Author: cconstantino1983

• Loss Absorbing Capacity: Beyond G-SIBs

  Here’s a summary of the paper “Loss-absorbing capacity requirements for resolution: beyond G-SIBs” (FSI Insights No. 69)
  

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  Summary of the Document

  Purpose of the Paper

  The paper examines how countries design loss-absorbing capacity (LAC) requirements for non-G-SIB banks—ie, banks that aren’t globally systemic but may still be domestically systemic. After the 2023 regional bank failures, global policy bodies have stressed the need to expand LAC beyond just G-SIBs.

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  1. Background & Rationale

  After the 2007–2009 financial crisis, authorities developed resolution regimes to ensure that systemic banks can fail safely, without taxpayer bailouts.
  Resolution depends heavily on LAC, which provides resources for:

  • Absorbing losses
  • Recapitalising the bank or successor entity
  • Supporting continuity of critical functions

  For G-SIBs, the FSB introduced the TLAC Standard.
  But no global standard exists for non-G-SIB systemic banks, even though many could still cause major systemic disruption in failure.

  Countries therefore tailor their own LAC rules for such banks.

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  2. How LAC Works (core concepts)

  LAC can come from:

  • Regulatory capital (CET1, AT1, Tier 2)
  • Additional long-term debt designed for bail-in
  • Industry-funded vehicles (deposit insurance, resolution funds)
  • Exceptional government support (undesirable)

  TLAC Eligibility Criteria (mirrored by many non-G-SIB frameworks):

  • Fully paid-in
  • Long-term (maturity > 1 year)
  • Unsecured
  • Subordinated
  • No set-offs or derivatives complexity
  • Must be bail-in-able and enforceable under governing law

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  3. Jurisdictional Approaches

  The paper reviews six jurisdictions:
  Australia, Canada, Hong Kong, EU Banking Union, South Africa, United Kingdom.

  Approaches vary along two dimensions:

  A. Scope of Application

  Countries use one of two models:

  (1) Only designated systemic banks (D-SIBs/SIFIs)

  • Canada
  • South Africa

  (2) Determined through resolution planning (broader scope)

  • EU Banking Union (SRB)
  • United Kingdom
  • Hong Kong
  • Australia (hybrid—currently D-SIBs only, but could extend case-by-case)

  B. Calibration Approach

  Two main models:

  (1) Uniform Add-on to Capital Requirements

  Simple, transparent, not tailored.

  • Australia: +4.5% RWA added to D-SIB capital requirements
  • Canada: TLAC ratios of ~25% RWA / 7.25% leverage

  (2) Tailored Requirements Based on Resolution Strategy

  Each bank’s LAC is customized based on:

  • Loss-absorption needs
  • Recapitalisation needs
  • Preferred resolution strategy (PRS)
  • Resolvability assessments

  Used by:

  • EU Banking Union (MREL)
  • United Kingdom (MREL)
  • Hong Kong
  • South Africa (future calibration to be tailored)

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  4. Key Characteristics of LAC Instruments

  Across jurisdictions, LAC instruments must be:

  • Long-dated
  • Unsecured
  • Subordinated (statutorily, contractually, or structurally)
  • Bail-in-able (with recognition clauses if foreign law applies)

  Some jurisdictions impose additional constraints:

  • Minimum debt ratios (HK and South Africa require ≥1/3 of LAC in debt)
  • Retail investor restrictions (HK, EU in some countries, SA)
  • Foreign-law enforceability requirements

  The EU and UK allow the widest range of instruments (eg, certain uninsured deposits).

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  5. Implementation Experience & Challenges

  Authorities report that:

  • Banks generally have not struggled to meet LAC requirements.
  • Smaller banks face higher issuance costs and weaker investor familiarity.
  • Market capacity considerations are important—authorities often phase in requirements over several years.
  • Supervisors actively engage with banks to develop issuance plans and ensure market understanding.

  Notable support measures include:

  • HKMA engagement with investors and rating agencies
  • SRB flexibility in issuance timelines
  • UK’s multi-year glidepath for growing banks nearing MREL requirements

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  6. Policy Observations & Trade-offs

  The paper highlights several policy tensions:

  A. Tailoring vs. Simplicity

  • Highly tailored calibration is more accurate but complex and less predictable.
  • Simpler frameworks promote transparency but may need conservative buffers.

