09 | December | 2020 | Mostly Economics

Archive for December 9th, 2020

Separating retail and investment banking: evidence from the UK

December 9, 2020

Matthieu Chavaz and David Elliott in this Bank of England Working Paper:

The idea of separating retail and investment banking remains controversial. Exploiting the introduction of UK ring-fencing requirements in 2019, we document novel implications of such separation for credit and liquidity supply, competition, and risk-taking via a funding structure channel. By preventing conglomerates from using retail deposits to fund investment banking activities, this separation leads conglomerates to rebalance their activities towards domestic mortgage lending and away from supplying credit lines and underwriting services to large corporates. By redirecting the benefits of deposit funding towards the retail market, this rebalancing reduces the cost of credit for households, without eroding lending standards. However the rebalancing also increases mortgage market concentration and risk-taking by smaller banks via indirect competition effects.

Posted in Academic research & research papers, Economics - macro, micro etc, Financial Markets/ Finance | Leave a Comment »

Ever expanding central bank analogies from animal world: From hawks/doves/owls to pig/frog/elephant

December 9, 2020

Central banks keep looking at analogies to explain their policies and those from animal world are apt. Apart from classifying central bankers as hawks, doves and owls for their policy stances, we have policies being classified as fox vs hedgehog.

Banque De France Governor François Villeroy de Galhau introduces another classification for the three key elements of digital regulation:

The subject of innovation and digitalisation is all the more topical in light of the Covid-crisis. Many of you have been following the very ambitious UBIN project that MAS has been carrying out for the past years. You may also know that Pulau Ubin is the name of a wild and protected island in the Straits between Singapore and Malaysia. But you may not know the traditional story of how this island was created: it says that the formation of Pulau Ubin was due to a Frog, a Pig and an Elephant who challenged each other to a race from the island of Singapore to Johor across the Straits. Anyone who failed to cross would be turned into a rock. All three of them failed… But, together, they formed a new ecosystem where life and nature would thrive.

Let me elaborate a bit on each of these animals. They illustrate three key elements of digital regulation that are crucial to promoting a better ecosystem at the international level. I will start with the pig. It is a symbol of good luck and prosperity, a shield against bad fortune: this leads us to cybersecurity. Cybersecurity is a sine qua non for a reliable and sustainable digital future….

….

Let us move to the elephant. It has another useful talent: memory. This brings us to the issue of data protection. Financial supervisors and authorities in charge of privacy have to invent new ways of cooperation to address data issues and their interaction with financial services. We can all notice that there is a striking discrepancy between financial services being “borderless” and privacy regulations elaborated mostly at the country or regional level, reflecting differing social norms…..

I finally move to the frog. As you know, it is a strong symbol of agility and transformation – from tadpole to frog. This is exactly what financial institutions and firms need to respect competition and anti-trust rules. It is becoming an ever-greater subject in Asia, echoing similar steps that are being taken in Europe. Bringing in new players is essential to challenge existing business models, such as the granting of licenses to digital banks by MAS and other jurisdictions in Asia. We also need to make sure that similar activities and risks are addressed in the same way, regardless of the type of institution involved. Situations where “the winner takes most” while staying outside of the financial regulated scope should be adequately anticipated and avoided. We have to collaborate more closely at the international level in order to adopt the most comprehensive approach across borders and regulatory scopes.

Posted in Academic research & research papers, Central Banks / Monetary Policy, Economics - macro, micro etc, Financial Markets/ Finance | Leave a Comment »

After failure of Bank of Karad in 1992, Karad Janata Sahakari Bank follows in 2020

December 9, 2020

RBI cancelled the licence of Karad Janata Sahakari Bank yday:

The Reserve Bank of India (RBI) has, vide order dated December 7, 2020 cancelled the licence of The Karad Janata Sahakari Bank Ltd., Karad, Maharashtra to carry on banking business, with effect from from the close of business on December 7, 2020. The bank was under All Inclusive Directions since November 07, 2017. The Commissioner for Cooperation and Registrar of Cooperative Societies, Maharashtra has also been requested to issue an order for winding up the bank and appoint a liquidator for the bank.

The Reserve Bank cancelled the licence of the bank as:

1. The bank does not have adequate capital and earning prospects. As such, it does not comply with the provisions of section 11(1) and section 22 (3) (d) read with section 56 of the Banking Regulation Act, 1949.
2. The bank has failed to comply with the requirements of section 22(3) (a), 22 (3) (b), 22(3)(c), 22(3) (d) and 22(3)(e) read with section 56 of the Banking Regulation Act, 1949;
3. The continuance of the bank is prejudicial to the interests of its depositors;
4. The bank with its present financial position would be unable to pay its present depositors in full; and
5. Public interest would be adversely affected if the bank is allowed to carry on its banking business any further.

