Wednesday, June 29, 2011

Regulatory overkill in banking?

That's the title of my last ET column.

At least some bankers think so. They see the proposed capital requirements for banks as too onerous. They are against any restrictions on investment banking or on size. Alan Greenspan takes a different tack. He thinks policy-makers and regulators simply do not enough to intervene, that the international financial system is far too complex for the sort of regulation proposed under the Dodd-Frank Act.

Greenspan is in a minority today at least among policy-makers. Both in the US and in Europe (and especially in UK), the tide is firmly in favour of tighter regulation. It's difficult to resist the proposition that inadequate regulation was a factor in the sub-prime crisis, if not the most important factor. My biggest concern is that regulatory reform will be late in coming. The biggest nightmare facing us is a macroeconomic crisis triggered by the problems in the Eurozone hitting the world before banks are shored up with more capital.

Sunday, June 26, 2011

Bankers and psycopaths

The characteristics that make for good traders and investment bankers are pretty much the same as those that define psychopaths, according to Michael Price, co-director of the Centre for Culture and Evolutionary Psychology at Brunel University in London. Indeed, Wall Street’s Gordon Gekko has clear psychopathic tendencies, he says.
“The banking industry is an ideal target for psychopaths,” Prof Hare (a specialist on psycopaths) told me recently. The ructions of the past few years will only have helped their rise. “These areas are tailor-made for the psychopath. Where things become chaotic and the normal rules don’t apply, enter stage right the psychopath.”

That's from an article in the FT. Even more interesting is this tidbit on high flyers in the corporate world in general:

A small-sample study by Prof Babiak, Prof Hare and a colleague found that while the average result in a common psychopathy test was the same for executive high-flyers and the wider population, 3 per cent of high-flyers scored highly enough to be classed as psychopaths.
Maybe it's time ask: how come these lunatics are making big bucks and calling the shots?

Saturday, June 25, 2011

Launch of book on Ravi Matthai-IIMA

We had a launch function for my book on Ravi Matthai-IIMA (Brick by Red Brick: Ravi Matthai and the Making of IIM Ahmedabad;Rupa Publications) on June 20. Dr C Rangarajan, Chairman, Economic Advisory Council to the PM, released the book.

Dr Rangarajan was a professor at IIMA in Matthai's time. He had been recruited from the US by Matthai and became a close associate of his here. Among those present were IIMA director Samir Barua, faculty and staff of the Institute, former faculty members of IIMA, people from the corporate world and the government of Gujarat and members of the media. The event was well covered in the Ahmedabad editions.

Saturday, June 11, 2011

Zhou Enlai was misquoted?

Talk about revisionism. This bit on Zhou Enlai, the former Chinese PM, is going to cause a bit of history to be rewritten. Zhou is famous for having said of the French Revolution and its impact, 'Too early to say'.

This has been famously interpreted as a sign of the far-sightedness of the Chinese, their ability to do serious long-term thinking. A news item in the FT now says that Zhou was misquoted. He was talking of the 1968 student riots in Paris, which had happened three years earlier, not of the storming of the Bastille.

At a seminar in Washington to mark the publication of Henry Kissinger’s book, On China, Chas Freeman, a retired foreign service officer, sought to correct the long-standing error.

“I distinctly remember the exchange. There was a mis­understanding that was too delicious to invite correction,” said Mr Freeman.

He said Zhou had been confused when asked about the French Revolution and the Paris Commune. “But these were exactly the kinds of terms used by the students to describe what they were up to in 1968 and that is how Zhou understood them.”

Apparently, this is not the lone instance of a Chinese leader being misquoted. Deng Xiaoping's, 'To get rich is glorious' is said to be fictional.

Thursday, June 09, 2011

Are margins too high in Indian banking?

The RBI seems to think so; one RBI official was even quoted as saying that Indian banks' margins are 'usurious'. It's hard to draw conclusions from the aggregate level of NIM because a bank's NIM is a function of a number of factors; for the same reason, comparing with other countries may not be useful.

The regulator must simply ensure that there is adequate competition- and live with the margin that results. There is a case for tolerating higher NIMs given that banks' capital requirements are poised to rise due to Basel 3 and stiffer regulation in the years to come. That will put banks' return on equity under pressure and make it a little difficult for Indian banks to finance their huge requirements of capital from abroad.

More in my ET column, RBI mustn't dicate bank margins.

Wednesday, June 08, 2011

How much equity does a bank need?

15-20%, says Sebastian Mallaby in an article in the FT. The Basel 3 norm of 7% core equity is not enough, he says. His argument is as follows:

Three factors drive this estimate. First, recall how much equity can be destroyed in a crisis. The International Monetary Fund calculates that credit losses at US banks between 2007 and 2010 amounted to 7 per cent of assets, so banks must be in a position to lose that much again and survive. Second, consider how much residual equity banks must have left after a large hit. Here the answer is about 8 per cent of assets – that is the amount that the top four US banks felt it necessary to hold in early 2010 in order to retain market confidence. Third, remember that capital is held against risk-weighted assets, and that the calculation of risk weights is notoriously treacherous, so banks should hold a further buffer against “model error”, aka geeks who screw up. Adding these factors together, a 20 per cent equity capital ratio seems reasonable, even if some of this may take the form of “coco” bonds that convert to equity in a crisis.
Mallaby dismisses the argument that more equity will mean a higher cost of capital for banks. He says as more equity is raised, the cost will fall because banks will be perceived as becoming safer. Swiss regulators have already imposed a requirement of around 20% on UBS and Credit Suisse if one includes convertible debt. Mallaby argues that, in order to prevent regulatory arbitrage, shadow banks too must be subject to minimum capital and other requirements.

