You Know You have a Masters Degree in Economics When...

• You haven’t bought a text book in three years-all three of which were spent as a student.
• You look at the contents of a textbook (the ones you bought the first time in three years), and disappointedly conclude, “Meh…undergraduate stuff”.
• You feel dissatisfied with your understanding of a concept (any concept) until you have worked out the math.
• You remember more about Keynes’ love life than his economics.
• You categorise fantasy fiction into two types- One, including the works of Tolkein and Rowling. The other, more whimsical type covering development models.
• You understand that for a lot people (not necessarily economists), “in fact” means roughly the same thing as “in my opinion”.
• You are the only person in social gatherings who does not feel outraged by how low the poverty line is. (It’s a only a measurement benchmark people, relax!)
• People who studied physics are more likely to have solutions to the country’s economic problems than you. 
• Your friend circle can be neatly classified into people who read the Hindu and those who read the Economics Times.
  
  (Secretly, you would rather just read the Times of India.) 
• You think sociologists/ political scientists/schoolteachers have glamourous jobs.

In Which I Try My Hand at Blogging About Economics

I was initially going to bitch about how  this article in the Economic Times is badly written and badly edited, and why I hate the newspaper. Then I decided that it would be a little rich coming from a person who was going to try their hand at writing an economics blogpost (without making fun of the subject) for the first time.

(By the way, this has nothing to do with my lack of real blogging ideas, promise.)

What is BASEL?
 BASEL, or more accurately the Basel Committee on Banking Supervision (BCBS) sets standards for prudential regulations in the banking sector. Member countries are not legally obliged to follow these regulations. However, since the Committee comprises representatives from the Central Banks of the various countries, who formulate and agree to these, adherence is normally expected.
BASEL III is the latest set of regulations that countries are expected to enforce.
In particular, the BASEL III document lists the various capital requirements on banks.

What is capital?
Capital refers to those components of a bank's balance sheet that do not have to be repaid, and thus can be used to cover losses (due to loans that are defaulted on, for example). Capital is categorised according to tiers. "Tier 1" capital is the strongest, and includes things like common shares (that do not have legal requirements on dividends) and are repaid only in the case of liquidation, that too after all other claimants (like bond holders) are paid first. Higher the tier number, broader are the definitions of capital that apply.

What does BASEL say about capital?
BASEL and most countries have minimum capital requirements from banks. This requirement is expressed in terms of risk-weighted assets* and hovers around 8-10 per cent. BASEL III stipulates the requirement in terms of various types of capital. So 4.5 per cent of a bank's risk weighted assets are to be maintained in the form of Common Equity Tier 1 Capital (the strongest type of capital within Tier 1 capital), 6 per cent in terms of Tier 1 capital and and 8 per cent in terms of Tier 2 capital.

Are minimum capital requirements enough?
BASEL III also imposes an additional requirement of 2.5 per cent of Common Equity Tier 1 capital as a proportion of risk weighted assets. This is over and above the minimum requirement. If a bank fails to meet it, then restrictions are imposed on the manner in which it distributes its profits in the subsequent financial year. According to the BASEL requirements then, banks have to maintain Common Equity Tier 1 Capital to the tune of 7 per cent of risk weighted assets. If a bank's actual maintenance is 5 per cent then it may distribute x per cent of its profits in a manner it deems fit. If the number is 6 per cent, then it may distribute y per cent (y>x) of its profits the way it wants to.
This buffer can be drawn down in cases where the bank faces financial stresses.

So what it the article saying?
The RBI's requirements of banks are a little more stringent than the BASEL ones. Banks have to maintain Common Equity Tier 1 Capital to the tune of 5.5 per cent, total Tier 1 Capital equaling 7 per cent and total capital equal to 9 per cent of its risk weighted assets. The capital conservation buffer is put at 2.5 per cent of Common equity Tier 1 capital, which makes the total requirement of Common Equity Tier 1 capital at 8 per cent (hence the 8 per cent you see in the article). If the capital falls below this requirement then restrictions on the way the bank distributes its profits kick in. Effectively, this has increased the capital requirements on banks. However, this is being implemented in phases and the full strength of the restrictions will only be felt by 2018.
Hence, banks are now implementing measures to augment their capital. This includes introducing BASEL III compliant instruments which entail the risk to investors of non-payment of coupon (when a bank's Common Equity Tier 1 Capital falls below the 8 per cent mark).
The United Bank of India has introduced exactly this type of instrument earlier this year.

If you are wondering what the headline to the article is about, then refer to the last two paragraphs. Which have nothing to do with capital requirements-what the columnist spends 90 per cent of the newsprint on.

Are bank level capital requirements enough?
No. In their haste to maintain minimum capital requirements, banks often end up reinforcing pro-cyclicality in lending. This may happen because of falling bank profits (which figure in the calculation of capital) or due to increasing risk weights to assets (on account of higher risk of default that an economic downturn invariably entails). Instead of taking measures to enhance capital, banks end up lending less, which in turn leads to a further downturn in economic activity. To guard against this, BASEL III moots the concept of a counter-cyclical capital buffer.

