Archive for the ‘Speech / Interviews’ Category

Future of cash: Cash is tried and tested and has a future (the Swiss view)..

February 28, 2017

Given the war on cash, a few “developed countries” like Germany and Swiss are not letting bills disappear that easily. They perhaps understand the issue of how cash prevents privacy much better than others. I shall not be surprised if there are deeper historical reasons behind them.

In this speech, Fritz Zurbrügg, Vice Chairman of the Governing Board of the Swiss National Bank defends cash.

The last few months and years have witnessed a growing debate on the future of cash. Its critics say that cash should be abolished, or that cashless alternatives will in any case gradually render it obsolete. However, to paraphrase Mark Twain: Reports of the death of cash have been greatly exaggerated.

This is reflected in the continuing robust demand for cash on the part of the general public. In many countries, the value of cash in circulation relative to GDP has increased over the last few years; a development that can be attributed to occasional periods of heightened uncertainty about the stability of banks in the wake of the financial crisis. Another factor is the low level of interest rates on transaction accounts, and hence the low opportunity cost of holding cash.

Moreover, surveys and anecdotal evidence suggest that cash is still widely and readily used for payments. This might seem surprising at first glance, given the numerous alternatives to cash, but there are a number of reasons. For instance, people like to use cash for personal reasons, because it allows more effective budget control or because it does not require technical know-how. People’s tastes can change, yet cash has properties that cashless methods do not have to the same extent. It is more reliable, because it does not depend on the use of a technical infrastructure. It also offers comprehensive protection as regards financial privacy. Only the availability of cash guarantees that the data owner really has control over the decision on how much financial information to share, and with whom.

In addition to these demand-side considerations, the SNB itself, as the supplier of banknotes, has no plans to do away with cash. The SNB is mandated by law to ensure the supply and distribution of cash as well as to facilitate and secure the smooth functioning of cashless payment systems. These tasks have equal status. By fulfilling both tasks, the SNB lays the groundwork for the public to choose its preferred method of payment for each individual transaction.

Yet this freedom of choice between payment methods exists only if the public has confidence in both cashless payments and cash. Prerequisites for public confidence in cash are, first, a monetary policy which is geared towards stability and ensures that banknotes and coins retain their value over the long term. Second, banknotes need to be of the highest quality and have the best possible protection against counterfeiting. Switzerland’s new banknote series is a case in point. It meets high standards of safety, design and technology. After all, banknotes are also a symbol for the quality and stability of our currency, as well as one of Switzerland’s ‘calling cards’.

It has to be seen for how long can these few dissenters against war on cash can continue…

Is the banking industry undergoing a change or a transformation?

February 17, 2017

A nice speech by Mr Frank Elderson, Executive Director of the Netherlands Bank.

He nicely mixes the consulting/strategy talk with that of central banking:

Now, the banking industry is facing several challenges. Fintech is rising, consumer trust is damaged and Basel 3.5 is on the horizon. Then there is doubt about the future of Europe, growing criticism of globalisation and uncertainty about the geopolitical landscape. Meanwhile, the world is trying to achieve the Sustainable Development Goals and implement the Paris Agreement.  

Banks will have to adapt – perhaps contribute – to this and the question is how. What is an appropriate business model or strategy? And what is the best form for the key functions that banks perform, such as safeguarding money, providing loans, and determining risk and return? Or is there a future in which non-banking entities perform banking functions?

In discussing these questions, perhaps it’s worthwhile to distinguish between change and transformation. To me, change implies an increase or decrease over time of something while its nature remains constant. Money was first metal, then paper and now digital, but it’s still money. And today’s stock exchanges are in essence quite similar to those established centuries ago.

Transformation is different. It implies something essential changes and a new order emerges. A caterpillar transforming into a butterfly. A child transforming into an adult. Philips, as Hans de Jong so eloquently described it, transformed from a consumer tech company into a health tech one. Transformation takes time, vision and the courage to take tough decisions. And it is anything but easy to genuinely transform an organisation’s culture.

