Archive for May, 2016

Payment Bank- Three down..

May 25, 2016

The eleven players that were licenced make a cricket team which was expected to do wonders playing the game of financial inclusion.

But things are not going well at all and we. After the first wicket fell in March (Cholamandalam) and now very quickly two wickets have fallen. After Sanghvi/Telenor/IDFC became the second player, Tech Mahindra becomes the third player to drop out of the match.

Again no real reason for dropping out. The third player was in news for forming its management team not very long ago.

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Should US opt for longer term bonds of say 50 year and more?

May 24, 2016

The term premium to hold long bonds is in negative and lowest since JFK era.

Barry Ritholtz makes a case for US issuing 50 year treasuries. One can always debate pros and cons of ultra low rates. But the least US govt could have done is to take advantage of these low rates and issue much longer term bonds. Currently it stops at 30 years whereas so many countries have issued 50 year ones:

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Learning about economics using peanut butter and cupcakes…

May 24, 2016

St Louis Fed has these interesting lessons to learn economics. They are meant for class 1-3 but don’t see why they cant be used for senior classes as well. It is far better to learn economics using these methods than the boring books which emphasize algebra over common sense.

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What is it like to be the first US bank to do business in Cuba?

May 24, 2016

Here is an interview of David Seleski, CEO of Stonegate Bank which became first such bank. The interview reveals how a bank both gets trapped in bad relationships between two countries and also shapes them:

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India’s Central Asia dreams to set sail from Chabahar

May 24, 2016

A nice summary of the recent deals by Indian government in Iran. Coincidentally, I have been reading this book by Scott Levi which documents how Punjabi Khatri merchants traded in Central Asia.

The recent deal is all about going back to history:

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A penalty to surrender payments bank licence?

May 24, 2016

The case seems to be getting more interesting. What should be treated as a normal entry and exit in business decisions is getting lost in licences and penalties. After the two payment banks surrendered their licences, the licencor is not amused.

 

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How Financialisation is destroying US economy (how far is India from it?)

May 23, 2016

Rana Fourhar of Time Magazine has penned a new book on how Financialisation is destroying US economy. INET has an interview and here is a brief overview of the book by the author herself (thanks to Gulzar for the last link).

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Economists discover Quasi-Equlibriated economic sub-particle

May 23, 2016

Prof. Steve Keen who has taken multiple digs at conventional economics takes another dig at the macro world.

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How taxmen are tracking your Facebook pictures to ensure proper filing of taxes…

May 23, 2016

Never underestimate the government especially when it comes to collecting more and more taxes. One may be posting his/her pics on EB to draw several likes and neighbor’s envy but is now also drawing attention from tax authorities.

Next time you are hiding your taxes saying low business income etc for the year, pop will come a picture from your Facebook showing a foreign holiday recently. The question the tax person will ask is if incomes are indeed low how did this holiday come about?

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Another prospective payment bank surrenders its licence…

May 23, 2016

As the blog was travelling over the weekend, another news came from the newly licenced payment bank industry.  The news was not a good one as another player dropped out from the race after Cholamandalam group opted out of the race.

The second one to opt out is a venture headed by Mr. Dilip Shanghvi with Telenor and IDFC as partners:

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How surnames continue to matter for economic status even over six centuries….

May 19, 2016

There is a lot of criticism on Indian society for lack of inter-generation mobility. But pretty much similar things exist in western societies as well.

In this paper, authors look at an example of mobility from Florence, Italy:

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How globalization is shaping temple culture in India…

May 19, 2016

Ipsita Chatterjee Professor of Geography at University of North Texas has an interesting post.

She points to her visits to Akshardham Temple in Delhi which to her looks like a Disneyland experience:

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100 years of Karur Vysya Bank!

May 18, 2016

There is much news (which is mostly noise) about future of Indian banking. There is very little on history of banking and particularly some banks, no matter how fascinating and interesting this history has been all these years.

