Archive for the ‘reports’ Category

UK Financial Sector Fix Plan Version??

July 9, 2009

Seeing the number of reports on financial sector after the crisis/recession, it will be a gigantic effort to reconcile them all.

After numerous plansin US, Uk is also busy taking out a series of reports on financial sector.

First there were aseries of reports on N.Rock, Banking Act – 2009, the much discussed Turner Review, report on future of UK International Finance Centre, and now a new report on reforming financial markets.

This document sets out the Government’s analysis of:

  • the causes of the financial crisis which has led to the world economy being hit by the worst global economic downturn for the last 60 years;
  • the actions already taken to restore financial stability; and
  • further reforms necessary to strengthen the financial system for the future.

Most reports talk about the same thing – increase capital ratios, curb leverage, make regulation sharper with teeth (however it is more important to get people who want to regulate) etc etc. What is the point of having same reports over and over again?

What is worse is as Buiter points in his blog:

The Chancellor of the Exchequer, Alistair Darling takes the cake in the bigger is better stakes.  He appointed “Win” Bischoff, the former chairman of Citigroup (appointed interim CEO for Citigroup in December 2007 after Chuck Prince bit the dust), to co-chair the writing of a report on UK international financial services – the future, published on May 7, 2009.  That’s rather like asking the Ayatollah Ali Khamenei to write a report on who won the Iranian presidential election.  It really is the most ridiculous appointment since Caligula appointed his favourite horse a consul.  You will not be surprised to hear that the report does not consider the size of UK banks to be excessive.

After reading these numeorus tomes on finance, one thing is sure- governments really want to curb financial sector and its excesses. However, by making so many me-too reports one just gets a feeling that they are just rushing into it.

 

Doing Business in India report

July 1, 2009

World Bank’s Doing Business Initiative has released a report on India. The summary is here and full report is here (heavy pdf file).

Mint has an interviewof Penelope J. Brook, of IFC explaining the broad findings. Some more findings on DB BLog. And here is a reminder on what DB Report tells you:

Doing Business in India does not measure all aspects of the business environment that matter to companies or investors, nor all of the factors that affect competitiveness. It does not, for example, measure security, macroeconomic stability, corruption, labor skills, the underlying strength of institutions or the quality of infrastructure. Nor does it focus on regulations specific to foreign investment.

 

OECD Free E-book on International Trade

June 26, 2009

I received an email from a visitor about this free e-bookfrom OECD which serves as a primer on International Trade. It is written by Patrick Love (OECD economist; can’t find his profile page) and Ralph Lattimore.

The visitor is promoting the book and thought it might be useful for Mostly Economics Readers. The other visitors can see the book in case they find it interesting.

I will try and write a review later on the book in the blog.

PS.

This blog is not used for any advertisement purposes. However, if visitors have useful eco/fin related e-books which could be useful for ME readers, I don’t mind adding it on the blog.

Comparing Russia in 1998 crisis and 2008 crisis

June 23, 2009

There was a story I read which said R from BRIC (Brazil, Russia, India, China) needs to be removed. The Russian economy has slipped big time as the 2008 crisis became deeper. Russia seemed to have undergone a major crisis in 1998 and comparisons are bound to be drawn.

There is an interesting analysis in IMF’s F&D comparing the two recessions in Russia.

Unlike the situation 10 years ago, the government now has sufficient funds to administer sizable demand-side fiscal stimulus and provide targeted social transfers to those hit particularly hard by the crisis. However, allocating public spending in a way that is productive and stimulates aggregate demand without creating new bottlenecks remains a challenge in Russia. In particular, the government’s capacity to manage large infrastructure programs is still limited. With the financial sector now playing a much more prominent role in the Russian economy compared with the 1990s, the potential costs of a banking system collapse for the real economy could be very high, as could be the cost of misguided fiscal policies. Russia’s government will have to tread carefully in the months ahead.

Read the whole thing for details.

I am actually wondering the experience of Russia like commodity driven economies. I know situation is bad as commodity/oil prices have declined and export bases must have shrunk. But how bad is the situation? What have been the policy responses? Chile had a stabilization fund from Copper exports which helped them sail through somewhat (same is the case with Russia as indicated in above analysis). It should be a good comparison study to do.

