"The only useful thing that banks have invented in the last 30 years is the ATM."
The volume is a collection of the transcripts of lectures and writings of eminent economists and financial experts. It narrates the story of India's financial sector reforms in the last two decades. It then focuses on the manner in which those reforms were implemented, the difficulties experienced in doing so and what remains ahead. There are 19 chapters, along with a good introduction by the editor.
The essays by Ashok Lahiri, K C Chakrabarty, N A Mujumdar, C Rangarajan and Y V Reddy deal with systemic issues. Mr Lahiri's work is a masterly survey of the reforms in the two decades since 1991. Mr Reddy highlights, inter alia, the temptation to debate the pros and cons of developments in the financial sector without full recognition of the macroeconomic environment and of the functioning of product markets and factor markets. He is one of the few who have focused on the real sector in the discussion on financial sector reforms. In another chapter, Mr Reddy discusses the timing of ex-ante and ex-post interventions when innovations are introduced in financial products.
I would say that the damage to the economy due to excessive innovation saw the near destruction of the financial system in the West. It is best summed up by the fact that, by 2006, $60 trillion worth of credit default swaps (CDS) had been written to cover just $6 trillion of debt. I call it a CDS multiplier of 10. In fact, according to some experts, pieces of the burst bubble are still being picked up and no one knows even now the real volume of CDS and the institutions bearing the liabilities. Therefore, Paul Volcker's comment quoted at the beginning is relevant in this context.
Joseph Stiglitz, Deepak Mohanty and Duvvuri Subbarao write about monetary policy. Mr Stiglitz has enunciated 14 lessons for monetary policy that emanate from the Great Recession, each of which could be the theme for a seminar. He concludes that the conduct of monetary policy and regulation by some central banks have been at the centre of our greatest crisis in three-quarters of a century.
Mr Mohanty draws practical lessons for central banking in terms of monetary policy framework, institutional design, and communication in pursuit of both monetary and financial stability. Mr Subbarao, in his celebrated lecture at the Second International Research Conference in Mumbai on February 1, 2012, on price stability, financial stability and sovereign debt sustainability, shows how, instead of becoming a trilemma, they can reinforce each other and become the holy trinity - unlike the impossible trinity of a fixed exchange rate, independent monetary policy and free capital flows. In discussing the possibility of fiscal dominance over monetary policy, he makes a general statement that open market operations (OMOs) could at times be motivated by the objective of providing liquidity to support government borrowings or of reducing the yield on treasury bonds to enhance debt sustainability. The last annual report of the Reserve Bank of India (RBI) was frank enough to admit that it had undertaken such operations.
In a letter to the editor in Business Standard on April 22, 2009, I had described the RBI's buyback programme under OMO, which had been announced then as DMO (debt management operations) with a fiscal - and not monetary - objective. I had pointed out that it violated the spirit of the Fiscal Responsibility and Budget Management Act to prevent the monetisation of the fiscal deficit. There is a case pending in the Federal Constitutional Court of Germany questioning the legality of OMOs proposed by the European Central Bank and contending that the bank oversteps its mandate. Mr Mohanty concludes that evidence suggests a significant improvement in monetary policy transmission under the new operating framework.
Harun R Khan gives a synoptic view of the origin and development of the Foreign Exchange Dealers' Association and the transition from the Foreign Exchange Regulation Act to the Foreign Exchange Management Act.
Basel III norms and prudential supervision form the subjects of the essays by Anand Sinha, B Mahapatra and D Subbarao. They discuss the challenge of constructing a comprehensive systemic risk surveillance and assessment system as an effective early warning signal; and the implications of Basel III for capital, liquidity and profitability of banks, and the fact that the RBI has prescribed norms higher than those of Basel III. Mr Subbarao's presentation answers 10 commonly asked questions on Basel III. Mr Khan and Mr Subbarao also deal with the issue of financial inclusion. The latter's lecture points out that efforts are needed not only on the supply side for financial services, but also on the demand side. It is to the RBI's credit that it practises what it preaches, which is evident from its popular outreach programmes in which its governor has participated.
Surprisingly, in an otherwise comprehensive volume, the mismatch between assets and liabilities has not been given the attention it deserves. The reviewer is an economic consultant, former officer-in-charge, Department of Economic Analysis and Policy (RBI), and was advisor to the National Bank of the Kyrgyz Republic and the Bank of Sierra Leone
INDIAN FINANCIAL REFORMS
Editor: Uma Kapila
Academic Foundation; 413 pages; Rs 1,195
- Paul Volcker, December 2009
The volume is a collection of the transcripts of lectures and writings of eminent economists and financial experts. It narrates the story of India's financial sector reforms in the last two decades. It then focuses on the manner in which those reforms were implemented, the difficulties experienced in doing so and what remains ahead. There are 19 chapters, along with a good introduction by the editor.
