Unforeseen Risk - The ECB’s Stealth Bailout

Don Alexander, MBA

Associate, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

 

The ECB, through its payment mechanism - European System of Central Banks (ESCB), acts as a de facto lender of last resort for troubled banks and member-country central banks across Europe.  The troubled banks, largely from deficit countries, obtain funding through the ESCB and indirectly finance the deficits, by central banks lending money against discounted public debt.  

 

The funds flow through the ESCB’s settlement system (real-time) called “target”.  Since 2007, when private capital flows dried up, large asset and liability positions emerged on the balance sheet of central banks.  The Bundesbank is the dominant creditor and dominant debtor central banks are those of Greece, Ireland, Portugal and Spain (GIPS).  The imbalances correspond to the cumulative current account deficits of those countries. 

 

A problem will emerge if these countries become insolvent and it impacts the solvency of the debtor country central banks.  This imposes large losses on the creditor central banks that are under pressure to aid domestic banks.  Taxpayers of the creditor country would have to bailout the central bank and recapitalize the banking system.  This mechanism serves as an indirect fiscal transfer.

 

This backdoor financing scheme shifts credit away from the surplus countries stifling growth.  This process can only be stopped, barring a major crisis, by a government takeover and adding central bank debt to government debt, already at alarmingly high levels.  This makes debt restructuring inevitable, increases the chances for a banking crisis and redenominating debt in a new, weaker currency.  The Eurozone has two choices, according to Sinn: a default/restructuring or open-ended support.

 

For more on the ECB’s stealth bailout click on the link to VoxEU, a policy portal set up by the Centre for Economic Policy Research:  http://www.voxeu.org/index.php?q=node/6599

Bittersweet

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

My previous blog talked about the Graduation ceremony for the Dalhousie MBA class which I am one of the Professors for.  The ceremony was for the first graduating class of the newly designed Corporate Residency MBA, which is a one of a kind program that I am especially proud to be a part of.

 

The students who graduated basically all took a huge gamble on entering into a very innovative program.  As with anything new and in uncharted territory, the downside risk was huge, while the upside risk was also great.  Fortunately the upside risk prevailed and I believe – based on my experience with several other MBA programs over the years, and with my work with financial institutions on their intake programs – that we have one of the best MBA programs in North America.

 

The graduation ceremony was particularly bittersweet for me.  I was thrilled to watch the students walk across the stage and be awarded their degree.  I am also very excited thinking about the wonderful careers that they will have.  They are an exceptionally talented bunch – the best MBA cohort I have been associated with in nearly 20 years of graduate level teaching that I have done.  I was also slightly sad to see them go.  I know I will keep in touch with many of them, but not having the opportunity to daily debate topics with them will be missed.

 

Risk management should also be a bittersweet exercise.  Risk managers should see the upside in every situation and not just dwell on the downside.  Risk management is a two-way street, although too often we focus on trying to turn it into a one-way street to ruin.

 

Meanwhile I have a short period of time to rest up.  The next cohort will be here in just over a month.  I can barely wait to see how they will match up and am tremendously excited about the thrills of working with them.

Graduation

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

Recently the convocation for the MBA program at Dalhousie University where I am an Associate Professor of Finance was held.  Graduation is always a big day; as students celebrate their success at getting through the program and excitedly start their working careers.

 

Convocations also bring about graduation speeches with their usual message about how graduation is the end of one chapter of one’s life and the beginning of a new chapter.  There is also the usual talk about how one should never stop learning.  Fortunately for the students, but unfortunately for my blog, our speaker yesterday at Dalhousie (Dr. Jack Duffy) said none of those things which I plan to pick up on in this blog.  (For those interested, Dr. Duffy’s excellent and amusing (and bless his soul short) talk is available on the Dalhousie website.  But back to my blog …

 

Just like as in the usual graduation speeches, those of us in the risk management profession need to realize that we can never stop learning and each new debacle (and there will be new debacles) will begin a new chapter in the life of the risk manager.  But I wonder how many of us remember to heed these truisms (just as Dr. Duffy speculated that one would forget his speech.)  Getting a risk management degree – or certification – is just the beginning and not the end of risk learning. 

 

Creative Mode

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

From a previous blog, readers know that I am a fan of Fast Company.  I was recently reading an article on management lessons for Google in the magazine and one of their “lessons” slapped me in the face.  The lesson was “When in creative mode, don’t start with the data!”

 

 

Risk management – thanks to propeller heads like myself – has become fixated with data.  As a profession we always start with the data.  Perhaps that is why the field has not produced more creative solutions.  Perhaps if we start with creativity, thought, ideas, and maybe even pure wackiness, and then let the data decide only after we have developed a new idea the solutions will be better and more effective.

 

In our consulting we almost always bring a “Wow!” factor to our client’s situations.  Remarkably this is easy to do.  They always start with the data, while we always try to start with ideas.  Funny how that works – isn’t it?

 

Starting without the data does not mean you avoid it or even worse ignore it.  Data (in the proper hands) does not lie and thus is necessary.  What data does do is crowd out ideas and creativity.  In other words data becomes the cart leading the horse.  It’s time for risk management to get the horses (creativity and thinking) back in front of the cart (data).

 

Financial Executive International Conference – Ottawa, June 8 - 10: RSD will be there

by Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

infor@RSDsolutions.com

 

Next week, Financial Executive International (FEI) will be hosting its popular annual conference entitled “Capitalizing on the Future” in Ottawa, Canada. The FEI is a professional association for senior financial executives with over 2,000 members in Canada and another 15,000 members throughout the rest of the North America. Together, FEI Canada and FEI United States represent 8,000 of North America's leading and most influential corporations.

 

The FEI Canada conference is the major event on the financial executive calendar as it is the largest such event in Canada and provides delegates with networking opportunities, information sessions and an Exhibitor Hall.  RSD Solutions Partners Stephen McPhie, Rick Nason and I will be representing the firm in the Exhibitor Hall, providing the 300 or so delegates with the opportunity to chat, learn more about our firm and our views on financial and strategic risk management.

 

For more information on the annual FEI Canada National Conference in Ottawa click on the link:

http://www.feicanada.org/events.php?eid=1028

The Perfect Calm

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by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

 

The past three years have been the perfect storm for financial institutions in terms of their risk management.  Chaos (folly) seemed to be the operating mode during the height of the financial crisis.

 

What about corporate financial risk though?  It seems to have been lost in the shuffle of the daily business news and perhaps understandably so.  Relatively speaking, exchange rates have been calm – although the recent saber rattling about currency wars might be shifting.  Interest rates for most of the world were at record lows before the crisis and, since, central banks have been playing a game of limbo dancing to see how low they can drive their domestic rates.  It seems that only commodity prices and perhaps demand have been relatively volatile.

 

Has the recent past then been a case of the perfect calm for corporate financial risk?  Will the lessons learned from the financial institutional mess translate to the corporate world?  (Were there lessons learned from the experiences of the financial institutions?)  One thing for sure is that the road to recovery (hopefully there will be a road to recovery) is likely to be interesting risk wise.

 

 

Today’s blog is a re-posting of RSD’s blog on Friday, November 26, 2010.  We thought it was fitting as the FEI members soon gather in Ottawa.

Where’s The Fun?

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

Some of us of a certain age remember the old burger chain commercials “Where’s the Beef?”  (For those of you who were raised by video games and the internet you can check it out on YouTube.)

 

Now that I am starting to get to a certain age where some might call me a crusty old person, I am going to ask “Where’s the Fun?”  Where is the fun in risk management.  We all know that managers and teams produce better ideas when they are having fun, so where is the fun?  Is your risk team having fun?  I am.