increasing liquidity reserves. On the investment side, the authors discuss how diversification did not reduce risk, but rather amplified it, and failed to stabilize returns. The authors conclude that the clear lesson from the crisis is to know one's risk. A lesson that is best served by concentrating on assets and sectors that you understand. Examines the weaknesses in the business models of many institutions, as well as the theoretical foundation for professionals in the field of finance. Identifies the shortcomings of Modern Portfolio Theory. Addresses how investment managers can find new strategies for creating "alpha" and why they need to re-vamp their fee structures. Filled with in-depth insights and practical advice, The Future of Finance will provide bankers and investment managers with a guide to realigning their businesses in order to prosper in the post-crisis financial markets."-- Provided by publisher