  B. Scope vs. Instrument Feasibility

  • Broader scope → more banks required to issue debt
  • Smaller banks may have trouble issuing market-priced instruments
  • Heavy reliance on CET1 is risky because CET1 may be depleted before failure

  C. Internal vs. External Sources of Resolution Funding

  Local decisions reflect:

  • Strength of deposit insurance funds
  • Industry-funded resolution funds
  • Political tolerance for bail-in of retail investors
  • Market depth for long-term bank debt

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  7. Key Takeaways

  • LAC is essential for ensuring that non-G-SIB systemic banks can fail without destabilizing the financial system.
  • Countries are extending LAC rules beyond G-SIBs, but no global consensus exists on how.
  • Two main approaches dominate: uniform capital add-ons vs. tailored MREL-style calibration.
  • Instrument eligibility rules broadly mirror the FSB TLAC standard.
  • Authorities must balance credibility, feasibility, and simplicity when designing national frameworks.

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  2025.12.04

• Intrinsic Value

  Maximizing the intrinsic value is the main financial goal of managers at publicly owned companies.

  The intrinsic value and the actual market stock price are determined by several factors, although their underlying foundations are the same.

  Determinants of Intrinsic Value

  The value of any asset, including a share of stock, is fundamentally based on the stream of cash flows that the asset is expected to produce for its owners over time.

  The key determinants of a stock’s intrinsic value are the “true” expected cash flows and the “true” risk associated with those cash flows.

  1. Managerial Actions and Environment: Managerial actions, combined with the economic environment, taxes, and the political climate, influence the level and riskiness of the company’s future cash flows.
  2. Expected Cash Flows: Investors prefer higher expected cash flows.
  3. Perceived Risk: Investors dislike risk, so the lower the perceived risk, the higher the stock’s price.
  4. Long-Run Concept: Intrinsic value is a long-run concept; management’s goal is to maximize the firm’s intrinsic value, which maximizes the average price over the long run.
  5. Estimation: Intrinsic value is an estimate of a stock’s “true” value based on accurate risk and return data, as calculated by a competent analyst.

  Determinants of Market Stock Price

  The market price is the actual price at which the stock sells, based on perceived, possibly incorrect, information available to the marginal investor.

  • Perceived Cash Flows and Risk: The market price is based on “perceived” investor cash flows and “perceived” risk, given the limited information investors have.
  • Marginal Investor: It is the views of the marginal investor (the investor currently trading the stock) that determine the actual stock price.
  • Equilibrium: When a stock’s actual market price equals its intrinsic value, the stock is in equilibrium, and there is no pressure for a price change. Market prices can, and do, differ from intrinsic values, but they tend to converge over time as the future unfolds.

  Valuation Models

  Financial analysts use models to estimate a stock’s intrinsic value, including:

  1. Discounted Dividend Model (DDM): Focuses on the present value of expected future dividends.
  2. Corporate Valuation Model: Focuses on the firm’s future free cash flows (FCF), which are discounted using the Weighted Average Cost of Capital (WACC).

  2025.12.04

• Forms of Business Organization

  Understanding the structure of a business is crucial because the legal form affects a firm’s operations and how it is ultimately valued.

  The goal of financial management is to maximize shareholder wealth, which means maximizing the firm’s long-run, true intrinsic value. The form of organization influences how easily a firm can raise capital, which is a major determinant of its ability to grow and maximize value.

  Here is a detailed summary of the main forms of business organization:

  1. Proprietorship

  A proprietorship is an unincorporated business owned by one individual.

  Feature	Description
  Establishment	Easy and inexpensive to form. A person simply begins business operations.
  Taxation	Subject to lower income taxes than corporations.
  Liability	The proprietor has unlimited personal liability for the business’ debts, meaning they can lose more than the amount initially invested.
  Life Span	Limited to the life of the individual who created it. Bringing in new equity requires a change in the structure.
  Capital	Has difficulty obtaining large sums of capital, so it is used primarily for small businesses.
  Conversion	Businesses often start as proprietorships and convert to corporations when growth makes the disadvantages outweigh the advantages.

  2. Partnership

  A partnership is a legal arrangement between two or more people who decide to do business together.

  Feature	Description
  Establishment	Relatively easy and inexpensive to establish.
  Taxation	The firm’s income is allocated to the partners on a pro rata basis and taxed as individual income, avoiding the corporate income tax.
  Liability	Generally, all partners are subject to unlimited personal liability. If one partner is unable to meet their share of liabilities in bankruptcy, the remaining partners are responsible for the unsatisfied claims. Variations exist, such as a limited partnership (which has one general partner with unlimited liability and limited partners whose liability is capped by their investment).
  Capital	Unlimited liability makes it difficult for partnerships to raise large amounts of capital.

  3. Corporation (C Corporation)

  A corporation is a legal entity created by a state that is separate and distinct from its owners (stockholders) and managers.

