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

H T Parekh Finance ColumnSubscribe to H T Parekh Finance Column

Supervising the Regulators?

What specific failings, if any, of the current regulatory structure have led to the proposed creation of the Financial Stability and Development Council is a question that needs to be answered by policymakers. Institutional reform is normally triggered by the failure of an existing institution to perform an assigned task or to keep pace with changing times. Has the existing regulatory system coped poorly or not adapted to changes? Looking back, neither institutional failure nor an inability of the present structure to respond to shocks to systemic stability justifies the FSDC.

Who 'Owns' the Foreign Exchange Reserves?

The old idea about the "use" of foreign exchange reserves is now being expressed in a new form. It is suggested that a part of the reserves could be drawn on to set up a sovereign wealth fund to acquire raw material assets abroad. This is just as bad an idea as the proposal mooted years ago.

A Critique of Current Proposals to Reform Financial Regulation

The notion that in reforming the financial system we should concentrate our efforts on making sure that banks are not "too big to fail" is based on an illusion. What we are looking for is regulation that makes the financial system less sensitive to error in the estimate of risk, not more so. There are two ways to do this. The first is to observe that this error is strongly correlated to the boom-bust cycle; counter-cyclical capital requirements will be part of this approach. Another way is to limit the flow of risks to institutions with a structural capacity for holding that risk.

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.

Sovereign Default in the Core?

Rising sovereign or sovereignguaranteed debt followed on occasion by sovereign default was until recently a problem faced by developing countries. Now the pattern has turned upside down. It is the metropolitan centres of capitalism which are running up large debts and are experiencing a rapid increase in the public debt-GDP ratio. Some of them may even end up defaulting on this debt.

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.

A Radical Proposal to Reform Governance of International Financial Institutions

The road to greater legitimacy for the International Monetary Fund and the World Bank does not lie merely through greater "democracy". Both the creditors and debtors of these international financial institutions need to have a greater say. A proposal to have two categories of shareholders, one of stakeholders and the other the creditors, the latter a group of countries that has hitherto not been given its due at the international financial institutions.

How Sound Is Indian Banking?

The Committee on Financial Sector Assessment has found Indian banking to be in sound shape. However, while liberalisation and financial integration may not have resulted in excess exposure of Indian banks to the toxic assets that originated in the US and Europe, there is still cause for concern since the behaviour of domestic banks - with lending shifting in favour of more risky assets - has begun to resemble that of banks in the advanced countries.

India in the G-20: What Should Matter Most?

To what degree does the work programme and the initial decisions mandated by the g-20 address the issues that are of concern to the major emerging markets, and what cues should the latter group derive from the deliberations thus far? The heated discussion at the g-20 on a coordinated fiscal stimulus has crowded out a much more difficult and important debate on the issue of global imbalances and mechanisms to intermediate these. Much of the current work emerging out of the g-20 remains oriented to the political and economic predicament of the advanced economies.

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.

Do Not Be Distracted by Mr Madoff

Financial crashes do not occur randomly, but generally follow booms. Through a number of avenues, sometimes regulatory, sometimes not, though often in the name of risk-sensitivity, sophistication and modernity, the impact of current market prices on behaviour has increased. This increased use of market prices has increased the endogeneity of financial market risks. In the economic up-cycle, pricebased measures of asset values rise, price-based measures of risk fall and competition to grow bank profits increases. A critical component of the policy response to crisis should be for bank regulation to act as a countervailing force to the natural decline in measured risks in a boom and the subsequent rise in measured risks in the subsequent collapse.

Beyond Basel for Banking Regulation

The financial crisis has made clear that the accumulation of risk and the occurrence of crises are almost inevitable in a self-regulated financial system governed by a framework of the Basel kind. One solution is to monitor investment banks and hedge funds and subject them to regulation while seeking an institutional solution that would protect the core of the financial structure, the banking system. The bail out implemented in the US and some of the west European countries has been forced to take a form that perhaps provides the basis for such a transformation. Governments have opted for state ownership and direct influence over decision-making. Will this be temporary or a new form of banking regulation?


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