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FT.com / In depth / George Soros lectures - Soros: Financial Markets
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I learned the hard way that the range of uncertainty is also uncertain and at times it can become practically infinite. Uncertainty finds expression in volatility. Increased volatility requires a reduction in risk exposure. This leads to what Keynes calls increased liquidity preference. This is an additional factor in the forced liquidation of positions that characterize financial crises. When the crisis abates and the range of uncertainty is reduced, it leads to an almost automatic rebound in the stock market as the liquidity preference stops rising and eventually falls. That is another lesson I have learned recently.
Bank Systems & Technology: The Blog: Taking an Integrated View of Governance, Risk and Compliance (GRC), Processes and IT
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Information technology is a fundamental business enabler in today’s financial services sector. Now more than ever, financial institutions are looking to IT solutions to help them address fundamental business challenges — from delivering more personalized customer service to managing risk to improving operational efficiency. The now inextricable link between IT and business operations has fueled a compelling need for FIs to implement comprehensive and holistic IT governance, risk and compliance (GRC) strategies.
FRB: Speech--Kroszner, Liquidity-Risk Management in the Business of Banking--March 3, 2008
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By pooling the assets of many depositors and offering term loans and credit lines to borrowers, banks effectively provide insurance against the uncertain liquidity requirements of households and firms.2 While the liquidity needs of an individual household or firm may be difficult to foresee, in normal circumstances some individuals' and firms' high demands for liquidity will typically be offset by others' low demands; hence, on average in normal times, the liquidity needs of large groups of households or firms are reasonably predictable. So when the savings of many investors are pooled together, a significant share of deposits can be used to make productive long-term loans, while a smaller share are held back as reserves to meet depositors' liquidity needs. Loan commitments and lines of credit serve a similar function by allowing borrowers with uncertain future liquidity requirements to take on bank debt as needed.
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Banks have been managing expected liquidity demands since the beginning of banking itself. This is accomplished today by, for example, holding some liquid assets such as Treasury bills and possibly by funding a share of assets with long-term debt. A mismatch in the duration of a bank's assets and liabilities exposes it to interest-rate risk, since an increase in prevailing rates will cause short-term funding costs to increase without a concomitant increase in interest income from long-dated, fixed-rate loans. Under normal conditions, this risk can also be managed relatively easily, for example by hedging interest-rate changes using derivative instruments. Unanticipated systemwide shocks to the demand for liquidity, however, are far more difficult to deal with.
FINANCIAL REGULATION Review of Regulators’ Oversight of Risk Management Systems at a Limited Number of Large, Complex Financial Institutions
Statement of Orice M. Williams, Director Financial Markets and Community Investment
Economic Scene - The Looting of America’s Coffers - NYTimes.com
Promised bailouts mean that anyone lending money to Wall Street — ranging from small-time savers like you and me to the Chinese government — doesn’t have to worry about losing that money. The United States Treasury (which, in the end, is also you and me) will cover the losses. In fact, it has to cover the losses, to prevent a cascade of worldwide losses and panic that would make today’s crisis look tame.
But the knowledge among lenders that their money will ultimately be returned, no matter what, clearly brings a terrible downside. It keeps the lenders from asking tough questions about how their money is being used. Looters — savings and loans and Texas developers in the 1980s; the American International Group, Citigroup, Fannie Mae and the rest in this decade — can then act as if their future losses are indeed somebody else’s problem.
Do you remember the mea culpa that Alan Greenspan, Mr. Bernanke’s predecessor, delivered on Capitol Hill last fall? He said that he was “in a state of shocked disbelief” that “the self-interest” of Wall Street bankers hadn’t prevented this mess.
He shouldn’t have been. The looting theory explains why his laissez-faire theory didn’t hold up. The bankers were acting in their self-interest, after all.
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