  Feature	Description
  Establishment	More complicated to form than a proprietorship or partnership.
  Taxation	The major drawback is double taxation. The corporation’s earnings are taxed, and then any after-tax earnings paid out as dividends are taxed again as personal income to the stockholders.
  Liability	Limited liability is a key advantage. Stockholders’ losses are limited to the amount they invested in the firm. This reduces the risks borne by investors, generally leading to a higher firm value.
  Life Span	Corporations have unlimited lives.
  Capital	It is much easier for corporations to transfer shares and raise the large amounts of capital necessary to operate big businesses, which is critical for taking advantage of growth opportunities.
  Dominance	More than 80% of all business (by dollar value of sales) is done by corporations, and this book focuses on them because most successful businesses eventually convert to this form.

  4. Limited Liability Companies (LLCs) and Partnerships (LLPs)

  These forms are popular hybrids combining features of partnerships and corporations.

  Feature	Description
  Structure	LLCs are generally used by other businesses, while LLPs are used for professional firms (accounting, law, architecture).
  Liability	They provide the limited liability protection of a corporation.
  Taxation	They are taxed as partnerships.
  Control	Unlike limited partnerships, investors in an LLC or LLP have votes in proportion to their ownership interest.
  Capital	Large companies still typically find it more advantageous to be C corporations due to the benefits in raising capital to support growth.

  A special type of corporation, the S Corporation, is taxed like a proprietorship or partnership (avoiding corporate income tax) but must meet limits (no more than 100 stockholders). This limits their use to relatively small, privately owned firms.

  The value of any business other than a relatively small one will likely be maximized when organized as a corporation due to its ability to attract capital more easily and the limited liability it offers investors.

  2025.12.04

• So What Exactly is Regression Analysis?

  “All models are wrong, but some are useful.” – George E.P. Box

  Simply put, regression analysis is a statistical method used to quantify and explain relationships. In even simpler terms, if this “thing” changes, then the outcome should be “that.” And in what direction.

  Now, let’s spice it up a bit and talk variables.

  Regression analysis is a statistical tool used to measure the relationship between one main outcome (the dependent variable) and one or more factors that might influence it (the independent variables).

  How It Works

  At its core, regression draws a “best fit” line (or curve) through your data points to estimate:

  Direction — Do the variables move together (positive relationship) or in opposite directions (negative relationship)?

  Strength — How much does the outcome change when the factor changes?

  Significance — Is this relationship likely real, or could it be due to random chance?

  A Few Everyday Examples

  Weather & Ice Cream Sales
  On hotter days, ice cream sales go up. Regression can measure how much sales increase for every extra degree of temperature.

  Study Time & Exam Scores
  More study hours generally lead to higher scores — but regression can tell you if 2 extra hours make a big difference, or just a small one.

  Sleep & Productivity
  Do you really work better with 8 hours of sleep instead of 6? Regression can quantify that change.

  The Math (Kept Simple)

  In its simplest form, the regression equation looks like:

  Y = β₀ + β₁Χ + ε

  Where:

  Y = What you’re predicting

  X = The factor influencing it

  β₀ = The starting value when X = 0

  β₁Χ = How much Y changes when X changes by one unit

  ε = All the other random stuff that affects Y

  Why It’s Powerful

  Regression analysis is everywhere:

  In business, it predicts sales, optimizes marketing spend, and evaluates risk. In sports, it helps measure the effect of training on performance. In health, it estimates how diet, exercise, or medications affect recovery rates.

  It’s essentially a way of saying:

  “We can’t control the future, but we can make educated, data-backed predictions about it.”

  2025.08.18

• Best Way To Learn Something – Practice!

  http://www.r-exercises.com

  2025.07.29

• Risk Management – What Is It?

  “Risk management is not about predicting the future, it’s about preparing for it.” – Anonymous

  Behavioral science has shown us that we are not inherently suited to manage risks in the modern business world. Gut instincts and past personal experience are not enough as the complexity of both Main and Wall Street has increased tremendously.

  Prior to my MS in Enterprise Risk Management, if you were to ask me, “What is risk?” I would have responded that risk is the downside of an event or action (e.g., the risk of insuring a home in a hurricane-ridden area). However, risk is really about uncertainty – both on the upside and downside.

  Now I like bullet points a lot, so you’ll see my tendency to “bold and bullet” through my website (I hope this helps you with recall).

  So what are the different types of risks?

  • Market Risk
  • Credit Risk
  • Operational Risk
  • Business and Strategic Risks

  2025.07.29