Index

ABN Amro, 51–52 Bahrain, 18 Africa, 17, 116 Bank for International Settlements (BIS), Agent-principal argument, xxiii 32–34 Agricultural commodities, 117–118 Bank-issued infl ation-linked notes, 109–110 AIG, macroprudential regulation and, 53 Bank of America, 46–47 Algeria, 19 Bank of England, 56, 106 Alpha, as myth, 82 Banks: ARCH/GARCH models, 78–80 concentration of derivatives in, 28–29 Argentina, 7 deleveraging of, xxv Asia: initiatives to address systemic risk in, central banks, 22 30–36 currency crisis of 1997–1998, 5, 24, 38 moral hazard and, 37–42 gross savings versus net lending in Barclays Bank, 48–49, 120 percentage of gross domestic product Barings bank, 27 of, 17 Basel Committee on Banking and Asset-backed commercial paper vehicles Supervision (BCBS): (ABCPs), in shadow banking system, limit on leverage ratios, 162 xxiv proposals for revamping rules, 173–175 Asset-liability committee (ALCO), 124 Basel II, 45 policies, 134–137 Basel III, 123 reporting, 136, 137–142 Bear Stearns: reporting, proposed, 174–175 fi nancial accelerator and, 68 Asset-liability management (ALM), systemic risk and, 52, 53–54 123–157 http://www.pbookshop.comBelgium: ALCO policy, 134–137 gross domestic product of, 51 ALCO reporting, 137–142 sovereign debt and, 100 basic concepts, 123–134 Bernanke, Ben, 14–15, 43 internal funding rate policy, 151–157 Best practices, internal funding rate policy liquidity risk management metrics, and, 154 145–151 COPYRIGHTEDBlackstone, MATERIAL 64 liquidity risk management principles, Blundell-Wignall, Adrian, 153 142–145 BNP Paribus: mismanaged, 86 effi cient market hypothesis and, 80–81 Assets: leverage and total assets, 46–47 internal funding rate policy and, 155–156 Boards of Directors: rotation of, 95–97 current regulations and bank strategy, strategy and review of, 161 160 Atkinson, Paul, 153 risk behavior and remuneration, 66 Australia, 68, 108 structure of, 167

191 192 INDEX

Bonds, infl ation risks and, 110–112 debt as percentage of gross domestic Bonuses. See Remuneration, corporate product of, 96 governance and excess foreign exchange reserves, xx Bradford & Bingley, 151 gross savings versus net lending in Brady, Nicholas, xx percentage of gross domestic product Brazil: of, 17 cost of fi scal crisis as percent of gross recommended solutions for global domestic product of, 9 imbalances, 16, 20–21 currency risk and, 7, 115–116 sovereign debt and, 105 debt as percentage of gross domestic Citigroup, xxiii, 46–47, 52, 53 product of, 96 Clinton administration, 4 Bretton Woods agreement, collapse of, 4 Collateralized debt obligations (CDOs), xix, Brunnemeier, Markus K., 25 xxii, 14 Bubbles: remuneration and calculation of profi ts, cyclical nature of, xix–xxi, xxvi, 38 62 overview of historical, 89 in shadow banking system, xxiv Buffett, Warren, 27 synthetic, 68 Bulgaria, 9 Colombia, cost of fi scal crisis as percent of Business cycles, 88–89 GDP, 8 Business models, 158–167 Commerzbank, 48–49 capital structure and, 163–165 Commodities: leverage ratios and, 161–163 ETFs and, 120–121 need for change in, 158–159 investment guidelines and, 116–118 risk identifi cation and, 165–167 sovereign debt and, 100 strategy and, 159–161 Compensation. See Remuneration, corporate governance and Canada: Concentration report, as liquidity risk currency risk and, 114 management metric, 146, 149–150 debt as percentage of gross domestic Consolidation, risk of too-big-to-fail and, product of, 96, 98 45–52 infl ation-indexed bonds of, 108 Contango effect, 120 leverage and, 68 Contingent-capital instruments, xxv Capital cost theorem, 85 Corporate governance, in new model, 167 Capital instruments, developing new, 45 Cost of funds, internal funding rate policy Capital management: and, 152–154 in bear market, 67–68http://www.pbookshop.comCountercyclical capital management, 67, special reversed convertible bonds and, 163–165, 170–173 69–75 Credit Agricole Group, leverage and total Capital structure, business model and, assets, 46–47 163–165 Credit default swaps (CDSs), 23, 31–32 Carry trade, 86 effi cient market hypothesis and, 79–80 Case-Shiller U.S. Home Price Index, 36 Credit rating agencies, 78 Cash fl ow matching, 131 Credit Suisse Group: Central banks, economic theories and, 89–92 hedge fund Index performance, 83 Central clearing party (CCP), proposed, leverage and total assets, 48–49 31–34 Credit Suisse/Tremont Hedge Fund index, Chile, 9 xiii–xiv China: Crises. See also Bubbles commodities and, 116 cyclical nature of, xix–xxi, xxvi currency risk and, 115 need for cycle-proof regulation, xxiii–xxv Index 193

