Understanding the Russian Sanctions by Roy C. Smith and Ingo Walter

Smith-and-Walter_articleThe latest tightening of the US and EU sanctions on Russian business and finance will provide an interesting lesson in international political, economic and military affairs. Here are some key issues to think about:

These Financial Sanctions Can Be Very Potent

They deny Russian access to capital markets in the US and Europe, which is to say global capital markets. Asian markets are not included but they are not significant enough to matter much. This is the most important sanction imposed on Russia so far, since Russian banks and businesses have been obtaining about half of their total funding requirements from these markets over the past three years, according to the FT.

Between them, Russian non-financial state-controlled companies ($41 billion), state banks ($33 billion), private banks ($20 billion) and non-financial private companies ($67 billion) will have $161 billion of foreign debt maturing in the next 12 months. The sanctions prohibit these borrowers from rolling-over this debt.

Read full article as published in Banks and Markets

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Subsidizing Mortgage Debt Does More Harm Than Good by Prof. Stijn Van Nieuwerburgh

The following is an excerpt from an op-ed by Professor Stijn Van Nieuwerburgh on The New York Times:

svnieuweHousing policy in the United States strongly favors homeownership, and it does so by subsidizing mortgage debt. Programs like the mortgage interest rate deduction and guarantees on mortgages bought and securitized by Fannie Mae, Freddie Mac and Ginnie Mae cost the taxpayer about $200 billion in lost tax revenues each year. These policies are highly regressive, benefiting the rich with expensive houses much more than those with average homes, and amplifying inequality in society. The financial crisis illustrated the risks of policies subsidizing mortgage debt, with many households taking on mortgages they could only service as long as house prices continued to go up and they stayed employed.

Surely there are benefits to home ownership. Some proponents cite the “forced savings” aspect that comes with building wealth in a home. That is not only a paternalistic perspective, but also one that is belied by historical price appreciation rates on homes far lower than those on other risky assets, and by the 31.7 percent collapse between 2007 and 2012 in American repeat home sale prices during the Great Recession. Others cite social benefits such as more civic engagement found in areas with higher home ownership. But correlation is not causation. The problem with studying the relationship between home ownership and, say, school quality is that most areas with good schools not only have high homeownership rates but also residents with better education and higher income. This makes it impossible to infer whether it is ownership rather than high income or parental education that causes the better school quality.

Read full article as published in The New York Times

Read the “The Macroeconomic Effects of Housing Wealth, Housing Finance, and Limited Risk-Sharing in General Equilibrium” paper here.

Register for the NYU Stern Center for Real Estate Finance Research third annual Fall Symposium held in collaboration with Bloomberg LP here!

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Nobel Laureate and Professor Robert Engle on VaR, Systemic Risk, and Liquidity

The following is and excerpt from an interview with Professor Robert Engle and the CFA Institute:

Robert Engle NYU Stern“I sat down with Nobel laureate Robert Engle in Tokyo last month to discuss an amazingly wide range of applications that he and industry practitioners have found for ARCH (autoregressive conditional heteroscedasticity) models and related research. Engle is a professor at the NYU Stern School of Business and his work is widely cited in academic journals and referenced by practitioners from hedge fund managers to risk management professionals.

This is the first part of a two-part series. In this installment, we will cover the development of the ARCH model, the global financial crisis, systemic risk, and forecasting liquidity with ARCH models.”

Read the full interview here.

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“The ‘Greatest’ Carry Trade Ever? Understanding Eurozone Bank Risks” by Professor Viral Acharya

Viral Acharya, NYU SternProfessor Viral Acharya and his co-author, Sascha Steffen of ESMT European School of Management and Technology, show that eurozone bank risks during 2007-2013 can be understood as “carry trade” behavior. They find that banks used short-term unsecured funding in wholesale markets to take long peripheral sovereign bond positions. On the upside, the bank would pocket the “carry,” that is the spread between long-term peripheral sovereign bonds and banks’ short-term funding costs. Bank equity returns loaded positively on peripheral (Greece, Italy, Ireland, Portugal, Spain, or GIIPS) bond returns and negatively on German government bond returns, generating the “carry” until the deteriorating GIIPS bond returns adversely affected bank balance sheets. The researchers find support for risk-shifting and regulatory arbitrage motives at banks in that carry trade behavior is stronger for large banks and banks with low capital ratios and high risk-weighted assets. They also find evidence for home bias and moral suasion in the subsample of GIIPS banks.

Read the full paper here.

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Getting Serious About Sanctions-Busting Banks by Professors Ingo Walter and Roy Smith

BSmith-and-Walter_articleNP Paribas is expected any day to admit to criminal *violations of U.S. sanctions against Iran and Sudan. This is likely to mean that the giant French bank will pay a fine of between $8 billion and $10 billion to the U.S. government, dismiss several executives, and temporarily cease its dollar-clearing business. The case has dramatically elevated the liability of global banks to the regulatory enforcement of U.S. law.

Trade and financial sanctions have long had a place in international affairs—from the high-profile sanctions applied to South Africa under apartheid to their increasing use as a substitute for military intervention in countries including Iraq, Libya, Iran, Cuba, Sudan and most recently Russia, where they are pending. They’ve attempted to discourage countries from building nuclear weapons, abusing human rights or invading their neighbors. Such sanctions, however, have been controversial because they have appeared to lack the cohesion and determination of allies to make them work effectively.

The U.S. prosecution of a major international bank for evading sanctions has changed the game. BNP allegedly stripped out identifying information from wire transfers to disguise sanctioned countries as origins or destinations of international payments. By raising the cost of violating the rules to significant levels, the Justice Department has ensured that U.S. sanctions will be complied with and effective.

Read full article as published in The Wall Street Journal

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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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