The essays by Ashok Lahiri, K C Chakrabarty, N A Mujumdar, C Rangarajan and Y V Reddy deal with systemic issues. Mr Lahiri's work is a masterly survey of the reforms in the two decades since 1991. Mr Reddy highlights, inter alia, the temptation to debate the pros and cons of developments in the financial sector without full recognition of the macroeconomic environment and of the functioning of product markets and factor markets. He is one of the few who have focused on the real sector in the discussion on financial sector reforms. In another chapter, Mr Reddy discusses the timing of ex-ante and ex-post interventions when innovations are introduced in financial products.
I would say that the damage to the economy due to excessive innovation saw the near destruction of the financial system in the West. It is best summed up by the fact that, by 2006, $60 trillion worth of credit default swaps (CDS) had been written to cover just $6 trillion of debt. I call it a CDS multiplier of 10. In fact, according to some experts, pieces of the burst bubble are still being picked up and no one knows even now the real volume of CDS and the institutions bearing the liabilities. Therefore, Paul Volcker's comment quoted at the beginning is relevant in this context.
Joseph Stiglitz, Deepak Mohanty and Duvvuri Subbarao write about monetary policy. Mr Stiglitz has enunciated 14 lessons for monetary policy that emanate from the Great Recession, each of which could be the theme for a seminar. He concludes that the conduct of monetary policy and regulation by some central banks have been at the centre of our greatest crisis in three-quarters of a century.
Mr Mohanty draws practical lessons for central banking in terms of monetary policy framework, institutional design, and communication in pursuit of both monetary and financial stability. Mr Subbarao, in his celebrated lecture at the Second International Research Conference in Mumbai on February 1, 2012, on price stability, financial stability and sovereign debt sustainability, shows how, instead of becoming a trilemma, they can reinforce each other and become the holy trinity - unlike the impossible trinity of a fixed exchange rate, independent monetary policy and free capital flows. In discussing the possibility of fiscal dominance over monetary policy, he makes a general statement that open market operations (OMOs) could at times be motivated by the objective of providing liquidity to support government borrowings or of reducing the yield on treasury bonds to enhance debt sustainability. The last annual report of the Reserve Bank of India (RBI) was frank enough to admit that it had undertaken such operations.
In a letter to the editor in Business Standard on April 22, 2009, I had described the RBI's buyback programme under OMO, which had been announced then as DMO (debt management operations) with a fiscal - and not monetary - objective. I had pointed out that it violated the spirit of the Fiscal Responsibility and Budget Management Act to prevent the monetisation of the fiscal deficit. There is a case pending in the Federal Constitutional Court of Germany questioning the legality of OMOs proposed by the European Central Bank and contending that the bank oversteps its mandate. Mr Mohanty concludes that evidence suggests a significant improvement in monetary policy transmission under the new operating framework.
Harun R Khan gives a synoptic view of the origin and development of the Foreign Exchange Dealers' Association and the transition from the Foreign Exchange Regulation Act to the Foreign Exchange Management Act.
Basel III norms and prudential supervision form the subjects of the essays by Anand Sinha, B Mahapatra and D Subbarao. They discuss the challenge of constructing a comprehensive systemic risk surveillance and assessment system as an effective early warning signal; and the implications of Basel III for capital, liquidity and profitability of banks, and the fact that the RBI has prescribed norms higher than those of Basel III. Mr Subbarao's presentation answers 10 commonly asked questions on Basel III. Mr Khan and Mr Subbarao also deal with the issue of financial inclusion. The latter's lecture points out that efforts are needed not only on the supply side for financial services, but also on the demand side. It is to the RBI's credit that it practises what it preaches, which is evident from its popular outreach programmes in which its governor has participated.
Surprisingly, in an otherwise comprehensive volume, the mismatch between assets and liabilities has not been given the attention it deserves. The reviewer is an economic consultant, former officer-in-charge, Department of Economic Analysis and Policy (RBI), and was advisor to the National Bank of the Kyrgyz Republic and the Bank of Sierra Leone
INDIAN FINANCIAL REFORMS
Editor: Uma Kapila
Academic Foundation; 413 pages; Rs 1,195