Archive for the ‘Financial Markets/ Finance’ Category

After pioneering inflation targeting, Reserve Bank of NZ leading the way in bank regulation as well..

December 18, 2018

Prof JR Varma blogs about Reserve Bank of NZ again leading the way in bank regulation.

RBNZ has decided to double the capital levels held by NZ banks. The approach to doubling the capital base is different:



The importance of reading annual reports in company valuation

December 10, 2018

Vikas Vardhan Senior Equity Analyst at Value Research Stock Advisor posts on the importance of reading and figuring annual reports.

After all there is this famous Buffet quote:

‘Other guys read Playboy, I read annual reports,’ said Warren Buffett in an interview when asked about how he discovered and got conviction in PetroChina, one of his best investments, which yielded more then 50 per cent over five years…..


If you are a cricket enthusiast, you can surely make out the difference between a T20 and a test-match commentary. A T20 match commentary gives a ball-by-ball description of the shots played and the runs scored. On the contrary, a test-match commentary is slightly slow-paced and discusses the strategy of players and the teams, how they played in the last match, their future potential, etc. While a T20 commentary reminds us of quarterly results, test matches are the equivalent of companies’ annual reports.

Like T20 matches, quarterly results are more glamorous and attract attention in the market, while the release of annual reports is not celebrated, though they are equally, if not more, important as quarterly results. Going through an annual report should be an inherent part of the investment process and merely relying on quarterly results may lead to missing out on important information.

Annual reports are one of the most reliable sources to gather company-specific information in an exhaustive manner. Ideally, annual reports serve two purposes. First, they help generate ideas and take investment actions and, second, they help identify red flags and early signs of trouble when everything seems to be going well. To summarise, annual reports act like an anchor to your investment decision.

He also tells us how and what to read in the indiv sections of the annual report.

A good and important post..

How economy and banking differs in western US compared to eastern US?

December 10, 2018

Interesting speech by Randal Quarles, Vice Chairman for Supervision at Federal Reserve.

We all know that throughout the history of the West, banking and finance have played an important role as vital infrastructure for the economy. That remains true today, although it is often overlooked in the traditional litany of issues critical to the West. A strong banking industry is necessary for households and businesses to engage in the spending, saving, and investment that constitute economic activity, and one of the purposes of financial regulation is to ensure that banks continue to be able to serve this purpose. So it is my plan today to talk about the economy of the West and link the recent and future performance of the western economy to the central and supportive role banks play as vital infrastructure in their communities.

But what is Western US?


Does better mathematics lead to making more money in financial markets? (remembering Fischer Black as well)..

December 7, 2018

Prof JR Varma of IIMA in this new post reflects on whether better math skills lead to making more money in the markets. The experience is mixed.

The purpose of this blog post is to ask a different question: how common is it for traders make money simply by better knowledge of the mathematics than other participants. My sense is that this is relatively rare; traders usually make money by having a better understanding of the facts.


Using unpublished mathematical results to make money often has the effect of destroying the underlying market. Nasdaq (which owned IDCH) delisted the swap futures contract within months of DRW unwinding its profitable trade. Similarly, Fischer Black effectively destroyed the Value Line index contract through his activities. Markets work best when the underlying mathematical knowledge is widely shared. It is very unlikely that the option markets would have grown to their current size and complexity if the option pricing formulas had remained the secret preserve of Ed Thorp. Mathematics is at its best when it is the market that wins and not individual traders.

Prof Varma also looks at whether Black’s math skills helped him win.


How will UK’s banking system differ and look like in 2019?

December 6, 2018

Interesting speech by James Proudman, Executive Director, UK Deposit Takers Supervision.

He points how UK’s banks are being ring fenced to prevent them in the next crisis:

In 2010 the Government established the Independent Commission on Banking (ICB) to make recommendations to improve financial stability and competition in the banking sector. The ICB recommended that the core retail banking operations of UK banking groups should be ring-fenced from any international or
investment banking activity in their groups. The ICB argued that if retail banking operations had been ring-fenced prior to the crisis, this would have reduced the likelihood that the banks would have needed Government support.

