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Finanstilsynet: Risk Outlook – December 2020

In the Risk Outlook, Finanstilsynet emphasises that banks and insurance companies must factor in the great uncertainty that still attends the future path of the Covid-19 pandemic and its economic impact. Banks’ loan losses have risen as a result of the crisis. However, the increase is moderate thus far and largely refers to oil-related loans. As major parts of the business sector have experienced a significant decline in income, there is a risk that potential losses may be underestimated in banks’ loss allowances. High house prices and a high debt burden in the household sector represent significant systemic risk. Despite the crisis, there has been a steep rise in house prices in recent months parallel to stronger growth in household debt, partly driven by record-low interest rates.

Just like the rest of the world, Norway experienced an abrupt and sharp economic downturn when the Covid-19 pandemic triggered strict containment measures and extensive lockdowns in the spring. Lower contagion rates provided the basis for a gradual reopening of society through the summer. During the autumn, several countries have once again experienced a surge in the number of infected people.

“Further developments in both the Norwegian and international economy are uncertain and will largely depend on the path of the contagion. Access to vaccines will gradually provide a basis for lifting the comprehensive containment measures. Nevertheless, it may be long before economic activity returns to pre-pandemic levels. Some industries may also face lasting changes in demand. Banks and insurance undertakings must therefore factor in the possibility of a deep and prolonged crisis,” says Morten Baltzersen, Director General.

The debt burden of Norwegian households is at a very high level both historically and compared to other countries and constitutes a significant vulnerability for the Norwegian economy. The growth in household debt has slowed somewhat in recent years, but has picked up since the summer. This year’s residential mortgage lending survey shows that a large and increasing proportion of new mortgages is taken out by borrowers with high total debt relative to income. Several borrowers also have large mortgages relative to their property’s market value.

There was a slight increase in house prices in both March and April 2020, followed by a rising annual growth rate. In October, 12-month growth was 7.1 per cent. which is clearly higher than in the preceding years. As a result of low interest rates, increasing house prices and weaker growth in household income, households’ total debt relative to income may grow further in the period ahead.

“High debt levels make a number of households vulnerable to declining incomes, rising interest rates and falling house prices,” says Morten Baltzersen.

The volume of consumer loans, which grew rapidly for many years, is now declining sharply. There could be several reasons for this. In addition to the economic setback, the introduction of debt registers is probably a contributing factor. An increasing number of loan applications from customers with weak debt servicing capacity are now rejected, as institutions have a better overview of the customer’s finances. Parallel to this, the share of non-performing consumer loans is still on the rise.

The Norwegian business sector is to varying degrees affected by the Covid-19 pandemic, the contention measures and the fall in oil prices. Extensive government measures have helped to keep up the level of economic activity in Norway and limited the decline in income for those parts of the business sector that have been most severely affected. Deferred payment of direct and indirect taxes and instalment payment deferrals on bank loans have improved many companies’ liquidity situation.

The banks’ regulatory capital adequacy ratio is high and has risen over the past year. However, this increase can largely be attributed to regulatory changes that do not imply an actual improvement in the banks’ financial soundness. Experience from previous crises has also shown that it may take time for the loan losses to be recognised in full in the banks’ financial statements. The banks must therefore factor in the possibility of a significant rise in loan losses in the coming period.

“The great uncertainty indicates that the banks should maintain their equity base by retaining profits to ensure that they are well able to provide loans to creditworthy customers even in a situation with high loan losses,” says Morten Baltzersen.

Pension institutions’ performance was severely affected by the fall in equity prices in the spring of 2020. Subsequent strong price increases gave a certain improvement in profits, but the return on the institutions’ collective portfolios for the first three quarters of the year is nevertheless weaker than in the corresponding period of 2019. The decline in interest rates makes it challenging to achieve excess returns on guaranteed rate products. Pension institutions have sizeable commercial property investments. Reduced demand for office space, hotel accommodation and to some degree shop premises weakens the current earnings of commercial property companies and may lead to lower property values.

As from 2021, 1.5 million Norwegians who have defined-contribution pensions will get an individual pension account. The aim is to give individuals a better overview of their pensions and to reduce total costs. The scheme may lead to intensified competition and lower prices in the defined-contribution pension market. The introduction may result in extensive transfers of assets between different managers of pension products, and it is important that the institutions have a good infrastructure for handling such transfers without delay and with minimal operational risk.

Overall, non-life insurers enjoy a sound level of profits in spite of the fact that some undertakings have experienced a increase in claims payments related to travel insurance this year. Favourable winter conditions and corona-related reductions in car travel and rush hour traffic have given a rise in profitability within motor vehicle insurance.

The Paris Agreement’s aim to mitigate climate change requires a fundamental restructuring of global energy use. For financial institutions and investors, it is important to gain good insight into companies’ exposure to transition risk. Finanstilsynet’s survey of listed companies’ sustainability reporting shows that Norwegian companies provide little information about the risk of changes in future profit levels as a result of the transition to a low emission society. Finanstilsynet will follow up companies’ future sustainability reporting.

Internationally, a number of processes are underway to establish classification systems for green investment products and ensure that investors and lenders receive the necessary information.

“Finanstilsynet will contribute to ensuring that relevant EU legislation is implemented in Norwegian law and will follow up the institutions’ adaptations to new regulations in this area,” says Morten Baltzersen.


Speech by Bank of Greece Governor Yannis Stournaras at the 86th Annual Meeting of Shareholders

2019 marks the beginning of new course for the Greek economy. Following the successful completion of the last economic adjustment programme in August 2018, the activation of the enhanced surveillance framework and with Greece now subject to the improved institutional framework for economic governance in the European Union and the euro area, the Greek economy is called upon to operate in a new economic policy context. It is our duty, as individuals, businesses, political and institutional stakeholders, to prove that we have taken ownership of the lessons of the crisis.

2018 saw the recovery of the Greek economy gain traction, with a GDP growth rate of 1.9%. The key drivers of growth were a rise in exports of goods and services, reflecting a greater extroversion of the economy, and a pick-up in private consumption supported by employment growth and an increase in households’ disposable income. 

The smooth execution and completion of the economic adjustment programme, improvements in confidence and the ensuing strengthening of growth led to a return of deposits to banks. This, in turn, enabled an increase in bank liquidity, a significant reduction and almost elimination of emergency liquidity assistance (ELA) from the Bank of Greece, a small recovery of bank credit, as well as a further relaxation of capital controls. 

All of the above led to upgrades of the credit rating of the Greek sovereign and enabled Greece to return to international financial markets a year later, in February 2019, when, taking advantage and of the favourable global investment climate, the Greek government successfully issued a five-year bond. The successful issue of a five-year government bond was the first positive step on the way back to normality. 

Moreover, the successful 10-year bond issue in March 2019, for the first time since the start of the public debt crisis in 2010, marked a more decisive step in the same direction, i.e. towards reconnecting Greece with the markets. The legal provision recently passed by Parliament on primary residence protection also contributes in this direction, as it reforms the relevant legislative framework, incorporating specific eligibility criteria and safeguards. 

