Sunday, March 25, 2012
Study identifies lapses in World Bank crisis response
From The Hindu
During its response to the worst financial-economic crisis in a generation, the World Bank failed to adequately tailor its lending patterns to the severity of the downturn across nations and today finds itself with potentially insufficient headroom to respond to a second crisis of similar or greater magnitude to the one in 2008-09, should there be one.
These results were part of a phase-two study of the Bank’s crisis response, presented in a report, titled The World Bank’s Response to the Global Economic Crisis: Phase II. The study report was unveiled on Thursday by its authors at the Independent Evaluation Group (IEG), which is a member of the World Bank group of institutions but reports to the Bank’s Board of Executive Directors rather than its management.
Speaking to The Hindu on both the achievements and shortcomings of the Bank’s response Anjali Kumar, lead author of the report and a Lead Economist with the IEG, said that while the headroom that the Bank had in the previous crisis would have permitted a doubling of lending by the International Bank for Reconstruction and Development – the Bank division focussed on middle and lower-income nations – by around September 2008, “Today it would be in a position to undertake business as usual lending... [yet] anything that approaches the previous global crisis could not be handled.”
While equity-to-loan ratios of the Bank at the outset of the crisis were around 37.5 per cent, the most recent financial figures released by the Bank for quarter closing September 2011 suggested it had come down to 27 per cent, a “precipitous drop for two years, [and it was] projected to drop for next three to four years,” Dr. Kumar noted, adding that low market rates of interest had not helped in this scenario.
Regarding the inadequate change in the Bank’s pre-crisis lending patterns, the IEG suggested that in part this phenomenon was driven by country demand for Bank lending, and hence countries that were most engaged with the Bank before the crisis – its “good clients” such as India and Indonesia – tended to approach the Bank more and in some cases get loans more quickly.
Other factors affected Bank lending too, such as the limited fiscal capacity of certain countries and the fact that some countries went to other lenders such as Russia’s engagement with the European Bank for Reconstruction and Development and Ecuador and Venezuela’s reliance on the Inter-American Development Banks.
Yet when the IEG conducted an analysis of patterns of stress across countries using high-frequency data and mapped that to Bank lending patterns it was clear that low resource allocation at the start of the crisis and the assumption that all financing demands could be accommodated from existing patterns of lending had played a role in the Bank’s ultimate lending decisions, Dr. Kumar explained.
Responding to the results of the IEG’s assessment Angela Walker, World Bank South Asia Region Spokesperson said, “This evaluation properly recognizes the World Bank Group's unprecedented level and speed of help during the crisis and we agree with the finding that the majority of countries suffering high levels of stress benefited from [Bank] lending.
Yet in comments to The Hindu Ms. Walker noted, “However, we disagree with the evaluation's analysis of the Bank's total response.”
In this context Bank officials drew attention to the IEG report’s findings that “The unprecedented volume of the Bank Group’s response….accelerations in processing efficiency and disbursements….the positive role, in crisis-response, of well-established country dialogue and country knowledge, the greater need to balance country focus with a global strategy notwithstanding….and the Bank’s comfortable financial position at the start of the crisis, which was a key element underpinning its crisis response.”
Touching on some India-specific results, Dr. Kumar said that there were some delays in the response after the downturn had kicked off. In particular, the Government of India had sent a written request to the Bank in November 2008 for increased support, and although the Bank initially aimed for operations to begin by March 2009, the proposal did not reach the Bank’s Board until September 2009, and the funds were not released until April of following year.
Nevertheless India was one of the Bank’s “largest borrowers in crisis,” Dr. Kumar noted, adding that it was sanctioned $7 billion in lending during crisis, of which $5 billion was tied to crisis-specific operations. Despite these large-scale commitments, some of them remained unrealised, including $3 billion for the financial sector were cancelled.
The IEG also noted that while much of the “budget-support” lending that the Bank undertook in India had helped signal the strength of public sector banks in the country, yet many of these public sector banks had capital adequacy ratios conforming to Indian government norms at the outset of crisis.
This again raised the question of Bank lending priorities during the crisis – for example whether it was a priority for the Bank to provide precautionary buffer capital to banks that were adequately capitalised.
During its response to the worst financial-economic crisis in a generation, the World Bank failed to adequately tailor its lending patterns to the severity of the downturn across nations and today finds itself with potentially insufficient headroom to respond to a second crisis of similar or greater magnitude to the one in 2008-09, should there be one.
These results were part of a phase-two study of the Bank’s crisis response, presented in a report, titled The World Bank’s Response to the Global Economic Crisis: Phase II. The study report was unveiled on Thursday by its authors at the Independent Evaluation Group (IEG), which is a member of the World Bank group of institutions but reports to the Bank’s Board of Executive Directors rather than its management.
