Carmakers and other industries need good risk management as they pivot toward climate-friendly products. This has prompted banks to return to taking outsized commodity bets, which in the past have caused trading losses and compliance disasters for many institutions.
Continue reading..Caught between a wall of QE cash and a web of capital rules, what is left for bank CEOs to do? The evidence from securities holdings, bond issuance and TLAC.
Continue reading..How the push for growth turned equity financing into a hotbed of regulatory arbitrage
Continue reading..The banking giant warned that it might slash its vast balance sheet if the Fed doesn’t roll over temporary leverage ratio relief. Could it unleash a wave of turmoil in wholesale markets if it doesn’t get what it wants?
Continue reading..UK councils are at the front line of the pandemic, but financial mismanagement is adding to their woes. Risky Finance has compiled a list of English authorities mostly likely to be on the receiving end of a government bailout.
Continue reading..Italian courts are prosecuting former officials involved in derivatives terminated by Morgan Stanley nine years ago. But the US bank actually did Italy a favour, unlike the country’s other sovereign counterparties.
Continue reading..Developed nations face ballooning post-pandemic debt burdens. In a QE world, does that actually matter?
Continue reading..The experience of a doctor who fought pandemics a century and a half ago provides some hope for today
Continue reading..Rampant gigantism in the stock market took a blow recently as small-cap stocks enjoyed a run of outperformance. Is this the return of value?
Continue reading..To keep banks operating smoothly during the pandemic, regulators eased capital requirements and boosted trading profits by underpinning financial markets. Did they go too far?
Continue reading..In 2020, junk bondholders have to choose between painful restructuring and pushing for a repayment that might kill a company
Continue reading..Outstanding corporate bonds grew by $500 billion between March and the end of May. As the Covid-19 pandemic raged, much of this debt was used to pay dividends and even buy back shares.
Continue reading..In value-at-risk models, counterparty exposure and securities holdings, the impact of the pandemic appears across bank balance sheets
Continue reading..Should accounting be independent of bank supervision? The arrival of IFRS 9 provisioning at the height of the Covid-19 crisis has exposed a three way tussle between auditors, regulators and bank management.
Continue reading..Emerging market nations may struggle to repay debt in the wake of the coronavirus pandemic. And for many the biggest lender is China, as a new visualisation shows.
Continue reading..An interactive visualisation of $12 trillion of corporate bonds showing the impact of the Covid-19 pandemic. Free to registered users.
Continue reading..The coronavirus outbreak has infected the corporate bond market as economies grind to a halt. Can trillions of emergency central bank measures keep borrowers alive?
Continue reading..The Covid-19 pandemic is driving bond yields to record lows. Meanwhile, the exposure of large US banks to falling rates has been amplified by regulatory changes and ballooning securities portfolios.
Continue reading..Rob Carver reviews ‘The Rise of Carry’ by Coldiron, Lee and Lee
Continue reading..Sub-sovereign or regional debt is normally viewed as riskier than the sovereign. But default-prone Argentina has pushed this thesis to breaking point.
Continue reading..A review of the top ten articles published in the last ten years
Continue reading..Goldman Sachs is venturing into consumer lending, with the help of Apple Card. Part of the strategy involves dramatic changes to the bank’s risk models
Continue reading..The Fed relied on JP Morgan to lend out cash into the repo market. But that was before the too-big-to-fail giant made a pivot out of cash into securities.
Continue reading..The S&P 500 index added $5 trillion of market cap this year, led by its biggest members. The trend is accelerating wealth inequality.
Continue reading..This year’s reversal in central bank sentiment has swept through the corporate bond market
Continue reading..The French banking giant more than doubled its securitisation exposure in the past 12 months, filings show. Does the ballooning CLO portfolio pose a risk?
Continue reading..Amounts of negative-yielding euro debt have surged to record levels in anticipation of further easing. But how effective is the ECB’s strategy?
