Credit Markets

13th Volume February 2011 issue #2

Credit Markets Interview Mathijs Bouman

Column R.C.J. Zwinkels PhD

FSR Gala 2011

p30

p39

p53

His view on credit markets

Credit derivatives: weapons of mass destruction?

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fsrforum • volume 13 • issue #2

Credit Markets

Preface

Dear reader, You are reading the second edition of this academic year of the FSR Forum, this is the first English edition. During the writing of this preface we are halfway through this academic year and several of this year’s activities have already taken place.

The Erasmus University is becoming a more internationally orientated institution. We notice that the number of international members of our association is increasing rapidly. That is why we decided to publish this magazine from now on entirely in English. Except one part of our magazine, the column of one of our members of honor: Mr. Groeneveld.

The theme of this edition is Credit Markets. In recent years, Credit Markets have occupied the headlines of the business news for many times, but unfortunately not always in a positive way.

In the first article, the increased importance of operational risk will be highlighted. The article concludes with some suggestions on future development of operational risk management, both from an organizational and industry perspective. The next article is about the major impact of the global financial crisis on the emerging market economies in Europe and the Commonwealth of Independent States. the last article studies whether corporate investment plans differ conditional on a survey-based measure of financial constraint.

Further in this issue of the FSR Forum there will be an interview with Mathijs Bouman, a Dutch journalist and economist. Mathijs Bouman was willing to give an interview about his views on the global credit market. This includes his opinion about the situation in Greece and Ireland, the Quantitative Easing 2 (QE2) in the United States of America and the role of China in a global financial climate.

I am also very elate to introduce a completely new column in the FSR Forum. In every edition from now on, we will invite a lecturer from the Erasmus University, who has a strong affinity with the theme of the edition, to write a column. In this Issue we invited R.C.J. Zwinkels PhD to write a column about his view on credit derivatives.

In the second part of this issue you can find the reports of the activities that already took place.

This part includes reports about the Traders Trophy and the Multinational Dinner, both really interesting and successful events. This FSR Forum also includes a report of our active members day. Every year the FSR provides an entertaining day to thank its active members. They are the ones who put effort in the fantastic events of the FSR. The report of this successful day includes the day time program, where we went paintballing, had a nice dinner and a good party to end the day. Furthermore in the second part of this issue there will more about other social activities in the first half of this academic year, for instance the FSR gala As you may expect, this issue also contains the usual items you always find in the FSR Forum.

For example the column of the FSR Alumni Association which is written by the new vice chairman of the FSR Alumni Association Anna Nijdam in this issue. Other familiar content will include the column of Mr. Groeneveld and the word of the chairman by Luc Gerretsen.

Because we are more or less halfway this academic year, we are able to give a verdict about the first part. We, as the XIIIth FSR Board, can be very satisfied with the first part of this academic year. We are looking forward to the next six months in which many activities are planned. For

2 • Preface

example the European Finance Tour; in April a group of 20 students will travel to Paris to visit several companies in this major business city. In the beginning of May another group of 20 students will depart to Kuala Lumpur and Singapore for the International Research Project and further events include the Corporate Finance Competition, Investment Banking Masterclass, Bachelor Accountancy Day and Young Financials Dinner.

Slightly passing the half of this academic year, we are also looking forward. Due to that we are aware of the necessity of good people and we are starting to search for our successors from now on. So if you are interested in a great experience, feel free to contact us for a coffee anytime.

I hope you enjoy reading the magazine and I wish to see you sometime at one of our many activities.

Sincerely, Kim de Vries Editor in chief FSR Forum FSR board 2010-2011

× Preface • 3

fsrforum • volume 13 • issue #2

Credit Markets

Table of contents

The Credit Crisis and Operational Risk – Implications for Practitioners and Regulators Andreas A. Jobst1 The fallout from the financial crisis has illustrated that many sources of systemic risk were triggered or at least propagated by vulnerabilities in operational risk management (ORM), which has not kept pace with financial innovation, and an excessive focus of regulation on prudential requirements without recognition of substantial operational risk in market based liquidity transformation. At the same time, institutions are at different stages of systems development and show considerable dispersion in ORM practices while falling short of integrating operational risk as a horizontal process. p06

The Real Effects of Financial Constraints: Evidence from a Financial Crisis Murillo Campello John R. Graham Campbell R. Harvey We survey 1,050 CFOs in the U.S., Europe, and Asia to directly assess whether their firms are credit constrained during the global financial crisis of 2008. We study whether corporate spending plans differ conditional on this survey-based measure of financial constraint. Our evidence indicates that constrained firms planned deeper cuts in tech spending, employment, and capital spending. Constrained firms also burned through more cash, drew more heavily on lines of credit for fear banks would restrict access in the future, and sold more assets to fund their operations. p22

Economie en politiek: de “(in)visible hand” K(R)anttekening drs. Joost G. Groeneveld RA RV De halve wereld moet bezuinigen. Daar hoort Europa bij. En in Europa ook Nederland. ­Bezuinigen is in het algemeen geen plezierige bezigheid, vooral niet als het moet. De term suggereert achteruitgang. We moeten inleveren en loslaten. Dingen waaraan we gehecht zijn geraakt, kunnen niet meer. Prioriteiten moeten worden gesteld, vooral omdat de kaasschaaf onvoldoende soulaas biedt. Nu is het vervelende bij prioriteit dat niet ieder daar hetzelfde over denkt. Wat voor de een overboord kan, is voor de ander een kwestie van lijfsbehoud. Drs. P alumnus van de Erasmus Universiteit Rotterdam (toen nog N.E.H.) - heeft dat in zijn “dodenrit” treffend verwoord. p36

Colofon FSR FORUM appears five times a year and is an edition of the Financial Study Association Rotterdam KvK Rotterdam no: V 40346422 VAT no: NL 805159125 B01 ISSN no: 1389-0913

Editor in chief Kim de Vries

13th volume, number 2, circulation 1500 copies

Editorial advisory Dr. M. B. J. Schauten Dr. W. F. C. Verschoor Drs. R. Van der Wal RA

4 • Table of contents

Editorial department Rick Klootwijk Barnabé Lacroix Rishi Sripal

With the cooperation of Drs. J. G. Groeneveld RA RV Mathijs Bouman Andreas A. Jobst Marek Dabrowski Murillo Campello John R. Graham Campbell R. Harvey R. Zwinkels

Editorial address Editiorial office FSR Forum, Erasmus Universiteit Rotterdam Room H14-06 Postbus 1738, 3000 DR Rotterdam Tel. 010 408 1830 E-mail: forum@fsr.nu

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Credit Derivatives: Weapons of Mass Destruction? 39 Word of the chairman

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Table of contents • 5

fsrforum • volume 13 • issue #2

The Credit Crisis and Operational Risk – Implications for Practitioners and Regulators Andreas A. Jobst1

I. Overview The fallout from the financial crisis has illustrated that many sources of systemic risk were triggered or at least propagated by vulnerabilities in operational risk management (ORM), which has not kept pace with financial innovation, and an excessive focus of regulation on prudential requirements without recognition of substantial operational risk in marketbased liquidity transformation. At the same time, institutions are at different stages of systems development and show considerable dispersion in ORM practices while falling short of integrating operational risk as a horizontal process. This is troubling in light of continued regulatory shortcomings and the need for greater operational risk (OR) awareness throughout organizations. Both industry and supervisors are called upon to resolve these challenges. Any procrastination would risk possible regulatory arbitrage and perpetuate existing fault lines before an industry standard for OR modeling emerges.

The following article highlights the increased importance of OR amid greater systemic risk concerns. After a brief review of the contributing factors to the credit crisis and the role of operational risk, the article will explore the current situation of ORM and highlight some of the current regulatory shortcomings. Finally, the article concludes with some suggestions on the future development ORM – both from an organizational and industry perspective.

II. Debriefing the credit crisis – greater scope for operational risk?

Both the scale and persistence of the credit crisis showed that excessive leverage and unfettered financial innovation — together with improvident credit origination, inadequate valuation methods, and insufficient regulatory oversight — can escalate market disruptions in poorly supervised markets, with adverse consequences for financial stability and economic growth. In this regard, we have certainly become more wary of the many failings of risk management vis-à-vis financial innovation. The collapse of the securitization market and the ensuing market turbulence have cast serious doubt on the economic proposition of unbundling, transforming, and redistributing credit risk via structured finance instruments.

Redeeming qualities were sorely missing.

The crisis also revealed the pivotal role of liquidity risk as an essential condition to collective insolvency problems. Many funding structures and business models were vulnerable to market shocks, which increased counterparty risks and led to a collapse of private markets outside the regulated banking sector. Amid greater uncertainty about hard-to-value assets, coordination failure led to liquidation of assets under fire sale conditions, which depressed asset prices, and fueled a confidence-induced downward liquidity spiral, causing system liquidity to dry up, with negative consequences for solvency. Market illiquidity complicated the validation of exposures while hedging occurred across a wider spectrum of assets, contributing to increased correlation across asset

1 International Monetary Fund (IMF), Monetary and Capital Markets Department (MCM), 700 19th Street, N.W., Washington, DC, 20431, USA, e-mail: ajobst@imf.org. This article should not be reported as representing the views of the IMF. The views expressed in this article are those of the author and do not necessarily represent those of the IMF or IMF policy. The author would like to thank attendees at the First International Conference on External Data for Operational Risk, organized by the Italian Bankers Association in Rome (September 24, 2009), and the OpRisk Asia 2009 conference in Singapore (September 15-17, 2009) for useful comments and suggestions.

6 • The Credit Crisis and Operational Risk – Implications for Practitioners and Regulators

classes, which complicated efficient risk management. At the same time, estimating the impact of changes in volatility on economic capital became exceedingly unreliable, which upset the basic tenets of the risk-based regulatory framework and raised the opportunity cost of holding capital to satisfy prudential requirements (IMF, 2008).

The unprecedented and sweeping crisis interventions have arrested the panic, effectively stabilized the global financial system, and helped shore up investor confidence. The appetite for risk has been gradually returning to pre-crisis levels but remains erratic while most support programs have been successfully scaled back without causing significant market disruptions. Although irreparable damage to the financial sector has been averted, continued policy actions are imperative to get the credit gears working again.

In spite of all the positive news, the encouraging picture has been tainted by mounting concerns in financial markets surrounding the fiscal positions of sovereigns that have borrowed excessively to stabilize their financial system and the related potential for contagion across the most vulnerable countries. The tremors in the financial system have flared up again amid a rapidly deteriorating market perception of the sustainability of sovereign balance sheets and growing strains on credit markets. Rising sovereign risk, however, could exacerbate remaining financial sector weaknesses, leading to a substantial relapse. While such a development would certainly constrain credit growth to support economic recovery, it also places strains on market-based liquidity transformation and the supporting infrastructure of payment and settlement systems, whose resilience was last

aimed at establishing a regulatory framework that mitigates the effect of individual failure on the overall solvency of the financial sector due to inadequate reserves for exposures to (i) contingent claims on other institutions (off-balance sheet activities), (ii) the cyclicality of volatility-based margin requirements and haircuts in wholesale funding markets, and (iii) the negative correlation between asset prices and funding costs during times of stress. In this regard, the size, interconnectedness, and complexity of individual financial institutions (with varying degrees of leverage and maturity mismatches) create vulnerabilities that amplify their contribution to system risk.

Although a wide range of financial sector reform initiatives have surfaced in response to the recent global financial crisis, little attention has been given so far to systemic risk arising from the inability of markets to sustain sufficient liquidity transformation.

Current policy recommendations fail to consider that the shortage of liquidity during the credit crisis was in part the result of the inadequate risk-proofing of elements of the infrastructure that were (and continue to be) critical to the functioning of the financial system in absence of close substitutes. Disruptions to the flow of financial services due to an impairment of all or parts of the financial system give rise to systemic risk if there is the potential of financial instability to trigger serious negative spillovers to the real economy (FSB, 2009).2 Since every financial institution’s risk-taking impacts the operation of the financial system as a whole (“network externality”), the magnitude of such disruptions increases with the level of asymmetric information. In particular, liquidity transformation outside the banking sector is heavily

Many funding structures and business models were vulnerable to market shocks tested at the end of 2008. As the financial sector remains vulnerable and recovery remains uneven, structurally lower levels of profitability could perpetuate acute refinancing challenges as the tolerance for “non- remunerated” risk exposures, such as operational risk, becomes ever so small.

As policy-makers and regulators hasten to re-design the financial sector architecture afflicted by the demise of selfregulation and failure of market efficiency, current regulatory proposals under discussion have failed to address systemic risk as a result of liquidity constraints and operational arrangements in funding markets. So far, most policy efforts, such as capital surcharges for systemically important banks, have espoused an institution-focused view of network externalities caused by dependencies between institutions and their effect on systemic risk. These efforts are primarily

reliant on trading protocols, informal rules of conduct, and collective burden sharing arrangements, whose limited capacity to absorb extreme shocks affects the way coordination failure can perpetuate market paralysis.3 Thus, it hardly comes as a surprise that system and process failures in the clearing and settlement of financial transactions as well as the trading and pricing of financial instruments have become acutely relevant to OR managers.4 With this in mind, any prudential treatment of systemic risk would invariably need to take into account OR – yet proposals for the development of an integrated policy approach to mitigate and ameliorate systemic liquidity risk by acknowledging OR from fragile infrastructures are few and far between.5 Current supervisory reluctance to move quickly might be explained by a very plausible insight – the assess-

2 Impairment to the flow of financial services occurs where certain financial services are temporarily unavailable, as well as situations where the cost of obtaining the financial services is sharply increased.

It would include disruptions due to shocks originating outside the financial system that impact on it, as well as shocks originating from within the financial system.

3 For instance, the concentration of critical infrastructural elements of clearing and settlement in few financial institutions (and the blurred distinction of institutions and markets) has been a destabilizing factor in the U.S. financial system.

4 This argument also holds in situations during the credit crisis when wholesale funding via non bank liquidity transformation was heavily impaired. Capital markets have become the main channels of monetary transmission as recovery has been based on financial disintermediation – large, well-rated institutions have been seeking funds from risk-conscious investors directly from the market at record rates in absence of effective liquidity arteries (i.e., bank-based financial intermediation), which raises the OR profile for two important event type categories (execution, delivery and process management; as well as clients, products and business practices).

5 The absence of proposals in this regard (leave alone efforts to expand the current prudential definition of operational risk) is curious, given that the current institution-based focus on added capital and enhanced prudential regulation is likely to increase the importance of non-bank-sponsored liquidity transformation as regulated institutions face greater difficulty to find funding.

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The Credit Crisis and Operational Risk – Implications for Practitioners and Regulators • 7

fsrforum • volume 13 • issue #2

ment of the systemic importance of markets (and the interactions of agents) presents many more conceptual challenges than that of institutions and is prone to lead regulators outside their comfort zone of the banking sector.

III. Operational risk during the credit crisis The scale of the current credit crisis has flaunted major shortcomings in risk management, which have triggered an avalanche of prudential reforms in response to the apparent failure of the existing regulatory framework predicated on combining capital market discipline, prudential oversight, and risk-based capital guidelines to safeguard financial stability. But more importantly, the focus on systemic risk, precipitated by the collapse of wholesale funding markets, and the realization of so- called “tail risks” during the credit crisis have elevated operational risk management (ORM) to greater prominence.6 Global leaders have certainly taken to action proposals for a revamped regulatory framework that puts a greater emphasis on more comprehensive risk management that assigns are greater role to ORM. The policy resolutions of the G-20 Summit in Pittsburg in September 2009 mark a shift of financial sector regulation from internal controls and sound risk management practices to macro-prudential regulation for systemic risk and contingency planning.

In the risk management hierarchy, OR traditionally trails credit and market risk in terms of perceived significance. ORM is seen as a useless exercise. Given that OR is not priced, incentives underlying ORM are different from those determining the hedging of credit and market risk; there is no return from greater risk, only pain and suffering. Remedies are processdriven rather than mathematical; it is difficult to quantify, especially as the demarcation line between OR and other types of risks (market and credit risks) becomes increasingly blurred. Since performance measurement of OR is inherently difficult in areas where it has the greatest effect on the bottomline, it has only been now that ORM has come into its own.7 Against the background of new sources of threats to financial stability, rising concern about systemic risk, and increased attention on tail events, OR is becoming a salient feature of risk management in financial institutions. Amid the virulence of the financial crisis, OR has become well-recognized, especially in capital markets, where OR managers had little direct involvement, at least initially, such as wholesale funding and derivatives trading. The increase in scope of OR is largely explained by two important characteristics: (i) OR amplifies system-wide risk levels and has a greater potential to transpire in greater and more harmful ways than many other sources of risk, given the increased size, interconnectedness, and complexity of financial institutions (which increases the possibility of errors and fraud), and (ii) techniques aimed at identifying worst-case scenarios associated with the inherently elusive nature of extreme events fall naturally within the domain of ORM. Let us recall three instances when OR has gained prominence during the financial crisis, and how risk management considerations in this area have dovetailed with greater supervisory concern about systemic risk. All are related to the trading book, which shows that OR stemming from systemic market

disruptions deserve much more attention – both from a measurement, modeling and management perspective.

Against the background of systemically important investment banks and brokerages failing, we witnessed considerable danger of systemic market disruptions in the credit default swap (CDS) market caused by OR. Although large backlogs of unconfirmed trades and uncertainties about post-default settlement protocols have been largely removed on the initiative of the New York Fed and other authorities, a large overhang of redundant bilateral contracts pointed to further infrastructural vulnerabilities that threatened to upset collective resolution mechanisms. Bilateral contracts proliferate because, rather than closing out existing contracts, counterparties often arrange for offsetting contracts. Despite efforts aimed at reducing this overhang among banks and dealers through multilateral terminations (“tearups”) –TriOptima’s “TriReduce” service processed more than $40 trillion tearups until end-2008 when the credit crisis was in full swing –the process is cumbersome and time-consuming. Thus, the International Swaps and Derivatives Association (ISDA) has been pushing a “portfolio compression” service that, instead of tearing up offsetting contracts, replaces them with a smaller number of replacement contracts.