How does the Counter cyclical capital buffer work?
The buffer gets activated in 'good times' when banks can afford to jack up their capital, and this can be drawn down in 'bad times' to ensure that the additional losses during the adverse economic situations can be covered. This may lead to banks not lowering their lending just to meet their capital requirements (though they may lower it anyway, if they are very risk averse).
The signal for the good times-i.e. for the bank to start increasing its capital is based on the movement of a macro-economic indicator. For example, the aggregate credit to GDP is recommended by BASEL III. If this exceeds the long term trend value by more than a pre-decided threshold, banks have to start increasing their capital. This is why the counter-cyclical buffer is called a macro-prudential instruments, as against the micro-prudential or bank specific requirements that are made under the conservation buffer (i.e. the drawing down begins when the individual bank is in trouble). The signal for drawing down the buffer may be different from the one that signals building up.
BASEL III envisages the buffer as an additional requirement of 2.5 per cent of capital over and above the minimum and the conservation buffer requirements. If a bank fails to meet the additional requirement (during the times it is meant to), then restrictions are imposed on the manner in which it may dispose off its profits in the subsequent financial year.

There is no small print?
There are actually lots of terms and conditions for the buffer to work well.
The most important being the choice of indicator that signals to banks to start increasing their capital. For example, according to a Countercyclical Capital Buffer Guidance for India (June 2012), the credit to GDP ratio in India was low and stable (with very little variation) up until 2002-03. Using the long term trend of the ratio as benchmark would also be misleading since financial repression in the past has meant that the trend itself if very low. Any deviation from that does not necessarily imply overheating or over-leveraging. This may simply be due to desirable financial deepening, a switch from informal to formal credit sources, priority lending, and increased lending to the manufacturing sector (which the Government aims to develop) where credit intensity is higher. This is possibly true of most emerging market economies. Indeed, the BASEL guidance document itself urges regulators to exercise their discretion when asking banks to increase capital.

This also the approach recommended by UK'S Draft Policy Statement on the Financial Policy Committee and its power to direct regulators on countercyclical capital buffers and sectoral capital requirements. In particular, FPC, intends to monitor 17 indicators including credit to GDP ratio,leverage ratios (capital to unweighted assets), returns on assets before tax (as a measure of bank profitability), loans to deposit ratio (indicative of stable source of funding for banks), bank debt measures like subordinated debt spreads (decreasing spreads during recessions may signal improvement in climate),nominal credit to the private sector, net foreign assets, gross external liabilities (where debt liability may be more risky than foreign direct investment),current account (reflecting possible imbalances in borrowing), metrics reflecting volatility in equity and debt markets, global spreads in debt markets (a spread that is too low may indicate that the premium on risk is not high- hence may trigger increased CCB to build resilience, the same occurrence during a downturn may reflect improvement in conditions and lower risks) etc. The FPC also rejects an "automatic buffer" which the BASEL guidance document recommends (automatic in the sense that as soon as a certain mark on the indicator is breached, the countercyclical buffer should increase or decrease). This is supported by EU recommendations.

The decision on the threshold of the variable (crossing which would signal banks to increase capital) is another matter of concern. The threshold should be low enough, and early enough for banks to start jacking up the capital in time. This is especially relevant as the banks would get 12 months after the trigger to meet requirements under the counter cyclical capital buffer. Drawing down can begin immediately.

How the adjustment should take place-i.e. how a threshold  translates into a particular capital requirement may depend on how badly banks would be affected in terms of a crisis (this is done through a simulation). Whether the minimum capital requirement is pro-cyclical at all is also an important consideration.

Yet another criticism of the countercyclical capital buffer is its crudeness. This means that the tool requires higher capital provisioning for all classes of assets, regardless of whether these are actually contributing to increased risks. This is addressed by imposing cyclical buffers relative to loans to specific "culprit" sectors. For example, Switzerland in January 2013, asked its banks to increase capital provisioning by 1 percentage point as a proportion of mortgage positions held (in risk weighted terms).

Does India have a countercyclical capital buffer?
Not yet. BASEL allows countries to start the buffer from 2016, implementing it in phases. Completion is expected only in 2019. UK and Switzerland are early birds in this respect. End November will likely see the release of a report by a B Mahapatra led committee, set up to look into the operationalise the buffer in India.

*That implies that riskier the asset- i.e. higher the possibility of default of a loan, higher the capital provisioning that has to be made.

Yes, I am afraid this is turning out to be an Agatha Christie appreciation blog.

Well at least we narrowed it down.

Who I Wanted to Be

Who I Hoped I Would Be

Who I thought I Could Be

Who I am Expected to Be

Who I Actually Am

If I Were a Book Consultant...

