Journal 38: Zicklin-Capco Institute Paper Series in Applied Finance

What trends have dominated the banking industry since April? You do not have to look too far to see that opinion is sharply divided. On the one hand we have witnessed the return to healthy profits with many pundits arguing that banking has turned the corner and that we are seeing the first signs of sustained recovery since 2008. On the other, there are those pointing out that in spite of resurgent balance sheets, we are still in the middle of a fundamental transformation of the sector, where complex regulation is expanding with little or no end in sight; productivity remains below benchmarks set by leaders in other industries; and where investors remain skeptical – although some optimism is returning. All these themes are the subject this Journal issue given the lively debate about the future of the industry, we aim to uncover the real issues and the prominent solutions available to financial markets participants.

At the present time, when we are still trying to understand how to move beyond the economic crisis, it may seem strange to talk about financial expansion. Yet, in a complex system, expansion may still occur. To understand why we need to take into account what is happening at the boundaries of the industry.

Our Ideas at Work section for this issue deals with operational excellence, a topic that ties in directly with financial transformation and evolution. As Julien Blanchet and coauthors explain, financial institutions are now targeting operational excellence and redefining their business model using methodologies – such as Lean Six Sigma – well established in other industries. This is just one way that institutions are propelling themselves towards a more efficient and industrialized regime.

Our High-level Debate section looks at the expansion of financial boundaries by examining the opportunities for Islamic finance at a time of rapid change, especially by developing new points of view for risk management. Rodrigo Zepeda’s article tackles this theme.

The High-level Debate section concludes with a discussion of the US house market and, in particular, whether the Federal Funds Rate has a direct impact on US home foreclosures. We know how important the house market has been at the onset of the crisis back in 2007/2008, and one of the key themes any expansion of finance has to consider is how governments and central banks may try and manage the house market. Gökçe Soydemir, Andres Bello and Tzu-Man Huang take up this challenge by investigating the relationship between the Federal Funds Rate and foreclosures.

This issue concludes with the Cutting Edge section. In the first article we conclude the investigation into how one could expand sovereign credit risk models by including regimes. Louise Potgieter and Gianluca Fusai present the practical application of the model (developed in the first part of the article, published in issue 37). In the second article of the cutting edge section, Wayne Tarrant and Dominique Guégan suggest that a lack of sufficient information in risk management can lead to ambiguous risk situations. The need for the reporting of multiple risk measures or, ideally, of the whole loss distribution is advocated. An expansion of current regulation in terms of multiple risk measures is also suggested.

This concludes this issue’s journey into the expansion of finance and conditions at its boundary. But of course the journey never really ends. We hope our readers will accompany us as we explore the possibilities at the limits of the financial industry and of course we also continue to welcome submissions.

Journal Articles