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FINShastra Information Technology Solutions

News letter of finance cell , Master of International Business
Volume VIII |
Issue II
January 31 ,2011
Your Finance Vocab

Team Finshastra What Does Accelerated Payments Mean?

A term associated with making additional unscheduled payments on a loan at predetermined, or

random intervals. Making additional unscheduled payments reduces the principal balance of the
loan, meaning that more principal and less interest is paid off in subsequent payments. Making
accelerated payments will lead to the early pay-off of a loan.

What Does Non-Recourse Debt Mean?

A type of loan that is secured by collateral, which is usually property. If the borrower defaults, the
issuer can seize the collateral, but cannot seek out the borrower for any further compensation, even
if the collateral does not cover the full value of the defaulted amount. This is one instance where the
Kamal Girdhar borrower does not have personal liability for the loan.

What Does Negative Float Mean?

The period of time between when a bank customer writes a check and when it is cleared. Negative
float is the difference between checks written or actual checks deposited as stated in a check
register and the checks that have cleared an account according to bank records. A negative
float occurs when checks are clearing faster than deposits received into the account.

What Does Credit Sleeve Mean?

A form of credit agreement, backed by physical assets, where the lending party will provide
Nripanshi Bansiwal working capital and collateral to another company, known as the "sleeve provider". The lending
party will essentially co-guarantee certain outstanding credit arrangements the sleeve provider has
with other lenders and increase the overall credit quality of the sleeve provider.

What Does Repricing Opportunity Mean?

The change in interest rate of an interest-sensitive asset or liability. Banks earn income from
interest, so their income fluctuates with changes in interest rates. A bank can minimize its interest-
rate risk and maximize its net interest income by minimizing the differences in repricing
opportunities between its assets, such as adjustable-rate mortgages, and its liabilities, such as the
rate of interest it pays on customer deposits or certificates of deposit.
Sunita Arora What Does Wildcat Banking Mean?

The banking industry in parts of the United States from 1837 to 1865, when banks were established
in remote and inaccessible locations. During this period, banks were chartered by state law without
any federal oversight. Less stringent regulations on the banking industry at the time led to this
period also being referred to as the "free banking" era.


For any query or suggestion email us at financecell.mib.dse@gmail.com


What Does Zombie Debt Mean?

A type of bad debt that is so old a person may have forgotten he or she owed it in the first place.
The debt has likely been given up on by the company to which it was owed. Zombie debt can haunt
a debtor if a debt collector buys the debt for a low price from the company in attempt to recover the
owed funds.

Also know as gap financing, bridge financing is a loan where the time and cash flow
between a short term loan and a long term loan is filled up. Bridge financing begins at
the end of the time period of the first loan and ends with the start of the time period
of the second loan, thereby bridging the gap between two loans. It is also known as
gap financing.

A bank account meant for customers with low incomes. These accounts are
characterized by little or no monthly fees and there is no strict rule regarding the
minimum balance.
A very large loan extended by a group of small banks to a single borrower, especially
corporate borrowers. In most cases of syndicated loans, there will be a lead bank,
which provides a part of the loan and syndicates the balance amount to other banks.

Contributed by:
Kamal Girdhar


Analyzing a Bank's Financial Statements

By Hans Wagner
Financial statements for banks present a different analytical problem than manufacturing and
service companies. As a result, analysis of a bank's financial statements requires a distinct approach
that recognizes a bank's somewhat unique risks.

Banks take deposits from savers, paying interest on some of these accounts. They pass these funds
on to borrowers, receiving interest on the loans. Their profits are derived from the spread between
the rate they pay for funds and the rate they receive from borrowers. This ability to pool deposits
from many sources that can be lent to many different borrowers creates the flow of funds inherent
in the banking system. By managing this flow of funds, banks generate profits, acting as the
intermediary of interest paid and interest received and taking on the risks of offering credit.

Leverage and Risk

Banking is a highly leveraged business requiring regulators to dictate minimal capital levels to help
ensure the solvency of each bank and the banking system. In the U.S., a bank's primary regulator
could be the Federal Reserve Board, the Office of the Comptroller of the Currency, the Office of
Thrift Supervisionor any one of 50 state regulatory bodies, depending on the charter of the bank.
Within the Federal Reserve Board, there are 12 districts with 12 different regulatory staffing
groups. These regulators focus on compliance with certain requirements, restrictions and
guidelines, aiming to uphold the soundness and integrity of the banking system
As one of the most highly regulated banking industries in the world, investors have some level of
assurance in the soundness of the banking system. As a result, investors can focus most of their
efforts on how a bank will perform in different economic environment.

Below is a sample income statement and balance sheet for a large bank. The first thing to notice is
that the line items in the statements are not the same as your typical manufacturing or service firm.
Instead, there are entries that represent interest earned or expensed as well as deposits and loans.
(To find out more about balance sheets and income statements.)