The debt relief measures agreed in June 2018, together with the increased disbursements from the European Stability Mechanism (ESM) for the creation of a cash buffer, have significantly improved the sustainability of public debt in the medium term. However, given that Greek government bonds are still rated at below investment grade and in the absence of access to a precautionary credit line, Greek bonds remained ineligible for the ECB’s quantitative easing programme (QE) that would have helped strengthen economic activity and further improve the credit standing of Greek bonds. Greek government bond yields are still high and volatile. They are sensitive to potential disturbances in international financial markets and are influenced by increased uncertainty regarding the maintenance of reform momentum. In fact, the yield spread of Greek 10-year government bonds remains elevated, at just under 400 basis points, despite the recent decline in yields. This persistent phenomenon is a matter that needs our serious attention. 

2019 will be another challenging year for the Greek economy. In the external environment, the slowdown of world trade amid rising protectionism could dampen export growth. 

On the domestic front, increased uncertainty about the continuation of reforms coupled with credit constraints are weighing on investment. High taxation in recent years has taken a toll on the growth dynamics of the economy, the competitiveness of Greek enterprises and confidence, and has caused tax fatigue leading to a contraction of the tax base and an exhaustion of the taxpaying capacity. 

In 2019, the growth momentum of the Greek economy is expected to continue at the same pace as in 2018, despite a further slowdown of growth rates worldwide and, especially, in the euro area. However, this forecast is conditional upon the resolute pursuit of structural reforms, the implementation of the privatisation programme without delays and the strengthening of productive investment. These conditions are essential to completing a successful transition to a sustainable and extroverted growth model. 

More specifically, according to Bank of Greece forecasts, GDP at constant prices is expected to grow by 1.9% in 2019, driven mainly by exports and private consumption. However, in order to make up for the huge losses suffered by the Greek economy in terms of output and employment during the long period of recession, higher growth rates are needed. 

The low level of investment, insufficient domestic savings, the high – albeit declining – stock of non-performing loans, the large loss of physical and human capital during the recession, as well as the apparently low expectations regarding medium-to-long term potential output growth as a result of adverse demographic trends and the sluggish adoption of new technologies in production processes, all weaken the growth dynamics. Meanwhile, the outlook for the economy still depends largely on foreign investor confidence and on foreign capital inflows. 

Turning to the domestic environment, and the fiscal front in particular, the possible implementation of Council of State Plenum rulings that earlier pensions cuts and the abolition of pensioners’ bonuses were unconstitutional, poses the greatest fiscal risk in the immediate future. 

Furthermore, the fact that Greece is entering an electoral cycle increases the risk of a slowdown of the reform effort and of fiscal relaxation, compounding economic uncertainty. Thus, backtracking on agreed policies would undermine the significant progress achieved so far. 


Actual GDP developments in 2018 and the outlook for 2019 indicate that the Greek economy is back on a track of positive growth. The challenge now is to preserve and reinforce the growth momentum so as to enable strong growth rates over a long period. 

The reason for this is that growth has yet to gain sufficient traction, as reflected in a negative rate of change in investment, a negative household saving rate and a still high – albeit decreasing – rate of unemployment. The continued underexecution of the Public Investment Programme is also dampening growth. 

The growth prospects for 2019 will, to a large extent, remain conditional on the course of the global economy and of the euro area economy in particular, as well as on the continuation of the reform effort. 

Economic expansion in the euro area is projected to continue in 2019, but at a significantly more moderate pace (1.1%), as recent data point to a considerable weakening relative to the strong growth rates of previous years. In order to avert the risk of a further economic slowdown in the euro area and to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term, the Governing Council of the European Central Bank (ECB) decided in March 2019 to maintain accommodative monetary policy by keeping the key ECB interest rates unchanged until the end of the year and by launching a new series of quarterly targeted longer-term refinancing operations (TLTRO-III) with a maturity of two years. This decision should improve financial conditions in Greece and support the growth effort. The ECB Governing Council additionally stressed, as it has been doing for some time now, that fiscal policy in euro area member states with adequate fiscal space should be supportive of economic growth. 

The Greek economy in the current year is forecast to be driven mainly by export growth, albeit at a slower pace, and a rise in private consumption. Private consumption will be supported by the continued robust performance of the tourism sector, the ongoing recovery of the labour market and the improved disposable income of households, while investment will benefit mainly from a stabilisation of the real estate market. 

HICP inflation fell to 0.8% in 2018, from 1.1% in 2017. The absence of significant further increases in indirect taxation during 2018, the sharp drop in international crude oil prices as from October 2018 and strong base effects were among the main factors behind weaker inflation developments. Looking forward, HICP inflation in 2019 is expected to fall to lower levels, as a result of low international crude oil prices, a slowdown in global activity and trade, as well as strong competition in the domestic retail food market. 


In 2017, for the third consecutive year, the general government primary balance exceeded the programme target. An overperformance is also expected for 2018, according both to the Introductory Report on the 2019 Budget and to Bank of Greece forecasts. 

However, the Public Investment Programme was once again underexecuted in 2018. Moreover, considerable delays were observed in the clearance of general government arrears to suppliers, despite targeted disbursements under the loan agreement. These developments, which have been observed repeatedly in recent years, tighten credit supply constraints, thereby depriving the real economy of much-needed financing resources and weighing on long-term growth, as also pointed out by the European Commission in its Enhanced Surveillance Report. 

For 2019, an expansionary fiscal package amounting to roughly 0.6% of GDP is envisaged, partly offset by a curtailment of 0.3% of GDP in Public Investment Programme expenditure. 
More importantly, possible further fiscal expansion in the run-up to the elections could put public finances at risk. 


Bank of Greece Governor Yannis Stournaras

Developments in the Greek banking system during 2018 were marked by an accelerating return of bank deposits, banks’ improved liquidity situation and diversification of funding sources through access to the interbank market and away from emergency liquidity assistance (ELA) of the Bank of Greece, a small recovery of bank credit and the maintenance of capital adequacy ratios at satisfactory levels. However, bank profitability remained weak. 

In early 2018, an EU-wide stress test exercise was conducted, including Greece’s four systemic banks, in order to assess bank resilience to hypothetical shocks over the period 2018-2020. The stress test exercise identified no capital shortfall in any of the participating Greek banks. 
Non-performing loans 

The high stock of non-performing loans (NPLs) on banks’ balance sheets remains the major challenge for Greek banks and a serious constraint on their lending capacity. Banks are using the options provided by the improved legal and regulatory framework, which has removed significant institutional and administrative impediments to NPL reduction. These important reforms have begun to bear fruit, as indicated by the reduction of the stock of NPLs to €81.8 billion at end-December 2018 (or 45.4% of total loans), down from a peak of €107.2 billion in March 2016. However, the NPL stock is still excessively high. 

At the end of March 2019, Greek banks submitted to the ECB and the Bank of Greece their revised operational targets for NPL reduction, incorporating any recent changes in their strategies since September 2018 and any revised macroeconomic assumptions. According to the previous submission in September 2018, the banks aimed to reduce the aggregate stock of NPLs to €34.1 billion by end-2021, bringing the NPL ratio down to 21.2% of total loans. With the new submission, the Banks aim to reduce the NPL ratio even further, to slightly below 20%. Despite the significant reduction, this ratio is still roughly six times the EU28 average, meaning that the NPL reduction needs to be further accelerated.

