Transcript Kein Folientitel - fu
Due To Deregulation, Liberalization and Globaliza tion The Traditional Bank Business Has Changed Dramatically.
Banks can enter a business that had been off limits before Deepening of Capital markets connected corporates directly to the market.
Corporate Finance business has suffered from highly specialized securities firms and institutional asset managers.
Traditional Sources Of Bank – Profits Have Shifted
Bank Deposits are decreasing. Liabilities as bank loans are also decreasing on the assets – side (Table 1,2).
On the other side negotiable liabilities have increased (tradable securities on the asset side) (Table 3,4).
In Most G7-Countries Bank Deposits in Percent of Total Liabilities were Decreasing During the Last Twenty Years
USA Japan Germany France Italy UK Canada 1980
75,5 71,8 73,9 46,3 86,5 79,7
1990
69,9 71,3 71,2 34,1 44,2 84,6 74,3
1995
58,5 71,3 65,7 27,5 36,9 86 72,4
Table 1. Bank Deposits in percent of total bank liabilities
In Some G7-Countries also Bank Loans as in Percent of Total Bank Assets Decreased
USA Japan Germany France Italy UK Canada 1980
63,3 55,3 83,6 35,7 43,6 70,4
1990
62,9 56,2 81,2 40,4 45,6 57,9 70,8
Table 2. Bank Loans in percent of total Bank Assets
1995
58,9 65,4 77,7 36,4 42,4 52,4 67,6
Banks are Using More and More Capital Market Instruments to Refinance Their Businesses
USA Japan Germany France Italy UK 1980
0,4 2,0 19,2 ...
12,2 3,9
1990
0,8 3,9 19,0 21,7 18,7 6,1
1995
1,1 4,8 23,5 19,4 22,0 7,3
Table 3. Negotiable Liabilities in percent of total Bank Liabilities
Banks Have Also Entered resp. Enlarged Their Asset Management Businesses
USA Japan Germany France Italy UK 1980
18,0 14,7 10,2 ...
20,4 9,2
1990
18,9 14,3 12,1 7,3 13,0 9,2
1995
20,1 15,4 15,7 13,7 13,9 17,9
Table 4. Tradable Securities Holding in percent of Total Bank Assets
Three Major Changes In The Composition Of Bank‘s Balance Sheets
Displacement of lending by other activities.
Growth of off-balance-sheet assets in percent of total assets.
Displacement of deposit loan-income by other operating income.
Changes Are Reflected By Desegementation And Restructuring E
xpanding into other markets (Securities) to face competition to the Asset Management Industry.
Entering the insurance markets Entering Asset Management business providing investment management services and a wider range of financial services to their customers.
All this changes are reflected by heavily increasing M & A – activities.
Source of Bank Profits Have Shifted From Interest Related Income to Other Income Other Earning Assets / Total Assets Off-Balance-Sheet Items / Total Assets Other Operating Income / Net Interest Revenue Commission and Fees/ Other Operating Income Trading Income / Other Operating Income
1991
33,35
1993
33,78
1996
37,14 14,58 20,81 49,18 62,00 20,33 67,06 86,56 61,09 24,80 22,06 57,54 18,15
Table 5. Balance Sheet Information of Top 50 Banks in percent as noted
The Traditional View of Financial Intermediation Has Eroded
Traditionally banks intermediate between borrowers and savers by using deposits, securities firms were providing the distribution of new issues of equity and debt to public.
On the demand side, households were bypassing banks by investing directly to those investment firms which could – cause of theire specializtion – more effective handle the savings.
On the supply side, Nonbank financial institutions have entered the traditional bank business. Insurance Comp., Investment banks, even telcos and food companies are providing bank-services.
As a result from this, the nonbank-sector became larger and larger.
(Table 6,7). In the United States the nonbank-sector is managing (1995)11,5 trillion US$ compared to 5 Trillion $ in the banking sector.
Institutional Investors Were Steadily Growing at High Average Rates
All Institutional Investors (in Billions of US$) United States Japan Germany France Italy United Kingdom Canada 1990
6.820,60 2.490,60 641,80 632,00 215,30 1.248,50 348,20
1993
9.262,20 3.576,70 776,20 870,50 244,70 1.637,00 437,20
1995
11.490,20 4.068,20 1.179,80 1.159,00 325,60 1.908,90 509,70
Annual Growth Rate 10,99% 10,31% 12,95% 12,89% 8,62% 8,86% 7,92% Total
12.397,00 16.804,60 20.641,40
10,73%
Table 6. Assets of Institutional Investors
Institutional Investors Were Steadily Growing at High Average Rates
Total Assets all Investors (in % of GDP) 1990 1993 United States Japan Germany France Italy United Kingdom Canada
118,70 77,90 39,50 49,80 18,50 117,50 60,30 141,40 84,10 42,50 72,50 26,90 175,20 81,20
Total
84,70 103,70
Table 7. Assets of all Institutional Investors in % of GDP
1995
158,60 87,00 48,90 74,00 29,10 176,00 89,20
Annual Growth Rate 5,97% 2,23% 4,36% 8,24% 9,48% 8,42% 8,15%
110,50
5,46%
Globalization
Financial Markets Are Facing Closer Integration
• • • •
Liberalization and Development of Information Technologies prepared the way to globalization and integration Securities Portfolios became far more internationally diversified (Table 8). The growth in gross portfolio flows increased by almost more than 200 times
.
Cross border transactions in Bonds and Equities reached up to between seven and one times GDP. In the US those transactions between US and foreign investors totaled 17 Trillion US$. (see Table 9) or 213% of the US - GDP.
