ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

T T Ram MohanSubscribe to T T Ram Mohan

How Do We Resolve the Too-Big-to-Fail Problem?

The Vickers Commission in the United Kingdom has advocated ring-fencing of core banking activities; the Volcker Rule in the United States prohibits banks from engaging in certain kinds of investment activities. Neither will be easy to implement and neither is likely to be very effective. To deal with the risks posed by systemically important financial institutions what is needed is a multi-pronged approach that addresses size, concentration and ownership structure and far more intrusive regulation than we have seen in the recent past. An important element in this approach must be the presence of a few large banks in the public sector.

Anatomy of a Bank Failure

The public report of the investigation by the United Kingdom's Financial Services Authority into the failure and subsequent bailout of the Royal Bank of Scotland in 2008 highlights deficiencies in regulation and supervision as also failures in bank governance. The fsa report is essential reading for regulators as well as those at the helm of banking.

New Banks: Don't Say 'Yes' If You Want to Say 'No'

The Reserve Bank of India has published its draft guidelines for new entrants to the banking sector. It would have been advisable for the RBI to spell out the principal objective in licensing new banks. Is the principal objective greater competition or is it financial inclusion? If it is competition, then it would be alright to subject the new banks to the same branch licensing norms as the existing ones; if it is inclusion then they must be told to focus to a greater extent on unbanked centres. Unfortunately, the RBI has not thought it necessary to make the case for new entrants.

Ravi Matthai and IIMA: A Response

 Ravi Matthai and IIMA: A Response T T Ram Mohan I am grateful to Shreekant Sambrani for the detailed treatment he has given my book on Ravi J Matthai (RJM) and for a highly readable review (

Foreign Banks: RBI Gets the Balance Right

The experience of the sub-prime crisis has underlined the virtues of caution in banking sector liberalisation. It has brought home the necessity of balancing efficiency and stability in banking. India's policy so far towards foreign banks has stood the country in good stead. In a review, a Reserve Bank of India discussion paper gets the balance right in future policy in every way.

Private Bank Licensing: Very Few Will Qualify

The Reserve Bank of India's discussion paper on entry of new banks in the private sector lists a number of issues in the next round of licensing of such banks. If the new private banks are to focus on inclusion, then a number of possible candidates - including industrial houses - would possibly be ruled out. Deep pockets, sound governance and an appetite for financial inclusion are not terribly common and these requirements cannot be relaxed merely in order to have more players.

World Economy Not Out of the Woods

The world banking system has been adjusting to the post-crisis deleveraging in the household and corporate sectors. At the same time, leverage in government has shot up as governments have intervened massively to rescue financial systems and to boost public spending in response to recessionary conditions. As the recent Greek crisis has vividly demonstrated, a new threat looms, namely, a rise in sovereign risks and the prospect of default on government debt. Where do we stand in relation to the crisis? Has the banking system recovered and to what extent? What new risks raise the prospect of another recession? What risks are emerging markets exposed to? A discussion based on the April 2010 edition of the Global Financial Stability Report of the International Monetary Fund.

Post-Crisis Regulation: A Contrarian Perspective

There have been a number of commissions and committees on the financial crisis over the past year, which have largely covered the same ground in their analysis and recommendations for reform of the financial sector. The Warwick Commission on International Financial Reform, constituted by the University of Warwick in the United Kingdom, however, strikes out on a different path. It raises a number of issues in a way that many other reports have not. And it also differs sharply in some of the recommendations it makes. This article highlights four themes that figure in the report: macro-prudential regulation, rightsizing the financial sector, regulatory capture and home country versus host country regulation.

Obama Ducks the Banking Challenge

The US has followed a cautious approach in tackling the current crisis in banking. It has refused to tackle the crisis head on, it has instead followed an "endure and wait" approach. What of preventing future crises through regulatory reform? The Obama administration's proposals to prevent another banking crisis are just as tepid and refuse to grasp the nettle in a number of areas - in preventing concentration, containing compensation levels and dealing with important human resources issues. The US Treasury proposals do not give the impression of going far enough in tackling the issues highlighted in the present crisis.

The Impact of the Crisis on the Indian Economy

The effects of the global financial crisis have been more severe than initially forecast. The turning point was the decision in September 2008 to let Lehman Brothers fail, an event that had a series of ruinous cascading effects. Given the depth of the crisis in the United States and Europe, it was only to be expected that India too would be affected. But India's well-regulated banking system and adequate policy responses should ensure that the fallout, at least on the banking sector, will be contained.

Ten Regulatory Lessons from the Sub-prime Crisis

The sub-prime crisis that erupted in the United States was the first manifestation of the larger financial crisis that has since swept across the world. What early lessons in regulation - on capital requirements, incentive structures, role of foreign banks, central bank regulation, governance and more - can we draw from the sub-prime collapse? A first listing of 10 lessons.

From the Subprime to the Ridiculous

It is somewhat misleading to label the present crisis a "subprime crisis". This suggests that when banks make subprime loans, that is, practise financial inclusion, they are apt to get into trouble. Some commentators have even gone so far as to warn against political pressure for financial inclusion in India. It is not exposure to subprime loans that is a problem; it is the loss on subprime related securities that explains the sheer magnitude of the present crisis. The evolution of the crisis shows that the world did not fully absorb all the lessons from the collapse of the hedge fund, Long-Term Capital Management in 1998. When do episodes of financial stress have a measurable impact on the real economy? Over the past 30 years, 60% of the financial stress episodes that led to downturns were banking-related events.

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