When Lehman Brothers collapsed and Merrill Lynch sought rescue in the arms of Bank of America, the timely resolution of the overhang of bilateral contracts (as well as contracts associated with prime brokers became a daunting prospect. The default of one of the ten investment banks that stood behind about 90 percent of outstanding CDS contracts did imply significant OR from a concentration of counterparty risk. This could have caused prolonged market disruptions due to the challenging logistics of closing out trades with a failed or distressed counterparty at a time when market prices are distorted and processing risks are high. All surviving counterparties would have had to gather together all of their outstanding derivative trades (not just CDS trades) with the defaulting counterparty, and try to replace them with contracts with other counterparties, offset them, or close them out.

In the same vein, the term rehypothetication conjures up bad memories, representing another area where insolvency, but more importantly, market failure precipitated by a compounding of errors in trading and sales, caused operational risk events. Like many other prime brokers, Lehman Brothers was fond of using collateral posted by its clients as collateral for its own activities – they “recycled collateral” as a way to expand their funding beyond on-balance sheet assets. The practice seem innocuous until Lehman collapsed, leaving hundreds of client scrambling to unwind trades and reclaim their collateral – not only from Lehman Brothers, but also from other brokers that were rumored to be in trouble.

In this context, operational risk arises from coordination failure in response to a general loss of confidence in a heavily negotiated market, and the difficulties of restoring funds to investors with assets in the hands of bankrupt or otherwise financially troubled brokerage firms, given the tendency of prime brokers to rehypothecate their clients’ assets along with their own proprietary assets as collateral for funding in money markets. In the case of Lehman Brothers in Europe, the absence of investor protection (like the Securities Investor Protection Act (SIPA) in the United States), certain rehy-

6 ORM also gains more relevance as the regulatory backlash increases the compliance cost of banks beyond more rigid controls (including higher capital and liquidity buffers).

7 Also scandals did ORM a big favor. The US$7 billion losses at Société Générale at the hands of a rogue trader showed the fallibility of banks’ ORM. After years of being pushed aside by banks, it was a timely and poignant reminder for regulators and financial institutions of just how critical ORM is.

8 • The Credit Crisis and Operational Risk – Implications for Practitioners and Regulators

pothecated assets were no longer held for the client on a segregated basis and, as a result, many clients no longer had a proprietary interest in the assets, and, thus, fell within the general body of unsecured creditors.

One and a half years on, the threat of a prime broker failing has receded, but the landscape of collateral and counterparty risk management has been redrawn significantly. Prime brokers have begun demanding more cash collateral in place of securities, while many investors, such as hedge funds, use their securities as collateral for financing their own positions via repo trades. Many clients are increasingly seeking to ensure that collateral assets are kept in separate accounts, including sweeping non- collateral assets into custody accounts. Funds have begun to diversify by using multiple brokers and insisted on stricter limits on rehypothetication, preferring separate accounts for different assets or custodianship with a third party. Some investors have even opted to hold assets in custody accounts as a precautionary measure against hypothetication. OR concerns have been mitigated as a result, but there certainly have not gone away.

Finally, legal disputes about business practices have recently become one of the most prominent types of operational risk in the wake of the credit crisis, affecting systemically important financial institutions. Both Goldman Sachs and Merrill Lynch are currently facing civil fraud charges for allegedly making misleading representations about the risks involved in specu-

was, in fact, systemic. Moreover, the task of identifying warnings of impending systemic risk has become increasingly complex as business processes have become highly integrated, and hence, systemic shocks can easily spillover across institutions and national borders.

The task for ORM is to identify drivers of OR events and measure their impact across institutions over time. Preferably, this would be done using structural (predictive factor) models based on macroeconomic conditions, market and credit risk data, and key risk indicators (KRIs), augmented by risk and control self-assessments (RCSAs) and business environment and internal control factors (BEIFs), which would help identify vulnerabilities or a gradual build up of imbalances (for example, related to funding mismatches, selection of counterparties, and organizational structure).

For instance, several techniques are available to integrate (high-frequency) forward- looking market data with both internal and external loss data in order to detect whether and when systemic risks became apparent. Starting from a simple correlation and cluster analysis, market-based measures can be calculated to capture joint tail risks – the risk that multiple business lines and financial institutions become distressed simultaneously – which seem to have given prior indications of impending stress for banks, insurance companies and the overall financial system. Specifically, some of

Thus, the International Swaps and Derivatives Association (ISDA) has been pushing a “portfolio compression” service that, instead of tearing up offsetting contracts, replaces them with a smaller number of replacement contracts. lative structured finance transactions as financial supervisors continue to investigate fundamental agency problems that contributed to the credit crisis. Similarly, the influence of consumer protection laws on the disclosure of relevant information about derivatives transactions has given rise to several court cases. Legal challenges have been raised by a growing number of municipalities and cities, which contest that their treatment as “sophisticated investors” by investment banks has denied them material information about the actual riskiness of certain derivatives transactions they entered into in order to circumvent debt brakes before booking large losses as asset prices collapsed.8 In the case of the recent law suits, however, many pension funds, or public sector entities, dispute their classification as sophisticated investors, which could result in substantial restitution cost to defendant banks if the courts rule in their favor.9

the more advanced tools examined include, for example, multivariate dependence, which is used to calculate tail-risk indicators within individual institutions as well as between institutions. These tail risks encompass both skewness and kurtosis, and thus, adjust to stressful conditions.

V. Current private sector initiatives and regulatory efforts

IV. Integrating operational risk in systemic risk frameworks

To be fair, some notable efforts towards tackling these regulatory issues are under way – in the form of private sector initiatives and regulatory consultations with the industry. First, the private sector. We certainly need to mention the emergence of loss data consortia, such as ORX and others, which have made significant progress in OR measurement (scaling and dependence modeling) using external loss data submitted by syndicate banks. External loss data have made an invaluable contribution to enhanced OR measurement and benchmarking, which informed a more careful assessment of OR profiles within banks over time.

So how can systemic risk be addressed in ORM? Systemic events are intrinsically difficult to anticipate. Once they have occurred, it is easier to look back and agree that a disruption

There has also been some development on the regulatory front – again. Before the publication of Guidelines on the Scope of

8 Investment banks generally apply two-tiered distinction between retail investors, who are safeguarded by consumer protection laws, and non-retail investors, who are considered to be “sophisticated.”

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The Credit Crisis and Operational Risk – Implications for Practitioners and Regulators • 9

fsrforum • volume 13 • issue #2

Operational Risk in September 2009, in April of the same year, the Committee of European Banking Supervisors (CEBS) had already started a public consultation on its Guidelines on Operational Risk Mitigation Techniques, whose intent is to move forward with respect to previous recommendations on insurance contracts and Other Risk Transfer Mechanisms (ORTM).

However, the focus of these guidelines is only on the recognition of insurance within the AMA capital calculation, such as eligibility of protection providers, characteristics of eligible products and haircuts for uncertainty of coverage. Unfortunately, the guidelines are silent on diversification benefits.

There has also been an update on the Basel Committee on Banking Supervision’s work on OR. In 2008, the Operational Risk Subgroup of the Standards Implementation Group completed the first international Loss Data Collection Exercise (LDCE) on all four data elements that are used in the AMA for OR – internal loss data, external loss data, scenario analysis, and BEICFs – and published the results in two papers. The first, entitled Results from the 2008 Loss Data Collection Exercise (Basel Committee, 2008 and 2009a) focuses on internal loss data and scenario analysis, while the second paper, Observed Range of Practice in Key Elements of Advanced Measurement Approaches (AMA) (Basel Committee, 2009b) external data and BEICFs as well as ORM practices in banks that use AMA. Both studies provide an assessment of OR data across different countries and help ensure a more consistent implementation of Basel II standards. The results also allow banks to benchmark their own ORM practices to those of their peers and identify areas of improvement.

However, if we compare the latest Basel Committee’s findings on ORM with earlier results, such as the 2006 paper Observed Range of Practice in Key Elements of Advanced Measurement Approaches (AMA) (Basel Committee, 2006a) and the 2004 LDCE conducted in the United States (OCC et al., 2005), some concerns mentioned above seem to be confirmed. Although banks have made considerable progress in the collection of internal loss data, there is still great variation of the frequency of internal data. This should raise concerns. If the number of observations differs, the comparative identification (and quantification of extreme becomes more intricate. This is especially true if banks share the same total OR exposure, but greater fragmentation of losses in one bank reduces the likelihood of extremes if loss volatility declines (see section V above). Even if we controlled for the interaction of extremes and loss volatility, more observations closer to the mean in tandem with a few far removed outliers can preserve variance but increase kurtosis and the tails lose their density.

The report also finds that OR capital for non-AMA banks is higher than for AMA banks, regardless of the exposure indicators used for scaling. For the typical AMA banks, the ratio of operational capital to gross income is about 10.8%, ­significantly below the standard charges under the Basic Indicator (15%) and the Standardized Approach (12-18%).

This shows that standardized approaches imply a percentile level that is higher than the 99.9% for AMA or the prescriptive threshold of 99.9% is too low to satisfy what regulators deem to adequate capital provisioning for OR (as demonstrated in the one-size-fits-all BIA and SA). So what does the future hold in store?

VI. Future developments Going forward, we need to review existing deficiencies and develop new frameworks for ORM while avoiding the pitfalls

10 • The Credit Crisis and Operational Risk – Implications for Practitioners and Regulators

that precipitated the crisis. Two issues are important in this regard. The industry needs to embrace a mode of ORM that fosters effectiveness and relevance (which also refers to the ORM demands and objectives implied by AMA) given the rising importance of stress-proofing market infrastructures for mitigating systemic risk in an environment where information will be less structured. This would require banks to: • institutionalize OR as an end-to-end process with delegated authorities that escalate remedies to identified vulnerabilities and influence risk-taking (even if OR is perceived as less consequential than market and credit risk), while recognizing control limitations (as basis for the assessment of effectiveness); • keep pace with financial innovation by placing greater focus on OR in markets, which affect multiple institutions (rather than single institutions only), while recognizing conceptual challenges in identifying interlinkages between elements where individual failure has repercussions by propagating stress; and • enhance risk measurement for prudential supervision.

Existing regulatory shortcomings demonstrate that new approaches to ORM need to be predicated on the complementarity of quantitative tools and heuristic approaches.

One-off OR events elude purely quantitative models and require a qualitative overlay with a considerable degree of judgment.

Admittedly, the last point smacks a bit of “back to the future”.

As AMA under Basel II evolved from the late 1990s, there was a marked shift from a model-based, statistical analysis to one that combined both quantitative and qualitative elements.

This change in emphasis was driven mainly (but not entirely) by the lack of sufficient operational risk loss data on which to calculate operational risk capital to the “soundness standard” demanded by regulators. However, the introduction (or more properly, the raising in importance) of qualitative approaches in Basel II was not accompanied by deep analysis of the implications, and pitfalls, of using subjective judgments in determining capital numbers. While a number of local regulators have highlighted some of the (quite serious) problems in combining disparate methods, there is as yet no agreement on how the results of the objective and subjective methods should be reconciled.

The measurement debate also highlights required improvements to the effectiveness of financial risk management in the future. Concerns about systemic risk are related more to “uncertainty”, which is characterized by rare and non-recurring events, and not by repeated realizations of predictable outcomes, render the application of the statistical apparatus using distributional frameworks highly problematic. The conventional focus on random events generated by a process that exhibits stochastic stability might generate robust point estimates, but fails miserably to capture risk from sudden and unexpected realizations beyond historical precedent.

Dealing with uncertainty that could precipitate a crisis, however, is removed from statistical optimization and precise quantification. It requires risk managers to acknowledge the irreducible core of unpredictable outcomes defies classical statistical analysis (Rowe, 2010).

Going forward, the role of uncertainty in risk management is closely related to the current challenges faced by ORM in systemic risk that propagates through markets. In this context, operational risk represents a high-dimensional problem that requires a more holistic and comprehensive but also more

amorphous assessment. Such a process would require less structured information across institutions, markets and products, which escape immediate tractability and cannot be collapsed into a single summary statistic. Successfully negotiating a balance between qualitative and quantitative information, however, depends on the capacity of risk managers to translate analytical input into synthetic judgments, while thinking strategically about vulnerabilities to potential crises. Given that crises are inherent to a dynamic economic environment that is fraught with unavoidable uncertainty, drawing from past experience of ORM could help avoid inviting a counsel of despair in response to such unpredictability. In fact, extreme market stresses over the last two years should inspire confidence in efforts to better integrate operational risk practices in the governance structure of organizations while encouraging more inter-disciplinary deliberations about risk.

VIII. Conclusion Given the elusive nature of systemic risk, policy-makers recognize the need for a multi- faceted approach comprising complementary measures in areas of regulatory policies, supervisory scope, and resolution arrangements as part of a sustainable solution towards a more resilient financial sector. In particular, greater concern about liquidity transformation in capital markets and tail risk has shifted attention to ORM. Despite the impressive evolution of ORM practices over the last five years, we now find ourselves at a critical juncture.

Attention on OR is often very short-lived and fades quickly.

Addressing the fringe relations between OR and other types of risk becomes more important – only then will OR managers be invited to sit at the grown-up table of any “Group Risk

Operational risk represents a high-dimensional problem that requires a more holistic and comprehensive but also more amorphous assessment.

In general, the greater symbiosis of quantitative and qualitative approaches is all about early warnings, which requires that: • ORM needs to identify vulnerabilities and map out risk scenarios sufficiently in advance so that corrective policies can be implemented (“flag raising”). ORM has a poor record of predicting the timing of large losses because precise triggers differ across events and are notoriously unpredictable.

It is much more successful in identifying the underlying vulnerabilities, i.e., the predisposition to shocks – whether they are caused by failed internal process, human error or external disasters – as well as transmission channels and knock-on effects within organizations and markets. Moreover, it needs to link multiple vulnerabilities to strengthen the persuasiveness of the flag; • ORM needs to warn of imminent risk that suggest tail events are about to materialize; and • ORM needs to help prioritize policy recommendations and formulation of contingency plans based on probability and potential impact while recognizing that vulnerabilities are still relevant even in benign times.

Committee”. From a measurement perspective, integrated ORM still has some way to go in combining heuristic and quantitative approaches, while AMA approaches remain overly focused on optimization rather than estimation (using structural factors). What is needed is a more prudent and transparent regulatory regime that encourages integrated ORM together with shift in focus from measurement to management.

The greater emphasis on management and internal control requires bank supervisors to explore enhanced measures that strike a balance between prescriptive and principle- based guidelines, which better reflects the economic reality of operational risk. Thus, we are likely to see a convergence of “standardized approaches”, a greater focus on supervisory review under Pillar II – banks will need to justify why their capital base is adequate –, and a more inclusive definition of OR in light of the market failures during the financial crisis.

References on request

The Credit Crisis and Operational Risk – Implications for Practitioners and Regulators • 11

Mazars is ontstaan uit een fusie tussen Mazars en Paardekooper&Hoffman

ℜ ς ϓ ℘ ΞΒ⇓ ∗ ∨

⎥ ⎦ W.w e ∼ kΨn bij m Ε z a rs .⇔ ← .

Ga verder met Mazars.

fsrforum • volume 13 • issue #2

The Global Financial Crisis and Its Impact on The Emerging Market Economies in Europe and the CIS: Evidence from mid-2010 Marek Dabrowski

1. Introduction In the early and mid-2000s, emerging market economies were major beneficiaries of the economic boom which preceded the recent global financial and economic crisis. They have become victims of the crisis, and their future development depends, to a large extent, on global economic prospects, which are highly uncertain in the fragile post-crisis environment.

Although there have been domestic economic policies which can be given credit for some of the early successes and then blamed for crisis-related problems, one cannot forget about the role of external factors. Many of the small open economies of Central and Eastern Europe (CEE), Latin America or Asia are dependent on external demand and capital flows originating from their dominant economic partners such as the EU, US, Japan or China. This has made them vulnerable to various shocks (both positive and negative) generated by those partners that are largely beyond their control and beyond the capacity of domestic policy to cushion their impact.

country (even the biggest ones like the US, Japan, China or the EU as an entire block) must recognize its limited economic sovereignty and must be prepared to deal with the consequences of global macroeconomic fluctuations.

The purpose of this paper is to analyze the behavior of emerging-market economies during the recent global financial crisis. Special attention is given to CEE and the role of EU integration. The paper is policy-oriented and contains some general policy recommendations.

But first, we give a brief description of the period of rapid economic growth in the early and mid 2000s and its sources.

2. The golden period of global growth before 2008 The years 2003-2007 recorded a remarkable pace of global economic growth and macroeconomic stability after a rather good decade in the 1990s. Looking back, this golden period of prosperity and relative stability resulted from a coincidence of numerous supportive factors.

First and most importantly, the world economy benefited from comprehensive and far going policy reforms conducted

Many of the small open economies of Central and Eastern Europe (CEE), Latin America or Asia are dependent on external demand and capital flows originating from their dominant economic partners This dependence results not only from formal integration arrangements such as EU membership/ candidacy (which, by definition, means giving up some degree of national sovereignty in economic and institutional spheres) or less binding free trade agreements, but also from the much broader phenomenon of rapid globalization observed during the last few decades. Thus, even the countries which do not belong to regional integration blocks like the EU face serious limitations in their domestic economic policies due to increasing global interdependence.

Today’s global and European economies are much more integrated and interdependent than they used to be ten or twenty years ago, let alone during the post-World War II period. In an environment of highly integrated global markets, each

in a number of important countries and regions in the 1990s and early 2000s (China, India, Russia, CEE, Latin America, etc.). Second, after two or more decades of macroeconomic turbulences caused by weak, and sometimes openly populist macroeconomic policies, the vast majority of less developed countries adopted a more prudent stance in this area. This resulted in an impressive disinflation trend worldwide, the rapid building up of international reserves, and a substantial improvement in fiscal balances. Third, these positive trends were accompanied by a unique calm in global financial markets. Fourth, with a certain time lag, the successful completion of the Uruguay round in the mid 1990s helped to liberalize the world’s manufacturing trade and, partly, trade in the service sector. Fifth, the accommodative monetary policy of

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mismatch between the collapse of these two asset markets), risk premia for both sovereign and private borrowing grew dramatically (see Figure 1 with respect to sovereign borrowing of EU NMS), and many national currencies depreciated (especially in countries which run floating exchange rate regimes) threatening the massive insolvency of economic agents borrowing in foreign currencies. Some countries experienced banking sector troubles. In the real sphere, external demand for exported goods and labor declined.