The ICB’s recommendations formed the basis of the banking reform legislation passed by Parliament in 2013. This set out the core banking activities which must sit in a ring-fenced bank, as well as the ‘prohibited’ activities that must be separated from the ring-fenced bank or stopped altogether. The legislation also
specified the degree of separation required. Ring-fenced banks must have the capability to make decisions independently of their groups and should not be operationally dependent on group entities which undertake prohibited activities. Ring-fenced banks must also have sufficient financial independence and have their own capital and liquid resources. Any exposures to the rest of the group must be limited and on commercial terms.

All large UK banking groups – defined as those with ‘core’ retail deposits greater than £25 billion – are required to implement ring-fencing by 2019. Currently, seven banking groups cross this threshold. Between them, these groups have around £5 trillion of assets, both in the UK and overseas.

The ring-fencing regime is designed to be consistent with the other parts of the post-crisis regulatory framework. The most systemically-important ring-fenced banks will be held to higher capital requirements. The Systemic Risk Buffer will be applied to ring-fenced banks to ensure they are adequately capitalised and
resilient to shocks. We expect ring-fenced banks to have, on average, around 1.5 percentage points more high-quality ‘Tier 1’ capital than non-systematically important banks.2 And a ring-fenced bank will not be able to be capitalised by debt raised externally by its group, which would give rise to so-called ‘double leverage’. 

 Overall, the Bank estimates that ring-fenced banks’ total loss absorbency will be, on average, around 27% of their risk-weighted assets, higher than the 17% recommended by the ICB.


On money, debt, trust and central banking: Monetary Classic by Claudio Borio

December 3, 2018

This is a fabulous paper/speech by Claudio Borio of BIS. The kind which is a classic for monetary scholars.

This essay examines in detail the properties of a well functioning monetary system – defined as money plus the mechanisms to execute payments – in both the short and long run, drawing on both theory and the lessons from history. It stresses the importance of trust and of the institutions needed to secure it. Ensuring price and financial stability is critical to nurturing and maintaining that trust. In the process, the essay addresses several related questions, such as the relationship between money and debt, the viability of cryptocurrencies as money, money neutrality, and the nexus between monetary and financial stability. While the present monetary system, with central banks and a prudential apparatus at its core, can and must be improved, it still provides the best basis to build on.

There is a lot of history in the piece along with current and future challenges ahead of monetary policymakers. The reference list in the paper is also superb.

Flight-to-safety and the Credit Crunch: A new history of the banking crisis in France during the Great Depression

November 28, 2018

Nice research by Patrice Baubeau , Eric Monnet, Angelo Riva  and Stefano  Ungaro.

They look at archival records of banks in France during Great Depression. They find that the impact was much severe than imagined:

Previous research has downplayed the role of banking panics and financial factors in the French Great Depression of the 1930s. Although scholars acknowledged that some banking failures occurred in France during the period 1930-1932, the common view of the absence of significant economic consequences has persisted. It results from the lack of statistics able to provide a comprehensive picture of the magnitude of banking panics, in the absence of banking regulation in France prior to 1941. The usual method to compute series of bank credit and deposits relied on the balance sheet of the four largest commercial banks – whose data were easily available – and to assume that those banks represented half of the banking sector. These large banks did not experience difficulties and their deposits did not decrease in 1930 and 1931.

Based on extensive archival research we have found the balance sheets of more than 400 hundred banks in interwar France. This finding gives a completely different view of the 1930-1931 banking crises. Whereas the four large commercial banks escaped the crisis, the remainder of the banking system experienced two dramatic waves of panic (end of 1930 and end of 1931), such that its deposits decreased by 40% between 1929 and 1931. The decrease in credit was even stronger (-44%). Banking panics were concentrated in 1930-1931. The decrease of banking activity that followed starting 1932 is fully explained by deflation.

Banking theory explains the mechanisms of bank runs, but it is silent on where deposits go when they are withdrawn from the banking system. Traditional monetary interpretations point to a drop in the money multiplier and in the money base, either because cash is hoarded or because deposits remain frozen in bankrupt banks. Our estimation of hoarded cash and frozen deposits show that they cannot account for the bulk of deposits that fled the banking system in 1930 and 1931.

