Category: regulation

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True purpose of pension fund

Kevin writes: ‘I must have been mistaken: the true purpose of a pension fund must be to finance a flutter on the housing market.’

When I first joined the world of insurance, it was explained to me somewhat cynically that banks borrow short term from depositors, and use the money to speculate with. If the bet turns sour and depositors want their money back, it goes horribly wrong very quickly.

Insurance companies, by contrast, borrow long term from future pensioners and use the money to speculate with. If the bet turns sour, it takes about 20 years for things to go horribly wrong, after the prime movers are safely retired (preferably not with a pension for the firm they worked for).

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A date for your diary

On Monday 1 October 2018, Kevin and I will be presenting ‘Is Equity Release a Second Equitable Life?’  at the London School of Economics.

The seminars start at 17.45 and end at 19.00 (unless otherwise stated) and are held in OLD 3.21, 3rd floor, Old Building, LSE.

Yay and naysayers alike are welcome! There will be a lively debate I am sure.

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Just in spotlight

Oliver Ralph of the FT has a piece ‘just’ out, on fears about the impact of proposed new PRA rules on Just Group’s capital base.

The PRA’s consultation paper suggested tougher treatment for these type of mortgages, to take account of the risk created by the no negative equity guarantees.

That’s not quite right, as we have pointed out here and elsewhere. The PRA’s consultation paper CP 13/18 (02 July 2018) is not about the risk of such mortgages, i.e. capital requirements, which  the PRA has so far been silent about, but rather their valuation, which impacts capital available or ‘capital resources’ as the regulator calls it.
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A house of many mansions

Eumaeus is dedicated to keeping an eye on the house, but this house has many dwelling places. Kevin Dowd’s ‘Asleep at the Wheel’ took the PRA to task for having dozed off a bit while deciding on how to price a put option, but there are also other regulatory or standard-setting bodies who are directly or indirectly responsible for valuing financial instruments correctly.

The exam question is, given the number of such bodies, why has none of them identified or addressed the problem that some firms apparently cannot value an elementary put option1 correctly?

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