Archive for the ‘Speech / Interviews’ Category

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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Italy – historical heritage and future prospects

May 31, 2016

Nice speech by  Mr Salvatore Rossi, Senior Deputy Governor of the Bank of Italy.

He gives a brief outline of evolution of Italy as a nation and its contribution to world economy:

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Culture in financial services..a much neglected and a very important domain

May 17, 2016

One has been trying to read as much financial history as possible across countries. It is all fascinating to read through accounts of ways things were financed back then and the hardships faced. One also comes across how financial innovations of today were used historically and there is hardly anything modern or innovative about them.

Another thing which emerged is strong cultural and trust values in banking firms. Firms that instilled these values early on and remained committed survived much longer than their peers. Leave all balance sheet analysis and financials aside. It is this cultural aspect which matters as greatly for both survival and growth of a banking firm. This applies to most firms but much more to banks for whom gaining trust and maintaining it is really central to everything.

The crisis of 2008 is leading all these lost values to come back.  Regulators stinged by the crisis despite all the fancy financing techniques and Basel norms, now realise culture of a firm is what matters at the end of the day.

In this speech, Andrew Bailey of Bank of England sums up the issues:

There is a reasonable debate about what is culture, but that is not a debate about whether it is important.  In my view, culture is a product of a wide range of contributory forces:  the stance and effectiveness of management and governance, including that well used phrase “the tone from the top”; the structure of remuneration and the incentives it creates; the quality and effectiveness of risk management; and as important as tone from the top, the willingness of people throughout the organisation to enthusiastically adopt and adhere to that tone.  Out of this comes an overall culture.  It is not something that has a tangible form.  As supervisors, we cannot go into a firm and say “show us your culture”.  But we can, and do, tackle firms on all the elements that contribute to defining culture, and from that we build a picture of the culture and its determinants.
 
Culture has a major influence on the outcomes that matter to us as regulators.  My assessment of recent history is that there has not been a case of a major prudential or conduct failing in a firm which did not have among its root causes a failure of culture as manifested in governance, remuneration, risk management or tone from the top.  Culture has thus laid the ground for bad outcomes, for instance where management are so convinced of their rightness that they hurtle for the cliff without questioning the direction of travel. We talk often about credit risk, market risk, liquidity risk, conduct risk in it’s several forms. You can add to that, hubris risk, the risk of blinding over-confidence.  If I may say so, it is a risk that can be magnified by broader social attitudes.  Ten years ago there was considerable reverence towards, and little questioning of, the ability of banks and bankers to make money or of whether boards demonstrated a sufficient diversity of view and outlook to sustain challenge.  How things have changed.  Healthy scepticism channelled into intelligent and forceful questioning of the self-confident can be a good thing.  In turn, culture matters to us as financial regulators because it can, left alone, tend to shape and encourage bad outcomes, but it doesn’t have to do that.
Happy revisiting history.
So what can regulators do and not do?
What can we do therefore as regulators to shape and influence better outcomes on a more consistent basis?  Let me start with one thing that we cannot do.  As regulators, we are not able, and should not try, to determine the culture of firms.  We cannot write a regulatory rule that settles culture.  Rather, it is the product of many things, which regulators can influence, but much more directly which firms themselves can shape.  We seek to ensure that firms have robust governance, which includes appropriate challenge from all levels of the organisation; and promote the acceptance that not all news can be good and the willingness to act on and respond promptly to bad news.  We insist that remuneration is structured to ensure that individuals have skin in the game, namely that a meaningful amount of past remuneration is retained or deferred and for senior people is at risk should problems then emerge.  We require that risk management and internal audit in firms are effective and act to root out poor incentives and weak controls.  All of this is important and central to what we do as regulators, but let me reinforce the point that culture begins and lives, and I am afraid dies, at home, with firms.
 
It is not for us as regulators to prescribe culture, that would not work.  Firms and their management have to want good culture.  But we can have a lot of influence here. 
Then he sums up the steps taken by BoE to try and influence culture:
In the last few months we have taken a very important step here by introducing for banks the Senior Managers and Certification Regime, as proposed by the Parliamentary  Commission on Banking Standards.  It replaces the Approved Persons Regime, and in time it will be implemented across the regulated financial services sector.
 
There is, let me be clear, no magic bullet to change culture, but the new regime is a big step forward in my view.  This is because at its heart it embeds the notion of personal responsibility for the affairs of the firm at the level of senior management.  The Approved Persons Regime did not do this, and in practice it focused on a notion of culpability not responsibility.  These two notions are different.  I have said many times, but will keep doing so, that senior managers cannot delegate responsibility.  To be fair, many have said to me over the last few years that this change does not make a difference for them as they always thought they were responsible.  Good.  But, set this against other conversations I have had which have doubted the enforceability of this notion of responsibility.  This has concerned, but not distracted me.  So, to be clear, responsibility is the central plank of the new Senior Managers Regime.  We do want senior managers to feel this responsibility in all that they do and that includes a responsibility for forming and implementing a positive culture throughout the organisation.  In this respect culture is no different to strategy; where are we today, where do we aspire to be tomorrow, how will we get there and what risks must we mitigate along the way.
 
Responsibility, as embedded in the Senior Managers Regime, is therefore an important hook to assist in firms’ shaping their own culture, and also to provide regulators with the powers to conduct supervisory oversight and to act when needed.  But, let me reiterate that it is not the job of regulators to enforce culture and to change culture.  If we have to step in, and occasionally we do, the overriding conclusion is that management has failed.

Alas, none of these measures are likely to work much. These things are pretty much inbuilt and historical. Moreover, there is no guarantee that once culture is set, it will continue. Change of senior management who do not believe in culture and history undo all the goods of the past and then sow the seeds for eventual destruction of the firm..

Can crises be curbed? Hayek vs Keynes…

April 19, 2016

Today is a day of this versus this on ME blog. After Schumpeter vs Kirzner, here is another take on the more famous Hayek vs Keynes.

This one is by Norges Bank  Deputy Governor Jon Nicolaisen. As he is a central banker, what more to expect than whether one should intervene ot let markets work during a crisis:

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