USIS Review October 2016 (7)




In This Edition:

• The Flash Crashes of the 21 st Century

• The Future of European Banking

• The Capital of European Finance?

• An Insight into Robotics & Banking

• Is China's Economy Slowing?

October 2016


Contents USIS Review October 2016


Editor’s Letter 3

Banking & Finance

- The Future of the Financial Capital of Europe 4

- The Future of European Banking 5


- Robotics and Banking 7

Investments & Strategy

- Flash Crashes of the 21 st Century 8

Economics & Globals Affairs

- The End of China's Endless Growth? 9

Our Partners

USIS Review October 2016

Editor's Letter


A Word from the Editor

Welcome to the first edition of the 2016/17 USIS Review.

I would like to begin by welcoming all of our new writers; and thanking everyone who contributed

their time, effort, and intellect to this issue.

The October edition of the USIS Review is brought to you by a range of students from a

wide variety of degree backgrounds. The financial world does not exist in isolation and geographical,

political, and scientific developments frequently have a huge impact on the way

that markets operate. We are proud of how the diversity of our writers allows us to fully

engage with this complex interrelation of factors, in order to create a review of some of the

major developments in the world of investment for students at the University of Sheffield.

Unsurprisingly, considering the result of the recent referendum on Europe, our Banking &

Finance team have focussed on the implications of “Brexit". They discuss whether London,

the capital of European finance, will retain its dominant status when Britain leaves the EU

and potentially the single market. More generally, they also analyse the state of European

banking, focussing on the innovative strategies being deployed to restructure Banks to promote

growth in a future that is clouded by uncertainty and fear.

Our Technology team considers the growing role of robotics and artificial intelligence in finance.

Will robots take our jobs, or make our banking system more intuitive and accessible?

This article finds an interesting counterpoint in the work of our Investments & Strategy

team; who have analysed a series of sudden crashes in the GBP/USD currency pair, which

many believe are being caused by algorithmic trading. Finally, our Economics & Global Affairs

team take a look at China, and the reality behind their apparent economic stagnation,

as they transition to a consumption based economy.

The USIS Review exists to provide an opportunity for students to both develop and showcase

their skills in writing, research, and editing. We welcome writers from every background,

and if you would like to join us please look to the back of this issue.

Our special thanks go to the University of Sheffield Enterprise Zone, Sheffield Student’s

Union, and the Sheffield University Management School for their on-going support with

this publication.

I very much hope you enjoy this edition of the USIS Review.

Editors, Contributors & Sources


Simon Cummins

Simon Cummins


Vice Editor:



Adilah Hameed

Edward Burton, David Scott Sana Shah, Adrien Talaska,

Adilah Hameed

Bloomberg, Bloomberg Businessweek, Thomson Reuters,

Financial Times, Economist, Investors Chronicle, Wall Street

Journal, Investopedia, Mergermarket, Yahoo Finance, Company

Press Releases & Company Annual Reports

4 Banking & Finance

USIS Review October 2016


Will London Remain the Financial Capital of Europe?

In the Aftermath of the EU Referendum, the Financial Capital's Future is Uncertain

After a historic vote to leave the EU,

London faces uncertainty regarding

its status as a financial capital. It was

clear which way ‘The City’ would have

preferred the vote to go, with lobby

groups finding 84% of polled member’s

voting to stay compared with 5%

of members voting to leave.

One of the benefits of institutions basing

their businesses in London is the

‘passport’ system which allows unrestricted

access to the European single

market. With increased chance of a

‘hard’ Brexit it is highly unlikely that

the UK will be offered such an easy

option as keeping the unrestricted

access. This makes London unappealing

to some 5500 companies who rely

on this system to conduct business on

the continent, but it’s not all one-way

traffic, the flip side is 8000 European

companies use this system to access

the UK markets.

After the vote, J P Morgan announced

they are cutting 4000 UK jobs, while

HSBC talks of cutting 1000 and moving

them to Europe. This is all while

France tries to court UK based companies

to move to Paris, with regulators

reducing red tape for companies

looking to register in light of Brexit.

They now accept documents written

in English to save companies the cost

of having new ones written in French,

stressing their freedom to do business

all over Europe. Immediately after the

Brexit vote, France announced very

generous tax breaks for expats who

could potentially see an income tax

break of 50%.

