Financial Cycles Also by Dimitris N Chorafas Public Debt Dynamics in Europe and the US (2014) The Changing Role of Central Banks (2013) Breaking Up the Euro: The End of a Common Currency (2013) Household Finance: Adrift in a Sea of Red Ink (2013) Quality Control Applications (2013) Basel III, the Devil, and Global Banking (2012) Sovereign Debt Crisis: The New Normal and the New Poor (2011) Business, Marketing, and Management Principles for IT and Engineering (2011) Energy, Environment, Natural Resources and Business Competitiveness (2011) Education and Employment in the European Union: The Social Cost of Business (2011) Cloud Computing Strategies (2011) The Business of Europe Is Politics (2010) Risk Pricing (2010) Capitalism without Capital (2009) Financial Boom and Gloom: The Credit and Banking Crisis of 2007–2009 and Beyond (2009) Globalization’s Limits: Conflicting National Interests in Trade and Finance (2009) IT Auditing and Sarbanes-Oxley Compliance (2009) An Introduction to Derivative Financial Instruments (2008) Risk Accounting and Risk Management, for Professional Accountants (2008) Risk Management Technology in Financial Services (2007) Stress Testing for Risk Control Under Basel II (2007) Strategic Business Planning for Accountants: Methods, Tools, and Case Studies (2007) International Financial Reporting Standards (IFRS): Fair Value and Corporate Governance (2006) Wealth Management: Private Banking, Investment Decisions and Structured Financial Products (2006) The Management of Bond Investments and Trading of Debt (2005) Financial Cycles Sovereigns, Bankers, and Stress Tests Dimitris N Chorafas FINANCIAL CYCLES Copyright © Dimitris N Chorafas, 2015 Softcover reprint of the hardcover 1st edition 2015 978-1-137-49797-0 All rights reserved First published in 2015 by PALGRAVE MACMILLAN® in the United States—a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010 Where this book is distributed in the UK, Europe and the rest of the world, this is by Palgrave Macmillan, a division of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries ISBN 978-1-349-69816-5 ISBN 978-1-137-49798-7 (eBook) DOI 10.1057/9781137497987 Library of Congress Cataloging-in-Publication Data Chorafas, Dimitris N Financial cycles : sovereigns, bankers and stress tests / Dimitris N Chorafas pages cm Includes bibliographical references and index Business cycles Financial crises Finance Monetary policy I Title HB3722.C463 2014 338.542—dc23 2014037907 A catalogue record of the book is available from the British Library Design by Newgen Knowledge Works (P) Ltd., Chennai, India First edition: March 2015 10 Contents List of Illustrations ix Preface xi 1 Financial Cycles The Difference between a Financial Cycle and a Business Cycle Financial Cycles in a Sophisticated Economy Sizing Up the Financial Cycle A Currency Union Is Incompatible with Sovereignty A Lesson Learned from Fermentation Economic Vibrions Can the Financial Cycle Be Managed? 12 15 17 20 Financial Stability Financial Stability Defined The Financial Stability Board Nineteenth-Century Economic Theories Are Unfit for Today’s Problems Financial Stability and the Sovereign’s Budget Are Western Economies on Their Way to Financial Stability? 25 25 29 31 34 38 Dismantling Globalization by Changing the Rules Reserve Currencies Monopoly Money and the Unfunded Liabilities The March of De-globalization The Transatlantic Trade and Investment Partnership IMF and the New Development Bank of BRICS Uneven Policies in Deleveraging The Risk of Disinflation 43 43 47 50 53 56 60 65 Twists of Monetary Policy and of Supervision The Shadow Banking System Macro-Prudential Supervision 69 69 72 vi CONTENTS Resolution Regimes Can Eurobonds Fly? Risks with Securitizations 77 80 83 Debt and Democracy Property-Owning Democracy versus Debt-Laden Democracy An Unaffordable Level of Public Debt Budget Deficits Are a Wrong-Way Policy A Democracy in Deep Debt Is in Terminal Decline “Just Buying Time” Is an Invitation to Disaster 89 Debt Sustainability Overindebted Countries Abandon Their Sovereignty The Sense of Debt Sustainability Public Debt Affordability Cannot be Taken for Granted Vulnerabilities of Borrowers and Lenders: The Case of Venezuela Private Debt Is Another Nightmare A Lesson Learned from the Fall of Feudalism 89 92 95 99 103 