EU membership and currency board regimes were no longer considered by financial markets as effective insurance against balance-of-payment and fiscal crises. Those NMS which managed to enter the EMU before the crisis (Slovenia, Cyprus, Malta and Slovakia) minimized nominal shocks (especially those related to currency risks) but were not able to use the exchange rate as a shock absorber. On the contrary, most countries with floating exchange rates experienced much bigger fluctuations of nominal variables but some of them (e.g. Poland) could accommodate faster to declining external demand.

The sharp fluctuations of nominal variables could lead in some cases, such as in Ukraine or Russia, to a serious disruption of the banking and financial sectors. However, in other countries, exchange rates and stock market indices started to rebound from spring 2009 on, which helped them avoid full-scale domestic financial crises.

The supportive policy of parent commercial banks from Western Europe backed by the European Commission and IMF also contributed to the relative stability of their CEE subsidiaries.

Three NMS (Hungary, Latvia and Romania), one highincome country of the European Economic Area (Iceland), two EU potential candidates (Bosnia and Serbia) and six CIS economies (Armenia, Belarus, Georgia, Kyrgyzstan, Tajiki­ stan and Ukraine) had to resort to IMF assistance in the second half of 2008 and the beginning of 2009 to secure their international liquidity and avoid both sovereign default and an uncontrolled run on their currencies. In the spring of 2010, the first EMU member, i.e. Greece had to ask for external financial aid (including the IMF program) because of its progressing public debt crisis (see Section 5).

the largest central banks conducted in the first half of the 2000s, the aftermath burst of the so-called dotcom bubble and the 9/11 terrorist attacks have meant a strong and positive demand shock for most less developed countries and strengthened their economic boom.

Emerging market economies and CEE were the major beneficiaries of this boom, as they were growing much faster than developed countries (which served as the main source of global demand, especially the US) and were contributing to impressive progress in global economic and social convergence. In addition to the above mentioned positive global factors, the EU New Member States (NMS) benefited from gaining full access to the Single European Market and a credibility premium upon EU accession (with the expectation of rapid entry into the EMU). It seemed that financial markets considered the entire EU as a homogenous area which was immune to adverse and country-specific macroeconomic and financial shocks. As a result, NMS risk premia were below those of other emerging markets (Luengnaruemitchai & Schadler, 2007).

Net capital inflows (and consequently, as a mirror phenomenon, current account deficits) reached a record-high level especially in the smallest economies with currency boards or fixed pegs such as the three Baltic countries and Bulgaria, which enjoyed a reputation of being fiscally prudent and microeconomically flexible. To a lesser extent, a similar trend was experienced by actual and potential EU candidates (i.e., Western Balkan countries and Turkey). In turn, Commonwealth of Independent States (CIS) countries which had no EU membership perspective (or even close association) benefited from the global commodity boom. All post-communist economies gained from the previous decade of painful economic reforms and restructuring.

3. The first shock: global financial crisis In the summer of 2008, most of the favorable factors described in the previous section disappeared or even started to have the opposite effect once the global financial crisis hit the entire world economy, including Europe. Liquidity and credit dried up, capital started to fly back to the main financial centers (mostly US), stock markets and commodity prices declined (although there was almost a one year time

FigureFigure 1: EU2:NMS: long-term government bond yields (annualized in in %), 2007-2010 EU NMS: long-term government bond yields (annualized %), 2007-2010

Cyprus Malta Slovenia Bulgaria Hungary Lithuania Romania

14.0

Germany Slovak Republic Czech Republic Estonia Latvia Poland

11.0

8.0

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14 • The Global Financial Crisis and Its Impact on The Emerging Market Economies in Europe and the CIS: Evidence from mid-2010

10

10 20

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The worst case scenario, i.e. the danger of a long-lasting and devastating Great Depression style crisis seemed to have faded away.

Table 1: Annual growth of real GDP, in %, 2003-2010, major regions Region World G7 EU Euro area Emerging & developing economies CEE CIS MENA Developing Asia Sub-Saharan Africa Western Hemisphere Fuel exporters

2003 3.6 1.8 1.5 0.8 6.2

2004 4.9 2.9 2.7 2.2 7.5

2005 4.5 2.4 2.2 1.7 7.1

2006 5.1 2.6 3.4 3.0 7.9

2007 5.2 2.2 3.1 2.8 8.3

2008 3.0 0.2 0.9 0.6 6.1

2009 -0.6 -3.4 -4.1 -4.1 2.4

2010 4.6 2.4 1.0 1.0 6.8

4.8 7.7 6.9 8.2 5.0 2.2 7.0

7.3 8.2 5.8 8.6 7.1 6.0 7.9

5.9 6.7 5.4 9.0 6.3 4.7 6.7

6.5 8.5 5.7 9.8 6.5 5.6 7.2

5.5 8.6 5.6 10.6 6.9 5.8 7.2

3.0 5.5 5.1 7.9 5.5 4.3 5.3

-3.7 -6.6 2.4 6.6 2.1 -1.8 -1.8

3.2 4.3 4.5 9.2 5.0 4.8 4.0

Note: Blue field means IMF April 2010 estimates, red field – IMF July 2010 estimate Source: International Monetary Fund, World Economic Outlook Database, April 2010; fuel exporters – WEO (2010_Apr), Table A1, p. 155.

4. Economic performance in 2009 – a mixed picture Over the period of 2008-2009, the expected impact of the global financial crisis on emerging market economies remained the subject of frequently changing forecasts and speculations.

Throughout all of 2008, many believed that the negative consequences of the financial crisis would be limited to the socalled advanced economies, mostly US, Western Europe and Japan, and most emerging market economies would remain relatively unaffected. The IMF World Economic Outlook Update released on November 6, 2008 (WEO, 2008, Table 1.1), i.e. seven weeks after the Lehman Brothers bankruptcy triggered a global financial panic, forecasted recession in most of the advanced economies for 2009. The actual recession was much greater than that predicted in the report. The report also predicted only a modest slowdown for emerging and developing economies. Such expectations may be based on the concept of “decoupling” (WEO, 2007_Apr, Chapter 4, pp. 121-160; Kose et al., 2008) according to which business cycles in emerging market economies become increasingly independent from those in advanced economies.

When it became clear that the crisis hit most emerging markets heavily, especially former communist economies in CEE and CIS, the previously optimistic forecasts gave way to alarming expectations. Fortunately, these fears proved to be exaggerated. Ex-post, in spring 2010, the picture looked less dramatic and more nuanced.

The IMF April 2010 preliminary GDP statistics for 2009 gave some opportunity to examine the depth of the crisis’ impact on various groups of countries and individual economies. The imperfection of the available data was caused not only by its preliminary character (subject to further revision) but also by the lack of a comparative set of quarterly GDP statistics.

Examination of the period of Q3 2008 – Q2 2009 or Q4 2008 – Q3 2009 would probably give a better picture of the crisis’ length and impact than annual statistics for 2009. Some

countries were hit by the crisis already at the end of 2007 while many others were hit half a year or one year later. In many countries, output recovery started already in the second half of 2009 while in others the recession has not ended yet. Keeping these methodological problems in mind, CEE experienced a smaller output decline than the Euro area and the entire EU. On the contrary, the CIS, especially its European part contracted more dramatically. At first glance, this might suggest that membership of or close association with the EU continued to provide some kind of protection umbrella for European emerging-market economies even in a time of distress. However, this conclusion seems to be premature and not necessarily well-grounded in reality.

Actually, there was a deep differentiation within each country group. Among NMS the deepest contraction was experienced by the three Baltic countries while Poland recorded a modest positive growth and Cyprus and Malta experienced only a modest decline (less than 2%). Within the group of actual and potential EU candidates, Kosovo and Albania recorded positive growth and Macedonia recorded a marginal decline.

The biggest recession hit tourism-dependent Montenegro and Croatia (respectively -7.0% and -5.4%).

However, even greater differences can be observed within the CIS: Ukraine contracted by 15.1%, Armenia by 14.4%, Russia by 7.9%, and Moldova by 6.5%. On the other hand, all 5 Central Asian countries, Azerbaijan, and Belarus continued growing.

Among large non-European emerging markets, China and India continued growing at pretty high rates while Brazil recorded almost no decline (-0.2% - ). These results may partly validate the decoupling hypothesis discussed earlier.

Equally difficult is the analysis of the factors which determined the size and length of the crisis-related shocks and resilience of individual economies against them. Some early opinions like that stressing the importance of the exchange rate regime do not necessarily hold true when a larger pool of countries and full 2009 data are analyzed.

Global statistics tell us that richer countries, which are more open to trade and whose banking sector plays a bigger role, while relying more on external financing, suffer more than less sophisticated economies, which are less dependent on trade and credit (especially from external sources). The previous good growth performance helped rather than handicapped growth in the crisis year of 2009 although there were some exceptions, especially in CEE and the CIS. When one limits the analyzed cross-country panel to Europe and CIS, the correlations remain the same in terms of direction but not in terms of strength.

Going beyond general observations would require an analysis

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of structural data (e.g. the share of various sectors and industries) which are not available in terms of a cross-country comparative dataset. The only available figure of this kind, the average growth rate of the group of fuel exporters (see Table 1), indicates that they were more heavily hit in 2009 than other economies. Some anecdotal evidence may suggest that large shares of the construction, metallurgy, the automobile industries or the financial sector made the recent recession more severe.

5. The second shock: European and global public debt crisis At the end of 2009 and beginning of 2010, the general mood in the global and European economy became more optimistic again. The worst case scenario, i.e. the danger of a longlasting and devastating Great Depression style crisis seemed to have faded away. There were several signs of the revival of financial markets, global trade and the real sector. The emerging market economies, especially those in Asia and Latin America started to attract capital inflows again (less so in Europe, although market sentiments improved there too).

This optimistic mood did not last long, however. The new blow came from the Greek public debt crisis, which erupted in the first quarter of 2010 and culminated in early May 2010, before the EU governing bodies and the IMF agreed on a rescue package for Greece.

The repercussions of Greece’s fiscal troubles went far beyond the boundaries of this relatively small economy. First, this was the first open public debt crisis experienced by a member country of the EMUsince its launch in 1999 and financial markets tested the degree of actual fiscal solidarity within the Euro area.

Second, the Greek episode placed market attention on similar vulnerabilities in other Northern Mediterranean economies (Italy, Portugal and Spain) and several other developed countries, including all G7 members except Canada. A year earlier the call for a substantial fiscal stimulus in all EU member countries overshadowed fiscal sustainability concerns which

Table 2: G7: Gross public debt to GDP, in % (2005-2015) Country Canada France Germany Italy Japan UK US

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 70.3 68.7 64.2 70.4 81.6 82.3 80.9 78.7 76.2 73.4 70.5 66.3 63.7 63.8 67.5 77.4 84.2 88.6 91.6 93.2 94.3 94.8 68.0 67.6 65.0 65.9 72.5 76.7 79.6 81.4 82.1 82.0 81.5 105.8 106.5 103.4 106.0 115.8 118.6 120.5 121.6 122.8 123.9 124.7 191.1 190.1 187.7 198.8 217.6 227.3 234.1 240.1 244.0 246.7 248.8 42.1 43.2 44.1 52.0 68.2 78.2 84.9 88.6 90.2 90.7 90.6 61.6 61.1 62.1 70.6 83.2 92.6 97.4 100.7 103.5 106.4 109.7

Note: Blue fields contain IMF estimates/ forecast Source: IMF WEO Database, April 2010

proved deeply wrong (Dabrowski, 2009). Table 2 clearly demonstrates how difficult it will be to stop the rapid increase in public debt to GDP ratio in most of the leading developed countries unless a dramatic fiscal adjustment is undertaken in the near future.

Third, the potential danger of Greek sovereign default served as a reminder about the continuing fragility of European banks and other financial institutions which did not recover fully from the post-Lehmann shock at the end of 2008 and could face big problems in the case of any new turbulence.

Although the pan-European bank stress test completed in July 2010 seemed to demonstrate that these fears were exaggerated, some experts questioned the macroeconomic assumptions used in this test (especially with respect to risks associated with government bonds) and banks’ honesty in disclosing all off balance sheet transactions.

Although the debt indicators in CEE look, on average, better than those in Western and Southern Europe, some of the EU NMS (Hungary and Poland) may face serious fiscal problems in the not so distant future unless they undertake corrective measures in time. Other CEE countries may suffer from the negative contagion effects generated by the fiscal problems of either peripheral EMU members or less fiscally prudent neighbors. The increased volatility of CEE exchange rates and bond yields in April and May 2010 (i.e. before and immediately after adopting a rescue package for Greece) may serve as a good indication of their potential macroeconomic vulnerability. Consequently, their financial systems, especially commercial banks, may also suffer from the increased

Figure2: 8:Average AverageGDP GDPgrowth, growth, 2003-7 (X-axis, in %) growth in 2009 (Y-axis, Figure 2003-7 (X-axis, in %) vs. vs. growth in 2009 (Y-axis, in %)in %) 12.0

8.0

4.0

0.0

-4.0

-8.0

-12.0

-16.0

-20.0 -4.0

0.0

4.0

8.0

12.0

Note: Data for 182 countries Source: IMF WEO Database, April 2010

16 • The Global Financial Crisis and Its Impact on The Emerging Market Economies in Europe and the CIS: Evidence from mid-2010

16.0

20.0

24.0

exchange rate volatility as well as from the potential problems of their mother banks in Western Europe.

6. The role of the EU/EMU umbrella As mentioned in the previous sections, the EU NMS and EU actual and potential candidates in South-Eastern Europe enjoyed several benefits from their progressive integration with the Single European Market and their adoption of EU institutions, standards and policies in the early 2000s. One of these benefits was related to rapidly decreasing risk premia and the perception of financial markets that this region was moving from the ‘emerging market’ category into the class of advanced and matured economies. Very few believed that any part of the EU (including its new Eastern and South Eastern peripheries) would ever be hit by serious macroeconomic turbulence. So EU membership was considered solid insurance against instability.

Furthermore, joining the EMU seemed to provide even more macroeconomic stability and security. Once a country showed serious interest in joining the EMU, its risk premia fell rapidly. This was the case for Italy, prior to its 1999 launch of the Euro zone, and Greece prior to its 2001 EMU accession (see Figure 2). The same phenomenon was repeated later when the EU NMS started to join the EMU. The spread between yields charged on government bonds of the most indebted EMU members (such as Greece or Italy) and the bonds of Germany remained very low for the first decade of the Euro’s existence (see Figure 2). This can be interpreted as the dominant belief of financial markets in either the successful work of EU/EMU fiscal discipline rules as defined in the Stability and Growth Pact (SGP) or in the eventual bailing out of the countries in fiscal troubles by other EU/EMU members even if it went against both the letter and spirit of the Maastricht Treaty.

The global financial crisis dramatically verified the above assumptions, which have not been well grounded in the real political, institutional and financial architecture of the EU. First, the fiscal surveillance rules in the EU and EMU were pretty weak from the very beginning and became additionally watered down by the reform of SGP in 2005. Second, the EU lacked both fiscal capacity and the operational mechanisms to provide rescue packages to member states in trouble. The same lack of capacity concerned the rescue mechanism of the European financial sector, a mechanism that was sorely needed at the end of 2008. Its inexistence threatened the disintegration of the Single European Market when individual governments had to come with national bailout packages, which were not always well coordinated (Dabrowski, 2010).

The first wave of troubles on the sovereign debt front in the second half of 2008 and the beginning of 2009 was modest enough to remain manageable under the then existing framework, i.e. IMF stand-by programs augmented by EU resources (for non-Euro area member states) and bilateral aid packages.

The three EU NMS (Hungary, Latvia and Romania) became the subject of such joint IMF-EU financial assistance.

However, at the beginning of 2010, the crisis got closer to the EU core, attacking the periphery of the Euro area. Greece was fighting dramatically with the danger of public debt default and some other EMU members (notably Portugal, Spain, and Ireland) experienced downgrades of their credit ratings and repeated crises of market confidence. The political disagreement within the Euro group on the scale and ways of supporting Greece not only dramatically deepened the problems of Greece itself but also undermined (at least temporarily) the market belief of the sustainability of the Euro project and the chances of EU members in trouble to

receive support other than the standard IMF programs. This lead to the increase of risk premia on the sovereign debt instruments of several EU members.

Once again, the EU’s Eastern periphery has been seriously affected by market uncertainties, this time stemming from Greece’s crisis. In spite of the Euro depreciation against the US dollar, the Swiss franc and other major freely floating CEE currencies depreciated even more (both to EUR and USD).

Finally, in May 2010, ECOFIN agreed to establish the European Financial Stabilization Mechanism which consists of 60 billion of the EU’s own resources and 440 billion of the Special Purpose Vehicle that is guaranteed on a pro rata basis by participating member states (ECOFIN, 2010). More importantly, this mechanism is backed by IMF resources (IMF, 2010). Greece became the first beneficiary of this mechanism (closely coordinated with the standard IMF stand-by loan and its conditionality).

This, however, is only a temporary and emergency solution.

In the long-term a permanent crisis resolution mechanism needs to be set up at the EU level, in addition to stronger fiscal surveillance rules. Greece’s problems are only the tip of a rapidly growing fiscal liability iceberg of the EU member states. On the other hand, such a mechanism must respect the limitation coming from the above mentioned Article 125 of TFEU and, more importantly, avoid moral hazard issues associated with a country’s potential bailout.

In the long-term a permanent crisis resolution mechanism needs to be set up at the EU level, in addition to stronger fiscal surveillance rules.

Based on the experience of the crisis years of 2008-2010, one can conclude that EU or even EMU membership cannot be considered an absolute shield against serious macroeconomic and financial shocks. The earlier naïve expectation of financial markets with respect to absolutely safe sovereign borrowing within the EMU proved to be wrong.

However, EU/EMU membership offers some additional external support on top of the standard IMF rescue programs which have been seriously expanded and modernized in the last few years (as a result of the influence of EU shareholders on the IMF among other reasons).