Having said that I wonder: is the banking industry changing or transforming? Perhaps both? I am sure this is something we can debate at our tables later on. For now, I would like to stress that transformation is not just an inspiring concept, but also a practical and operational process. People and organisations have a capacity to transform that can be nurtured. In today’s turbulent environment, banks would do well to evaluate this capacity. It could mean the difference between relevance and irrelevance.

Sums up the issue quite neatly indeed.

He then points to some lessons from the central bank on their work on pension funds:

DNB has conducted research into the capacity of pension funds to transform and we found several things I am sure apply to other industries.

For example, we found that leadership is key. Specifically, individual leaders with the capacity to identify changes in the landscape, develop best-case and worst-case scenarios and create a compelling vision. Also leaders who are able to develop a strategy around this vision and then execute it. The leadership team is of importance, too.

There needs to be openness, trust and diversity in terms of personalities and competences. We also found that pension funds need to be appropriately equipped.

They need to be agile, have an up-to-date IT infrastructure, have sufficient budget and task the right people with the transformation process. And pension funds need to have their house in order. For unless everything runs smoothly, the organisation will focus its attention on managing the present rather than designing the future.

Finally, we found that pension funds need to be proactive. If they wait until the environment forces them to change, they are at risk. Instead, they should proactively adapt. Some pension funds began to transition from a defined benefit to a defined contribution system years ago and they are now in a good shape. Those who haven’t, are struggling to adjust to changing realities. So transformation is a process that can be managed. But the process needs to lead to something. Transformation is a means, not an end. So what is or should be the end result of a bank or the whole banking industry transforming?

He says organisations should have a well-defined purpose (vision/mission?) and work towards their purpose. Netherlands central bank purpose is financial stability (as monetary function in hands of ECB):

De Nederlandsche Bank believes in the value of having a purpose and we cherish ours. We are in this world to contribute to the sustainable welfare of the Netherlands by promoting financial stability. Through this, we also contribute to the realisation of the Sustainable Development Goals. This inspires us and guides us in relating to our stakeholders. And it seems we are not alone in this. Last December, the Dutch Banking Association published a report in which it explored how banks can contribute to the Sustainable Development Goals. I wholeheartedly encourage such explorations.

Many issues simplified..

RDX. RDX2, RDXF, SAM, QPM, ToTEM, LENS….are names of economic models used by Bank of Canada!

February 3, 2017

While reading this speech by Stephen Poloz chief of Bank of Canada, for a moment one thinks he/she is reading some scifi stuff. But such has been the state of economic modelling.

Infact the speaker starts with comparing economic forecasting to astronomy:

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Reflections on the art and science of Policymaking in India

January 30, 2017

Dr. Vijay Kelkar recently gave the CD Deshmush lecture organised by NCAER. The lecture was in news as Kelkar said there should be just one GST rate. The news agencies know shot ways to kill any interest in the lecture. This was barely a line in the whole lecture!

The lecture is based on the wide experience of the speaker in Indian policy.

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Case of Palava: Creating a ‘smart city’ from the ground up in India

January 18, 2017

Interesting interview of Abhishek Lodha of Lodha Group which is building a greenfield city outside Mumbai – Palava

He says smart city is not just about technology:

McKinsey: What is a “smart city”?

Abhishek Lodha: A smart city is not just about technology. This misinterpretation has often led cities to make investments that are doomed to fail. Cities can be governed using technology but have to be designed with vision. I like to say that to make a place good to live, you need “CCTV” to work—citizens, community, technology, and vision. Probably because technology is more tangible than “community” or “vision,” people tend to grab it when they define a smart city.

When we started building Palava, we began with the classical definition. We used the notion of 5-10-15, which means everything you require daily should be within 5 minutes of walking, what you need every three to four days should be within a 10-minute walk, and things you use within a week to a month should be within a 15- to 20-minute walk.

When you start designing an entire city with this in mind, there are multiple benefits. Given our population, India can never build enough roads to solve our traffic problems. What we can do is design cities so you don’t need so many cars. It is also much healthier for people to walk more.

Interesting insights throughout the talk.

