Cass Finance Blog

June 2, 2014
by Andrew Clare

Macro-prudential or Macro-muddle ?

It is often said that the essential component of a central banker’s job is to “take away the punch bowl just as the party gets going”*.  However, history indicates that Mr Greenspan must have been asleep next door with earplugs wedged firmly into his ears as the credit bubble expanded in the last years of his Chairmanship of the Fed.  It is not only with hindsight that it is now clear that the Fed kept rates too low for too long in the aftermath of the high tech bubble collpase (another bubble he missed!), plenty of people made this comment at the time.

Even though one member of the Bank of England’s MPC, Martin Weale, has recently suggested that rates might have to rise faster than the market currently assumes, overall his comments do not indicate a very sharp likely tightening of monetary conditions in the UK – and the other 8 members of the MPC are not even this hawkish.  Meanwhile in the US, tapering continues, but at the moment – and probably for the remainder of this year – this is just a reduction in the amount of monetary stimulus, rather than a reduction in the stimulus itself. Continue Reading →

May 30, 2014
by Thorsten Beck

Friday links


Everyone talks about shadow banking, Ralph Koijen from LBS talks about Shadow Insurance – is it the regulators’ next nightmare?

More on Bitcoin, this time from Ignacio Mas.

The Centre for Banking Research at Cass Business School, the British Accounting and Finance Association and Centre for Responsible Banking and Finance at the University of St. Andrews are co-sponsoring the 4th Emerging Scholars in Banking and Finance Conference on December 8 and 9 in London.  Call for paper here.

Coming up: Macro-prudential or macro-muddle; more on bankers’ pay; and a Postcard from Lusaka.

May 29, 2014
by Peter Hahn

CoCo Pops….the bonds, not the cereal

The next European banking crisis has the potential to be just so much messier than the continuing one.  Growth in shadow banking, high levels of indebtedness throughout Europe, yes but is it the new capital fudge of Contingent Convertible Bonds or CoCos that is likely to accelerate banking chaos in a bad downturn?  CoCos, the new form of frankenstein bond/equity directly encouraged by regulators and national treasuries (tax subsidised) and indirectly encouraged by central banks’ easy money are the investor must have product of 2014 and perhaps disaster of 2019.  Call it a bond, put a recognisable high street retail bank (previously supported by government) name on the cover, offer what appears as the best interest payment available and Wow….investors don’t even bother to consider that it can be economically subordinated to equity…and equity has an upside.  So how do CoCos increase downside? Well, we have to think back to the US TARP programme of 2008-2009 and recall the US moved to recapitalise banks across the spectrum and not just the weakest.  As soon as a major European bank, or some significant percentage of banking provision, appears unstable the incentive/temptation for regulators to cause across the board CoCo conversion will be the market talk and why not?  Why would regulators want to wait?  Wasn’t the lesson of 2008-2009 big swift systemic action?  For investors, the reality of the bond never maturing and the ensuing race for the exit could lead to a heck of big ‘pop’ and price decline, but banks this equity appearing has rapidly increasing higher yield debt will challenge all of their funding.  Most kids know that CoCo Pops cereal tastes great out of the box, but once they’re poured into the bowl their enjoyment declines as they get soggy.  The CoCos are being poured on into the market.

May 28, 2014
by Alessandro Beber

Are banks really benefitting from short selling bans?

At the peak of both the 2008-09 subprime crisis and in the 2010-11 euro-area debt crisis, stock market regulators around the world imposed short selling bans, targeted mainly at the stocks of financial institutions. In practice, that meant that in a large number of countries it was not possible to sell stocks of financial institutions unless you had previously purchased them. The alleged motivation of the regulator was that short sellers were causing large drops in financial institution stock prices, likely to be unrelated to the banks fundamentals. Such a collapse of bank stock prices could lead them to experience funding problems, which would trigger further price drops: short-selling bans of bank stocks would break this loop, stabilizing banks and making them less likely to become insolvent.