Furthermore, EMU membership continues to eliminate exchange-rate-related risk premia, contributing to a more stable macroeconomic and financial environment. Henceforth, the continuation of efforts to join the EMU by those NMS which remain outside the Euro area makes sense. In comparison, countries that joined the EMU in recent years and are running responsible fiscal policies (Slovenia, Cyprus, Malta and Slovakia) have gone through the crisis without serious financial or macroeconomic turbulences.

7. Looking ahead: what can happen next?

The continuing macroeconomic uncertainty makes it difficult to predict what may happen in both the near and more distant future. The IMF April and July 2010 forecasts­

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Increasing both the formal and effective retirement age seems to be the best response.

(See the last column of Tables 1-5) suggest that recovery in 2010 will not be fast and will not be enjoyed by all countries: those which recorded the deepest recession in 20082009 may continue to experience recession or stagnation.

On average, CEE and CIS countries have the chance to grow faster than the Euro area and the entire EU. This gives them the opportunity to continue the catching-up process, although at a slower pace than during the last boom. The picture will be uneven within each regional group/subgroup as it was in 2009. In addition, the overall macroeconomic environment will be less comfortable, with higher debt-to-GDP ratios in most countries, and tighter credit conditions. The EU NMS (including those that already entered or will enter the EMU) and EU candidates cannot count on lower risk premia gene­ rated by the EU/ EMU “umbrella” anymore. Its role was serious­ly reassessed by financial markets both at the end of 2008 and at the beginning of 2010.

In the future, the situation of emerging market economies,

In the future, the situation of emerging market economies, especially those located in Europe and its periphery, will depend on how the world economy manages to overcome the crisis and its underlying roots. especially those located in Europe and its periphery, will depend on how the world economy manages to overcome the crisis and its underlying roots. The two potential scenarios seem particularly dangerous for this group of countries. If the global economy experiences a so-called double-dip recession (which could be caused by premature tightening of ­macroeconomic policies in major advanced economies, a public debt crisis or a new round of troubles in the financial sector), emerging market economies will be hit again on the demand side and may react more strongly on the down than their developed counterparts. However, if the fiscal stimulus is not withdrawn in time, another danger might become

apparent: higher inflation -perhaps stagflation, new imbalances and new bubbles. Under such a scenario, emerging market economies in CEE can easily become the first victims of a new macroeconomic and financial crisis.

8. Conclusions and recommendations The global financial crisis of 2007-2009 had severe consequences for the entire world economy, including emerging market economies. Even if it was shorter than one might have expected at its emergence, the negative consequences of the crisis will take longer to heal. Several countries were hit quite significantly, losing a substantial portion of their GDP. In most of these countries, part of the earlier accomplished progress in poverty reduction has been reversed. Their fiscal accounts also deteriorated, their indebtedness increased, and in some cases, the credibility of their national currencies was also damaged (demonstrated by the increasing share of spontaneous dollarization/ euroization). Recovering those loses will not be easy and will take time.

The output rebound experienced since mid-2009 is rather weak so far and subject to various uncertainties. New rounds of financial and macroeconomic turbulences are possible as demonstrated by the consequences of the Greek fiscal crisis in the spring of 2010. Financial conditions are and will remain tighter as compared to the pre-crisis situation. Credit will be more expensive and less available for both the private sector and most sovereign borrowers.

The financial markets will scrutinize the economic policies of individual countries more seriously than they used to.

The above-mentioned issues mean that the golden era of rapid and easy economic growth (in the sense that it did not require serious economic policy effort) is unlikely to return soon. A higher rate of economic growth and the continuation of the catching up process by lower income economies is still possible, but would require a new round of economic reforms in both individual countries and at the global and regional levels.

On a national level, the economic reform agenda depends very much on individual country characteristics. However, there are some common challenges shared by larger groups of countries. First, the rapidly growing public debt in most countries must be stopped as soon as possible; this will require a far-reaching fiscal adjustment and will be impossible, in most cases, without the revision of major expenditure programs (especially in the social welfare sphere). All developed countries and some emerging-market economies (especially those in CEE) must neutralize the fiscal and other consequences of population aging and decline. Increasing both the formal and effective retirement age seems to be the best

18 • The Global Financial Crisis and Its Impact on The Emerging Market Economies in Europe and the CIS: Evidence from mid-2010

response. A greater openness to immigration (contrary to widespread populist fears in many countries) could be another good recipe.

A radical overhaul of the welfare systems and labor regulations is important not only for balancing government accounts but also for making labor markets more flexible, i.e. overcoming the serious obstacles to economic growth in continental Europe, including most of the EU NMS and EU candidate countries.

Most middle and low-income countries need to work hard on improving their business and investment environments, upgrading their legal and public administration systems, fighting corruption etc., to be able to attract more investment flows. The deregulation agenda is also important in the developed world, particularly in continental Europe and Japan. Many countries should continue the privatization of their public enterprises, including the quick withdrawal of public ownership from those financial institutions which received emergency capital injections from public sources in 2008-2009.

There is also a large, perhaps even more complex and difficult reform agenda on the supranational level, as the crisis demonstrated a high degree of global interdependence and the limits of both national policies and regulations. First of all, this concerns global financial markets and institutions where both close coordination of national regulations and the building of global standards, regulations and supervisory institutions is required. The same concerns some form of coordination of macroeconomic policies among the biggest players, which the G20 tried to do with mixed results. Finally, it is time to conclude global trade negotiations that began a decade ago under the Doha round even if the crisis and recession have created the temptation for protectionist policies at national levels. In spite of populist rhetoric, developing and transition countries may become the major beneficiaries of the new round of global trade liberalization (as happened after the conclusion of the Marrakesh agreement in 1994).

The same concerns the regional level, especially in Europe.

The EU must complete building a Single European Market, especially with respect to the services and financial sectors.

Some deregulation of product markets, especially for agricultural goods, would also be beneficial for the future growth of both EU member states and their trade partners.

Accelerating EU Enlargement (with respect to the Western Balkan countries and Turkey) would bring greater economic, financial and political stability to this part of Europe and make the Single European Market more vibrant and competitive. The same applies to EMU enlargement, which

offers more macroeconomic and financial stability to those NMS still outside the Euro area.

Having well-coordinated economic policies on a supranational level is probably the most important lesson that can be drawn from the recent crisis experience.

No country can claim to be immune to global and regional shocks. Any policy measure taken on a national level must also be judged against its externalities.

This relates not only to the measures directly affecting the competitiveness of other countries such as trade, investment and labor market protectionism, competitive devaluations of national currencies and other types of beggar-thy-neighbor policies; leading developed countries must be aware that their macroeconomic policy decisions affect not only their economies but also most others’, including those in the developing world. For example, if the US FED or ECB decide

Most middle and low-income countries need to work hard on improving their business and investment environments, upgrading their legal and public administration systems, fighting corruption on interest rates and other monetary policy measures, this determines not only domestic liquidity in the US or Euro area but also in the international one. Perhaps in the short term, such externalities can be disregarded; but after some time the international consequences of such decisions boomerang back to their authors. Unfortunately, these externalities are not always taken into account for both institutional (accountability to domestic constituencies) and analytical reasons (lack of adequate conceptual and analytical framework for global macroeconomic analyses).

References on request.

Full version of the paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1687623## CASE Network Studies and Analyses No. 411

The Global Financial Crisis and Its Impact on The Emerging Market Economies in Europe and the CIS: Evidence from mid-2010 • 19

fsrforum • volume 13 • issue #2

Bij Financiën tel je meteen mee.

Zeker als bedrijfseconoom.

Bedrijfspresentatie Als ambitieuze academicus kun je overal aan de slag. Ook bij de overheid. Daar moet je wel bewust voor kiezen, de publieke zaak moet je ter harte gaan. Bij ­Financiën vertaal je politieke keuzes in concreet beleid. Het gaat daarbij om heel veel geld, zo’n 180 miljard euro per jaar, een bedrag dat zo effectief en ­efficiënt mogelijk moet worden ingezet. Resultaatgericht en projectmatig werken is bij ons dan ook eerder regel dan uitzondering.

Tegelijkertijd opereren we in de context van hectische poli-

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uitgeven van staatsaandelen, het initiëren en stimuleren

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van publiek-private samenwerkingsverbanden, het risico­ management van de staatsschuld, het optimaliseren van

Vanaf dag één meedoen

bedrijfsvoeringprocessen, het verbeteren van het risico­

Bij het ministerie van Financiën draai je gelijk volledig mee.

management, het uitvoeren van audits en het meewerken

Zo is het heel gewoon dat je als bedrijfseconoom om de tafel

aan de Miljoenennota.

zit met andere beleidsmedewerkers en externe partijen als aandeelhouders en CFO’s. Ook werk je mee aan het opstellen

Zo blijf je in beweging

van de financieringsplannen voor grote projecten. Het werk

Bij het ministerie van Financiën tel je meteen mee. Maar het

is dus deels beleidsmatig, deels projectmatig.

is natuurlijk belangrijk dat je je ook snel verder ontwikkelt.

Je kunt meewerken aan het verzekeren van exportkredieten.

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hoe zijn daar de economische vooruitzichten?

Financiën is voor bedrijfseconomen een plek met heel veel

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Als bedrijfseconoom aan de slag

Studentendag

Tegenwoordig verschilt de overheid helemaal niet zo veel van

Elk jaar organiseert het ministerie van Financiën de

een bedrijf. Het gaat om het effectief en doelmatig inzetten

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Je kunt ook meteen solliciteren via recruitment@minfin.nl.

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20 • Company presentation Ministerie van Financiën

‘Het spreekt me aan om op de scheidslijn van de publieke en private sector te werken en een actief onderdeel van de markt uit te maken.’

Gedegen kennis opbouwen op financieel economisch gebied dat wil Tamim Chébti (27). Tijdens zijn tweejarige traineeship bij het Agentschap wordt kennis van beleid en ervaring in de praktijk om de zes maanden afgewisseld. Tussendoor kan hij ook stage lopen bij diverse banken.

‘Ik heb eerst Internationaal Business in Utrecht gestudeerd, vervolgens heb ik in 2007 aan de Erasmus Universiteit in Rotterdam mijn studie Bedrijfskunde voltooid. Ik heb me tijdens mijn studie ook internationaal georiënteerd met diverse studies en stages in het buitenland. Maar tijdens mijn studie Bedrijfskunde ontdekte ik een grote interesse. Ik wilde me volledig verdiepen in de financiële sector. Financiële markten zijn continu in beweging.

Via de Studentendag bij het ministerie van Financiën ben ik bij het Agentschap in Amsterdam terechtgekomen. Het spreekt me aan om op de scheidslijn van de publieke en private sector te werken en een actief onderdeel van de markt uit te maken.

Ik besloot te solliciteren en ben aangenomen voor de functie Financial Markets Trainee.

De financiering van de Nederlandse staatsschuld van 220 miljard valt primair onder de verantwoordelijkheid van het Agentschap.

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Ik houd me op de huidige afdeling bezig met cashmanagement.

Volgens het verdrag van Maastricht mag de Staat dagelijks een saldo tussen de nul en vijftig miljoen euro bij De Nederlandsche Bank hebben staan. Als er een overschot is, dan zetten we geld uit, bij een tekort moeten we juist geld lenen. Tijdens de kredietcrisis toen de Staat in één week meer dan 20 miljard nodig had om de Fortis deal te financieren, hebben wij dat geld opgehaald. Ik heb het goed naar mijn zin, want het zijn turbulente en leerzame tijden. Je weet vaak ’s ochtends niet wat er in de markt gaat gebeuren. Rustig is het al tijden niet meer.’

Kijk voor meer informatie op www.minfin.nl of bel 070 342 89 69.

Je sollicitatie mail je naar recruitment@minfin.nl

fsrforum • volume 13 • issue #2

The Real Effects of Financial Constraints: Focused evidence from a Financial Crisis

Murillo Campello, John R. Graham, Campbell R. Harvey

1. Introduction We survey 1,050 CFOs in the U.S., Europe, and Asia to directly assess whether their firms are credit constrained during the global financial crisis of 2008. We study whether corporate spending plans differ conditional on this survey-based measure of financial constraint. Our evidence indicates that constrained firms planned deeper cuts in tech spending, employment, and capital spending. Constrained firms also burned through more cash, drew more heavily on lines of credit for fear banks might restrict access in the future, and sold more assets to fund their operations. We also find that the inability to borrow externally caused many firms to bypass attractive investment opportunities, with 86% of constrained U.S. CFOs saying their investment in attractive projects was restricted during the credit crisis of 2008. More than half of the respondents said they canceled or postponed their planned investments. Our results also hold in Europe and Asia, and in many cases are stronger in those economies. Our analysis adds to the portfolio of approaches and knowledge about the impact of credit constraints on real firm behavior.

2. Data We gather firm-level information using a survey of CFOs conducted in the fourth quarter of 2008.

The survey approach provides the opportunity to directly ask managers whether their decisions have been constrained by the cost or availability of credit. Since we want to understand the role of financial markets in shaping corporate decisions when credit is tight, we investigate the relation between firm characteristics (such as size and credit rating) and whether managerial policies are influenced by access to credit. We surveyed CFOs in the U.S., Europe, and Asia. Many of these

22 • The Real Effects of Financial Constraints: Focused evidence from a Financial Crisis

CFO’s are subscribers of CFO magazine, CFO Europe, and CFO Asia; others are executives who have participated in previous surveys conducted by Duke University.

The U.S. survey was conducted via E-mail invitation on November 25, 2008, and a reminder E-mail was sent one week later.

The survey closed on December 5, 2008. Due to logistical issues, the European and Asian surveys started and ended about one week earlier. Most of those surveyed have the job title of CFO. Some have the title of Treasurer, Assistant Treasurer, V.P. Finance, Comptroller, or a similar title. We refer to this group collectively as CFOs. In the U.S., CFO magazine sent out 10,000 E-mail invitations. The approximate failure rate of these invitations is 7%. We know the distributions of firm size and industry breakdown of the CFO invitations. Combining CFOs invitation figures with the information from our final sample, we can estimate the response rates in the U.S. The sample we analyze in the remainder of the paper contains responses from 1,050 non-financial firms in the U.S. (574), Europe (192), and Asia (284). Since the bulk of research in corporate finance is based on the Compustat universe, the comparisons in this table illustrate the representativeness of our survey data with respect to firms in the U.S. In particular, we study whether the 130 public firms in our sample are similar to firms in the Compustat database of public firms. (We do not make any comparisons for the private firms in our sample because there is no Compustat-like database of private US firms). We compare our public firms with 4,979 non-financial public Compustat firms, for which we gather valid, comparable data on assets, sales, profits, and cash holdings available from the fourth quarter of 2008.

Profitability in the survey and Compustat samples is to be com-

parable: approximately four out of five companies in both samples were profitable in the previous fiscal year. Likewise, the propensity to pay dividends is similar across the two samples: 47% of the firms in our survey pay dividends, compared to 40% of those in Compustat. Finally, cash holdings are very similar across the two samples. The mean cash-to-assets ratio is 16.3% (8.0%) for survey firms and 17.0% (8.3%) for Compustat firms.

Most of the statistics suggest that the survey respondents are roughly comparable to those used in prior research in corporate finance. However, we note the potential for a selectivity bias with respect to credit ratings. In particular, a large proportion of the public firms in our survey have investment grade ratings. This implies that firms in our sample could be of a ‘better quality’ than the representative Compustat firm.

Our survey allows us to ask unique questions about the actions corporate managers plan to implement during the crisis. We discuss how their answers conform to economic priors; in particular, whether and how financing frictions affect firm behavior. In this sense, what is unique about our paper is its approach. At the same time, we stress that there are potential concerns related to using surveys to gather data. While we consulted with experts and refined the survey questions, it is still possible that some of the questions were misunderstood or otherwise produce noisy measures of the desired variables of interest. In addition, when interpreting field studies one needs to consider that market participants do not necessarily have to understand the reason they do what they do in order to make (close to) optimal decisions. Moreover, given its design and timeliness, the results we get are difficult to replicate (one would need to design and implement a similar instrument in a similar situation).

Finally, our survey was conducted at one point in time, so we cannot exploit advantages that are sometimes available in panel data studies.

3. Assessing Financial Constraints from a Survey The survey instrument allows us to group firms by whether or not they indicate they are financially constrained. In this section we describe and contrast these two groups of companies.

3.1 What Are Financially Constrained Firms Like?

A large literature examines the impact of capital market imperfections on corporate behavior. In this literature, the standard empirical approach is to gather archival data and use indirect metrics such as asset size, ownership form, and credit ratings to characterize a firm as either financially constrained or unconstrained. Our instrument, in contrast, directly asks whether a company’s operations are ‘Not Affected,’ ‘Somewhat Affected,’ or ‘Very Affected’ by difficulties in accessing the credit markets. For the survey conducted in the fourth quarter of 2008 in the U.S., we have 244 respondents indicating that they are unaffected by credit constraints, 210 indicating that they are somewhat affected, and 115 indicating that they are very affected. In what follows, we carefully document the characteristics of the respondents in each of these categories.

3.2 What Kinds of Credit Frictions do Constrained Firms Face?

We ask CFOs to elaborate on the types of frictions they have encountered when trying to raise external finance during the crisis. In particular, we ask CFOs who indicate that they have experienced financial constraints - i.e., Somewhat Affected and Very Affected firms - whether they have experienced: (1) quantity constraints (limited credit availability); (2) higher costs of external funds; or (3) difficulties in originating or renewing a

line of credit with their banks. Understanding the exact nature of the difficulties CFOs face when trying to raise external funds when credit is tight is key for research about financial constraints. This information is not found in standard sources.

Table 1 shows that 81% of the Very Affected firms say that they experienced less access to credit (which we denote ‘quantity constraint’), 59% say they experienced higher cost of funds (‘price constraint’), and 55% say they experienced difficulties in accessing a credit line (‘LC access’). For Somewhat Affected firms, only 50% cite quantity constraints, 40% cite price constraints, and 20% cite difficulties with lines of credit. We interpret these numbers as an indication that a CFO’s statement that his/her company is financially constrained is a reflection of concrete, tangible experiences that are related to difficulties in raising funds in the credit markets. Importantly, the results in Table 1 help better describe what CFOs mean when they say their firms are financially constrained. Throughout the paper we conduct supplemental tests based on these three categories of constraint, reporting the associated results.

