Archive for the ‘Financial Markets/ Finance’ Category

Ireland establishes a Bank Culture Board

April 19, 2019

In my earlier article in Moneycontrol, I argued how culture in banking or lack of it has become one of the key agendas for central bankers. I had pointed how Ireland is one of the main countries looking to do something about improving culture in its banks.

Taking the agenda forward, the they have set up a Irish Banking Culture Board (IBCB) :



The Fault in R-Star: Has the natural rate of interest lost its luster as a navigation aid for monetary policy?

April 15, 2019

Tim Sablik of Richmond Fed reflects on Rstar in this piece:

In a sense, the Fed’s view on r-star hasn’t changed. Early in the recovery, policymakers used it to help explain why interest rates were low and why they were likely to remain low for some time. But they were always careful to communicate the uncertainty surrounding r-star. As the federal funds rate has risen and that uncertainty has become more relevant, the Fed’s communications have reflected that heightened concern. One thing has changed in the last decade, though. The renewed interest in r-star has spawned more efforts to better estimate and understand it.

“Multiple Reserve Banks are now contributing to the effort to measure r-star,” says Lubik. “Some estimates are on the high end and some are on the low end, but together they provide a good assessment of the most likely value for r-star under a variety of assumptions and methodologies.”

The Fed is making use of these and other data to gain a better picture of the economy while it shifts monetary policy into neutral. At the FOMC’s September 2018 meeting following Powell’s Jackson Hole speech, participants noted that “estimates of the level of the neutral federal funds rate would be only one among many factors that the Committee would consider in making its policy decisions,” according to the meeting’s minutes.

R-star has become an important tool in the Fed’s kit following the Great Recession, but it should not come as a surprise to see its fortunes wax and wane as economic conditions change over time. It’s a rare kind of navigational aid, one that becomes blurrier as it gets closer.


Foreign banks in Central and Eastern Europe becoming easy prey for the populists…

April 10, 2019

Erik Berglöf, a former chief economist of EBRD in this Proj Syndicate piece:

After socialism collapsed, a small number of banks based in the European Union invested heavily in retail networks, helping to build these countries’ financial systems from scratch and massively increasing citizens’ financial access. And these strategic retail banks stayed put during the crisis when other capital flows dried up.

They stayed thanks to the Vienna Initiative, an ambitious coordination effort involving home- and host-country regulators and supervisors, finance ministries, international financial institutions, and, most importantly, the strategic banks. On March 27, veterans of the crisis gathered in the Austrian capital to mark the initiative’s ten-year anniversary. There is much to celebrate: it saved Europe from a devastating banking collapse, and helped to manage risks during the eurozone crisis.

But the Western European banks that the initiative saved now face an uncertain future in Central and Eastern Europe. Their investments in the region have become stranded assets ready to be picked off by local populists. And, unsurprisingly, Hungarian Prime Minister Viktor Orbán has led the attack.

Foreign banks in Hungary and elsewhere became objects of hate and loathing during the financial crisis. Urged on by the banks’ over-eager financial advisers, citizens rushed to take out loans in euros, dollars, and even yen, and suddenly found themselves with crushing debts when the crisis caused domestic currencies to tumble. When repayments lagged, banks were quick to foreclose on homes, cars, and companies. Taxing the banks, as Orbán did, seemed only fair.

Furthermore, Orbán’s taxes allowed OTP, Hungary’s own cross-border bank, to rebuild its balance sheet and strengthen its domestic franchise after it had itself become overextended before the crisis. Foreign banks in Hungary had to redefine their strategies radically, and in some cases seek support from international financial institutions. Many simply pulled up stakes and left.

This is part of a broader pattern across emerging markets. Most foreign banks intend to continue withdrawing, and those that stay increasingly fund themselves through local deposits. Although there are fewer foreign banks, some – especially Russian and Chinese banks – have increased their presence through acquisitions and growth, resulting in greater market concentration. (And Russian banks would have had a much greater presence were it not for international sanctions.)

