Are Major Banks Really Too Big to Jail?

The following is an excerpt from Banks and Markets of an article titled “Are Major Banks Really Too Big to Jail?” by NYU Stern Professor and MS in Risk Management Academic Director, Ingo Walter:

iwalterIt used to be that financial institutions indicted on a criminal charge went out of business long before they had their day in court in a proper jury trial, which is their right. Instead, clients and employees would flee and regulators would be forced to withdraw their operating licenses. Unlike individuals convicted on a criminal charge, this is as close as things ever came to jailing an institution. Not anymore.

By sowing fear and intimidation among its regulators and law enforcement officials – based entirely on its own vulnerability to punishment – the Credit Suisse pleaded guilty to a criminal offense and emerged as a convicted felon clean as a whistle, with no apparent effect on its business, its management or its shareholders.

Having confessed to one count of criminal fraud, CEO Brady Dougan told a press conference on May 20th he didn’t think there would be any effects on the bank – no “material impact on our operations or capabilities.” There was the small matter of $2.6 billion in fines and penalties, but he said that could be earned back by the end of the year and wouldn’t affect the bank’s regulatory capital. No serious changes in strategy. No senior management changes. No discernible boardroom reaction. No client defections. No investor flight. Just business as usual. Credit Suisse stock in Zurich was up 2% on the day in an otherwise flat market.

Read full article as published in Banks and Markets

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Risk Symposium Featured on NYU Stern Homepage

Symposium 2014 flyerOn Saturday, May 31, approximately 100 risk professionals and Stern alumni gathered in New York to hear from John Chambers, deputy head of Standard & Poor’s Sovereign Ratings Group, and NYU Stern Professors Michael Posner, Viral Acharya and Bruce Tuckman at NYU Stern’s Second Annual Risk Management Symposium. The Symposium centered on thought-provoking subjects related to risk and the global economy.

Chambers opened the Symposium with a discussion on sovereign risk with Stern Professor and MS in Risk Management Program (MSRM) Academic Director Ingo Walter. Chambers discussed sovereign government ratings methodology and emphasized that, “Both ability and willingness of governments to pay their debt in full and on time is critical.”

Read the full article here.

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“Guaranteed to Fail” by NYU Stern Professors Makes American Banker’s Summer Reading List

Excerpt from American Banker:

book_cover“This book alleges that Fannie Mae and Freddie Mac were run as the largest hedge fund on the planet. The four authors, all professors at the Leonard N. Stern School of Business at New York University, argue that Fannie and Freddie should get out of the business of promoting homeownership for low-income households.”

Read the full American Banker article here.

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NYU Stern economists Viral Acharya, Matthew Richardson, Stijn Van Nieuwerburgh, and Lawrence J. White provide a rational analysis of how Fannie and Freddie collapsed and why housing finance in general is broken.

Read more about “Guaranteed to Fail: Fannie Mae, Freddie Mac and the Debacle of Mortgage Finance” here.

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Professor Viral Acharya Named Fellow of the European Corporate Governance Institute

Viral Acharya, NYU SternProfessor Viral Acharya was named a fellow of the European Corporate Governance Institute (ECGI). The ECGI announced the appointment of five new fellows, including Professor Acharya, at their 2014 General Assembly in Brussels on April 29. Professor Acharya was appointed a member of the Review of Finance‘s Advisory Board for 2014-2016. In February, he participated in a panel discussion at the “Symposium on Financial Stability and the Role of Central Banks” at the Bundesbank Conference in Frankfurt. Again in March, he spoke about the role of central banks at the Bank of England. On April 21, he served as a panelist during a discussion on “Models and Risk Surveillance” at the International Monetary Fund.

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MSRM Welcomes the Class of 2015!

MSRM 2015 Module 1 Group Picture

 Last week, the Master of Science in Risk Management Program welcomed the Class of 2015. These 40 students represent 23 nationalities, 40% of which are women and 45% are expatriates. NYU Stern’s Master of Science in Risk Management program for executives, exposes its students to various areas of risk management in 5 executive-friendly modules. The MSRM program is proud to welcome the new cohort to Stern!