The successful resolution of the NPL problem is one of the major challenges facing the Greek economy in its effort to achieve sustainable growth, given that bank lending is the main source of financing for non-financial corporations (NFCs), owing to their structure and size, and for households. Freeing the banks of the NPL burden would help reduce the financial risks and funding costs faced by banks, thereby improving their internal capital generation capacity on a sustainable basis and enabling them to resume their intermediation role. In addition, alleviating the NPL burden would strengthen banks’ resilience and shock-absorbing capacity against potential future shocks; support operating profitability and put the conditions in place for a gradual increase in loan supply and a decrease in lending rates to enterprises and households, thereby enabling the smooth financing of the real economy.

The Greek authorities will soon need to decide on new, more systemic tools that would complement the banks’ own efforts. The Bank of Greece has for quite some time now proposed a systemic solution, which provides for the transfer to Special Purpose Vehicles (SPVs) of a significant part of NPLs along with part of the deferred tax credits (DTCs) on banks’ balance sheets. This solution has the advantage of addressing two very serious problems at the same time: NPLs and DTCs. The government and the Bank of Greece are working together towards the submission for approval of such systemic solutions by the competent European authorities and their ultimate adoption with a view to successfully tackling the NPL problem. 

Furthermore, as mentioned previously, the new legislation on primary residence protection is a first step towards an overhaul of the personal insolvency framework in pursuit of a holistic solution to the problem. The implementation of the new framework, which incorporates specific eligibility criteria and safeguards, aims to protect the more vulnerable social groups, to avoid creating moral hazard at the expense of non-delinquent borrowers and to ensure that the impact on bank capital is manageable. 


As a consequence of Solvency II, the Greek private insurance market matured further in 2018, with improvements in governance structures and human resources. Risk and solvency assessment capabilities were also improved, with a view to better capital and risk management and more effective protection of policy-holders. In 2018, insurers continued their efforts to reduce the long-term guarantees embedded in their products. In this context, the time horizon of coverages has been reduced, and the financial guarantees offered reflect more accurately the prevailing economic conditions. These practices have had a positive impact on the undertakings themselves, by enhancing their solvency position, and on policy-holders, by ensuring lower insurance costs and better quality of insurance products. Nevertheless, insurance undertakings must take care not to lose their long-term perspective.

In the life insurance sector, insurance undertakings are increasingly designing and providing insurance-based investment products. This business strategy supports the financial strength of insurance undertakings, while also enabling them to offer higher returns to policy-holders, although exposing them to higher investment risks. Against this background, it is of crucial importance that insurers provide accurate and relevant information to prospective customers, enabling them to understand the risks involved and avoid losses. In addition, with Law 4583/2018, Directive (EU) 2016/97 on Insurance Distribution was transposed into national legislation, and the Bank of Greece was entrusted with the supervision of insurance intermediaries and distributors. 

The outlook for the domestic insurance market is promising. In particular, based on the recent proposal for an EU regulation on a Pan-European Personal Pension Product (PEPP), Greek insurance undertakings could assume a new role and offer personal pension products to customers seeking to supplement their pension entitlements. Likewise, insurance undertakings could be part of a broader scheme providing protection against natural disasters, climate change-related and environmental risks in general. 

Moreover, insurance undertakings can take advantage of new technologies, such as big data analytics, artificial intelligence and machine learning, to improve risk assessment and pricing. 


Despite the progress made so far, as shown by key economic aggregates, risks remain, both domestic and external. 
On the external front, risks could arise from a possible further slowdown of global economic activity in 2019 amid increasing trade protectionism, geopolitical risks and vulnerabilities in emerging market economies. The slowdown of the European economy is also a significant source of concern, which together with heightened uncertainty over the outcome of the Brexit process, could negatively affect the growth of Greek exports and tourism. 

Turning to the domestic front, the possible implementation of Council of State Plenum rulings that earlier pensions cuts and the abolition of pensioners’ bonuses were unconstitutional, poses the greatest fiscal risk in the medium term. The associated additional expenditure would weigh negatively on the public debt sustainability analysis and would feed uncertainty about the fiscal policy and the financial sustainability of the pension system. 

Other domestic risks include the potential implications of high taxation and the overall fiscal policy mix, as well as the backtracking on reforms or delays in their implementation. In addition, in the labour market, the increase in the minimum wage, legislated last January, though expected to bring about short-term gains by supporting disposable income and thereby private consumption, is expected in the medium term to hurt employment, mainly of youth, and competitiveness. In any event, any raise of the average wage must be consistent with labour productivity growth, so as to preserve the gains in competitiveness and employment achieved through a painstaking reform effort since 2010. 

Greece is confronted with a dual challenge: on the one hand, to achieve strong and sustainable growth rates and, on the other, to ensure high primary surpluses in order to meet its fiscal commitments, as defined in the Eurogroup decision of June 2018 and by the broader framework of European fiscal rules. 
During the long period of adjustment, the Greek economy succeeded in correcting several macroeconomic imbalances. However, Greece continues to face vulnerabilities which can, to a large extent, be considered a legacy of the crisis, although the multiple and interrelated nature of these vulnerabilities reveals chronic weaknesses.

In greater detail: 
The permanent return of the Greek State to international financial markets on sustainable terms is the greatest challenge ahead. The existence of a cash buffer, though useful, is only a temporary means for refinancing State borrowing requirements, and would prove rather ineffective in the event of future shocks in international markets. By no means, therefore, can the cash buffer substitute for a return to the markets at regular intervals and on sustainable terms. 
The high public debt-to-GDP ratio increases public and private sector borrowing costs and puts a drag on growth. Although Greece’s debt sustainability improved markedly with the measures adopted by the Eurogroup since 2012 and up, most recently, to June 2018, debt reduction ultimately hinges upon both achieving the fiscal targets and remaining committed to the reform effort so as to ensure robust GDP growth. 
The maintenance of large primary surpluses over an extended period of time (3.5% of GDP annually until 2022 and 2.2% of GDP on average over the period 2023-2060), especially when accompanied by high taxation, weighs on growth and consequently on debt sustainability. 
The high stock of non-performing loans (NPLs) on banks’ balance sheets hampers the financing of growth, as it ties up bank capital and financing resources in non-productive activities. The successful resolution of this problem is absolutely necessary in order to improve the quality of bank assets. This, in turn, would enhance the access of healthy entrepreneurship to bank credit. 
The rate of unemployment remains not only high, but the highest across the European Union. High unemployment, in particular youth and long-term unemployment, gives rise to inequalities that threaten social cohesion, devalues human capital, saps away any motivation for better education and work, and feeds the brain drain. 
Low structural competitiveness, with in fact a trend towards deteriorating. 
The still negative rate of change in investment, considering the need to replenish Greece’s capital stock, especially in the wake of a protracted period of disinvestment. Moreover, continued underexecution of the Public Investment Programme holds back growth, as it reduces aggregate demand, leads to a deterioration of public infrastructure and increases businesses’ operating costs. 
Insufficient domestic savings. The rise in nominal disposable income per capita, in particular in the lower income brackets, supported by employment growth especially among youth and workers with part-time and intermittent employment contracts, was chiefly channelled into consumption. Thus, the household saving rate has remained in negative territory. 
Delays in the delivery of justice. According to the Enforcing Contracts Indicator used in the World Bank’s Doing Business report for 2019, compared to the OECD average, the time for trial and to enforce the judgment is three times longer in Greece, while the time for resolving insolvency is twice as long. Therefore, the rapid and fair settlement of legal disputes in a transparent and stable legal framework is crucial to strengthening the rule of law, thereby also improving investor confidence. 
The quality of institutions and respect for independent authorities. Countries with weak institutions lack in flexibility and adaptability, making potential economic disturbances more likely to occur and more difficult to address. 
Adverse demographic developments. Over the past decade, Greece’s demographics have deteriorated dramatically, as evidenced by the decline and rapid ageing of the population and a very low fertility rate. This trend in demographic data was further exacerbated by the recent wave of migration of part of the population of reproductive age. The demographic crisis is one of the most serious challenges that Greece’s society and economy will need to address in the immediate future, as the rapid contraction and ageing of the population adversely impacts potential output and the pace of economic growth in the medium-to-long term. 
The slow digital transformation of the economy. According to the Digital Economy and Society Index (DESI), Greece ranked second to last among the EU28 in 2018, meaning that the digital transformation of the Greek economy remains slow. As a result, Greece is still considered ‘digitally immature’. Consequently, policy action must be taken to eliminate this technological lag and reduce digital illiteracy. 
Climate Change and the challenge of sustainable development. Redefining the concept of growth in a sustainability context and embracing the principles of a circular economy will be crucial to our future. According to the World Economic Forum’s Global Risks Report for 2019, three of the top five risks for the world economy are environmental and all three relate to climate change. 