1. Nobody, I repeat, nobody does crime better than Christie.
2. Hype (due to a famous author) sells more books. I would have never paid 600 for John Galbraith’s debut novel.
3. Higher expectations (due to a famous author or hype) take away from the fun. Especially if your book is not about a boy-wizard called Harry.
4. Cuckoo’s Calling is not about a boy-wizard called Harry.
5. It’s about Cormoran Strike, the most insipid British detective I have met. Prosthetic leg and chequered past notwithstanding.
6. Strike’s sidekick, Robin is more interesting. She is a stand-in for everybody who grew up wanting to be a detective but got saddled with a more realistic career.
7. No, that is different from just being less brilliant than the protagonist.
8. Rowling should use the light touch she brought to the early Potter books, if she wants to continue this series. More so, if the actual plot is weak.
9. (Sorry to harp about this, but learn from Christie!)
10. Higher expectations can also diminish the enjoyment of books by Agatha Christie, as sad as I am to report.
11. The Murder of Roger Ackroyd is not Christie’s masterpiece. The Mirror Crack’d from Side to Side is.
12. Forget I said that. Just read.

Born to Whine

Whining is cathartic.
Nothing matches the relief of vocalising your complaints about your life to someone. The listener should :

• Know you well enough to know that you whine. A lot. About everything. And nothing.
• Take you seriously enough to know that your complaints are genuine.
• Not take you seriously enough to start worrying about your future.
• Not be a parent.
• Not be a smug, content-with-life type.
• Preferably draw parallels between his/ her life and yours, letting you know that life is a b***h in general.

The problem with being a whiner is, that you aren't sure whether you are truly unhappy or if you are just whining out of habit. And you will probably never have the courage to do anything but the conventional. Because what if you risk everything for the unconventional and still want to whine?

PS: When I say you...
PPS: I meant bitch when I wrote b***h. The blog will not become subject to mental filters.

The Oddest School in the World (No, not Hogwarts)

This was brought on by a friend's blog post.

Apparently, working people sleep whenever they can. I saw this in my father, see it in my sister, and see it every day in the cab I take to and from work. The first two-three days I was taken aback at the lack of conversation among colleagues, now I understand. I sleep for most of the hour too. Except for two minutes in the evening when I unfailingly awaken every day. It happens on a stretch of road known as the Benito Juarez Marg. The road that has my old school, sitting by its side. (This probably explains my love for K3G, but that’s not important here.)

The funny thing is, I didn’t particularly like my school while I was in it. Or even now. I don’t really miss it or anything, but every time I think of it, I remember some oddity that makes me smile.

For example, this ritual we had of ‘cleaning duty’. Every day a ‘cleaning duty monitor’ (one of the most influential members of the class), would designate four people to broom the class-room after school. It was supposed to be a character building exercise. We thought the school was too cheap to hire help. Or was allowing us to explore alternative career options, a very popular opinion, given the quality of some of the teachers.

To be fair, we had some excellent teachers. But they were almost always hamstrung by the lack of time. Brought on by the range of extra-curricular activities-so important for character building-that the school encouraged. Activities included an Africa Week, an annual celebration of our friendship with the continent. Through the week, we would write (essay, poetry competitions), talk (assemblies), draw (poster making competitions) on topics around the theme. Then on the last day, there would be a proper cultural programme with song and dance (the same one every time). African dignitaries would be guests. For all the wonderful education that the students were receiving, they weren’t shy of poking fun at the clothes and the girths, and sadly, the complexions, that our guests sported. 

We weren’t limited to Africa though. There was a Palestine Club, with 15 year old members dedicated to the cause. So what if they were foggy about what the cause exactly was. And then there was the, even broader in scope, International Evening. The Evening featured a ballet of some sort, but my abiding memory is that of a handful of foreign students dancing to “Heal the World”, while the Indian kids stood around with candles in their hands.

 The only function that the students (local and international) really looked forward to, was School Birthday. The closest equivalent, if you went to a sane school would be Founders’ Day. From what I hear, the latter is a stiff formal function attended by Very Important People with a proclivity for long speeches. In some, prizes are given out and the proud history of the school recited. There might be a sombre lunch or an off day for the students in the more generous schools. We on the other hand, had a School Birthday Party- complete with its very own birthday ditty, and a cake cutting ceremony. Some of the kids, who had their birthdays in the same week (or who could convincingly lie about it being so) would go up on stage to help the matronly Founder Principal do the honours. They would also get a bite of the cake on stage, which they claimed was much nicer than the one all of us got in class, later.

In junior school, the main event was the fancy dress competition.  Which was always painful, mostly due to my unimaginative parents.  But also in part due the over-ambitious mothers and zealous elder sisters some of the other kids in the class had. Once I remember, I had a huge bruise on my cheek after falling down from the swing. My parents still made me a fairy. Because that would involve dressing me up in the lone frilly frock I had, and handing me a magic wand my father had fashioned out of a twig and aluminium foil, a couple of School Birthdays back. The same year, the boy next to me in the queue came dressed as a witch. In third standard, the fattest boy in class came dressed as a woman, wearing a green spaghetti top, a black skirt and chandelier earrings (clearly, parents were less squeamish, back in the 90s). I went dressed as a fairy, in case you were wondering. 

No chance of a win, year after year, after year. May be they did manage to build character after all.