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January 2, 2011

Pareto

Indian Banks and the crisis
VIRAL ACHARYA, ANUKARAN AGARWAL and NIRUPAMA KULKARNI presented an insightful paper (State ownership and systemic risk: Evidence from the Indian financial sector during 2007-09) at the 7th NIPFP-DEA research program.

The paper rejects the hypothesis that public sector banks (PSB) are safer than the private sector counterparts. They find private sector banks which had higher risk before the crisis, saw their share prices fall more during the crisis. Even deposits contracted more for riskier banks. However in case of PSBs, some banks’s share prices do not fall as much despite having higher risk. Both deposit and credit growth remains strong too. The authors show that PSB’s fared better because of perceived government support. PSB’s having higher risk also got more capital infusions from the government.

The authors argue that the lessons are not to go slow on private sector banking. Though, public sector and government’s role help in crisis, it leads to crowding out of private sector in the long run. Also going by experiences of Fannie Mae/Freddie Mac in the United States, it is dangerous to keep giving explicit and implicit government support and guarantees. It leads to build up of complacency which leads to higher risks and trouble in future.

Living in the Age of Leverage
Though leverage has becomes a bad word post 2007 crisis but DAVID ANDERSON of Brookings has a different perspective (The Age of Leverage).

Mr Anderson suggests that leverage has become a dominant theme in 21st century by becoming a tool used across spheres—social, political, international. New patterns have emerged where leverage is being used frequently to exert power by individuals, organisations, and countries. It is an old theme but the times have generated an extraordinary range of leverage-makers and leverage situations and leverage successes and leverage failures. What has led to this rise in leverage? There are three factors—Information and Communications Technology Revolution, New Family Networks and State of Geopolitics.

He gives nine isolated examples showing how leverage is present in each. The examples are from simple family decisions to international security issues, for instance, a person looking for a job by using social media sites like Facebook and LinkedIn is using a form of leverage.

Given this, it is important not to be over-leveraged and equally important not to remain under-leveraged and not use resources optimally. He introduces a normative principle of leverage which helps balance these objectives.

ECB scores in environment economics
The European Central Bank (ECB) may have scored poorly on its monetary policy but does well on its environment policy. ECB released its first report detailing the high priority it gives to environment management. ECB has developed an environment management system which forms the policies on the topic. It organises workshops, internal communications and guest lectures to create awareness and also observes the Green Day.

ECB measures its consumption of energy, water, paper and carbon dioxide. For instance, report says water usage has increased because more travelers and people are turning more hygienic due to fear of pandemics. Total carbon emissions in 2009 were 22 percent lower compared to 2008, with the greatest reduction coming from a switch to carbon-neutral hydropower. Paper usage was reduced by printing fewer publications and using more recycled paper.

Further, ECB plans to reduce carbon usage by 15 percent in 2011. It will move to its own premises by 2014 and aims to make its new office 30 percent more energy efficient than current European norms. It plans to have a combination of avant-garde and time-tested facilities to achieve this objective.

Central banks and competition watchdogs
JOHN VICKERS of Oxford University compares central banks and competition authorities in a new paper and notices that there are both similarities and differences between the two institutions. He compares central bank to a hedgehog taking one major action (interest rate decision) and competition policy to a fox taking many small actions. The independence of both is based on two interrelated rationales—comparative advantage and commitment.

He highlights six areas of difference—simplicity, exclusivity, repetition, accountability, information, and interested parties. For example, a central bank frames its policies based on public economic data and decision is unchallenged by vested interests. A competition authority, on the other hand, works in a complex legal system with confidential information and receives challenges from interested parties.

Before the 2008 economic crisis, both competition and monetary policy were based on the neoclassical thought of minimal government interference. Post-crisis, questions are being asked on whether this consensus is useful at all. Mr Vickers says on the contrary the crisis points to importance of independence of both these bodies. The political debate, however, may result in different conclusions. He hopes the eventual outcome is influenced by good economics but going by current state of debate, the hope is likely to remain just that.


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