Instead, most of these deposits went to savings institutions (Caisses d’Epargne) which collected deposits at a regulated interest rate and invested their assets in Treasury bonds. We characterize this phenomenon as a flight-to-safety. Because of capital inflows and the flight-to-safety from banks to non-banks, the total amount of deposits slightly increased in France from 1930 to 1932.

How can a country experience deflation and a decline of about 1/3 in real activity, whereas at the same time the money supply increases? The answer to this question lies in the dramatic decrease of credit. A credit crunch occurred because the institutions that received deposits during the banking panic – namely the saving institutions and the central bank – did not lend to the economy. New cash deposited with the savings institutions (Caisses d’épargne) was used directly to repay marketable public debt, which decreased between 1928 and 1933. 

The large banks which were not affected by the crisis deposited 25% of their assets with the central bank. The central bank increased very modestly its lending to the economy (both banks and non-banks) but it was dwarfed by the dramatic increase in gold reserves, the ultimate safe asset. Gold reserves doubled between 1929 and 1932. No financial institution replaced the banking system as a lender to the economy.

The highlighted bit suggests deposits lead to loans. But this has been disputed off late by several experts. Instead we now say loans lead to deposits.

Given this, a better way to say is there were limited business opportunities to lend to. So whether it is commercial banks or savings institutions, they either did not find lending opportunities or loan-seekers were not coming to these financial institutions….

Thinking about regulating shadow banks and renaming shadow banks as non-banks…

November 28, 2018

Luigi Federico Signorini in this speech talks about the need for regulation of non-banks.

He also points how Financial Stability Board has changed the nomenclature of shadow banks:

With the completion of Basel 3, the post-crisis overhaul of banking regulation is essentially over; with a limited number of exceptions, the only issues remaining for the next few years will be the implementation of reforms and the evaluation of their effects, intended or otherwise, over time. Banks, however, do not comprise the entire financial sector.

Arguably, non-bank financial intermediation has taken on an increasing role in the global financial system and poses new challenges to regulators. The attention of international co-ordinating bodies such as the FSB is therefore now mainly, and rightly, directed towards what used to be known by the vaguely derogatory name of ‘shadow banking’ but is now more neutrally termed ‘non-bank financial intermediation’. The aim of this speech will be to explore the emerging risks from non-banks, to describe the (not insignificant, but still inchoate) regulatory response so far, and to speculate about a possible agenda for
the medium-term future.

Global non-bank finance concerns everybody, even countries where banks continue to play a dominant role in the internal financial system, like Tunisia – or Italy, for that  matter. In a globally interconnected financial system, no country stands alone; none can remain isolated from market shocks and turbulence whose ultimate source may be in faraway parts of the globe. This is a key point for emerging market and developing economies.

Witness the recent experience of the ‘taper tantrum’, when a number of emerging economies faced external financial conditions that had tightened abruptly and higher generalised risk premia in reaction to a policy decision taken by the US authorities. On that occasion the countries affected found that the negative repercussions on their economy stemming from the generalised repricing of assets could not be mitigated through policy actions (either by relying on floating exchange rates or through capital  flow management measures). It has also become apparent that a low degree of financial deepening may actually increase the sensitivity of emerging asset markets to external shocks.

The issue with non-bank finance, it will be argued, is not the stability of individual intermediaries—micro-prudential risk. As the risk connected to managed assets is borne almost entirely by the ultimate investor, rather than by the manager itself, it is not, or not mainly, the possible default of the manager that should concern regulators.

On the other hand, the actions of asset managers may affect the financial system and the  general economy through their systemic consequences on market developments. The key questions are then whether, to what extent and under what conditions non-bank intermediation can amplify market movements and determine instability. It is, therefore, essentially a macro-prudential question. Understanding and measuring such risks will require data, research and careful reflection; tackling them is likely to require new or reinforced supervisory tools and, quite possibly, a broader mandate for supervisory authorities.


We are again seeing some concerns from non-banking financial sector. Here is another recent speech from Luis de Guindos, Vice-President of the ECB.

History of Standard Chartered Bank in West Africa/Ghana

November 23, 2018

These speeches are really useful to understand how western banks started businesses in other countries as foreign banks. And overtime became an integral part of the local economy.

