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Capital Markets Best Practice

Best Practice

Internationally renowned finance leaders, experts and educators distil and summarize the most important aspects of finance best practice. Each Best Practice essay has an Executive Summary for quick reference, outlining the main points. The Making It Happen feature illustrates practical applications, and where relevant authors have provided illustrative case studies and definitions.

  • ALM in Financial Intermediation: The Derivatives Business
    by Krzysztof M. Ostaszewski
    The headlines about the credit crisis of 2008 and the subsequent downturn in the global economy often name the exploding trade in derivative securities as the villain in this economic calamity. This attribution of the cause of the crisis is related to the perception that derivatives are somehow new, mysterious, and incomprehensible to the clients of banks, insurance firms, and other financial intermediaries. I consider this perception not only...
  • Analyzing a Bank’s Financial Performance
    by Jyothi Manohar
    Individually and collectively, the financial health of banks and the banking system is critical to national and global economies. Central banks or other regulators in various countries monitor financial institutions using rating and evaluation systems that may be unique to those countries. However, there are certain common measures of financial performance and the safety and soundness of a financial institution. No one measure, by itself, is an...
  • Banking Transparency and the Robustness of the Banking System
    by Solomon Tadesse
    Crises have been a common feature of banking systems for a long time—the United States alone experienced 11 banking panics between 1800 and the beginning of World War I (Beim and Calomiris, 2001). The crises of recent times have, however, been rather severe. The full range of costs linked to the 2007–09 financial crisis may not be easily estimable. While initial gross government commitments to deal with the crisis have reached between 20% and...
  • Banks and Small and Medium-Sized Enterprises: Recent Business Developments
    by Sergio Schmukler, Augusto de la Torre, María Soledad Martínez Pería
    A common perception is that small and medium-sized enterprises (SMEs) cannot access appropriate financing. This perception is often supported by academic and policy circles’ “conventional wisdom” that banks are generally not interested in dealing with SMEs, mainly due to SMEs’ perceived opaqueness1 and higher informality.2 As capital markets do not compensate for these deficiencies in the banking sector, the need to receive special assistance,...
  • Capital Adequacy Requirements for Islamic Financial Institutions: Key Issues
    by M. Kabir Hassan, Ebid Smolo
    The Islamic financial industry (IFI) has grown tremendously in the last two to three decades. In short, Islamic finance refers to financial activities that are guided by the teachings of shariah (Islamic law), which strictly prohibits the payment and receipt of interest. Today, Islamic finance attracts both Muslim and non-Muslim market participants. The worldwide market for shariah-compliant Islamic financial products is estimated to be between...
  • Credit Derivatives—The Origins of the Problem
    by Eric R. Dinallo
    There is no doubt that credit default swaps (CDSs) have played a major role in the financial problems the world now faces. As the insurance regulator for New York, the New York Insurance Department had a role to play in the development of CDSs. As they developed, there was a question about whether or not they were insurance. As they initially were used by owners of bonds to seek protection or insurance in the case of a default by the issuer of...
  • How the Settlement Infrastructure Is Surviving the Financial Meltdown
    by Yves Poullet
    While the headlines are dominated by the plight of the banking sector, and the wider economic implications of the financial crisis, it is our job to make sure that the securities settlement infrastructure on which you have come to rely continues to function well. As if that was not challenging enough these days, we are committed to delivering an infrastructure that offers even greater efficiency, with reduced risk, and at the lowest possible...
  • India and Brazil—Still Winners as the Global Economy Collapses?
    by Maya Bhandari
    “Decoupling”—the buzz word for emerging market analysts just 12 months ago—has been successfully debunked. The reason we are where we are in the first place is in fact the precise opposite—extreme coupling. This is the symbiotic relationship, built over the last decade or so, between countries that rely on excess debt for consumption-led growth and countries that funnel excess savings, mainly to the United States, to keep their currencies under...
  • Interdependence of National and International Markets: The Foreign Information Transmission (FIT) Model
    by Boulis Ibrahim, Janusz Brzeszczynski
    The interdependence of national and international financial markets, both in returns and volatility, is well documented in the finance literature. Twenty-four-hour markets, such as the currency market, and less-continuous ones, such as stock markets, are known to exhibit correlation in returns and volatility both over time and across countries or regions. In many cases, such correlation has been increasing in recent decades. This apparent...
  • Islamic Finance and the Global Financial Crisis
    by Bilal Rasul