Although it is unlikely that any one city

will take all the work, the most likely

outcome is financial institutions will

spread their workforce over a number

of cities, including Paris and Frankfurt.

Which could potentially weaken

Europe’s ability to compete internationally,

with speculation that Asian

financial capitals such as Singapore

and Tokyo will start taking insurance

customers from the likes of Lloyds of


Although US bank head-hunters have

turned their sights to the continent

after the vote, this could just be a move

to increase their presence in main land

Europe. But with a potential saving of

40% this could just be a cost-cutting


“Brexit may mean a reverse Big Bang

for the UK’s relationship with Europe,”

says Pierre-Henri Flamand, senior portfolio

manager at $26bn hedge fund GLG Partners.

“But it could mean Big Bang II for its relationship

with the rest of the world.

Brexit could improve the City’s prospects

of doing business in parts of the world such

as Asia and Africa where the growth is, and

where the ability to strike trade agreements

may have been hampered by the UK’s membership

of the EU.”

While there are fears that over time London’s

stature could be eroded, many of the factors

that have made it attractive, such as its time

zone, language, rule of law and ecosystem of

professional services are still in place, it may

not quite time to write London off.

Edward Burton

BA Accounting & Finance

USIS Review October 2016


The Future of Banking in Europe

How Banks are Adapting to Survive in a Post-Brexit Europe

Banking & Finance


The investment banking world is slowly

waking up to the fact that things cannot

carry on the way they are. Though banks

like Deutsche are taking up the headlines,

with a different rumour every day,

sending worrisome markets flailing, all

the European banks are suffering.

It is not for nothing that this month the

CEO of Credite Suisse, Tidjane Thiam,

warned that European banks are “not

really investable as a sector”. It is not just

Thiam who holds this view. Markets are

also wary of their poor performance and

European banking stocks have fallen

around 75% since their pre-crash peaks.

They are predicted to lose more in the

coming year.

The largest reason for this is that European

banks have been plagued with poor

profitability. Revenues from investment

banking are down 30% from the same

period last year and are predicted to

fall another 12%. This is easy to believe

however given the current environment

in which the banks must operate.

The largest contributor to low profitability

is the current climate of ultra-low

interest rates. Though a bold and necessary

measure, they have caused banks

to lose a substantial proportion of their

profit which is derived from the difference

between lending and borrowing.

European regulators are still pushing

an agenda of large regulatory change.

Banks are being told to improve their

Tier 1 capital ratios in order to ensure

that they can remain solvent during

periods of financial stress. This involves

shedding profitable, risky assets in

favour of low risk assets like cash and

government securities. The banks are

also still faced with the prospect of large

fines for their past misdeeds. Standard

and Poor estimates that the largest four

banks will pay out a further £19.5bn in

fines, compensation and legal expenses

by 2017.

Other services which the larger banks

provide such as share dealing, fixed

income trading and investment banking

are all far less profitable and earnings

from equity markets have dropped 52%,

as cautious investors ignore risky assets.

Given these unprecedented conditions,

it is clear to all that banks must change

the way that they operate. Different

banks are deploying different strategies

to try and overcome these hurdles. It is a

strange environment in which CEOs are

being roundly rewarded by markets for

their parsimony and future planning,

rather than chasing large profits.

Different Strategies

It would be impossible to consider the

outlook of the European banking sector

without an examination of Deutsche

bank. The once great bank is now trading

at 72%, less than its book value. This

is often the case for banks, however it

carries repercussions. The bank needs

capital and it is now cheaper to raise it

by selling off assets than turning to its

shareholders. John Cryan, the bank’s

CEO, is selling off its asset management

division. This division has the highest

return on equity of any division in the

bank and some see this as a foolish

move. However, it is all part of the

spring cleaning that all European banks

were too slow to do in the years after the


Tidjane Thiam, the CEO of Credit

Suisse, has started taking his bank on a

different course. He is leaning towards

wealth management, Asia and scaling

back the investment banking division

heavily. This has manifested itself in two

strategic overhauls in which investment

bankers and high risk products were

shed. The share price is down by over

50% since a peak in 2015 but rising now

that the cull is coming to a close.

6 Banking & Finance

USIS Review October 2016

These two are taking a slightly different direction

to Barclays with Jes Staley at the helm.