Addressing the above challenges effectively will require, as a minimum, the following set of policy actions: 

First, a continuation and completion of structural reforms, so as to safeguard the achievements made so far, reinforce the credibility of economic policy and further improve Greece’s credit standing, paving the way to a permanent return to international financial markets on sustainable terms. In this context, top priority must be given to reforms that enhance public administration efficiency, legal certainty, especially in land use, and the faster delivery of justice. 

Second, reducing the high stock of non-performing loans, so as to free up funds for viable businesses, facilitate the restructuring of the business sector and strengthen healthy competition. Meanwhile, the legal framework reforms currently under way should improve payment morale. 

Third, a change to the fiscal policy mix geared towards lowering the excessively high tax rates, further rationalising public expenditure and enhancing the Public Investment Programme. Ideally, this change should be combined with more realistic primary surplus targets, considering that, with public debt close to 170% of GDP, one additional percentage point increase in GDP contributes 1.7 times more towards reducing the public debt ratio than does one percentage point of primary surplus. 

Fourth, greater focus on attracting foreign direct investment of high value added, which would accelerate technology integration, strengthen Greece’s export performance, utilise inactive human resources, thereby increasing total factor productivity. This presupposes a continuation of privatisations, along with an encouragement of public-private partnerships and a removal of disincentives to investors. 

Fifth, strengthening the “knowledge triangle” (education, research, innovation). As shown by the latest global trends, in modern efforts to reconcile the functioning of a market economy, i.e. capitalism, with democracy, investing in knowledge and the access opportunities to knowledge for all are a crucial catalyst both for economic growth and for social justice. The Greek education system, despite producing a pool of highly-qualified individuals, fails to equip them with the skills required in today’s digital world. The new technologies can generate employment opportunities, provided that labour can rapidly adjust to a human-centred working environment, in which knowledge, skills, personal initiative, mobility, flexibility and cooperation will play a key role. Investing in human capital and fostering entrepreneurship are strategies crucial to the successful adjustment of the labour market. All levels of the education system must therefore be redesigned in order to cultivate the skills required by the modern labour market. Closer links between education and the production process will contribute towards this goal. 
2019 will be a challenging year, as domestic and external risks remain. Therefore, there is no room for complacency. Greece’s successful course in new, post-crisis, European normality calls for strict commitment to uphold the very important achievements made so far, conduct a prudent economic policy aimed at eliminating the remaining imbalances and pursue reforms. The ultimate objective is to complete the Greek economy’s safe transition to a sustainable growth model based on extroversion, entrepreneurship, investment, knowledge and social cohesion, with social sensitivity and respect for the natural environment. The benefits to be reaped are substantial: a rapid decrease in the unemployment rate, a reversal of the brain drain, higher total productivity, higher wages and incomes. 

Olli Rehn: The euro beyond 20 – monetary policy in the real economy

Keynote speech by Mr Olli Rehn, Governor of the Bank of Finland, at the Conference on financial market policy, at the Economic Council (CDU Wirtschaftsrat Deutschland), Berlin, 29 January 2019.

Olli Rehn, Governor of the Bank of Finland

As the euro turned twenty at the beginning of this year, it is logical to have a look at the two decades, and to prepare for the third decade of the monetary union that has now started. After all, it is our clarity of vision and sense of purpose, as Europeans, as citizens and decision-makers, which will determine how the future of the monetary union turns out.     

In my remarks today, I will discuss the challenges the monetary policy makers face, with an eye on the future of the euro. I will not talk about monetary policy only in a narrow sense, as we need to discuss our monetary concerns in a broader context of economic and political developments.

In this context, let me quote Joseph Schumpeter, one of the greatest economists of all time, who wrote: “Der Zustand des Geldwesens eines Volkes ist ein Symptom aller seiner Zustände.” [“The condition of the monetary system of a nation is a symptom of all its conditions.”] – What Schumpeter said about a nation, goes today as well for Europe as a whole, for our Economic and Monetary Union. What happens to our money, is a reflection of the state of our union and its economy.  So we have to take a broad view.

Monetary policy has its own mandate in economic life, but it cannot solve all the world’s problems. However, monetary policy and economic success are interdependent: price stability is a necessary condition, although not a guarantee, for sound economic development. Simultaneously, the real economy together with political developments determines the preconditions for successful monetary policy. As Schumpeter understood, if the economic and political fundamentals are weak, that will be felt in the monetary developments as well.  

The interaction of real and monetary factors brings me to the following point: Central bankers are often labelled as either hawks or doves. I don’t see this as a very useful classification. It is almost a caricature of one-eyed dogmatism, not fitting to any serious central banker that I know of.

Instead, a more relevant distinction was made by the philosopher Isaiah Berlin, who divided policymakers to foxes and hedgehogs: “the fox knows many things and the hedgehog knows one big thing”.  

In monetary policy, pursuing the price stability objective with long-term consistency and resolve calls for the central banker to develop a personality of the hedgehog.

But monetary policy is not a mechanical exercise that can be done in a social vacuum. A strategic sense of the interplay between the economy and politics, the markets and the media is also essential – knowing when to play offensive, when to hold on to defence, and how to combine the two. By being aware of the big picture, and capable to navigate in uncertain seas, central bankers should be foxes, as well.

So, monetary policy must always take into account the analysis of the prevailing situation in the real economy, in enterprises and the society at large, recognizing its challenges and how they relate to the commitment and responsibility that central banks have for monetary stability.

Our present starting point has both positive and negative features.

On the positive side, the recovery of the euro area after the financial crisis has lasted for almost six years now. We should appreciate the achievements: the number of jobs in the euro area has now passed the pre-crisis peak of 2008, and the unemployment rate is continuing to fall. Over 9 million jobs have been created since 2013. There has also been a significant improvement in public finances of the euro area as a whole, and also the bank balance sheets are now stronger than before.

