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Articles from: 2011

Rebuilding society post-recession

What next? Financial crises

Research Review Summer 2011 - Cover imageProfessor Brian Scott-Quinn’s article published in the Summer Issue of the University of Reading’s Research Review

Professor Brian Scott-Quinn, the chairman of the ICMA centre for financial markets at Henley Business School, discusses financial crises and whether regulatory capture is to blame.

The crisis in the banking system which commenced in 2007 has caused most people to wonder what caused the problem. Even the Queen asked some economists who were visiting the palace why they could not have predicted it since they should have been able to know what indicators to look for in advance. While here at the Henley Business School’s ICMA Centre we are researching the more arcane issues such as how to model financial risk better in future and how to calibrate liquidity requirements for financial institutions, the much more general questions that need to be answered are ?what caused it and who is guilty??.

In trying to find a root cause, we might simply say that it was sub-prime mortgages, or we could blame statistical modelling and risk management failures. But this is not a sufficient explanation. All financial crises have different causes ascribed to them, yet in fact they all seem to have one thing in common ? the symbiosis between bankers, regulators and governments.

Of course the monetary, fiscal and regulatory authorities are supposed to stop financial crises arising. We have the Bank of England, the Treasury, the Financial Services Authority and others all having a share of responsibility for financial stability. The Bank did at least warn the government of critical problems that were building up many times prior to the crisis. However, no one listened. But why would the government take any notice? The economy seemed to be doing very well, thank you, in 2006/7.

So what about the regulators? Banking and nuclear power are the most regulated industries worldwide simply because they can both have meltdowns. I would suggest that it was ?regulatory capture? that led to the financial crisis, just as it did in the nuclear crisis. By that we simply mean that nuclear regulators were too close to Tepco in Japan, just as bank regulators in the US, the UK and the Eurozone are too close to the major banks.

The relationship that bankers have to their regulators is much like that experienced during Stockholm syndrome; with regulators playing the role of the innocents captured by guerrillas. The best example of this was the story of Patti Hearst, the billionaire’s daughter who was kidnapped by the so-called Symbionese Liberation Army in California in 1974 and ultimately joined her captors in furthering their cause by helping to rob a bank.

Capture, sadly, is also what happened to our regulators. The real problem in regulatory capture which is, I believe, central to the crisis, is the symbiosis between bankers and regulators, senior civil servants and government ministers. The regulators, if they are not former bankers, would like to be bankers, and aspire to be offered a job in the industry. The regulators also see the bankers as people who seem to understand an esoteric business which they find difficult to comprehend, and have a secret admiration for them.

One of the alarming things about the banking business is that despite the worst crisis in living memory, nothing much so far seems to have changed. Indeed one of the key regulators, the Controller of the Currency (in the US) was quoted in the Financial Times recently as having said at a City dinner (at which the author was also a guest) that we are actually in grave danger of over-regulating the banks, and that could be even worse than under- regulating them. He may be correct, but I doubt it.

So do I have any ‘solution? to the problem? No solution but one insight we have from our research is that regulators need to pay more attention to ?outliers? ? financial institutions which stand out from others in some way. The particular way we think is relevant, is their growth rate. If we look at Fannie, Freddie and AIG in the United States and Northern Rock and RBS over here, they were all growing much faster than the pack before the crisis. Indeed for most of them, their asset growth rate was so high that it did not need much of an enquiring mind to ask why they were able to achieve such growth. Regulators probably did ask this but preferred not to act on it; had they done so they would have been blamed for damaging economic growth prospects. Indeed in the case of RBS it had a declared objective to become the world’s largest bank, and it nearly achieved that goal, but fell at the last hurdle.

So our conclusion would be that regulators need to pay much more attention to the signals arising from the business strategy of a firm, and to ask why a firm is seemingly growing much faster than its competitors. In the answer to this question regulators may find the financial institutions they have to rein in. The next problem, of course, is how we will rein in governments who overspend and cause sovereign debt crises. That is, unfortunately, a much more complex issue.

How do you solve a problem like the banks?

The Commission, chaired by Sir John Vickers, was established by the Chancellor of the Exchequer in June 2010 to recommend changes to the UK banking industry structure following the worst financial crisis in living memory. The Commission was asked to consider reforms to the UK banking sector to promote financial stability and also to make the market in the provision of retail bank services more competitive.

The twin objectives, ‘financial stability’ and ‘competition’, are key. Financial stability means avoiding another banking collapse. Its opposite, instability, is something that, were it to happen again, would probably topple any government on whose watch it happened. But, more importantly, the problem faced by the authorities is that they no longer have the firepower to put out the flames from another banking fiasco. Banks, as we have discovered recently, have a symbiotic relationship with governments and can cause the collapse of the sovereign authority itself.  The need for more competition is to avoid the banks making themselves safer and their employees increasingly richer, simply by exploiting the consumer due to an uncompetitive market for retail bank services.