109 109 113 116 121 124 127 What Is Special about Banks? A Snapshot of the Banking Industry Tangible Book Value and Other Metrics Universal Banking The Challenge of Past-Due Loans What’s the Sense of Huge Penalties for Alleged “Misconduct”? The Banking Industry Is Still Not Out of the Tunnel 131 131 134 136 140 A Structure of Analysis through Stress Testing Structure of Analysis by Means of Stress Testing Dry Holes in the Finances of Euroland’s Credit Institutions A Methodology for Stress Testing Policies with Stress Tests in the US and Europe Risk Analysis and Asset Quality Review Exposure at Default and Unexpected Losses 153 153 156 160 163 167 170 The Hydra of Financial Exposure Loans to Governments Risk-Weighted Assets and Helicopter Fines Espirito Santo: The Bank That Drove Itself Nuts Interbank Contagion International Accounting Standards: The New Rules on Banks’ Credit Losses 175 175 178 182 186 144 149 190 CONTENTS 10 The European Banking Union: An Exercise in Abstraction Banking Union and the Financial Cycle Reservations about the Banking Union and Its Impact Banking Union Weaknesses Because of Profligate Member States Political Risks with the Banking Union The Crisis of Confidence Is an Expected Risk The Cost Is Half a Billion The Benefit Is Uncertain Appendix Bitcoins: A Solution or a Hoax? vii 195 195 199 202 206 210 214 219 Notes 225 Index 233 This page intentionally left blank Illustrations Figures 1.1 8.1 10.1 Financial cycle and business cycles Stress tests help to project real-life worst cases and associated unexpected losses Banking union and supervisory assessment of exposure of Euroland’s banking industry 11 171 196 Table 1.1 The five cycles of the Western economy, post–World War II NOTES 10 11 12 13 14 15 16 17 18 19 20 227 Financial Times, September 8, 2014 Ibid Also called the Transatlantic Free Trade Area (TAFTA) Financial Times, July 26, 2012 Decided in the course of the G20 meeting in Los Cabos, Mexico, in mid-June 2012 Barack Obama stated he had no money to contribute David Cameron promised $30 billion but faced opposition by the backbenchers The Economist, September 15, 2014 Ibid ECB, Financial Stability Review, May 2014 After the socialists got into the Berlin government Financial Times, February 24, 2014 Financial Times, March 3, 2014 The Economist, January 26, 2014 The Economist, March 8, 2014 Ibid Financial Times, March 14, 2014 Twists of Monetary Policy and of Supervision Financial Times, July 14, 2014 D N Chorafas, “Banks, Bankers, and Bankruptcies under Crisis: Understanding Failures and Mergers during the Great Recession (New York: Palgrave Macmillan, 2014) UBS Wealth Management Research, December 21, 2011 Financial Times, July 21, 2014 Financial Times, July 29, 2014 ECB, Financial Stability Review, May 2014 Financial Times, April 11, 2014 Debt and Democracy John Perkins, Confessions of an Economic Hit Man (London: Plume Books, Penguin, 2004) Ibid Peter L Bernstein, Against the Gods: The Remarkable Story of Risk (New York: Wiley, 1996) Bloomberg, March 22, 2011 European Central Bank, Financial Stability Review, May 2014 Experts outside that panel have said that in Obama’s 2012 budget 43 cents of every dollar is borrowed money The Economist, October 26, 2013 The Economist, June 14, 2014 The Economist, March 15, 2014 228 10 11 12 13 14 15 16 17 18 19 20 NOTES Ibid Financial Times, July 17, 2014 Ibid International Herald Tribune, February 1, 2010 Ibid Financial Times, September 24, 2013 D N Chorafas, Public Debt Dynamics in Europe and the US (New York and London: Elsevier Insights, 2014) Le Canard Enchainé, September 25, 2013 After me the flood The Economist, October 26, 2013 Ron Suskind, The Price of Loyalty: George W Bush, the White House, and the Education of Paul O’Neill (New York: Simon & Schuster, 2004) Debt Sustainability RaiMed July 31, 2014, a ticker written in big letters on a red background as breaking news http://www.bloomberg.com/news/2014-07-08/schaeuble-says-economicoverhaul Ibid Joseph Stiglitz, Making Globalization Work (London: Penguin, 2006) As of October 2013 Financial Times, August 21, 2013 The Economist, March 19, 2011 Le Canard Enchainé, July 30, 2014 Financial Times, August 1, 2014 10 Bank of America Merrill Lynch, Venezuela Viewpoint, November 8, 2014 11 The Economist, July 19, 2014 12 Financial Times, August 1, 2014 13 But still 300 percent longer than the life of communism 14 This happens today with jobs as those inside the system try to block the entry of these outside, using obsolete labor laws as their weapon 15 Bank of America Merrill Lynch, 2Q12 Retail Quarterly, September 6, 2012 What Is Special about Banks? 