Cumulative liquidity model, as liquidity risk Equities, infl ation risks and, 110–112 management metric, 146, 148 Euro, 105, 115 Currency risk, 104, 114, 115–116, 120 Europe, gross savings versus net lending in Current-account defi cit in U.S., 9, 11–15 percentage of GDP, 17 Current account surpluses, need to reduce, European Central Bank (ECB), 106 16, 20–21 Exchange rates (artifi cially low), role in Cycle-proof regulation, need for, xxiii–xxv fi nancial crisis of 2007–2009, 15–16 Czechoslovakia, 9 Exchange-traded funds (ETFs), 112, 118–121 Debt (public), as percentage of GDP, advantages and disadvantages of, 7–8, 9 119–120 Deleveraging, xxv, 96–97, 106 Delphi, 112 Fama, Eugene, 76, 77 Demographics, sovereign debt and, Fannie Mae, 39–40, 105 101–103 Federal Deposit Insurance Corporation Derivatives, xxi–xxii (FDIC), 43 growth in use of, 22–24 Federal Reserve: solutions for improvement, 30–36 economic theories and, 90 systemic risk and, 23–30 infl ation and, 106 Deutsche Bank, leverage and total assets, interest rate conundrum and, 11–15 48–49, 68 as proposed regulator of banks, 30 Devaluations, 104, 115 Fiat money, 105 Dexia, leverage and total assets, 50–51 Finance, paradox of, xxi Diversifi cation theory, xiii–xv, 76, 85–88 Finance companies, Thai crisis and, 6–7 Dynamic provisioning, 68–69 Financial accelerator, 68 Financial crash of 2007–2009: Economic theories, 76–92 capital buffers and reverse convertibles, capital cost theorem, 85 67–75 diversifi cation and, xiii–xv, 76, 85–88 capital safeguards and, 75 effi cient market hypothesis, 76–84 derivatives and systemic risk, 22–36 fi nancial instability hypothesis, 88–89 economic theories and, 76–92 lessons for central banks, 89–92 emerging market crises and, 5–8, 9, 10 Ecuador, 9 exchange rates and, 15–16 Effi cient market hypothesis (EMH), 76–84 globalization and, 3–4 anomalies, 80–83 recommendations and solutions, 16–21 free markets and, 76–77http://www.pbookshop.comremuneration and corporate governance, rationality and, 79–80 60–66 in theory and practice, 78–79 savings glut and low-yield environment, volatility and, 84 8–9, 11–15 Effi cient portfolio theory, xiii–xv too-big-to-fail and moral hazard, 37–59 Egypt, 19 Financial instability hypothesis (FIH), of El-Erian, Mohamed, 104 Minsky, 88–89 Emerging economies: Financial markets, benefi ts of, xix currency risk and, 115–116 Financial Services Authority (FSA), 54, 56, globalization and, 4 123, 142 gross savings versus net lending in liquid asset buffers and, 175–177 percentage of gross domestic product new models of liquidity risk management, of, 17 168–175 role in fi nancial crisis of 2007–2009, 5–8, remuneration and, 65 9, 10 SRC and, 70 194 INDEX