Although investment portfolios are fare away from beeing adequately internationally diversified, i.e. portfolios still do not reflect the the structure of the world market capitalization (USA: 42%, Japan 15%, UK: 9%, other industrial countries: 23%, emerging markets: 11%)
Globalization
Financial Markets are Facing Closer Integration
•
Mirroring this expansion firms also turned to international markets to raise funds (see Table 10).
•
Even the volume of outstanding issues of international debt securities reached to 3,7 Trillion US $, sixfold larger than in 1985.
•
Financial Globalization has been a counterpart to international trade. The foreign exchange market has far outpaced the growth of trade. In 1995 an annual worldwide trade volume of 6,1 Trillion US$ was faced by a daily market turnover of 1,2 Trillion US $. (see T.11.)
•
Nonresidents holdings of public debt also increased substantially (see Table 12)
Foreign Net and Portfolio Investments (in bn $)
Gross and Net Flows of Foreign Direct and Portfolio Investment (billions US$) Gross Flows Foreign Direct Investment Portfolio Investment Net Flows Foreign Direct Investment Portfolio Investment 1970
14,45 5,26 -4,05 1,42
1980
-8,14 16,02
1990 1995 1997
82,82 60,93 283,24 329,63 369,01 764,34 448,32 1.040,19 -59,58 41,36 -83,18 186,53 -92,60 272,51
Table 8. Gross and Net Flows of Foreign Direct and Portfolio Investment (G7)
Cross Border Transactions of Bonds and Equities
Cross Border Transactions Bonds & Equities (in percent of GDP) United States Japan Germany France Italy Canada Total 1975
4,00 2,00 5,00 ...
1,00 3,00
15,00 1980
9,00 8,00 7,00 5,00 1,00 9,00
39,00 1985
35,00 62,00 119,00 33,00 21,00 4,00 27,00
182,00 1990 1995
65,00
1997
89,00 135,00 213,00 96,00 57,00 172,00 253,00 54,00 187,00 313,00 27,00 253,00 672,00 65,00 189,00 358,00
411,00 1.001,00 1.905,00
Table 9. Cross Border Transactions in Bonds and Equities
Foreign Exchange Trading (Turnover in bn $ per day)
Foreign Exchange Trading Global Estimated Turnover (daily, in billions of US $) As a percent of World Exports of Goods Total reserves minus gold
Table 11. Foreign Exchange Trading
1986
188
7,40 36,70
1989
590
15,80 75,90
1992
820
17,40 86,00
1995
1190 19,1
84,30
Nonresidents Holdings of Public Debt (in % of Total Debt)
Nonresident's Holdings of Public Debt (in % ) United States Japan Germany Italy United Kingdom Canada 1983
14,90 ...
14,10 ...
7,20 10,70
1988
18,40 2,00 20,70 ...
15,70 15,70
1993
22,20 5,40 32,80 10,10 21,80 21,80
1996
35,00 4,30 29,30 15,90 23,80 23,80
Table 12. Nonresidents‘ Holdings of Public Debt (in percent of total public debt)
• • •
Accompanying all this, we can observe extending linkages between international Exchanges (Eurex, CBOT and Eurex) OTC- and Exchange traded markets will merge New Markets for unbundling and trade of risks will emerge
Actually the risk market volume is estimated to reach up to a volume of more than 130 Bio US$ /year (notional amount outstanding per end of year). This would be more than the total volume of all traded bonds, equities and bank assets
Outlook to new market propositions
In future we will face an ongoing increase of methods and products concerning risk markets, also dealing new kinds of risks like: Catastrophe Risks (ART) – will change insurance markets Credit Risks – will change the business potential of credit business.
Private Income Risks
New Trends New Markets New Chances New Risks
New Markets and Products for Unbundling, Pricing, Trading and Managing Risks
Example:
U.S. bank has given a floating – rate Yen denominated loan to a Japanese bank.
Risk Exposure of U.S. bank: Risk Management Tools: Foreign Exchange Risk Interest Rate Risk Credit Risk Currency Swap (Y/US$) Interest Rate Swap (V/F) Credit Default Swap Credit-risk loaded floating rate, Yen-denominated loan Riskless, fixed rate dollar denominated security
How Risk – Management Works
US Bank Floating – Rate Yen Loan Fixed Rate Dollar Loan 100 Bio Y at LIBOR LIBOR Payed in Y Payback in Yen LIBOR in Yen Fixed rate in Yen Yen - Payer US$ Receiver Japanese Bank Floating – Rate Yen Credit Interest Rate Swap Currency Swap Credit Default Swap
Growth in Global Security Issues, 1990-2003
$ Bn 6000 5000 4000
Global debt & equity
3000 2000 1000
U.S. Issuers worldwide
0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Derivatives - Notional Amount Outstanding per 12/1987 to 12/2005
350
316,4
in Thousand Bio US$ 300
280,8
250
221,7
200 150
99,8
100
58,3 63,1 69,2
50
0,87 3,45 8,48 25,5
0 1987 1990 1993 1996 1999 2000 2001 2002 2003 2004 2005
Markets are Interlinked
Example: Spot and Futures Market
Spot – Future - Parity
Index Arbitrage (Example) Today, one (theoretical) Index-Future is sold at 5,500 € (1 € per Index-point). Long and Short-positions can be described by a profit and loss diagram:
Profit
Long Future = Buyer
Loss
5,500 Short Future = Seller Index If you are Long-Future, then you may claim for delivery of „one index“ at a price of 5,500 € at the maturity of the index future. That means, if the index at delivery is quoted at more than 5,500, you will win from your futures position.
Spot – Future - Parity
Index Arbitrage (Example) You hold an Index-Portfolio, currently valued at 5,500 € (1 Index-point = 1 €). If the annual risk free rate r one year to maturity has a fair price of: f is at 3.5 % and the expected dividends on your Index portfolio are at 100 € (d = 100/5,500) , an Index – Future with
F 0 F 0 F 0
S 0
1 5 , 500
r F
1
d
0 , 035
0 , 0182
5 , 592 .