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Market Cap EBIT + Depreciation + Amortization D N Chorafas, Basel III, the Devil and Global Banking (London: Palgrave Macmillan, 2012) Financial Times, June 2012 NOTES 229 The Economist, June 13, 2014 D Yergin and J Stanislaw, The Commanding Heights (New York: Simon & Schuster, 1998) R Christopher Whalen, Inflated (New York: Wiley, 2011) Financial Times, July 21, 2014 10 Financial Times, May 28, 2013 11 UBS, CIO WM Research, January 27, 2014 12 Bloomberg News, August 6, 2014 13 Financial Times, August 8, 2014 14 Ibid 15 Financial Times, August 1, 2014 16 Financial Times, September 30, 2013 17 Financial Times, August 21, 2013 18 Like cash and government bonds that can be sold quickly and at relatively sound prices A Structure of Analysis through Stress Testing D N Chorafas, Managing Risk in the New Economy (New York: New York Institute of Finance, 2001) Financial Times, October 14, 2014 Credit Suisse, Global Investor, 2014 Wall Street’s fall in October 1987, for example, was a 14.5 standard deviations event This solution has nothing to with value at risk (VAR), which is an obsolete and limited model, albeit still popular among retrograde banks and regulators The first nearly 15 standard deviations event on record has been the sharp fall in the Dow Jones in October 1987 Many others followed with standard deviations financial events having become nearly “normal.” The Economist, May 16, 2009 Bloomberg News, May 21, 2009 Euronews, March 11, 2014 HypoVereinsbank provided some comfort to its Italian parent UniCredit as the Munich-based lender announced net profits of more than €1 billion—but warned that 2014 would be a difficult year Bloomberg News, August 15, 2014 10 For members of the OECD, which means nothing 11 UBS, CIO WMR, May 8, 2014 12 Financial Times, April 17, 2014 The Hydra of Financial Exposure Financial Times, August 1, 2014 Mainly in Latin America Mainly in Africa and the Middle East 230 NOTES ECB, Financial Stability Review, May 2014 Deutsche Bundesbank Monthly Report, November 2013 Bank of America Merrill Lynch, Global Economic 2014 Year Ahead, November 24, 2013 ECB, Financial Stability Review, May 2014 The Economist, August 23, 2014 Financial Times, August 8, 2014 10 Financial Times, September 12, 2014 11 Financial Times, September 2, 2014 12 Bloomberg News, August 8, 2014 13 Financial Times, July 25, 2014 14 Financial Times, August 1, 2014 15 D N Chorafas, IFRS, Fair Value and Corporate Governance: Its Impact on Budgets, Balance Sheets and Management Accounts (London and Boston: Butterworth-Heinemann, 2005) 16 The new version of the US accounting standard for financial instruments is said to be stricter than IFRS on the timing of loan loss provisions 10 The European Banking Union: An Exercise in Abstraction D N Chorafas, Banks, Bankers, and Bankruptcies under Crisis (New York: Palgrave Macmillan, 2014) The SRF will be funded over the next eight years through financial sector contributions that will ultimately total €55 billion, a relatively small amount given the task This, however, will take some time, and nobody can tell right now what might be the demand for funds versus the available SRF capital Financial Times, August 8, 2014 Financial Times, November 20, 2012 Financial Times, July 11, 2013 About 7.5 percent of US poultry production was exported to Russia prior to the ban UBS CIO WMR, August 7, 2014 Financial Times, August 8, 2014 Ibid 10 Ibid 11 Ibid 12 No explanation has been provided for such a huge discrepancy in costs between Germany and France, or between France and Italy 13 Financial Times, August 21, 2014 14 D N Chorafas, The Changing Role of Central Banks (New York: Palgrave Macmillan, 2013) 15 John Man, Attila the Hun: A Barbarian King and the Fall of Rome (London: Bantam Press, 2005) 16 Financial Times, August 21, 2014 17 Financial Times, August 25, 2014 NOTES 231 Appendix Bitcoins: A Solution or a Hoax? Barter agreements are a special