A former J.P. Morgan investment banker, he

is carrying out a massive restructuring effort

whilst keeping the core investment banking

business. The bank is plagued with staff costs

which have increased by £400m to £4.6bn, an

estimated £1b loss to ring fencing laws and

likely further litigation and fines. Their tier

1 capital equity ratio comes in at 11.5% which

will be lower than even Deutsche Bank’s after

their long awaited sale of their stake in Huaxia.

Barclays has begun a process of selling off

non-core assets, helped along by a recent sale

of its Egyptian arm, but is finding it hard to

find buyers for an assortment of other operations.

It is apparent that each bank is making

drastic changes internally to cope with this

uncertain future. Some cast doubt on whether

there is any model of investment bank that

can exist in this climate. Regardless, with

these significant changes in structure in the

coming years, it is impossible to know what a

standard European investment bank will look

like in ten years’ time.

What can Europe do?

With the banks unsure of a single strategy to

ensure their survival, and their survival critical

to the health of the European economy,

one may wonder what Europe itself is doing

to help.

Unfortunately for the banks, bank friendly

policy is still politically toxic. The European

Union has laid down tough new rules in the

form of the Bank Recovery and Resolution

Directive, first proposed in 2014 but being

properly implemented this year. These rules

give limits on how badly a bank must be

doing to warrant state support after the huge

bailouts of 2008. Instead the support must be

derived from bondholders and depositors in

the form of bail-ins.

Recently, a Dutch-Swedish cross border

merger between ABN and Nordea was

rejected. This was a defensive deal with the

potential to create massive savings through

economies of scale across a far larger market.

It was rejected due to concerns that it would

have allowed Nordea to escape stringent

capital requirements in Sweden, yet it is

exactly the kind of deal which will allow

banks to survive in the current environment.

It makes one wonder exactly how

dire the outlook of the big banks must

be before politicians and bureaucrats

allow sensible and effective actions to

take place.

However, the banks do have some on

their side. Worried about the volatility

caused currently by Deutsche Bank,

Christine Lagarde of the IMF has told

Deutsche bank to quickly settle a $14b

(£11.3b) fine from the American DoJ and

to press ahead with critical restructuring.

At the IMFC conference, ECB chancellor

Mario Draghi sought to alleviate

fears about the European banks, commending

them on their restructuring

efforts, newly built stress resilience and

expressed sympathy at the slow process

of removing low performing loans, a

large drain on profitability.

Although policy makers may be enforcing

harsher measures on banks, nobody

in Europe wants the banks to fail. Increased

regulation might actually have

a long term benefit on the banks; tough

rules imposed on American banks

initially stunted their recovery, but now

they are outperforming their European

counterparts in nearly every measure.

And in the short term, it is unlikely that

any bank would be allowed to fail.

Future outlook.

McKinsey believe that the banks still

have far more pain to come. They

predict that only three to five European

banks will be able to carry on

operating on a truly global scale in all

their pre-2008 capacities. The others

will specialise or reduce the scope of

their operations. Most banks are in

an untenable position with different

sized services spread unevenly

over the globe and this is a drain on

profits. The current asset selloff at

many European banks is a sign that

they are beginning to see this and act

upon it.

It is unlikely that we will ever see the

banks return to the dominant global

positions that they assumed before

the crash. With a slowing global

economy and no sign of interest rate

rises, it is likely that it will take much

longer still for banks to find their feet.

However, the outlook is not entirely

gloomy. Banks across the board have

momentarily lost their obligation to

chase profits and now have breathing

time to ready themselves for the


David Scott

MEng Mechanical Engineering

USIS Review October 2016


The Rise of Robotics in Banking

How Artificial Intelligence is Revolutionising Finance

Finance & Technology


Technology has brought vast advancements

in the way we live our day-today

lives, and this is especially true in

Artificial Intelligence (AI). Simply put,

artificial intelligence is said to be the use

of development of computers in carrying

out tasks ordinarily done by people, in

a manner which we would constitute as


Ingrained in the development of AI has

been the long-term goal of finding a way

of enabling a computer to do a task a

human would otherwise perform, but at

a more advanced level. As such, the use of

artificial intelligence is increasingly become

a priority area within the financial


Across the world, banks are investing

large amounts of time and money into

implementing artificial intelligence into

the way they operate. At the centre of

this, for retail banks, it is the possibility

of using AI to ease the way consumers

use their banking services. It is apparent

consumers (in particular millennials)

prefer digital servicing channels than the

traditional method of banking of going

into branch or calling in. As such banks

are enhancing their products to meet

their demand for speed, personalisation

and convenience. Earlier this year for

example, Santander and HSBC were the

first UK banks to launch voice-banking


On a more sophisticated level, some

banks have even adopted customer

engaging bots that exercise some personality.