The recommendations of the Commission in respect of UK banks fall essentially into three areas:

  • ‘Ringfencing’ the high street retail banking business from the wholesale City of London investment banking business;
  • Increasing the amount of equity capital which retail banks must employ to finance their operations in order to provide more protection to depositors and hence to the taxpayer;
  • Proposing to the government that Lloyds Bank sell the branches it must by law divest, to another largebanking group, rather than a new banking group, in order to make that group a truly stronger competitor to Lloyds.
Ringfencing, is thought by many analysts and commentators to be on balance, a worthwhile step despite the objections that the major banks have raised in respect of the proposal. It would do no more than take us back to earlier times before 1986 when banks and investment banking were separate and when the economy was actually growing much faster than it is today. It would also force the retail component of the bank to focus on the ‘real economy’ i.e. lending to businesses and households rather than trying to find ways to create assets to trade independently of what might be happening in the real sector. With ringfencing, if the retail part of the bank got into difficulties it could be rescued, ‘resolved’ to use the jargon, at much lower cost to the taxpayer than the banking companies we have today. On the other hand the trading part of the bank could be allowed to collapse with few shedding a tear.

Would ringfencing prevent another crisis? Of itself probably not. But in combination with the greatly enhanced capital requirements that the Commission recommends, which are considerably in excess of the minimum levels global regulators are pressing for, it certainly makes collapse less likely and, were it to happen, less expensive for the taxpayer.

Competition is also key to reforming the banks since without it banks may become lazy, impose unjustified charges and try to ensure that pay for employees comes before customer service and low charges.

In summary, the outcome of the deliberations of the Vickers Commission (IBC) represents a good step in the right direction towards returning retail banking to its former role ? helping the growth of the real economy. But equally, it is only one set of the many reforms that needs to be taken over the years ahead to provide the UK with a banking system that will also be safe and not be liable to plunge the country yet again into a state of financial instability.

ICMA Centre student celebrates winning third award of the year

The weather couldn’t dampen high spirits at the ICMA Centre last week as over 300 students celebrated their remarkable achievements. One student in particular had special reason to celebrate not only did he come top in his class thereby winning the MSc Academic Achievement Award but he was also awarded the Vetiva Prize. In total MSc International Securities, Investment and Banking student Chardin Wese Simen has won three awards this year including the CISI Stephen Cooke Award.

The Centre makes a number of Academic Achievement Awards each year to the highest performing students, other winners included MSc Financial Engineering student Ramelis Acosta from the Domincan Republic and BSc student, Tsz y Luk, from China.

The Vetiva Prize for Best Graduating African Student was established by one of the ICMA Centre’s alumni, Dr Olaolu Mudasiru, who is now Deputy Managing Director of Vetiva Capital Management Limited in Nigeria. In addition to the £1,000 prize Chardin, was also offered a job at Vetiva. Dr Musasiru, said of the prize:

“The prize was established to ensure that the African youth are rewarded for their endeavours. Vetiva envisioned a future where the most excellent African minds would be instrumental in providing solutions to Africa’s economic challenges, with the ultimate aim of accelerating the pace of economic development in the continent.”

Chardin, who is from Cameroon, has demonstrated his drive to achieve both in his work and studies taking the initiative in participating in Insight Programmes with leading institutions such as Deloitte, PWC and the FSA and also successfully setting up his own business prior to studying in the UK.

Prof Charles Sutcliffe , Head of School at the ICMA Centre, said:

“Chardin is an outstanding student and we are delighted that he will be joining our PhD Programme in the autumn.”

Lecturer receives promotion, award and research project grant

The ICMA Centre’s Dr Marcel Prokopczuk has much to celebrate this week. Dr Prokopczuk who joined the Centre in 2009, received a promotion on the 1st of July to Senior Lecturer and yesterday was awarded a University Teaching and Learning prize as well as being awarded a British Academy research project grant.

The Outstanding Contribution to Teaching and Learning awards recognise and reward individuals who have made an exceptional, ongoing contribution to teaching and learning, either through direct interactions with students, their support of staff within the School/section, or their contributions to a Faculty, Directorate or University initiative. Only eight of these are prestigious £1,000 awards are conferred each year.

In addition to the promotion and award Marcel has also been awarded (with co-applicant Professor Chris Brooks) a research project grant by the British Academy under their “Small Grant Scheme”. The title of the project is “Risk Premia in Commodity Markets” (project abstract appears below).