case Bitcoin was invented by Satoshi Nakamoto His currency can be broken down to eight decimal places for small transactions Facebook sells “Credits”; Gamers on Second Life, a virtual world, pays with Linden Dollars; customers of Tencent, a Chinese Internet firm, deal in QQ Coins In March 2014 Financial Times, April 4, 2013 This is a real advance According to some estimates, nearly percent of Britain’s pound coins are fakes The American agency that tracks and prosecutes whitewashing of money Le Canard Enchainé, August 13, 2013 The Economist, October 5, 2013 10 Financial Times, May 7, 2013 11 Financial Times, July 11, 2014 Index 25-year cycle, xii, 50-year cycle, xii AbbVie, 40 Abenomics, 76 ABN Amro, 181 accountability, 53 accounting standards, xv accumulated debt, 65 Affordable Care Act, 98 AIG, 151 Alipay, 223 American debt-to-GDP ratio, 115 American extraterritoriality, 52 anaerobes, 18 Angel, Jim, 222 antiglobalization, xiii, 41 anti-money laundering, 147 apprenticeships, 19 asset quality, 28 Asset Quality Review (AQR), xii, 66, 141, 156–8, 167, 168, 169, 177, 180, 211, 214, 215 asset-backed securities (ABS), 61, 84, 212 assets bubble, 211 assets of nonbank banks, 69 asset-to-equity ratio, 28 austerity, 94, 99, 111, 114 bad debts, 125, 141, 168, 169 bad loans, 142, 143 bail-inable debt, 138 bail-ins, 34, 42, 126, 199–201 bailouts, 34, 35, 142, 159, 183, 184, 200 balance of payment assistance, 57 balance sheet recessions, 20 balance sheet repair, Banca Popolare di Milano, 168 Banco Commercial Portuguese, 157 Banco Espirito Santo, xiv, 14, 62, 78, 127, 160, 182–5, 187, 195, 210 bank assets-to-GDP ratio, 28 bank deleveraging, 63 bank fines, 144 Bank for International Settlements (BIS), Bank of America Merrill Lynch, 130, 150, 181 Bank of England, 14, 47, 84, 85, 138, 153 Bank of Japan, 47 Bank of New England, 171, 222 Bank of New York Mellon, 168 Bank of Tokyo-Mitsubishi, 181 Bank Recovery and Resolution Directive of the EU (BRRD), 78 bank solvency legislation, 162 banking book, 189 banking crisis, banking industry, xiv, 37, 144 banking union, xv, 80, 103, 104, 195, 197, 201, 202, 206, 209, 210, 217 bankruptcy equity, 158 Barclays, 138, 140, 146 Basel Committee on Banking Supervision, 150, 165 Basel II, 179, 180 Basel III, 137, 143, 151, 162 Bayrou, Franỗois, 217 234 INDEX Bernanke, Ben, 112 Berner, Thomas, 31 Bersani, Pier Luigi, 36 big data, 155 Bitcoins, 221, 222 BitPay, 222 Black Monday, 170 Blackrock Solutionsm, 216 BNP Paribas, 52, 138, 145, 148 bond issuance, 48 bonds, 120 Bonnafé, Jean-Laurent, 148 Brandeis, Louis, 137, 138 Bretton Woods agreement, 43, 44 BRICS, 56 Brinkhaus, Rakph, 61 British Shire, 40 Brookings Institution, 98 budget deficits, xiii, 62, 79 budgetary rigor, 36 Bundesbank, 39, 67, 204 Burns, Arthur, xi, xii, Burrows, Oliver, 201 Bush, George W., 105, 112 Bush doctrine, 109 business confidence, 7, 20, 21, 39, 120, 125, 213, 217 business cycle timeframe, business cycles, 1, 3, 5, 9, 21 business risk, 166 capital allocation, 25 capital base, capital buffer guidelines, 163 capital buffers, 30, 103, 162 capital requirements, 77, 137, 180, 187 capital reserves, 113 capital shortfall, 133, 159, 165, 168, 197 capitalism, 33, 106 Carney, Mark, 14, 138 car-related debt, 87 Carson, Ben, 98 catastrophic losses, 171 central banks, xii, xiii, 4, 5, 14, 23, 52, 94, 215 certified public accountants (CPAs), 192 Chilton, Bart, 223 China’s National Audit Office, 71, 75 Chinese banking system, 75 Citibank, Citigroup, 138, 165 civil war, 17 coinage, 219 Coinfloor, 224 collateralized debt obligations (CDOs), 84, 85 collateralized loan obligations (CLOs), 132 commercial banking transactions, 145 Committee on Banking Supervision (Basel), 30, 31 Commodity Futures Trading Commission (CFTC), 223 common monetary policy, 38 communism, 107 community intelligence, 34 company cash flows, 21 competitiveness, 44 concentration risk, 166 contagion, 159 contingent convertibles (cocos), 140 contingent reserve arrangement (CRA), 58, 59 convertible bonds, 199 conviction, 16 Cordes, Eckhard, 209 core capital, 164 corporate bonds, 48 corporate debt markets, 22 corporatist maladies, 32 counterparty risk, 178 country risk, 175 Countrywide Financial, 171, 181 Covidien, 40 creative accounting, 49, 136, 179 creative destruction, 17 credibility, credit, 69 Crédit