Should the Riksbank (Sweden central bank) issue e-krona and is this time any different?

January 12, 2017

Came across this really interesting speech by Cecilia Skingsley of Riksbank. It is a pity that the media and experts discuss every word of speeches made by Fed and ECB chiefs much of which is repetitive. In the process, we miss such speeches which give you a panoramic view of the burning issues  by smaller central banks. And this is from the oldest central bank in the world.

Anyways Ms. Skingsley gives you a very nice historic and institutional account of central banks and their currency function. As cash usage in Sweden is one of the lowest in the world, they are talking much more about digital payments and digital currencies.

Given all this, the big question is should the central bank issue its own currency? If yes, how do we think through the changes? She says we need to think about e-krona as a complement to krona.

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Institutional identity of Indian central bank has been damaged….

January 10, 2017

This blog had warned that we should be more careful while judging central bank appointments. There was a wide feeling by wide number of experts that the appointments at the Indian central bank signals recognition for expertise, need for continuity and what not. Others added how the newly constituted MPC had put India in the league of global peers and how they along with the government will power India into the next set of growth.

How quickly all these beliefs have changed. Even skeptics like this blog are stunned by the sheer pace of the events. Enough has been said about state of governance within the central bank. Even the MPC members will not know their role as they just paused in December meeting. The experts said that this was a clear signal that RBI independence is back (so quickly!). The bankers all praised the move only to cut the rates in new Year of 2017 like not seen before. Not one statement has been made on the relevance of having so many experts decide interest rates when they can be changed so easily. It has taken

In the interim of all this we had another announcement of a new central bank appointment. And again we saw similar views as made in August. One would think there would be some learnings but alas there is nothing of this kind. All these repeated mistakes keeps taking you to this stinging piece on state of media in India.

All this while, it has been disappointing to see former central bank officials not coming to help the organisation. This has been the practice in India for a long time as outgoing officials don’t comment on policy much letting successors do their job. But this is not a day to day thing and clearly requires former heads to come and share their views. But instead they were telling us things which could have been best left to analysts.

Now, finally we have Dr YV Reddy raising concerns:

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Demonetisation History: When Saddam Hussein demonetised Iraqi currency in 1993

December 16, 2016

This is a brilliant speech by Mervyn King, Former chief of Bank of England.

The speech is in a different context. It is on importance of monetary institutions and how they shape expectations. But in this he discusses the Iraq experience which is highly relevant for today’s discourse. The speech cannot be extracted due to security so here is a broad summary.

He points how Iraq was divided into two parts in 1992 – North and South with latter under control of Saddam. Due to restrictions imposed by West, Saddam decided to do deficit financing. Till then Iraq imported notes made elsewhere but they were not available anymore due to restrictions. This led Saddam to print new currency notes on an inferior paper with his image. He even demonetised ths highest denom note of 25 Dinars and asked it to be exchanged with Saddam Dinars. Eventually the Saddam regime printed many more dinars than required leading to high inflation. Plus, the Saddam DInar could be easily counterfeited as it was on poor paper and low tech.

Meanwhile in the North, the old currency continued as no avenue for exchange. No extra notes could be printed as there was no mon authority.

This presence of irresponsible policy and absence of any policy panned out differently as it became clear that Saddam regime will collapse. The North currency called Swiss Dinar appreciated as things were far more stable there.

Fascinating stuff. Time to dig in old speeches of former central bankers…

How culture (or lack of it) is becoming the major issue in finance….

October 28, 2016

Not too long ago, mention of culture in finance space was scoffed. It was seen as this soft issue which does not bring much value. Finance  was this hard subject all about numbers and jazz. This hard bit has taken a huge hit and has become really a soft target now. As a result, again people are going back to talking about the once soft things like culture, ethics etc in finance.

NY Fed has been organising conferences trying to figure the culture bit. The first was in 2014 and second in 2015.

In the 2016 edition, NY Fed chief William Dudley talks about things which central banks never thought they would – norms, ethics etc:

The evidence is pervasive that deep-seated cultural and ethical problems have plagued the financial services industry in recent years.  Bad conduct has occurred in both investment banking and securities market activities as well as in retail banking.2  This has eroded the industry’s trustworthiness.