On the negative side, the convergence of the euro area price developments to our price stability objective is incomplete. For that reason, we still face the challenge of
euro normalization after a decade with non-standard measures. Hence, we continue to aim at stabilizing inflation back to the target of “below but close to 2 per cent in the medium term”, so that we would be able to ensure ourselves with “policy space”, and thus be able to react to deflationary as well as inflationary shocks, by moving our interest rates as needed.

Such policy space would require higher interest rates on average than today, which will be possible when the European economy can sustain a clearly higher real interest rate than now, or when we see sustained convergence of inflation to the ECB’s definition of price stability, or both.

The context has become more difficult recently. As you know, uncertainty about the future of the European recovery has increased in the last months – the risks to the growth outlook have moved to the downside. This is largely because of the weakening of the global economic cycle, which is felt in European exports, also in Germany. The shadow of global trade conflicts and protectionism is hanging over the European recovery.

Not all risks are external, however: political uncertainties within Europe have increased. A messy Brexit, the worries about Italian fiscal policy, and the recent French unrest, are among the sources of this uncertainty.  

All in all, my analysis is that the current situation requires patience and persistence in removing the monetary policy accommodation. Perhaps paradoxically, this is necessary precisely in order to reach higher interest rates in the future in a durable way. If we were to tighten monetary policy too soon, the interest rate increases might turn out to be unsustainable, and we might end up being stuck back in the ultra-low interest rate situation for even longer time than otherwise.

Of course, we should not wait for too long either: an unnecessarily long period of inaction could trigger financial stability issues that the low interest rate environment may bring about, such over-indebtedness in some sectors; increases in real estate prices or other market segments; and the squeeze on banks’ interest rate margins.

And, of course, if we were to wait for too long, inflation might eventually accelerate too much, which would require applying the monetary policy brakes harder than otherwise would be necessary.

This patient approach is reflected in the current forward guidance of the ECB monetary policy, by which the interest rates will remain at the present levels as long as necessary to ensure the sustained convergence of inflation to levels consistent with our definition of price stability; and the reinvestment phase of our bond purchase programme will continue for an extended period beyond the first increases of the ECB policy rates. 

Forward guidance has been a very important instrument in the ECB policy toolbox in the recent years. A key reason for having a clearly communicated strategy for monetary policy is the management of expectations of general price developments among economic actors. This is so on many grounds, not least because inflation expectations are the most important immediate determinant of actual inflation. The effect is so strong that it is often said that inflation expectations tend to be “self-fulfilling”.

Over the last five years, however, the connection between the ECB’s price stability objective and the expectations has been weaker than it should be. I have elsewhere previously expressed my view that it would be wise to make a thorough analytical review of the monetary policy strategy of the ECB, in order to strengthen our ability to stabilize the expectations, and to improve our accountability and transparency even further. I would like to reiterate this view also here.

As I pointed out at the beginning, monetary policy is not made in isolation from the rest of the economy. In particular, successful monetary policy needs financial stability and healthy economic fundamentals.

The most fundamental challenge has to do with the real economy – to revitalize investment and productivity in the euro area countries. The economic potential of our enterprises and workers must be unleashed and developed.

This is of paramount importance for the well-being of our citizens, but it is also absolutely crucial for solving the monetary and financial problems that we still have, even ten years after the financial crisis. The real interest rate that is sustainable in the long run is determined by the growth of productivity and the demand for investment in the European economy.

I would like to stress that the entrepreneurial drive and long-term orientation of the German Mittelstand sets an important example for the business life all across Europe, an example that could help to strengthen the foundations of European productivity and competitiveness.  

Climate change is not only an existential threat to our planet but also reinforces the urgency of Europe’s economic renewal. The transition of our economies to sustainability calls for both right incentives and plenty of investment. And turning big time to renewable energy – which is going on in Finland, in Germany and all over Europe – is also a major opportunity for businesses, which has to be enabled by consistent public policy. The central banks in the Eurosystem are committed to climate policy and support the ongoing work for removing the obstacles holding back sustainable finance and the disclosure of climate-related risks.

Another structural challenge is to improve  financial stability in the monetary union. The most critical lesson of the two past decades was how important financial stability is for real economy and employment. It has become clear that financial stability was grossly disregarded when the Economic and Monetary Union was created – it was the “neglected stepchild” of Maastricht, as the economist Daniel Gros has put it.

Going forward, there are several initiatives already on the table, including those by Germany, France, and the European Commission. In my view the manifesto of 14 German and French economists, published last year, is a particularly substantive and important contribution.

The manifesto proposed a synthesis uniting the core principles of “German” economic philosophy, which calls for a stability union with sound incentives and firm rules, and those of “French” economic thinking, which emphasizes economic governance with insurance and stabilization.

In essence, such genuinely European synthesis could pave the way for a solid stability union, where the main responsibility for economic policies should rest with the member states. This responsibility can and should be balanced with the insurance provided by stronger common structures, designed especially to safeguard financial stability.

For example, the European Council of last December decided to create a credible liquidity backstop for the Single Resolution Fund, to ensure that bank resolutions could be effectively managed without recourse to the politically damaging bail-outs at taxpayers’ expense.

Finalizing the banking union also calls for a common European Deposit Insurance Scheme to prevent cross-border bank runs that could be dangerously destabilizing for the banking systems.

These remaining elements require convincing measures of risk reduction and possibly some co-insurance features to be feasible politically. In particular, legacy problems in the banking sector should be worked out in the member states, without shifting the risks to the euro area level.

A further area where work is needed is in the governance of the fiscal policy of the member states. There has been tension between reliance on market discipline and budgetary rules. However, the dichotomy between rules and market discipline is overstated. Both are needed. At best, rules and market discipline support and complement each other.

The obvious lesson is that the institutions and incentives have to be designed so that they help orientate the market forces to meaningful directions – you may call it ‘market discipline by design’ – an idea that immediately brings to mind the economic thinking of Ludwig Erhard, the architect of the German social market economy.

So we need fiscal rules, and they should be well designed. The European Union fiscal framework can be amended to emphasise national ownership of fiscal rules and to avoid forced pro-cyclical fiscal policy.


This analysis of the institutional challenges brings us into the realm of democratic politics and the development of the EU as an organization.

The EU is a union of democratic states. It is the citizens’ preferences and trust that count when the future of the monetary union is decided.

Today, the Enlightenment values, which underpin the European societal model, are challenged, both politically and socially, both from the inside and the outside. Politically, a populist and nationalist agenda is tempting to many. Socially, the values of tolerance, social market economy and inclusivity are increasingly under threat.

On the other hand, let us recall that the Europeans value their single currency. According to a fresh Eurobarometer survey1, as many as 77 % of euro area citizens support the Monetary Union and the euro. This is the highest figure since 2004. Only 18 % of the citizens of the area say they are against. In Finland, the percentage of those “for” was even higher, altogether 80 per cent; in Germany as high as 83 %.

This support for the common currency is of course conditional. It depends on the stability of the euro and its performance. Moreover, in any member state, the support for the euro also depends on how successful the economic policy in that particular country is in adjusting the economy to the requirements of life within the monetary union.

There is a reason why eurozone reform is anything but a technical matter. It is linked to the overall future of the EU.

First and foremost, we need a monetary union that is capable of delivering on the promises made to our citizens – promises of financial stability, sustainable growth, and opportunity for employment.

As Joseph Schumpeter said, money is a reflection of the condition of our economy and our polity. Looking from that angle, reinforcing the monetary union is an integral part of a broader endeavour to strengthen Europe.

