Archive for March 15th, 2017

Lessons on Central Bank Governance from Charlotte Hogg, Deputy Governor of Bank of England who resigned…

March 15, 2017

It would have been least expected that one of the major issues which will trouble central banking is governance. How we keep seeing several such cases in recent years – NY Fed, Barbados Central Bank, India central bank and so on…

Now a new one has come up from the mother of central banking: Bank of England.  And this is a strange one.

Charlotte Hogg was a COO in the central bank for four years after many years in private sector. Based on her great track record, she was appointed Deputy Governor on 1 March 2017. But in just 14 days she has had to resign. Reason? She did not disclose her brother working at Braclays at the time of joining the Bank.

She says it was an honest mistake with no ill-intentions. But given a public job, there cannot be such mistakes and so she should resign:

Dear Mark and Anthony,

Last week I offered you my resignation in recognition of the fact that I made a mistake in not declaring my brother’s work on the forms that the Bank requires. It has become clear to me that I should now insist. As I have said, I am very sorry for that mistake. It was an honest mistake: I have made no secret of my brother’s job – indeed it was I who informed the Treasury Select Committee of it, before my hearing.

But I fully accept it was a mistake, made worse by the fact that my involvement in drafting the policy made it incumbent on me to get all my own declarations absolutely right. I also, in the course of a long hearing, unintentionally misled the committee as to whether I had filed my brother’s job on the correct forms at the Bank. I would like to repeat my apologies for that, and to make clear that the responsibility for all those errors is mine alone. I have not shared confidential information or misused it in any way. I do not have any financial relationship with my brother and I am utterly committed to the safeguarding of confidential information and the separation of a home and work life.

However, I recognise that being sorry is not enough. We, as public servants, should not merely meet but exceed the standards we expect of others. Failure to do so risks undermining the public’s trust in us, something we cannot let happen. Furthermore, my integrity has, I believe, never been questioned throughout my career. I cannot allow that to change now. I am therefore resigning from my position. I will, of course, work with you through any transition.

BoE accepted her resignation with deep regret.

Though what is more interesting is how she was grilled at the Parliament hearing:

At Ms Hogg’s appointment hearing on 28 February, the Committee asked about the interests declared in her questionnaire response, which included her statement, “my brother works for Barclays as a Director in Group Strategy”

Kit Malthouse: One final thing from me is that you have declared some conflicts of interest. Obviously you have family connections in the industry, so what measures have you agreed with the Bank to manage those?

Charlotte Hogg: My only connection at the moment, which you are referring to, is my brother, who is part of Barclays’ strategic planning group. He has been for a number of years. I do not discuss work with him and he does not discuss it with me. We mostly talk about his children. [ … ]

Chair: Let us go back to an answer you gave to Kit Malthouse a moment ago. You said that, with respect to conflicts of interest with your brother, you do not discuss business with him and that that should be enough to allay concern of any conflicts with your work on the PRC particularly, which has direct responsibility for regulating Barclays. Have you discussed the reply you just gave with the Governor?

Charlotte Hogg: I have always declared, from the moment I joined the Bank, all of my potential conflicts of interest. I would be more than happy to discuss it with Mark if he wants to. I am pretty sure he is aware of it. [ … ] Charlotte Hogg: [ … ] I am in compliance with all of our codes of conduct. I know that; I helped to write them.


Court confirmed that there were multiple opportunities when Ms Hogg could have declared her brother’s role: Helen Goodman: How many opportunities has she had to declare that her brother works at Barclays?

Anthony Habgood: When she joined, whenever she has attested to that code, which I guess we brought in 18 months ago or something like that, so probably two or three and she has not attested to that. [ … ]

Chair: [ … ] we went through several hoops when she first arrived in the Bank and then these two or three further opportunities to address this on a code that she herself had written. In evidence to us she said she knew she was compliant because she helped write the code. But it took parliamentary scrutiny and the requirements of parliamentary scrutiny to elicit a response that she should have given several years ago. It does not look good, does it, Mr Habgood?

Anthony Habgood: It does not look good. I agree with you—it does not look good. Chair: To use the phrase of Mr Fried, it does not look like leading by example, does it, Mr Habgood?

Anthony Habgood: It does not look like leading by example, no. Helen Goodman: There was the occasion when she took up her initial appointment. There were the annual attestations—there might be a couple of those—and then there was the application for the job.

The whole hearing document is a great read. Tells you how important central bank governance is against what quite a few believe in India.

Seeing all this drama in recent years, one realises how much stress we put on monetary policy framework, policy etc but so little on governance matters. Take for instance Indian central bank which is undergoing such a transition amidst huge hype. But the more important issues of governance and appointment matters remain under a wrap. It isn’t clear how various people are appointed on central bank (other regulators as well) nor we get to read about their discussion with government on matters. In Bank of England on the other hand, these things are common and central bankers are grilled for their decisions.