40 €
To prevent our Index-Portfolio from losses, we could
hedge
the price risk by taking a short – future position (selling a future at 5,592.40).
Spot – Future - Parity
Index Arbitrage (Example) The total expected payoffs from your portfolio will depend on the fu ture state of the environment (see below payoffs 1-5). A decreasing stock market will be compensated by profits from the short future po sition, increasing stock prices will be outbalanced by losses due to pay ment obligations from the future.
Profit Loss 5592,40 Assets
Stock Portfolio Dividends Index
Payoff 1 Payoff 2 Payoff 3 Payoff 4 Payoff 5
+4500,00 +5000,00 +5500,00 +6000,00 +6500,00 +100,00 +100,00 +100,00 +100,00 +100,00 Short Future Total +1092,40 +592,40 +92,40 -407,60 -907,60 +5692,40 +5692,40 +5692,40 +5692,40 +5692,40
Assets
Stock Portfolio
Spot – Future - Parity
Index Arbitrage (Example)
Payoff 1 Payoff 2 Payoff 3 Payoff 4 Payoff 5
+4500,00 +5000,00 +5500,00 +6000,00 +6500,00 Dividends +100,00 +100,00 +100,00 +100,00 +100,00 Short Future Total +1092,40 +592,40 +92,40 -407,60 -907,60 +5692,40 +5692,40 +5692,40 +5692,40 +5692,40 Initially you have paid 5,500 € for your stock portfolio. Taking the short future position, the final outcome of your portfolio will be 5,692,40 €, whatever the stock price will be, i.e. you will earn 192,40 which equals 3.5%. Obviously, this profit is riskless:
F 0
D
S 0 S 0
r F
F 0
S 0
1
r F
d
Spot-Future Parity
Spot – Future - Parity
Index Arbitrage (Example)
Rising future prices will – due to arbitrage trading - induce
rising spot prices. For example, a future traded at 6,000 € is (relative to a spot market price of 5,500) clearly overpriced, if the stock price remains unchanged at 5,500 €. In this case, „smart“ traders will make arbitrage profits of 407,50 € per contract and bring back the market to equilibrium:
Action t 0
Borrow money at r F (3,5%) + 5,500.00 - 5,692.50
Buy/Sell Stock Portfolio - 5,500.00 + Stock Sell/Buy Future at 6,000 0
t 1
+ 6,000.00 - Stock Total 0
+ 307,50
Note, that the arbitrage profit equals the difference between a fair- and mispriced future (6,000 – 5,592,40) plus Dividends. Higher Future prices will lead to massivly increased demand at spot markets until spot prices and futures are back to equilibrium.
Spot – Future – Parity
Index Arbitrage (Example) • Spot Markets and Future (Forward) Markets are interlinked.
• Mispriced spot or future market instruments will affect both markets.
• Future market speculations that drive futures prices will also drive spot market prices due to arbitrage trading (et vice versa).
• Speculation on futures markets, resulting in higher future prices will induce higher spot market prices due to arbitrage trading. Finally this may result in spot market bubbles that jeopardizes the allocation mechanism of real goods markets.
Management of Operational Risks: Weather Derivatives
Weather – Derivatives History
• Weather – Derivatives occured in 1997 in the USA after the El Ni ño effects. (Aquila Energy, Kansas City/Missouri).
• At the end of 1998 first Weather – Derivatives were issued in Germany • Since 1998 Weather – Futures and Weather - Options are traded at the
C
hicago
M
ercantile
E
xchange .
• In August 2001
L
ondon
I
nternational
F
inancial
F
utures
E
xchange (LIFFE) started trading Weather Futures.
• Eurex planned to launch weather related derivatives in 2004.
Weather – Derivatives
German Temperature Index Xelsius
Weather – Derivatives
German Temperature Index Xelsius
Weather – Derivatives
German Temperature Index Xelsius
HDD
Interval
= Max { 0, 18°C -
Temp } CDD
Interval
= Max { 0,
Temp - 18°C }
Example: On December, 12th 2001 the average temperature in Berlin has been - 6° C. This day the Index shows 24 HDD.
Weather – Derivatives
In many cases operational income is directly weather related
12000 1200 10000 1000 8000 6000 4000 2000 0 GWh Umsatz
Season 1996 1997 1998 1999 2000
3047 2640
HDD 3047 2640 2379 2606 2425
2379
GWh 10908 9785 8785 9247 8357
2606
Turnover 1006 903 810 853 771 per HDD 0,33016081 0,34204545 0,34047919 0,32732157 0,31793814
2425 800 600 400 200 0
Weather – Derivatives
In many cases operational income is directly weather related The annual turnover (Business Unit Heating Energy) of the former Berlin Energy - Supplier BEWAG (now VATTEN FALL) 1999 / 2000 mounted to 771 Mio DM. The winter season 1999/2000 showed 2.425 HDD. This equals an average turnover per HDD of 320 TDM.
If the winter would have been warmer (for example at only 2000 HDD) this would have caused a lower turnover of approx. 425 HDD x 320 TDM = 136 Mio DM.
Insofar BEWAG‘s operational income is directly related to the average temperature in winter season.
Weather – Derivatives
The Payoff-Profile from Heating Business remembers to the payoff profile of a financial future. Example: If 2500 HDD would represent an average cold winter, then a higher number of HDD would create additional turnovers, whereas a lower number would lead to a smaller turnover.
1.100 1.000 900 800 700 600 500 400
Weather – Derivatives
In this example the risk of warmer winters (i.e. < 2500 HDD) could be hedged by weather futures. At a Standard of 100 € per HDD, a weather future on the basis of 2500 HDD has a contract value of 2500 x 100 € = 250 T€. Given a profit-margin of approx. 20% (turnover at 2500 HDD = 2500 x 320 TDM = 800 Mio DM (400 Mio €) i.e. a total average profit of 160 Mio DM or 80 Mio € resp. an average profit per HDD of 32 T€) BEWAG could hedge the weather risk selling 320 weather – futures at an Index of 2500 HDD.
HDD 2000 2100 2200 2300 2400 2500 2600 2700 2800 2900 3000
Weather – Derivatives
If BEWAG takes the short-position this could result in the following scenarios:
Turnover
(Mio €)
320 336 352 368 384 400 416 432 448 464 480 Operational Income Profit
(Mio €)
64 67 70 74 77 80 83 86 90 93 96 Income from Short Future
(Mio €)
16 12,8 9,6 6,4 3,2 0 -3,2 -6,4 -9,6 -12,8 -16 Total Profit
(Mio €)
80 80 80 80 80 80 80 80 80 80 80
Weather – Derivatives
Payoff-profiles of a hedged (operational) business are similiar to the payoff profiles of a future hedged trade.
40 30 20 10 -10 -20 -30 -40 1500 29 26 22 19 16 13 10 6 3 -29 -26 -22 -19 -16 -13 -10 -6 -3 Profit 3 -3 6 10 13 16 19 22 26 -6 -10 -13 -16 -19 -22 -26 Future 2000 2500 3000 3500
Weather – Derivatives
Options
Put - Options Hedging with weather futures means not only to eliminate operational risks but also to eliminate the chance of having a better result than hedged. To avoid this, one could lmake use of weather options (as traded at LIFFE). To minimize option premiums, options frequentlly contain caps or floors.
Cap at 2300 HDD Short Put at a Strike of 2500 HDD
2500 HDD
Long Put at a Strike of 2500 HDD
Weather – Derivatives
Options
Call - Options To buy a put at a strike of 2500 HDD leads to compensations when the average number of HDD is below 2500 HDD. To buy a call wouold mean, that the buyer can claim fo compensation-payments if the number of HDD is above 2.500 HDD.
Short Call at a Strike of 2500 HDD
2500 HDD
Long Call at a Strike of 2500 HDD Floor at 2700 HDD
Weather Collar
Short Call 2700 HDD and Long Put at 2300 HDD
140.000
120.000
100.000
80.000
60.000
40.000
20.000
0 -20.000
-40.000
2.000 2.100 2.200 2.300 2.400 2.500 2.600 2.700 2.800 2.900 3.000
Max. Risk Max. Chance
Weather Collar
( Short Call 2700 HDD and Long Put at 2300 HDD) A Zero – Cost Weather – Collar (Short Collar) can be designed to restrict the volatility of weather related profits wo to the boundaries of an upper and lower limit.
HDD
Short Call 2700 Long Put 2300 Collar Profit
Gesamt
2.200 2.300 2.400 2.500 2.600
10.000 10.000 10.000 10.000 10.000 0 10.000 -10000 -10000 -10000 -10000 0 0 0 0
2.700
10000 -10000 0
2.800
0 -10000 -10.000 50000 60000 70000 80000 90000 100000 110000 60.000 60.000 70.000 80.000 90.000 100.000 100.000
Management of Operational Risks:
Non Performing Loans and Credit Risk Marktes
Topics Covered:
NPLs in China and Germany Origin and Dynamics of NPLs Centralized Problem Solving Approaches Decentralized Problem Solving Approaches Outlook
Germany: At a Total Volume of 3,500 bn. € Loans Outstanding approx. 300 bn. € are Non Performing (estimated in 2004)
Cooperative Banks 12% 423,5 Mrd.
Mortgage Savings 3% 121 Mrd.
Credit Banks 26% 956,8 Mrd.
Others 23% 810,6 Mrd.
300 Mrd.
Federal Banks 16% 579,2 Mrd.
Mutual Savings 20% 702,4 Mrd.
Referring to Fundamental Data (Profits) German Stock Markets Were Overvalued From 1997-2001
350,0% 300,0% 250,0% 200,0% 150,0% 100,0%
Index Unternehmensgewinne
50,0% 0,0% 1995 1996 1997 1998 1999 2000 2001 2002 2003
180 175 170 165 160 155 150 145 140 135
Although Investments (Plant, Machinery) Were Decreasing Loans to Enterprises Remained High
Investments Loans to Enterpr.
786 151 1998 760 160 1999 809 176 2000 837 165 2001 825 150 2002 860 840 820 800 780 760 740 720
After the Bubble Bad Debt and Bad Debt Losses Increased
30 20 10 0 70 60 50 40 700 21,9
NPL (Flow) Los s es / Cas e
590 19,7 590 20,1 620 17,3 760 24 820 30,9 1200 61,5 1996 1997 1998 1999 2000 2001 2002 1400 1200 1000 800 600 400 200 0
Stock Problem
Solving the Problem
Securitisation Workout Write-off 1/3rd of Total Volume will be transferred Smaller Proportions transferred to Bad Banks Tax Deductible, frequently in Combin. With Securit.
Flow Problem Credit Restrictions Extended & Improved Approval Procedure Due to Measures in Portfolio Management Due to Introduction of Rating Systems Enforcement of Controlling Measures New Regulations Issued By Supervisory Authority
China: In
2002 Total NPL Amounted to $ 770 bn. Which Corresponded to 61% of GDP or 37% of Total Loans $ 168 bn
$ 168 bn
Non Performing Transfers to AMCs
Approx. 2,508 bn $ 602 bn
$ 602 bn
Total Outstanding Loans Total Non Performing Loans
Origin and Characteristics of NPL
NPL Stock Flow Bad loans undertaken in the past Future loans to debtors, that will not be able to serve the loan Policy directed Lending to SOE‘s Financial System
Policy loans
Directed by government to support policy. Before 1986 not lending authority, until 1994/95 obliged to finance budget deficits.