As financial intermediaries, banks assume two primary types of risk as they manage the flow of
money through their business. Interest rate risk is the management of the spread between interest
paid on deposits and received on loans over time. Credit risk is the likelihood that a borrower will
default on its loan or lease, causing the bank to lose any potential interest earned as well as the
principal that was loaned to the borrower. As investors, these are the primary elements that need
to be understood when analyzing a bank's financial statement.

Interest Rate Risk

The primary business of a bank is managing the spread between deposits (liabilities, loans and
assets). Basically, when the interest that a bank earns from loans is greater than the interest it must
pay on deposits, it generates a positive interest spread or net interest income. The size of this
spread is a major determinant of the profit generated by a bank. This interest rate risk is primarily
determined by the shape of the yield curve.
As a result, net interest income will vary, due to differences in the timing of accrual changes and
changing rate and yield curve relationships. Changes in the general level of market interest rates
also may cause changes in the volume and mix of a bank's balance sheet products. For example,
when economic activity continues to expand while interest rates are rising, commercial loan
demand may increase while residential mortgage loan growth and prepayments slow.

Banks, in the normal course of business, assume financial risk by making loans at interest rates that
differ from rates paid on deposits. Deposits often have shorter maturities than loans and adjust to
current market rates faster than loans. The result is a balance sheet mismatch between assets
(loans) and liabilities (deposits). An upward sloping yield curve is favorable to a bank as the bulk of
its deposits are short term and their loans are longer term. This mismatch of maturities generates
the net interest revenue banks enjoy. When the yield curve flattens, this mismatch causes net
interest revenue to diminish.

A Banking Balance Sheet

The table below ties together the bank's balance sheet with the income statement and displays the
yield generated from earning assets and interest bearing deposits. Most banks provide this type of
table in their annual reports. The following table represents the same bank as in the previous

First of all, the balance sheet is an average balance for the line item, rather than the balance at the
end of the period. Average balances provide a better analytical framework to help understand the
bank's financial performance. Notice that for each average balance item there is a corresponding
interest-related income, or expense item, and the average yield for the time period. It also
demonstrates the impact a flattening yield curve can have on a bank's net interest income.

The best place to start is with the net interest income line item. The bank experienced lower net
interest income even though it had grown average balances. To help understand how this occurred,
look at the yield achieved on total earning assets. For the current period, it is actually higher than
the prior period. Then examine the yield on the interest-bearing assets. It is substantially higher in
the current period, causing higher interest-generating expenses. This discrepancy in the
performance of the bank is due to the flattening of the yield curve.

As the yield curve flattens, the interest rate the bank pays on shorter term deposits tends to
increase faster than the rates it can earn from its loans. This causes the net interest income line to
narrow, as shown above. One way banks try to overcome the impact of the flattening of the yield
curve is to increase the fees they charge for services. As these fees become a larger portion of the
bank's income, it becomes less dependent on net interest income to drive earnings.

Changes in the general level of interest rates may affect the volume of certain types of banking
activities that generate fee-related income. For example, the volume of residential mortgage
loan originations typically declines as interest rates rise, resulting in lower originating fees. In
contrast, mortgage servicing pools often face slower prepayments when rates are rising, since
borrowers are less likely to refinance. As a result, fee income and associated economic value arising
from mortgage servicing-related businesses may increase or remain stable in periods of moderately
rising interest rates

When analyzing a bank you should also consider how interest rate risk may act jointly with other risks
facing the bank. For example, in a rising rate environment, loan customers may not be able to meet
interest payments because of the increase in the size of the payment or a reduction in earnings. The
result will be a higher level of problem loans. An increase in interest rates exposes a bank with a
significant concentration in adjustable rate loans to credit risk. For a bank that is predominately funded
with short-term liabilities, a rise in rates may decrease net interest income at the same time credit quality
problems are on the increase.

Credit Risk

Credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its
obligations in accordance with agreed terms. When this happens, the bank will experience a loss of some
or all of the credit it provided to its customer. To absorb these losses, banks maintain an allowance for
loan and lease losses.

There are a couple of points an investor should consider from Figure 4. First, the actual write-
offs were more than the amount management included in the provision for loan losses. While this in
itself isn't necessarily a problem, it is suspect because the flattening of the yield curve has likely
caused a slow-down in the economy and put pressure on marginal borrowers.

Arriving at the provision for loan losses involves a high degree of judgment, representing
management's best evaluation of the appropriate loss to reserve. Because it is a management
judgment, the provision for loan losses can be used to manage a bank's earnings. Looking at the
income statement for this bank shows that it had lower net income due primarily to the higher
interest paid on interest-bearing liabilities. The increase in the provision for loan losses was a 1.8%
increase, while actual loan losses were significantly higher. Had the bank's management just
matched its actual losses, it would have had a net income that was $983 less (or $1,772).

An investor should be concerned that this bank is not reserving sufficient capital to cover its future
loan and lease losses. It also seems that this bank is trying to manage its net income. Substantially
higher loan and lease losses would decrease its loan and lease reserve account to the point
where this bank would have to increase the future provision for loan losses on the income
statement. This could cause the bank to report a loss in income. In addition, regulators could place
the bank on a watch list and possibly require that it take further corrective action, such as issuing
additional capital. Neither of these situations benefits investors.