This erosion impedes the ability of the financial services industry to do its job.  That job is financial intermediation—to facilitate the efficient transfer of resources from savers to borrowers, and to help customers manage the financial risks they face.  Verification—whether through regulation or internal controls—is an expensive substitute for trustworthiness.  Fines for bad behavior drain resources that could be better used to expand access and improve services, but billions of dollars in avoidable penalties are just the start.  The time spent handling a legal crisis is time not spent on more productive pursuits.  Moreover, I worry that, in the long term, an industry that develops a reputation for dubious ethics will not attract the best talent.3 

In contrast, a trustworthy financial services sector will be more productive and better able to support the economy.  Reliable financial intermediaries can help increase the flow of credit, promote economic growth and make the financial system more stable.  This is why restoring trustworthiness must be the ultimate goal of reforming culture. 

The industry’s shared norms—its culture—will not change by mere exhortation to the good, whether from me or from the industry’s CEOs.  In my experience, people respond far more to incentives and clear accountability than to statements of virtues and values.  The latter are worthy and necessary, but remain aspirational or even illusory unless they are tied to real consequences.4  What does it mean for a firm to profess to putting the customer first, if employees are compensated and promoted regardless of what’s good for customers?  Or, worse, if they are not held to account for activities that can harm customers?  If we focus on nothing else in today’s conference, let’s explore how best to structure incentives and reinforce accountability to align with core purposes and first principles.

To put it very simply, incentives drive behavior, and behavior establishes the social norms that drive culture.  If the incentives are wrong and accountability is weak, we will get bad behavior and cultures.  This implies a role for both firms and supervisors.  Firms need to continually assess their incentive regimes so that they are consistent with good conduct and culture.  When they are not consistent, the incentives need to be changed.

He says private sector should play the main role. But even the govt can help:

The primary responsibility for reforming culture—and changing incentives—belongs to the industry.  However, the industry does not act alone.  The public sector can play an important role as well.  I’ll discuss that issue this morning with my colleagues Norman Chan, chief executive of the Hong Kong Monetary Authority, and Minouche Shafik, deputy governor of the Bank of England.  Later this morning another panel will discuss the ways in which supervision can further contribute to improving bank culture.

Let’s also consider ways in which new laws or regulations might help—especially to overcome perennial collective action and first-mover problems that are common across the industry.  Two years ago I proposed solutions to two such obstacles to reforming culture.  First, there should be a database of banker misconduct to combat the problem of “rolling bad apples.”5  Second, a baseline assessment of culture is needed in order to measure progress.  I proposed an industry-wide survey, but there may be other good alternatives.  Once again, I invite the industry to take the initiative on these issues, and to look to the public sector for support.

I also hope that we will attend to issues that we may have overlooked in our earlier discussions.  Gillian Tett of the Financial Times argues in her new book, The Silo Effect, that the key to understanding any culture is identifying and explaining “social silences”—the issues that are not being discussed.

Database of banker misconduct…

There was a time when these databases only reported high salaries and bonuses of the sector. Now it is about misconduct..

Why study economics (and some lessons for Indian central bank?)

September 28, 2016

Stanley Fischer, Vice chair of FOMC gives a convocation speech at Howard University:

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How Beethoven was one of the first investors in stock of Austrian Central Bank…

September 20, 2016

The Oesterreichische Nationalbank or Austrian Central Bank is celebrating its 200 year history.

Its chief Dr Ewald Nowotny gives this interesting speech through the 200 year journey:

Milestone birthdays not only provide an occasion to gather family and friends. They also afford an opportunity to pause for a moment and reflect on one’s past as well as one’s plans and hopes for the future. The 200-year history of our institution has been eventful, to put it mildly. In its first 100 years, the Nationalbank was the central bank of a major power; in its second 100 years, that of a small open economy in the middle of Europe. The fate of the Nationalbank has always been closely entwined with the fate of Austria, for better and for worse.