Finland, 9 Gregory, Joe, 64 Flannery, Mark, 69–70, 71 Gross, Bill, 97 Foreign exchange reserves (excess), xx Gross domestic product (GDP): Fortis Bank, 48–49, 51–52 debt as percentage of, 96 401(k) plans, 4 economic environment and ratio of debt France: to, 103–105 bond ratings, 113 per country, 51 debt as percentage of gross domestic public debt as percentage of, 7–8, 9 product of, 96, 98 gross domestic product of, 51 HBOS, leverage and total assets, 48–49 infl ation-indexed bonds of, 108 Hedge funds: sovereign debt and, 105 growth of industry, 22 Freddie Mac, 39–40, 105 negative 2008 performance, 87 Friedman, Milton, 13, 105 in shadow banking system, xxiv Friedman, Thomas, 116 Housing market, property derivative Fuld, Dick, xxiii, 64 proposed, 35–36 Funding risk, defi ned, 151 HSBC, xv, 46–47, 142 Hungary, 9 Geithner, Timothy, 101 Hutchinson, Michael, 5 Gelband, Mike, 64, 92 Germany: Iceland, 45 bond ratings, 113 India: currency risk, 114 currency risk and, 115–116 debt as percentage of gross domestic debt as percentage of gross domestic product of, 96, 98 product of, 96 gross domestic product of, 51 Indonesia, 9 gross savings versus net lending in Infl ation, 105–114 percentage of gross domestic product effects of, 105–107 of, 17 equities versus bonds and, 110–112 infl ation-indexed bonds of, 108 ETFs and, 120 sovereign debt and, 105 investment solutions, 106–110 Global bailout, cost of, 39–42 sovereign debt and, 100 Globalization, xxi Infl ation-indexed Treasuries (TIPS), 107 hedge funds and, 22 ING Bank, 48–49, 51 role in fi nancial crisis of 2007–2009, Insurance industry, 21 3–4 http://www.pbookshop.comInter-entity lending report, as liquidity risk Global warming, 117–118 management metric, 146, 150 Gold, 116–117 Interest rate conundrum, 11–15, 22, 34 Goldman Sachs, 41–42, 46–47 Interest rate derivatives, 23, 31 Greece: Interest-rate gap, 126, 137–138 credit default swaps and, 114 Interest-rate risk, ALM practice and, infl ation-indexed bonds of, 108 124–127 sovereign debt and, 105 Interest rate swaps, network of, 26–27 Greenspan, Alan: Internal demand, need to stimulate, 20 interest rate conundrum and, 11–13, 22, Internal funding rate policy, 151–157 34 assets/liabilities and, 155–156 interest rates and, 77 best practices and, 154 moral hazard and, 38 cost of funds and, 152–154 transparency and, 43 framework, 151–152 Greenspan Put, 38 liquidity premium calculation, 156–157 Index 195

scope, 154–155 Laissez-faire capitalism. See Effi cient market transfer pricing policy, 154 hypothesis (EMH) International Accounting Standards Board Lebanon, 19 (IASB), 69 Lehman Brothers, xxii, xxiii, 24–25, 64, “International Monetary Exchange,” 44 68, 163 International Monetary Fund (IMF), 5, 32 alpha and, 82 Investment guidelines, 95–122 leverage and total assets, 46–47 asset rotation, 95–97 Lender of last resort (LOLR), 37–38, commodities, 116–118 41–42, 44, 51, 57–58 currencies, 115–116 Leverage, false sense of safety and, 34–35 emerging markets, 115–116 Leverage ratios, business model and, exchange-traded funds, 118–121 161–163 government debt and demographics, 96, Lewelyn, Jonathan, 87 97–105 Liabilities, internal funding rate policy and, infl ation and, 105–112 155–156 sovereign bonds, 112–114 Libya, 19 Ireland: Liquid asset buffer (LAB), 175–177 gross domestic product of, 51 Liquidity gap, ALM practice and, 126, rescue of banks in, 45, 50 127–133 Italy: Liquidity premium framework, 154 debt as percentage of gross domestic Liquidity ratio, 133–134 product of, 96, 98 limits proposed, 44 gross domestic product of, 51 Liquidity risk factor (LRF), as liquidity risk infl ation-indexed bonds of, 108 management metric, 146, 148–149 sovereign debt and, 100, 105 Liquidity risk management: Ivory Coast, 9 ALM practice and, 124–133 Basel Committee proposals, 173–175 Japan: countercyclical funding, 170–173 cost of fi scal crisis as percent of gross key metrics of, 145–151 domestic product of, 9 liquidity risk defi ned, 151 currency risk and, 115 new models of, 168–175 debt as percentage of gross domestic principles of, 142–145 product of, 96, 98 Lloyds TSB Group: demographic issues, 102 leverage and total assets, 50–51 drop in input as a percentage of gross SRC and, 70 domestic producthttp://www.pbookshop.com of, 9 Loan-to deposit ratio, as liquidity risk gross domestic product of, 51 management metric, 146 infl ation-indexed bonds of, 108 Long Term Capital Management (LTCM), sovereign debt and, 97 xix, xxi–xxii, 24, 38, 68, 78 Japan Airlines, 112 Look-back options, SRC bonds and, 72–74 Jordan, 19 Low-yield interest environment, 8–9, 11–15 JPMorgan Chase, 27, 46–47, 68 MacCarthy, Larry, 64 Kahneman, Daniel, 79 Macroprudential fi nancial regulation, xxiii– Kalman fi lter, 79 xxv, 53–58 KBC Group, 50–51, 53 Malaysia, 8, 9 Kirk, Alex, 64 Markowitz, Harry, 76, 85–88 Korea, 9 Matched book, 130–131 Krugman, Paul, 5–7, 76 Mathematical modeling, xxi–xxii Kuwait, 18 Maturity transformation, 158 196 INDEX

