Eurobank S.A. · ATHEX:EUROB
Eurobank — Investor Presentation (August 2008)
29 slides from Eurobank's investor presentation, August 2008
Slide 1: Τετάρτη, 27 Αυγούστου 2008 Μεγάλη Βρεταννία
Τετάρτη, 27 Αυγούστου 2008 Μεγάλη Βρεταννία 1 1
Slide 2: The Changing Price of Liquidity and Risk Transfer
The Changing Price of Liquidity and Risk Transfer: Risk Management and Lessons from the Current Market Crisis Myron S. Scholes Platinum Grove Asset Management August 2008 2
Slide 3: Four Ways to Earn Returns
Four Ways to Earn Returns • Hold or predict Systematic exposure – ETFs and Index Fund – Beta and other factors. • Prediction of cash flows or risk parameters – Alpha • Liquidity provision- react to opportunities. – Omega • Risk transfer services – react as well – Omega 3
Slide 4: Prediction of cash flows or risk parameters: Alpha or Beta
Prediction of cash flows or risk parameters: Alpha or Beta • Active Managers predicting the future – Macro funds – CTAs – Long-Short Equity Hedge Funds – cash – Low frequency quantitative trading - factors • Making market efficient – Trend followers make money while trend lasts. – Momentum traders •
Slide 5: Liquidity provision: Omega
Liquidity provision: Omega • Entire Financial Intermediation Industry makes money through the provision of liquidity services • Private Equity • Real Estate • Hedge funds provide liquidity – Small stocks and high-yield paper – Residuals of structured products – OTC products and instruments - bank lo
Slide 6: Risk transfer services: Omega
Risk transfer services: Omega • Hedgers Pay Speculators in markets – Commodity Markets (Miller stores commodity and hedges to transfer risk) • Reinsurance Markets (Insurance companies hedge and transfer risk) • Financial Markets (Broker / Dealers and Banks assist clients and transfer risk) • General
Slide 7: Key Evolution in Finance
Key Evolution in Finance • Financial Innovation: Movement away from the “one shoe fits all” approach – Strategic use of hedging to reduce the need for equity by hedging generalized risks. • Use of options and other derivatives to hedge risks. – Strategic use of hedging to produce products and servic
Slide 8: Price of risk transfer services and liquidity provision does not remain constant
Price of risk transfer services and liquidity provision does not remain constant. • Time series business – Entities want to change portfolio holdings asynchronously – Substitution versus flows – Opportunity for intermediaries to compress time – reduce mismatch – “step into the shoes of” • Scaling or
Slide 9: Price of risk transfer services and liquidity provision does not remain constant
Price of risk transfer services and liquidity provision does not remain constant. • Salient events/shocks occur, unanticipated – Mini shocks, Local shocks, Global shocks • At extremes capital market intermediaries withdraw capital from the market and/or demand much higher prices to provide liquidity
Slide 10: Price of risk transfer services and liquidity provision does not remain constant (3)
Price of risk transfer services and liquidity provision does not remain constant. (3) • Demanders of liquidity willing to pay more for liquidity services: they want to acquire an option – Interest rate curves steepen – Spreads widen whether or not credit spreads – Volatility increases – Asset values
Slide 11: Natural providers
Natural providers Understanding of market/human capital – Financial service entities – Hedge funds – Reinsurance companies – Form vs Function Longer-horizon capital holders – Pension funds and endowments provide capital for liquidity provision because of long horizon – Insurance companies – Infra ma
Slide 12: Cascade of Re-pricing of Risk and Liquidity Globally - Solvency vs. Liquidity
Cascade of Re-pricing of Risk and Liquidity Globally - Solvency vs. Liquidity • August 2007 shocks starting with sub-prime mortgages • Rebound in September and October 2007 • Follow on shocks as a result of write downs by Citibank, other banks, Merrill. Northern Rock run on the bank. January shock –
Slide 13: Re-pricing of Risk and Liquidity Globally – Far from over
Re-pricing of Risk and Liquidity Globally – Far from over • Credit spreads have widened and liquidity has disappeared. – Underlying bonds and loans fell in value much more than CDS and index hedges. • Broker/dealers hedging M&A commitments and hedging risk. • Carry traders hurt badly; borrowing in y
Slide 14: Setting the stage
Setting the stage • Liquidity ample from 2002 – 2007 – Last credit crunch was November 2002: General Motors – February – March 2003 – Fed argues for disinflation, lower Federal funds rate to 1%, 3.08% at 10 year in US. – Led to waves of refinancing: greater than $1 trillion – Then Central Banks sugg
