Banks’ business models impact on financial stability

 

The investigation of the British government appointed Independent Commission on Banking regarding the Britain’s banking structure impact on financial stability raise my doubts, whether considerations to separate retail banking from the investment banking is a reasonable solution to keep financial stability.

In general competitiveness of the company depends on the capabilities to identify and satisfy the needs of customers. So, while assets risk is based on business decisions, it is more likely that not a standardize particular business model but enhanced corporate governance standards may lead to more efficient asset allocations, which generate positive NPVs and increase value of the company.

The problems with the financial stability arise from the financial risk that depends on the capital structure. It may seem that increased free cash flows from large leverage are advantageous decisions because of the interest tax shield. However, when the company uses excessive debt it increases the risk of equity and imposes financial distress costs.

Moreover, as long as asset risks are usually similar within the industry it is more important to look for more effective financial risk management tools rather than discuss the appropriate business models for financial institutions.

 

Monday, 17 January 2011

The cooperation of the US and China

 

The scheduled meeting of the U.S. President Barack Obama's and Chinese President Hu Jintao to discuss the cooperation of the leading economy countries in Washington on Wednesday, 19 January is an interesting event to observe because the leaders wish to agree on the power of influence.

Could China insist to stop the U.S. Federal Reserve’s economy stimulation program through the huge bond purchases that should keep long-term interest rates at the law level, depreciate the dollar and raise inflation? Is the US able to convince the China to appreciate its currency and reduce its products' export to overseas? Similarly, does Chinese suggested alternative to shift the US dollar domination in the global markets with the China’s currency would be a more reliable solution?

Agenda is full of contradictions. So, could a common interest of the cooperation arise? Maybe, the answers to the following questions should be disclosed, first of all.

What are visions of the political leaders of the most powerful economies and how they are leading towards it? Why they consider themselves responsible for the global economy issues and why do they keep on persuading each other that the policies of their own interests are mutually beneficial solutions for the rest of the world?

Monday, 10 January 2011

Banks’ bonuses versus the risk of banking system’s collapse

 

High bonuses for banks’ executives are not only an issue of conflicts between companies’ stakeholders, and it is not just a subject of ethics. The context of today’s fragile European economy’s recovery sends a message - new risk management challenges are ahead.

Banking system is the most important sector of any financial system as its main purpose is resource allocation. So, well operating banking system when firms ensure effective risk management of liquidity and capital adequacy by themselves is essential for economy growth. However, besides the troubles to liquidate the toxic assets after the subprime mortgage crisis the other, maybe even complicated challenge should be mastered. It is banks’ exposure to at least risky and the highly liquid class of assets - sovereign bonds, the bonds of the largest borrowers in the economy, the obligations those credibility is declining in the markets.

So, who is going to rescue the financial system once again in the event of irresponsible banks’ bonuses when actually there are no additional recourses for the bailout?

Saturday, 8 January 2011

Sufficiency of the means used to stabilize domestic economies

 

How powerful are national decisions in open markets and globalization processes and how sufficient are broadly used indirect means such as control of the supply of the currency, regulation of interest rates, budget restrictions, tax rates and, etc. to reach the desirable state of domestic economy and the welfare of the nation’s people?

Broadly discussed economy stabilization issues and threats of rising inflation point attention to the most important goods of people’s daily life required to satisfy the minimum demands. We could hardly live without food, clothes, heating or transport nowadays, the products or services that usually do not have substitutes and those demands do not change or vary slightly despite the rise of their prices. The helpless victims of circumstances are evident once the most important goods of people’s daily life are imported and depend on the global market prices.

Consequently, the attempts to boost recovery and protect from inflation by ordinary means of national monetary and fiscal policies are not enough and should be sought direct and specific ways for the achievement of domestic goals.