This is a crucial period of Indian banking in a way. As we look to create new banking institutions (with most being old wine in a new bottle – link one, link two), we often forget how old some of our continuing institutions are and how they continue to serve us for so long.

In this list, we ignore the new private sector banks created post 1994 as they are still new in the list (though some post 20 years now) and just look at the nationalised banks and old private sector banks . Here is how the list looks now:

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Greece in a monetary union: Lessons from 100 years of exchange rate experience, 1841-1939

May 17, 2016

Greece’s troubles on economic front are hardly anything new. They are as old as it gets.

Matthias Morys sums up the experiences of 100 years since 1841-1939.

Culture in financial services..a much neglected and a very important domain

May 17, 2016

One has been trying to read as much financial history as possible across countries. It is all fascinating to read through accounts of ways things were financed back then and the hardships faced. One also comes across how financial innovations of today were used historically and there is hardly anything modern or innovative about them.

Another thing which emerged is strong cultural and trust values in banking firms. Firms that instilled these values early on and remained committed survived much longer than their peers. Leave all balance sheet analysis and financials aside. It is this cultural aspect which matters as greatly for both survival and growth of a banking firm. This applies to most firms but much more to banks for whom gaining trust and maintaining it is really central to everything.

The crisis of 2008 is leading all these lost values to come back.  Regulators stinged by the crisis despite all the fancy financing techniques and Basel norms, now realise culture of a firm is what matters at the end of the day.

In this speech, Andrew Bailey of Bank of England sums up the issues:

There is a reasonable debate about what is culture, but that is not a debate about whether it is important.  In my view, culture is a product of a wide range of contributory forces:  the stance and effectiveness of management and governance, including that well used phrase “the tone from the top”; the structure of remuneration and the incentives it creates; the quality and effectiveness of risk management; and as important as tone from the top, the willingness of people throughout the organisation to enthusiastically adopt and adhere to that tone.  Out of this comes an overall culture.  It is not something that has a tangible form.  As supervisors, we cannot go into a firm and say “show us your culture”.  But we can, and do, tackle firms on all the elements that contribute to defining culture, and from that we build a picture of the culture and its determinants.
 
Culture has a major influence on the outcomes that matter to us as regulators.  My assessment of recent history is that there has not been a case of a major prudential or conduct failing in a firm which did not have among its root causes a failure of culture as manifested in governance, remuneration, risk management or tone from the top.  Culture has thus laid the ground for bad outcomes, for instance where management are so convinced of their rightness that they hurtle for the cliff without questioning the direction of travel. We talk often about credit risk, market risk, liquidity risk, conduct risk in it’s several forms. You can add to that, hubris risk, the risk of blinding over-confidence.  If I may say so, it is a risk that can be magnified by broader social attitudes.  Ten years ago there was considerable reverence towards, and little questioning of, the ability of banks and bankers to make money or of whether boards demonstrated a sufficient diversity of view and outlook to sustain challenge.  How things have changed.  Healthy scepticism channelled into intelligent and forceful questioning of the self-confident can be a good thing.  In turn, culture matters to us as financial regulators because it can, left alone, tend to shape and encourage bad outcomes, but it doesn’t have to do that.
Happy revisiting history.
So what can regulators do and not do?
What can we do therefore as regulators to shape and influence better outcomes on a more consistent basis?  Let me start with one thing that we cannot do.  As regulators, we are not able, and should not try, to determine the culture of firms.  We cannot write a regulatory rule that settles culture.  Rather, it is the product of many things, which regulators can influence, but much more directly which firms themselves can shape.  We seek to ensure that firms have robust governance, which includes appropriate challenge from all levels of the organisation; and promote the acceptance that not all news can be good and the willingness to act on and respond promptly to bad news.  We insist that remuneration is structured to ensure that individuals have skin in the game, namely that a meaningful amount of past remuneration is retained or deferred and for senior people is at risk should problems then emerge.  We require that risk management and internal audit in firms are effective and act to root out poor incentives and weak controls.  All of this is important and central to what we do as regulators, but let me reinforce the point that culture begins and lives, and I am afraid dies, at home, with firms.
 