A check on India MF Industry

June 23, 2009

There was a lot of media coverage over a speech given by MS Sahoo, SEBI whole-time member. The speech has been included in SEBI’s May Bulletin and is a must read. You seldom across speeches by regulators who don’t agree to the practices of a certain market segment.

He looks at 5 issues:

  • Most MFs are top cities and urban centric.
  • MFs should cater to Retail investors but growth in assets comes from corporates (he says it nicely- the conclusion is  that the RIIs are also investors in the industry.)
  • Portfolios are churned highly leading to higher costs for investors
  • Too many types of MFs leading to confusion
  • MFs say they are doing educational awareness  campaigns but are actually marketing campaigns

Read the speech for details. It is an excellent check on Indian MF industry. This blog has made these points across various posts. So let’s hope SEBI does something for this.

What interested me most is the 4th point on too many choices:

The 1990s witnessed the emergence of a variety of funds. There are funds which invest in growth stocks, funds which specialise in stocks of a particular sector, funds which invest in debt instruments and funds which invest aggressively and funds which do not do all these. Thus, we have income funds, balanced funds, liquid funds, Gilt funds, index funds, sectoral funds and there are open-ended funds, close-ended funds and fund of funds – there is a fund for everybody and for every need. The number of schemes at the end of February 2009 was close to 1,000, equal to the number of securities listed on the NSEIL.

The small investor has no means to know which fund or scheme to choose. He likes choice, but in this case he is lost with too many choices. To complicate his life further, a scheme has sub-schemes, which has different plans (wholesale, deposit, institutional), different options (dividend, growth, bonus), option variants (quarterly, annual), different AMC fees, etc., 1,000 schemes may have in all about 5,000 products. A small investor earlier had problem in choosing out of 2,000 securities, now he has to choose out of 5,000 MF products and 2,000 securities.

He wanted relief from the deep sea, but ended up between the deep sea and the devil.

Somewhere down the line people in the financial industry do not appreciate the problems faced by an investor. I have talked to a couple of people on this (this is by now way the majority, but just an anecdote) and they believe an investor should be able to slect the fund. The more choices are a plus and not a minus. They even add we are not forcing the investor to invest!! If he has decided to invest in this fund he would have done his homework etc.

His solution for the problem:

Probably, the industry needs to provide a few simple standard products which suit the needs of the majority of the small investors. In addition, they may provide niche products of different complexities for those who can understand. The MF, which provides the simplest products, needs to be recognized.

This is the vanilla products which even US is contemplating to introduce. I had mentioned in this post that if developed countries need such products, developing need it all the more. It is great to know one of SEBI’s members is thinking about the problem.

The question that next comes is. Should SEBI let industry develop such products or intervene to ask MF industry to develop them? I don’t see former happening and can only see more and more MF products being added. It will be good if SEBI forms a committee with industry people as members and design such products.

Libertarian Paternalism happening in India and US

June 19, 2009

SEBI has passed some major reforms y’day. It was in an overdrive mode last year and is interesting to see some action once again. The idea is to make equity investments  more friendly for investors

  • It has lowered transaction costs across the entire securities trading spectrum,
  • it has floated a concept of anchor investor to make markets more stable (cannot sell share till 30 days of allotment),
  • No shares to have superior voting rights

However, two developments weree really interesting as we see some form of libertarian paternalism (LP) happening:

Rationalisation of disclosure norms for rights issues: Since rights issues are made to existing shareholders, who are in possession of basic information about the company and have been receiving reports regarding major developments in the company on a continuous basis, it has been decided to rationalize disclosures in rights issue offer document by doing away with or modifying existing disclosure requirements.

So, it has done away with disclosures which are repeated in the rights issue prospectus making it easier for investors to read. This is a form of LP where the regulator has intervened making things easier for the investor. The standard regulation approach following classical economics would be let investors decide which info is useful and which is not. However, we know it does not really work that way and SEBI has intervened to make things easier. However, the choice to select whether to invest in the rights share or not remains with the investor (this is what LP is all about).

Another decision:

Transparency in payment of commission to Mutual Fund distributors : There shall be no entry load for the schemes, existing or new, of a Mutual Fund.  The upfront commission to distributors shall be paid by the investor to the distributor directly. The distributors shall disclose the commission, trail or otherwise, received by them for different schemes/ mutual funds which they are distributing or advising the investors.

