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Oh for the simplest solution in finance

Bank teller
Image Source | Getty Images

It is Albert Einstein who is quoted, although possibly apocryphally, as saying: "Everything should be made as simple as possible, but not simpler."

This is a good maxim for everything in life. But not, it would appear, if one is trying to demonstrate one's excellence and superiority in the field of finance.

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The corporate finance needs of most firms are simple. They would like to be able to borrow money when needed, and they would like to remove uncertainty – hedge, if you like – when it comes to planning and forecasting cash flows and budgets. These uncertainties arise essentially in the field of interest-rates and FX rates. The product range does widen out of course – manufacturing companies may wish to protect against a rise in the cost of raw materials, much as airlines may wish to hedge against rising cost of aviation gasoline – but pretty much that's it. The above describes almost all of the financial market needs of most companies.

So why is it so difficult to get a simple solution? In a commoditized world, competition amongst banks appears to have driven them towards the most complex solution first, rather than the simplest. It seems this differentiates them. Concerned about volatility in commodity prices, or a rise in interest rates? Don't look to a Forward or an interest-rate swap, rather look at the double-barrier knock-in knock out option or the range accrual dual-purpose swaption (okay I made the last one up but it sounds snazzy doesn't it?).

This cultural trait has been building up over the last 20 years or so to the point where it is ingrained just about everywhere. Ever more complex structured finance products such as "synthetic collateralized debt obligations" were blamed for the financial crash – that is simplistic and misses the point – but the fact is, who really needs them? Can the investors' needs be met only with such products?

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The answer is no, of course. As The Jam sang over 30 years ago, "the public wants what the public gets". Most companies would be happy with the simplest solution but if they are presented with the complex one first, they will often consider it because it's there.

In any industry, it is possible to be respected and admired even if one offers the simplest product suite. The old-fashioned basics of attention to detail and customer service are usually sufficient. This column is always looking for silver linings in the cloud of the 2008 bank crash, and surely banks offering the simplest solution first, whether in the field of hedging or financing, is one such long-overdue lining?

Professor Moorad Choudhry is at the Department of Mathematical Sciences, Brunel University and author of The Principles of Banking (John Wiley & Sons 2012).