Professor Charles Sutcliffe, Head of School commented:

“This is excellent news both for Marcel and for the Centre. It is very well deserved and recognizes the significant contribution Marcel has made to the Centre since his appointment in 2009.”

Project Abstract: Commodity derivatives markets serve important economic functions in terms of risk management and long term investment strategies. However, compared to equity and fixed income markets, commodity linked securities have received only little academic attention and are thus a relatively unknown asset class. Most importantly, the existence and nature of risk premia in this market have, so far, not been studied satisfactorily. In this project, we will therefore address the following questions: (i) Are risk premia in different commodity markets positive or negative? (ii) Which economic factors determine the variation of risk premia cross-sectionally and over time? (iii) Are there risk premia for volatility and jump risk? The answers to these questions will substantially improve our understanding of commodity derivatives markets. This knowledge will help long-term investors, such as pension funds, to optimise their investment decisions and also manufacturing companies to improve their risk management strategies.

ICMA Centre ranked in the top 25 by the Financial Times

The Financial Times’ Global Masters in Finance 2011 has ranked the ICMA Centre in the top 25 in the world.
The Centre and its flagship MSc International Securities, Investment and Banking programme sits amongst the top finance schools and programmes in the world alongside the likes of Oxford, Saïd and HEC Paris.

The ranking evaluates alumni career progress and satisfaction with the programme, school diversity and international experience at the school.

The mentioned Masters programme prepares students for careers in the financial markets. Graduates go on to join investment banks in trading, sales, research or specialist areas such as complex derivative products while others join brokers and commodity traders.

In addition, many graduates follow other career paths including consultancy, accountancy, operations, IT and higher education and doctoral research.

The MSc International Securities, Investment and Banking programme was the Centre’s first Masters programme launched in 1994. The Centre, which has recently celebrated its 20th anniversary, now offers ten Masters in Finance programmes, an undergraduate programme as well as a range of executive educations courses.

The ICMA Centre is ranked 4th in the UK for its placement success which reflects the work of its dedicated Career Development service. In addition, the Centre is ranked 16th for value for money and for International Mobility citing that the Centre is one of best-valued and multicultural institutions in the world.

More promisingly, the Centrehas a high employment rate with 94% of graduates being employed within three months of leaving; this is encouraging news especially on the back of a recession.

The Financial Times has praised the ICMA Centre’s practical approach in the past, citing that studying at the ICMA Centre permits ?a spirited participation in the capital markets through a simulation programme that allows students to apply finance theory to specific real world issues.’

This close collaboration between industry and academia characterizes the foundation of the centre’s training courses – a first for Europe.’

More details of the rankings are available on the Financial Times website.

The ICMA Centre Turns 20

The University of Reading’s ICMA Centre has just celebrated 20 years of providing high-quality education for the financial markets.

To mark the occasion staff past and present, alumni, and current students attended a special drinks reception at the Centre last week. Guest enjoyed a trip down memory lane, seeing photographs from the last 20 years and a video produced in the 90s, and also competed in a trading competition.


Now part of Henley Business School, the ICMA Centre was established in 1991 with funding from the International Capital Market Association. The Centre has come a long way in twenty years with an impressive range of undergraduate and Masters Programmes, a PhD programme, research, consultancy and its own executive education programmes.

Professor Brian Scott-Quinn, Chairman and founder of the Centre opened the speeches reminiscing on the early years and thanking Martin Scheck, Chief Executive of ICMA for the organisation’s vision and continued support for the Centre.

Martin Scheck said: “The ICMA Centre is a driving force in the provision of high quality, relevant education and we value our relationship with the Centre very highly.  The development of a successful, internationally recognised, education programme requires a long term, multi year commitment and we are extremely fortunate to have such a partner in the ICMA Centre.”

Professor John Board, Director of the Centre and now Dean of Henley Business School, and Professor Tony Downes, Deputy Vice-Chancellor also spoke of the value placed on the relationship by the Centre and the University.

Professor Scott-Quinn said: “From small beginnings, large ventures grow… The Centre has gone from strength to strength with John Board taking over the Directorship from me in 2005 and driving forward not only the project for the extension to our building which was also financed by ICMA, but a large number of very successful educational and business development initiatives.

“We now have the benefit of being part of a larger and very successful business school – Henley Business School – which is proving to be a good and helpful parent organisation. It’s great seeing the Centre going from strength to strength with around 400 students, including our BSc programme. As important is the range of ICMA executive education programmes offered by the Centre. From the original two programmes when the Centre started out to the amazing number of 39.

“In addition, the ICMA Centre’s own executive education programmes have expanded dramatically with clients ranging from major investment banks through regulatory agencies to trade associations around the world.