 This is again a continued form of LP from SEBI. I have bragged in numerous posts how mutual funds in India(see this one, see US case) are actually a distributor’s fund with most benefits going to a distributor than an investor. SEBI has been trying to reform this. It first removed entry load from direct applications, then it asked MFs not to charge entry load in case of bonus units. And now this step which does away with direct loads completely.

However, again it leaves the discretion to investors on how much entry load they want to pay their distributors. This is what LP also suggests- just intervene to kae things better. This means distributors better provide valuable investment advice or he does not get any commissions.

Now in the US. As I mentioned in my last post Obams’ new plan proposes setting a Consumer Financial Protection Agency. This will look into all matters pertaining to regulation in financial products/payments that matter to consumers.

1. Transparency: CFPA will be authorized to require that all disclosures and other communications with consumers be reasonable: balanced in their presentation of benefits, and clear and conspicuous in their identification of costs, penalties, and risks.

2. Simplicity. We propose that the regulator be authorized to define standardsfor “plain vanilla” products that are simpler and have straightforward pricing. The CFPA should be authorized to require all providers and intermediaries to offer these products prominently, alongside whatever other lawful products they choose to offer.

3. Fairness. Where efforts to improve transparency and simplicity prove inadequate to prevent unfair treatment and abuse, we propose that the CFPA be authorized to place tailored restrictions on product terms and provider practices, if the benefits outweigh the costs. Moreover, we propose to authorize the Agency to impose appropriate duties of care on financial intermediaries.

4. Access. The Agency should enforce fair lending laws and the Community Reinvestment Act and otherwise seek to ensure that underserved consumers and communities have access to prudent financial services, lending, and investment.

Just like in SEBI’s case, this one is also a form of LP. As consumers cannot understand financial products, it is better to ask the agency to simplify things for them. US takes a step further and even advocates designing plain vanilla financial products ( I had also advocated the same in my paper) helping people make right choices.

All this would have been completely unthinkable if not this crisis. Though in India’s case the issues are completely different. Indian regulators seem to have taken a liking for findings of behevaioral economics (see this as well) (though am not sure whether SEBI has consciously nudged). I even pointed Fed could be nudging as well.

These are all quite remarkable development I must say. We may not be realising it, but LP is beginning to shape our decisions

Comparing US recessions and Great Depression

June 17, 2009

There are numerous sources comparing previous US recessions with this one  (see UK here, India here).

CFR has an update on the same which is quite useful. It puts all recessions at time zero and compares across various economic parameters:

Financial markets have dramatically improved, but from an extremely low base. Rather than pricing in disaster, they anticipate tough times ahead. For example, the charts on the spread for AAA and BAA bonds show the credit market moving from unprecedented panic to a level of fear that is merely in keeping with the worst experiences since 1945.

Real economy indicators show signs of stabilization. See in particular the charts on manufacturing sentiment, nonfarm payrolls, oil prices, and car sales. Nonetheless, many of these indicators remain worse than anything hitherto experienced in the postwar period.

The collapse in the federal government’s finances is unprecedented, raising questions about how the government deficit will be brought under control.

By most measures, the current recession is far milder than the Great Depression. But the appendix shows that house prices have recently fallen much more sharply than in the 1930s. 

Good stuff.

International Financial Multiplier

June 8, 2009

I came across this very useful paper from Michael Devereux (Univ of British Columbia) and James Yetman (of BIS).

Paul Krugman had developed a model to show how international financial multiplier works. The main idea was how  changes in asset prices are transmitted internationally through their effects on the balance sheets of highly leveraged financial institutions.

In this paper the authors work on the same concept (different model) and show how financial channel works and damages economic prospects:

The recent financial crisis has highlighted the role of interdependence among major economies through linkages among financial institutions, in addition to the trade linkages that are at the centre of traditional models of the international business cycle. This paper develops a model of the international transmission of shocks through de-leveraging across financial institutions. In a macro-economic model in which highly levered investors hold interconnected portfolios across countries, we show that the presence of binding leverage constraints introduces a powerful financial transmission channel which results in a high correlation among macroeconomic aggregates during business cycle downturns, quite independent of the size of international trade linkages.

The authors detail a model which is quite simple to understand. They explain it in English and then use the greeks to make it more rigorous. Minus the Greeks it is pretty readable.

