A History of British Actuarial Thought

by Craig Turnbull Palgrave Macmillan 2016 The reputation of actuaries in the UK has declined precipitously in the last three decades. Once they were among the most powerful decision makers in Britain’s financial sector, albeit semi-invisible. Today their role has been sharply curtailed by regulation and market trends, while their profession struggles to articulate its…

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Close-out netting and safe harbours increase systemic risk

The banking industry has long argued that close-out netting provisions in derivative contracts reduce systemic risk, and successfully lobbied to have 'safe harbour' provisions to protect counterparties from bankruptcy claims. This is embedded in US Generally Accepted Accounting Principles, resulting in trillions of derivatives exposures not being counted on bank balance sheets. However the Lehman…

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Just over two years ago, I took a train from Berlin to Wolfsburg, to visit a senior executive at Volkswagen. From the station platform the famous chimneys of VW’s vast car plant loomed up. Inside the gate, the company’s vehicles were everywhere, catching

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Borges, Babel and the race against the machine

In a world of information, the way we measure combinations of words or ideas is important. Some people say it might even save humanity. Last year, economists Eric Brynolfsson and Andrew McAfee suggested that increasing combinations of business ideas could save us from being supplanted by intelligent machines. Like any powerful algorithm, combinatorics is both…

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Most-read articles of 2014

Is the sharing economy a new form of regulatory arbitrage? That was the question posed by my most popular article this year. Published in January, my take on Uber turned out to be prescient, as the ride sharing company attracted increasing regulatory headwinds around the world. The second most-read new article is actually a pair…

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House of Debt

The authors are experts at crunching microeconomic data on American borrowing patterns and uncovering explanations for what they see. Their starting point is the remarkable statistic for US household debt, which doubled to $14 trillion between 2000 and 2007. This build up of debt was responsible for the ensuing havoc because of its effect on borrowers, Mian and Sufi argue.

To understand this argument, consider mortgage borrowers versus those who invest in their mortgages via bank deposits. The borrowers tend to be poorer than the investors, who have spare cash. As Mian and Sufi put it, a poor man’s loan is a rich man’s asset.

However, the risk distribution is highly asymmetric because mortgage holders have a senior claim on property while the borrowers’ equity claim is junior, and gets wiped out first. When US house prices fell from late 2006 onwards, losses were concentrated among the poorest segment of the population who had levered exposure, while the richest segment ““ the savers ““ were cushioned.

That explains why inequality increased during the Great Recession, but Mian and Sufi don’t stop there. Using economic analysis that reads like a detective story, they show how the evaporation of poor peoples’ wealth led to a collapse in spending, effectively causing the Great Recession itself. To show causality, they point out that spending initially fell the most in areas of biggest housing wealth declines.

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Disruptive Business Models, Uber and Plane Crashes

Disruptive internet-based business models have upended traditional industries like recorded music, newspapers and retailing. The latest flurry of innovation involves start-ups that take a service traditionally provided by a regulated firm - such as a hotel or taxi company - transforming it into commission-paying transactions between buyers and sellers. Accessed via smartphone apps and 'regulated'…

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From the UK to Italy, an interest rate derivatives headache

My story (with Elisa Martinuzzi) about Italy admitting it paid Morgan Stanley billions to unwind derivatives, and the UK newspaper coverage reporting on the alleged mis-selling of derivatives by banks like Barclays to small British companies, have something in common. Small British companies and Italy share an environment where both of them are finding it…

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Nudge and Predictably Irrational

Nudge: Improving Decisions About Health, Wealth and Happiness by Richard Thaler and Cass Sunstein ( Yale University Press, 2008) Predictably Irrational: The Hidden Forces That Shape Our Decisions by Dan Ariely (Harper Collins, 2008) Just over a year ago, I made a rough estimate of the size of my income tax bill that I would…

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