Foreign banks’ ongoing retreat from emerging Europe is all the more remarkable given that the regulatory framework within the EU has improved massively over the past decade. Although the EU’s banking union is certainly not perfect, cross-border banking is now supported by institutions and instruments that those leading the Vienna Initiative could only have dreamed about.

What economic factors are driving the tech firms to enter financial services?

April 9, 2019

Really nice paper by a team of authors: Jon FrostLeonardo GambacortaYi HuangHyun Song Shin and Pablo Zbinden.

We consider the drivers and implications of the growth of “BigTech” in finance – ie the financial services offerings of technology companies with established presence in the market for digital services.

BigTech firms often start with payments. Thereafter, some expand into the provision of credit, insurance, and savings and investment products, either directly or in cooperation with financial institution partners. 

Focusing on credit, we show that BigTech firms lend more in countries with less competitive banking sectors and less stringent regulation. Analysing the case of Argentina, we find support for the hypothesis that BigTech lenders have an information advantage in credit assessment relative to a traditional credit bureau. For borrowers in both Argentina and China, we find that firms that accessed credit expanded their product offerings more than those that did not. It is too early to judge the extent of BigTech’s eventual advance into the provision of financial services. However, the early evidence allows us to pose pertinent questions that bear on their impact on financial stability and overall economic welfare.


2019 marks 75 years of IMF and 50 years of SDR: time for a truly global currency?

April 8, 2019

José Antonio Ocampo (board member of Banco de la República, Colombia’s central bank) writes in Project Syndicate.

He points how  apart from 75 years of BW institutions such as World Bank and IMF, 2019 also marks 50 years of IMF’s currency Special Drawing Rights.  This makes it good to revamp both SDR and how IMF has been using SDR:


How banking regulatory environments are differing after the crisis?

April 8, 2019

Howard Davies in this Project Syndicate piece says that the crisis impacted banks similarly across developed world. However, the regulatory responses have been different which reflects in their share prices as well:

What is noteworthy in this cycle, however, is that while the impact of the crisis was fairly similar in most developed countries (with some idiosyncratic features in each case), the regulatory pendulum is not swinging back in the same way outside the United States.

In the United Kingdom, banks are only this year implementing new ring-fencing rules enforcing a separation of their investment banking activities from their retail and commercial activities, at a time when the analogous Volcker Rule in the US (which in any case is far less constraining) is being watered down. A new senior managers regime is being introduced in London for banks and insurance companies, tightening up the requirements on directors. In the eurozone, the banking union similarly remains in a re-regulation phase, both centrally and country by country. And earlier this month, the French authorities imposed a new countercyclical buffer – a capital surcharge – at a time when the economy is slowing sharply (if it is not already in recession).

In Europe, there is evidently little or no political appetite for deregulation of the financial sector. European right-wing populists are as hostile to bankers as their left-wing counterparts. In this area, the Trump agenda finds no takers at all.

The markets have noticed this transatlantic difference in regulatory cycles. Most European banks are trading at well below their book value, in some cases below 50%, while US bank valuations have recovered. That no doubt partly reflects the US and European economies’ relative growth rates, and their different interest-rate curves, but expectations of future regulatory requirements are also part of the mix.

And yet this misalignment of regulatory cycles matters less than one might think, because US and European retail and commercial banks do not compete very directly. Global banks – those beasts with a presence in all major markets – are as out of fashion as flared trousers. But there is head-to-head competition in investment banking, with US banks’ market share in Europe rising in the last decade.

Perhaps different societal choices are implicitly being made. European governments have seemingly concluded that hosting large, risky, and volatile financial firms and markets is not worth it, while the US administration still regards the financial sector as a comparative advantage for New York. We will not know for a while yet which side has made the wiser choice.