Since 1995 by State Dev.
Banks
Loans to SOEs
SOE show an accelerated leverage risk due to ex treme D/E – ratios at low profitability. But: 50% of industrial output, 70% of employment, 80% of total capital stock.
Weak Banking
Poor risk and portfolio management, high sys temic risk, no diversifi cation, no adjustments for approp. Risk pre miums possible; AMC‘s close to SOB‘s (1:1)
Stock and Flow – Problems Need Different Approaches
NPL Stock Flow Solve the Stock Problem: Debt-Bond Swaps Securitisation Cash Funding Debt – Equity Swaps Amortisation (write-off) Solve the Flow Problem: Credit Ceilings Efficient Legal Framework Operational Restructuring Centralized Bad Bank Hard Budget Constraints
2500
Market for Credit Derivatives
Source: British Bankers Association (in Bio. US$) 2385 2000 1581 1500 1000 893 1000 500 450 170 0 20 1996 1997 1998 1999 2000 2002 2004
Basics of Credit Derivatives
Asset Swaps
Investor
Receives fixed rate
Reference Value (z.B. Bond)
pays fixed Swap-rate (Coupon Rate)
Risk Buyer
receives LIBOR + var. Premium (spread) The Investor protects his portfolio against credit quality degradations by a simple swap construction: using a interest swap the investor swaps fixed income from his portfolio into variable + premium payments from the risk buyer.
Credit Default Swap (C.D.S.)
Risk Seller (Protection buyer) Premium: bps x Notional Value Credit Event ?
Yes: Compen sation No: No Com pensation Risk Buyer (Protection seller) Reference value (e.g. Bond)
Total Rate of Return Swap
(Synthetic Sales or Short Sales of Loans) Total Rate Receiver (Riskbuyer)
negative Market price changes LIBOR +/-Spread
Total Rate Payer (Riskseller)
Fixed Interest Rates positive Market price changes
Reference Value (e.g. Bondes, Indices Asset baskets, Loans)
Credit Linked Notes (CLN)
Risk Buyer (e.g.Investor)
Notional Value of CLN Fixed Rate CLN
Risk Seller (e.g. Bank)
Repayment of C.L.N. possibly minus compensation if Credit Event
Referencial Assets (e.g. Bonds, Indices, Asset baskets, Loans)
Credit Spread Put
Construction of strike-spreads Example: 5-y. € Corp.Bond:
5,95%
5-y. € Swap-rate ( fix against 6-M-EURIBOR) :
5,50%
Credit Spread: 0,45% = 45 base points 90 bps Strike Spread: 45 bps 25 bps At an agreed strike-spread of 45 bps, the short side will pay a compensation, if the spread increases.
Spread increases: Loan Devaluation Execution Spread decreases: Improved C. Qual.
Forfeiture
Credit Spread Put
Mechanism Put – Buyer (Long) (Protection buyer) Option price in base points Right to deliver an Asset-Swap-Pakets at LI +/- Credit Spread Put – Buyer (Long) (Protection buyer) Execution
Reference value LI +/- Credit Spread Fixed Rate (Ref. Val.) Payment par Reference value
Put Seller (Short) (Protection seller) Put Seller (Short) (Protection seller)
What is A Credit Event ?
The ideal case would be a reference value (e.g. a bond) that is highly correlated with the secured loan.
Insolvency Payment Delay Payment Reluctance Cross Default Restructuring Down-grading Risk of Convertibility Market Inefficiencies
Credit Default Swap / Option Settlement Versions Cash Settlement: CDP = (Par - recovery value) CDP = (Par - Marktpreis nach Credit Event) CDP = (Synthetischer Preis - recovery value) Binary: Zahlung eines kontrahierten Festbetrags Physical Settlement: Lieferung Referenzwert zum Festbetrag bzw. gegen Zahlung von par
Extension of Risk Management by Credit Derivatives
Risk of Default Market Risks Insolvency Risk Credit Default Swap Spread Risk Credit Spread Put Total Rate of Return Swap
Alternative I: ABS – Transactions („True Sale“)
Price of the Credit Pool Price of Bonds Bank (Originator / Seller) Sale of a Credit Pool S.P.V.
(Buyer) Investors Issuance of ABS Coupon-Payments; Redemption minus Losses on ABS
Market Securitisation of Credit Risks
(Europe 2002 in Mrd. $)
60 50 40 30 20 10 0 4,9 50,2 GB 7,0 22,8 I 29,8 9,5 D 2,0 20,6 NL Kreditderivate Asset Backed Securities 18,7 E 9,7 F
Alternative II: Synthetic Sales by Collateralized Debt Obligations (C.D.S.) Swap-Prämie Emission CLN Kuponzahlung Rückzahlung CLN abzgl. Kreditausfälle Bank (Originator) S.P.V.
(Buyer) Investoren Ausfallgarantie per CDS Bondpreis Anlage der Emissionserlöse Sicherheiten Pool
Fazit
• • • Die Problemkreditbearbeitung wird zukünftig deutlich stärker von risikopräventiven und/oder risikokurativen Managementaufgaben geprägt sein.