It is not for us as regulators to prescribe culture, that would not work.  Firms and their management have to want good culture.  But we can have a lot of influence here. 
Then he sums up the steps taken by BoE to try and influence culture:
In the last few months we have taken a very important step here by introducing for banks the Senior Managers and Certification Regime, as proposed by the Parliamentary  Commission on Banking Standards.  It replaces the Approved Persons Regime, and in time it will be implemented across the regulated financial services sector.
 
There is, let me be clear, no magic bullet to change culture, but the new regime is a big step forward in my view.  This is because at its heart it embeds the notion of personal responsibility for the affairs of the firm at the level of senior management.  The Approved Persons Regime did not do this, and in practice it focused on a notion of culpability not responsibility.  These two notions are different.  I have said many times, but will keep doing so, that senior managers cannot delegate responsibility.  To be fair, many have said to me over the last few years that this change does not make a difference for them as they always thought they were responsible.  Good.  But, set this against other conversations I have had which have doubted the enforceability of this notion of responsibility.  This has concerned, but not distracted me.  So, to be clear, responsibility is the central plank of the new Senior Managers Regime.  We do want senior managers to feel this responsibility in all that they do and that includes a responsibility for forming and implementing a positive culture throughout the organisation.  In this respect culture is no different to strategy; where are we today, where do we aspire to be tomorrow, how will we get there and what risks must we mitigate along the way.
 
Responsibility, as embedded in the Senior Managers Regime, is therefore an important hook to assist in firms’ shaping their own culture, and also to provide regulators with the powers to conduct supervisory oversight and to act when needed.  But, let me reiterate that it is not the job of regulators to enforce culture and to change culture.  If we have to step in, and occasionally we do, the overriding conclusion is that management has failed.

Alas, none of these measures are likely to work much. These things are pretty much inbuilt and historical. Moreover, there is no guarantee that once culture is set, it will continue. Change of senior management who do not believe in culture and history undo all the goods of the past and then sow the seeds for eventual destruction of the firm..

50 year anniversary of India turning sharply left in 1966…

May 16, 2016

We are celebrating 25 years of 1991 reforms. However, there is another equally important 50 years anniversary. It was in 1966, that India turned extremely left due to the political developments. It led to wide-scale bank nationalisation, income tax levels of 97%, private industry coming to halt and so on.

Ashok Lahiri has a piece on this anniversary:

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Mostly Economics ranked in top 100 economics blogs!

May 16, 2016

Today is a big day for Mostly Economics Blog and its viewers. ME  has been ranked 79 in these rankings by intelligent economist of best economics blogs in 2016. The blog completed its 10 years in April 2016 as well.  So, a very good 2016 for the blog.

To be included in the list with such big names of economics world is truly inspirational and humbling..

Thanks all the visitors and well-wishers..

Why was the Industrial Revolution British and not Dutch? The innovation angle..

May 13, 2016

Anton Howes, has completed his PhD recently and is a Historian of innovation.

In this piece he looks at this perennial interesting question on industrial revolution. Why Britian? Why not in the other imperial power – Dutch? Being a historian on innovation, he says part of the reason could be that British were pretty good at innovating new things. Then they developed a social network where the innovators passed on their skills to others interested:

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The first two years of NDA Government: A critical appraisal..

May 13, 2016

Prof Pranab Bardhan shares his views on the first two years. Pretty critical one!

Media macro vs actual macro, city economists vs academic economists…

May 13, 2016

Simon Wren Lewis introduced this term called media macro. It basically meant financial media taking control over economic matters. Using their propoganda they kept highlighting macro issues which they thought were important. The problem is their understanding of these macro issues is mostly flawed and actually creates further problems. He shows how British media’s obsession over austerity in early part of the crisis got the economy into tailspin laters.

In a longish essay Prof Lewis, explains the issues further:

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