Table 1

3.3 Financial Constraints and Corporate Policies: A Matching Approach One issue we investigate is whether the survey measure of financial constraint has a significant relation with corporate policies that is not subsumed by standard measures of constraint. Our data allow us to test this idea both for the crisis peak period of 2008Q4 as well as for the quarters preceding it.

In particular, prior rounds of the U.S. quarterly survey allow us to produce a rotating panel containing policy and demographic information for hundreds of companies in each of the following quarters: 2007Q3, 2007Q4, 2008Q1, 2008Q2, and 2008Q3 (a total of 2,226 observations). These data are interesting because they precede the Lehman debacle (which happened at the very end of 2008Q3). For ease of exposition, we label this period the ‘pre-crisis period’. We employ two matching estimator approaches to make comparisons across time.

Our variables are largely categorical and fit well with the fullcovariate matching procedure of Abadie and Imbens (2002).

For every firm identified as financially constrained (or ‘treated’), we find an unconstrained match (a `control’) that is in the same size category, the same ownership category, and the same credit rating category. We also require that the matching firm is in the same industry and survey quarter. The procedure then estimates the differences in corporate policies (’outcomes’) for constrained firms relative to those that are unconstrained, conditional on matching on each and all of the aforementioned characteristics. Generally speaking, instead of comparing the average difference in policy outcomes across all of the constrained and all of the unconstrained firms, we compare the differences in average outcomes of firms that are quite similar (i.e., matched) except for the ‘marginal’ dimension of CFO-reported financial constraints. This yields an estimate of the differential effect of financial constraints on corporate policies across ‘treated’ firms and their ‘counterfactuals’.

First, even for the pre-crisis periods, our measure of financial

»

The Real Effects of Financial Constraints: Focused evidence from a Financial Crisis • 23

fsrforum • volume 13 • issue #2

Our evidence indicates that constrained firms planned deeper cuts in tech spending, employ-

ment, and capital spending.

constraint picks up significant differences in policy outcomes for constrained vis-à-vis unconstrained firms. Column 1 shows that firms that report themselves as being financially constrained systematically planned to invest less in technology (an average differential of -5% per year), invest less in fixed capital (-8%), cut marketing expenditures by more (-6%), reduce employment by more (-6%), conserve less cash (-3%), and pay fewer dividends (-8%). These numbers are economically and statistically significant.

These constrained-unconstrained differences increase quite noticeably during the peak of the crisis.

The Abadie-Imbens estimator requires exact matches for constrained and unconstrained firms in every category of the control variables - in our case, industry classification, small and large, private and public, speculative and investment grade firm groups - within each individual survey. Given the relatively limited size of our dataset for some periods, exact matches are sometimes unavailable.

One way to deal with the problem of dimensionality in this setting is to use propensity score matching (Rosenbaum and Rubin (1983)). We implement the estimator proposed by Dehejia and Wahba (2002), which uses observed characteristics (size, ownership, ratings, and industry) as inputs in a probit regression determining whether the firm is financially constrained. Once firms are projected in this propensity score space, for each constrained firm, the procedure looks for the nearest unconstrained match. After partitioning the propensity score vector into ‘bins,’ it is checked whether the constrained and unconstrained firms in each bin have the same average propensity score (else the process is restarted with a ‘rebalancing’ of the bins or a new selection model). The procedure also ensures that firms that are matched in the same propensity categories also have similar averages of the covariates in the probit estimation. Once assignment to treatment is determined in this way, we can measure the average treatment effect on policy outcomes of constrained and unconstrained firms in a fashion analogous to the matching procedure.

4. Liquidity Management in the Financial Crisis The previous section links our survey measure of financial constraint to corporate spending plans during the financial crisis. In this section we investigate how firms manage cash reserves and bank lines of credit to minimize the impact of the crisis on their business operations. We examine data from many countries, but to streamline exposition we often benchmark on U.S. data. We only examine the December 2008 survey for the remainder of the paper because the earlier surveys do not have detailed information about liquidity management or investment behavior.

24 • The Real Effects of Financial Constraints: Focused evidence from a Financial Crisis

4.1 Cash Management Previous research suggests that firms manage their cash as a way to deal with credit frictions (Almeida et al. (2004)). We first document how much cash companies had on their balance sheets when the survey was conducted in December 2008, and how much they had one year before. We compute the average cash-to-assets ratio conditioned on our measure of financial constraint. Figure 1 depicts the cash holdings of firms in the U.S., Europe, and Asia.

Figure 1

There is a wide degree of variation in the levels of cash holdings of firms in different categories and countries. The first panel of Figure 1 presents U.S. data. According to our survey, the cash holdings of constrained and unconstrained firms in the U.S. were roughly similar one year prior to the financial crisis. The 2008 crisis did not affect unconstrained firms’ cash levels, but constrained firms burned through a substantial fraction of their cash reserves by year-end 2008. Cash reserves at constrained companies fell by one-fifth, from about 15% to about 12% of book assets. In other words, there are noticeable differences between the two groups of firms in terms of changes in cash.

Similar cash burn patterns are observed in Europe and, to a lesser extent, in Asia.

To gauge statistical significance, we compute the difference in average change in cash holdings across constrained and unconstrained firms. This difference is highly statistically significant. Since the cash holdings of unconstrained firms stay constant, our test suggests that financially constrained firms have been forced to spend part of their cash reserves to cope with the financial crisis. In particular, there is a pronounced reduction in cash levels among financially constrained firms over the previous year (3.3% of total assets).

This magnitude is startling when combined with our previFigure 2

ous result that constrained firms expected to burn through another 15% of cash holdings during 2009.

One concern is whether constrained firms performed more poorly in the second half of 2008 and that poor performance - not difficult access to credit - may have led them to hold lower cash stocks. This concern is similar to the heterogeneity issue we dealt with in the Assessing Financial Constraint Section via the use of matching estimators. We apply those same estimators here and find that inferences are insensitive to controlling for cash flows. The Abadie-Imbens estimator suggests that the cash holdings of constrained firms are 2.8 percentage points lower than that of unconstrained firms following the crisis (t-statistic of -2.9).

4.2 Managing Lines of Credit We also investigate how firms manage their bank lines of credit (LCs). The CFOs report their available lines of credit at the time of the survey (during the crisis) and also one year prior. As indicated in panel A of Figure 2, constrained U.S. firms have, on average, higher LC-to-asset ratios than their unconstrained counterparts. Despite differences in the levels of LC-to-assets across different categories, firms do not display pronounced changes in the amount of their outstanding LCs over the year. These inferences are confirmed in formal mean comparison tests (output omitted). We find roughly similar patterns in Europe (panel B) and Asia (panel C), with the exception that constrained firms in Europe increase the size of their LCs during the crisis. Our findings seem consistent with theoretical priors that lines of credit serve as an insurance policy against liquidity shortages in bad times (Holmstrom and Tirole (1998)).

Next, we examine the factors that prompt companies to draw cash from their outstanding LCs over the period leading up to the crisis. To understand their motivations, we compute the proportion of respondents that point to any of the following reasons for drawdowns: ‘’to manage immediate liquidity needs,’’ ‘’to fund normal daily operations,’’ ‘’to build cash for the future, as a precaution,’’ and ‘’to obtain cash now in case the bank restricts LC access in the future.’’ Respondents are allowed to check all options that apply, so that for each available category we use the following code: unchecked = 0 and checked = 1. The first two options capture the link between firms’ regular use of LC facilities and their business operations, while the last two capture the ‘strategic’ aspect of LC management in the relationship between firms and their banks. Table 2 presents standard mean comparison tests (via OLS) for U.S. data to help establish which of these considerations (business-related or strategic reasons) determine corporate line of credit management.

Table 2

Note: ***, ** and * indicate statistical significance at the 1%, 5%, and 10% (two-tail) test levels.

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The Real Effects of Financial Constraints: Focused evidence from a Financial Crisis • 25

fsrforum • volume 13 • issue #2

The results in the table point to significant differences in LC management conditional on financial constraint. Constrained companies rely on LCs more heavily for liquidity needs and to fund daily operations. Constrained firms also exhibit the highest propensity to draw from their LC accounts as a way to build cash stocks (precautionary motive) and due to concerns about future access to their LCs. In particular, a significant fraction of constrained firms (17%) withdrew funds during the crisis because of concerns that banks would limit their access to their LC facilities in the near future.

This latter finding is consistent with recent work of Ivashina and Scharfstein (2010), who document a ‘draw now, just in case’ phenomenon during 2008. Our analysis provides new insight into those authors’ findings by tying this behavior to financially constrained borrowers.

We look overseas to determine whether companies world-wide manage their LCs in ways consistent with their American counterparts. We find very similar patterns abroad. Companies around the world rely heavily on LCs for their immediate liquidity needs and daily operations. More interestingly, we find that constrained Asian firms manage their lines of credit with an eye on building precautionary savings, while constrained European firms do not. Regarding the issue of strategic behavior of LC withdrawals, we find that, just like in the U.S., constrained European and Asian firms draw funds for fear that their banks will restrict access to credit lines in the future.

Finally, we ask managers whether they voluntarily limit their use of lines of credit, and if so why. We compute the proportion of respondents checking any of the options: ‘’to avoid paying fees,’’ ‘’interest rate is too high,’’ ‘’to preserve reputation amongst bankers and credit markets,’’ and ‘’to save borrowing capacity.’’ The first two options capture regular business concerns with the cost of LC facilities. The last two capture strategic aspects of LC management. In untabulated analysis we find that firms very rarely report concerns about the costs associated with LCs as a main driver for limiting the use of those facilities. However, they are interested in saving future borrowing capacity by restricting current usage of available LCs. To a lesser extent, companies are also concerned with reputational costs associated with the use of funds from LCs. Figure 3

26 • The Real Effects of Financial Constraints: Focused evidence from a Financial Crisis

5. Corporate Investment during the Financial Crisis Researchers and economic policy-makers are generally interested in the real-side implications of credit market imperfections. In other words, they worry about whether capital market frictions may trigger adverse effects on corporate investment, revenues, employment, tech spending, asset growth, and acquisitions. The timing of our survey allows for unique insights into how corporate managers react to constrained capital markets in terms of how they plan to operate and invest.

5.1 The Relation between Investment and Internal Liquidity A question of much debate in the literature concerns the degree to which firms use internal funds to finance investment when they face credit frictions (see Stein (2003)). Researchers have examined this question by looking at empirical correlations between investment and cash flows, reporting mixed results.

Under the standard testing approach, researchers’ gauge ‘neoclassical’ estimates of firms’ financing needs, constraints, investment demand, and growth opportunities, among others.

Our approach is different. We start from the premise that each CFO has her own `hard-to-specify’ investment model, and instead of engaging in an econometric exercise that approximates that model, we directly ask managers whether they use their firms. internal resources to finance profitable investment opportunities when access to external credit is limited. We compute the proportion of respondents checking each of the following answers to our question about investing in profitable projects under credit constraints: ‘’investment funded by cash flows,’’ ‘’investment funded by cash holdings,’’ ‘’investment funded by other sources (including partnerships),’’ and ‘’investment is cancelled or postponed.’’

Respondents are allowed to check all options that apply, so that for each available category we use the following code: unchecked = 0 and checked = 1. As in previous analyses, we average these 0/1 responses across the four firm categorizations (size, ownership, ratings, and financial constraint).

Figure 3 indicates that firms across all categories are likely to use internal sources of funding for their investment when access to external capital markets is limited. The figure supports

the notion that, in the face of a negative credit supply shock, companies consider their internal resources as a way to finance future investment. Likewise, firms across all categories indicate that they are likely to postpone or cancel investment plans when the capital markets are tight. Some cross-sectional differences stand out in Figure 3. For example, large, public, investment grade, unconstrained U.S. firms indicate they are relatively more likely to rely on cash reserves to finance future investment. This is in line with our previous findings that more constrained firms have already burned through a significant fraction of their internal cash reserves during the crisis.

The graphs also suggest that firms with low credit quality and those that are financially constrained show particularly strong propensity to cancel their investments. Indeed, some 56% of constrained companies in the U.S. indicate that they would cancel investment when external funding is limited, compared to about 31% of investment rated and unconstrained firms. In Europe, 69% of financially constrained firms say they are inclined to cancel their investment. These results are notable, given how little data are available on investment cancellation.

Assuming that firms would prefer to draw on their cash reserves before cancelling their planned investments (which is, presumably, a very costly course of action), we further condition the decision to cancel investment on whether CFOs indicate they are able to use cash to fund investment if external financing sources are inadequate. For those constrained firms for which using internal cash is not an option (perhaps because cash stocks are already depleted), the rate of investment cancellation goes up to 71% in the U.S.; for unconstrained firms the rate is 39%. In Europe, the cancellation rate of constrained firms that cannot use cash to fund investment is as high as 80% (64% in Asia). Notice that archival data do not allow for direct insights into whether investment is cancelled when access to credit markets is tightened. In particular, the financial statement data used in prior studies only capture information relative to observed investment spending. That limitation makes it difficult to fully measure the effective trade-off between investment financing and constrained financing.

We check whether the inferences we gather from Figure 3 are statistically meaningful. Group means comparison tests show no significant cross-group differences in the propensity to use cash flows and cash stocks to fund investment when capital markets tighten (table omitted). The degree to which firms that have low credit ratings or are financially constrained cancel their investments is significantly greater than that of other groups of firms. The statistical significance and implications of our U.S. results are confirmed in the European and Asian surveys.

Conclusions While the financial crisis of 2008 and the associated recession led to severe hardship, it also provided an opportunity to learn about the impact of financial constraints on corporate policies. We survey 1,050 chief financial officers (CFOs) in 39 countries in December 2008 and gather a number of interesting insights from the answers to our questionnaire. Our survey approach allows us to collect information that cannot be deduced from archival data. For instance, it allows measuring investment plans (as opposed to ex-post investment) and gauging whether investment is cancelled altogether because of credit constraints. At the same time, as we discuss, that approach has its own limitations (e.g., replicability and selection biases).

We find that financially constrained firms planned to cut more investment, technology, marketing, and employment relative to financially unconstrained firms during the crisis.

We also show that constrained firms were forced to burn a sizeable portion of their cash savings during the crisis and to cut more deeply their planned dividend distributions. In contrast, unconstrained firms do not display this behavior.

Among other results, we find that constrained firms accelerate the withdrawal of funds from their outstanding lines of credit because of concerns that their banks may restrict future access to those lines. Unconstrained firms rarely engage in this strategic behavior. Nearly 90% percent of constrained companies say that financial constraints restrict their pursuit of attractive projects, and more than half of these firms are forced to cancel valuable investments. Constrained firms also display a much higher propensity to sell assets in place as a way to generate funds during the crisis.

These results are shown to hold in the U.S., Europe, and Asia.

A large literature studies how credit constraints affect firms in normal times. Our study is different in that we gather information on firms’. responses to the sharpest credit shortage in nearly a century. We study the crisis period because it provides a good laboratory to study the issues we examine; however, we suspect that the effects we document exist in normal times, too.

Our results indicate that the financial constraint systematically reduced real investment. The bypassing of positive NPV projects reduces the strength of future economic growth. In this context, one can better understand why policy-makers undertook unprecedented actions to unfreeze credit markets during the crisis. Looking beyond the crisis, our paper provides new ­evidence that financial constraints hamper investment in valuable projects. Relaxing these constraints would produce additional long-term growth opportunities in the economy.

References on request.

The Real Effects of Financial Constraints: Focused evidence from a Financial Crisis • 27

A N d e r h A l f U U r v o o r d e e i N d b e s p r e k i N G vA N d e j A A r r e k e N i N G vA N e e N G r o ot r e c l A m e b U r e AU

W W W.G A A A N . N U

Š 2011 KPMG N.V., alle rechten voorbehouden.

fsrforum • volume 13 • issue #2

Interview Mathijs Bouman Dr. Mathijs Bouman (1966) is a journalist and economist. Shortly after his doctorate in 1998, he started as a researcher and teacher at various Dutch universities.

He then switched to journalism, working principally as assistant-editor for the financial paper FEM Business.

From 2003 until 2005 Bouman used to prepare the bi-monthly meetings between Nout Wellink, the President of De Nederlandsche Bank, and the ECB. At present, Mr. Bouman appears weekly as a marketanalyst and commentator on RTL-Z (a Dutch business news channel), and is regularly invited on various talk shows and news programs. He is a columnist at Het Financieële Dagblad (a Dutch financial paper) and on the business website Z24.nl. He also directs seminars on subjects like the recent credit crisis, the recession, the Dutch economy and the financial markets, and he is the author of several books, the last of which came out in 2010 with the title “De Elektrische Spijkerbroek, en andere avonturen in de economie”.

By Bart Lips and Kim de Vries (November 24, 2010)

The theme of our latest FSR Forum edition revolves around Credit Markets, which are currently under pressure. How important are they when it comes to commerce as a whole?

The credit markets are extremely important and one cannot underestimate their impact. A major part of commerce is based on credit lines, otherwise you would need much more working capital.

It is therefore efficient to outsource it to the banks, but that is also what makes them vulnerable.

Without having done the research for it, I believe that all the containers you can see being shipped are partly owned by the banks; as collateral at least.

Would it be a good option to switch to a barter system?

Pure bartering is not a good idea because of the high transaction costs involved in such a system. For example, a firm would first have to find someone who is willing to buy its products before it will order them from the producer. Money allows the company to avoid this conditional step and only needs to focus on finding the adequate supplier. This money can come from your own capital, but it is more efficient when it comes from the banks.

In other words, money made us more efficient…?

Yes, because otherwise an ordinary retail store would order a container of products, some of which would not be used, which in turn would lead to idle cash on balance sheets. One cannot afford any mistakes, since there is no cushion mechanism to absorb temporary losses. If a bank fails, there is no credit and you cannot import anymore. For a brief moment in 2008 export credit was not being made. Say you wanted a kettle back then: it was produced in China and perhaps already transferred to one of its harbors waiting to be shipped; only it would not have come to you. You were not able to buy it, ship it, or insure it. This makes commerce very ­fragile and thus it can only work given that everyone follows the ‘business-as-usual’ mantra. It was common practice to see the economy as a machine, but maybe we should see it as a herd of ­wildebeests running in a certain direction without really knowing why.