In a new Cass Business School working paper co-authored with Daniela Fabbri and Marco Pagano, we test these ideas by canvassing the evidence produced by both crises, looking at thousands of stocks from 18 different countries. Continue Reading →

May 27, 2014
by Peter Hahn

Deutsche Bank: FICCs For Europe

Deutsche Bank’s tenacity to be Europe’s only bulge bracket FICC player deserves some positive press despite all the ugly bits. Undoubtedly, interest rates will rise and investors will respond to attractive higher quality bonds paying nominally higher coupons with the banks best able capitalise on this printing profits – this almost seems assured with reduced underwriting capacity.  Of course, the question is when this will occur and it is far from clear whether it is sooner or later.  More importantly, will those someday glorious returns make up for recent and current under performing  years?  The cyclical or structural debate is simply that we won’t know if it’s a bet worth taking for a long time from now. That’s the usual risk shareholders take.  However, as Europe tries to reduce its ‘real economy’ dependence on bank lending and modest size European countries encourage their universal banks out of FICC, Deutsche’s hanging in there may be vital for Europe.  If Deutsche’s bet wins without too long a delay,  shareholders will enjoy….but if it all comes to tears, or worse, and Germany or the new European Resolution mechanism might need to step-in, yet it might still have been worth the option for Europe to have a FICC champion.

May 23, 2014
by Peter Hahn

Credit Suisse et al: Seriously, It’s The Wrong Governance & Economic Message


The conduct and sanctions related fines levied over the past few years have a clear message for bank board directors, management or outside (non-executive) and, sadly, that message is ‘avoid the details’.  The current settlement process surely implies it may be better not to know than to know how the business operates.  While each bank violation and settlement appears to be handled idiosyncratically from Japan to Europe to the USA, the popular message comes across as those on the bottom suffer while those at the top use distance and  ignorance to march on.  Stepping back, and despite all the criticism of regulatory demands, the most critical role for the board of any financial institution is to know how its revenues were earned and how much risk was involved.

Continue Reading →

May 22, 2014
by Meziane Lasfer

Is Vodafone right to keep its dividends despite a decrease in its earnings?

On 20 May 2014, Vodafone reported a total dividend per share of 11p, up 8% from last year. It also stated that it was committed to annual growth in dividends even if they will be uncovered for the next two years. Although this year’s profit are relatively good, it warned that they will be lower in the future, partly because of heavy investments of £7bn network improvement aimed at turning around struggling European operations that lead to a £6.6bn writedown. The stock price went down by more than 5% on the announcement date and by a further 2% the following day.

The Finance theory tells us that dividends act as a signalling device. Clearly, in this context, the theory is not working. Continue Reading →

May 21, 2014
by Peter Hahn

Clawback: Human Rights & Some Humour

Clawing back deferred bonuses in banking is fundamental considering the time lags between revenue and risk recognition.  However, as we’ve seen the unintended consequences of bonus limitation appearing as higher salaries has anyone considered the unintended age bias presented with combining deferred structures and proposals for long-term clawback?  We could argue it’s inherent to banking that a 30 year old might receive this year’s deferred bonus at age 35 and perhaps even a few years longer – the current proposal would make it age 41 before the money were secure.  But, hey, if the worst happened there’s still time to move to a hedge fund and a new career.  But what about a 57 year old banker….?  Is banking now only for the young?  Anti-diversity anyone?  Or is the message that you’ve got to make the big bucks as early as possible? Bankers may soon come up with strategies to reduce their clawback risk.  Would hopping banks every few years diversify clawback risk?

May 19, 2014
by Peter Hahn

Wealth Banking: Investment Banking or Retail Banking?

Barclays recently announced strategy included folding its heretofore stand-alone wealth division into its UK retail led business with many analysts questioning the wealth units’ profitability, but does this miss the point.  Individuals with substantial financial assets need advice and a reasonable part of investment banking at the core is about advice.  Retail banking regulation is increasingly, perhaps inadvertantly, about not providing advice – perhaps at best, retail bankers in the future are going to offer ‘help’ but advice?   Private banking at retail banks began with increased personal service levels for the most valuable customers and expanded into advisory – stronger profitability analysis and regulatory costs are forcing this process to reverse, if it is sustainable at all.  The result may be that beyond knowing who is on the phone and more attractive packaging there will be little product difference for those with or without wealth at retail banks.   For investment banks with equally poor cost control but at least an advisory core, wealth banking is increasingly a match.  It’s harder to see the wealth to investment banking extension, but the future of investment banking may be tied to wealth banking.

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