Im risikopräventiven Bereich erwarte ich einerseits eine intensive Auseinandersetzung mit portfolio-orientierten Risikostrategien, andererseits eine spürbare Zunahme des Transfers von Adressen-risiken Im risikokurativen Bereich erwarte ich eine stärkere Akzentuierung eines fundamentalen (Kredit-)Sa nierungsmanagements auch unter Einbeziehung bankexterner Funktionen
Management of Operational Risks:
Capital Markets and Refinancing of Insurance Industry
Alternativer Risiko Transfer (A.R.T.)
• Katastrophen - Derivate • Katastrophen – Anleihen (Cat – Bonds) • Act – of – God - Bonds
A.lternativer R.isiko T.ransfer
Größte versicherte Schäden 1989 - 2001
1.
2.
3.
4.
5.
6.
*
MIO US $ 5.326
5.531
6.420
17.945
13.227
43.000
6.062
JAHR 1989 1990 1991 1992 1994 2001
2000
EREIGNIS Hurricane Hugo Wintersturm Daria Wirbelsturm Mireille Hurricane Andrew Erdbeben Northridge WTC - Attentat
EBITDA Allianz
Alternativer Risiko Transfer
Versicherbarkeit von Risiken
Risiken Ausfall Olympische Spiele Zufälligkeit
X
Max. Schaden schätzbar Ausr. Anzahl gleichartiger Risiken
X nein
Produkthaftpflicht für Arzneimittel
?
nein ?
Attentat mit nuklearen Waffen
X ?
nein
Klassischer vs. Alternativer Risiko Transfer
Klassischer versicherungstechnischer Risiko transfer
Versich.
nehmer Versich.
Untern.
Vers. Unt./ Rückvers.
Alternativer versicherungstechnischer Risiko transfer
Versich.
nehmer Versich.
Untern.
Kapital markt
Produktentwicklung im Risikogeschäft A.R.T.
Tradit.
Vers.
Produkte Bonding Produkte Multiline Produkte Multiyear Funding Produkte Financial Rein surance (Finite Risk) Finanz markt produkte (Derivate, Securiti zation) Integrative Produkte
A.R.T. - Produkte
Finanztitel originär derivativ Bonds Options Futures Principal Verknüpfung mit versicherungstechnischem Risiko Coupon Principal und / oder Coupon at Risk Underlying GCCI , PCS (Property Claims Services) - Indices
A.R.T. - Produkte
Struktur eines CAT - Bonds mit S.P.V.
Versicherungs nehmer Prämien Prämien Schadens ausgleich Wert papiere Special Purpose Vehicle Kapitalmärkte Kapital Tilgung Zinsen Versicherer Investoren Refinanzierung des Schadenausgleichs Tilgung, Zinsen
A.R.T. - Produkte
Ausstattungsmerkmale Cat-Bonds Pionierprodukt war der Cat-Bond (Hagelbond) der Winterthur Versicherung (WinCat). Der erste WinCat – Bond enthielt folgende Formulierung:
„Die Zahlungen auf den Zinscoupon entfallen, wenn die Winterthur während der Beobachtungs-periode, die jeweils vom 1. November bis zum 31. Oktober des Folgejahres dauert, als Folge min-destens eines großen Hagel- oder Sturmereignisses für mehr als 6,000 Motorfahrzeuge ihrer Motorfahrzeug-Kasko versicherung Leistungen erbringt. Dabei werden Schäden, die innerhalb eines Kalendertages auftre ten, dem gleichen Schadensereignis zugeordnet.“
A.R.T. - Produkte
Beispiel Cat-Bonds 1997 plazierte ein SPV (United Services Automobile Association und Residential Reiunsurance Limited) einen Cat Bond über 477 Mio USD in zwei Tranchen mit jeweils einjähriger Laufzeit: Die erste Tranche war nominalwert geschützt (Class A-1, LIBOR + 273 bps) und umfaßte 164 Mio USD, die zweite Tranche (Class A-2, LIBOR + 576 bps) über 333 Mio USD unterlag Tilgungsrisiken. Die Zahlungsströme der Tranchen waren auf Hurricane Katastrophenschäden bedingt, soweit diese in ausgewählten Regionen einen Gesamtbetrag von 1 Mrd. USD übersteigen. Erreichen die Hurricane - Schäden ein Volumen von 1,5 Mrd. USD, verlieren die Class-A-2 Investoren ihr gesamtes Kapital.
A.R.T. - Produkte
Optionsprodukte/ Beispiel An der Chicago Board of Trade werden seit 1992 indexbasierte Optionsprodukte, Puts und Calls, gehandelt. Der zugrunde-liegende Index ist der PCS - Property Claims Services - Schadensindex. Jeder Indexpunkt repräsentiert einen Marktschaden von 10 Mio USD. Beispiel: Ein Erstversicherer möchte sein Sturmrisiko / Florida reduzieren. Er nutzt hierzu den an der CBOT gehandelten Florida PCS - Call Spread 100 / 150, d.h. er kauft Call Optionen auf einen PCS - Indexstand 100 und verkauft gleichzeitig Call Optionen auf einen PCS Indexstand von 150.
A.R.T. - Produkte
Wirkung eines 100/150 Call Spreads auf den PCS-Index 100 80 60 40 20 0 -20 -40 -60 80 Long Call 100 Short Call 150 Total 90 Gehedgt es Risiko 100 110 120 130 140 150 160 170 180 190
A.R.T. - Produkte
Optionsprodukte/ Beispiel
Szenario A:
Liegt der PCS -Index aufgrund der in Florida aggregierten Marktschäden bei weniger als 1 Mrd. USD, verfallen beide Optionen. Per saldo sind Prämien von 5 Mio USD verloren.
Szenario B:
Marktschäden übersteigen 1 Mrd. USD, bleiben jedoch niedriger als 1,4 Mrd. USD: Die Long Call Position bei einem Strike-Index von 100 gerät ins Geld, die Short-Position verfällt wertlos. Schadensausgleich wird im Idealfall kompensiert durch A.R.T. – Gewinne.