Ernest Addsion, Governor of Bank of Ghana recently inaugurated a new headquarter building of Standard Chartered Bank in Ghana. His speech gives us a brief about the bank’s origins in Ghana:

It gives me great pleasure to be here today for the official launching of this new ultra-modern head office for Standard Chartered Bank (Ghana) Limited, and for the opportunity to make a few remarks on this occasion.

2. Standard Chartered bank has been a very successful Bank with a great tradition as a financial institution. Established as the Bank for British
West Africa (BBWA) during the colonial era, it predates all existing banks including the Bank of Ghana itself. The Bank’s slogan “Here for Good” provides a deep historical perspective to banking in Ghana and indeed in the entire West African sub region. The Bank has also been managed  largely by a Ghanaian workforce and it is a Ghanaian Bank by every standard.

3, Mr. Chairman, the overall contribution of Standard chartered to the banking industry in Ghana is not in doubt. Its history is intertwined with the
socio-economic development of Ghana. It remains one of the top tier banks in terms of total assets and deposits of the industry. The Bank has also
contributed churning out of astute professional bankers who have moved on to serve other institutions in the industry. It has also supported lending
to various sectors of the economy such as mining, utilities, construction, agriculture, manufacturing, and services. More recently, the bank has gone
through some transformation based on its business model re-engineering to reposition itself as a major player in the industry.

Wiki link of BBWA gives some more history. Fair bit there as well. The journey started from 1891 and was eventually taken over by Standard Chartered in 1965.

How did research in finance start in Finland and become important overtime?

November 22, 2018

Interesting paper by Mika Vaihekoski of Bank of Finland. This is a paper which tells us how to go about writing research papers that matter and be counted in literature:

This paper reviews the first thirty years of finance research and education in Finland, starting with publication of the first dissertation in finance in 1977. That was also the year when the first department of finance was established in Finland – among the first in the Nordic countries. This review shows how Finnish financial education and research developed from a humble beginning to a level that brought international acclaim. This can be largely attributed to a number of talented and hard-working individuals but also to the decision for collaboration among the Finnish universities, as a means to overcome some of the problems of a small country.


Monetary and Fiscal History of Peru 1960-2010: Radical Policy Experiments, Inflation and Stabilization

November 21, 2018

César Martinelli (of GMU)  and Marco Vega (Central Bank of Peru) in this paper review the economic history of Peru:

Peruvian recent economic history is marked by an ambitious attempt to refashion the economy of the country through command-and-control policies adopted by a left-wing military dictatorship from 1968 to 1975. After the military returned to the barracks, they left as a legacy an expansive state, precariously financed through debt accumulation and inflation tax. The hyperinflation of the second half of the 1980s occurred in the midst of another radical policy experiment. The policies adopted by the populist administration then in office, such as pervasive price and exchange controls, were counter productive by and large. These policies also made it hard or impossible for the following administration to rely on a exchange rate peg to anchor expectations as part of the stabilization policies.

Looking back, it is hard to miss the fundamental mistrust in market allocations by economic and political actors in the run-up to hyperinflation.26 Mistrust was compounded by wishful thinking by government authorities, in particular during the episodes of 1968-1975 and 1985- 1990. Remarkably, a radical policy gamble attempted in the latter experiment was stopped by popular protest. In a way, society learnt faster than the political elites, and popular repulse of
arbitrary government intervention in the economy preceded the stabilization of 1990.

The stabilization of 1990 was preceded by other attempts that looked ex ante similar. The question arises as to why this particular attempt was successful, leading to a persistent change in policy regime. Moreover, why did the same, or very similar, politicians behave more responsibly in fiscal and monetary matters after stabilization? The recent history suggests a process of social learning.

From this viewpoint, the credibility of policy regime change in the 1990s may be linked ultimately to the change in public opinion giving proper incentives to politicians. Both the dollarization of the economy and the respect for central bank independence which are currently characteristic features of Peru’s economics and politics, can be traced back to some extent to the effect of the traumatic events of the 1980s. Borrowing the phrase of Malmendier and Nagel (2011), those who lived through those events are “hyperinflation babies.”

