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

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Debt as Bargain Counter

The agreement in the United States on raising the debt ceiling that was reached at the last minute need not have been a cliffhanger. The broad contours of a deal and whose interests it would serve were known for some time. However, it could be a pyrrhic victory for the powerful financial sector. The downgrade of US debt by one rating agency does not change anything.

A Systemic Approach to Systemic Risk

As India officials look at the international debate on "too-bigto- fail" issues they should reflect on the more general problem that while there is now universal familiarity with the words systemic risks, systemic resilience and macro-prudential action, there is precious little agreement on their meaning. To make the financial system safe we need to shift the focus away from an obsession with the component parts, and focus more on the system as a whole and how we can make it work as a system that transfers risk from places with limited capacity for those risks to other places with greater capacity.

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.

Extending Private Banking

Following the reiteration in the Union Budget of the decision of the government and the central bank to issue new bank licences, the union cabinet has approved certain amendments to the Banking Regulation Act in order to enlarge the influence of private promoters. A year after the proposal was first made and months after the issue of a Reserve Bank of India discussion paper, the purpose of licensing new private banks remains unclear.

Revisiting Reserves

An ideal system of global liquidity for the official sector is one which both lubricates international commerce with low risk while facilitating the smooth adjustment of global imbalances when these represent an underlying disequilibrium, all in an environment of highly mobile international capital.

A Keynesian Moment? Hardly

One cannot argue that the high unemployment today in the advanced economies calls for a Keynesian solution. Unlike the 1930s, which were characterised by high unemployment and large savings, it is hard to argue, yet, that unemployment now is stuck at a permanently high plateau and that we are in a prolonged slump. More importantly, we are not here as a result of persistently high savings in the high unemployment countries.

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.

Manipulating Basel III

The global banking lobby has managed to block structural reform aimed at averting another financial crisis as in 2008. It first stalled radical reform measures to restrict the activities of banks and break down institutions that were too big to fail. The focus then shifted to Basel III proposals that would strengthen capital requirements. But the global banks have now managed to dilute even the Basel proposals so as to make the changes currently on the table insubstantial.

The Return of Fiscal Dominance

Cross-border finance will increasingly be shaped by the fiscal crisis in the advanced countries.

In Defence of Complexity

That complex financial derivatives lay at the root of the financial crisis is a seductive but wrong idea. When liabilities are complex assets cannot be simple, otherwise we will have a mismatch between the two. The problem is not with the nature of derivatives but of the incentives. Financial regulators need to concentrate on incentives that reduce the build-up of lending in a boom, irrespective of the precise instrument of leverage.

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.

The IMF on Capital Controls

Why has the International Monetary Fund argued, through a staff paper, that there could be circumstances where capital controls may be warranted. It could be that since the current surge in capital flows to developing countries is causing problems, the IMF possibly does not want to be seen as having made the mistake of opposing capital controls as a means to manage excessive inflows. It has still to forget the criticism it faced when its intervention in the east Asian crisis exacerbated the downturn. On the other hand, by boxing in the situation where such controls are warranted, it appears to be encouraging policymakers in emerging markets to avoid such controls and providing them with the ammunition to justify inaction.

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