Central banks never operate in isolation. The most important lesson to be drawn from our 200-year history is that the greatest threat to financial and monetary stability has been, and still is, war.

In fact, it was the twenty odd years of the Napoleonic wars which stood at the origin of the Nationalbank in 1816, as Austria strove to stabilize a currency which had undergone strong inflation and depreciation.

So the “privileged Austrian central bank” was founded as an independent institution with private shareholders. One of the first shareholders was Ludwig van Beethoven – and just for the record: this turned out to have been a very good investment for him.

🙂 How good was it? Given state of central banks, one wouldn’t be surprised if Beethoven would call the investment as profitable but of bad taste…

Rest of the speech is the usual bit on World Wars,  European integration and so on. Useful to read..

 

Singapore’s financial centre – resilience, dynamism, trust

September 9, 2016

Just a few days ago, HK Monetary Authority chief TL Chan pointed to two factors for HK brand of finance: quality and credibility.

Now Monetary Authority of Singapore, Ravi Menon points to three factors for Singapore financial centre:  resilience, dynamism and trust. Not much difference between the two.

The competition between the two for higher share of financial services has been there for a while. But core values of finance remain the same across  countries..

What does it take to build a “Hong Kong Brand” for financial services?

September 6, 2016

Norman T.L. Chan, chief of Hong Kong Monetary Authority in his latest speech looks at the HK brand of finance.

It always is around quality and credibility whatever the brand. This is more so with financial services as people’s savings are involved.

  1. Today I would like to talk about building Hong Kong as a “Brand” for financial services.  So what is a “Brand” made up of?  For merchandise goods, “quality” and “credibility” are two major components of a “Brand”.

Quality

  1. Quality means the product or services are suitably designed, structured and built to meet the needs of consumers/customers.  In the field of fashion or luxury goods, customers’ taste is evolving all the time but very often the “Brand” actually takes the lead in shaping the trend.
  2. In the context of financial services, the concept of “quality” entails the availability of a wide range of financial products that can adequately and effectively meet the needs of customers with vastly different financial needs.  For individual customers, such products range from the basic banking services for the mass market, to very sophisticated private wealth management services for high net worth customers.  For corporate customers, quality products range from the basic transactional banking for the SMEs, to the very diverse and sophisticated services in treasury, hedging, and equity and debt financing for the very large corporates. 
  3. If Hong Kong is to become a “Brand” for financial services, it must be able to offer “quality” financial products and services.  This means that we should have ample supply of financial products and services that:

(a)           can effectively meet the needs of customers, be they individuals or corporates;

(b)          are competitively priced; and

(c)           are efficiently distributed through a network of intermediaries that treat customers fairly.

  1. So where does Hong Kong stand now in terms of “quality”?  If we benchmark Hong Kong against any of our regional peers, I would say Hong Kong stands out as one of the best in this regard.  It is hard to pinpoint any key areas in which Hong Kong would have a material gap in offering a suitable and competitive product to meet the financial needs of the customers. 
  2. Credibility
    1. As I am running out of time, I just wish to have a brief word on the second component of a Brand, and that is credibility.  It is not enough just to sell good quality products to customers.  Like any world class brands in cars, watches and luxury goods, post-sale maintenance or support service is equally important.  In other words, the success of a “Brand” also rests on establishing a reputation for being credible – to deliver a product that stands up to what it is sold for.
    2. Credibility is even more important when it comes to financial services.  This is because financial products usually have a finite life, and very often customers need to renew or purchase similar or different products from time to time.  To develop into a long-lasting and successful “Brand”, Hong Kong must be able to provide a platform for offering products that can effectively meet the changing needs of customers.  While such needs are always evolving, one thing never changes, and that is “fair treatment of customers”.  In the context of pricing, consumer/investor protection, distribution, dispute handling and resolution, the interests of the financial firms or intermediaries must not take precedence over those of the consumers or investors.  This is a difficult mission to accomplish as it requires not only a robust and yet user-friendly regulatory regime, but also a corresponding change in the culture, values, mind-set and behaviour of the financial firms and their staff.   As hard as it seems, I strongly believe that we cannot afford not to accomplish this mission.  We must try harder and harder until we have got it right.                    