Speaking to The Hindu on both the achievements and shortcomings of the Bank’s response Anjali Kumar, lead author of the report and a Lead Economist with the IEG, said that while the headroom that the Bank had in the previous crisis would have permitted a doubling of lending by the International Bank for Reconstruction and Development – the Bank division focussed on middle and lower-income nations – by around September 2008, “Today it would be in a position to undertake business as usual lending... [yet] anything that approaches the previous global crisis could not be handled.”
While equity-to-loan ratios of the Bank at the outset of the crisis were around 37.5 per cent, the most recent financial figures released by the Bank for quarter closing September 2011 suggested it had come down to 27 per cent, a “precipitous drop for two years, [and it was] projected to drop for next three to four years,” Dr. Kumar noted, adding that low market rates of interest had not helped in this scenario.
Regarding the inadequate change in the Bank’s pre-crisis lending patterns, the IEG suggested that in part this phenomenon was driven by country demand for Bank lending, and hence countries that were most engaged with the Bank before the crisis – its “good clients” such as India and Indonesia – tended to approach the Bank more and in some cases get loans more quickly.
Other factors affected Bank lending too, such as the limited fiscal capacity of certain countries and the fact that some countries went to other lenders such as Russia’s engagement with the European Bank for Reconstruction and Development and Ecuador and Venezuela’s reliance on the Inter-American Development Banks.
Yet when the IEG conducted an analysis of patterns of stress across countries using high-frequency data and mapped that to Bank lending patterns it was clear that low resource allocation at the start of the crisis and the assumption that all financing demands could be accommodated from existing patterns of lending had played a role in the Bank’s ultimate lending decisions, Dr. Kumar explained.
Responding to the results of the IEG’s assessment Angela Walker, World Bank South Asia Region Spokesperson said, “This evaluation properly recognizes the World Bank Group's unprecedented level and speed of help during the crisis and we agree with the finding that the majority of countries suffering high levels of stress benefited from [Bank] lending.
Yet in comments to The Hindu Ms. Walker noted, “However, we disagree with the evaluation's analysis of the Bank's total response.”
In this context Bank officials drew attention to the IEG report’s findings that “The unprecedented volume of the Bank Group’s response….accelerations in processing efficiency and disbursements….the positive role, in crisis-response, of well-established country dialogue and country knowledge, the greater need to balance country focus with a global strategy notwithstanding….and the Bank’s comfortable financial position at the start of the crisis, which was a key element underpinning its crisis response.”
Touching on some India-specific results, Dr. Kumar said that there were some delays in the response after the downturn had kicked off. In particular, the Government of India had sent a written request to the Bank in November 2008 for increased support, and although the Bank initially aimed for operations to begin by March 2009, the proposal did not reach the Bank’s Board until September 2009, and the funds were not released until April of following year.
Nevertheless India was one of the Bank’s “largest borrowers in crisis,” Dr. Kumar noted, adding that it was sanctioned $7 billion in lending during crisis, of which $5 billion was tied to crisis-specific operations. Despite these large-scale commitments, some of them remained unrealised, including $3 billion for the financial sector were cancelled.
The IEG also noted that while much of the “budget-support” lending that the Bank undertook in India had helped signal the strength of public sector banks in the country, yet many of these public sector banks had capital adequacy ratios conforming to Indian government norms at the outset of crisis.
This again raised the question of Bank lending priorities during the crisis – for example whether it was a priority for the Bank to provide precautionary buffer capital to banks that were adequately capitalised.
Labels: financial crisis, financial meltdown, global economic crisis, global economy, World Bank
Friday, October 08, 2010
Financial system is the Achilles' heel of advanced nations
From The Hindu
The economic recovery under way has been proceeding broadly as expected, but downside risks remain elevated and the global financial system is the Achilles' heel of this recovery, according to the International Monetary Fund (IMF).
In releasing two key documents on the state of the global economy — the October 2010 World Economic Outlook (WEO) and the Global Financial Stability Report (GFSR) — the IMF provided a cautious outlook that comprised both gradual improvements in economic conditions and significant uncertainty in Western economies.
In doing so, the Fund, however, made a distinction between the growth trajectories of developed economies on the one hand and emerging markets such as India and China on the other. In the WEO, it noted that most advanced economies still faced “large adjustments,” that their recoveries were advancing at a sluggish pace, and that high unemployment still posed major social challenges.
However, in contrast, the WEO noted that many emerging and developing economies were again witnessing “strong growth,” because they did not experience major financial excesses immediately before the recession of 2009.
In what might be a reference to the ongoing controversy over China's currency value and its role in creating a trade surplus for the country the IMF said that the recovery would require external rebalancing, with “an increase in net exports in deficit countries, such as the U.S., and a decrease in net exports in surplus countries, notably emerging Asia.”
