Archive for February 1st, 2010

Crony capitalism in South East Asia was found after the 1997-98 crisis…

February 1, 2010

I was reading this 1994 paper by Dani Rodrik on economic policy reform. I will come back to the paper later. What it says in middle of the paper is very interesting:

How Did East Asian Countries Manage to Intervene without Inviting Rent Seeking?

(more…)

Advertisements

Understanding Iceland’s crisis

February 1, 2010

Már Guðmundsson, Governor of the Central Bank of Iceland has given a nice speech explaining about whys and hows of crisis in Iceland.

What we observed during this peak of the crisis was thus a run on cross-border banking operations. We know how to solve such problems domestically by letting central banks lend to markets and/or institutions through their almost unlimited short-run capacity to expand their domestic balance sheet. However, when it comes to foreign currency, a central bank’s capacity to help banks to refinance the foreign liquidity denied them on the market is limited by the size of its reserves or the willingness of its big neighbours to help.

This is what did the Icelandic banks in. At that point, their balance sheet was almost 11 times GDP, with the foreign currency part constituting ⅔, or almost 7½ times GDP. And as is always the case in banking, there was a significant maturity mismatch between the asset and liability sides. Compare these numbers to the reserves of the Central Bank of Iceland, which were 21% of GDP at the time; a swap agreement with the Nordic countries amounting to €1.5 bn, or around 12% of GDP; and committed credit lines of around 2% of GDP, or a total of around 35%. This is dwarfed by the foreign currency liabilities of the banks, even if some of them were, of course, longer-term.

These defences could only buy limited breathing space in the face of a full-scale run on cross-border operations of banks this size. Further research is needed before we can assess to what degree such breathing space would have facilitated a more orderly and less costly episode than the complete collapse that took place.

In 2003 bank assets were less than 2 times of GDP and by 2007 it was 11 times!

From 2003 to 2007, the banks’ total assets grew from less than two times Iceland’s GDP to almost nine times. Right before their collapse, total assets amounted to eleven times GDP. Over 40% of total assets were in foreign subsidiaries, 60% of total lending was to non-residents, and 60% of income was from foreign sources. Over two-thirds of lending and over three-quarters of deposits were denominated in foreign currency, notably in pounds sterling.  Around 85% of the banks’ foreign lending was in Europe, with half in the Nordic countries, a third in the United Kingdom, and a tenth in the Benelux countries.

Read the whole thing. In the end the Governor says:

I told you in the beginning that this is a complex saga with many twists. I have only covered a small part of it. However, be sure that there is more to come. I am currently reading a newly published biography of Snorri Sturluson. He and other Icelanders wrote about events that occurred here in Norway and Iceland, in some cases more than two centuries earlier. We might thus be writing about the Icelandic financial crisis for centuries as well! If history is any judge, then we are probably better at it than we were this time at managing, regulating and supervising a cross-border banking system. For the sake of all of us, let us at least hope so.

:-)…Economics history always has surprises  for you….

RBI to organise a conference on financial literacy

February 1, 2010

I pointed to two RBI research conferences. One of them is over (deposit insurance) and second one to be held on Feb. RBI is organising another conference with OECD on financial literacy on 22-23 March at Bangalore.


%d bloggers like this: