Archive for August 14th, 2009

RBI’s weekend reading

August 14, 2009

RBI has released 3 papers/studies (as part of its DRG series)  which could serve as a useful weekend reading:

  1. Strengthening Decentralisation – Augmenting the Consolidated fund of the States by the Thirteenth Finance Commission: A Normative Approach
  2. Introducing Expenditure Quality in Intergovernmental Transfers: A triple-E Framework
  3. An Outline of Post 2009 FRBM Fiscal Architecture of the Union Government in the Medium Term

The third study is of immediate interest to me. Its abstract says:

The study emphasises the need for reconciling the discrepancies between the fiscal deficit and movement in debt in designing a meaningful framework on fiscal consolidation in India. The paper finds that discrepancy between the two arose mainly due to: (i) exclusion of off-budget liabilities and Market Stabilization Scheme (MSS) in fiscal deficit while being part of outstanding liabilities; (ii) part of National Small Savings Fund (NSSF) being utilised by the States to finance their deficits being shown as liabilities of the Central Government; and (iii) financing of fiscal deficit by draw-down or build-up in cash balances. Accordingly, the paper attempts to reconcile the discrepancy and also reclassifies the expenditure components into current and investment component as against revenue and capital components in the Budget.

For the fiscal consolidation framework, interest payments (IP) to revenue receipts (RR) ratio is considered the target variable, and based on budgetary identity, the Study derives the tolerable level of deficit and debt under alternative assumptions of growth and interest rate. From the derived tolerable level of deficit, the components of expenditure are calibrated by making adjustments in the discretionary component. Under alternative assumptions of growth, interest rate, revenue buoyancy and chosen ratio of targeted interest payments to revenue receipts (IP-RR), the paper generates a menu of choices on the path of fiscal consolidation during the medium term. The Study provides simulated results of 54 alternative fiscal scenarios based on interest rate, revenue buoyancy and target ratio of IP-RR which may help in building a framework for post 2009 FRBM fiscal architecture.

Not the ideal way to spend your weekend. But as most places for recreation remain closed due to Swine Flu (esp in Mumbai and Pune), one might just take a look at these studies.

Regulating Shadow Financial System

August 14, 2009

One of my favorite economist duo, Tobais Adrian and Hyun Song Shin have written this short paper reviewing US Shadow Banking System and its regulation. The paper is a shortened version of their earlier papers (this and this).

In this paper they look at how this shadow banking system developed, how the balance sheets were leveraged and were different from households balance sheets and role of securitization.

Finally, they touch on four ideas of financial regulation that have come up:

Having identified the problem as the excessive growth of leverage during the boom, the remedy that has gained recent support by policy makers is the imposition of tighter regulation, especially regulation that targets the procyclical nature of the current system of capital regulation under the Basel II system. Many ideas have been advanced, of which we will discuss four.

first is an explicit leverage ratio bound that restrains growth of leverage at the peak of cycles. Switzerland has recently implemented such a system, Canada has had explicit leverage ratios as part of their regulatory framework for some time, and the Financial Stability Forum (2009) recommends a broader review of such a leverage ratio.

The second is the forward-looking provisioning scheme used by Spain, where a provision is created at the time that a bank makes a loan, and the provision goes through the income statement of the bank. This system of forward looking provisioning has been credited with maintaining a more robust banking system thus far in Spain relative to other European countries, in spite of the Spanish housing boom.

Third, several recent policy reports have advocated explicit countercyclical capital rules (see, for instance, the Geneva Report (2009) and the Joint FSF-CGFS Working Group (2009) on the role of valuation and leverage in procyclicality).

Fourth, Adrian and Brunnermeier (2009) propose to base capital adequacy rules explicitly on measures of systemic risk of particular institutions.

Crisis of economics or economists?

August 14, 2009

A new paper (HT: Niranjan)by Luigo Spaventa is another of a series of papers being written which say it is introspection time for economics and economists. He aslo points to numerous other economists articles/papers on the same.  

See this one by Celestin Monga of World Bank and this one by yours truly.

How about knowing a bit about Graham Leach Biley Act?

August 14, 2009

There is a lot of talk and research about Glass Steagall Act. However, what ended Glass Steagall Act’s limits on banks, was undone by Graham Leach Biley Act. Here is a paper from 3 economists telling about the act and what it did.

In sum the act did not do much as limitations on banking were being eased before the act. There were 3 factors:

  • The first was the increasing weight of empirical evidence generated by academics. A number of studies found that the securities activities of commercial banks bore little responsibility for the banking traumas of the Great Depression
  • Regulators had allowed U.S. banking companies to undertake limited securities and insurance activities in recent years. By the end of the 1990s, few U.S. banking problems had been attributed to the wider range of permitted activities.  Advocates of repealing Glass-Steagall also cited the extensive experience from other developed countries of banking companies that had securities and insurance businesses as providing support for the repeal of Glass-Steagall.
  • The third factor was rapid technological advance that has already markedly reduced the costs of using data from one business to benefit another business, and is expected to reduce such costs further in the future. These cost reductions raised the expected profitability of cross-selling insurance and securities products to both household and business customers. Together, these three factors added powerfully to the case for repealing Glass-Steagall.

Hmmm. So the GMB act did not impact much. The changes were happening already. Anyways, an interesting read. Table 1 at the end of the paper shows the permitted activities for banks in 1997 in  various economies. The authors say US along with Japan was most restrictive and did not allow banks to engage in other businesses. So, the authors say US banks could expand in other areas as well. Am wondering what will they say now.

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