Archive for March 22nd, 2017

Books on Indian Financial History and World Economic History

March 22, 2017

Prof JR Varma of IIMA lists Indian Financial History books. It has contributions from Prof Chinmay Tumbhe of IIMA and yours truly as well. Those interested can mention other books/papers which should be read.

Niranjan alerts to this interesting list of World economic history books.

So much to read…

Denmark outsources minting coins to Finland

March 22, 2017

One fundamental question businesses face is: Should one produce or outsource?

Denmark has decided to outsource the minting coins to Finland.

The Mint of Finland has now begun to produce Danish coins. The coins will be put into circulation in Denmark later this year.“We chose the Mint of Finland after a transparent tender process and we are convinced that they will be able to meet our expectations,” says Governor Hugo Frey Jensen, Danmarks Nationalbank.

It was Hugo Frey Jensen himself who pressed the button to start production of Danish 20-krone coins during a visit to the Mint of Finland in the southern Finnish city of Vantaa. In the near future, the Mint of Finland will also start producing the other Danish coins. “Ever since the tender process, production of Danish coins has been a big and important task for us. We are proud to celebrate the start of production,” says Jonne Hankimaa, CEO of the Mint of Finland.

Although all Danish coins are now minted in Finland, their appearance has not changed. The only difference is that the year on the new coins is 2017.

Reasons? Falling demand of coins and banknotes has made the activity financially unviable:

Payment patterns have changed and demand for new banknotes and coins has been falling for a number of years. Hence it could not be justified financially to keep up an own production of banknotes and coins at Danmarks Nationalbank.

A tender process for production of Danish coins was initiated in December 2015 and a 4-year framework agreement was subsequently signed with the Mint of Finland.

No agreement has yet been concluded with a supplier of banknotes. Danmarks Nationalbank has just published a timeline for the forthcoming tender for banknotes, and a supplier is expected to be found in early 2018.


But the cost of printing and minting is hardly much especially given the seignorage, the State gets from this activity. Now, it seems Denmark has found it even cheaper to mint the coins via Finland (and print the currency later).

How central bankers see themselves as saviors, but not the cause of the instability at the first place

March 22, 2017

C Jay Engel posts based on a speech by Peter Praet of ECB:

ECB Executive Board member Peter Praet recently gave a speech in Brussels. The underlying theme captures the convenient positioning of world central banks. They want to be seen as saviors of collapsing financial markets, but neither the cause of the instability nor the continued struggle for economic growth. From the speech:

Faced with a prolonged crisis, the ECB’s unconventional policy measures have been essential to provide additional accommodation to the economy and prevent a self-sustaining fall in inflation — and they have been a clear success. Easier credit conditions have fed into a domestic demand-led recovery that has spread across countries and sectors. The economic outlook today is now better than it has been for many years.

And yet, as he admits, the ECB has been in crisis mode since 2008. So they want appreciation for bringing forth recovery, but want the world to look elsewhere for the reason why these economies aren’t self-sustainable. He even blames the crisis in the first place, not on central bank activity from 2000–2007 but on the masses themselves! 

The first [cause of the crisis] was the bout of over-optimistic expectations which took hold in several advanced economies in the pre-crisis years, reinforced in the euro area by a renewed sense of security and economic prosperity following the launch of monetary union. Despite slowing potential growth, agents in a number of economies overestimated their future income and borrowed against it, accumulating excessive debt. In some countries this over-leveraging was centred [sic] on firms, in other countries on households and in others still on the state.

Well, one might ask where this “excessive debt” came from. Does it not come from central bank policy? What Harry Browne once noted of governments equally applies to central banks: “Government is good at one thing: It knows how to break your legs, hand you a crutch, and say, ‘See, if it weren’t for the government, you wouldn’t be able to walk.'”

One of the consequences of living in an unfree world is the aggravating subjection to condescending Official Narratives. It’s not just that our Monetary Saviors get to make money supply and interest rates decisions on our behalf, it’s also that we are being saved from our own over exuberant actions. We ruin the economy, and then we get pulled from our own fires. And the bureaucrats hardly get a thank you.


Investors may have missed D-Mart stock, but customers have long gained from the store…

March 22, 2017

What a fairy tale story indeed. From being a low profile retail player to becoming a stock market darling is quite something. Though, there are signs of irrational exuberance.

The huge opening day gains has prompted one financial house to ask the question: Missed the D-Mart Bonanza?

This blog is guilty of not writing on D-Mart despite deciding many times to write on it only to forget. Part of the forgetting was there was never even a side reference on the .retailer

One always wondered before the IPO buzz, why aren’t there any articles on D-MArt at all? The retailer was clearly the best in the business whose only purpose was to make sure customers gain from their purchases. It gives you discount on nearly all its products. In case there is no offer on a product, you get an assured discount of 5-7% on those products. There is a saving on all products.

Some call it Walmart of India which is not right. Unlike Walmart stores which are huge and located outside the cities, D-Mart stores are much smaller and housed in city centres. Infact, it is amazing how the retailer manages to store so much in such limited space. Yes, there are bigger stores as well but most are small and mid-sized ones.

The only similarity with Walmart is discounts on all products and trying to lower prices for the customer everyday. It is unbelievable how the retailer manages to have so many 50% off, Buy one get one offers etc which all retailers together are not able to manage. And all this was happening without any hype and buzz. It was low key with amazing impact on customers.

Walmart had a dynamic founder in the name of Sam Walton but D-Mart just had an opposite natured founder who is just so media shy.

Other stores err on looking fancy but D-Mart is your typical local store. You just walk in and walk out. Though walking out is never easy given huge crowds. People just throng to D-Mart stores knowing there are both savings and value at the stores.