History matters. Wherever you are…

Trust in financial services in Australia and last bank failure in Australia was in 1931…

November 21, 2018

I had written a  piece on how culture/ethics/trust is becoming one of the main talking points amidst central banks.

Philip Lowe, Governor Reserve Bank of Australia, joins in with this speech. Australia is going through its own sets of troubles with bankers found to be mis-selling financial products and services.

What I found more interesting was his mention of this bank failure in Australia:

Finance is all about trust. When a deposit is placed in a bank, we trust it will be repaid. We also trust financial institutions to invest our hard-earned savings for us. And we trust them to provide us with sound advice. Without this trust, the financial system cannot operate properly and the economy cannot prosper. As the first line of the Banking and Finance Oath says: ‘Trust is the foundation of my profession’.[1] I encourage everybody in the finance sector to read this oath regularly and to live by it.

Australia’s banks have a strong record of being worthy of the trust that is placed in them to repay deposits. The last bank failure in Australia that resulted in a loss to depositors was almost 90 years ago, back in 1931, and it was a very small bank and depositors lost only a small fraction of their deposits.

This is a positive record that few countries can match. This strength was apparent during the financial crisis a decade ago and has served Australia well. The Australian banks are strongly capitalised and have considerable liquidity buffers. On the whole, they have also managed credit risk effectively, reporting few problem loans by global standards. This means that we can have a high level of trust in the ability of Australia’s banks to repay depositors. Indeed, our strong and stable banking system is one of the Australian economy’s strengths.

It is in other areas, though, where trust has been strained. It is clear that the behaviours highlighted by the Royal Commission have dented the community’s trust in parts of our financial sector.

It is quite a record really.

This paper further explains:

Only three banks failed during the 1930s ñ two small trading banks (the Primary Producers Bank and the Federal Deposit Bank) and the Government
Savings Bank of NSW. The Government Savings Bank was brought down by political turbulence as much as the economic conditions. While the
Commonwealth Bank provided some limited support to two of these banks, it was later criticised for not taking a more active role, particularly since two of the banks were solvent when they suspended payment.

In 1930, the Primary Producers Bank of Australia accounted for less than 0.5 per cent of Australian banksí deposits. Most of its customers were farmers, and
as the prices of primary produce fell the bank suffered a steady drain on its resources. Over the 18 months prior to the bankís closure, it lost 40 per cent of its

In April 1931, the bank sought the assistance of the Commonwealth Bank in anticipation of a run following the suspension of the Government Savings Bank.
The Commonwealth Bank provided an unsecured overdraft of £100 000 and a loan of £295 000 secured by government bonds, a fixed deposit at another bank
and the bankís premises. The Primary Producers Bank actively sought amalgamation with the other trading banks and overseas financial groups. While
the Commonwealth Bank considered arranging joint action with the trading banks to avoid closure of the Primary Producers Bank, the other banks decided against the proposal. In the wind-up of the bank depositors were not quite fully paid, losing just 1.25 per cent of the value of their deposits (Royal Commission into the Monetary and Banking Systems 1937).

Need to read more amd more about different banking systems across the world….

Federal Reserve undergoing changes in banking and monetary policy matters…

November 16, 2018

Several changes underway at Federal Reserve.


Kalecki’s insights on coordinating India’s fiscal and monetary policy (lessons from Pakistan?)

November 6, 2018

Good to read and learn from article which bring a key idea/ideas from past to make better policies of today.

Rathin Roy of NIPFP in this piece brings Kaleckian ideas to improve coordination in our fiscal and monetary policies:


Trust and ethics in finance and why Friedman’s quote on “…business should only make profits” is misrepresented

November 1, 2018

Andrew Bailey, chief executive of Financial Conduct Authority in this speech speaks about lack of trust and ethics in finance. He reviews the experience since 1930s when the idea of making money at all costs was not there. This has changed overtime:

I want to illustrate this trend of declining trust by spending a little time on the history of senior executive remuneration in the US.

My starting point is the period from the end of the Second World War until at least the early 1970s. What is striking is the absence of emphasis on pay for performance, and the rejection of excessive executive remuneration. At the time, there was a broad cultural aversion to high pay. Fear of moral outrage kept executive salaries in check, pointing to a social norm. This social norm may have held, at least in the US, until the mid 1980s. 