It was very rare when the media covered (got to cover?), Indian central bank head grilling over demonetisation. But noting much came out of it as it was just picked from sources. The thing should have been televised or transcript put for viewing later.

The so called best practices about running institutions is as much about governance as it is about policies. High time we focus on former as well..

When dealing with financial services, one’s default attitude should be distrust and suspicion

March 15, 2017

An interesting post by Dhirendra Kumar of Valueresearch. It is nice when people who belong to financial services warn people to be careful while dealing in finance. After all, financial services business is full of tricks and games around other people’s money. It is for no reason that finance was always treated with suspicion for ages and those who dealt in money highly despised. Despite changing attitude of society towards finance , most financial players contineu to complicate things and missell their products.

He says usually the default option for most activities should be open and trusting. But in finance default should be the opposite which is ironical as finance is all about trust:

Those who have a positive attitude towards what life brings them are more likely to be successful and happy. Or at least, that’s a common belief. There’s more. When you meet someone new, it’s better to assume the best about them since most people are honest and sincere. Generally, things will work out better if your default attitude is open and trusting.

Unfortunately, this is not true while choosing and buying financial services. As a rule, you should assume that everyone who is trying to sell any financial service to you is either hiding something or is actively lying. This maybe only 90 or 95 per cent true but it’s better to assume the worst to protect yourself. The only way to make the right choices when you save, invest and insure yourself is to educate yourself independently, and make your decisions yourselves without having to depend at all on what a salesperson is telling you. Decades of interacting with the customers of financial services and observing how these industries work has left me with the strong belief that when it comes to dealing with them, distrust and suspicion should be the default attitude.

Why should this be the case? Why is buying financial services different from buying, say a jacket or a shoe or a car. There are many reasons for this and while some are to do with specific issues with the way business and regulations are conducted in India, there is a much deeper reason that is fundamental to financial services.

This reason is that the input, product and output of a financial service business is all the same stuff–money, and the only way they can earn more is by ensuring you get less of it. Think about that carefully.

Best way out is to educate yourself:

This has a really important implication: for a given type of financial service, and a given competence with which it is run, the only way the provider can make more money is to give you less of it. If the provider wants more of anything, be it profits or salaries for employees, or more dividends for the owners, then that has to come from reducing what you get. If it wants to increase sales by paying more commissions to agents then that too is paid for by reducing your returns. EVERYTHING comes out of your pocket.

Don’t think that is some esoteric, conceptual model of financial services. This is what drives every interaction you have with your bank, insurance company, stockbroker, mutual fund, and those who are trying to sell you their services. And don’t count on regulators to protect you. In general, India’s financial regulators are always well behind the curve in stopping the malpractices that are rife in all these products.

The only way to protect yourself is to educate yourself with information and knowledge that is not tainted by actually being generated by the same people, and to always be suspicious of everyone who is selling a financial product, and have distrust as your default posture. I know it sounds terrible, but that’s the way things are.

Actually it is sad to see such an article from one of the major spokesperson of financial world.

Chennai’s tryst with desalination of sea water…

March 15, 2017

A very interesting piece on experience of Chennai with desalinating seawater. Needless to say, we need a holistic policy to do these things:

The Minjur Desalination Plant, India’s largest, was set up in the village of Kattupalli along the northern fringes of Chennai city in 2010. Ever since, the plant has been supplying 100 MLD water to households in the northern suburbs of Ennore, Manali, Tiruvottiyur, Tondiarpet and Madhavaram. The second desalination plant came up at Nemmeli, about 35 km south of Chennai city along the East Coast Road. Functional since 2013, the plant supplies 100 million litres of drinking water per day mainly to the city’s southern suburbs including Sholinganallur, Neelangarai, Thoraipakkam, Thiruvanmiyur, Velachery, Taramani, Adyar and Besant Nagar.

While the water demand for the Chennai city and its urban agglomeration is projected at 1560 MLD for the year 2019, the actual water supply hovers around 840 MLD, leaving a supply-demand gap of 720 MLD. To fill this void, the Chennai Metropolitan Water Supply and Sewerage Board (CMWSSB) has proposed the setting up of additional units of 150 MLD and 400 MLD as part of its phased expansion in Nemmeli. Both these plans will come up at Perur in Nemmeli village, very close to the existing facility.


For every 100 MLD of potable water generated by the desalination plant in Minjur, the treatment unit draws in 237 MLD of seawater. Post-treatment, the briny reject is let out into the sea, around 650m away from the shore. While documents suggest that a similar reject-discharge arrangement is in place at Nemmeli, reality appears otherwise.