Mauldin, John, 80, 81 Over-the-counter (OTC) derivatives, central McDonald, Lawrence G., 64 clearinghouse proposed for, 44 Merrill Lynch, 46–47 Mexico, 9 Paraguay, 9 Middle East, gross savings versus net Paulson, Henry, 105 lending in percentage of GDP, 17 Pension funds: Middle Eastern and North African (MENA) broadened investment guidelines of, 4 currency, limitations of, 18–19, 21 demographic issues, 103 Miller, Merton, 85 industry focus needed, 21 Minsky, Hyman, 25, 87, 88–89, 91, 98 Personal behavior, remuneration and, 64–65 Mishkin, Frederic, 5 Peterson, Peter, 64 Mitsubishi UFJ Financial Group, 46–47 Petrodollars, xx Mitzuho Financial Group, 48–49 Philippines, 9 Modern portfolio theory (MPT), xiii–xv, Portugal, 105 85–88 Prices, rising demand and, xxi Modigliani, Franco, 85 Prince, Chuck, xxiii Money markets, central clearinghouse Private equity fi rms, 22 proposed for, 44 Property derivative, proposed, 35–36 Moral hazard risk, 37 mitigating of, 42–53 Qatar, 18 Morgan Stanley, 41–42, 48–49 Quants, 78 Morocco, 18 Mortgage-backed securities (MBS), xix, xxii Rating agencies, xxii Murphy, J. Michael, 80 Rationality, EMH and, 79–80 Mutual fund industry, 87 Reagan administration, 4, 77 ETFs contrasted, 119 Refl exivity, xxii Regulations: Netherlands: need for counter-cyclical, xxiii–xxv currency risk and, 114 proposals for reregulation of fi nance, xxv gross domestic product of, 51 Regulatory Reform Plan, 30 sovereign debt and, 105 Reinhart, C., 95, 97, 98, 103, 104, 113, 115 Net present value (NPV), remuneration and Remuneration, corporate governance and, calculation of profi ts, 61–62 60–66 Net stable funding ratio (NSFR), 173–175 bonuses and moral dilemmas, xxvi, Neuberger, Ilan, 5 60–61 Nonbank institutions,http://www.pbookshop.com in shadow banking distorted model of, 61–64 system, xxiv personal behavior and, 64–65 Nonexecutive directors, number and role of, recommendations, 65–66 167 Reversed convertible (RC) bond, 69, 71 Non-interest-bearing liabilities (NIBLs), 131 Risk: Northern Rock plc, 38, 52, 53, 143, 151 business model and identifying of, Norway, 9, 114 165–167 effi cient market hypothesis and, 80–83 Obama, Barack, 30, 100 Robinson, Patrick, 64 O’Driscoll, Gerald Jr., 90 Rogoff, K., 95, 97, 98, 103, 104, 113, 115 Oil shock, 1973–1974, xx Royal Bank of Scotland, 46–47, 51–52, 53 Oman, 18 Russia: One-week and one-month liquidity ratios, as crisis in, 24 liquidity risk management metric, 146 currency risk and, 115 Orange County, California, 27 debt as percentage of gross domestic Overnight index swaps (OISs), 31 product of, 96 Index 197

