The Future of Finance

New banking and investment business models to navigate the post–financial crisis environment The financial crisis of 2007–2008 has discredited business models in the banking and fund management industries. In The Future of Finance, Moorad Choudhry and Gino Landuyt argue that banks must realign their business models, implying a lower return–on–equity, diversifying their funding sources, and increasing liquidity reserves. On the investment side, the authors discuss how diversification did not reduce risk, but rather amplified it, and failed to stabilize returns. The authors conclude that the clear lesson from the crisis is to know one′s risk. A lesson that is best served by concentrating on assets and sectors that you understand. Examines the weaknesses in the business models of many institutions, as well as the theoretical foundation for professionals in the field of finance Identifies the shortcomings of Modern Portfolio Theory Addresses how investment managers can find new strategies for creating "alpha" and why they need to re–vamp their fee structures Filled with in–depth insights and practical advice, The Future of Finance will provide bankers and investment managers with a guide to realigning their businesses in order to prosper in the post–crisis financial markets.

Foreword. Preface. Introduction. Market Instability. Derivatives and Mathematical Modeling. Senior Management and “Staying in the Game”. Macro–prudential Financial Regulation and Cycle–Proof Regulation. The Way Forward. Conclusion. Part I: A Review of the Financial Crash. Chapter 1: Globalization, Emerging Markets, and the Savings Glut. Globalization. A Series of Emerging Market Crises. Low Yield Environment Due to New Players on the Financial Markets. Artificially Low Exchange Rates. Recommendations and Solutions for Global Imbalances. Chapter 2: The Rise of Derivatives and Systemic Risk. Systemic Risk. Derivative Market Systemic Risk: Solutions for Improvement. Chapter 3: The “Too–Big–To–Fail” Bank, Moral Hazard, and Macroprudential Regulation. Banks and Moral Hazard. Addressing Too–Big–to Fail: Mitigating Moral Hazard Risk. Macroprudential Regulation: Regulating Bank Systemic Risk. Conclusion. Chapter 4: Corporate Governance and Remuneration in the Banking Industry. Bonuses and a Moral Dilemma. A Distorted Remuneration Model. Unsuitable Personal Behavior. Conclusion. Chapter 5: Bank Capital Safeguards: Additional Capital Buffers and Reverse Convertibles. Capital Issues in a Bear Market. Looking for New Capital Instruments. Counter–Cyclical Capital Management. Chapter 6: Economic Theories under Attack. A Belief in Free and Self Adjusting Markets. Modigliani and Miller. Markowitz and Diversification Tested. Minsky Once Again. Lessons to Be Learned for Central Banks. Conclusion. Part II: New Models for Banking and Investment. Chapter 7: Long–Term Sustainable Investment Guidelines. The Investment Landscape after the Crisis. Government Debts and Demographics. A New Economic Environment. The Inflation Dragon. Currencies and a Changing Geo–Political Landscape. Exchange Traded Funds: A Flexible Asset Class. Conclusion. Chapter 8: Bank Asset–Liability and Liquidity Risk Management. Basic Concepts of Bank Asset–Liability Management. Asset and Liability Management: The ALCO. ALCO Reporting. Principles of Bank Liquidity Risk Management. Measuring Bank Liquidity Risk: Key Metrics. Internal Funding Rate Policy. Conclusion. Chapter 9: A Sustainable Bank Business Model: Capital, Liquidity and Leverage. The New Bank Business Model. Corporate Governance. Liquidity Risk Management. The Liquid Asset Buffer. Conclusion. Notes. References. About the Authors. Index.