The Royal Bank of Scotland has

announced plans to unveil its chatbot

“Luvo” by the end of this year. In acting

as a virtual assistant, it will answer questions

and accepts requests (e.g. replacing

a lost bank card), whilst also reacting

with empathy when faced with a customer’s

frustration. The bank also predicts

that as AI develops in the financial sector,

the bot’s capabilities will become more

refined such as using predictive analytics

to detect potential issues.

Outside retail banking, major financial

platforms have also adopted Al, particularly

investment banking. A recent report

by Thomas Reuters estimates that at least

75 percent of the volume of global traders

worldwide are now handles by algorithmic

trading systems, with this figure

predicted to grow at a steady rate over

the next few years.

AI technologies like cognitive computing

has the significant advantage of being

able to address vast amounts of data at

one time and to enhance the quality of

its decision making. Thus, the benefits

of artificial intelligence are enormous. Al

has the potential to understand individual

risk preferences and goals, and

potentially to take advice beyond what

a human can currently offer. Aite Group

senior analyst David B. Weiss highlights

‘inorganic intelligence has the potential

to be instrumental for streamlining

client on boarding, mitigating and

identifying cyber threats, and developing

more intuitive marketing analysis and

operations analytics.’

Though the growth of artificial intelligence

in the financial industry has

been invaluable, it is argued that this is

putting the human workforce at risk,

as banks have alternative cheaper and

instant methods of providing a service

using technology. Analyst Warren Mead,

KPMG told the FT “It’s about cost-cutting

to an extent. Banks face a huge cost

challenge as they go forward, but it can

be done in a way that augments customer

service”. Others attempt to reassure

workers by highlighting the positive

impact artificial intelligence has on staff,

as they can attend to more complicated

tasks without being caught up in the

mundane. However, there are simply too

many tasks that cannot be replicated by

a computer, namely human interactions

and judgement calls. In today’s competitive

climate it is ever more important

that financial services and organisations

pay attention to technological developments.

Sana Shah


8 Investments & Strategy

USIS Review October 2016


Flash Crashes of the 21 st Century

What Causes a Two Minute Financial Crash?

May 6th, April 23rd and now October

6th – these are just some of the dates,

in their respective years, which will go

into the world’s financial history books

under the heading: Flash Crashes of the

21st Century.

On October the 6th at 23:03 UK time,

the pound unanimously crashed across

all currency pairs. The GBP/USD dollar

pair dropped an entire 6.1% from 1.26

to just over 1.80 under two minutes, before

rebounding back to the 1.22 range

during the London trading hours. In a

matter of 120 seconds, the end result

was a 3.2% loss in value for the cable,

the nickname traders give to the GBP/

USD pair.

Although 3.2% may not seem like much,

it is important to note that currency

movements in the foreign exchange

market, also known as Forex, normally

deviate no more than 0.5% per day.

Exceptions of course exist, such as

on the day of the Brexit referendum

with a 10% loss in value for the cable.

However, the exceptions are normally

calculable and predictable changes,

rather than immediate, unannounced

crises such as the one experienced in

early October.

Hence, the mainstream media was quick

to conclude that the publication of a report

on French president Francois Hollande,

in which he claimed that the UK would

“suffer” for its decision to leave the EU,

combined with news-reading algorithms

operating at microseconds could easily

have induced this particular sterling crash.

However, financial markets reward prudence

and patience. Jumping to premature

conclusions can easily lead to limiting one’s

understanding of other alternatives. Perhaps

a large-scale investor simply required

to deleverage his British stock portfolio

following the conclusions of a group of analysts.

Perhaps the financial elite has early

access to information concerning the continuation

of passport rights for the finance

industry, or perhaps it was simply an initial

computer system error which evolved into a

detrimental price shift in currencies.