Continue reading..Gauging the significance of the LOBO redemption wave
Continue reading..Portfolio optimisers often give results that are extreme and unstable. With so many variables involved, it can be hard to decipher why. This article presents a simplifi ed formula for a two-asset optimisation which will bolster your intuitive understanding of how a portfolio optimiser behaves and why it may behave badly. Download the paper here About…
Continue reading..Portfolio optimisation has transformed investing in recent decades. But according to a new paper, naive application of such modelling can lead to extreme or unstable trading strategies.
Continue reading..As trade tensions worsen, dollar-denominated bond issuance by Chinese real estate companies is at a record high, while credit spreads have tightened.
Continue reading..With a softening approach from central banks, borrowing-driven M&A is being rewarded
Continue reading..Dismantling Deutsche Bank, JP Morgan’s Steinhoff fallout and the return of securitisation
Continue reading..The 1MDB scandal may result in a record legal settlement for Goldman Sachs. Risky Finance visualises the expected loss and explores how life-changing it might be for Goldman.
Continue reading..The decline in equity markets seen in the last few months would have been worse without the countervailing effect of buybacks. But by how much?
Continue reading..The Collins amendment has become a binding capital constraint for the biggest US banks. Does this support the Fed’s argument for rolling back the advanced approaches provisions of Dodd-Frank?
Continue reading..Judea Pearl’s causal modelling and a critique of AI
Continue reading..Turkey faces an economic crisis as its dispute with the US escalates. We highlight Turkey’s financial vulnerabilities with six charts.
Continue reading..Robert Carver reviews ‘Advances in Financial Machine Learning’ by Marcos Lopez de Prado
Continue reading..Frontier market sovereigns are splurging on new borrowing just as investors are cooling on the asset class. A Risky Finance visualisation tool identifies the countries you need to watch.
Continue reading..The Fed’s annual stress tests and capital analysis amount to a contest between the regulator’s models of large banks in a crisis and those of the banks themselves. The latest disclosures suggest troubling flaws in the Fed’s calculations.
Continue reading..The AT&T Time Warner merger, and the battle between Comcast and Disney for Fox will prompt a vast amount of new borrowing. The spillover effects on other borrowers in the media and telecom sectors could be challenging.
Continue reading..Italy’s new populist government is on a collision course with the ECB, which is mulling the tapering of QE purchases. But inflation divergence suggests a way out for the central bank.
Continue reading..In a time of rising bond yields, active bond funds can use derivatives to manage duration risk. But as the experience of Pimco shows, attempts to generate alpha this way do not justify the risks or management costs.
Continue reading..Being a takeover target has a dramatic effect on share price performance for UK stocks, in contrast to the US. What does this say about attitudes to foreign ownership?
Continue reading..Pimco’s star manager uses credit default swaps to boost returns and increase inflows to his fund. How transparent are the risks?
Continue reading..Market-based loan repayment penalties imposed by the UK government are being blamed for worsening pressures faced by local councils, and incentivising property speculation. Now calls are being made to reform the system.
Continue reading..Since adopting Basel III reporting standards three years ago, the biggest US banks have started reducing risk weights while increasing lending. Is this a reflection of a healthy US economy or European-style gaming of internal models?
Continue reading..Trading volume is much higher than economists predict. Quant Tom Hyer addresses the paradox from the perspective of relative value.
Continue reading..Deutsche Bank’s inability to control its investment bank compensation bill may have doomed John Cryan, analysis of pay disclosures suggests.
Continue reading..The death of a pedestrian hit by an Uber self-driving car highlights the need to understand the decision-making of autonomous vehicles. The story goes back 17 years to when the technology was first refined.
Continue reading..A scandal at South African group Steinhoff has hit the large banks that lent $1.6bn to the company’s largest shareholder. Differences in the way banks treated the exposure highlight hidden risks in the financial system.
Continue reading..A €350bn decline in the exposure of EU banks to UK counterparties was widely interpreted as an exodus sparked by Brexit, but closer analysis of the data refutes this interpretation.
Continue reading..Morgan Stanley has vaulted over Goldman this year in fixed income trading. Analysis of risk disclosures helps explain the divergence between the two firms.