The rise of corporate market power and its macroeconomic effects

April 8, 2019

IMF has released the analytical chapters of World Economics Outlook for April 2019.

Chapter 2 is based on the hot research topic of today: The Rise of Corporate Market Power and Its Macroeconomic Effects

This chapter investigates whether corporate market power has increased and, if so, what the macroeconomic implications are. The three main takeaways from a broad analysis of cross-country firm-level patterns are that (1) market power has increased moderately across advanced economies, as indicated by firms’ price markups over marginal costs rising by close to 8 percent since 2000, but not in emerging market economies; (2) the increase has been fairly widespread across advanced economies and industries, but within them, it has been concentrated among a small fraction of dynamic—more productive and innovative—firms; and (3) although the overall macroeconomic implications have been modest so far, further increases in the market power of these already-powerful firms could weaken investment, deter innovation, reduce labor income shares, and make it more difficult for monetary policy to stabilize output.

The blogpost explaining the research is here.

Pakistan launches regulations for Electronic Money Institutions and looking to issue digital currency by 2025…

April 8, 2019

State Bank of Pakistan launched regulations for Electronic Money Institutions:

The State Bank of Pakistan (SBP) held today the launching ceremony of regulations of Electronic Money Institutions (EMIs) in Islamabad. Federal Minister for Finance, Revenue and Economic Affairs, Mr. Asad Umar was the chief guest. EMIs are non-bank entities that will be licensed by the SBP to issue e-money for the purpose of digital payments.

Addressing the meeting, the Finance Minister appreciated the launching of this new category of institutions which will complement the efforts of Government of Pakistan in creating an enabling environment to empower stakeholders in trade and commerce. This will help businesses in improving their productivity and contributing towards positioning the nation for global competition.

The Finance Minister said that the Government was determined to transform the country into a knowledge economy by making IT one of the top contributors in Pakistan’s economy and job creation besides producing world-class knowledge workers in sync with international market trends. “It is our government’s policy to encourage the use of e-commerce amongst public through awareness campaigns to promote a culture of e-commerce in the country, which
supports electronic business transactions at national, regional and international levels,” he elaborated. He also highlighted the importance of cyber security which is a growing threat for the financial institutions.

The Finance Minister termed the launching of electronic money institutions as a game changer for promoting e-commerce and digital economy in the country.

Further, the Finance Minister spoke on issuing digital currency:

The State Bank of Pakistan (SBP), the country’s central bank, is considering the launch of a digital currency by 2025.

According to a report from news source Dawn on Tuesday, SBP deputy governor Jameel Ahmad said that the central bank is currently working on the digital currency concept in order to “promote financial inclusion and reduce inefficiency and corruption.”

The central bank is also reportedly planning to make its services “fully digitized and technology equipped” by the year 2030.

In light of the proposed digitization efforts, Pakistan’s finance minister Asad Umar asked the central bank and the country’s Federal Investigation Agency (FIA) to ensure cybersecurity in the banking system, the report adds, as a failure here could cause damage to confidence in the system and the economy.


How to develop a “financial Eurosystem” post-Brexit?

April 8, 2019

Mr François Villeroy de Galhau, Governor of the Bank of France in this speech reflects on post-Brexit financial Eurosystem.

In earlier speeches Mr Villeroy de Galhau said that post-Brexit, Paris could be shaped as a financial centre. Now he mentions, a polycentric network of financial centres in Europe:

The unfortunate reality is that Brexit leaves us no other choice: we must now reshape the European financial system and develop its autonomy. The euro area can already build on strong assets: an effective monetary Eurosystem, the legal framework for a single financial market and essential components of a Banking Union. However we do not, as yet, have a “financial Eurosystem”, made up of stronger pan-European financial institutions and market infrastructure. Let’s be clear: there will not be a single City for the continent, but rather an integrated polycentric network of financial centres, with specialisations based on areas of expertise. A polycentric system of this nature can function, as illustrated by the United States: New York’s financial centre is favoured by corporate and investment banks, Chicago’s financial centre handles futures, while Boston specialises in asset management.