Ladies and Gentlemen,

This is of paramount importance especially today, when the international role of Europe as a key standard-bearer of democracy and the rules-based international order has become even more essential than it may have been some years ago.

For politicians, my message is: instead of using political energy for drawing red lines to agitate the home audience, we’d do better by pursuing positive goals of reform and focusing on building bridges across Europe.

A stronger Europe and a more stable monetary union are essential for both internal and external reasons. And these goals can, as in the football field, only be achieved in unity and by teamwork. This is a vision we can only achieve in dialogue and with support of the citizens of Europe.

Selling Covered Calls

Selling Covered Calls Option Strategy

When you are neutral on a stock or market and you want to generate additional income from your stock investments, there is an option strategy that is worth your consideration. The strategy involves selling covered calls on stocks or assets that you own and are willing to sell at a particular price.

With the selling covered call strategy, you are selling someone the right to buy an asset that you own at a fixed price (the strike price), on or before the expiration date of the option.

This strategy has some advantages.

You receive a premium for selling someone the right to purchase your asset at a particular higher price that you are willing to sell it for anyway. If the asset price is below the strike price at expiration, then the calls that you sold are not exercised and the premium that you collected provides additional income for you, increasing your rate-of-return or reducing your basis in the stock. If you are writing out-of-the-money calls, the asset may continually increase in value, yet the options may never get exercised, allowing you to do this over and over again. This generates continuous income for you, increasing your portfolio and generating cash flow for other investments.

The downside risk of owning the stock is ameliorated by the option premiums that you collect by selling covered calls, because the premiums reduce your basis in the stock.

If the calls that you sold do get exercised, then you are obligated to sell the asset at the exercise price. But you essentially sell the asset at a premium from the asset price that existed when you sold the covered calls, because you collected the option premium.

You have already agreed that you would like to sell the asset at the exercise price and the price is augmented by the option premium that you collected.

Since you are the seller of the option, the time decay of the option works in your favor. The time-value portion of the call premium constantly declines with time, going to zero on the expiration date. The rate of decay is predictable and is easily calculated by options analysis software. As the expiration date approaches, the rate of decay increases. For this reason, it is often better to sell calls with one month or less until expiration. After they expire, you can sell calls on the next month out and collect another premium.

It is also important to cover risks and disadvantages of this strategy.

If the price of the underlying asset goes below the strike price by more than the option premium that you collected, then you are losing money on paper. But this risk is similar to outright asset ownership and is ameliorated by the option premium that you collected.

When you sell a covered call on an asset that you own, you are limiting your upside potential. If the stock price rockets skyward and stays above the strike price at expiration, then the option will probably be exercised and you will be obligated to sell the asset at the agreed-on strike price. So there is some lost opportunity cost here if the asset turns into a high-flyer.

It is important to analyze your expectations for the underlying asset before writing the covered call. If you have a target price in mind for the asset, you can write an out-ot-the-money covered call approximately at your target price and collect a lower premium but participate in the rise of the asset. If you expect the asset price to remain stable, you can write the call approximately at-the- money and collect a larger premium without much risk. If you expect the asset to decline, but you do not want to sell the asset at that time, the premium you collect from selling a covered call can help offset the price decline. If you sell an in-the-money call, the premium you collect will be even larger, but you run a greater risk of the call option being exercised.

If you are thinking about selling the stock anyway, selling a covered call on the stock can be used to sell the asset at a premium, or generate income for you as you stand ready to sell the asset at a premium. However, if you have decided that there is considerable downside risk in a stock and want to eliminate it from your portfolio, then it is probably better to sell it outright.

Forex Trading Signals and Robots

Options: Pros and Cons

History of Futures Trading

Kamikaze Defense

Kamikaze Defense

A kamikaze defense is a method for deterring a potential acquirer from purchasing a company.

How it works:

Kamikaze defense is named after the suicide attacks of Japanese pilots during World War II. For example, Company FGH makes a bid to buy Company STW. The STW board of directors does not want to sell the company, but Company FGH goes directly to the Company STW shareholders and offers to buy their shares for a 15% premium.

Fearful that Company FGH may be successful in its efforts, Company STW sells its key intellectual property and randomly buys Company X35, which makes cigarettes and horsemeat. Company FGH finds Company STW less attractive and drops its bid.

Why it Matters:

The kamikaze defense is near suicide in that the board has to be willing to nearly kill the company in order to save it from acquisition. This is very risky, and in some cases the shareholders will oppose the effort. For this reason, the kamikaze defense is often a last resort.

How to Draw Trend Lines

Support and Resistance Lines

Forex Trend Trading


Options: Pros and Cons

Options: Pros and Cons



Limited risk

Buying options limits your exposure. The maximum you can lose is the value of the option, the price you paid for it.

Purchasing options as a speculative vehicle offers limited downside — you cannot lose more than the price you paid for the option — and unlimited upside, at least on a call. If you purchase a put, your profit is technically limited to the underlying currency going to zero.

The cost of the option may be less than the margin on the same spot position.



High costs


You pay for the time value of an option. In spot forex, other than rollover charges (typically small), you do not pay for the time you hold a position.


Time decay


How to Draw Trend Lines

Support and Resistance Lines

Forex Trend Trading



Random variable
A function that assigns a real number to each and every possible outcome of a random experiment.

Random walk
Theory that stock price changes from day to day are at random; the changes are independent of each other and have the same probability distribution. Many believers of the random walk theory believe that it is impossible to outperform the market consistently without taking additional risk.

Randomized strategy
A strategy of introducing into the decision-making process a random element that is designed to reduce the information content of the decision-maker’s observed choices.

The high and low prices, or high and low bids and offers recorded during a specified time.

Range Accrual Option
An Option that accrues value for each day that the index rate remains within the specified range. See Range Note, Hamster Option.

Range Binary Option
An Option that pays off a fixed amount at expiration if and only if the underlying price remains in the range the option’s entire life. .

Range forward
A forward exchange rate contract that places upper and lower bounds on the cost of foreign exchange.

Rate anticipation swaps
An exchange of bonds in a portfolio for new bonds that will achieve the target portfolio duration, based on the investor’s assumptions about future changes in interest rates.

Rate of interest
The rate, as a proportion of the principal, at which interest is computed.

Rate of return ratios
Ratios that are designed to measure the profitability of the firm in relation to various measures of the funds invested in the firm.

Rate risk
In banking, the risk that profits may decline or losses occur because a rise in interest rates forces up the cost of funding fixed-rate loans or other fixed-rate assets.

An evaluation of credit quality Moody’s, S&P, and Fitch Investors Service give to companies used by investors and analysts.

Rational expectations
The idea that people rationally anticipate the future and respond to what they see ahead.

Raw material supply agreement
As used in connection with project financing, an agreement to furnish a specified amount per period of a specified raw material.

A decline in prices following an advance. Opposite of rally.

Real assets
Identifiable assets, such as buildings, equipment, patents, and trademarks, as distinguished from a financial obligation.

Real capital
Wealth that can be represented in financial terms, such as savings account balances, financial securities, and real estate.

Real cash flow
A cash flow is expressed in real terms if the current, or date 0, purchasing power of the cash flow is given.

Real exchange rates
Exchange rates that have been adjusted for the inflation differential between two countries.