    Islamic finance is a safe financial doctrine that promises justice and equity. The theme of Islamic finance is popular among those economies that are either interested in following the shariah tenets or are exploring alternative investment opportunities that have a sound basis and a promising potential.The principles of Islamic finance fundamentally uphold the corporate governance and social responsibility philosophies: that is, accountability,...
  • Middle East and North Africa Region: Financial Sector and Integration
    by Samy Ben Naceur, Chiraz Labidi
    The Middle East and North Africa region, as defined by the World Bank in the MENA 2008 Economic Developments and Prospects (EDP) report,1 comprises Algeria, Bahrain, Djibouti, Egypt, Iran, Iraq, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, the Palestinian Territories (West Bank and Gaza), Qatar, Saudi Arabia, Syria, Tunisia, the United Arab Emirates, and Yemen.The World Bank classifies these countries within three groups: Resource-poor,...
  • Outsourcing and the Banks
    by Shamus Rae
    The major banks in developed markets have been extensive users of outsourcing and have been at the forefront of pushing the boundaries of outsourcing onshore, near-shore, and offshore (near-shore in this context refers to outsourcing to a country location that has a time differential of not more than three hours from the bank’s main business locations). High-profile examples here include Barclays Bank’s outsourcing arrangement with Accenture,...
  • Product Taxonomy: A Key Tool for Understanding Risk–Return Within the Banking Framework
    by Markus Krebsz
    What does a callable, daily, dual-currency range accrual with quanto features have in common with a sugar-free, hazelnut-flavored, soya milk decaf cappuccino? The answer is that both are products.Dealing with “products” (whether coffee or financial) requires an understanding of:what their features are;how to determine or measure their value;the type of customers who would be interested in buying them.It is also important to understand and manage...
  • Rules versus Discretion in Supervisory Interventions in Financial Institutions
    by Marc Quintyn
    Financial supervisors’ main task is to monitor the behavior and actions of the institutions under their area of responsibility. They check compliance with the regulatory framework, and, when necessary, impose sanctions and enforce them. So, in every jurisdiction, a key component of the regulatory and supervisory framework is the nature, timing, and form of intervention by the supervisors in case the health of an individual institution fails. The...
  • The Crash and the Banking Sector—The Road to Recovery
    by Angela Knight
    With the empowering gift of hindsight, there were some telling signs leading to the financial crisis, which has now become a global recession. Global imbalances had been growing for a decade. The United Kingdom and other Western economies imported raw materials, manufactured goods, gas, and oil from the East, exported their inflation, and, in the case of the United Kingdom, sought to fill the balance of payments deficit in tangible goods through...
  • The Emergence and Development of Islamic Banking
    by Umar Oseni, M. Kabir Hassan
    As an alternative banking system, Islamic banking emerged in the global landscape with the advent of Islam. This form of interest-free banking has developed over a long period of time with the introduction of new products in the industry. The crystallization of interest-free banking based on Islamic legal principles has won a positive global image for Islamic banking in the modern world. The underlying philosophy in Islamic banking is to...
  • The International Role of Islamic Finance
    by Andreas Jobst
    Since the summer of 2007 the global financial system has undergone a period of dramatic turbulence, which has caused a widespread reassessment of risk in both developed and emerging economies and the price it should command across different asset classes. After a rather painful reckoning, policy-makers and regulators are hastening a redesign of the financial sector architecture afflicted by the demise of self-regulation and a failure of market...
  • The Payment Services Directive: A Crucial Step Toward Payment Harmonization Across the EU
    by Björn Flismark
    The Payment Services Directive (PSD) provides a legal framework for payment services in the internal market of the EU and the European Economic Area (EEA). It was adopted by European legislators on November 13, 2007, for transposition into national law by the 27 EU member states by November 1, 2009 (about half of the EU countries took a bit longer than foreseen by the official deadline and completed their transposition in 2010) . The three...
  • The Perfect Storm—Why Did No One See It Coming? The Missing Piece in Risk Management
    by Nigel Walder
    It’s been an unforgettable 12 months, with multi-billion write-offs every week, well-established firms collapsing, fire sales, runs on banks, and as near to a totally global systemic meltdown as any of us will ever want to get. And we’re not out of it yet.How can such well-established firms get it so wrong? Why did the risk departments and regulators fail so dramatically? Hindsight is a wonderful thing, but I firmly believe that one of the major...
  • Why Printing Money Sometimes Works for Central Banks
    by Paul Kasriel
    At the start of March 2009, even after the signing of the US$787 billion fiscal stimulus package from President Obama, doom and gloom was the order of the day from most commentators. The markets were extremely volatile, anticipating the imminent nationalization of one or more major US banks. The US commerce department released its fourth-quarter GDP data for 2008, which showed that the economy had contracted at an annualized rate of 6.2%, the...

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