Hmm.. This is interesting. So what specialities do European financial centres such as Paris, Frankfurt, Amsterdam etc have?

He then discusses the two unions which will help in this polycentric network:

Starting with the Banking Union, its success depends on the completion of a robust resolution mechanism, probably even more than a full common deposit insurance scheme. Regarding the backstop of the Single Resolution Fund, in the interests of financial stability, we should consider extending the maturities on the credit lines. But we will not achieve an effective and profitable Banking Union without cross-border consolidation in Europe: there are still too many roadblocks and not enough cross-border restructuring. Compared to the US market, the European banking sector remains fragmented: the market share of the top 5 European banks amounts to 20%, compared to more than 40% in the US. So we should aim to create a “single banking market”, as recently proposed by Annegret Kramp-Karrenbauer, where genuine pan European banking groups could operate more effectively and better face foreign competition. 

Together with the Banking Union, a genuine Capital Markets Union (CMU) is essential to strengthening financial integration in Europe: we advocated it strongly with Jens Weidmann, President of the Bundesbank, in a joint paper published yesterday, and it will be a key topic of today’s informal Ecofin, thanks to the Romanian Presidency. Despite some recent achievements, progress on this topic is proving difficult and slow. Let us finally move on from a rhetorical consensus in principle to concrete headways, notably on instruments, access to finance for SMEs, and supervision.

In this respect, I welcome the progress achieved on a Pan-European Personal Pension Product (PEPP): this product is portable across member states and offers consumers a wider range of investment opportunities. We should also make progress towards the harmonisation of insolvency regimes. It should facilitate cross-border investment.

One of the most challenging issues of the CMU is to provide cheaper and easier access to equity for SMEs in order to support their growth. Equity financing is a key driver of innovation: it is better suited to the uncertainty and offers long-term returns associated with innovative projects. The euro area is seriously lagging behind in this respect: equity only accounts for 80% of GDP, compared with 122% in the United States.

Despite setbacks. European policymakers keep talking about more and more unions…It is a one-way club membership..

The international role of the euro: down but not out

April 5, 2019

Claudio Borio of BIS in this speech:

Much has been said about the role of the euro in the international monetary and financial system and about the currency’s prospects. And much of it is not particularly encouraging.

Some of what has been said is about the future. Based on the lessons of history, there is a broad consensus on the financial and political preconditions for making that future a bright one.2 One can only conclude from those lessons that the distance to travel is, to put it mildly, considerable. I can hardly add
anything of value to that aspect of the debate.

Some of what has been said has been about the evolution to date. Take the IMF’s tally of the share of official foreign exchange reserves denominated in euros. This shows a sizeable diminution, from about 25% in 2012 to some 20% recently.3 Moreover, the ECB’s composite index of the euro’s international
role paints a similarly unflattering picture.4 One might conclude from all this that the euro has lost clout across the board.

Today, I would like briefly to question this verdict. My thesis is that the verdict is too categorical – a more nuanced assessment is in order.

I would like to argue that, in some significant but underappreciated respects, the euro’s heft has actually grown in recent years. I shall highlight three aspects: the euro’s influence on global bond markets; its influence on exchange rates globally; and its influence on the “effective pricing“ of commodities, regardless of the currency in which their prices are actually denominated.

Interesting sets of graphs in the speech..

A tale of two scary curves: Flattening Philips and Inverting Yield Curve

April 4, 2019

My new article in Moneycontrol.

How to build a public investment bank ….(lessons from India)

April 1, 2019

India has done away with all its public investment banks. Though, scholars in the West think they are still useful.