Real interest rate
The rate of interest excluding the effect of inflation; that is, the rate that is earned in terms of constant-purchasing-power dollars. Interest rate expressed in terms of real goods, i.e. nominal interest rate adjusted for inflation.

Real market
The bid and offer prices at which a dealer could do “size.” Quotes in the brokers market may reflect not the real market, but pictures painted by dealers playing trading games.

Real time
A real time stock or bond quote is one that states a security’s most recent offer to sell or bid (buy). A delayed quote shows the same bid and ask prices 15 minutes and sometimes 20 minutes after a trade takes place.

Realized compound yield
Yield assuming that coupon payments are invested at the going market interest rate at the time of their receipt and rolled over until the bond matures.

Realized return
The return that is actually earned over a given time period.

Realigning the proportions of assets in a portfolio as needed.

Receivables balance fractions
The percentage of a month’s sales that remain uncollected (and part of accounts receivable) at the end of succeeding months.

Receivables turnover ratio
Total operating revenues divided by average receivables. Used to measure how effectively a firm is managing its accounts receivable.

A bankruptcy practitioner appointed by secured creditors in the United Kingdom to oversee the repayment of debts.

A claim for the right to return or the right to demand the return of a security that has been previously accepted as a result of bad delivery or other irregularities in the delivery and settlement process.

Term describing a type of loan. If a loan is with recourse, the lender has a general claim against the parent company if the collateral is insufficient to repay the debt.

Eligible for redemption under the terms of the indenture.

Redemption charge
The commission charged by a mutual fund when redeeming shares. For example, a 2% redemption charge (also called a “back end load”) on the sale of shares valued at $1000 will result in payment of $980 (or 98% of the value) to the investor. This charge may decrease or be eliminated as shares are held for longer time periods.

Redemption cushion
The percentage by which the conversion value of a convertible security exceeds the redemption price (strike price).

Reference rate
A benchmark ‘interest rate (such as LIBOR), used to specify conditions of an interest rate swap or an interest rate agreement.

Refunded bond
Also called a prerefunded bond, one that originally may have been issued as a general obligation or revenue bond but that is now secured by an “escrow fund” consisting entirely of direct U.S. government obligations that are sufficient for paying the bondholders.

The redemption of a bond with proceeds received from issuing lower-cost debt obligations ranking equal to or superior to the debt to be redeemed.

Registered bond
A bond whose issuer records ownership and interest payments. Differs from a bearer bond which is traded without record of ownership and whose possession is the only evidence of ownership.

Registered representative
A person registered with the CFTC who is employed by, and soliciting business for, a commission house or futures commission merchant.

Registered trader
A member of the exchange who executes frequent trades for his or her own account.

Financial institution appointed to record issue and ownership of company securities.
Regression analysis
A statistical technique that can be used to estimate relationships between variables.

Regular way settlement
In the money and bond markets, the regular basis on which some security trades are settled is that the delivery of the securities purchased is made against payment in Fed funds on the day following the transaction.

Regulatory accounting procedures
Accounting principals required by the FHLB that allow S&Ls to elect annually to defer gains and losses on the sale of assets and amortize these deferrals over the average life of the asset sold.

Regulatory pricing risk
Risk that arises when regulators restrict the premium rates that insurance companies can charge.

Regulatory surplus
The surplus as measured using regulatory accounting principles (RAP) which may allow the non-market valuation of assets or liabilities and which may be materially different from economic surplus.

Reinvestment rate
The rate at which an investor assumes interest payments made on a debt security can be reinvested over the life of that security.

Reinvestment risk
The risk that proceeds received in the future will have to be reinvested at a lower potential interest rate.

Reinvoicing center
A central financial subsidiary used by an MNC to reduce transaction exposure by having all home country exports billed in the home currency and then reinvoiced to each operating affililate in that affiliate’s local currency. It can also be used as a netting center.

REIT (real estate investment trust)
Real estate investment trust, which is similar to a closed-end mutual fund. REITs invest in real estate or loans secured by real estate and issue shares in such investments.

Relative purchasing power parity (RPPP)
Idea that the rate of change in the price level of commodities in one country relative to the price level in another determines the rate of change of the exchange rate between the two countries’ currencies.

Relative strength
A stock’s price movement over the past year as compared to a market index (the S&P 500). Value below 1.0 means the stock shows relative weakness in price movement (underperformed the market); a value above 1.0 means the stock shows relative strength over the 1-year period. Equation for Relative Strength: [current stock price/year-ago stock price] [current S&P 500/year-ago S&P 500]

Relative value
The attractiveness measured in terms of risk, liquidity, and return of one instrument relative to another, or for a given instrument, of one maturity relative to another.

Relative yield spread
The ratio of the yield spread to the yield level.

One who receives the principal of a trust when it is dissolved.

Remaining maturity
The length of time remaining until a bond’s maturity.

Remaining principal balance
The amount of principal dollars remaining to be paid under the mortgage as of a given point in time.

Remote disbursement
Technique that involves writing checks drawn on banks in remote locations so as to increase disbursement float.

Reoffering yield
In a purchase and sale, the yield to maturity at which the underwriter offers to sell the bonds to investors.

Creating a plan to restructure a debtor’s business and restore its financial health.

Replicating portfolio
A portfolio constructed to match an index or benchmark.

A agreement in which one party sells a security to another party and agrees to repurchase it on a specified date for a specified price. See: repurchase agreement.

Reported factor
The pool factor as reported by the bond buyer for a given amortization period.

Repurchase agreement
An agreement with a commitment by the seller (dealer) to buy a security back from the purchaser (customer) at a specified price at a designated future date. Also called a repo, it represents a collateralized short-term loan, where the collateral may be a Treasury security, money market instrument, federal agency security, or mortgage-backed security. From the purchaser (customer) perspective, the deal is reported as a reverse Repo.

Repurchase of stock
Device to pay cash to firm’s shareholders that provides more preferable tax treatment for shareholders than dividends. Treasury stock is the name given to previously issued stock that has been repurchased by the firm. A repurchase is achieved through either a dutch auction, open market, or tender offer.

Required reserves
The dollar amounts based on reserve ratios that banks are required to keep on deposit at a Federal Reserve Bank.

Required return
The minimum expected return you would require to be willing to purchase the asset, that is, to make the investment.

Required yield
Generally referring to bonds, the yield required by the marketplace to match available returns for financial instruments with comparable risk.

An accounting entry that properly reflects the contingent liabilities.

Reserve currency
A foreign currency held by a central bank or monetary authority for the purposes of exchange intervention and the settlement of inter-governmental claims.

Reserve ratios
Specified percentages of deposits, established by the Federal Reserve Board, that banks must keep in a non-interest-bearing account at one of the twelve Federal Reserve Banks.

Reserve requirements
The percentage of different types of deposits that member banks are required to hold on deposit at the Fed.

(1) Parts of stock returns not explained by the explanatory variable (the market-index return). They measure the impact of firm-specific events during a particular period. (2) Remainder cash flows generated by pool collateral and those needed to fund bonds supported by the collateral.

Residual dividend approach
An approach that suggests that a firm pay dividends if and only if acceptable investment opportunities for those funds are currently unavailable.

Residual losses
Lost wealth of the shareholders due to divergent behavior of the managers.

Residual method
A method of allocating the purchase price for the acquisition of another firm among the acquired assets.

