Cass Finance Blog

April 30, 2014
by Peter Hahn
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AstraZeneca: Insider Trading Bonanza???

As news spread of Pfizer’s initial approach to AstraZeneca in January 2014 offering a 30% premium I couldn’t resist taking a look at the movement of AZ shares and there was quite an increase in price in January.  Just the market?  Sudden excitement over AZ?  The lack of an AZ board announcement will certainly be questioned, but it looks like a dead certainty that many a regulator and lawyer will be very busy.

April 28, 2014
by Meziane Lasfer
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Why do companies issue hybrid bonds?

Over the last few years a number of companies are issuing a special category of bonds referred to as Hybrid Bonds. These bonds are like normal bonds in the sense that the interest paid by the issuer is tax deductible. However, unlike normal bonds which mature after a number of years, hybrid bonds are, like equity, perpetual. In general hybrid securities have some characteristics of debt and some of equity, but they are most known as, for example, convertible bonds which convert into equity at maturity debt, or preference shares which, like debt, have fixed yield, but, like equity, preference dividend is not tax deductible. Continue Reading →

April 25, 2014
by Thorsten Beck
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Friday links

Two exciting events next Thursday (May 1) at Cass: first, during the day: The Centralised Investment Process, See the big
picture finally come into view, organised by, among other, my co-blogger Andrew Clare, and then in the evening, the IMF’s Stijn’s Claessens presenting Financial Crises: Causes, Consequences and, and Policy Responses.

If you thought banks are all about lending, think again, especially after reading Nicola Cetorelli and Linda Goldberg’s paper on Complexity of Global Banks.

A fascinating experiment with loan officers’ risk taking reacting to performance-based compensation, by Leora Klapper, Martin Kanz and Shawn Cole. High-powered incentives can be useful, volume-based compensation rather not!

April 24, 2014
by Giovanni Cespa
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Persistent noise, investors’ expectations, and market meltdowns

The recent financial crisis has revived interest in the question of what triggers crashes and meltdowns in financial markets. An important reason for abrupt and large price dislocations is the lack or ‘slow motion’ of arbitrage capital (Duffie 2010) that weakens the risk-bearing capacity of liquidity providers. In a recent paper we propose an alternative explanation that relies on expectations dynamics in the presence of persistent noise trading. Our idea relies on a particular, backward-looking expectation revision mechanism that arises when asset prices reflect fundamentals and persistent noise trading, that we dub “retrospective inference.” We show that because of retrospective inference, the market can hover in a high-liquidity, high-informational-efficiency state, or be mired in a low- liquidity, poor-informational-efficiency trap.

Continue Reading →

April 23, 2014
by Thorsten Beck
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The social value of finance – fostering competition and opportunities

In a previous blog, I have discussed the importance of finance for real sector outcomes and have stressed the allocation function of financial institutions and markets. One important dimension of this role is fostering competition.  And by fostering competition, financial deepening can also improve on other dimensions that make it socially valuable, including discrimination on the basis of gender and race as I will discuss in this blog. Continue Reading →

April 17, 2014
by Thorsten Beck
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Postcard from Johannesburg

South Africa received some less than magnifying news recently as Nigeria released new GDP estimates, which showed that South Africa is now the second largest rather than the largest economy in Sub-Saharan Africa. As a side note that also implies that the Nigerian financial sector just shrank relative to the real economy. Not that it matters much for the financial sector in South Africa, which seems on the upswing, even though with its own and new set of challenges. A rather developed and diversified financial system, both host to European banks and home country to cross-border banks reaching out across the continent, it offers some interesting lessons both for its neighbouring countries on the continent as for more developed countries. Continue Reading →

April 15, 2014
by Thorsten Beck
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Banking Union – mission not accomplished yet

The European Parliament passed the legislation for the Single Resolution Mechanism (SRM) yesterday.  In my opinion, this will neither provide the common financial safety net that the Eurozone so urgently needs nor will it solve the current crisis (for which it is not even designed.

The Single Resolution Mechanism is supposed to complement the Single Supervisory Mechanism at the ECB, providing options for resolving failing banks as identified by the ECB.  By centralizing decisions, national biases vis-a-vis their own banks should be minimized and a level playing field created. Ultimately, the purpose is to overcome the increasing renationalization of European banking systems.    However, there is only partial and gradual mutualization of risks and losses and the intervention and resolution process is a complicated one, which makes a swift process, preferably over the weekend all but impossible.  And while it foresees a joint resolution fund, it is a small one, which, critically, lacks a public backstop as we have it in other countries with their own currencies. Ultimately, the current structure will not help cut the deadly embrace between banks and sovereigns in many Eurozone countries.  While designed for the next crisis, it will almost certainly fail to help if it stays in its current form.

More importantly, it does not (and is not supposed to) address the current banking crisis in the Eurozone. Continue Reading →

April 13, 2014
by Peter Hahn
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Janus The Regulator: Bank Shareholders Should Change the Rules or Get Out

Bank regulators, like the two faces of Janus, traditonally played their role of assuring stablility and limiting risk (the risk face) yet leaving enough risk in banks (the return face) for the return required by equity investors and sustainability.  Janus is often confused with the sad and smiling masks of tragedy and comedy at theatres, and while those might seem appropriate about banking, the metaphor is really about the way Roman Janus looked at the past and future simultaneously.

Banks all know that Janus has changed, but fail to realise how much?  I think much more than equity investors have realised;  since 2009, the risk face peers through microscopic – perhaps myopic – lenses while the return face sports darkened glasses.   It isn’t just two directions or two activities and it’s imperative that equity investors take note and form a new strategy. Continue Reading →

April 10, 2014
by Thorsten Beck
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Corporate governance – yes, banks are special!

The governance structure of financial institutions has been a neglected stepchild in the research community for many years, with corporate governance researchers focused more on non-financial corporations and banking researchers on other issues, such as bank regulation.  The recent crisis, however, has brought this topic again to the forefront, with a new focus on executive compensation, board structures and incentive systems in banks. In the UK, the Walker Review of 2009 analysed what went wrong in bank governance in the run-up to the crisis and made recommendations for improvement.  Last week, my colleague and fellow-blogger Peter Hahn organized a conference Five Years after the Walker Review, with fascinating discussions. Here are some of my thoughts on this topic. Continue Reading →

April 7, 2014
by Andrew Clare
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ECB QE – all hot air?

Last Thursday the ECB president, Mario Draghi, announced that the ECB would be in favour of radical measures to stave off the zombie-like state of deflation, including Quantitative Easing (QE).  The bond markets greeted this news enthusiastically.  The yields on bonds in the prephiery of the Eurozone fell in anticpation of the prospect of being able to sell these toxic instruments to a buyer with potentially infinite resources.

In this respect then the announcment had a beneficial impact on the Euozone’s financial climate, and at a notional cost of zero too.  In financial terms at least, it cost the ECB President nothing to utter these words, just as it cost him nothing when he told the world that the ECB would do “whaterever it takes” to support the Euro and the Eurozone.

There are two points worth pondering. Continue Reading →

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