Nonetheless, it is essential to realise that

during any financial crash, there are

enormous winners and losers. Any financial

market is essentially a market for

the transfer of wealth. Hence, whilst the

massive volatility of price movements is the

golden haven of most algorithmic trading

approaches implementing price arbitrage,

they are also the dreaded circumstances

of simpler stop-loss and take profit set


Yet perhaps there exists a silver lining to

all these flash crashes. When a security

of any kind experiences such detrimental

price shifts in the matter of seconds,

it might very well, through the filling of

pending orders at extreme price points,

lead towards financial bubbles being

burst before they can inflict any serious

damage. In sharp contrast to a more systematic

crash such as in 2008 with years

of economic turmoil, the few minutes of

a flash crash barely impact the common


Only time will tell if these flash crashes

are part of the new reality of the financial

world. Until then, it is probably best to remember

Sir John Templeton’s words: “The

four most dangerous words in investing:

‘this time it’s different.’”. The flash crashes

may be signs of a global crash yet to come.

Adrien Talaska

MEng Civil & Strucrural Engineering

Theses flash crashes,however,are

actual financial crashes; they seemingly

occur when people least expect it and

explaining their occurrence is rather

perplex. In the past, an erroneous tweet

about fictional attacks on the White

House or an unusually large trade

order has been sufficient to trigger a

flash crash. However, commentators

are increasingly highlighting that the

“fragile” market structure consisting

of trading algorithms and new market

participants such as HFT firms could

be blamed as well.

USIS Review October 2016


The End of Endless Growth?

Economics & Global Affairs


The World's Second Largest Economy is at Risk of Losing its Status

During the US presidential debate on

9th October, Republican candidate

Donald Trump displayed a common and

misleading understanding of economic

growth between the United States and

China. In response to a question from

an audience member regarding the U.S

tax policy he said “We have no growth

in this country,” whilst further stating

“If China has a GDP of 7 percent, it’s like

a national catastrophe. We’re down to 1


The Republican candidate’s fundamental

confusion of this 7 percent growth is

not a demonstration of China’s economic

strength but rather its weakness.

Staggering efforts to steer away from

its heavy reliance on manufacturing

to a consumption-based economy has

caused a decline in GDP. Growth in the

Chinese service industry – an important

element to their planned transition to a

more sustainable economic model - deteriorated

during the third quarter such

as financial services, private healthcare,

telecommunications, and the media


In addition, the retail industry and the

subsectors within, such as food and

luxury goods, also slowed in growth. The

knock-on effect of an abrupt plummet

in China's growth would agitate equity

markets and hinder financial companies

across the globe, whilst also damaging

countries of close trading links such as

Japan, South Korea and Australia.

Chinese banks have also been hiding

losses off their balance sheets through

wealth management vehicles or by

categorising them as interbank credit,

seemingly with the collusion of officials.

be heavily dependent on government

spending to influence out-dated debtfuelled

growth engines as much of the

economic drive has come from infrastructure,

manufacturing, commodities

and real estate.

Although the nation’s total debt is on

target to reach 253% of gross domestic

product by the end of 2016, a doubling

over the past eight years, according

to a credit ratings agency, Julian

Evans-Pritchard, an economist with

Capital Economics Pte, states that “I

don’t think there’s going to be a crisis

next year,”. Other economists affirm

Pritchard’s notion that the Chinese

economy will remain relatively stable

through the leadership change in 2017,

as long as the capital continues stimulating

the economy enough to avoid a

dramatic drop in economic growth.

ending its use of and by communicating its

intentions clearly.

Thus, the biggest worry that for China is

that whether the government fails to deliver

on reforms, leading to economic stagnation

and a hefty amount of additional

debt– similar to a situation which occurred

in the Soviet Union.

Although China is not facing a huge

amount of trouble, issues are bubbling

underneath the surface. The fate of the

economy which holds 25% of global wealth

lies in the hands of government spending

and decisions made by financial companies.

What happens to China indirectly

effects the all countries. For now, it is just a

waiting game


Leland Miller, China Beige Book’s president

argues that “This is not a stable

economy. It’s one that twists and turns

and happens to end up at the same

spot, there are real problems below the

surface.” Indeed, China does seem to

Additionally, a report released by the

International Monetary Fund said China

could reduce the negative impact

on the global economy if it shifts to a

slower and more sustainable growth by

Adilah Hameed

English and History



USIS Review October 2016

USIS Review

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The USIS Review is the University of

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