Archive for January 7th, 2020

Small Finance Banks: the new buzzword or the problem of future?

January 7, 2020

In 2018, RBI announced voluntary transition of UCBs into SFBs.

Under the scheme UCBs with a good track record shall be eligible to voluntarily transit into a SFB. Eligible UCB shall identify promoters in the manner as set out subsequently in the scheme for making an application to RBI for transition to SFB under the scheme. After due diligence exercise, RBI will issue an in-principle approval for transitioning of the UCB into SFB, subject to, compliance with the requirements mentioned in the scheme and will allow a maximum period of 18 months for commencement of business as SFB. The promoters shall incorporate a public limited company under the Companies Act, 2013 having the word ‘bank’ in its name after receiving the in-principle approval from RBI. The board of directors of the company shall have required experience and shall meet RBI’s ‘fit and proper’ criteria. The above company shall enter into an agreement with UCB for transfer of assets and liabilities, to be executed at a future date (after issuance of SFB licence).

The promoters shall then approach RBI for issuance of SFB licence, with evidence of funds available for infusion as equity in any acceptable form, so as to ensure that the SFB commences operations with a minimum net worth of Rs.1 billion and minimum promoters’ contribution of 26% of the paid-up equity capital. The licence application will be processed in accordance with the guidelines dated November 27, 2014 for licensing of SFBs in the private sector, subject to, what is stated in this Scheme. RBI will issue SFB licence at this stage followed by execution of the slump sale agreement to transfer the assets and liabilities of the UCB to the new company. The licence will be effective only after transfer of assets and liabilities of the UCB to the SFB and meeting, inter alia, the minimum net worth requirement prescribed for SFBs. The promoters will ensure that there is no business disruption during the process of transfer of assets and liabilities. On transition into a SFB, it will be subjected to all the norms as applicable to SFBs including maintenance of CRAR of 15% on a continuous basis. The UCB will surrender its banking licence to RBI. The resultant Co-operative Society will be wound up in due course.

Based on this guideline, RBI has given “in-principal route” to Shivalik UCB to become a SFB:


War on cash: Dutch edition

January 7, 2020

Dutch Government has recently passed a law:

The draft law intends to reinforce the measures taken to prevent money laundering by limiting the use of large amounts of cash.

The draft law prohibits natural or legal persons trading in goods, in the course of their business or professional activities, from receiving or making a payment in cash in an amount equal to or greater than EUR 3 000, regardless of whether the transaction is carried out in a single operation or in several operations which appear to be linked. The ECB understands that the draft law is addressed to professional parties and will only affect consumers if they buy or sell goods from such a professional party. Transactions between consumers are not covered by the draft law.

ECB’s view:

The ECB understands that electronic payment instruments are increasingly used as the method of payment in the Netherlands, while the use of cash is declining. Nevertheless, as indicated above, cash is a well-established means of payment providing for immediate settlement of debts and direct  control over the payer’s spending, and also facilitates the inclusion of the entire population in the economy by allowing it to settle any kind of financial transaction in this way.

The ECB notes that cash could play an important role in the event of a disturbance in the payment systems, even though cash machines and other service points may also be affected as these are dependent on interaction with the account holding institutions. The ECB considers it important that all Member
States take appropriate measures to ensure that credit institutions and branches operating within their territories provide adequate access to cash services, in order to facilitate the continued use of cash..


Reviewing the new tools of monetary policy..

January 7, 2020

Ben Bernanke in this new paper reviews the new tools of mon policy. He also summarises the paper on Brookings blog:

Since the 1980s, interest rates around the world have trended downward, reflecting lower inflation, demographic and technological forces that have increased desired global saving relative to desired investment, and other factors. Although low inflation and interest rates have many benefits, the new environment poses challenges for central banks, who have traditionally relied on cuts to short-term interest rates to stimulate sagging economies. A generally low level of interest rates means that, in the face of an economic downturn or undesirably low inflation, the room available for conventional rate cuts is much smaller than in the past.

This constraint on policy became especially concerning during and after the global financial crisis, as the Federal Reserve and other major central banks cut short rates to zero, or nearly so. With their economies in freefall and their traditional methods exhausted, central banks turned to new and relatively untested policy tools, including quantitative easing, forward guidance, and others. The new tools of monetary policy—how they work, their strengths and limitations, and their ability to increase the amount of effective “space” available to monetary policymakers—are the subject of my American Economic Association presidential lecture, delivered January 4, 2020, at the AEA annual meetings in San Diego. As I explain below, my lecture concludes that the new policy tools are effective and that, given current estimates of the neutral rate of interest, quantitative easing and forward guidance can provide the equivalent of about 3 additional percentage points of short-term rate cuts. The paper on which my lecture is based is here. Below I summarize some of the main conclusions.

Central bank purchases of longer-term financial assets, popularly known as quantitative easing or QE, have proved an effective tool for easing financial conditions and providing economic stimulus when short rates are at their lower bound. The effectiveness of QE does not depend on its being deployed during a period of market turbulence.

Forward guidance, though not particularly effective in the immediate post-crisis period, became increasingly powerful over time as it became more precise and aggressive. Changes in the policy framework could make forward guidance even more effective in the future.

Some major foreign central banks have made effective use of other new monetary policy tools, such as purchases of private securities, negative interest rates, funding for lending programs, and yield curve control.

For the most part, the costs and risks of the new policy tools have proved modest. The possible exception is risks to financial stability, which require vigilance.

The amount of policy space the new monetary tools can provide depends importantly on the level of the nominal neutral interest rate.  If the nominal neutral rate is in the range of 2-3 percent, consistent with most estimates for the United States, then model simulations suggest that QE and forward guidance together can add about 3 percentage points of policy space, largely compensating for the effects of the lower bound on rates. For this range of the neutral rate, using the new policy tools is preferable to raising the inflation target as a means of increasing policy space.

There is, however, an important caveat: If the nominal neutral interest rate is much less than 2 percent, then the new tools don’t add enough policy space to compensate for the effects of the lower bound. In that case, other measures to increase policy space, including raising the inflation target, might be necessary.

A bottom-line lesson for all central banks:  Keeping inflation and inflation expectations close to target is critically important.

Bernanke is clearly underestimating the risks to financial stability.

Financial Supervisory Authority and Central Bank of Iceland merge

January 7, 2020

More and more central banks are becoming responsible for banking/financial supervision.

Iceland joins the growing list:


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