Szenario C:
Die Marktschäden liegen bei mehr als 1,4 Mrd. USD. Der Wertzuwachs der Long-Position wird kompensiert durch Verluste aus der 140er Short-Position.
Alternativer Risiko Transfer
• A.R.T. - Refinanzierung der Versicherer / Rückversicherer über die Kapitalmärkte eröffnet Chancen zur Kapazitätser- weiterung und Versicherung bislang unversicherbarer Risiken.
• A.R.T. bietet Instrumente, die aufgrund ihrer Kovarianzpro- file gut in viele Anlageportfolios passen würden.
• A.R.T. bieten sich an zur kapitalschonenden Risikodiver- sifkation der Versicherer bzw. zur Ergänzung von klassischen Investor - Portfolios aus traditionellen Finanzmarktprodukten.
• A.R.T. – Produkte sind schwierig zu bewerten. Es exisitiert kein allgemein anerkanntes Preisbildungsmodell, Investoren verhalten sich deshalb abwartend. • A.R.T. Markt ist klein und entwickelt sich zögerlich.
Financial Markets Imbalances
are
Accompanied By Increasing Size and Activity of Alternative Investments
Alternative Investment Strategies And Financial Market Stability
Southwestern University of Finance and Economics Chengdu September 2006 „The only hope to produce a superior record is to do something different. If you buy the same securities as other people, you will have the same results as other people“ John Templeton
Berlin Klippakademie Prof. Dr. Rainer Stachuletz Berlin School of Economics Berlin School of Economics 84
Contents
o Business models of hedge fund investors and their current role in financial markets o Typical designs, mechanisms and conditions of hedge funds investment strategies o Do alternative investments jeopardize the stability of financial markets o Summary / Conclusions / What to do ?
The Universe of Alternative Investments
Real Estate and Natural Resources Private Real Estate REITs Commodities / Energy Private Equity Strategies Venture Capital Buyouts Distressed Debt Mezzanine Public Market Strategies Hedge Funds Multy-Strategy Funds Arbitrage Managed Futures
General Characteristics of Alternative Investment Strategies
Features of Trad. Investments
(e.g. Investmentfonds)
Benchmark oriented High correlation with equity and/or bond markets Must always be invested Transparent, regulated markets No investments in own funds No levered investments Striktly limited use of derivatives
Features of Altern. Investments (e.g. Hedge Fonds)
Absolute Return Low or no correlation with other markets Short sales possible Unregulated markets, offshore Investments in own funds High levered investments Usage of derivatives
Hedge Funds Business Model
Mostly unregulated, offshore residing eclectic investment pools with aggressively managed short term portfolios. Hedge Funds employ investment techniques like short selling, leverage, and are allowed to create a variety of synthetic positions by unlimited usage of derivatives.
Often hedge funds are set up as private partnerships, open to a limited number of investors and require a very large initial minimum investment. Typically hedge Funds are illiquid as they often require investors keep their money in the fund for a minimum number of years.
Hedge funds managers typically charge a management fee (1-2% of asset value) and a performance fee of about 20% of the capital gains and capital appreciation.
Development of Hedge Funds
Number and Portfolio (in Bio US$)
Hedge Funds Investment Strategies
Global Macro Managed Futures Dedicated Short Bias Long/Short Equity Merger Arbitrage Distressed Securities Equity Market Neutral Convertible Arbitrage Fixed Income Arbitrage
Directional Event Driven Relative Value ( Arbitrage )
PROFIT
Relative Value Strategy
Long / Short Equity – Hedge Long
Home
at 16,7 Expected Market
16,7 23,9
Expected Market
P/E - Ratio LOSS
Short
Lowe‘s
23,9 at
Relative Value Strategy
Long / Short Equity – Hedge
Enter spread position
Directional Strategies Non Hedge Long-/Short Directional Strategies represent unhedged, directional speculations on growing (long) or declining (short selling) markets. By additional usage of debt (leverage) respectively completing short– or long-positions synthetically, the total risk and return – positions can be amplified. Leverage
Short Call
Long Put Expect. Market Exp. Market
70
Event – Driven Strategies
Bank Austria
(Merger Arbitrage)
1 Ad – hoc News at 28. April 2000 Hypovereinsbank Bank Austria 3
60
End of Purchase
50
2 Merger Declaration
40 Bank Austria Hypovereinsbank
0 -10 -20
Event – Driven Strategies Long–Short–Equity and Merger Arbitrage
50 40
Expected Share Price Bank Austria
30
Long Bank Austria
20 10
45 50 55 Short HVB Expected Share Price HVB 60 65 70 75 80 85
Event – Driven Strategies (Merger Arbitrage)
Traditional Investment Fund
Trade:
Hedge Fund Manager
Trade: Kauf Due to the short selling, the Hedge Fund gains an approx. 100% higher profit than the trad. Fund.
Three Popular Arguments on Hedge Fund Investments and Financial Market Stability ?
1. Hedge Funds operate high leveraged portfolios of mostly risky assets. As a result, market processes tend to be more volatile and more uncertain. Thus syestemic market risk will increase !
2. Hedge Fund investments tend – because of their sheer size – to manipulate asset prices. This will directly compromise the pricing mechanism and thus lead to inefficient factor allocations !
3. As Hedge Funds often do not have to follow any regu lations that are used to be applied to onshore finan cial institutions (transparancy of investment styles, accounting, disclosure and auditing, taxes etc.) investors are not sufficiently protected.