Photo: Left – Professor Brian Scott-Quinn, ICMA Centre. Right – Martin Scheck, ICMA.

Results Day

ICMA Centre’s students were in jubilant mood after their eagerly anticipated results were released.

Saurav Mukherjee, an MSc Capital Markets, Regulation and Compliance student, said his course was ‘an unforgettable challenge, which has changed my life’ and MSc Financial Risk Management student, Ganesan Chandrasekaran, described his course as ?my career’s best launch pad’.

A beaming Luis Fernando Garcia cited his course as an ?unforgettable year’s experience’, whilst Akisanya Abimbola said ?the ICMA Centre challenged me to go beyond my capacity, ultimately transforming me from good to extraordinary’.

Richard Stephens described his MSc International Securities, Investment and Banking experience as ?diverse, challenging and fulfilling’.

Students shared the news with family and friends, telling proud parents of their achievements, whilst others were embraced classmates relieved after all their hard work.

Students will now be looking to their next challenge be it further study or a job in the City, and enjoying some down-time before graduation and leaving Reading. The students have earned it.

Congratulations to all ICMA Centre students on their achievements.

ICMA Centre’s Tom Markham speaks about football’s £90 million match

Whilst Reading’s sporting entourage were packing the trains to Wembley for the Reading FC against Swansea City playoff final, ICMA Centre’s very own Tom Markham was speaking to Nicki Whiteman on her BBC Radio Berkshire radio show about the economic impact promotion to the Premier League would have.

The playoff final is worth an estimated £90 million, which gives the winner a substantial financial windfall and with Tom’s enthusiasm and knowledge of the beautiful game’s financial side, he was asked to speak intensively on his specialised area.

Tom’s devotion to football is noticeable through the quantity of research he has concluded. His MSc dissertation ?The Plight of Football Clubs as Listed Companies from an Investor’s Viewpoint’ analysed the investment potential and financial of the then seventeen listed British clubs using comprehensive ratio analysis and a bespoke multivariate bankruptcy prediction model.

His MBA dissertation ‘The Valuation and Solvency of Top Tier British Clubs since the Inception of the Premier League. Is the Current Model Sustainable?’ was supervised by football finance expert Professor Tom Cannon, who regularly appears on Sky Sports News.

Tom collected his MBA (FI) with distinction from the University of Liverpool in December 2009. He is currently embarking on a PhD in Football Finance – under the supervision of Professor Adrian Bell and Professor Chris Brooks – at the ICMA Centre.

Find Tom’s interview here at the 1:06:00 mark .

University Cements its Top 20 Place in the Guardian’s University Guide for Business & Management

The University of Reading has been ranked 11th on the Business and Management section - which includes the ICMA Centre – of the Guardian’s University Guide.

The University of Reading has been ranked 32 overall in the 2012 Guardian University Guide , 13 places higher than the previous year.

Vice-Chancellor of the University of Reading Professor Gordon Marshall said: ”We are delighted to have moved up in the Guardian league table, as we constantly strive to improve. Our ranking reaffirms the high regard in which our students hold the quality of teaching and research at the University across a broad range of subjects.”

In addition to the news on the Guardian league table, the latest employability data for Reading’s 2010 graduates shows its best result for a decade.

ICMA Centre Doctoral Researcher Heads to Portugal

ICMA Centre PhD student Christos F. Mavrovitis will be presenting a working paper in Portugal this June.
Firstly, Mr. Mavrovitis will be attending the 2011 FMA Annual European Meeting in Porto on June 8 before travelling to Braga for the 2011 EFMA Annual Meeting from June 22.

He will be presenting the working paper ?How Have M&As Changed? Evidence from the Sixth Merger Wave?’, which he has co-authored with ICMA Centre colleague Dr. George Alexandridis and Nickolaos G. Travlos.

Christos’ MSc dissertation focused on Mergers and Acquisitions and the title of his thesis was ?M&As: A Global Study’. This current paper is a contributing factor in his continuation of his doctoral research in the area of Mergers and Acquisitions at the ICMA Centre.

Abstract for How Have M&As Changed? Evidence from the Sixth Merger Wave?

We examine the characteristics of the sixth merger wave that started in 2003 and came to an end approximately in mid-2007. The drivers of this wave lie primarily in the availability of abundant liquidity, in line with neoclassical explanations of merger waves. Acquirers were less overvalued relative to targets and merger proposals comprised higher cash elements. Moreover, the market for corporate control was less competitive, acquirers were less acquisitive, managers displayed less over-optimism and offers involved significantly lower premiums, indicating more cautious and rational acquisition decisions. Strikingly however, deals destroyed at least as much value for acquiring shareholders as in the 1990s.

The paper is available from ssrn.