Tuesday, June 07, 2011

Book on Ravi Matthai - IIM Ahmedabad

My book on Ravi Matthai- IIM Ahmedabad, published by Rupa Publications, is out (Brick by Red Brick: Ravi Matthai and the Making of IIM Ahmedabad). ET carried a story on it a couple of weeks ago.

The book is timed to coincide with IIMA's golden jubilee and is meant to celebrate the remarkable effort at institution-building in the Institute's formative years. IIMA stands out in the Indian education landscape for one reason: it is that rare institution that has been at the top for most of the five decades for which it has been around. There is an Iron Law that operates in Indian education and that dictates that institutions of higher education, started with great fanfare, must go to seed in about thirty or forty years' time. IIMA is a noteworthy exception.

My book attempts to explain IIMA's success and to answer the questions: what sets IIMA apart in the IIM fraternity? why does it enjoy a premium rating? I also devote a chapter to the governance issues in the IIM system today and make suggestions on how to inject greater accountability into the system.

The answer to the above questions, which I came to grasp only after I had spent some five years at IIMA, lies in the culture and processes that Vikram Sarabhai, its founder, and Ravi Matthai, its first full-time director, put in place. That something, which is intangible but which makes all the difference to an academic institution, has been solid enough to sustain IIMA for five decades now.

When IIMA was founded, Ahmedabad was a small town. The infrastructure at the Institute was very basic, they did not have today's IT and the connectivity it provides, communications were poor. And yet IIMA quickly made an impact on the nation as a centre of excellence. Can you imagine an IIT or IIM being set up in Tirunelveli or Patiala making a similar impact today? That is a measure of the achievement of IIMA's founding fathers.

Matthai was all of 38 years old when Sarabhai and others chose him as the first full-time director. He was not an academic by training, he had been a corporate executive. He achieved what he did in just seven years' time. His appointment as director was not a contractual appointment, and yet at the age of 45, he chose to step down. He spurned numerous lucrative offers and turned his energies towards a novel experiment in rural education in Jawaja, a small block in Rajasthan. It was a story waiting to be told. I am privileged to have had the opportunity to tell it.

PS: The book is expected to reach the market in about a week's time but it can be ordered from flipkart. com or from Rupa's website.

America's moon mission and the public sector

John F Kennedy's moon mission was meant to make a point about US supremacy in science after the jolt delivered by the Soviet Union's putting a man in orbit. It cost an enormous sum- $150 bn in 2010 dollars, according to an article in the Economist, "five times as much as the Manhattan Project and 18 times the cost of digging the Panama Canal." The Economist points to an irony at the heart of the moon mission:

The Apollo programme, which was summoned into being in order to demonstrate the superiority of the free-market system, succeeded by mobilising vast public resources within a centralised bureaucracy under government direction. In other words, it mimicked aspects of the very command economy it was designed to repudiate.
However, attempts to mobilise the public sector for other large projects failed, for example, Lyndon Johnson's attempt at social engineering on a huge scale. The Economist believes that Obama's calls for a leap in technology and infrastructure will fail for the same reason.

The Economist oversimplifies, methinks. The Apollo mission succeeded, not just because it invoked national pride. It was a case where expense was no consideration because a matter of national prestige was involved. Other giant public sector projects do not come with a blank cheque, expenditures are subjected to scrutiny and are pruned at the first opportunity.

Here in India, we have seen that several projects in the public sector have delivered for the same reason- ISRO, BARC, DRDO, IITs and IIMs. It is only when people start demanding results commensurate with expenditure that we have a problem- and indeed that is what is happening today. No longer are people willing to back the pursuit of excellence with an open purse.

In short, it is not the nature of the project that matters or the fact that is in the public sector, it is a matter of the resources with which it is backed.

Thursday, June 02, 2011

IITs say no to greater autonomy!

Going by a report carried by BS, the IITs don't really want greater autonomy, at least as envisaged by the Anil Kakodkar committee report on IITs.

The Kakodkar committee has favoured devolving greater powers to the IIT boards, with decisions on salaries, recruitment etc being largely left to them. Towards giving IITs greater operational freedom, it has suggested a substantial increase in fee from Rs 50,000 to Rs 2-2.5 lakh per annum. The IIT directors that BS spoke to had a different point of view from that expressed by the Kakodkar committee.

IIT Madras director MS Ananth is quoted as saying, "“In my personal opinion IITs have adequate autonomy. As an institution funded by tax-payers, I do not expect to be handed more on a platter." The IIT directors and also some faculty see any government withdrawal as coming in the way of the IITs' future growth:

“While the whole idea of the Kakodkar Panel is rooted in providing us more autonomy, I am not so sure that this will provide us with the prospects of growth that we need in the immediate future and in the long run,” said an IIT-Kharagpur professor on the condition of anonymity.
Gautam Barua, director, IIT Guwahati, expresses the view that key decisions should be taken by the IIT Council, which includes all IIT directors, rather than being left to the individual boards; leaving it to the boards would mean the absence of uniformity across IITs and the dilution of the IIM brand.

The attitude of the IIT directors is in refreshing contrast to that of some IIMs. The IITs have less autonomy on paper than the IIMs as the former are governed by an Act of Parliament whereas the latter are not. And yet the IITs believe they have all the autonomy they need while some of the IIMs keep bleating about lack of autonomy.

The older IIMs have been saying just the opposite of what the IITs are saying. They say they need to be financially independent of the government; they want more power be given to the boards; they have resisted moves to evolve a common policy across the IIMs through a pan-IIM board and other means; and they would rather have individual IIMs promoting their own brand.

So who has got it right on autonomy? The IITs, whose brand is better known worldwide than the IIMs, or the IIMs? I leave it to you to judge.