1. Do Hedge Funds Increase Market Volatility ?
monthly S&P 500 Volatility Source: Bloomberg
1. Are Hedge Fund Strategies Risky Investments ? S& P 500 Global Macro Equit y Long / Short Emerging Market s Merger A rbit rage -1 4 , 3 2 % -1 4 , 6 1 % Event Driven Dist ressed Securit ies Convert ible A rbit rage Equit y Market N eut ral Hedge Fund I ndex -20% Standard Dev.
Annual Return -15% -10% -6 , 4 1 % -8 , 7 4 % -4 , 1 0 % -5 , 3 3 % -6 , 5 4 % -2 , 9 6 % -1 , 8 4 % -6 , 9 7 % -5% 0% 1 0 ,5 5 % 1 2 ,0 1 % 1 3 ,7 7 % 1 3 ,6 6 % 1 0 ,8 0 % 1 3 ,3 5 % 1 4 ,2 7 % 1 1 ,7 7 % 9 ,4 0 % 1 5 ,1 3 % 5% 10% 15% 20%
1. Do Hedge Funds Increase Systematic Risk ?
(Theoretical Portfolios of Traditional Assets (MSCI 50%, JP Morgan Global 50%) and the CSFB-Hedge Fund Index based on monthly figures between 1994-2004) 1,00% 0,90%
100% HF/ 0% TF
0,80%
45 % HF / 55 % TP
0,70% 0,60%
0 % HF / 100% TP
0,50% 0,40% 1 ,8 0 % 2 ,0 0 % 2 ,2 0 % 2 ,4 0 %
Standard Deviation
2 ,6 0 %
2. Hedge Funds and Market Manipulation
Hedge Funds do not rely on momentum – investments and often take contrary positions. Thus, their engagement will support the pricing mechanism while providing liquidity and keeping the market process running. By this, Hedge Funds help substantially to rebalance the markets and smooth volatility.
Hedge Funds, that operate in smaller markets generally have the potential of market manipulation. In the case of arbitrage trading or related relative value strategies, hedge funds activities target directly to change market prices. A „manipulation“ of prices back to the equilibrium is desired. This may be seen different concerning other investment strategies.
2. Hedge Funds and Market Manipulation In fact, only 20% of the total investment is arbitrage tra ding. The rest is more or less directional. The major part of directional investments is represented by directional equity-investments (long-/short-only).
120,00% 100,00% 80,00% DI RECTI O N AL EVEN T DRI VEN ARBI TRAGE
5 5 , 0 0 % 6 7 , 4 0 % 4 7 , 9 0 %
60,00% 40,00% 2 0 , 1 0 % 1 8 , 5 0 % 20,00% 0,00% 1 1 , 5 0 % 8 , 8 0 % 1994 2 0 , 7 0 % 2002 1 9 , 5 0 % 2004
3. Need Investors to be Protected ?
The Hedge Funds market is dominated by well experienced, well informed and educated powerful investors (average entry investment at 630 T$ !) like banks, pension funds, endowments and wealthy individuals (HNI). As they are strong enough to take care of their specific information needs, no regulation is required. Endowment s 6% Pension Funds 14% Banks, I nsurances 27% High Net wort h I ndividuals 53%
3. Need Investors to be Protected ?
• Investor protection seems to be a week argument, if it is focused on the typical hedge fund investor as shown above. • As hedge funds have started to copy the profitable investment model of private equity funds in a short term version, there are not the hedge fund investors that need to be protected, but those long term investors, who are affected by short term hedge fund investment activities.
• Therefore, to focus investor protection on the hedge fund investor is misleading. Investors should be protected against hedge fund investors.
Summary and Conclusions 1. Currently Hedge Funds control an investment volume of about 1.2 Trillion USD, which means a proportion of 12% of the total global fund investments.
2. Although they are powerful, Hedge Funds are widely un regulated, e.g. they do not report their acitivities like other financial institutions, mostly they don‘t have to fol-low minimum capital requirements, minimum disclosure standards or minimum audit standards. In a strong sense they do not contribute to rational decision making. 3. Due to their characteristics – non regulated offshore residents, excessive leverage, short sales and unlimited incorporation of derivatives (synthetic assets) – their investment styles and their sheer size, hedge funds affect or have the potential to affect market processes.
Summary and Conclusions 4. The total business model including investors who provide equity, hedge fund corporations that select investments and investment styles and investment banks which provide the loan is highly concentrated and interlinked. That high integrated and concen trated business modell increases the probability of extensively widespread cascading effects in case of a failure (see the LTCM – Case in 1998).
5. As Hedge Funds have started to copy typically „Private-Equity-Engagements“ even those parts of the real economy that have not been direktly linked to capital markets, have become the target of short term financial investments and will be exposed to intensified leverage risks.
Does The Market Need Hedge Fonds ?
Hedge Funds are in general non transparent, offshore located and tax avoiding investment strategies beyond any national jurisdiction. Hedge Funds have not only the potential but also strong incentives to manipulate market processes e.g. to generate price movements that enhance the profitability of their underlying positions.
With the today known market strategies that includes desireable arbitrage trading only to a proportion of approxi mately 20% and the observable move to directional strategies concerning long equity positions Hedge Funds need to be regulated to support long term oriented micro and macro-policy approaches.
Private Equity Investments and Regulatory (Tax) Arbitrage
„Private Equity“ means to invest in non-listed, frequently undervalued corporations and any other (undervalued) assets. Mostly returns result simply from tax arbitrage.
Assets 1.000
E 500 D 500 (r D : 4%) Exp.: 60 Int. : 20 Tax: 5 Profit: 15 Sales 100 Withdraw E. and replace by D.
Offshore Tax 0 Profit 40 Int. 40 Assets 1.000
D (1) (r D : 4%) 500 D (2) (r D 8%) 500 Exp.: 60 Int.: 60 Tax: 0 Sales 100 Loss 20