Cass Finance Blog

November 29, 2013
by Thorsten Beck
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Friday links

Is Europe facing a lost decade like Japan? Takeo Hoshi and Anil Kashyap argue that yes and point to some striking parallels in the Japanese approach to crisis resolution post-1997 and the approach in several European countries post-2008.

We have been talking a lot about housing prices in the UK these past two weeks, so here is a cross-country version, with data for 51 countries, and some interesting graphs.

Cass’ Emerging Market Group, the European Central Bank and the Journal of International Money and Finance organize the 4th Emerging Markets Group Conference on Emerging Markets Finance, with Viral Acharya and Helene Rey as keynote speaker, on 8th-9th May 2014 in London. Deadline for submissions is December 6!

Coming up nxt week on our blog: Labor and Finance – An Uneasy Relation; Should Investors Worry about Companies that Delist from the London Alternative Market?; and much more.  Happy weekend!

November 28, 2013
by Paolo Volpin
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Credit Rating Agencies: Who Needs Them?

Credit rating agencies (CRAs) have been widely criticized for their role in the 2007-2008 subprime crisis. In particular, it has been argued that rating inflation, coupled with naïve investment decisions, contributed to the massive mispricing of risk that led to the crisis. More recently, CRAs’ hasty downgrading of some countries’ sovereign debt has also been criticized for contributing to the acceleration of the sovereign debt crisis in Europe. Continue Reading →

November 27, 2013
by Thorsten Beck
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Finance in China – quo vadis?

China’s authorities seem to have taken the reform path in the financial sector, with the recent announcement from the leadership summit.   Rather than settling the uncertainty, however, this has raised more questions, partly because details are still lacking and keep trickling out at a slow rate. The 36th PAFTAD conference I attended last week at the Hong Kong Monetary Authority offered a great forum to discuss many of these issues, but also a unique window into the discussion among leading Chinese academics that are close to the on-going policy discussion. Continue Reading →

November 25, 2013
by Giacinta Cestone
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Do financial crises unveil the potential of conglomerates?

Two recent academic papers suggest that conglomerates and corporate groups may be better equipped than stand-alone companies to withstand financial turmoil. Heitor Almeida and Chang Soo Kim (2012) analyse how Korean firms affiliated with large groups (chaebols) reacted to the 1997 Asian crisis, as opposed to their stand alone counterparts. They find that chaebol firms reduced investment significantly less than stand-alones in the aftermath of that crisis. Belén Villalonga and Venkat Kuppuswamy (2012) look instead at US conglomerates in the current crisis. They find that the diversification discount shrank in the post crisis period, and by a meaningful amount. This seems largely due to an internal capital market effect: when external finance is tight, the story goes, access to the pool of internal liquidity generated by the whole conglomerate/group becomes extremely valuable to prop up investment. Continue Reading →

November 22, 2013
by Thorsten Beck
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Friday links

A new report by the World Bank on Financial Inclusion, including reference to lots of new data sources, financial innovation (of the good kind!) and policy challenges

 

The dark side of good bank governance: leading to lower capitalization and more fragility, as argued by Deniz Anginer and co-authors with empirical data on the U.S.

 

Financial Regulation after the crisis: how did we get here and how do we get out?  With this provocative headline, Jerry Caprio argues against risk weights and for a leverage ratio.  Most importantly, he urges a stronger focus on accountability of regulators and transparency of banks and the regulatory process.

 

And following up on my previous piece on the banking union, here a suggestion on how to address legacy losses before moving into a banking union with a joint public back-stop.

November 21, 2013
by Richard Payne
1 Comment

FX manipulation: dark arts at tea-time

After the discussion of LIBOR manipulation on this blog, I wanted to add a few words on more recent claims of price rigging in FX markets. At present, in this case, all we have are allegations and the knowledge that regulators around the world are looking at the conduct and FX trading records of several large and well known investment banks. We also know that several investment banks have already taken action, in that key FX employees have been let go or suspended. The focus of attention appears to be on trading patterns around the regular ‘fixes’ in the market.[1] These fixes occur at particular points of the day, most importantly 4pm, and consist of the computation and publication of reference prices for exchange rates based on prices of executed trades in the minute or so before the fix time. Continue Reading →

November 19, 2013
by Thorsten Beck
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Housing Finance: the academic side, the policy view, and a Nobel prize winner

Housing finance has become an increasingly important topic since the crisis in 2007/8, for academics and policy makers alike. This is on the background of housing being the most important asset that most households will finance over their lifetime and the fact that mortgage finance constitutes an increasingly important part of banks’ balance sheets.  It is more, the impression that bank’s intermediation function consists of channelling funds from savers to entrepreneurs is more and more replaced with the reality that they intermediate savings to house owners.

Last week, I had the honour to co-organize a conference on Housing, Stability and the Macroeconomy: International Perspectives with the Federal Reserve Bank of Dallas, the IMF and the Journal of Money, Credit and Banking (which will come out with a special issue with papers from the conference in 2014 or 2015). The program consisted of a number of exciting theoretical and empirical papers on housing finance, two policy panels and two keynote speeches, by David Miles from the Bank of England’s MPC and Nobel Prize Winner Robert Shiller (whom we invited before he got the award).  Continue Reading →

November 18, 2013
by Andrew Clare
5 Comments

More Housing Bubble Trouble?

Despite what many would have you believe, the causes of the financial crisis that engulfed the global economy and its financial markets were not special or unique, even though the consequences were unprecedented for most of us.  It is true that it had unique characteristics, in particular the role that credit derivatives played in inflating the credit bubble.  But in the end the main cause of the crisis was all too familiar: too many greedy bankers lending too much money to too many people who could not afford to pay them back!

Continue Reading →

November 18, 2013
by Giovanni Cespa
1 Comment

Liquidity co-movements and price observability

There is by now a growing consensus among financial economists over the importance of market frictions to explain asset pricing anomalies. According to this view, frictions pose an impediment to the working of textbook arbitrageurs in their attempt to exploit price discrepancies, thereby preventing asset prices from falling in line with fundamental values. A relevant role in this respect is played by liquidity.

The liquidity of an asset captures the ease with which the asset can be traded. A number of factors contribute to an asset’s liquidity: the existence of transactions costs (e.g., taxes or brokerage fees), by imposing an exogenous outlay on the negotiating parties, lowers the gains from trade, thereby augmenting the asset illiquidity. Similarly, the potential difficulty to readily find a counterparty, by increasing the uncertainty over the successful completion of a trade, also weigh negatively on an asset liquidity. Finally, the illiquidity of an asset is also heightened by the existence of asymmetric information in the market: this is because the risk of facing agents holding better information reduces less informed parties’ willingness to take part in a transaction.

Continue Reading →

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