A question regarding the EU: we decided to bail out Greece first and Ireland thereafter. How can these two countries get back on their feet?

The treasury bills are overestimated by the media. Spain recently sold its national 10 year bonds at a 6% interest mark. The market price is often based on the level of speculation during

30 • Interview Mathijs Bouman

You would have to be a real clown in order to lose the market’s confidence.

If this is what you want to achieve, then you can say that the U.S. central bank is in good hands with Bernanke.

the day. An interest rate of 6% is not all that much, after all this is what most Dutch people pay for their mortgages. Moreover, if we look back at the 1980s, people then used to borrow at rates between 10 and 11%, albeit with higher inflation but still. Such a percentage does not weigh so much on the budget of a country to make it go down the bankruptcy path. Greece is in a different situation however: its deficit is so large that it must refinance it. It has to pay higher interest rates with lower tax revenues, due to austerity plans. At some point the lines can cross, in other words there is not much leeway left whether you impose austerity or not.

What will be the result? What will happen to such a country? Will it go bankrupt?

Let us look at the hypothetical scenario in which Greece cannot honor its debt obligations ­anymore. It cannot repay what it owes plus the interest; therefore the country goes, in effect, bankrupt. This is called a sovereign default, and it happens once or twice a year, usually on the other side of the equator. The country then goes to the IMF and asks for emergency assistance, which helps the country to get back on its feet. The bondholders, on the other hand, will remain angry at the country for quite some time. They did ask for 10% interest however, meaning that they must have incorporated the possibility of default in their expectations. If you look at the history of the past 10 years you will see that, since the euro was introduced, Greece has been able to borrow at a rate which was just above the rate paid by Germany. This is absurd of course, because such interest rates are calculated based on the time-horizon of repayments, the country’s credit risk, and the exchange rate risk. The latter was de facto not applicable thanks to the euro, but the credit risk of a country remained. Already from the start did the ECB together with several other bankers show concern for this type of risk. It was strange, at least, to see Greece borrow at 4% while Germany borrowed for almost the same rate. Everyone knew that Germany would one day be saddled with Greece’s troubles. This is a kind of planned misery.

How would such a default scenario affect the Euro Currency?

This is fundamentally impossible to predict. I can say that it will probably be lower, but the currency markets can be rather surprising. Nobody would have thought that the Dollar was going to increase after the second round of Quantitative Easing, which basically stands for printing more money. The currency market is one of the most active markets there is; perhaps the most active market in the history of international trade. We have never seen so many people active

in a currency exchange rate market as in the one for the Euro-Dollar exchange rates. This implies that the only way a change in the exchange rates can occur depends on events which were not predicted by analysts. Another important question is whether the Euro will survive the current confidence crisis. One must realize that the Euro is more of a political matter than it is an economical one. Its roots stem from the Second World War and the German unification: it was created for stability, not just because we may find it useful when we go on a holiday. This also means that as long as there is political will to prop up the euro, funds needed to support it can always be found.

Do you think that Quantitative Easing 2 (QE2) is a sensible measure?

It can cause one of two things. It can trigger inflation, which I believe is dangerous in the long-term since it is very difficult to tame. It can also not trigger inflation, in which case the measure is pointless. I find it a rather desperate maneuver; but in a world where Ben Bernanke has the floor, it makes a lot of sense. If you are worried about deflation i.e. falling prices (this is how Bernanke feels because he has studied the ‘30s), ultimately you will not do good as president of the central bank. You would have to be a real clown in order to lose the market’s confidence. You would have to look unreliable and not care at all about inflation. If this is what you want to achieve, then you can say that the U.S. central bank is in good hands with Bernanke. It is a risky experiment with a high probability of failure. He will achieve nothing but the loss of his own credibility.

»

Interview Mathijs Bouman • 31

fsrforum • volume 13 • issue #2

Let us go back to the markets for a moment. Do you think the market would be better off if we let the banks and other businesses fail, instead of bailing them out?

Yes, it would be a good thing. Banks are too big however.

This is a major fault in today’s financial system; a fault which leads me to claim that the system is not capitalistic.

Recent events do not disprove this view, as a number of banks are somehow nationalized. Their enormous size makes it very dangerous for society in case of bankruptcy, and they know it. Governments cannot let such a failure happen, so they bail out the banks. The costs of a bank going under are, opportunistically speaking, greater than in case of a rescue; but on the long term this may be very different, since we end-up with a crippled financial system.

Who is responsible for the crisis? It is a series of wrong decisions, but who can you identify?

The problem with bankers is that they hide behind the gospel of self-interest.

I think that the economist community is guilty, especially those in America working for the FED. People like Alan Greenspan who advocated a derivatives market free of regulation. Gordon Brown also has his share of responsibility in this mess, because he explicitly wanted his country to be a banana republic for bad banks; a type of Caiman Islands for people with mischievous plans. I believe it to be a very serious matter where guilt is attributable, because these people have acted out of opportunism while they were given significant responsibilities.

Are the bankers also ‘guilty’?

The problem with bankers is that they hide behind the gospel of self-interest. They « follow the market incentives », as they like to put it. That is of course something typically wrong: there lies a diamond somewhere, and instead of bringing it to the police, you stick it in your pocket. Of course you have incentives to do so, but it is morally wrong.

Ethically speaking, I think many bankers out there are doing the wrong things; bankers who hold brainstorming sessions to create a new derivative without really knowing its usefulness, not to mention its potentially harmful effects, and throw it at the markets to see what comes out.

If a derivative received some market reaction, they had invented a beautiful new CDO, which they then sold to the markets with a few lies for their own benefit. So morally speaking I think the guilt is largely ascribable to those American commercial bankers, and, again morally speaking, the stupidity lies on the side of those other bankers who understood too little but still joined the act. Those bankers worked mainly in Europe. Furthermore, some banks were too late but still went with the flow. Small banks, such as the Dutch government banks, appeared to

32 • Interview Mathijs Bouman

Why does Philips apply electric current unto clothes? Who came up with the idea to use six blades for shaving? Is wearing a short skirt a sign of prosperity? Why do we refuse any direct form of road pricing? How useful is gold? These are not trivial questions. But Mathijs Bouman has proven with his accessible and humoristic book De Elektrische Spijkerbroek that adventurous economists may provide us with solid answers. It is a book filled with amusing stories on the edges of economic theory, such as pleas in favor of higher gasoline taxes (to get the sheiks), the abolition of calculus teaching (better give everyone a calculator), real market ­efficiency (but one that customer also cares about) and lower taxes (but only for women).

have invested in some very strange and obscure products.

In that respect I think stupidity is as despicable as wrongdoing. It is my opinion, however, that the overall guilt lies on the side of the financial sector. People who are looking for a mortgage and opt for the cheapest one is also a form idiocy, but it is morally less condemnable because it bears no consequence on to the economic system. There are only a few parties who I believe should have known better, and they are all part of the financial sector. The authorities could not have done much, because they do not have full control over those banks and transparency is limited. Of course, retroactively speaking they should have punished many more, because now they have only given a naïve warning.

From this perspective, how do envision the future?

No fundamental changes have been made to the banking sector over the past two years. The bankers of today might have learnt their lesson, but ten years from now there will be a new club of banking folks who could possibly repeat the same mistakes. Something is fundamentally wrong with the present system. Leaders must come forward with new measures to fend off those risks. If nothing changes soon we are on our way to a new credit crisis; the world economy is struggling enough already.

Let us turn our attention to the rest of the world: China keeps its currency artificially low, is this a fair and good strategy?

Simply put, China is extremely poor. It is so big because it has 1.3 Billion people living within its borders. Its economy is ‘only’ marginally bigger than that of Germany however: we would have done much more with the same population size. The boom in China occurs principally on its coasts.

The only good trend is that China used to do a few things in very stupid way, and now it does them less badly. It is not like they discovered something new or revolutionary: they tweak the economy here and there and then the latter shoots up. The effect will dissipate over time however, because developing countries go through this rapid growth phase only once. Having them growing is a good thing, because the greater the number of prosperous countries the better, this way they can buy our stuff.

Is it not a problem, since we may not be able to buy cheap products anymore…?

Not true. If all countries surrounding The Netherlands were developing ones, we would be much worse off. If that were true, we would go back to our wooden shoes in no-

time. It is important that as many countries as possible participate in the capitalist game, because international trade brings synergy with it. The price of cheap products does go up, but so does your purchasing power which means those products remain relatively cheap. There is always somebody who can produce for cheaper. If everybody is very rich, there will always be someone willing to do it. Wealth is labor productivity. If all countries have rather high labor productivity, there will always be one with the lesser labor productivity. It will then produce the ‘expensive’ T-shirts, which remain ‘cheap’ for the relatively more productive countries. There are no losers, only winners. This changes when a country does not play by the rules, just like China is doing when it keeps it currency artificially low. The lowskilled workers in the U.S. can never compete with their Chinese counterparts. On the other hand this situation is good news for Europe, who can keep on buying cheaply thanks to the Chinese low purchasing power. I do have a problem with China keeping itself poor however. The problem is that its people are not rich, but poor. They live in bubbles. The American housing market would have never burst had it not been for the Chinese fear of its internal migrations from rural to urban areas. All these people need jobs, otherwise they might take it to the streets and start major protests. This is why the currency must stay low, in order to keep products affordable. All U.S. Dollars were sent straight back to the U.S. capital markets. In fact, it is a type of QE, only a considerably more massive one.

It is a power play of course, because America does not find it fair and Europe shares this view.

China on the other hand pretends to be looking at it, but nothing happens. Nobody really seems to hold the reins. Is it normal?

But this is what is happening. Some believe that we must tend toward a system fixed exchange rates, but I think this is where the core of the problem lies. If everyone had fixed exchange rates then everybody would be trying to manipulate it. This is what the U.S. tried with its QEs. Europe would end up being the loser, because we are the only place on earth with a serious central bank and therefore we would not be participating. Luckily we have Ireland and Greece to keep our Euro under pressure. Nobody has won anything yet on the currency markets. We must try to lure China into raising the value of the Yuan. You simply need to make sure to avoid trade wars; otherwise you would end up shooting yourself even harder in the foot. That is what happened in the ‘30s, when only a few years were needed to obliterate one third of the world trade. For now, we could still use some of those cheap Chinese products.

Interview Mathijs Bouman • 33

PwC. Je ideeën zijn belangrijker dan je studierichting Wat je gestudeerd hebt zegt veel, maar lang niet alles. Bij PwC vinden we je ideeën en je inbreng uiteindelijk belangrijker dan je specialisatie.

Bij PwC werken professionals samen vanuit drie invalshoeken: Assurance, Advisory en Tax & Human Resource Services. Wil je daarop excelleren, dan moet je zorgen dat je mensen in huis hebt die breed georiënteerd zijn. Dus ook als je bij wijze van spreken biologie hebt gestudeerd, vind je bij PwC een stimulerende werkomgeving waarin je ideeën zeer welkom zijn.

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Als je weet welke kant je op wilt Je ambitie is duidelijk: je wilt een carrière in de financiële dienstverlening. Je studie sluit daar naadloos op aan en je bent alleen nog op zoek naar de beste plek om je carrière te starten. Bij PwC vind je een werkomgeving waarin je écht de ruimte krijgt. Je ideeën worden gehoord en initiatieven gestimuleerd. En PwC biedt je de mogelijkheid om te switchen tussen sectoren.

Dus als je start op de afdeling die beursgenoteerde ondernemingen adviseert, kun je later altijd nog overstappen naar de groep die bijvoorbeeld werkt voor de overheid.

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fsrforum • volume 13 • issue #2

Economie en politiek: de “(in)visible hand”

K(r)anttekening | Drs. Joost Groeneveld RA RV

De halve wereld moet bezuinigen. Daar hoort Europa bij. En in Europa ook Nederland. Bezuinigen is in het algemeen geen plezierige bezigheid, vooral niet als het moet. De term suggereert achteruitgang. We moeten inleveren en loslaten. Dingen waaraan we gehecht zijn geraakt, kunnen niet meer. Priori­ teiten moeten worden gesteld, vooral omdat de kaasschaaf onvoldoende soulaas biedt. Nu is het vervelende bij prioriteit dat niet ieder daar hetzelfde over denkt. Wat voor de een overboord kan, is voor de ander een kwestie van lijfsbehoud. Drs. P - alumnus van de Erasmus Universiteit Rotterdam (toen nog N.E.H.) - heeft dat in zijn “dodenrit” treffend verwoord.

Voor bezuiniging staan diverse wegen open. 1. Iets niet meer doen. 2. Iets op een andere manier doen. 3. Iets door een ander laten doen. Menigeen heeft in de eigen huiselijke kring

te willen uitvoeren. Ze wil het beleid ‘fors omgooien’.” In de notitie “prestatiebekostiging” van 23 november 2010 staat “dat ze van plan is de marktwerking in de zorg tot 2015 te verminderen omdat de kosten anders uit de hand lopen”.

Ik vind het een verwarrend bericht. Maar ik denk dat het betekent dat van marktwerking een bezuinigingseffect wordt verwacht dat zich niet voordoet wanneer de marktwerking tijdelijk wordt verminderd. Daarom wil zij de nota niet uitvoeren.

We hebben hier te maken met een schijnbaar maakbare wereld. De tijdelijke vermindering zou gelden tot 2015. Dat is de periode van wat een regeertermijn zou kunnen zijn. Daarna zouden de teugels van de marktwerking weer kunnen worden gevierd. Wat mij verbaast, is dat marktwerking kennelijk een

Marktwerking kan blijkbaar nauwkeurig en met onmiddellijk effect worden gedoseerd.

Drs. Joost G. Groeneveld RA RV is directeur van Wingman Business Valuators B.V. te Breda en voorzitter van de Stichting WBO (register van business valuators). Hij was hoofddocent aan de Economische Faculteit van de Erasmus Universiteit te Rotterdam.

ervaring met alle drie de vormen. Bijvoorbeeld: 1. We gaan dit jaar niet op vakantie. 2. We gaan wel op vakantie maar we blijven niet in Nederland en we nemen een goedkope vlucht naar Afgelegerije. 3. We rijden mee met vader en moeder, want dan betalen zij wel.

Ook in de overheidshuishouding komen deze varianten terug.

Subsidies vervallen en musea sluiten de poort (variant 1). In Tilburg is Scryption (museum voor schriftelijke communicatie) daarvan een voorbeeld. Minder subsidie, dus minder kosten voor de Gemeente, is de onderliggende gedachte. Toch een beetje ‘narrow minded’ misschien. Scryption had 12 medewerkers die worden ontslagen. Dus weer een paar gevalletjes van werkloosheid, herplaatsing, kosten van bemiddeling en uitkering. Maar dat is een ander budget (variant 3).

Variant 2 (dezelfde dingen op een goedkopere manier doen) vinden we terug onder het kopje “Schippers neemt afstand van notitie” (NRC Handelsblad, 12 januari 2011). Het geval wil dat “haar ambtenaren een notitie hebben opgesteld over een tijdelijke vermindering van de marktwerking in de zorg”.

Minister Schippers (Volksgezondheid) zegt deze notitie “niet 1

Directeur Wingman Business Valuators B.V., Breda

36 • Economie en politiek: de “(in)visible hand”

beestje is dat je naar believen van stal kunt halen en weer op stal kunt zetten. Een dimmer als bij de lichtknop. Ik zou menen dat je met betrekking tot meer/minder marktwerking moet denken in termen van structuren, attitudes, doel­ stellingen, vaardigheden, risico’s en beloningssystemen die niet op korte termijn in of uit de grond zijn te stampen. Een keuze is niet zomaar omkeerbaar. Maar kennelijk vergis ik me daarin. Marktwerking kan blijkbaar nauwkeurig en met onmiddellijk effect worden gedoseerd.

Het kabinet heeft de smaak te pakken. Oók op 12 januari 2011 wordt gemeld dat Staatssecretaris Teeven (Veiligheid en Justitie) “grote delen van het gevangeniswezen wil privati­ seren” (Lea Bouwmeester, lid Tweede Kamer). SpitsNieuws schrijft dezelfde dag dat “Fred Teeven laaiend enthousiast is teruggekomen uit Engeland. … Hij is onder de indruk van de manier waarop privatisering in het gevangeniswezen heeft geleid tot lagere kosten en weinig problemen met hygiëne”.

Vooral dat laatste is saillant: privatisering heeft geleid tot weinig problemen met hygiëne. Dus een smeerboel? Ik probeer me dat liever niet voor te stellen. Een zoethouder als na de chemiebrand in Moerdijk? Niet gebleken is van gevaar voor de (volks)gezondheid.

Teeven “ontdekte dat onze westerburen kleinere cellen hebben en wil die nu ook in Nederland. … De cellen hier zijn sober en kleiner – en dus goedkoper, zo stelt hij vandaag in De Telegraaf”.

Ik moet denken aan het gedicht van Jan Campert “De achttien doden”: een cel is maar twee meter lang en nauw twee meter breed … Welke zijn nu eigenlijk onze normen en waarden? En zijn die te koop?

Ik draaf nog even door. De postbezorging is in Nederland geliberaliseerd. Dat is denk ik een ander woord voor marktwerking. De postbezorgers hebben de rekening betaald gekregen: per poststuk. Ruud Vreeman - oud-burgemeester van Tilburg – moest met zijn advies uitkomst brengen. Het werd kennelijk wat al te liberaal.

Maar het gaat me hier niet om een politiek statement. De economie ervan is interessant. Marktwerking is een “invisible hand”. Die hand is van niemand of van iedereen. Dus niemand krijgt de schuld als die hand zich overspeelt. De schade wordt op iedereen verhaald. Die hand beheerst het spel van het ondernemen. In accounting wordt het winststreven wel eens als ondernemingsdoel

Marktwerking is een “invisible hand”.

