Final Notes - Finance, Banking, and Investment PDF

Lecture 1: Indirect: through financial intermediaries Direct: directly through financial markets Why? Consumption timing, allocation risk, separation ownership and control, liquidity, information processing and production. Transformations cause mismatches -\> risk Lecture 2: High debt levels...

Lecture 1: Indirect: through financial intermediaries Direct: directly through financial markets Why? Consumption timing, allocation risk, separation ownership and control, liquidity, information processing and production. Transformations cause mismatches -\> risk Lecture 2: High debt levels especially in mature markets Lecture 3: 2014: SSM, AQR. 2016: clear deviation -\> Nordic top Challenges Europe: slow growth, NPL, profitability gap compared to US NII: most gains from wides margins from what banks can charge for loans and pay out on deposits - Still trade at steep discount 2012: spillover -\> banking union - Ssm - Srm - EDIS - Germans fear moral hazard - Southern + France support. Final stage CMU -- debt, IPO Lecture 4: CB tools: lending/deposit facility, open market operations, RR CB emerge as response to widespread bank failures and losses to depositors Independence: stimulate economy upon elections by relaxes credit policy, avoid printing money as money supply instead of taxes. ECB: hierarchical mandate: price stability above all Rr rarely used -\> immediate liquidity problems for banks, uncertainty makes illiquidity management difficult. Conventional: short term interest rates Unconventional: forward guidance, APP, term funding facilities, negative interest rates Low r -\> false sense of security. Lecture 5: Sources of funds: 1. Liabilities -\> core deposits, managed liabilities (purchased funds, more volatile, more rate sensitive, national and international bond/money markets). 2. Equity: equity + regulatory\< (equity -\> cushion). Uses of funds: 1. Interest earning assets -\> loans and leases, investment securities 2. fee-generating assets 3. nonearning assets Basel 1: RaR = CET1+CET2/RwA - adjusted by risk class Basel 2: - credit rating - IRB Basel 3: - Leverage ratio = CET1/ average total consolidated risks - Simple non-risk-based backstop measure - LCR, NSFR Basel 4: - Very large no longer use due worrying variability - Output floor Why hard? - No market assessment - Large information asymmetries - What exact risks, who exactly borrows? Lecture 6: Regulate: structure and activities, liquidity, transparency, capital adequacy. 2^nd^ directive: allowed to offer full range of financial services -\> universal banking -\> can undertake investment banking activities. - Eventually in US Gramm-Leach-Bliley act -\> can undertake securities and insurance activities. Unforeseen demand government safety nets: 1. EDIS 2. Lender of last resort facility - In return must allow regulators to monitor liquidity and show statistical findings. Aggregate risk facing system is much higher than simple sum of individual risks G-SIBS: allocated buckets corresponding to higher capital buffers that they are requires to hold by national authorities in accordance to international standards. O-SIIs: additional loss absorption capacity. How strict three main issues? 1. Moral hazard a. Forbearance: continue operating when capital is fully depleted due to time inconsistency problem b. Government safety nets 2. Compliance costs 3. Barriers to entry Lecture 7: Shadow banking: MF, ETF; HF; VC; PE; FinTech, Insurance, pension Mutual fund benefits: liquidity intermediation, denomination intermediation, diversification, cost advantages, managerial expertise - Indirect fees Investment fund: UCITS and AIFs pool savings of investors with similar investment goals, each fund with own particular investment objective DM: asset manager receives authority to buy and sell assets and execute transactions on behalf of that investor, on their private account. ETF listed on stock exchange -\> highly liquid. - Growing popularity, fees under pressure. - Active ETF more fees generated from new flows than passive. Lecture 8: ABS: bonds that are issued on the back of a package of assets CDOs: securitization of packages of corporate bonds/loans. - Credit risk hard to assess by end-investor Banks hold loans on own balance sheet and maintain credit risk, while P2P no credit risk on itself -\> less stringent capital requirements. Sustainability shadow banks. 1. More regulation as they become too large 2. Hard to expand to other asset classes, like mortgages due to volatility and more regulatory scrutiny 3. Competitive response from incumbent banks. Lecture 9: Capital market supervision- information, market abuses Banking supervision -capital adequacy, governance, risk management, reporting Digitalisation and analysis- policy, payment, reporting Insurance supervision -- protect insured benefits, solvency, risk management Legal unit -- administrative sanction, guidelines and regulations, legal support. Part of EBS, work with ESA Fund managers must be authorised and registered. Harmonised fund regulation, collective portfolio management UCITS open-ended and marketed to retail investors. -\> only managed by authorised UCITS fund managers. - Authorised before marketing - Must hold assets separate from own in depository, must be limited liability - Not harmonised legal form, in Finland only contractual funds -\> rules, changes, fund mergers must be approved by FIN-FSA. AIFMD - does not require authorisation. - AIFM legal person who in in charge of managing AIF - Raising capital - Collective investment undertaking - From number of investors - Invest in accordance with defined investment policy. - FIN-FSA can decide whether they need a license Not fulfilled if investors have not delegated decision making power to third parties AIF only to professionals. Lecture 11: Insurance companies are risk neutral; buyers are risk averse. Two sources of income 1. Initial underwriting income from insurance premiums 2. Investment incomes from holding premiums. - Collect now, pay later model. Adverse selection solutions: screening, risk-based premium Moral hazard: restrictive provisions, prevention of fraud cancellation of insurance, deductibles, coinsurance Solvency II. Reduce probability of insurers failing - Valuation techniques, capital requirements, governance and reporting standards. - Risk based capital regime Unit linked does not mean insuring your assets it is an investment through an insurance company. DB: constant accrual rate for each year of service, burden on the employers to properly fund the expected retirement benefit payouts. DC: flow into individual account, accumulation of contributions and investment returns converted into pension-income stream at retirement. -\> benefit is uncertain 401k: target date, postpone, employer matching Finland some partial funding, both earnings related pension expenditure and previously collected funds.