In essence, the system that operated from the Great Depression until the 1980s relied on the legacy of the 1930s and an almost unstated code in society that the remuneration of senior executives should not increase beyond a quite limited multiple of average pay on the basis that to breach this relationship would be viewed as ostentatious and breaking a norm that acted as a glue in society more broadly. I would go further and argue that this formed the basis of trust, with an expectation of future behaviour and a common value or ethic.

Things changed from around the early 1980s. You can label it the ‘Greed is Good’ era if you can remember the first Wall Street film with Michael Douglas. It is also often labelled as the era in which so-called agency theory came to prominence, in which corporate governance was used to change the policies under which a manager (agent) operates, and thereby emphasise the interests of the owner (principal). This led to a rapid increase in senior executive pay as the limits of the previous social norm were replaced by an approach which used remuneration to incentivise performance.

He says Friedman’s quote was an intellectual shift but people have just picked parts of the quote:

One of the intellectual origins of this shift away from the traditional post-Depression approach came in September 1970, in an article written in the New York Times by Milton Friedman. It went under the title: ‘The Social Responsibility of Business is to Increase its Profits’. Here is a key quote:

‘In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom’.

Friedman started by setting out the essence of agency theory. Some people who know the piece tend to stop there. But let’s go on, because the interesting part for me is when he wrote that the responsibility to make as much money as possible should conform with the basic rules of society, as embodied in the law, and ‘in ethical custom’. Here to my mind we have the essence of the issue around trust and ethics.


I mean similarly few ideas are stretched and misrepresented: Adam Smith’s invisible hand, Keynes as a crusader for more government….

True finance and three lies of finance..

October 24, 2018

Interesting lecture by Mark Carney of Bank of England.

He talks about how the GFC has led to changes in the financial system for the good. But there can be no progress if we don;t know the three lies of finance:

  • Lie I: “This Time Is Different”
  • Lie II: “Markets Always Clear”
  • Lie III: “Markets Are Moral”


He says we should work towards true finance. Call it truer finance actually:


Will Indian financial markets click Robert Merton’s SeLFIES?

October 24, 2018

Prof. Robert Merton recently gave the RH Patil memorial lecture organised by NSE.

Here is my recent piece where I have reviewed the key ideas of his lecture. The lecture was about this retirement financial product which he has named as SeLFIES. I also have tried to figure whether and how India can click these SeLFIES.

Danske Bank: the story of Europe’s biggest money laundering scandal

October 23, 2018

As culture in finance keeps going worse from one scam to another, Prof Sean Curley of Staffordshire University in this piece tells us about Danske Bank:


In recognition of the extent of the problem, the G7 group of major economies formed the Financial Action Task Force on Money Laundering back in 1989. The idea behind this was to produce a set of standards and guidelines and to monitor progress on anti-money laundering regimes.

The focus is to identify suspicious transactions and report them. For anti-money laundering efforts to be successful, it requires financial institutions to know their customers. This means that banks must be able to identify the ultimate beneficial recipient of a transaction – so the person who takes the profit – of any customer on their books.

This is where Danske Bank ran into trouble. Its Estonian branch came about when Danske acquired Sampo Bank, a small Finnish Bank in 2007. Sampo had a non-resident portfolio in Estonia and it is this that caused the problems.

In the words of the independent report into the scandal, which preempted CEO Borgen’s resignation: “Anti-money laundering procedures at the Estonian branch had been manifestly insufficient and inadequate.” Danske Bank has also admitted there were “major deficiencies in controls and governance that made it possible to use Danske Bank’s branch in Estonia for criminal activities such as money laundering”.

Danske shut down the non-resident portfolio in 2015 after it became clear that the bank’s anti-money laundering procedures at the Estonian branch weren’t working. As a mere branch, Estonia should have been subject to Danske’s own money laundering systems – but the branch had its own IT platform, which meant it was not covered by the same risk monitoring as the bank’s Copenhagen headquarters.

The independent investigation found that more than half of Danske’s 15,000 customers in Estonia were suspicious. The source of funds passing through the portfolio was identified as more than 58% coming from Russia, Estonia and Latvia. The destinations of the funds were worldwide.