Agricole, 187 INDEX credit booms, credit event, 180 credit flows, 47 credit freeze, 74 credit inflation bubble, 116 credit portfolio models, 154 credit risk, 166, 175, 187 Crédit Suisse, 146, 224 credit supply, 23 credit vultures, 91 credit-to-GDP ratio, 10 crisis management, 13 crisis of confidence, 213 cross-border banking, 73 cross-border competition, 65 cross-border regulations, 86 cross-border settlement, 198 cross-holdings, 187 currency devaluation, 64 currency risk, 94, 176 currency unions, 14, 27, 52, 204 current crisis, 13 cyber warfare, 17 Cypriot financial industry, 41 Dallas Federal Reserve Bank, 47 debt, 4–6, 89–91, 140, 141 debt accumulation, 20 debt and risk trap, debt dynamics, 63 debt financing, 96 debt loads, 12 debt mutualization, 33 debt overhangs, 23, 63 debt papers, 14 debt restructuring, 103 debt sustainability, xiv, 93, 104, 113–15, 124 debt vultures, 91 debt-laden democracy, 89 debt-to-GDP ratio, 93, 97 default probability, 172, 173 default risk, 120, 175 deficit targets, 22 deflation, 66–8, 76, 114 235 de-globalization, xii, xiii, 50, 53, 197 deleveraging, 27, 60–4, 92, 106, 115, 127 Deloitte, 216 democracy, 89 Deposit Guarantee Scheme Directive (DGSD), 79 deposit insurance, 158 deposit insurance fund, 294 deregulation, 29 derivatives, 37, 85, 136, 137, 172, 179 derivatives risk, 76 derivatives swaps agreements, 132 Deutsche Bank, 139, 140 developed economies, 12 digital currencies, 222, 224 disinflation, 4, 65 Djisselbloem, Jeroen, 110 Dodd-Frank Act, 139, 201 Doha Round, 50 domestic economy, 45 downside risks, 121 Draghi, Mario, 22, 60, 61, 81, 86, 203 earnings growth, 135 ECB Deposit Facility, 79 Ecofin, 110 economic and financial crisis, economic forces, 14 economic globalization, xiii economic history, 36 economic infrastructure, xii economic mismanagement, 15 economic policy, 15 economic policy surveillance, 57 economic risks, economic sovereignty, xiv economic vibrions, 19 educational standards, 19 Edwards, Albert, 15 Elliot’s Grand Super Cycle theory, embargo legislation, 145 emergency liquidity assistance (ELA), 158 emerging economies, 12, 13 236 INDEX emulation, 16 endowments, xiv, 37 entitlements, 27, 96, 129 Ernst & Young, 216 Erste Bank, 176, 177 Espirito Santo International, 183 EU Council, 116 euro crisis, 13 Eurobank, 157 Eurobanks’ exposure to sovereigns, 82 Eurobonds, 80, 82 Eurogroup, 42 European ABS market, 86 European Banking Authority (EBA), 126, 132, 158, 166, 204 European banking industry, 195 European banking supervision, 204 European Central Bank/ECB), xiv, 9, 22, 30, 38, 39, 41, 47, 48, 58, 61, 62, 66, 80, 81, 102, 155, 158, 167, 168, 201, 202, 212, 214 European Commission, 35, 51, 54, 116, 142, 184, 206, 210 European debt crisis, 38 European Investment Bank (EIB), 81 European Stability Mechanism (ESM), 79, 127, 212 European Supervisory Authorities, 79 European System of Financial Supervision, 79 European Systemic Risk Board, 79 Euroland, 57, 78 Euroland member states, 14 Eurosystem, 77 Eurosystem’s TARGET2 payments, 38 evaluation of asset prices, 27 excessive credit growth, 60 Excessive Deficit Procedure (EDP), 79 excessive liquidity, exchange rate parity, exchange rate pegs, 43 exchange rates, 46 expected losses, 170–3, 190 exposure, 9, 87 exposure at default, xiv, 177, 180 exposure at penalties (EAP), 181 exposure database, 173 exposure to risk, 113, 154 external capital, Fannie Mae, 151 Federal Reserve, xi, xiv, 2, 3, 22, 30, 31, 39, 47–50, 52, 84, 105, 120, 155, 170 fermentation, 16, 17 fiat money, 23, 43, 49, 214, 219, 220, 221, 224 Financial Accounting Standards Board (FASB), 191, 192 financial and trade sovereignty, 45 Financial Assistance Scheme (FAS), 39 Financial Conduct Authority, 84 financial crisis, 72 financial cycles, xi, xii, xiii, 1, 5, 6, 9, 10, 13, 19 financial excess, 47 financial long waves, 50 financial positions, financial reforms, 13 Financial Services Authority, 190 financial stability, xii, xiii, 14, 25, 28, 31, 36, 41, 70, 73, 74, 79, 92 Financial Stability Board (FSB), xiii, 29, 30, 31, 69, 71, 86, 138, 139 Financial Stability Forum (FSF), 29 financial transaction tax, 116 financial transactions, 175, 176 financial union, 203 financing of national debt, 23 fiscal austerity plans, 97 fiscal compact, 36, 37, 38, 97 fiscal consolidation, 97, 110 fiscal discipline, 