Continue reading..Presentation to council borrowing event, London 18th July 2017
Continue reading..Is the Fed’s DFAST stress test telling us that banks are getting safer, or are the banks just getting better at doing the internal modelling?
Continue reading..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…
Continue reading..Dozens of UK councils are paying a significant proportion of tax revenues in debt interest payments, and the burden is worsened by record low interest rates
Continue reading..HSBC paid senior executives millions in bonuses for achieving RWA reduction targets. But how much was the result of their efforts?
Continue reading..Why did the bank unilaterally waive LOBO provisions in loans last year, losing as much as £1 billion in the process?
Continue reading..S&P 500 companies have $2.4 trillion of cash and investments which may soon be repatriated back to the US as a result of tax reforms. We visualise the size of this cash pile relative to market cap.
Continue reading..After making dramatic cuts to its balance sheet and capital requirements, Morgan Stanley is boosting returns in fixed income. Is the bank using bond ETFs for regulatory capital arbitrage?
Continue reading..In the wake of unprecedented currency shifts, consumer goods companies are reducing hedging in favour of product sizing techniques to retain customers
Continue reading..After making dramatic cuts to its balance sheet and capital requirements, Morgan Stanley is boosting returns in fixed income. Is the bank using bond ETFs for regulatory capital arbitrage?
Continue reading..Christmas is when European banks typically book restructuring costs and goodwill writedowns. A study of quarterly profits shows the divergence versus US banks.
Continue reading..ECB president Mario Draghi says that corporate bond purchases are a success. Using securities lending disclosures allows the hypothesis to be tested with the help of an animated bubble chart.
Continue reading..In December 2015, the Securities & Exchange Commission proposed new regulations on the use of derivatives by US registered investment companies. This article looks at the derivatives exposures of two large mutual funds.
Continue reading..Emerging market bonds have outperformed most asset classes this year, prompting talk of a QE-induced bubble. But research into global inequality suggests a secular shift into emerging market debt makes sense.
Continue reading..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…
Continue reading..The Federal Reserve’s proposal to sharply raise capital requirements for bank physical commodity holdings puts Goldman Sachs on the spot and highlights the regulatory drive to rebuild barriers between banking and commerce.
Continue reading..Operational risk capital for US banks is the highest in the world but the Fed resists formally testing op risk in its stress tests. One reason might be that the Fed would have to explain why the charges need to be so high.
Continue reading..15 years after it was signed, the Goldman-Greece swap continues to be a reputational problem for the bank. A longer feature that reviews a decade’s worth of unreported material on the story.
Continue reading..Were regulatory warnings about bond market herding borne out in the high yield sell off and rebound?
Continue reading..How pension policy cowardice helped doom Britain’s steel industry. Tata’s decision to write off the value of its UK steelmaking business and seek a quick sale, while keeping its Dutch business, is really a story about pension regulation.
Continue reading..Artificial intelligence is booming and technology companies are pouring billions into AI research. But has AI really got to a take off point, and what does the history of the field have to tell us about the prospects for success?
Continue reading..When I was in my twenties, I worked on a film being shot on location in the London borough of Newham. The film itself, which starred Jude Law and Sadie Frost, was forgettable, but one memory that stayed with me was the all-pervading smell of refined sugar from the nearby Tate & Lyle factory by the river Thames.
Continue reading..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
Continue reading..In 2015, size equalled success in the stock market. But did benchmarking make this a self-fulfilling prophecy? Let’s start by looking at the market capitalisation of S&P 500 companies at the end of the year, with colours according to price change.
Continue reading..There have been plenty of words written about the high-yield corporate bond market in the last week, but sometimes a chart expresses things better than words.
Continue reading..Between July 2007 and November 2008, Newham council entered into 10 range LOBO loans with Barclays worth a total of £238.5 million. New information on the council’s controversial loan portfolio shows the impact of its relationship with Barclays, raising questions about risk management decisions.
