Cass Finance Blog

December 20, 2013
by Thorsten Beck

Friday links

Everybody talks about the Fed Reserve System these days – here is the movie about its past, present and future:
Randomised control trials have become the gold standard for proving causality, even in economics, with some claiming that if you cannot randomise it, it is not worthwhile studying.  Well, there seem to be limitations, even in medicine.Thanks to Bill Easterly for this link.
The Cass Finance Blog is taking a holiday break until Monday, January 6.  We wish all our readers a peaceful holiday season and an excellent start into 2014!

December 19, 2013
by Thorsten Beck

Guest post by Cristiano Bellavitis: London’s property price bubble is poised to burst

This is a guest post by Cristiano Bellavitis, PhD student at Cass Business School, on a familar topic – housing prices.

Fears of a looming house price bubble have grown in recent months.  But two affordability ratios – the house price-to-earnings and salary-to mortgage payments ratios – could suggest London prices are heading for a fall. Continue Reading →

December 18, 2013
by Thorsten Beck

Researchers and policymakers– what can they learn from each other?

The 30th anniversary conference of CEPR at the Bank of England on November 21 and 22 was not only a celebration of 30 years of policy-relevant research across different areas of economies, but also saw two interesting panel discussions by (former) academics, some of whom are now in leading policy functions across Europe and the globe, on the interaction between research and policy worlds.  What can policy makers learn from researchers and what can researchers learn from policy makers? Continue Reading →

December 16, 2013
by Enrique Schroth

Financial panics and regulation: Lessons from the ABCP crisis

In my previous post, I mentioned how Asset-Backed Commercial Paper (ABCP) conduits were set up by regulated banks in order to arbitrage minimum capital regulations, creating a very large but fragile market within the so-called shadow banking system. As my colleague Thorsten Beck writes in this blog, these ‘shadow’ activities are precisely what banks will pursue to stay ahead of regulators and legislators. Therefore, more data about these markets is needed to understand how they create instability, and whether something can be done about it.

Fortunately, such data has been collected and a series of articles have recently clarified what happened in the ABCP market. Here is my take on that literature. Continue Reading →

December 16, 2013
by Thorsten Beck

Finance and growth: lessons from the crisis

Having started my academic career with publications on the finance-growth link, my popularity dropped dramatically with the onset of the Global Financial Crisis.  The peak was in 2010 when someone asked my during a conference discussion at the Dutch Central Bank: “You are not seriously claiming that finance can be good for growth?” Well, having thought about this a lot over the last years, my response is: yes, I do claim that finance can be good for growth though we have to define better what we mean by finance. Continue Reading →

December 13, 2013
by Thorsten Beck

Friday links

If you are a migrant, does experiencing a banking crisis in your home country affects your use of banking service in your new country?  Una Okonwko Osili and Anna Paulson argue that yes.

The Eurozone is making progress on the future banking union, but seems to ignore existing problems, as I argue here.

Coming up next week: Financial panics and regulation: Lessons from the ABCP crisis; and: finance and growth: lessons from the crisis

December 12, 2013
by Meziane Lasfer

Is Corporate Governance more Effective in Weak Investor Protection Countries?

On the 27 November 2013, The Financial Times has reported that the outgoing chief executive of PSA Peugeot Citroën, Philippe Varin, who has been chief executive since 2009, has given up pension benefits worth €21m, amid criticism from French union leaders and senior government figures over the size of the payout.

This is a very good example of corporate governance at the time when the debate on excessive compensation by top management, which is not linked to performance, is a daily news. It seems that in France, the unions and the government succeed where shareholders monitoring fails. They appear to do the job of shareholders who give the impression to free ride!  Why is this? Continue Reading →

December 11, 2013
by Andrew Clare
1 Comment

How good is ‘Risk Parity’ as a Way of Allocating Across Asset Classes?

How should we allocate our investment portfolio between the growing range of asset classes now available? This is one of the most difficult decisions that any investor has to make. At the same time it is also the most important decision. Research (and common sense) shows that getting asset allocation right is far more important than finding a manager that can outperform their particular market. Continue Reading →

December 10, 2013
by Anthony Neuberger

Did Bad Finance Theory lead to Bad Financial Architecture?

Many people have commented on the proliferation of exotic financial structures – complex tranching, CDOs and CDO-squared – and so on. It does seem surprising that investors were so ready to buy claims on these special purpose vehicles (SPVs). The vehicles held large portfolios of poorly understood securities, which they combined with swaps, caps and credit enhancement features to deliver bond-like cash flows, using complicated priority rules to determine how the cash flow is divided between different claimants. Why would one want to invest in them? Continue Reading →

December 9, 2013
by Thorsten Beck

Shadow banking – how to regulate it?

Shadow banking is back in the news, both as alternative financing source for SMEs (e.g. peer-to-peer lending) and as instrument for banks to manage their capital efficiently.  Either way, it is again a hot topic for regulatory and policy makers around the globe.  I was recently asked to give a brief talk to British legislators on this topic, and here is an abbreviated version.

The policy agenda in the financial sector is full of trade-offs.  On the one hand, we would like to have a thriving financial sector providing financial services to the real economy, especially SMEs that have been shut out during the crisis.  On the other hand, we are afraid – and rightly so – of excesses and boom-and-bust cycles leading to systemic banking fragility and crises. On the one hand, we want competition in the financial sector, which reduces prices and facilitates access; on the other hand, this same competition can lead to herding trends and fragility.  On the one hand, we might want to look beyond banks to alternative financial service providers, especially in times, when banks are still recovering from the previous crisis; on the other hand, we are preoccupied with the lack of a regulatory framework for these institutions.  Shadow banking is an excellent illustration of this trade-off. They are non-bank financial institutions or instrument that are outside traditional banking regulation, but that are an important part of the financial system.  Continue Reading →

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