2. Consequent to the cancellation of its licence, The Karad Janata Sahakari Bank Ltd, Karad, Maharashtra is prohibited from conducting the business of ‘banking’ which includes acceptance of deposits and repayment of deposits as defined in Section 5(b) read with Section 56 of the Banking Regulation Act, 1949 with immediate effect.

3. With the cancellation of licence and commencement of liquidation proceedings, the process of paying the depositors of The Karad Janata Sahakari Bank Ltd., Karad, Maharashtra as per the DICGC Act, 1961 will be set in motion. On liquidation, every depositor is entitled to repayment of his/her deposits up to a monetary ceiling of ₹ 5,00,000/- (Rupees Five lakh only) from the Deposit Insurance and Credit Guarantee Corporation (DICGC) as per usual terms and conditions. More than 99% of the depositors of the bank will get full payment of their deposits from DICGC.

This closure reminded me of another Karad based bank – Bank of Karad- which closed in early 1990s . Bank of Karad was established in 1946 in Karad Maharashtra. The Bank was majorly involved in Harshad Mehta Scam.

From the RBI History Volume 4:

The Bank of Karad Ltd had undertaken large transactions in securities on behalf of some brokers without verifying the genuineness of transactions or the ability of the broker clients to honour commitments under bank receipts. In view of its small size and large liability, the bank had to be taken into liquidation, for which a petition was filed in the Bombay High Court.

The Bank was later taken over by Bank of India amidst high drama. From Trends and Progress of Banking in India (1992-93):

On the petition filed by the Reserve Bank, the Bombay High Court passed an ad-interim order on May 27, 1992, appointing a Provisional Liquidator and his taking over the assets, properties and affairs of the Bank of Karad Ltd. While the application was pending before the High Court, three banks which indicated their intention to takeover certain assets and for running the branches of Bank of Karad Ltd. were given access to the relevant records of the bank with the approval of the Bombay High Courtto enable them to give concrete offers. Based on these offers, the proposal for sale of certain assets of Bank of Karad Ltd. to Bank of Baroda was submitted to the High Court. The Bombay High Court did not approve the proposal and ordered that the Provisional Liquidator should call for fresh offers from all public sector banks, covering not only purchase of assets, takeover of staff, but also taking over of demand and time deposits liabilities of Bank of Karad Ltd.

Accordingly, the Provisional Liquidator invited fresh offers from all public sector banks. A lone offer of Bank of India was received. At the same time, the Deposit Insurance and Credit Guarantee Corporation (DICGC), who had provided Rs.37 crore to the Provisional Liquidator for making payments of insured deposits has appealed to the High Court that the purchasing bank should not be required to take over deposits liability. The Court on December 17, 1993 approved the offer of Bank of India for taking over the specified assets for a total sum of Rs.41.65 crore and also all the employees of the bank except those against whom criminal/disciplinery proceedings have been instituted. The Court also directed that the Bank of India should take over the deposits liability amounting to Rs.22.38 crore and pay the net surplus after deducting the above amount from its offer. As per the Court order, the Bank of India has to take over the deposits liability from the first day of February 1994 and settle the claims of the depositors within the period of three months thereafter.

Posted in Indian Economy/Financial Markets | Leave a Comment »

Should RBI have written a letter to Government for missing the inflation targets?

December 9, 2020

In the December-2020 Policy, RBI kept the policy rates unchanged. In the statement, central bank raised inflation expectations for the upcoming quarters and noted that said elevated inflation “constrains monetary policy at the current juncture from using the space available to act in support of growth”.

In the post-policy meeting with the media, Mythili Bhushurmath of ET Now asked following question from the RBI Top Management:

You have listed six objectives, Governor- enhance liquidity, deepen financial markets, conserve capital, strengthen supervision, facilitate external trade, upgrade payment system. Nowhere there is a mention of getting inflation under control at a time when inflation is running well above our upper band of 6%, and for close to three quarters. In fact, this is the time when RBI perhaps should be presenting a statement in the Parliament, on what it has done to inflation. So, would I be wrong in assuming that somehow de-facto inflation targeting, at least as we knew it, has been junked?

This is interesting and I have been thinking about this for a while.

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