Profs. Mariana Mazzucato and Laurie Macfarlane of UCL in this piece:

In many countries, patient finance increasingly comes from public investment banks. These can be national institutions, like Germany’s KfW, or multilateral ones such as the European Investment Bank. Because these banks are typically not under pressure to deliver short-term returns, they can provide longer-term financing, place a higher priority on broader social and environmental objectives, and take a different approach to risk and reward than private-sector institutions.

Until recently, public investment banks focused mainly on infrastructure investment and counter-cyclical lending. But many have now taken on more active “mission-oriented” roles to confront the key social and environmental challenges of the twenty-first century.

The authors specify four conditions to build public investment banks:

Our work has examined how the design of public investment banks influences their role and impact. From this, we identified four lessons for structuring such banks most effectively.

For starters, the bank’s mandate is crucial. Whereas some public investment banks have a narrow remit to support particular sectors, customers, or activities, many of the more successful ones have broader mandates that enable them to support a wider range of economic objectives and respond to emerging priorities. Moreover, such banks tend to be more effective when they finance specific “missions” aligned with government policy. Banks that promote directionless economic objectives such as growth or competitiveness, on the other hand, often end up supporting incumbent firms to carry on with business as usual.

Second, public investment banks need new monitoring and evaluation frameworks that adequately capture the dynamic spillovers generated by bold, catalytic investments. This should help to reduce the (occasionally merited) criticism of these banks for “picking winners” and “crowding out” business. Rather than focusing on “fixing” market failures, these frameworks should instead measure the success of public investment banks in catalyzing new activity that otherwise would not have happened.

Third, employees in public investment banks generally have broader collective expertise and capacities than those in private financial institutions. As well as financial know-how, staff have significant engineering and scientific knowledge. As a result, such banks can base their investment decisions on a wider set of criteria than market signals alone, and are better placed to appraise social and environmental factors.

Effective governance is the final key component. Many of the problems commonly associated with public banks, such as financial mismanagement and interest-group capture, have resulted from poor governance. To avoid this, these banks need to find the right balance between political representation and independent decision-making. While public investment banks must be democratically accountable, and ideally should finance projects in coordination with government policies, their management teams should be free to make sound, long-term decisions in line with the bank’s mandate, free of day-to-day political interference.

If correctly structured and governed, public investment banks can be powerful catalysts for investment-led growth. By deciding to establish such a bank, Scotland has taken an important step toward achieving its bold ambition to become a dynamic, inclusive, and low-carbon economy. Other countries should watch closely and take note.

The fourth one is most important. India’s investment banks went down under (IDBI, IFCI etc) largely because of lack of governance.

Why central bankers don’t understand inflation?

March 29, 2019

Frances Coppola in this piece argues that central bankers are trying to fight the demon of low inflation, which ironically they themselves have created:

Central banks have advanced all sorts of explanations for the failure of the inflation demon to awaken. Post-crisis fiscal austerity, which is a considerable drag on both growth and inflation. Globalisation, which forces workers in developed countries to compete with workers in countries where the price of labour is lower. Technological advances that threaten to replace workers with machines. The trend towards longer working lives as the population ages: recent research by the Bank for International Settlements finds that a higher proportion of older people in the workforce puts downwards pressure on wages. The rise of the gig economy, self-employment, casual, temporary and zero-hour contracts, alongside weakening union power, falling union membership and systematic dismantling of collective bargaining.

These explanations all boil down to the same thing. Labour power is much weaker than it was in the 1970s, and is still weakening due to a combination of government policies and global economic forces. Wage rises and inflation are on the floor and are expected to stay there.

Belatedly, central banks are beginning to wake up to their weakness. They have little power to raise inflation when governments are hell-bent on feeding the economic forces that are keeping it down. And although they say they would like to see wages rising, they are simultaneously signalling that if wages rise, they will stamp on them. Why bother raising wages, only to take them away again in higher interest rates?