Die hand is van niemand of van iedereen.

genoemd maar dat is onjuist. Ondernemen impliceert een productieve activiteit die gericht is op waardecreatie. In financiële economie gaat het daarbij om twee elementen: verwachte vrije geldstromen en risico/onzekerheid. De verwachte vrije geldstromen moeten het rendement bieden voor de investering. Het risico moet worden vergoed in de te stellen rendementseis.

Als van marktwerking bezuiniging wordt verwacht, zou die in termen van economische waarde op twee fronten kunnen worden verkregen: hogere verwachte vrije geldstromen en/of een lagere risicovergoeding. Op het eerste front zou dat hogere opbrengsten en/of lagere kosten betekenen. Voor een gevangenis zijn hogere opbrengsten moeilijk voor te stellen. Inderdaad dus variant 1: minder wasbeurten, goedkoper voedsel, minder personeel dus meer beperking, goedkoper personeel, dus minder kwaliteit en minder zorg; unisize streepjespakken. En de keerzijde? Wat gaat die kosten?

Op het tweede front wordt door de bezuinigende overheid denk ik niet met een rendementseis gerekend. De private ondernemer doet dat zeker wel. Dus die premie moet extra worden ­verdiend aan nog meer bezuiniging. Er van uitgaande dat de huidige gevangenissen hun cliënten niet overdreven verwennen, is er geen marge voor zulke bezuinigingen. Of zijn die ondernemers zoveel creatiever en efficiënter dan de beherende overheidsdienaren, dat zij met behoud van kwaliteit goedkoper kunnen ondernemen dan de overheid kan bedrijven? Als dat zo is, is het een ‘testimonium paupertatis’ van diezelfde overheid. In plaats van bajesklanten hoort een ondernemer risico te exploiteren.

Economie en politiek: de “(in)visible hand” • 37

<On confidence in teamwork >

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For our Analyst Program, NIBC is looking for university graduates who share our enthusiasm for teamwork. Personal and professional development are the key-elements of the Program: in-company training in co-operation with the Amsterdam Institute of Finance; working side-by-side with professionals at all levels and in every financial discipline as part of learning on the job.

We employ top talent from diverse university backgrounds, ranging from economics and business administration, to law and technology. If you have just graduated with aboveaverage grades and think you belong to that exceptional class of top talent, apply today. Joining NIBC’s Analyst Program might be the most important career decision you ever make!

Want to know more? Surf to www.careeratnibc.com.

Interested? Please contact us: NIBC Human Resources, Frouke Röben, recruitment@nibc.com. For further information see www.careeratnibc.com. NIBC is a Dutch bank that offers integrated solutions to mid-market clients in the Benelux and Germany. We believe ambition, teamwork, and professionalism are important assets in everything we do.

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fsrforum • volume 13 • issue #2

Credit Derivatives: Weapons of Mass Destruction?

Remco C.J. Zwinkels PhD

The use of credit derivatives, such as Credit Default Swaps (CDS), has often been mentioned as one of the causes of the credit crisis; super-investors Warren Buffet has called them weapons of mass destruction. In the previous decade, the market for CDS has grown to a mind-blowing 62,000 billion Dollars. Despite the importance and size of the credit derivative markets, the academic literature is still undecided regarding the question whether credit derivatives are ­beneficial for the stability of the financial system, and the economy as a whole. It appears there are two sides to these complex financial instruments and the net effect is unclear.

On the one hand, credit derivatives are products to hedge risks. A financial institution with bonds in her portfolio can use credit derivatives to cover against the potential default of the issuer (typically a company or a government). As such, credit derivates can accommodate a more efficient allocation of risk among market participants with different motives and different levels of risk aversion. In addition, they introduce more liquidity in the market for corporate bonds. Seen from this angle, credit derivatives increase the stability of the financial system.

Opponents, however, point out the dangers of this onedimensional positive view of risk sharing. They argue that when financial institutions have the opportunity to hedge more of their risks, they will take on larger positions in the first place and thus more risks. This makes financial institutions less reserved as they assume that the underlying risks can be offloaded anyway. A second mechanism p­ ossibly causing the systemic risk to increase is the speculative use of CDS. Many market participants do not use credit derivatives to hedge their risks, but to take on more risks in their portfolio. Because of the high leverage, speculation can yield large gains but also losses. If a financial institution purchases a CDS without owning the underlying bond, it is speculating on the default of the issuer of the bond. Vice versa is also possible: the American insurance company AIG sold a huge amount of CDS without going short in the underlying bonds. When a large number of companies went bankrupt, the US Government had to bail out AIG to cover the losses. A third and final argument is that the exact risk profile and value of these complex instruments is still unclear. As a result, it is difficult to make a fully efficient decision even for the most sophisticated investor.

the stability of the 20 largest financial institutions in Europe between 2001 and 2008. Specifically, we have looked at whether the use of credit derivates positively or negatively affects the financial stability of these institutions. The study shows that the use of credit derivates significantly increases the probability of default. Even ­ stronger, this effect is shown to be progressive: the more credit derivatives the institutions have in their portfolio, the more their probability of default increases. In other words, it appears that financial institutions are behaving more risk seeking as a result of the increased availability of credit derivatives. This means that these products, which were initially meant to decrease risks, are more often used as a speculative instrument than a hedging instrument.

Financial institutions often take the path of least resistance. Striking in this respect is the roll of credit rating agencies, which insufficiently recognized the risks of ­certain products or companies. To test for this, the study is extended by testing whether credit rating agency Standard & Poor’s (S&P) incorporates the effect of credit derivatives in their ratings. The results show that credit derivatives have a positive but non-significant effect on the rating of the financial institutions. Hence, S&P hardly takes the effect of credit derivatives into account and when they do, with the opposite sign. As a result, the financial markets are incapable of gathering the necessary information on ­financial institutions using credit ratings.

The history of financial markets is full of examples where financial innovation first gains the confidence of the markets and subsequently destabilizes the system as a result of opportunistic speculative behavior. For example, the liberalization of the financial sector to foreign capital eventually led to the Asian crisis in 1997. Similarly, the rise of the New Economy and the use of the internet led to the IT-bubble in 2001. The wide use of financial instruments today has a clear negative effect on the current credit crisis. The learning curve of the market has not been very steep in the previous decades. It is the task of economists and policymakers to break the cycle of boom and bust where a fundamental innovation inevitably attracts greedy herding behavior, leading to instability and loss of welfare.

Remco C.J. Zwinkels PhD Department of Business Economics Erasmus School of Economics (ESE) Erasmus University Rotterdam

Within the finance group of the Erasmus School of Economics, we have studied the effect of credit derivatives on

Weapons of mass destruction • 39

fsrforum • volume 13 • issue #2

Word of the chairman

Luc Gerretsen

Dear members, After a smashing new year, family quality time and a week of holidays the second part of the academic year started. First of all I would like to wish you all a very good new year on behalf of the FSR board! As you may have noticed this FSR Forum is in English. The student population at the Erasmus University is getting more international every year and with that our members.

To serve every member with the FSR Forum we decided to publish it in English from now on.

If we look back at the past half year we can think of very successful events. The first big event was the International Banking Cycle. This year over 250 students were selected to participate in a workshop of 10 large Investment Banks. In the workshop students could ­experience what it would be like to be an Investment Banker. Even more students visited the general presentations followed by a network drink in The Faculty Club. The competition for an internship or fulltime position at the participating banks was very high. Still, quite some students managed to get a position at a top Investment Bank after the Banking Cycle. The other big event at the start of the year was the BIG4 cycle. This year the Accounting firms had an all-time record of enrollments. The following event was the Traders Trophy which is a n ­ ationwide trading event.

One of the Rotterdam finalists, Hans Zijlman, became second at the national final.

In the past half year we also organized guest lectures. The guest lectures are an ideal platform to combine the theoretic lecture with the practical insight of a company. We already offerd guest lectures of BNP Paribas, Kempen & Co, Shell and AEGON and the first upcoming guest lecture is from Alp Invest for the seminar Private Equity.

At the 13th of November the yearly active members’ day took place. Due to the rainy weather the day program changed the last minute. Eventually, we went to The Hague for a rough paintball match. The evening program remained the same with a dinner in Furore and a finishing drink in Plan C. In the second part of the academic year we will kick off with the Financial Business Cycle.

This cycle consists of six inhousedays at two traders, two multinationals and two banks. The next activity is the Accounting Firm Day. This activity will be held for the first time. It’s a full day of cases from 4 mid-sized accounting firms at the monumental building ‘Heerenhuys’. The day will be ended with a network drink.

As every year the FSR will not only stay in the Netherlands. In April the European Finance Tour will go to Paris. A group of 20 Finance students will visit companies in Paris and the HEC ­University. The theme for this year’s European Finance Tour will be ‘coping the crisis’. The International Research Project will go to the tropical destinations Kuala Lumpur and Singapore.

On location ten finance and ten accountancy students will do research in the field of Diversity.

In May we have two activities in the field of Mergers and Acquisitions. The first is the Investment Banking Master class. This is a two-day event with Training-The-Street and Barclays Capital. At the first day Training-The-Street will give a very intensive lecture about M&A. This day students can bring their newly gained knowledge into practice with workshops given by B ­ arclays. The other finance event is the Corporate Finance Competition. This is a three-day event in the 5 star hotel Duin en Kruidberg. This is a perfect opportunity for students to face all stages of an M&A deal, from a large Investment Bank till a mid-sized Accounting firm.

40 • FSR news

The legendary H-Building drink will this year be in March.

All the Study associations with an office in the H-Building will give a combined drink for their board and active members.

This year the FSR started a new service for students. We now offer booklets with all lecture slides. After a very successful test case with the master course Corporate Finance, we now offer a booklet for both major accounting courses. A booklet can picked up at our room for free if you are an FSR member.

We can look back at a very successful first half year. On all events we got very positive feedback from both students and companies. Special thanks go to our active members who made it possible to organize all the events. I hoop to see you on one of our cycles, inhousedays, workshops or drinks.

fsrforum • volume 13 • issue #2

FSR Former board member

Lena Groen

Passport Name: Lena Groen Age: 28 Residence: Amsterdam Employed at: Rabobank International M&A Current position: Associate Director Which FSR Board: 7th Which Board function: Chairman Studies: Bachelor Social Science, University College Utrecht, Master Financial Economics, Erasmus Universiteit Year of graduation: 2006 Which car do you drive: Peugot 107 What do you drink on a Friday night: Beer Life motto: Although my life motto cannot be captured in a standard phrase, my goal is to remain challenged at all times. If this is not longer possible, it is time for change

I have numerous valuable memories from my year in the board of the FSR. One of the most interesting experiences was our first ‘ALV’ (General members meeting). Although we were quite busy in the summer of 2004 in preparing ourselves for our board positions and were actually almost feeling like the VIIth FSR Board, we obviously still had to make it through the ‘wisselings- ALV’. I was getting slightly nervous in preparation of this wisselings-ALV from our predecessors who made clear that whatever happens we would have to make sure that nothing gets stolen that night and from the minutes of previous ALVs. As I was going through these minutes I noticed that the questions raised on these evenings can be quite tough. One name that kept coming back was the name of a ­certain Mr. Emanuel da Costa. The tension rose on the actual evening of the ALV when we noticed that this Emanuel da Costa was also present.

As it turned out it was not only Emanuel but most of our predecessors that, rightfully so, continued to ask us tricky and d­ ifficult questions throughout the evening. Although we understood that the tough questions are required as a FSR board position is quite a responsibility, we were happy the night was finally over. Especially when we noticed that hardly any relevant things were stolen that night (I hereby do not consider an ‘overheadprojectorsnoer’ to be a great triumph). The following weeks we visited the ALVs of the other Rotterdam study associations to get further acquainted and in search of some free drinks. Only here we found out that the FSR does not only have the most fun ALVs but thanks to our inauguration we were also well-trained to conquer the most valuable ALV requisites. In our board year we managed to obtain quite some guest books (e.g. from the ED), and several symbolic memorabilia (e.g. Maeur’s cardboard penguin, even after an outnumbered chase across the ­Oostzeedijk). I am actually very proud as a former board member to learn that this tradition is still in place and we are, as FSR, still a dreaded ALV visitor.

My year in the board of the FSR has been a great year. If anyone is considering applying for a board position I can definitely recommend it! The most important result has been the group of great friends I met during the year which I still see on a regular basis. As a board we have now celebrated 2 marriages and also still managed to hang on to our annual weekend getaway. Furthermore I have been able to develop on a personal level as well. Not only, as a chairman, how to manage the interests of the FSR but also how to work together with a wide range of personalities. Another advantage of a year in the board of the FSR is that you have the opportunity to get acquainted with numerous companies from various financial disciplines.

After my year in the board of the FSR I did an internship at Rabobank International M&A. Around 5 years later I am still working here with great enthusiasm. What I like about the Rabobank are the numerous career opportunities it offers, also internationally. I for example, also worked for several months in our New York M&A team. Rabobank International M&A is an entrepreneurial, dynamic and ambitious department with at the same time a down-toearth mentality. In 2010 we were the market leader in Dutch M&A market, in terms of deal volume and currently have the largest M&A team in the Netherlands.

FSR news • 41

fsrforum • volume 13 • issue #2

Deloitte

Company Presentation

Deloitte is one of the leading professional services organizations specializing in Audit, Tax, Consulting and Financial Advisory Services with a broad range of clients in several different industries. We provide powerful business solutions to some of the world's most well–known and respected companies.

At Deloitte, you can have a rewarding career on every level.

In addition to challenging and meaningful work, you'll have the chance to give back to your community, make a positive impact on the environment, participate in a range of diversity and inclusion initiatives, and get the support, coaching, and training it takes to advance your career. Our commitment to individual choice lets you customize e­ verything from your career path to your educational ­opportunities to your benefits. And our culture of innovation means your ideas on how to improve our business and your clients' will be heard.

Visit www.werkenbijdeloitte.nl to learn more about our culture, benefits, and opportunities.

Rex Neijtzell de Wilde has been working for the past 3,5 years at the Core Audit department based in Rotterdam. His current position is Senior Staff. When he was still a student, he was treasurer of the FSR board for one year.

I first came in contact with Deloitte at an inhouse day organized by the FSR during my third year. Afterwards I have participated in other recruitment events such as the Business Course to Madrid in 2004. During my board year at the FSR I also had contact with Deloitte on a regular basis and then I decided to apply for an internship there to get to know the firm even better.

Dynamic capabilities Deloitte distinguishes itself from other large auditing firms through its people. Everyone here possesses the technical competencies needed to understand the complex aspects of a challenging case. Moreover, if you want to work here you also ought to have good social skills: not only is it crucial to understand a specific case in detail, but it is also very important to be able to communicate your expertise to your colleagues as well as to your clients. These technical and social elements -along with a healthy work ethic of course- are characteristics which I r­ ecognize in my colleagues.

Culture If I have to describe the company culture in three words, ‘Openness’ would definitely be the first. From someone that just started at Deloitte to experienced partners everybody can speak to everybody here and come up with ideas and suggestions. Even in more difficult situations, it is essential that people can communicate openly to each other; this allows you to carry on with your personal development. ‘Fun’ and ‘Ambition’ are also essential elements, because that’s what drives Deloitte employees in their daily work.

Opportunities Why is Deloitte such a great employer? Here I feel that I am truly seen as a person, and not just as another number. A good example to illustrate this is the summer internship I did in New York. I told Deloitte that it was my dream and ambition to work and live in New York for a while, and in the summer of 2006, I was given the opportunity to join the American internship program and had a great time! This shows that if you really want something Deloitte will ­consider your request seriously and see what can be arranged to make things possible.

There is more than just studying My advice to students is to make sure that you engage in various activities beside your studies.

You can do this by working in a committee or on the board of a student association, but also by doing sports or having a nice student job. What really matters is to be able to demonstrate that you are not just somebody with high grades who regularly goes to the lectures, but that you have learned something and developed during your time as a student. I already mentioned ­earlier that social and communication skills are at least as important as your technical skills.

The bottom line is this: do nice things besides your studies, because we highly value this aspect of every person we hire at Deloitte.

42 • Company presentation Deloitte

Deen Sonneveldt is a Partner at the Core Audit department in Rotterdam.

Honestly, I was not so much interested in accountancy as a student. For me it was most important to have a solid financial education. Close to my graduation from the Erasmus University I was in contact with a few large multinationals, until I ran into a friend who was working at Deloitte. I was interested in getting a post-doctoral education to become a chartered ­accountant (register accountant) and Deloitte offered a good program, in becoming an allround financial professional. At first my primary goal was not to become partner at Deloitte, I simply wanted to get a good education and training in order to become chartered accountant. Five years later I was facing an important question: Was the program enriching enough to stay with Deloitte or should I continue my career elsewhere? I decided to stay at Deloitte and over the years I have grown to become a Partner.

My decision to continue as an accountant is based on the various activities you are engaged in.

First of all, you are busy working in your own field; but in addition to that you get to work on the commercial aspect of things since you need to deal with current clients while getting new clients in. Thirdly, you are a manager. Each project involves a team of people and each team must be adequately led. I truly enjoy these three activities are incorporated in my job.

Training program Deloitte offers, within certain limits of course, enough freedom for personal development and continuous growth to its employees. We allocate substantial amounts of funds and energy toward training and education programs and we also try to take the diversity of our people into account. We are a company where you will find different types of people, with different personalities. As a professional at Deloitte you work in different teams and as a consequence you get to learn how to work with many types of people. Try to learn from all these different “on the job coaches” and adopt their qualities. This will undoubtedly enrich your knowledge and experience. This knowledge and experience is a solid foundation for a successful career.

‘As one’ We never divested our consultancy department and this is one of the things that distinguishes us from the other Big 4 accounting firms. Because of this, there are many people with diverse backgrounds working at our company. This lies at the core of our strategy, which we named accordingly: ‘As One’. In multidisciplinary teams (Audit, Tax, Financial Advisory and Consulting) focused on specific industry groups we work together to find the best solutions for our clients.

Develop yourself Deloitte is entrepreneurship, innovation and quality. We look for students with a specific drive, people who can enjoy working and possess the energy to go the extra mile. Needless to say, hard work is part of the game, however this should not happen at the cost of a positive and energetic environment. We are not only looking for people with a lifelong ambition to become accountant. At Deloitte you will receive valuable education and on the job training in becoming an ­allround financial professional, but you need to show your ambition.