The WEO also made reference to the effectiveness of the overhaul of financial regulation in European countries and the U.S., arguing that “the repair and reform of the financial sector need to accelerate to allow a resumption of healthy credit growth.”
In terms of the financial system itself, the Fund stuck a note of concern in the GFSR, which pointed out that progress toward global financial stability experienced a setback since April, and the recent turmoil in sovereign debt markets in Europe had highlighted “increased vulnerabilities of bank and sovereign balance sheets arising from the crisis.”
The GFSR further noted that while the financial situation has subsequently improved, owing to the “forceful response by policymakers which helped to stabilise funding markets and reduce tail risk,” substantial market uncertainties persisted.
Touching on emerging markets in particular the IMF said in the WEO that many of them had successfully concluded first-generation reforms that improved macroeconomic policy frameworks, strengthening their resilience to macroeconomic shocks.
However, it cautioned, in order to sustain or further raise potential growth and employment, it would be necessary to simplify product and services market regulation, raise human capital, and build critical infrastructure.
The Fund argued that such reforms would help absorb growing capital inflows in a productive manner, “which would accelerate global income convergence and external rebalancing.”
Labels: bailout plan, financial crisis
Thursday, September 02, 2010
Bernanke for better risk management to avert crisis
From The Hindu
In a testimony to the Financial Crisis Inquiry Commission, Federal Reserve Chairman Ben Bernanke said that while risk-taking, at the heart of the financial crisis, could not be entirely avoided in a dynamic economy, a framework that promoted the “appropriate mix of prudence, risk-taking, and innovation,” was needed in order to achieve both sustained growth and stability.
Touching upon the triggers of the crisis, including private and public sector vulnerabilities, Mr. Bernanke also said to the Commissions that the crisis was amplified by the problem of “too-big-to-fail” firms. He said that such firms generated a severe moral hazard, an uneven playing field between big and small firms, and endangered systemic financial stability.
By way of solution to this problem, Mr. Bernanke said, the new financial reform law and current negotiations on new Basel capital and liquidity regulations had together “set into motion a three-part strategy to address too-big-to-fail.”
This strategy included “greatly” reducing the propensity for excessive risk-taking by large, complex, interconnected firms, allowing the government to resolve a distressed, systemically important financial firm in a fashion that avoids disorderly liquidation and increasing the resilience of the system by forcing more derivatives settlement into clearinghouses and strengthening prudential oversight of key financial market utilities.
Among the vulnerabilities of the private sector Mr. Bernanke cited dependence on unstable short-term funding, deficiencies in risk management, excessive leverage, need for better regulation of derivatives.
So far as the public sector’s role in the crisis was concerned, the Fed Chairman said that the main issues related to statutory gaps and conflicts, ineffective use of existing authorities and insufficient crisis-management capabilities.
Labels: Federal Reserve, financial crisis
Sunday, April 18, 2010
Obama warns Wall Street
From The Hindu
Setting the stage for a major overhaul of financial regulation in the coming weeks, U.S. President Barack Obama on Saturday said Wall Street banks and other financial institutions had been “reckless” and “irresponsible” and they, along with their “special interest” representatives in Washington, were to blame for the crisis that has “ripped through our economy”. He added that his administration would hold them accountable and protect and empower consumers going forward.
Quoting investment guru Warren Buffet during his weekly address to the nation Mr. Obama put derivatives trading in the regulatory spotlight arguing that “derivatives bought and sold with little oversight [are] financial weapons of mass destruction”. He noted that the crisis was in part caused by firms such as AIG making “huge and risky bets — using things like derivatives — without accountability”.
In the context of the financial regulation legislation awaiting a Senate debate and vote over the coming weeks and months, Mr. Obama also sharply criticised the Republicans for siding with the special interests of Wall Street and waging “a relentless campaign to thwart even basic, common-sense rules — rules to prevent abuse and protect consumers”.
In a direct attack on the Republican leadership including Senate minority leader Mitch McConnell and Republican Senatorial Committee chairman John Cornyn, he said they had recently met two dozen top Wall Street executives to talk about how to block progress on this issue.
“Lo and behold, when he returned to Washington, the Senate Republican leader came out against the common-sense reforms we've proposed. In doing so, he made the cynical and deceptive assertion that reform would somehow enable future bailouts — when he knows that it would do just the opposite,” said Mr. Obama.
In addition to tighter controls over derivatives trading, he outlined a range of key areas of regulatory reform, including consumer financial protections, closing loopholes that allowed executives in institutions that were “too big to fail” to take risks that endangered the entire economy, and giving shareholders “new power” in the financial system, such as a vote on the salaries and bonuses awarded to top executives.
Underscoring his determination to get the legislation passed, Mr. Obama said: “This is certain: one way or another, we will move forward. This issue is too important. The costs of inaction are too great.”
Labels: Barack Obama, financial crisis, U.S. politics, Wall Street
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