The Federal Reserve’s Daniel Tarullo has warned that central banks are relying too much on “inflation expectations”. He advises that central banks should wait until inflation starts to rise before raising interest rates. Belatedly, they are now beginning to follow his advice. But in the fight against lowflation, central banks are largely irrelevant. Unless governments actively embark on initiatives to raise incomes and living standards, inflation will remain on the floor whatever central banks do.


Central bank communications in a post-truth world…

March 29, 2019

Not seen an central banker talk about post truth world.

Mr Mugur Isărescu, Governor of the National Bank of Romania. in this speech touches on the topic:


Hong Kong grants licences to virtual banks

March 29, 2019

I had blogged about HK looking to licence virtual banks.

Now they have given licences to 3 such banks with 5 more in pipeline:

The Hong Kong Monetary Authority (HKMA) announced today (27 March 2019) that the Monetary Authority has granted banking licences under the Banking Ordinance to Livi VB Limited, SC Digital Solutions Limited and ZhongAn Virtual Finance Limited for them to operate in the form of a virtual bank. The granting of these banking licences takes effect today.

Mr Norman T.L. Chan, Chief Executive of the HKMA, said, “We are pleased to grant the three virtual banking licences today. The introduction of virtual banks in Hong Kong is a key pillar supporting Hong Kong’s entry into the Smart Banking Era. It is a major milestone in reinforcing Hong Kong’s position as a premier international financial centre. I believe that virtual banks will not only help drive FinTech and innovation, but also bring about brand new customer experiences and further promote financial inclusion in Hong Kong.

“As virtual banks will have no physical branches, they will rely on the internet for customer acquisition and for the delivery of banking services. I believe that virtual banks will have to offer innovative and customer-centric services in order to attract customers. Moreover, in targeting the retail public and SMEs as their main client base, virtual banks should help promote financial inclusion in Hong Kong.

According to their business plans, these three newly licenced virtual banks intend to launch their services within 6 to 9 months.

After the granting of the above banking licences, the number of licensed banks in Hong Kong will be increased to 155.

The HKMA is making good progress in the processing of the remaining 5 virtual bank applications.

155 banks alone in HK.

Here is a speech by Arthur Yuen, Deputy Chief Executive, Hong Kong Monetary Authority giving rationale for their selection and so on…

India’s managing agency system may be dead but its spirit remains alive…

March 28, 2019

One of India’s foremost financial columnists Andy Mukherjee has this interesting piece. He links current affairs in Indian business to the managing agency system, which was a popular form of running  business in India until 1960s:

A smug, entitled business class driven by greed and hubris, but sorely lacking in resources to legitimize their control. I could be describing the India Inc. of today – or 1959. Nothing much has changed.

Jet Airways Ltd., India’s oldest surviving private-sector airline, is about to crash land. Founder Naresh Goyal neither brought in enough new equity of his own to rescue the debt-laden carrier, nor did he allow a timely sale to suitors who wanted the business, albeit without him. Jet may yet survive, but it’s touch-and-go. Or take the country’s second-largest hospital chain, put into the trauma room by its founders’ 4 billion rupee ($56 million) fraud. Fortis Healthcare Ltd. wants brothers Malvinder and Shivinder Singh arrested. Complicating matters, Malvinder has accused Shivinder of siphoning funds from the family holding company and diverting them to a spiritual guru. The whole thing is an unholy mess.

For at least six decades, scholars and policy makers have been aware of the strain placed by India’s feudal system of corporate governance on capital formation, job creation and growth. Yet the last major reform was in 1969, which ironically was also when India was nationalizing banks and lurching toward a more virulent socialism. Subsequently, globalization caught up with India, the economy opened up and attracted hundreds of billion dollars in foreign capital, but the foundations of corporate structure stayed weak. It’s only now, when the edifice is showing cracks, that it’s becoming clear a fresh coat of paint alone won’t suffice.