Slide 15: Stage Seemed Supportive
Stage Seemed Supportive • Economy stable – Inflation targeting working – Macro economists patting themselves on the back – no more recessions – Real economy strong • Tax rates lower – Rapid growth and deregulation – Greenspan argues that derivatives had created stability cushions for the economy – R
Slide 16: High Leverage, Untested Vehicles, No Shock Protection
High Leverage, Untested Vehicles, No Shock Protection • Sub-prime trigger – Moody and S&P downgrades – Bear Stearns and other bailouts – Commercial paper difficulties – Government regulation of mortgage lending • Consequences – Leverage reduction – Margin calls – Fear led to withdrawal of capital –
Slide 17: Central Bank Policy
Central Bank Policy • One instrument, federal funds rate to accomplish five things, which is difficult – Target inflation – Support growing economy – Exchange rate management – Prevent asset bubbles. – Prevent failure of the financial system • Moral hazard issues. • Lender of last resort. • Each int
Slide 18: What to learn from this
What to learn from this • Bayesian vs. Information Theory 9 Bayesian prior beliefs are specified incorrectly 9 Data leads us to confirm incorrect beliefs o Select data that confirm beliefs. o Central banks tame economy reduce volatility o Derivatives spread and reduce risk o Recent period appears be
Slide 19: More Learning
More Learning • Role of government 9 Should not reduce natural volatility o Buys an option – creates wrong responses 9 Non-linear feedback o Fire in Yellowstone and subsequently in west. 9 Liability and risk management o Disclosure – false security o How apply to whole market – aggregation problem •
Slide 20: Shocks create change
Shocks create change • We learn from shocks for redirects are thinking. • Growth occurs again and better off. • Financial Innovations: – Aggregation problems and Flexibility: • How do we run entities in light of shocks • How much flexibility • Risk management systems – Accounting systems need seriou
Slide 21: Risk Control Framework
Risk Control Framework 21
Slide 22: Capital Allocation Model For Leveraged Financial Entities
Capital Allocation Model For Leveraged Financial Entities • Portfolio theory (VaR) • Correlation structure changes – liquidity • Changes in opportunity set • Each investment strategy must be allocated capital to withstand chaotic events. (Contingent capital only from CBs?). – Trading model – Investo
Slide 23: Optimization Tools Incomplete Cost of Adjustment - Leverage
Optimization Tools Incomplete Cost of Adjustment - Leverage • Risk management is not risk minimization • Level of risk is decided by hedge- fund/bank/corporation/regulation • Dynamics change with volatility – Flexibility is more valuable with greater tail risks – Maybe also increased volatility • Sy
Slide 24: Plan for crisis, scenario analysis
Plan for crisis, scenario analysis • Hedge tails, pro-active approach • Reduce risk if unbalanced – Plan for inability to sell assets in a crisis – Must provide liquidity and can’t reduce debt increasing the risk of equity. • Tradeoff between balance, insurance and reduction of level of risk • Goldi
Slide 25: Feedback system
Feedback system • Learning – Adjust models. – More research – Systematization • Lack of information in a chaotic environment – Too complex without models to abstract information • How making money at banks. – Factor exposures or convergence – Better allocations with measurements • Structure strategi
Slide 26: Reporting system for risks
Reporting system for risks • Internal: Trust but Verify. – Failure of management at financial institutions – Relevant technology to summarize risks for traders/management – Major problem if vertical structure is incomplete to complement horizontal growth. • Leads to failures – Operational risks • In
Slide 27: Firm structure/compensation
Firm structure/compensation • Moral hazard – Trader model – Investor model • Agency problems – Banking profits – Reporting – Option to come back (Japan) – Model risk (Buffet/derivative failures) • Overcome Failures – Brain power weak, – Memory is bad, – Risk Sharing concerns –not wanting to admit in
Slide 28: Capital structure issues
Capital structure issues • Leverage policy is not independent of nature of assets – inflexibility trap • Investors – Permanent capital – Overnight capital – Contingent capital with dynamic opportunity set • Moral hazard and regulation. 28
Slide 29: Τετάρτη, 27 Αυγούστου 2008 Μεγάλη Βρεταννία
Τετάρτη, 27 Αυγούστου 2008 Μεγάλη Βρεταννία 29 29