Financial Markets

Financial Markets

1. financial innovation

   • securities lending
     • Hedge Funds
       • AIFMD
         • non-UCITS funds
           • UCITS fund: allow small investor to have access to the market
             • collective investment schemes
       • don't own what they sell
       • uses short-selling: more efficient markets and resolve mispricing
     • crisis: HF borrower short-selling
       • defaulted + value of the collateral did not cover the losses
         • domino effect
       • help market to operate more efficiently
         • HF can help resolve mispricing
         • lender always has the right of ownership
           • lending fee
   • reduc. costs
     • better allocation of risk
       • improve access for consumers
         • better choice & decisions
           • response to unmet need for consumers
             • more efficient allocation of resources
               • FSUG
   • securitization: allows for unitization
     • offload bad loans from balance sheet
       • Credit Risk Diversification
         • SPVs
           • information asymetry
             • loans with misprice risks
               • skin in the game
                 • alignment of interest between the arrangers and investors (at least 5% of the asset pool)
     • (concentrating on a very small scale economics exposure
       • accessible to individual small investors
   • derivatives
     • hedge risk
       • insuring against price movements
     • speculate on fin. market
       • option to sell/buy at a special time
     • OTC: systemic
     • modified exposure
     • ETF: Exchange-Traded Fund
       • transparent
       • liquid
       • increases volatility

2. 60% of cross-border capital flows have fallen

3. trends

   • financial globalisation
   • rise of market-based finance
   • financial innovation (product & techniques)
   • high frequency trading
     • lower transaction costs
     • destabilize economy
   • democratisation of finance
   • fin. repression & re-regulation of fin.

4. measure integration

   • cost of capital should be the same across EU
   • price convergence among the states
   • volume of cross border flows
   • no more trading costs

5. bank balance sheet

   • assets
     • loans
     • reserves
       • Core tier 1: 7.5% & 10%
   • liabilities
     • deposits
     • loans from other banks
     • capital
       • issue equity & bonds
         • EONIA
   • unfunded liabilities
     • + asset side
     • - liability side
   • excess liquidity
     • overvaluation of stocks

6. 3 kinds of loans

   • Good (default >10%)
   • Medium (10%-30%)
   • Bad (<30%)

7. Branch vs subsidiary

   • subsidiary: separately capitalized. Regulated by Host MS
     • Host: determines capital req. + decision of lender of last resort
   • branch: regulated by Home MS

8. Global ageing

   • a need to invest in fin. markets to get the money that we need for retirement