Residual value
Usually refers to the value of a lessor’s property at the time the lease expires.

Resistance level
A price level above which it is supposedly difficult for a security or market to rise.

Restrictive covenants
Provisions that place constraints on the operations of borrowers, such as restrictions on working capital, fixed assets, future borrowing, and payment of dividend.

Individual and institutional customers as opposed to dealers and brokers.

Retail credit
Credit granted by a firm to consumers for the purchase of goods or services.

Retail investors individual investors
Small investors who commit capital for their personal account.

Retained earnings
Accounting earnings that are retained by the firm for reinvestment in its operations; earnings that are not paid out as dividends.

Retention rate
The percentage of present earnings held back or retained by a corporation, or one minus the dividend payout rate. Also called the retention ratio.

A price movement in the opposite direction of the previous trend.

The change in the value of a portfolio over an evaluation period, including any distributions made from the portfolio during that period.

Return on assets (ROA)
Indicator of profitability. Determined by dividing net income for the past 12 months by total average assets. Result is shown as a percentage. ROA can be decomposed into return on sales (net income/sales) multiplied by asset utilization (sales/assets).

Return on equity (ROE)
Indicator of profitability. Determined by dividing net income for the past 12 months by common stockholder equity (adjusted for stock splits). Result is shown as a percentage. Investors use ROE as a measure of how a company is using its money. ROE may be decomposed into return on assets (ROA) multiplied by financial leverage (total assets/total equity).

Return on investment (ROI)
Generally, book income as a proportion of net book value.

Return on total assets
The ratio of earnings available to common stockholders to total assets.

Return-to-maturity expectations
A variant of pure expectations theory which suggests that the return that an investor will realize by rolling over short-term bonds to some investment horizon will be the same as holding a zero-coupon bond with a maturity that is the same as that investment horizon.

An increase in the foreign exchange value of a currency that is pegged to other currencies or gold.

Revenue bond
A bond issued by a municipality to finance either a project or an enterprise where the issuer pledges to the bondholders the revenues generated by the operating projects financed, for instance, hospital revenue bonds and sewer revenue bonds.

Revenue fund
A fund accounting for all revenues from an enterprise financed by a municipal revenue bond.

Reverse price risk
A type of mortgage-pipeline risk that occurs when a lender commits to sell loans to an investor at rates prevailing at application but sets the note rates when the borrowers close. The lender is thus exposed to the risk of falling rates.

Reverse repo
In essence, refers to a repurchase agreement. From the customer’s perspective, the customer provides a collateralized loan to the seller.

Reverse stock split
A proportionate decrease in the number of shares, but not the value of shares of stock held by shareholders. Shareholders maintain the same percentage of equity as before the split. For example, a 1-for-3 split would result in stockholders owning 1 share for every 3 shares owned before the split. After the reverse split, the firm’s stock price is, in this example, worth three times the pre-reverse split price. A firm generally institutes a reverse split to boost its stock’s market price and attract investors.

Reversing trade
Entering the opposite side of a currently held futures position to close out the position.

Revolving credit agreement
A legal commitment wherein a bank promises to lend a customer up to a specified maximum amount during a specified period.

Revolving line of credit
A bank line of credit on which the customer pays a commitment fee and can take down and repay funds according to his needs. Normally the line involves a firm commitment from the bank for a period of several years.

Reward-to-volatility ratio
Ratio of excess return to portfolio standard deviation.

Riding the yield curve
Buying long-term bonds in anticipation of capital gains as yields fall with the declining maturity of the bonds.

A short-lived (typically less than 90 days) call option for purchasing additional stock in a firm, issued by the firm to all its shareholders on a pro rata basis.

Trading arenas located on the floor of an exchange in which traders execute orders. Sometimes called a pit.

Typically defined as the standard deviation of the return on total investment. Degree of uncertainty of return on an asset.

Risk-adjusted profitability
A probability used to determine a “sure” expected value (sometimes called a certainty equivalent) that would be equivalent to the actual risky expected value.

Risk arbitrage
Speculation on perceived mispriced securities, usually in connection with merger and acquisition deals. Mike Donatelli, John Demasi, Frank Cohane, and Scott Lewis are all hardcore arbs. They had a huge BT/MCI position in the summer of 1997, and came out smelling like roses.

Risk averse
A risk-averse investor is one who, when faced with two investments with the same expected return but two different risks, prefers the one with the lower risk.

Risk classes
Groups of projects that have approximately the same amount of risk.

Risk controlled arbitrage
A self-funding, self-hedged series of transactions that generally utilize mortgage securities as the primary assets.

Risk indexes
Categories of risk used to calculate fundamental beta, including (1) market variability, (2) earnings variability, (3) low valuation, (4) immaturity and smallness, (5) growth orientation, and (6) financial risk.

Risk lover
A person willing to accept lower expected returns on prospects with higher amounts of risk.

Risk management
The process of identifying and evaluating risks and selecting and managing techniques to adapt to risk exposures.

Risk neutral
Insensitive to risk.

Risk prone
Willing to pay money to transfer risk from others.

Risk premium
The reward for holding the risky market portfolio rather than the risk-free asset. The spread between Treasury and non-Treasury bonds of comparable maturity.

Risk premium approach
The most common approach for tactical asset allocation to determine the relative valuation of asset classes based on expected returns.

Riskless rate
The rate earned on a riskless investment, typically the rate earned on the 90-day U.S. Treasury Bill.

Riskless rate of return
The rate earned on a riskless asset.

Riskless arbitrage
The simultaneous purchase and sale of the same asset to yield a profit.

Riskless or risk-free asset
An asset whose future return is known today with certainty. The risk free asset is commonly defined as short-term obligations of the U.S. government.

Risky asset
An asset whose future return is uncertain.

Risk-adjusted return
Return earned on an asset normalized for the amount of risk associated with that asset.

Risk-free asset
An asset whose future return is known today with certainty.

Risk-free rate
The rate earned on a riskless asset.

Roll over
Reinvest funds received from a maturing security in a new issue of the same or a similar security.

Most term loans in the Euromarket are made on a rollover basis, which means that the loan is periodically repriced at an agreed spread over the appropriate, currently prevailing LIBO rate.

Round lot
A trading order typically of 100 shares of a stock or some multiple of 100. Related: odd lot.

Round-trip transactions costs
Costs of completing a transaction, including commissions, market impact costs, and taxes.

Procedure by which the Long or short position of an individual is offset by an opposite transaction or by accepting or making delivery of the actual financial instrument or physical commodity.

R squared (R2)
Square of the correlation coefficientthe proportion of the variability in one series that can be explained by the variability of one or more other series.

Forex Trading Tips

It’s proved and highly recommended not to trade on Mondays or after holidays, when the market has recently awaken

Respect your stop order and don’t move it “cherishing hopes”

Running two or more open trades gives an option to close some positions earlier and keep others running for higher profits.

Let your position be open for as long as the market wishes to reward you
Don’t allow a couple of losing trades in a row become a snowball of losing trades. When it is obviously not a good day, turn the computer off

Never add positions to a losing trade. Do add positions when the trade has proven to be profitable.

Never risk more than 2-3% of the total trading account

Trend is your friend. Trade with the trend to maximize your chances to succeed.

By moving a stop loss further a trader increases his chances to end up with a much bigger loss.

forex trading articles