Finally, my advice for those of you who are still studying: do not start working too early, instead you should try to do fun things. Make sure to develop yourself during your student time.

Company presentation Deloitte • 43

Wat belangrijk is, laat je niet los.

d Ik wil ruimte om te groeien. Waar zet ik

Waar je ook bent, belangrijke beslissingen zijn nooit ver weg. In je rol als accountant en bij het bepalen van je volgende carrièrestap.

Bij Grant Thornton begrijpen we dat je voortdurend bezig bent met je groei. Sterker nog, wij zijn er zelf ook mee bezig. Onder andere door jouw ambities alle ruimte te geven en door je talent te versterken met een goed doortimmerde opleidingsaanpak. Meer over ons op onze website.

www.carrierebijGT.nl

ol ev

g

e end

stap?

Grant Thornton bij jou in de buurt: Alphen aan den Rijn - Amsterdam Boskoop - Gouda - Leiden - Rijswijk Rotterdam - Woerden

Accountancy - Belastingen - Advies

fsrforum • volume 13 • issue #2

FSR Active Members Day

On Saturday November 13th all committee- and board members of the FSR got together to get to know each other better. Half an hour after the official meeting time, everyone had arrived and we could leave in four mini buses to The Hague. Unfortunately there was one bus that required the most time to arrive at the right destination, but we won’t write down any names here. We all got overalls in the Indoor Paintball Centre in The Hague, so our clothes would stay clean. After some explanation about the games we would play, we could start paintballing and the real shooters and daredevils appeared. Everybody was shooting with the paint and many of the Active Members remembered the day for a while due to the large number of bruises.

After paintballing, the mini buses drove us back to Rotterdam where we had drinks and dinner, which was concluded in Plan C. For some of the Active Members, this was the beginning of a long night…

FSR news • 45

Het doel is dat je zelf initiatief neemt.

Ga naar aegon.nl/werk

Eerlijk over werken bij AEGON.

fsrforum • volume 13 • issue #2

FSR Activity report Traders Trophy 2010

On Friday, November 26th was the big day: The preliminary rounds of the Traders Trophy Worldwide in Rotterdam. This year the event was organized by Optiver and Oxyor.

After the success of last year with AllOptions and Oxyor the expectations were high. This year Oxyor has expanded the Traders Trophy to a real Traders Trophy Worldwide.

There are Traders Trophies being held in India, Hong Kong, Belgium, New York, Australia, Singapore, Sweden, Switzerland, Lebanon and Dubai. Students from all over the world are participating in Traders Trophies and on the 26th of November students of Rotterdam could experience what it is like to be a trader in one hour.

The preliminary rounds were a big success. Rotterdam had the most enrollments compared to Amsterdam, Groningen, Tilburg, Delft and Maastricht. A lot of you readers have participated in one of the sessions, but to give a short impression we have made a short recap of the day itself.

After a warm welcome in the lounge of Optiver students entered the “trading room”. After some explanation was given about the simulation by Göran Persson from Oxyor, the real trading started. The stock exchange opened, news items were coming in and phones were ringing. In just one second classroom J1-49 transformed into a real trading floor where decisions had to be made quickly. Of the 100 contestants seven instead of six students made it to the final round, based on their scores on profitability, market awareness, market making (client service) and risk management. Christiaan Zijlmans, Niels van de Loo, Sirvydas Dagys, Robbert van Kampen, Sander Verloren van Themaat, Bram Lips and Daan Stolk reserved a place in the final which was held on December 2nd in the Euronext in Amsterdam.

On the way to Amsterdam the finalists were discussing possible strategies which could be followed for the final round where the students had to trade with three stocks. Other strategies had to be made compared to the preliminary rounds and the decision between being a market maker or market taker was one of the crucial decisions to be made. Without a demo our seven finalists started trading against 33 other finalists. The finalists were all very focused and concentrated and you could feel the tension.

It is a real pleasure for me to tell you that the national second prize is won by Christiaan Zijlmans!

He won e 500,- and is running up for a place in the worldwide final where the winners from all continents will compete against each other in Amsterdam to become the world’s first best student trader. On behalf of the FSR I want to congratulate him and we wish him all the luck for the worldwide final!

Overall we of the FSR are more than satisfied with the entire event. The Traders Trophy is unique and with this event we offer students a good impression of what it is like to be a trader. Next year we hope to organize a successful day once again.

The FAN Committee 2010, Sandhya Poeran, Roald Schennik and Daan Stolk

FSR news • 47

fsrforum • volume 13 • issue #2

FSR Activity report Multinational dinner

On December 1st 2010, it was freezing at least 10°, but still 25 students and 10 represen­ tatives of leading multinationals travelled to the ‘Westelijk Handelsterrein’ in Rotterdam for the yearly FSR Multinational Dinner. During this evening, the selected students get the opportunity to sit at a table with three of the five companies and ask them all questions they have about career opportunities. For the five participating companies, this is a good, ­informal way to get to know a group of talented and motivated students and inform them about the organization they work for.

The participating companies this year were Ahold, Heineken, KPN, Shell and TNT and they have told about their traineeships, internships and starting positions. The students could confirm the impression they have about the multinational or change it according to real-life stories.

During the three-course dinner, the students switch tables every course and therefore sit at the table with three different companies. The concluding drink gives the opportunity to talk to the companies they haven’t met yet or go deeper into conversations that started at the dinner tables.

We have received many positive reactions from both the students and multinationals, which makes us very content.

If you are enthusiastic about this concept, please keep an eye on our website, because in March 2011 there will be a new dinner: the Young Financials Dinner.

48 • FSR news

Gezonde balans tussen werk en vrije tijd

We zijn de grootste zelfstandige accountants- en adviesorganisatie in Nederland en groeien nog steeds.

Met ongeveer 1.600 medewerkers bedienen we vanuit 47 kantoren 44.000 cliĂŤnten. Wil jij een actieve bijdrage leveren aan die stijgende lijn? We bieden je graag alle kansen om je eigen koers te bepalen.

En dat zeggen we niet zomaar.

We streven naar innovatie, creativiteit en kennisontwikkeling. Eigenschappen als lef, gedrevenheid en puurheid kunnen we daarbij goed gebruiken. Overigens zorgen we niet alleen voor volop mogelijkheden om je ambities waar te maken, maar ook voor een gezonde balans tussen werken en vrije tijd.

www.werkenbijacconavm.nl Ruimte voor onder nemen !

fsrforum • volume 13 • issue #2

Mazars, een organisatie waar Rules don´t Rule!

Bedrijfspresentatie Schrijver

Rules don’t rule Regels. In de accountancy heb je ermee te maken. Maar dat betekent niet dat wij ons door regels laten regeren. Bij Mazars vinden we dat ze geen rem mogen zijn op onze inventiviteit.

Integendeel. Wij helpen bedrijven zich verder te ontwikkelen. Vooruitkijken vinden we even zinvol als achteruitkijken. Creëren is net zo belangrijk als controleren. We verschuilen ons niet achter regels, maar gebruiken ze. Rules don’t rule staat voor onze mentaliteit. Onze accountants en fiscalisten durven over grenzen te kijken. In welke functie je bij ons ook aan de slag gaat, je werkt altijd samen met andere disciplines. In teamverband ga je verder dan het geijkte. Dat maakt je werk boeiend en inspirerend.

Onze ontwikkeling Het daadkrachtige en breed opererende Paardekooper & Hoffman fuseerde met het internationale Mazars-netwerk. Hieruit ontstond Mazars, nu uitgegroeid tot een van de meest markante spelers in accountancy. Mazars heeft niet de ambitie de grootste accountantsorganisatie te worden, maar wil zich onderscheiden door zijn actieve opstelling, brede dienstverlening, hoogwaardige kennis en effectieve, inventieve oplossingen. Als netwerkorganisatie zijn we een vertrouwde partner voor een toenemend aantal cliënten die Europa als hun thuismarkt zien en behoefte hebben aan een andere mentaliteit in accountancy. Wereldwijd werken er 12.500 professionals bij Mazars. In Nederland hebben we 13 kantoren.

Geen standaardwerk, maar directe

verantwoordelijkheid.

Startende accountants Bij Mazars krijg je als startende accountant de mogelijkheid je te ontplooien in een maakbare organisatie met een breed takenpakket. Geen standaardwerk, maar directe verantwoordelijkheid. Onder begeleiding van je eigen coach kun je meteen zelfstandig aan de slag. Je werkzaamheden variëren van het vergelijken van cijferopstellingen en controle op debiteuren en crediteuren tot het doorlichten van systemen, het samenstellen van jaarrekeningen, het geven van advies en het voeren van overleg met cliënten.

Beginnen als management consultant Onze management consultants richten zich op advisering op het gebied van bedrijfsvoering en informatisering. Je kennis varieert van praktische zaken, zoals eenvoudige administratieve systemen, tot en met advies bij meer complexe bestuurlijke en strategische IT-vraagstukken. Wie een brede kijk heeft, kan zich beter inleven en denkt mee op elk niveau.

Durf jij verder te gaan met Mazars?

Ga verder met Mazars. Het is een opdracht én een belofte. Voor onszelf, voor onze medewerkers en voor onze cliënten. Een belofte die we waarmaken door een bredere en actievere dienstverlening op het gebied van accountancy, fiscale dienstverlening en management consultancy. Bij Mazars vinden we leren erg belangrijk. Kennis en inventiviteit zijn de peilers van onze dienstverlening. Daarom krijg je bij ons de ruimte om je eigen weg te vinden. Vind jij dat regels nooit het excuus mogen zijn om niet meer na te denken? Ben jij klaar om je te ontplooien in een organisatie waarin niet alles vastligt?

Neem dan contact op met Antonet Lajqi: (010) 27 71 550 of antonet.lajqi@mazars.nl.

Of kijk op www.rulesdontrule.nl

50 • Company presentation Mazars

Rules don´t rule volgens… Jan Pieter Uittenbroek

Aan het woord… Guido Andeweg

Mijn naam is Jan Pieter Uittenbroek en ik werk naast mijn studie Economie en Rechten bij Mazars. Als voltijd student heb ik een bijzondere positie bij Mazars. Ik werk 12 uur per week en kan dit, in overleg, vrij indelen. Mijn werkzaamheden zijn vooral de bijzondere opdrachten die binnenkomen, zo werk ik onder andere mee aan deskundigenberichten voor rechtbanken en doe ik faillissementsonderzoeken.

Ik heb voor Mazars gekozen vanwege de persoonlijke sfeer die er hangt, iedereen kent elkaar en gaat informeel met elkaar om. Daarentegen is het niet zo dat Mazars klein is, Mazars is groot genoeg om opdrachten van formaat te doen en doet dit ook. Dit is het voordeel van een middelgroot kantoor, persoonlijk maar kundig.

Accountancy is een vakgebied dat een stoffig imago blijft houden, maar wie verder kijkt ontdekt dat de werkzaamheden bij de functie van een accountant meer aspecten kent dan de alleen controle van financiële gegevens en voldoen aan wet- en regelgeving.

Rules don´t rule zie ik in mijn werk duidelijk terug door de vrijheid die ik heb en de bijzondere positie die ik heb als werkstudent. Dit zorgt ervoor dat je zelf verantwoordelijk ben voor je werkzaamheden en hier ook naar gaat werken.

Maar rules don´t rule geldt niet alleen voor mij, vrijheid om zelf je keuzes te maken. Verder te kijken dan de noodzakelijke regels is een algemeen gedeeld gevoel binnen Mazars. Dat maakt het werk leuk en uitdagend!

Mijn werkzaamheden omvatten dan ook alle aspecten van de controle van de jaarrekening en bestaan onder andere uit: het inrichten van de planning van de controle, het uitvoeren van een risico analyses, bepalen alsmede uitvoering van werkzaamheden, aansturen van assistenten, rapporteren aan (junior) manager en verantwoordelijk accountant en schrijven van jaarrekeningen. Hierbij geldt tevens dat je als financieel dienstverlener gesprekspartner en vraagbaak bent voor de cliënt. Het totaalpakket van werkzaamheden bij verscheidene cliënten ontwikkelt je hierbij op vaardigheden in vaktechnisch maar tevens in hoge mate op persoonlijk, communicatief en sociaalgebied.

Als senior-assistent accountant binnen Mazars ben ik dagelijks betrokken bij de controlewerkzaamheden van ondernemingen binnen het MKB-segment. De samenstelling van de cliëntenportefeuille binnen Mazars biedt de mogelijkheid deze werkzaamheden (in teamverband) bij ondernemingen van verschillende aard en omvang uit te voeren. Ik kom hierbij letterlijk achter de schermen bij deze ondernemingen.

De praktijk kan als zeer goede leerschool worden gezien, waarbij binnen Mazars mogelijkheden worden geboden voor persoonlijke ontwikkeling tot financieel expert en derhalve een deskundig dienstverlener die een toegevoegde waarde kan zijn voor de cliënt.

Company presentation Mazars • 51

2011-2012

XIV FSR BESTUUR BEN JIJ ER KLAAR VOOR? De FSR is op zoek naar nieuwe bestuursleden!

Heb jij interesse? Stuur dan nu een email naar bestuur@fsr.nu dan drinken we een kop koffie en praten we verder.

Kijk voor meer informatie op:

fsrforum • volume 13 • issue #2

FSR Gala Dinner

January 22, 2011

FSR news • 53

DO yOu nOtIce What cOnnects these numbers?

We are looking for Junior Traders. Can you look beyond the figures and perceive the bigger picture? If so, you might be the new colleague to fill our vacant workplace.

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Our culture?

Work hard and play harder. We offer a performance based incentive scheme, training opportunities, luxury lifestyle perks, and an open collegial environment. In addition, we offer the opportunity to work overseas.

Interested?

For more information and in-house days at the Amsterdam headquarters contact Recruitment +31 (0)20 799 6799 or check out www.flowtraders.com.

fsrforum • volume 13 • issue #2

FSR Alumni Association ‘Amai zeg, toch nie die Belgen he!’

Fancy houses, newest cars, “it’s just about the way it looks”. That’s what the people in Belgium invest in, the inside doesn’t matter that much. Good food, that’s what it is all about in Belgium. Belgians and their intelligence. If you want to have a good party, you should go to Belgium. These are just some random prejudices about our neighbors of the south. It is commonly known that our neighbors find our directness a little bit too much. Dutchies are frugal, noisy… There are plenty of prejudices. Although, there are indeed some differences, cultural differences!

Did these cultural differences have an impact on the possible bankruptcy of Belgium as was noted in the Belgium newspaper ‘De Standaard’? In recent months, Belgium has climbed rapidly on a list of countries at risk of going bankrupt, according to international research of the international research firm ‘Credit Market Analysis’ (CMA), which prepared the so-called bankruptcy list quarterly. A shocking news fact, because our southern neighbors are placed just behind countries as Lebanon and Romania.

If we take a quick look at the research on culture performed by Geert Hofstede (Hofstede, G., 1980), it can be seen that Belgium has a very high Uncertainty Avoidance Index (Hofstede divided culture in five pillars, the so-called Power Distance Index, Individualism, Masculinity, Uncertainty Avoidance Index and Long-term Orientation), compared to the average European country. In an effort to minimize or reduce this level of uncertainty, strict rules, laws, policies, and regulations are adopted and implemented in these countries. The ultimate goal of these countries is to control everything in order to eliminate or avoid the unexpected. As a result of this high Uncertainty Avoidance characteristic, the Belgium society does not readily accept change and is very risk averse. If we take this into account, and combine it with the fact that Belgium didn’t have a ruling government since June 2010, and now the news about the increase on the list of going bankrupt....... it’s just a thought...

The example above shows it is important to have a good governing body. That’s what we have in mind at the FSR Alumni Association as well! We started as a new board of the FSR Alumni Association in October, where we planned four brilliant activities for the coming year. So keep an eye on your e-mail the coming time, for an invitation to meet your FSR friends and have a brilliant time together! See you soon.

Anna Nijdam Vice Chairman FSR Alumni Association

FSR news • 55

fsrforum • volume 13 • issue #2

FSR Activity Agenda 2010-2011

Activities 2011 February

May

Financial Business Cycle

Bachelor Accountancy Day

Explore the financial opportunities.

Will you choose accountancy?

March

Investment Banking Masterclass Learn to valuate, like an investment banker.

Young Financials Diner Get to know interesting financial companies.

Corporate Finance Competition Five star event: hotel, companies and participants!

Multinational Battle Five multinationals, five battling cities, are you part of it?

International Research project Kuala Lumpur & Singapore, diverse yourself.

April European Finance Tour Paris, Coping the crisis.

National Investment Competition Invest and be a winner!

56 • FSR news

We waarschuwen je nu alvast voor opdringerige headhunters.

Academisch toptalent Gefeliciteerd, je titel is binnen. Op naar je eerste baan. Wordt het een bank, een energiereus, een internationaal elektronicaconcern? Als jij droomt van een topbaan bij een multinational of de overheid, is er eigenlijk maar één antwoord mogelijk: Deloitte.

Veel topbestuurders in Nederland hebben Deloitte als eerste werkgever op hun cv staan. En dat is niet toevallig. Bij ons werk je namelijk al vanaf dag één aan innovatieve oplossingen voor én met toonaangevende organisaties. Ondertussen investeer je zo sterk in je eigen marktwaarde dat je ook buiten onze organisatie niet lang onopgemerkt blijft. En de kans groot is dat je over een paar jaar voor diverse topfuncties benaderd wordt.

Zoek jij de beste start van je carrière? Begin eerst hier: werkenbijdeloitte.nl.

Blijkt de universiteit ineens een vooropleiding.

Diederik van de Scheur Consultant TAS

Piet-Hein Touw Staff FSO

Een succesvolle carrièrestart is meer dan een goede cijferlijst. Het begint met karakter en inzicht in jezelf. Ontdekken wie je bent, weten waar je naartoe wilt groeien Ên hoe je dat voor elkaar krijgt staat altijd aan de basis. Ernst & Young coacht jou actief op weg naar jouw succes. We bieden je volop kansen in de wereld van assurance, tax, transaction en advisory. Ontdek ze op ey.nl/carriere