 This paper adds more weight to Krugman’s paper for the multiplier effect and John Geanakoplos for the role of leverage in a financial transaction.  

Good stuff.

Eastern Europe is now facing the brunt of capitalism’s crisis

June 3, 2009

Brookings economists Laurence Chandy, Geoffrey Gertz and Johannes F. Linnhave written a superb short paper on world growth prospects. It is actually a lesson on how one can use World Economic Outlook report from IMF for a more valuable analysis. They just use one set of data – GDP growth rate to derive some fascinating analysis.

This report marks the most extensive effort to measure the health of the global economy since the outbreak of the global financial crisis last fall. The WEO’s centerpiece is its GDP growth projections, given for 182 countries over the next five years. This indicator alone provides a wealth of information, allowing an examination of not only how countries will fare this year, but whether expectations of the crisis’ impact have stabilized, where and when the recovery might come and how much poorer the crisis will eventually leave us. By identifying which countries and regions are being hit worst by the downturn and which appear to be weathering the storm relatively well, we can learn a great deal about the nature of the crisis, including the channels through which it is spreading around the world and the possible paths to recovery.

Here are some points:

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Growth without growth in credit is possible

June 1, 2009

Stijn Claessens,  M. Ayhan Kose and  Marco E. Terrones in a voxeu article say:

Many analysts suggest the economic recovery may have started but others worry that the sorry state of developed countries’ financial systems will prolong the recession. Can economic activity revive absent a recovery in credit and housing markets? This column presents new research suggesting that a “creditless recovery” is possible, but it would likely be slow and shallow.

The research is based on their superb paper - What Happens During Recessions, Crunches, and Busts? They look at past recessions and many combinations- recessions with equity price bust, recession with housing market bust and recession with credit market bust. They find that economy starts to recover before credit markets pick up. Hence, creditless growth is possible. 

On average, the recession ends two quarters before the credit crunch ends and nine quarters before housing prices bottom out; equity prices tend to bottom out just as the associated recession ends

Read the whole thing for more details.

This recession is unusual as it has all three busts. So, it will be interesting to see how this one fares.

Keeping track of rising protectionism in world trade

May 22, 2009

Chad Brown of Brandeis Universitykeeps a tab on what is happening in World Trade System. His research on the issue looks quite promising as well.

He has develoepd a seperate webpagefor keeping a track on how world trade system is faring in this crisis? Is protectionism rising? If yes which countries are raising trade barriers and against which countries?

He says in both 2008 and Q1 2009, protectionism is on a rise. India seems to be the leader in both the periods initiating cases and imposing trade restrictions.

In 2008:

  • Overall, the number of initiations of new anti-dumping investigations in 2008 increased by 31 per cent compared to 2007. The number of new anti-dumping measures applied in 2008 increased by 19 per cent compared to 2007. Developing countries dominated use of anti-dumping (73% of all new investigations) in 2008, and developing country exporters were the most frequent target (78% of all new investigations).
  • Sixteen WTO Members initiated a total of 188 new antidumping investigations in 2008, compared with 143 initiations by the same Members in 2007.[3]These Members applied 120 new final anti dumping measures in 2008, a 20 percent increase over the 100 new measures that these Members applied in 2007
  • India initiated the most antidumping investigations in 2008, with 54 new initiations.[5] It was followed by Turkey and Brazil (23 each), Argentina (19), the United States and the European Union (18 each), China (7), Colombia and Australia (6 each), South Korea (5), and Canada, Pakistan, and South Africa (3 each).
  • Exporters in developing countries were the subject of 147 antidumping investigations in 2008 – forty-five per cent more than the 101 investigations directed at developing country exporters in 2007. In addition, 92 of the 120 new measures in 2008 were applied to developing countries′ exported products, compared with 78 of 100 new measures in 2007. China was the most frequent subject of antidumping investigations in 2008, as thirty-five per cent (66 initiations) of all the new initiations in 2008 were directed at its exports.

It was pretty obvious that China would lead the list of countries against whom the barriers would be raised. Surprising to see India top the list in countries raising these barriers. You would usually assume developed economies to impose barriers on China.