13, 67 fiscal gap, 49 fiscal outlook, 21 fiscal policies, 38, 76, 89, 104, 196 fiscal profligacy, 14 fiscal rigor, 67 fiscal transfer union, 25 Fisher, Richard, 47 five cycles of the Western economy, floating exchange rates, 43 fluctuations in commodities, INDEX 237 foreign debts, 112 foreign exchange, 46 foreign investors, 22 Freddie Mac, 151 Frederick the Great, 15 free enterprise, 32 French government bonds, 82 Friedman, Thomas L., 101 high debt levels, Hollande, Franỗois, 38, 62, 80, 81, 94 household consumption, 95 households debt, 95, 100, 126, 155 HSBC, 138, 147, 165 human capital, xi hyperinflation, 94 hypotheses, 16 Gasparini, Maurizio, 38 generational change, 97 Glass-Steagall Act, 76 global competitiveness, 22 global exposure to derivative instruments, 76 global financial system, 74 global governance of markets, 29 global markets, 29 global monetary system, 43, 44 global policies, 41 global regulation, 29 global reserve currency, 44 global reserves, 44 globalization, 25, 29, 46, 50–2 Goldman Sachs, xiv, 168, 183 government bond holdings, 132 government bonds, xiii, 82, 133, 142, 169, 216 government budgets, 12, 210 government creditworthiness, 169 government debt, 44, 71, 142 government revenues, 12 Great Recession, 4, 39, 46, 47, 76, 78, 83, 156 Greek sovereign bonds, 42 Greenspan, Alan, 105, 155, 170 Greenspan put, 74, 164 Gross, Bill, 94, 95 Group of Twenty (G20), 29 IBG/YBG principle, 103 identification and quantification of risk, 189 idiosyncratic risks, 72 IMF/EU/ECB troika, 99 IMF loans, 56 income inequality, 33 industry-specific regulation, 54 inequality in income and wealth, 32 inflation, 60, 65, 115 inflation risk, 176 Ingves, Stefan, 149 inheritance taxes, 33 inheritances, 33 innovation, 23 Insee, 66 institutional and political integration, 52 intellectual property holdings, 137 interbank contagion, xiv, 187, 188 interbank market, 71 interest rate risk, 93 interest rate swaps, 85 interest rates, 7, 19, 21, 38, 39, 45 internal controls, 146, 189 internal devaluation, 63 International Accounting Standards Board (IASB), 190 international monetary and financial system, 57 International Monetary Fund (IMF), xiii, 5, 39, 41, 46, 56, 58, 59, 133 inverse delegation, 159 inverse globalization, 59 Italian sovereign bonds, 39 haircuts, 47 Hayek, F A., 46 HBOS, 181 healthcare, 102 helicopter fines, 181, 192 helicopter money, 14 Jackson Hole, Wyoming, 60 Japanese credit institutions, 76 238 INDEX JPMorgan Chase, 138, 148, 150 junk bonds, 84 Kallas, Siim, 110 Kay, David, 36 Keynes, John Maynard, 45, 46, 93 Knight, Adam, 224 knowledge engineering, 188 Kondratieff, Nikolai, xi, xii, Kondratieff cycle, Kotlikoff, Laurence, 49 labor laws, 83 labor markets, 22 Lagarde, Christine, 41 large and complex banking groups (LCBGs), 28, 34, 116, 145, 153 Lawsky, Benjamin, 181 legacy banking, 69 legacy costs, 25 legacy debt, 217 Lehman Brothers, 136 Letta, Enrico, 36 leverage, 5, 61, 92, 95, 152 Liberty Reserve, 223 Libor, 85 limits to growth, xii liquidity, 5, 6, 30, 52, 175 liquidity risk, 166 living wills, 77, 201 Lloyds Banking Group, 84, 146, 147 loans exposure, 66 lobbying, 192 local banking, 30 London Whale, 150 longer cycle of growth, longer-term refinancing operations (LTROs), 81 loose financing conditions, LTRO repayments, 82 Maastricht Treaty, 36, 102 Maastricht Treaty’s Article, 104, 102 macro-prudential regulation, 74 macro-prudential supervision, 72–4, 76 Madoff, Bernard, 148 Main Refinancing Operation (MRO), 79 mandatory bail-in structure, 35 market confidence, 22, 25, 28 market risk, 166, 175 Marx, Karl, 17, 32 Meddings, Richard, 182 Medtronics, 40 Medvedev, Dmitry, 208 merger of capitalism and socialism, 129 Merkel, Angela, 7, 8, 36 micro-prudential supervision, 73 minimum wage, 67 misconduct, 144 mismanaging public finances, 12 mispricing of risk, 25 monetary conditions, monetary history, 43 monetary policy, 6, 27, 62, 70, 115 monetary union, 7, 25 money, 219, 220 Monte dei Paschi di Siena, 157, 168, 184 Monti, Mario, 80 moral hazard, 57 Morgan Stanley, 67 mortgage debt, 92 mortgage-backed securities, (MBSs), 84, 150 mortgage-related assets, 83 Mt Gox, 221, 224 Münchau, Wolfgang, 66, 74, 83 Munich Center for the Economics of Ageing, 67 mutualization of public debt, 81 nanny state, 111 national currency, National Bank of Greece, 