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Prof. Robert Engle is Interviewed About the Financial Services Industry

The following is an excerpt from the El Paso Times: 

Robert Engle NYU SternThe nation’s giant banks and other large financial institutions have regained much of the financial cushion they lost during the financial crash of 2008-09, a Nobel Prize-winning economist told University of Texas at El Paso faculty and city business leaders during a breakfast speech Friday.

But he also said government regulators need to keep a much closer eye on them than the yearly stress tests now being done.

Robert Engle, a New York University economist, said the U.S. financial sector is much less at risk of a systemic, or broad, failure now because banks are “making a lot of progress building up their capital cushions” that help weather financial crises.

Read the entire article here.

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Professor Stijn Van Nieuwerburgh on the Cost of Renting vs. Buying

The following is an excerpt from The Wall Street Journal:

svnieuweBuying a home has long been part of the American dream. But rising prices have made renting less expensive in many places.

People often aspire to own a home for reasons that have little to do with money, and rental options are limited in some communities. Yet owning property can limit your flexibility to move when you want and ties up a lot of your money.

The median sales price of existing single-family homes rose 11.4% in 2013 from the previous year—the highest yearly increase since 2005, according to the National Association of Realtors. Prices in many places, including Los Angeles, Baltimore and Portland, Ore., rose even more last year.

The monthly cost of renting was lower than buying in 20 large metropolitan areas at the end of last year, the most recent period for which data are available, according to figures provided exclusively to The Wall Street Journal by Deutsche Bank. DBK.XE -1.49% That is up from 15 large metropolitan areas a year earlier.

The bank calculates the costs in 54 markets based on average local rents and median home-sale prices, which it uses to estimate monthly mortgage payments for a hypothetical buyer in the 25% federal income-tax bracket.

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While those costs can be folded into monthly rent, apartment renters often pay a smaller share as landlords spread the costs among many tenants, says Stijn Van Nieuwerburgh, director of the Center for Real Estate Finance Research at New York University. If a window breaks or the toilet plugs up, your landlord—not you—pays for the repairs.

Renters don’t end up with a valuable asset, as buyers do when they pay off a mortgage. But renters might be able to make more money by investing the monthly savings, as well as the cash they would otherwise use for a down payment, he says.

Read the full article here.

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MSRM Class of 2013 Capstone Paper Published by INCAE Business Review

MSRM square avatarA Capstone paper by Alex Rubinstein, Kiran Dwarakanath, Claire Fox, Rose Kinuthia, Ted Rockwell, and Alex Solares of the MSRM Class of 2013 was published by INCAE Business Review.

The article is a summary, prepared in Spanish, of the paper titled, Managing Currency Risk in Small Emerging Markets: A Case Study in Costa Rica:

Executive Summary:

International trade is growing faster than world output, driven mainly by emerging
markets. Companies are doing more business abroad and increasing their exposure to
currency risk. Ordinarily readily available financial tools to manage and hedge currency
risk in developed financial markets may not be an option in many developing countries.
This research paper aims to provide guidelines and tools to manage currency risk in such a
scenario. Using Costa Rica as a specific case to apply the results, we used surveys, in depth
interviews, market data collection and simulation to gather information from bank
authorities and companies in the country regarding potential alternatives to manage this
risk. We analyze the effectiveness, cost and associated risks of industrial hedging, money
market hedging, financial hedging, indirect hedging, possible combinations or no hedging
at all. Our study finds that managing and hedging currency risk in a small emerging
economy such as Costa Rica is feasible yet with some limitations. We present
recommendations on what alternatives might be more suitable for different types of
companies according to their risk tolerance and strategic goals.