Continue reading..by Gillen D'Arcy Wood (Princeton University Press 2014) In my last year at Harvard, before I decided to drop out of the PhD program and pursue other things, I took a graduate meteorology class. The class teacher, Brian Farrell, was doing what other professors did and quietly sounded students out about taking him on as…
Continue reading..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 the sun like a metallic sea. It crossed my mind that it…
Continue reading..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…
Continue reading..Ten years after Lehman, nothing evokes the crisis better than the plunge in collateralised debt obligations that was a key indicator of systemic risk at the time. This article includes a visualisation of a unique ratings agency database that will be kept on this site as a matter of public record. They rated every deal,…
Continue reading..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…
Continue reading..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.
Continue reading..Why can't the ECB bring itself to stress test banks for deflation? I was thinking about this question when I remembered an episode from the past. Just over ten years ago, I took a train from Frankfurt to the sleepy spa town of Wiesbaden. It was the sort of place where a lone taxi is…
Continue reading..For as long as most people can remember, UK municipal finance has been safe and boring. In the wild days of the 1980s, Hammersmith & Fulham council almost went bust speculating in derivatives, and was saved by a landmark House of Lords ruling. Since then, UK council borrowing has been tightly constrained by central government while derivative use has been banned.
Continue reading..by Timothy F Geithner (Random House 2014) If you had perfect foresight and were going to pick the best regulator or policymaker capable of dealing with the global financial crisis and its aftermath, whom would you choose? You'd probably want someone with a track record of dealing directly with crises, perhaps in emerging markets, and…
Continue reading..Junk bond funds are seeing record outflows. This has been described as a 'six-sigma event', in other words, six standard deviations away from the mean weekly flow, something that if normally distributed should only be expected once in millions of years. By definition that's unusual, but in the context of broader investment in riskier corporate…
Continue reading..The In/Out Question: Why Britain should stay in the EU and fight to make it better by Hugo Dixon (Kindle Single, 130pp) European Spring: Why our Economies and Politics are in a Mess and How to Put Them Right by Philippe Legrain (Amazon print-on-demand, 448pp) As the May elections to its parliament showed, the…
Continue reading..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'…
Continue reading..As the year ends, I thought it would be interesting to share with you the most-read articles on this website for 2013. Unsurprisingly, the review of Nassim Taleb's book Antifragile takes first place. Published just over a year ago, this review not only got the most views in the past year, but is the most-read article…
Continue reading..24 years ago I was a graduate student studying earth and planetary science at Harvard. My advisor, Professor Mike McElroy, was an expert on atmospheric chemistry and I helped him teach a course to 300 undergrads in what was known as the 'core curriculum'. As a special treat for the students, McElroy invited his friend,…
Continue reading..I first encountered the Higgs boson in 1989 on a blackboard in an advanced quantum field theory class for graduate students at Harvard University. It was the point that I realized that the life of a theoretical physicist was not for me. I remember the lecture theatre well. There were three blackboards side by side,…
Continue reading..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…
Continue reading..Are we on the verge of another Lehman weekend? The crisis of September 2008 unfolded in several stages: 1) a long bubble in subprime and credit markets in general, in which Lehman and other banks profited from by increasing their balance sheet leverage, 2) following a realisation that subprime was a haven of fraudulent lending,…
Continue reading..In January 2008, I scribbled down some ideas for a book about what was then a crisis sparked by subprime mortgages, based on my decade of experience writing about financial derivatives. Three-and-a-half years later, the book has now been published. It was the feeling of being trapped inside history that prompted me to write the…
Continue reading..Today, I participated in a panel discussion at the Economist Bellwether Europe conference on 'A Vision for Europe', together with Estonian finance minister Jürgen Ligi, head of markets at the UK Financial Services Authority Alexander Justham, and the chief executive of the Association for Financial Markets in Europe, Simon Lewis. Below are my answers to…
Continue reading..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…
Continue reading..
Carmakers and other industries need good risk mana...
Caught between a wall of QE cash and a web of capi...
How the push for growth turned equity financing in...
The banking giant warned that it might slash its v...