Salinas de Gortati, Carlos, 6 Sweden: Santander Central Hispano, 46–47 cost of fi scal crisis as percent of gross Saudi Arabia, 18 domestic product of, 8 Savings glut and low-yield environment, infl ation-indexed bonds of, 108 role in fi nancial crisis of 2007–2009, Switzerland 8–9, 11–15 debt as percentage of gross domestic Savings ratio, demographic issues, 102–103 product of, 96, 98 Scholes, Myron, 34–35, 78 gross domestic product of, 51 Schwarzman, Stephen, 64 Syria, 19 Scope, internal funding rate policy and, Systemic risk: 154–155 defi ned, 23–24 Self-certifi ed mortgages, xxii–xxiii derivatives and, 23–30 Senegal, 9 interconnection of fi nancial markets and, Shadow banking system, xxiv, xxv, 23 44–45 Shiller, Robert, 36 macroprudential regulation and, 53–58 Slovakia, 9 solutions for improvement, 30–36 Smick, David, 4 Société Générale, 48–49 Taleb, Nassem, 87 Sorkin, Andrew Ross, 64 Tequila crisis of 1994, 6 South Korea, 9, 102 Thailand: Sovereign debt: cost of fi scal crisis as percent of gross bonds and, 112–114 domestic product of, 9 ETFs and, 120 drop in input as a percentage of gross investment guidelines and, 96–105 domestic product of, 9 new environment for, 103–105 1997 crisis in, 5–7 Sovereign wealth funds (SWFs), 9, 11–15, THB (Thai baht), 6 22 Thatcher administration, 77 Spain: THB (Thai baht), 6 cost of fi scal crisis as percent of gross TIPS, 107 domestic product of, 9 Too big to fail (TBTF), 37–59 debt as percentage of gross domestic addressing to mitigate moral hazard, product of, 96, 98 42–53 excess foreign exchange reserves, xx banks and moral hazard, 37–42 gross domestic product of, 51 best practices recommendations, 57–58 risk management in, 68–69 consolidation trends and, 45–52 sovereign debt and,http://www.pbookshop.com 105 cost of global bailout, 39–42 Special purpose vehicles, in shadow banking interconnection of fi nancial markets and system, xxiv systemic risk, 44–45 Special reversed convertible (SRC) bond: macroprudential regulation and, 53–58 assumptions and issues of, 71–72 transparent communication and, 43–44 characteristics, 69–70 Transfer pricing, internal funding rate pricing of, 72–75 policy and, 154 Sri Lanka, 9 Transparent communication, central banks Stern, Gary, 69 and moral hazard, 43–44 Stimulus packages, infl ation and, 106 Treasuries, infl ation-indexed (TIPS), 107 Strategy, business model and, 159–161 Troubled Asset Relief Program (TARP), 41 Stress tests, 169–170 Tunisia, 19 Structured investment vehicles: in shadow banking system, xxiv UBS, 51, 53, 153 in Spain, 68 leverage and total assets, 48–49, 68 Sumitomo Mitsui Financial Group, 48–49 Unicredit, 48–49 198 INDEX

United Arab Emirates, 18 gross savings versus net lending in United Kingdom: percentage of gross domestic product bond ratings, 113 of, 17 currency risk and, 115 infl ation-indexed bonds of, 108 debt as percentage of gross domestic sovereign debt and, 100–101 product of, 96, 98 Uruguay, 9 demographic issues, 102–103 U.S. dollar, emerging-market crisis and, devaluation and, 104 15–16 excess foreign exchange reserves, xx gross domestic product of, 51 Value-at-risk (VaR) exposure: gross savings versus net lending in effi cient market hypothesis and, 80–83 percentage of gross domestic product Goldman Sachs and, 41–42 of, 17 Venezuela, 9 infl ation-indexed bonds of, 108 VIX contract, 26, 35 open economy of, 4 Volatility, effi cient market hypothesis and, United States: 84 bond ratings, 113 currency risk and, 115 Water, as commodity, 118 current-account defi cit in, 9, 11–15 Welch, Jack, 60 debt as percentage of gross domestic Wells Fargo & Co., 46–47 product of, 96, 98 Wolf, Martin, 5, 15, 20, 76 demographic issues, 102 World Bank, 32 excess foreign exchange reserves, xx gross domestic product of, 51 XUA/USD volatility, 84

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