In Q1 2009:

The first quarter 2009 increase is above and beyond the sharp increase that began in 2008 with the spread of the global economic crisis. Compared to the same time period in 2008, the first quarter of 2009 saw an 18.8% increase in initiated investigations in which domestic industries request the imposition of new import restrictions under trade remedy laws. While the list of new investigations is dominated by India and Argentina, other G-20 members that also initiated at least one new investigation during the first quarter of 2009 include Australia, Canada, China, the European Union and its member states, Mexico, South Africa, Turkey and the United States. China`s exporters were the dominant target for these new investigations that may result in import restrictions, facing over two thirds of the new investigations.

Excellent work from Prof Brown. You get an idea on world trade in this crisis in one page. The protectionism is clearly rising and WTO has huge task at hand.

OTC Derivative Markets- Notional Amount declines but Market Values increase

May 21, 2009

As US Treasury looks to regulate OTC derivative markets BIS released its new report on the size of the market. The data comes with a lag and we have data till Dec 2008.

The press release provides quick findings:

  • The total notional amount of over-the-counter (OTC) derivatives contracts outstanding was $592.0 trillion at the end of December 2008, 13.4% lower than six months earlier. The decline is the first since collection of the data began in 1998
  • Credit market turmoil and the multilateral netting of contracts led to a contraction of 26.9% in outstanding credit default swaps (CDS). The second half of 2008 also saw the first significant decline of OTC derivatives contracts outstanding in the interest rate market (8.6%) and in the foreign exchange market (21%
  • Despite the drop in amounts outstanding, movements of financial market prices in the second half of 2008 lifted gross market values 66.5%, to $33.9 trillion. Gross market values measure the cost of replacing all existing contracts and are thus a better measure of market risk than notional amounts outstanding.

BIS releases these stats bi-annually and it is just amazing to think we have created a multi trillion dollar market without anyone watching the growth. Just amazing. It clearly speaks of the mindset w.r.t. to financial world.

BIS report on Governance of Central Banks

May 18, 2009

BIS has released a timely report on Governance of Central Banks:

This report by the Central Bank Governance Group presents information intended to help decision-makers set up governance arrangements that are most suitable for their own circumstances. The report draws on a large body of information on the design and operation of central banks that the BIS has brought together since it initiated work on central bank governance in the early 1990s.

The need to deal with chronic inflation in the 1970s and 1980s prompted the identification of price stability as a formal central bank objective and led to a significant reworking of governance arrangements. The current global financial crisis could have equally important implications for central banks, particularly with respect to their role in fostering financial stability. Although it is too early to know how central banking will change as a result, the report takes an important first step in identifying governance questions that the crisis poses.

(emphasis is mine). So, central banks for financial stability.

It makes an immediate reading as it looks at number of issues in Central banking. The only issue is it is a huge report and is about 201 pages long.

Chile’s development story

May 15, 2009

Growth Commission has put up number of  papers on few country’s development experience. I had pointed out to Brazil’s experience a while back. Here is a nice paper by Klaus Schmidt-Hebbel on Chile’s development.

This paper analyzes the relations between leadership, the policy policies and institutions, and development results in Chile. It starts with a stylized model for the dynamics of development that derives a Kuznets relation between growth and distribution of income, determined by the quality of leadership, the policy framework is applied to Chile, identifying the features of the policy process and leadership that allowed for continuation of growth reform, with a stronger focus on equity goals, since the transition to democracy. As a result of three decades of reforms, Chile has recorded a quantum leap in economic growth, which is traced down to specific reforms. Yet Chile’s equity experience is much more mixed: poverty has declined massively but income remains highly concentrated, a likely result of shortcomings in the quality of education and in labor markets. The paper reviews the major risks to the country’s future development pace and points out the main reform challenges faced by policy makers. Ten lessons from Chile’s experience close the paper.

 

 

 

 

The paper is not like the Brazil paper. It is written from a typical economic point of view unlike the Brazil one which was from a political economy angle. Anyways a good read.

Understanding Capital Regulation using balance sheets

May 13, 2009

Simona Cociuba of Dallas Fed has written a nice brief on capital regulation. She illustrates the need for regulators to have a systemic perspective via balance sheets. One individual Bank may have sufficient capital but could still face a run if its counter-party is in trouble. Or a prudent action by one bank (say cutting loans in times of uncertainty) could impact the other.

It also has a small description of Northern Rock Troubles.