View the paper summary in Spanish on page 44 here

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Whatever Happened to Swiss Bank Secrecy? By Professor Ingo Walter

The following is an excerpt from an article titled, “Whatever Happened to Swiss Bank Secrecy?” by NYU Stern Professor and MSRM Academic Director, Ingo Walter:

iwalterFinancial secrecy – or more politely “confidentiality” – involves non-disclosure of financial information concerning individuals, firms, financial institutions and governments. It is a key element of banking and financial services, fiduciary relationships, and regulatory structures. It is vital in tax evasion, the drug trade, organized crime, money laundering, terrorism, political and economic corruption, and host of other activities that can cause real damage to civil society. But financial privacy can equally be considered a human right – what regime hasn’t made great efforts to compromise personal privacy in the name of the state?

What financial secrecy is worth depends on where the money came from and the consequences of disclosure, all the way from family tensions to the firing squad. And who’s tasked with safeguarding financial secrets? All the usual suspects ranging from uncle Harry, lawyers, accountants investment advisers, banks, and the ultimate gold standard – highly reputable financial institutions operating abroad in politically and economically stable sovereign countries that maintain tough secrecy laws and blocking statutes.

As long as the bankers can keep it up there’s a treasure trove of fees to be earned and high-paying jobs to be had, much more reliably than grinding away at the mug’s game of trying to outperform the competition on investment returns and risk. As in any good market, financial secrecy is bought and sold and both sides are happy – albeit sometimes at the expense of somebody else.

Read the full article published in Banks and Markets here.

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3D Risk Management: A Survivorship Framework by Dante Disparte, MSRM Class of 2014

MSRM Class of 2014 student, Dante Disparte compares the structural balancing act between risk management in finance versus the manufacturing context in a recent article titled, “3D Risk Management: A Survivorship Framework.”

Disparte, Dante pictureDante currently serves as the managing director of Clements Worldwide, a leading risk management firm and insurance brokerage serving customers in more than 180 countries.  Based in Washington, D.C., he is a specialist in risk reduction through the design and delivery of comprehensive insurance solutions of worldwide scope.  Dante is credited with designing the world’s first card-based life insurance program for the United Nations, a plan that placed more than a half billion USD of risk with the markets in more than 140 countries in 12 months. This innovation was heralded as one of the top product innovations of 2011 by the MENA Insurance Review.

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The following is an excerpt from the 3D Risk Management article:

For most firms risk management is a necessary evil, increasingly consigned to being an adjunct to compliance, finance and other so called “business prevention” functions. Non-financial firms traditionally address risk through a series of transfer mechanisms, such as insurance, self-funded vehicles or they merely absorb unforeseen losses with their earnings. The financial sector, on the other hand, applies sophisticated statistical methods in a form of speculative risk management that captures the upside and the downside of risk-taking. These approaches are used to calculate value at risk (VaR), regulatory capital and other internal and external risk measures. Many of these methods, however, are based on backward looking book values and a permissive fox watching the chicken coop environment, wherein financial institutions often develop their own internal risk metrics with loose guidance from regulators.

The frequency of potentially preventable losses, along with the calamitous effects of black swans, suggests that quants not only need qualitative tools in their arsenal, they need structural alternatives to one-dimensional risk management. This one-dimensional structure often misses the mark and can suffer from confirmation bias in that centralized risk managers who look for trouble, may in fact find it by chasing misleading risk signals. JP Morgan, long considered a best practitioner in banking risk management, missed the London Whale’s transgressions, despite some fairly obvious warning signs1. Under the first dimension, even though many firms like JP Morgan install ‘native’ Chief Risk Officers (CROs) in their business lines, these individuals are often marginalized and kept on a need-to-know basis. This has the placebo effect of creating a false sense of comfort that risks are being managed, when in reality often excessive risk-taking behavior is carried out in the CRO’s line of sight. The latency and backward orientation of traditional risk measures often negates proactive controls and when the smoke begins to rise, it is often too late.

Read the entire 3D Risk Management article here.

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