So, even if investors lost out on the IPO its customers have only gained. Share prices will go up and down and risky for most households. But day to day consumption items are essential and so far D-Mart has not failed them in this endevour.

Infact, the share price might look irrational exuberant but the crowd in D-Mart stores is unbelievably exuberant. You sometimes feel as if things are sold for free!

So lots of power to DMart and hope it continues in its core function and not get carried away by the recent riches…

Reforming Culture (in financial services) for the Long Term

March 22, 2017

I just blogged about why importance of preserving local culture and values as SBI merges its associate banks.

So, one just came across this NY Fed chief William Dudley Speech in London on reforming culture in finance. In evening he participates in a panel discussion titled: Worthy of Trust? Law, ethics and culture in banking.

Dudley who was under fire for corporate misgovernance a NY Fed has earlier also made remarks on culture.

In the recent speech he says:

As I have argued before, incentives shape behavior, and behavior drives culture.  If you want a culture that will support your long-term business strategy, you need to align incentives with the behaviors that will sustain your business over the long haul.6

Incentives—compensation and promotion, in particular—are powerful tools for communicating the conduct and culture you desire for your firm.  Of course, the cultures of firms can and should vary.  But, the culture of every bank should share a common theme: stewardship—a word that implies professional care, exercised year after year for the benefit of the firm and its stakeholders.  A commitment to the long term must be at the core of banking.  Incentives within a firm should support that goal, not undermine it.

My emphasis on incentives is not new, but it bears repeating.  Bad incentives were a key contributing factor in the financial crisis.  In the United States, the Financial Crisis Inquiry Commission concluded that “Compensation systems—designed in an environment of cheap money, intense competition, and light regulation—too often rewarded the quick deal, the short-term gain—without proper consideration of long-term consequences.”7   This theme applied to all levels of banking organizations.  One notable example was mortgage brokers, who were paid based on the volume of loans they generated, not their quality.8

The financial crisis came to a head in the fall of 2008.  Fast forward eight years to the fall of 2016.  Wells Fargo’s chairman and CEO resigned after regulators uncovered what appeared to be widespread fraud in the retail bank.  Compensation, once again, seems to be at the center of a scandal.  Neighborhood bankers were paid based on the volume of new accounts opened, apparently with utter disregard for whether customers wanted them or even knew about them.  And, like mortgage brokers in the early 2000s, it appears that job security depended almost exclusively on meeting targets, regardless of how those targets were met.  There was a serious mismatch between the values Wells Fargo espoused and the incentives that Wells Fargo employed.9  

Investigations into what happened at Wells Fargo are continuing, so I will wait before drawing more definitive conclusions.  For now, though, it is sufficient to note the powerful role—for good or for bad—that incentives can play in an organization.  I understand that making progress on culture is difficult.  But, if you want the next round of metrics to look better than the last, use a powerful lever—use incentives. 

Today’s discussions—here at Mansion House and later at the Bank of England—are evidence that the issue of culture is important to the private and public sectors alike.  We have to keep working on this.  The public sector must continue to shine a spotlight on the issue, and the industry must continue to demonstrate that it is taking responsibility for its culture.  And, culture cannot be a subject that only receives attention because bad conduct has occurred in the recent past. 

I am convinced that a good or ethical culture that is reflected in your firm’s strategy, decision-making processes, and products is also in your economic best interest, for a number of reasons:

  • Good culture means fewer incidents of misconduct, which leads to lower internal monitoring costs.
  • Good culture means that employees speak up so that problems get early attention and tend to stay small.  Smaller problems lead to less reputational harm and damage to franchise value.  And, habits of speaking up lead to better exchanges of ideas—a hallmark of successful organizations.
  • Good culture means greater credibility with prosecutors and regulators—and fewer and lower fines. 
  • Good culture helps to attract and retain good talent.  This creates a virtuous circle of higher performance and greater innovation, and less pressure to cut ethical corners to generate the returns necessary to stay in business. 
  • Good culture builds a strong organizational story that is a source of pride and that can be passed along through generations of employees.  It is also attractive to clients.
  • Good culture helps to rebuild public trust in finance, which could, in turn, lead to a lower burden imposed by regulation over time.  Regulation and compliance are expensive substitutes for good stewardship.

Good culture is, in short, a necessary condition for the long-term success of individual firms.  Therefore, members of the industry must be good stewards and should seek to make progress on reforming culture in the near term. 

Well, there was a time when NY Fed would never discuss such issues. They were seen as soft and not of any importance. NY Fed was more about hard finance and fancy stuff.


An analysis of the branch network of SBI Associate banks: How local are they?

March 22, 2017

SBI has announced it shall close 47% of the branches of associate banks:

State Bank of India (SBI), which will see five associate banks merge into it on April 1, has decided to shut down almost half the offices of these banks, including the head offices of three of them. This process will start from April 24.

“Out of the five head offices of the associate banks, we will retain only two. Three head offices of the associate banks will be unbound along with 27 zonal offices, 81 regional offices and 11 network offices of the associate banks,” SBI Managing Director Dinesh Kumar Khara told IANS in an interview.

“We will keep their structure in place till April 24 and, post that, we will start dismantling the associate banks’ controlling offices, which includes head offices, regional offices, zonal offices and network offices,” Khara said.

The shut-down move is to avoid overlapping offices in the same area and “we intend to remove any kind of duplicacy in the controlling structure”, Khara said.

There are currently 550 SBI offices while its associate banks have 259. The target for the number of controlling offices after the merger is 687 — a reduction of 122 offices.

This blog has been trying to work on the branch network of these SBI Associate Banks just to understand geographical coverage and so on.

First some concepts. There are two things: Offices and Branches. In offices, banks also do admin work. Most offices (barring Head office. reginal office etc) also serve as branches. There is more here.

The article above talks about Offices and not branches. This is how the numbers look.


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