      I simply cannot envisage how a financial centre can thrive and sustain its competitiveness over time if it cannot build a credible reputation for treating customers and investors fairly.  

Simple stuff. Still needs to be emphasied over and over again.

Finance is less about all the glitz and glamour it is known as today. At its core, it shares the same ideas of quality and credibility as all other products and services..

Adding “realism and a degree of modesty” to monetary policy framework?

August 16, 2016

Reserve Bank of Australia chief Glenn Stevens in a speech says:

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SEBI’s role in shaping capital markets since 1991: progress, cooperation with finance ministry and humility….

July 22, 2016

In the 25 anniversary celebrations of 1991, we are seeing quite a bit of activity. It has given a continuous fodder for this blog as well.  There are all kinds of articles (this one is a good summary) with each of the key actors trying to assess how things happened and their roles in the same. Some like Dr MM Singh call it a team work whereas others like Montek point to how their document was the brainchild. This is truly the finest hour for the lost legacy of the then PM PV Narasimha Rao who has a mixed record with success in economics but not politics. This was interesting in itself as he had no understanding of economics and was always a politician. But then I guess things are being carried too far away pointing to all kinds of characteristics which were behind the reform. We tend to overdo all such things and not just accept that somehow certain things happen.

Anyways, there is plenty of learning happening.

So far the discussion has been around the Prime Ministers, Finance Ministers, Central bank people and Planning Commission members. Most of these interviews were but expected. Most of them have been superstars of financial media in their own way.

This one article looks at a silent player – SEBI – which changed the capital market game in a big way. This is one area where our progress has been huge but it is barely discussed. The person here is DR Mehta whose seven year tenure changed quite a few things at SEBI. Unlike others, he just calls it a job. He also adds there was never a conflict with any of the Finance Ministers:

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The dangers of external economic advice

July 14, 2016

Given the debate on economic advisory in India (and elsewhere), one obviously wonders how global should economic advice be? Here too much of discussion is biased as Global or International advice essentially means advice coming from US based think-tanks and universities.  Globalisation should also mean that the US (and rest of the west) be open to hearing  views from other countries, but that of course is a joke. The rest of the world is hardly good enough to advice the best in the world. But how is it that those based in rest of the world are not even seen worthy of advising their own economies? Is it possible that experts based in US ivy league think-tanks and universities will know about most economies in the world?

The usual discourse in media is how external economic advice helped save some of the countries from an impending economic disaster.  One thing which is missing in such discussions is how the external advice has brought ruin as well.

Peter Bauer in this tribute to Prof B.R. Shenoy points how Indian govt’s second five year plan was equally supported by the distinguished external experts. He warns against relying too much such expertise:

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Why India’s policies continue to be of the 10%, by the 10% and for the 10%?

July 11, 2016

Dr YV Reddy revisits the 25 years of reforms.

He usually has the most meaningful things to say. Unlike other such interviews who glorify the whole thinking behind 1991, his view is far more nuanced.

He says we suffer from this tyranny of 10%. On reading just the headline, one thought he referring to our obsession with 10% growth. But what he means is how policy space is being cornered by the 10%:

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Maruti Suzuki is less prone to yen volatility now…

June 17, 2016

Interesting interview by Maruti Suzuki Chairman RC Bhargava.

He says how the company has reduced the impact of yen volatility on its balance sheet. No policy intervention needed:

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Status of Indian economic and business history..

June 7, 2016

An interesting and depressing interview of Prof Tirthankar Roy. Much is already known though but one would hope he says things are getting better.

He reviews a lot of trends in Indian economic and business history:

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How are financial innovations regulated in India?

May 31, 2016

Very nice speech by R Gandhi of Indian Central Bank. It is a pity that such speeches are barely covered in media. All we care for is newsbytes and news that hardly matters other than create hype.

The speech is given in the context of recent developments in P2P lending space where India has decided to regulate the space. After looking at various ideas around financial regulation (which makes for a great read as well), the speaker talks about Indian approach:

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