On July 25, 2007, Northern Rock published its interim report for the year. The chief executive acknowledged that annual profits would be affected by recent sharp increases in money market borrowing rates but concluded that “the medium term outlook for the Company is very positive.” On Sept. 14, the Bank of England granted emergency liquidity support to Northern Rock. This was the first run on a U.K. bank since 1866. Northern Rock was taken into public ownership in February 2008.

Yet another report on financial services sector

May 7, 2009

UK Govt releases another report on financial services sector. The number of reports and proposals being released on financial sector are simply mind-boggling.

This new one is quite interesting. It is to set vision for continued success of London in global fin markets (whatever that means).

The Group was tasked in June 2008 with examining the medium to long-term challenges to London’s continued success in global financial markets.  Working against the backdrop of the most severe financial crisis in generations, the Group has proposed a ten to fifteen year framework for strengthening the UK’s place in the rapidly changing global financial services industry.

The report highlights the contribution of regional financial centres, noting that the majority of financial sector jobs are based outside the City of London, providing employment for hundreds of thousands of workers in regional economies.  It also argues that the UK-based industry must seize opportunities to help meet the financial services needs of businesses and citizens in emerging markets, such as China.

The Group acknowledges the huge fiscal costs of the banking crisis to the global economy, taxpayers and public finances, and strongly argues that effective regulation – with the UK taking a leading role in formulating global and European standards – will be the most important determinant of the sector’s future success.

Alongside regulation, the Report also highlights the importance of maintaining effective long-term performance in areas such as the UK’s skills base, tax environment, innovation and promotional efforts to ensure that the financial services sector is well positioned to play a role in meeting the future economic opportunities of the UK and global economy.

I haven’t read the report but did not really understand this continued fascination for financial services sector. Finance is important but I thought main lesson would be to work on the real economy and let finance support it. Let me read the report and see if I can find anything more interesting.

BoE releases a new report on bank lending trends in UK

April 23, 2009

Bank of England has started to release a new report- Trends in lending. The report would be a monthly feature giving an analysis of bank lending trends in UK. The report is divided into three types of credit- to business, mortgage and  consumer. It then looks at amount and interest rates in each type of credit.

The first report findings:

  • Growth in the stock of lending to UK businesses slowed markedly during 2008 but looking ahead, some lenders expect the overall availability of credit to the corporate sector to increase over the next three months.
  • Growth in the stock of mortgage lending to individuals has slowed sharply since the start of the financial crisis as credit availability declined. Lenders expect the demand for secured credit to remain weak in coming months.
  • The availability of unsecured credit has tightened over the past year and weak demand for unsecured lending is expected to continue over the coming months.

 It also looks at whether lack of demand or lack of supply are influencing credit conditions. It is pretty difficult to say in each of the three categories. At best, both seem to be at work.  However, it does provide some basis for analysing this:

 

 

 

A key issue for policymakers when assessing how best to support the flow of credit to the wider economy is the extent to which the observed weakening in lending reflects a reduction in 

supply , such as a tightening in banks’ credit provision, or weaker  demand  for funds from businesses and households as the UK economy entered recession. Assessing the balance of these factors requires an assessment both of lending quantities  and of loan pricing adjusted for risk. If the lending slowdown is predominantly driven by weaker demand then, other things equal, we would expect spreads charged on lending to fall. By contrast, if a tightening of supply is more important, spreads would be expected to rise. On these grounds in initial phase of crisis, in UK it seems to be more of a supply issue (as rates were high) and now more of a demand issue (as rates have declined but credit has not really picked up). But then again it is very difficult to entangle the two clearly. We can just take a relative picture.

 

 

 

I recently pointed to an analysis on US Bank lending trends which said small banks have raised lending.

I also updated Indian Bank lending trends which says though interest rates have lowered but credit has declined. So, in India also we see a similar picture as seen in UK. The credit flow has declined in Jan-Apr compared to Oct-Dec. However, rates have declined (though not as much as RBI policy rates) esp in Public Sector banks. So, the decline is likely to be more demand driven than supply driven.

This is a great initiative by BoE and it will be great if most Central Banks release similar reports on a monthly basis. This would provide a lot of clarity to state of lending in their respective economies. As non-banking sources of finance have collapsed everywhere, banks are the key. RBI does release a lot of data on a regular basis on banks (so must be other central banks which are bank regulators) but such reports are always useful. It will provide the trends in one snapshot.

