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Restoring Confidence in The Financial System is a groundbreaking book in which a top mathematician, who is also one of the City of London's most experienced traders, and an experienced City banker explore how confidence in the global financial system was destroyed by the current banking crisis. Drawing on his firsthand experience of steering the trading floor at a major European bank, Sean Tully, together with Richard Bassett, analyses the steps that led up to the crisis and pinpoints precisely one of the main causes of the lending bubble with whose consequences we are all now living.
The authors explain the intricacies of the regulatory framework of Basel I and Basel II, the two landmark events in banking regulation which inadvertedly laid the foundation for the current crisis. The authors then show how a radical and new but easily understood measure of risk, revealed here for the first time, can prevent another such bubble from ever happening again. This new measure, called see-through leverage or STL, can be used to restore faith in the financial system by allowing a rapid means of differentiating between potentially toxic and healthy 'AAA'-rated securities. Armed with STL, investors, rating agencies and regulators alike can cut through the complexity of economic modelling to the nub of the problem: leverage.
Restoring Confidence in The Financial System is a vital book for the international business community. In a globally interconnected world, no one can claim to be untouched by the crisis. How could bankers have got their sums so wrong? How could regulators and politicians have failed to see the storm coming? Above all, how can confidence be restored to get the wheels of the global finance machine working again? This book has the solution.
Acknowledgements ix
Preface xi
Introduction xv
1 Brave New World 1
2 The Unintended Consequences of Basel I and Basel II 31
3 Rating Agencies and the Shadow Banking System 47
4 How the Current System Failed and the Need For See-Through Leverage (STL) 73
5 How STL(X) Should Be used in Practice by Investors, Regulators and Rating Agencies 99
6 Towards A Basel III 125
Glossary 151
Bibliography 157
Index 161
Overview
Restoring Confidence in The Financial System is a groundbreaking book in which a top mathematician, who is also one of the City of London's most experienced traders, and an experienced City banker explore how confidence in the global financial system was destroyed by the current banking crisis. Drawing on his firsthand experience of steering the trading floor at a major European bank, Sean Tully, together with Richard Bassett, analyses the steps that led up to the crisis and pinpoints precisely one of the main ...