Back in the 1960s, “managing agencies” dominated India’s industrial landscape. The 70 companies in the Tata Group were run by nine agencies, while 49 firms in the Birla Group were managed by 13. Such was the sway of the “boxwallahs,” as the agents were pejoratively referred to, that State Bank of India wouldn’t lend to an operating company without its managing agency’s guarantee. Nevermind that a majority of these proxy controllers didn’t even have 1 million rupees in capital of their own. They were vehicles for business families to extract commissions and control empires in the garb of providing managerial expertise.

Andrew Yule, Martin Burn, W.H. Brady and MacNeill & Barry. As the names suggest, the managing agencies started out as part of the British colonial project, but about a hundred years ago ownership started to pass into Indian hands. The world wars and India’s 1947 independence hastened the switch. India eventually outlawed managing agencies in 1969, but entrenched families lost no time in gaming the corporate boards that were now in charge.

Explicit recognition of some shareholders as “promoters” has perpetuated their exorbitant privilege, and infected even firms of a newer vintage. The co-founders of Mindtree Ltd., a mid-bracket software services company, didn’t show any urgency when a large investor warned them of his intention to cash out. Now that the investor has sold to engineering firm Larsen & Toubro Ltd., the insiders are shocked, shocked that L&T is out to “decimate” Mindtree with a  $1.6 billion hostile takeover


Foreign investors believe they can navigate around India’s governance fault lines. Still, South Korea’s chaebol discount could also become a millstone for India if the grip of a handful of private interests on state institutions and economic opportunities tightens. The new boxwallahs will be much harder to shake off than the old cronies.


How granting women property rights is itself a financial innovation..

March 27, 2019

Moshe Hazan, David Weiss and Hosny Zoabi in this interesting research show how property rights given to women lead to economic changes:

Historically, women have had property rights in South-Western Coast of India. It has been shown they have much better socio-economic status compared to other women. It will be interesting to explore whether local financial markets were also impacted due to these property rights.

Botswana launches Financial Stability Council

March 26, 2019

Amidst African countries, Botswana is a rare jewel.

Botswana represents one of the few development success stories in Sub-Saharan Africa. Real Gross Domestic Product (GDP) growth averaged almost 9 percent between 1960 and 2005, far above the Sub-Saharan Africa average. Real GDP per capita grew even faster, averaging more than 10 percent a year — the most rapid economic growth of any country in the world. The crucial question is: Why has Botswana grown the way it has done, and what lessons does it offer?

This evidence-based story is an account of policy and institutional dynamics of sustained growth and development in Botswana — illuminating the role of leadership. It shows how a secure political elite has pursued growth-promoting policies and developed, modified, and maintained viable inherited traditional and modern institutions of political, economic, and legal restraint. These institutions have remained robust in the face of initial large aid inflows and spectacular mineral rents, producing a growth pattern that has been both rapid and cautious.

The nature of the Botswana developmental state is illustrated by the way in which the state mobilized development resources-especially savings, investment, and human resources, widely known as the primary drivers of economic growth, and prudently managed the economy without becoming excessively involved in the nuts. It demonstrates that through intentional policy choices and countercyclical instruments, countries can shift from aid-dependent to trade-led natural resource development (though probably with narrow-based growth), to a broader development strategy as long as the state is capable and operates within effective institutional design. Botswana’s story is sterling example of how the critical issue in development is not so much access to resources but how resources are managed.

Not interested in sitting on laurels, the country keeps doing something or the other.

Now it has launched a financial stability council. Mr Moses D Pelaelo, Governor of the Bank of Botswana explains:

Ladies and gentlemen, as I look back, the launch is the culmination of several significant steps and consultations. Among these are: first, the initial assessment by the Bank of the need and prospective role of a Financial Stability Council, articulated in the 2018 Monetary Policy Statement; second, consultations by officials within the auspices of the Bank of Botswana/Ministry of Finance and Economic Development Working Group, and also involving the Non-Bank Financial Institutions Regulatory Authority and the Financial Intelligence Agency; third, approval for establishment of the Council by the Honourable Minister of Finance and Economic Development obtained in April 2018; and fourth an inaugural meeting to consider an outline of the Macroprudential Policy Framework and review of the draft Memorandum of Understanding in September 2018.