From the time the plant commenced operations in 2013, villagers complained of brine reject from the plant being let out directly onto the beach and not 650m into the sea as mentioned in the environmental clearance granted by the Ministry of Environment, Forests and Climate Change (MoEFCC). Pipelines carrying the reject water were later buried under the sand but poor maintenance led to clogging, as a result of which pools of brine reject got stagnated along the beach stretch. Even as recently as December 2016, Chennai-based Coastal Resource Centre has documented evidences of hyper-saline reject being dumped right on the beach. The situation has not changed since; concentrated brine reject continues to be let out on the beach till date.Back in 2013, a fact-finding team looked into allegations of environment and human rights violations arising out of the construction and operation of the Nemmeli plant. The report recorded villagers’ accusations of the desalination plant eroding the coastline and endangering their livelihoods in addition to turning the groundwater salty.

Ecologist Sultan Ismail explains that the brine reject tends to create a sort of niche microhabitat with higher levels of salinity around areas where they are let out. This microhabitat creates a localised imbalance as it may not house organisms which are otherwise found in the adjoining waters, resulting in a lower organism diversity in the area. Government bodies set out to study such imbalances claim that the ocean is too big for such a small niche to actually be a troublesome entity.

But the impact on marine life can be better understood by identifying where the reject water is being let out. “There are some species of fish which feed, breed and spend most part of their early life along the coast. If the hypersaline reject is let out close to the coast, the probability of these organisms being affected is rather prominent. Fish species such as sardines, mackerels and anchovies feed on planktons along the coast. When the plankton population decreases due to hypersalinity, it affects the health of fishes up the food chain which in turn affects fish diversity as well as density,” adds Ismail. In addition, high-pressure motors used to draw in water also brings in marine life forms of varying sizes despite nets placed to avoid relatively larger organisms. Fish, fry and crabs get crushed and killed in the process.

You intervene somewhere and it leads to problems elsewhere. Water is by far the biggest issue which will hit India (and other water irresponsible countries) like nothing else has hit us. It is such a pity when you go around old sections of cities/towns where you see how conscious we were with respect to water. We have done away with all these methods and principles in the name of modernism only to stare at a water crisis which will disrupt everything.


Did Thatcher reverse UK decline? Questioning the standard narrative…

March 15, 2017

It is quite fashionable to build narratives around economic growth/development of a country with one/two individuals. Nothing sells as much as this narrative. It has an immediate appeal. What starts as a narrative eventually becomes a fairy tale of sorts and that person a very popular character. What better than India to see this where 1991 was the year when Dr Manmohan Singh just changed Indian economy.

The problem with such grand narratives is the story starts much before and is a series of multiple steps and actors which culminates in that big narrative. So in India’s case researchers have often pointed things started with Rajiv Gandhi post 1985 but it does not really capture the mood.

Similarly in this piece, Profs. Nauro Campos and Fabrizio Coricelli question the Thatcher narrative:

 Though, both EEC membership and Thatcher actions are complementary:

These results provide new evidence that the great British reversal was driven by membership of the European Economic Community, not Mrs Thatcher’s structural reforms. These two explanations may, however, be complementary.

These reforms were implemented in the second term of the Thatcher government. Her June 1983 general election victory was the most decisive since Labour’s victory in 1945. The main reforms that defined her second term covered labour, product, financial market liberalisation, privatisation and openness to foreign investment (Card and Freeman 2004, Oulton 2016).

Our main finding was that the 1969 turning point is more powerful than structural breaks at the launch of Mrs Thatcher’s programme of structural reforms in 1983 or 1986. Our earlier Vox column on this topic discusses the determinants of the UK decision to join the EU (Campos and Coricelli 2015), while here we focus on its implications by providing new statistical evidence on the effects of European integration on UK economic performance, compared to Mrs Thatcher’s reforms. Hence our study combines the empirical identification of structural breaks with an analysis of how and why the benefits from EEC – and later, EU – membership changed over time (Campos et al. 2016, Crafts forthcoming). The UK’s per capita GDP relative to the EU founding members declined steadily from 1945 to around 1970, and became relatively stable after that. If the UK joined the EEC to stop its relative economic decline, it worked. It also laid the ground for future improvements in relative economic performance with the introduction of the single market.

The success of Mrs Thatcher’s reforms required EEC membership. These structural reforms were not implemented in a vacuum. They could not have existed without the powerful support of British entrepreneurs (Grossman and Helpman 2001), who benefited from a larger, deeper and more innovative market (contrast the EEC at the time with EFTA and the Commonwealth). These entrepreneurs also realised that to be competitive they would need access to deeper capital and labour markets supported by a set of common standards, rules and regulations (Baldwin 2016, Mulabdic et al. forthcoming). Without support from such powerful constituencies, Mrs Thatcher’s reforms would not have been implemented as they did, and certainly would not have been as successful.

This explanation draws parallels with the French experience in the immediate post-war period (Adams 1989). Between 1945 and 1957, there was a conflict of interest between powerful groups of French entrepreneurs, some of whom were against, and some in favour of, further European economic integration. The interests of those against were associated mostly with the former French colonies, though they lost influence in the run-up to the Treaty of Rome and found themselves locked into the European integration project even after de Gaulle was elected president in 1958 (Moravcsik 2012). At that point, they could redirect but not reverse the process.

Nice bit..

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