157, 177 National Development Bank of Brazil, 59 national supervisors, 80 NATO, 17 New Development Bank (NDB), xiii, 58, 59 INDEX New York State Department of Financial Services (NYDFS), 146, 149 Newton, Isaac, 90 NINJA loans, 155 Nixon, Richard, 44 Nomura International, 85 nonbank banks, 69, 71, 133 noncore assets, 139 non-investment grade bonds, 48 non-performing loans, 21, 64, 143, 168, 177, 180 nonsystemic risk factors, 167 normal banking, 72 Novo Banco, 157, 200 Oak Finance, 183 Obama, Barack, 98, 112, 130 Obama doctrine, 109 Obamacare, 40, 98 Office of Foreign Assets Control (OFAC), 145 Office of the Comptroller of the Currency, 148 one-sided fiscal rules, 14 operational risk, 139, 166, 192 opinions, 16 Oppenheimer, Robert, 16 Orban, Victor, 208 outright monetary transactions (OMT), 39 overexposure, 28 overindebted governments, 97 overleveraged firms, 95 overnight funding, 45 Padoan, Pier Carlo, 110 paper money, 48, 219 Paris Club, 124 past success and failures, 11 past trials and error, 11 past-due loans, 65 Pasteur, Louis, 10, 16, 18 Peace, John, 147, 182 pension expenditures, 83 pensions, 98, 102, 210 239 Peoples’ Bank of China (PBoC), 71, 75, 76 perception of risk, 73 Perkins, John, 90 personal accountability, 10 personal responsibility, 53 petrodollars, 51 Phelps, Edmund, 32 Piketty, Thomas, 32, 33, 34 Pimco, 158 policy innovations, 22 policy reforms, 22 political inconsistencies, 62 political responsibility, 36 political risk, 147, 176, 209 political union, 27, 37, 206 Popular Bank of Cyprus (Laiki), 158, 159 PricewaterhouseCoopers, 181, 216 private creditors, 58 private debt, 7, 83, 92, 124 private equity, 64, 126 Private Sector Involvement (PSI), 102 productivity, 20 profligate European sovereigns, 22 profligate governments, 14 property-laden democracy, 89 provisioning shortfall, 180 prudential banking supervision, 196 prudential rules of bank supervision, 30 public and private debt, 20, 23, 62, 92 public confidence, 25 public debt affordability, xiv public debts, xiii, xv, 7, 11, 14, 21, 37, 79, 83, 91, 112, 124, 206 public deficits, 35 public health care expenses, 98 public money, 35 Putin, Vladimir, 59 qualitative easing, 48 quality control, 86 quality histories, 85 quality of earnings, 134 quantitative easing (QE), 4, 31, 47–9, 61, 100, 115 quantity and quality of money, 19 240 INDEX Raghuram Rajan, 5, 125, 211 Raiffeisen Bank, 177 Rand Corporation, 99 real assets, 23 real credit growth, 10 real property growth, 10 real wages, 25 recapitalization of credit institutions, 15, 103, 162, 201 recessions, recovery, redistribution of wealth, regionalization, 25, 50, 51 regulatory arbitrage, 71 regulatory calculation difference (RCD), 180 Rehn, Olli, 38 Reinhart, Carmen, 63, 116 Renzi, Matteo, 7, 8, 94, 110 Repo, 105, 136 Reserve Bank of India, 5, 144, 211 reserve currencies, xiii, 43, 46 residential mortgage-backed securities (RMBSs), 85, 132 resolution regimes, 77 resource misallocation, 20 restructuring of sovereign and banks debt, 15 restructuring the labor market, 52 retirement age, 25, 67 Rhodes, William, 5, 211 rights without responsibilities, 38 risk analysis, xiv risk and return, 86 risk capital adequacy, 166 risk committees, 20 risk control, xv, 139, 162 risk of failing to act, 20 risk-off policies, risk-on policies, risks, 6, 9, 20, 27 risk-taking, risk-weighted assets (RWA), xiv, 28, 131, 133, 153, 164, 169, 179 risk-weighting of sovereign bonds, 39 Rogoff, Ken, 63, 116 Royal Bank of Scotland, 139, 165, 181 sanctions, 208, 209 sanctions settlements, 145 sanctions violations, 145 Sands, Peter, 182 Santander, 165 Schäuble, Wolfgang, 80, 110, 142, 199 Schumpeter, Joseph, 17 science, 16 science and technology, 10 science of fermentation, 18 securities financing transactions, 70 Securities Markets Program (SMP), 80 securitization of subprimes, 83, 87 securitizations, 83, 86 security, 222 Seehofer, Horst, 61 Seibert, Steffen, 205 senior unsecured bondholders, 77 sequestration, 12 settlement risk, 175 shadow banking, xiii, 23, 69–72, 74, 69, 223 shadow leveraging, 92 shareholders, 21 Sheiner, Louise, 98 short-termism, 52 Siemens, 61 Sikka, Prem, 216 simulation, 16 single deposit insurance treasury, 203 Single Resolution Mechanism (SRM), 80 Single Supervisory Mechanism (SSM), 80 Sinn, Hans-Werner, 125 small and medium enterprises (SMEs), 82 social and economic reforms, 52 social costs, 38, 128 social democracy, 107 social safety net, 40 social security systems, 208 socialism, 106 INDEX Société Générale, 15 socio-economic reforms, 83 socio-economic system, 94 Soros, George, 29, 151, 217 sound economic and financial management, 15 sound government finances, 21 South Sea bubble, 221 South Sea Company, 90 sovereign bonds, 122 sovereign budgets, xiii sovereign debt, 93, 103, 204 sovereign debt crisis, 203 sovereign exposures, 93 sovereign risk, 56, 179 sovereigns, xiv, Spanish banking industry, 143 special drawing rights (SDRs), 46 special purpose vehicles (SPVs), 70, 71 Stability and Growth Pact, 79 Standard Chartered, 146, 147, 182 standard deviations, 170, 171 state bailouts, 35 state budgets, 36 statistical filters, 10 statutory minimum wage, 209 Stephens, Philip, Stiglitz, Josef, 112 Stojberg, Inger, 111 Strauss-Kahn, Dominique, 103, 104 stress testing, xii, 133, 155, 160, 161, 165, 186, 188 stress tests, 132, 143, 158, 166, 170, 187, 214 structural reforms, structural weaknesses, 20 structured finance, 86 structured securities, 137 student loans, 87 subordinate bondholders, 77 subprime auto asset-backed securities, 86 subprime auto lenders, 86 subprime lending, 87, 211 subprimes, 25, 155 Subramanian, Arvind, 58 241 Sun Tzu, 15 supervisory authorities, xii, 74 Swiss National Bank (SNB), 8, 9, 47 syndicated loans, 48 systemic importance of a credit institution, 161 systemic risk, 31, 60, 162 systemic risk factors, 167 tangible book value, 133, 134 Tardieu, André, xiii TARGET2, 38, 39 targeted longer-term refinancing operations (TLTROs), 212 tax increases, 12 tax inversion, 40 tax optimization, 41 tax overhaul, 12 tax reform, 143 tax statistics, 33 taxation, 40, 83 taxes, 22, 37 taxpayer money, 199, 200 Tennessee Coal, Iron and Railroad Company, 138 Tier capital, 133, 139, 153, 185 Tier capital, 133, 180 time series, 154 too big to fail, 37, 159 too big to jail, 37 toxic assets, 84, 137 toxic home loans, 151 toxic waste, xiii, 47, 65, 81, 82, 86, 131, 154, 155, 162, 179 trade privileges, 52 Trade Promotion Authority, 55 trading book, 189 Transatlantic Business Dialogue (TABD), 54 Transatlantic Economic Council, 54 Transatlantic Free Trade Area, 54 Transatlantic Partnership, 54 Transatlantic Trade and Investments Pact (TTIP), 8, 50, 53–6, 59, 213 transfer union, 207, 208 242 INDEX Trans-Pacific Partnership (TPP), 50, 55, 56 transparency, xv Treaty of Westphalia, 109 UBI, 168 uncertainty, 27 unemployment, 62 unexpected losses, 171–3 unfunded liabilities, xiii, xiv, 37, 49, 92, 98, 100, 105 UniCredit, 168, 177 uniform global supervision, 151 uninsured deposits, 158 universal banking, 136, 138, 144 unsecured lending, 152 US Commodity Futures Trading Commission, 84 US Congressional Budget Office (CBO), 98 US corporate cash pools, 21 US Department if Housing and Urban Development, 181 US Department of Justice, 149, 181 US Government Accountability Office (GAO), 96 US Social Security and Medicare entitlement programs, 49 US Social Security deficit, 105 US Supreme Court, 51 US Treasuries, 44, 45, 95 value analysis, 12 Van Batenberg, Robert, 49 vibrions, 18 virtual bankruptcy of Greece, 11 virtual currencies, 223 virtual currency trading platforms, 224 Volcker, Paul, xi, xii, Washington Mutual, 151, 171 wealth inequality, 33 weapons of mass destruction, 36 Weidmann, Jens, 39, 67, 204 welfare state, 111, 149 welfare systems, xiv Wells Fargo, 147 Whalen, Christopher, 138 Wolf, Martin, 14, 156 World Bank, 59, 142 World Trade Organization, 54 World War I, xii World War II, xiii, xiv write-downs, 64 wrong-way risk, 180 yield, 120 zero interest rates, 61, 84, 92 zombie banks, 185 zombie companies, 97 ... Structured Financial Products (2006) The Management of Bond Investments and Trading of Debt (2005) Financial Cycles Sovereigns, Bankers, and Stress Tests Dimitris N Chorafas FINANCIAL CYCLES Copyright... Chorafas, Dimitris N Financial cycles : sovereigns, bankers and stress tests / Dimitris N Chorafas pages cm Includes bibliographical references and index Business cycles Financial crises Finance... 10.1 Financial cycle and business cycles Stress tests help to project real-life worst cases and associated unexpected losses Banking union and supervisory assessment of exposure of Euroland’s