The Financial Stability Council comprises the leadership of the Ministry of Finance and Economic Development (MFED), the Bank of Botswana (the Bank), Non-Bank Financial Institutions Regulatory Authority (NBFIRA), and Financial Intelligence Agency (FIA), institutions that are involved in developing legislation and regulations, policymaking and supervision with respect to the whole or facets of the financial sector. It is acknowledged that the respective institutions have unique statutory mandates, objectives, oversight frameworks and operational spheres, albeit mostly related.

In this regard, the Financial Stability Council is not established to usurp or dilute the role of the respective institutions, which is neither feasible nor desirable. Rather it is to share information and where, desirable, facilitate collective and coordinated approach to financial sector monitoring frameworks and crisis resolution.

Much like India’s Financial Stability Development Council. Also interesting to note that they have a seperate regulatory body for NBFI..

Eastern Carribean central bank to launch blockchain-based digital currency..

March 20, 2019

ECCB conducts monetary policy for eight island economies:

 Anguilla, Antigua and Barbuda, Commonwealth of Dominica, Grenada, Montserrat, St Kitts and Nevis, Saint Lucia, and St Vincent and the Grenadines.

Apart from Sweden, ECCB is now looking to issue its own digital currency:

The Eastern Caribbean Central Bank (ECCB) and the Barbados-based fintech company, Bitt Inc. (Bitt) have signed a contract to conduct a blockchain-issued Central Bank Digital Currency (CBDC) pilot within the Eastern Caribbean Currency Union (ECCU).

The watershed contract was signed on 21 February at the ECCB’s Headquarters in Basseterre, St Kitts and Nevis.

This ECCB CBDC pilot is the first of its kind and will involve a securely minted and issued digital version of the EC dollar (DXCD). The digital EC dollar will be distributed and used by Licensed Financial Institutions and Non-Bank Financial Institutions in the ECCU. The DXCD will be used for financial transactions between consumers and merchants, including peer-to-peer transactions, all using smart devices. For example, an individual in St Kitts and Nevis will be able to send DXCD securely from his/her smartphone to a friend in Grenada in seconds – and at no cost to either party.

The Governor of the ECCB, Timothy N. J. Antoine, emphasised that in contrast to previous CBDC research and experimentsthe ECCB is going a step further.

“This is not an academic exercise. Not only will the digital EC Dollar be the world’s first digital legal tender currency to be issued by a central bank on blockchain but this pilot is also a live CBDC deployment with a view to an eventual phased public rollout. The pilot is part of the ECCB’s Strategic Plan 2017-2021 which aims to help reduce cash usage within the ECCU by 50 per cent, promote greater financial sector stability, and expedite the growth and development of our member countries. It would be a game-changer for the way we do business”.

CEO of Bitt Inc., Rawdon Adams, said, “I thank the ECCB for choosing Bitt. Our mission is the practical application of cutting edge technology to solve persistent financial problems. It is about a successful currency union building on its impressive record of financial stability, development and integration to deliver a quantum improvement to the lives of all its 630,000 citizens. Enhancing economic growth and the quality of life of ordinary people is the aim.”

The ECCB is now poised to embark on the DXCD pilot from March 2019. The pilot will be executed in two phases: development and testing, for about twelve months, followed by rollout and implementation in pilot countries for about six months. As part of pilot implementation, the ECCB will ramp up its sensitisation and education initiatives to facilitate active public engagement throughout all member countries.

The ECCB is being technically supported on this Project by Pinaka Consulting Ltd. 

The Governor in a later speech explained the motivation:


The rage called Modern Monetary Theory (MMT)

March 19, 2019

My piece in moneycontrol on MMT.

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