Useful Central bank Annual reports to read

April 22, 2009

There is plenty of research work to read since last week. IMF’s WEO and GFSRare out and are being recommended by all top econs to read (quite pessimistic reports).

A few Central banks have released their annual reports which provide a good read as well on the impact of crisis on their economies.

  1. ECB (Lucas Papademos, VP of ECB provides a summary) . The chapter on non-ECB EU members is quite interesting. They have faced quite severe pressures in this crisis.  So is the chapter on Slovakia’s inclusion in ECB. It is going to turn into a useful event study for researchers going ahead. How did Slovakia become a member of ECB, what were the challenges, the integration process etc.
  2. Swiss National Bank : Apart from Swiss econ devleopments, it has a nice discussion on the UBS deal (though I could not understand much of it)
  3. HongKong Monetary Authority

Actually, the central banks reports especially the ones with so called modern financial systems/international finance centres should be aggregated to get some policy learnings. Singapore and Bank of England are yet to come out with their reports. Though we all know how UK feels about the modern financial system via its Turner review. Even Iceland story is well-known by now. The aggregated literature would in turn provide future policy lessons for wannabe modern financial systems/international finance centres.

It needed a crisis as big as this one to convince acads that we need to rethink about modern finance. I hope lessons are not lost quickly.

Dissecting the credit crunch in India -II

April 22, 2009

RBI released its monetary policy for 2009-10. Just like my previous post, I was interested to see the credit market data.

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But IMF does macroprudential analysis and it hasn’t worked

April 13, 2009

You pick up any report/paper/article on lessons from the crisis/preventing future crisis/reforming financial system and regulation  and one of the foremost suggestion you would get to read is – Implement Macroprudential approach to financial regulation.  It basically means the regulators need to shift from focusing on individual firms to the system as a whole. The individual firms may look well (just like before the crisis) but as a whole could pose risks to the entire system . Read this Bernanke speech for further insights.

FSA, UK conducted a conference to discuss Turner Review. I was reading this speech given by Adair Turner himself at this conference. It serves as a good summary of the review.

These words were of immediate interest to me.

The Review sets out eight sets of recommendation for regulatory reform. ……Fourth, the importance of macro-prudential analysis and intellectual challenge.  

however, one thing we clearly need is intellectual challenge to conventional wisdom. Because where we did do macro-prudential analysis, it often still failed to see the emerging problems.

Each edition of the IMF Global Financial Stability Report is full of macro-prudential analysis. But in April, 2006 it said this (Exhibit 16):

 ‘There is  a growing recognition that the  dispersion of credit risk by banks to a broader and more diverse group of investors, rather than warehousing such risk on their balance sheets, has helped make the banking and overall financial system more resilient.

The improved resilience may be seen in fewer bank failures and more consistent credit provision: consequently the commercial banks may be less vulnerable today to credit or economic shocks’

Which was not just wrong – but 180° wrong. So how do we ensure that we don’t in ten years’ time get it wrong again, going along with a dominant conventional wisdom? Market prices are subject to self-reinforcing herd effects: policymakers and policy intellectuals can be subject to intellectual herd effects; and there is no failsafe way to offset this human tendency to collective error. But we need as best possible to embed challenge into our institutions.

(IMF GFSR reports are here) This is excellent stuff again. Just like the crisis was a result of pessimism herd , the solutions also seem to following the herd  without actually checking whether it has been implemented already ? IMF has been using it and they have not been successful. IMF’s economists like Rogoff and Rajan did raise issues in their independent researches, but GFSR could not (ideally GFSR should have been able to see events as it sees the system as a whole).

Lord Turner is absolutely right in saying if we could not get it right then, what are the chances to get it right in next 10 years? Most of this macroprudential analysis is anyways going to be base on fancy models. Most of these models in turn will be based on the assumptions that have led to problems in the first place - people are rational and markets are efficient. And again we are most likely to get the same results – things are fine and this time is different (only to realise it is not).

This is not to say macroprudential exercise will not work etc. But to just point that it will be no magic potion. Bernanke in his speech had given a reality check on these models and they will be difficult to implement. Developed economies may still manage, it will be very difficult for emerging/developing economies.


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