Archive for January 28th, 2019

South Africa’s central bank – ownership, mandate and independence

January 28, 2019

Discussions over independence of South Africa’s central bank continue.

Prof Jannie Rossouw of the University of the Witwatersrand in this piece looks at the issues.

In recent months, various debates about the South African Reserve Bank have focused broadly on three aspects – its shareholding, its mandate and its independence.

The three debates are somewhat convoluted. They are indeed three different issues, but they are interlinked.

Let’s turn to the issue of ownership first.

The South African Reserve Bank is one of only eight central banks in the world with private shareholders. The others are in Belgium, Greece, Italy, Japan, San Marino, Switzerland and Turkey.

The debate about shareholding in South Africa’s Reserve Bank centres around the issue of nationalisation. Some political players, such as the third largest party – the Economic Freedom Fighters – are calling for the ownership of the Bank to be transferred from current private shareholders to the South African government and has tabled a bill in Parliament to achieve this objective.

The issue is very charged. But it’s also confused and not very well understood. There’s an assumption that a change of ownership would automatically mean a change in the role the Bank plays. This isn’t the case because in fact the Bank’s shareholders play no role in its mandate. In that sense it doesn’t matter who the shareholders are. Because they can’t affect its mandate, nationalisation won’t affect the independence of the central bank.

But there are other ways in which the Bank’s ability to do its job can be undermined. This is where the Bank’s primary mandate comes in.


The Founding of the Federal Reserve, the Great Depression and the Evolution of the U.S. Interbank Network

January 28, 2019

Interesting paper by Matthew Jaremski and David C. Wheelock:

Financial network structure is an important determinant of systemic risk. This paper examines how the establishment of the Federal Reserve and Great Depression affected U.S. interbank network structure. Seeking liquidity sources, banks generally preferred to connect to Federal Reserve member banks in cities with Fed offices or clearinghouses. Overall network concentration declined initially as banks connected to Federal Reserve cities other than New York, but increased in the Depression. Banks that survived the Depression generally had higher percentages of connections to Federal Reserve cities and to correspondent banks that also survived.

More specifically, Federal Reserve was key to Depression in many ways:

The Federal Reserve was intended to reduce the banking system’s reliance on the interbank network, and especially the concentration of the system’s reserves in New York City. Although the share of interbank deposits held by major New York City banks did fall after the Fed was established, previous studies have not examined how the interbank network changed with the introduction of the Fed. Using newly digitized data on the interbank relationships of every U.S. depository institutions in 1900, 1910, 1919, 1929 and 1940, we quantify changes in network concentration and other aspects of network structure over four decades.

We show that while the banks most central to the network remained those located in New York City and other major centers, the regional Federal Reserve cities took on a more important role in the network after the Fed was established and again during the Great Depression. Ironically, by pushing the
network toward the regional Fed cities, the System’s founders may have inadvertently made the banking system more vulnerable to regional liquidity shocks and to the responsiveness of local Federal Reserve Bank officials to those events.17

Interbank connections were a conduit for bank distress during the Great Depression. Banks with correspondents that failed or otherwise closed were themselves more likely to close during the Depression. Banks apparently responded to the Depression by linking even more to correspondents in cities with Federal Reserve offices, especially to banks in New York City, which saw a relative increase in correspondent links between 1929 and 1940. Thus, while the establishment of the Federal Reserve altered the structure of the interbank network, the Fed’s presence neither eliminated the network nor prevent it from transmitting shocks across the banking system. Moreover, the amplification of distress through the network in turn contributed to events that further altered the network’s structure while at the same time having even more profound long-term impacts on the regulation of the U.S. banking system.



Hindu Business Line celebrates 25th anniversary

January 28, 2019

As the paper celebrates its 25th anniversary today, the editor R Srinivasan writes on taking fresh guard:

The peerless Sunil Gavaskar always took fresh guard after scoring a hundred. Milestones were important to Gavaskar — in his long career, he was out in the 90s only five times, while scoring 34 test match centuries — but more important was the task at hand. Hence the fresh guard.

Today, as The Hindu BusinessLine reaches a significant milestone of its own, completing 25 years of credible, unbiased journalism — we too are taking guard afresh. The world around us has changed enormously over the past quarter of a century; but in many ways, the challenges we face haven’t.

In our very first editorial, we wrote that the raison d’etre of our existence was to serve as “a pathfinder, a consultant facilitating economic and business decision-making” and to provide “insight and analyses that will let readers sense and grasp opportunities that are all so transient.”

That mission hasn’t changed. The Hindu BusinessLine has, over the years, built up a well-deserved reputation for sober and factual reporting, neutral and insightful analysis, and a sustained focus on news and information that is important, not merely attention-grabbing. These qualities will continue to underpin everything we do.

The challenges we face, however, have changed enormously. In the post-truth world of fake news and false flags, where algorithms and feed filters strive to envelop us in a comforting but unreal echo chamber, it is all the more vital that the independent media sticks to its purpose of speaking truth to power, to put public interest above all else, to serve as a vehicle for credible news and as an enabler of informed debate and informed public discourse.

At The Hindu BusinessLine, these values continue to drive us. We are a national newspaper, with editions spread from New Delhi in the north to Thiruvananthapuram in the southern end of the subcontinent, from Ahmedabad in the west to Kolkata in the east, but we have always had, and will continue to have, a nationalistic heart. For us, our readers and our nation’s interest will always come first.

In this, we are inspired by our group’s rich experience and track record of quality journalism. The Hindu, the group’s flagship publication, has, over the 140 years of its existence earned that which cannot be acquired at any price – the trust of its readers. It is a daunting legacy to live up to, but we have found there is a simple way to do it – by sticking steadfastly to our group’s codes of journalistic ethics and business values, by doing what The Hindu set out to do in 1878 – the fearless pursuit of ‘fairness and justice.’

Yes, India has changed. In the 25 years that we have been reporting on the Indian economy, per capita GDP (in PPP terms) has gone up eight-fold; we have moved from low-income to middle-income status, the number of people living in poverty has fallen by more than half, foreign direct investment has jumped 22 times, while the Sensex has climbed from 4,000 to 36,000 levels.

But in an increasingly volatile and uncertain world, the challenge of providing authentic and unbiased information remains unchanged. That is why we take fresh guard today.

Hope there are many more anniversaries…

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