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The Future of Finance A New Model for Banking and Investment

ISBN: 9780470572290 | 0470572299
Edition: 1st
Format: Hardcover
Publisher: Wiley
Pub. Date: 11/2/2010

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The financial crisis of 2007-2008 has discredited business models in the banking and fund management and industries. In The Future of Finance, Moorad Choudhry argues that banks must re-align their business models, targeting a lower return-on-equity, diversifying their funding sources, increasing liquidity reserves. Banks no longer can rely entirely on funding long-dated assets with short-dated funds, as that practice has proven to be unsustainable over market and business cycles. On the investment side, the financial crisis has discredited tenets of Modern Portfolio Theory. Diversification did not reduce risks and stabilize returns. Indeed, diversification across asset classes and geographical regions amplified, rather than reduced, risk. The only way to have added value in the bear market of 2007-2009 was to short the market, but that was a directional strategy that is inconsistent with MPT and the notion of diversification. Choudhry concludes that the clear lesson from the crisis is to "know one's risk" -- a lesson and that is best served by concentrating on assets and sectors that one understands. Moreover, he argues investment managers should reduce the utilization of short-term maturities to meet funding requirements and restrict the leveraging of the capital base to no more than fifteen times. The Future of Finance will provide a guidebook to bankers and investment managers seeking to re-align their businesses to prosper in the post-crisis financial markets.

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