The difficulty in identifying the true source of the funds comes from the lack of transparency as to the real owners of the customers in the portfolio. A proportion of them are UK-based companies that are registered as limited liability partnerships – this means they are not required to publish details of their eventual owners. This is a classic case of money laundering where ownership often passes through a series of shell companies before the eventual owner can be identified.

The customers are being investigated by several national authorities including the FBI and the UK National Crime Agency. The Danish regulator is investigating Danske Bank itself. Harsh penalties for the bank could ensue – Denmark’s business minister said the Danish authorities could fine Danske 4 billion Danish kroner (£475m). But it remains to be seen what the long-term damage will be for Danske, if any.


Promoting financial education using cinema…

October 19, 2018

Banca D’Italia oe Central Bank of Italy is promoting financial education using cinema:

As part of Financial Education Month, on 19 October at 9.30, Marco Onado, Senior Professor at Milan’s Bocconi University and expert in the law and economics of financial intermediaries, will give a talk to the students present at the screening of Adam McKay’s film ‘The Big Short’ at the Bank of Italy’s convention centre in Via Nazionale 190, Rome. The aim is to encourage high school students to reflect on themes relating to the economy and finance.

They even have a poster. Nice bit.

The Indian government/regulators could not just screen movies but even teach economics/finance lessons from them via Housefull Economics columns run by Think Pragati

Pakistan’s IMF bailout is fighting against history

October 17, 2018

Nice edit piece in Mint:

……Back in 2016 when Pakistan completed its last IMF programme, it held over $18 billion in forex reserves. Those reserves have now halved to a level barely sufficient to cover two months’ imports. A $15 billion current account deficit (CAD) then is likely to grow to $20 billion this fiscal. Add to that a likely $11.7 billion in external debt servicing and a budget deficit that was hovering at the 6.5% of gross domestic product mark around the time that the Khan government came to power. The revised budget presented last month aims to trim this to 5.1% of GDP by the end of the fiscal year. That is a tall ask and one deeply at odds with Khan’s promised land of an Islamic welfare state.

China’s role in this dysfunction is known. For all the rhetoric about the China-Pakistan Economic Corridor (CPEC) being transformative, it has been supply driven. This has been distortionary on multiple levels. Islamabad now finds itself holding the bag for 85 CPEC projects at various stages of planning and completion worth about $90 billion. Commercial and bilateral loans made by Chinese banks, such as the China Development Bank and Industrial and Commercial Bank of China, add to the mix. Consequently, China now holds a significant proportion of Pakistan’s external debt. The experience of a number of Belt and Road Initiative countries has shown that Beijing knows how to leverage this. This will come into play as the rumblings in Islamabad about reassessing CPEC projects grow louder.

The structural problems in Pakistan’s political economy, however, are more dangerous in the long run. Pakistan is a power-hungry country that has been singularly unsuccessful in meeting demand. This almost came to a head in the 1970s; hydro power from the Mangla and Tarbela dams bailed Islamabad out then. The tipping point came in the 1990s. In 1994, the Pakistan Peoples Party government under Benazir Bhutto launched a power policy aimed at privatizing the sector and attracting independent power producers (IPPs). It might have worked under a cleaner administration. Under the PPP, corruption—IPPs were given sweetheart deals guaranteeing high tariffs without competitive bidding—hollowed out the sector. It hasn’t recovered since.

This had ripple effects through the economy. It has led to poor investment in resource extraction; the fact that much of those resources are in Balochistan hasn’t helped. Consequently, Pakistan’s energy import bill has ballooned, leaving the CAD vulnerable to exogenous shocks such as the current spike in crude prices. Shortfalls in power and high tariffs have gutted Pakistan’s manufacturing base. In the 1960s, its manufactured exports were higher than those of the countries that would go on to become tiger cub economies. Today, uncompetitive and low value exports, and imported machinery mean that the balance of payments deck is stacked against it.

The amount of times Pakistan has gone in and out of crisis in last few years could make Pakistan Asia’s Argentina. As a sports fan, one is already suffering due to decline of football in Argentina and cricket in Pakistan. Sigh…

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