A careful review of a bank's financial statements can highlight the key factors that should be
considered before making a trading or investing decision. Investors need to have a good
understanding of the business cycle and the yield curve - both have a major impact on the economic
performance of banks. Interest rate risk and credit risk are the primary factors to consider as a
bank's financial performance follows the yield curve. When it flattens or becomes inverted a bank's
net interest revenue is put under greater pressure. When the yield curve returns to a more
traditional shape, a bank's net interest revenue usually improves. Credit risk can be the largest
contributor to the negative performance of a bank, even causing it to lose money. In addition,
management of credit risk is a subjective process that can be manipulated in the short term.
Investors in banks need to be aware of these factors before they commit their capital.

by Hans Wagner


In yet another specimen of failing governance and human greed what has gained limelight is a Rs.
400 crore scam by none other than the relationship manager of a well-known foreign bank, Citi.
Shivraj Puri allegedly siphoned money from approximately 40 HNIs (High Net worth Individuals)
and corporate entities. Hero Group promoters(250 crore) and managing director of Helion
Advisors, SanjeevAggarwal(33 crore) are some of the major clients that have lost money in this
fraud. Associate Vice President of Hero Corporate Services, Sanjay Gupta is also accused of colluding
with Puri in return for a Rs. 20 crore commission.

Police is reportedly investigating the case thoroughly ranging from the extensive search of Puri’s
ipad to appointing a specialized accounting firm to analyze the loopholes and asking NSE for all the
information related to the scam. As per sources as much as 19 accounts were involved in the scam.
Puri allegedly invested part of the funds in the real state but major portion was invested in Nifty
options, Nifty’s benchmark index being the underlying asset mainly through brokerage firms
Religare and Bonanza. Some funds were also routed through Norman Martin, a firm owned by a
relative of Puri.

Amidst all this interrogation, dog-hunting, hue and cry one question that creeps up is that how can
Citi’s higher official be ignorant of such a breach by their own employee. After all “Citi never
sleeps…” Puri’s family members have gone to the extent of claiming that he has been charged on
false ground and it was his employer who took the final decision on their investment in the
schemes. In fact Aggrawal, who happens to be the co-founder of business process outsourcing firm
Daksh that was later acquired by IBM, has filed a cheating complaint against Citibank and 11 others,
including its chief executive Vikram Pandit. Though the bank has said in a statement that “Citibank
has been in touch with its impacted customers and is fully committed to safeguarding their
legitimate interests.”, doubt still persists. And if that be true, there is something grossly wrong with
the era we have entered into.

However assuming that person at the helm of affairs is only Puri who cheated his clients by
assuring them an annual return of 36% through a forged SEBI statement to validate his schemes,
what possible precautions could have been taken.At one point it is incredible that HNIs who are
presumably smarter than all could be gullible enough to trust such vast sums of money to someone
showing them a hope of illusionary results way beyond the normal market returns. If a scheme
sounds too good to be true it probably is. Granting power of attorney to someone is inviting trouble
unless the person has your implicit trust.

On the regulatory front certain norms, guidelines are already in existence. For example as
per SEBI guidelines it is mandatory for all the brokerage firms to allow their clients to trade
in derivatives only after the submission of valid income proof. In cases of discrepancies or
the income profile not matching with the investment portfolio, the brokers are supposed
toimmediately inform the regulator. Brokers are supposed to collect these documents every
year and these include copies of latest Income Tax Return Acknowledgment, Annual
Accounts (last financial year for individuals, last two financial years for non individuals)
and Copy of Form 16 in case of salary income. Besides, the clients also need to submit a CA-
certified net worth certificate for the latest financial year, salary slip of one month in current
financial year, bank account statement for last six months, demat account Holding
statement and other documents substantiating ownership of assets. NSE has also been
running some awareness campaigns for investors through radio and TV channels.
But even after all this if such scams are taking place we clearly lack somewhere. There is an
absence of specific guidelines for wealth management in India. Country needs good systems
and audit in place to prevent the relapse of such frauds. At the banking front, since
relationship managers run after incentives banks must have robust systems to check
misuse. For instance, if it is noticed that money from a wealth management account has
moved in and out of various mutual fund schemes, then the bank should check whether this
is being done simply to earn more commission from fund houses. While the commission is
earned by banks, a slice of it is passed on to relationship managers. Often their earnings
from incentives could be as high as their salaries.

Last but not the least, we as investors need to stay awake as perhaps Citi is sleeping.



1. This was established in Kolkata on 1st April 1935 in accordance with the provisions
of an act of the same name passed in 1934. Name the institute.

2. This bank sponsored the first regional bank in India by the name “Pratham
Grameen Bank”.

3. Which was the first co-operative Bank in Asia?

4. The Imperial Bank of India was renamed in 30th April 1955. What was it called?

5. Name the first foreign bank to open a branch in India.

6. Which bank operates on behalf of SBI in Nigeria?

7. Who is the Chairman of SBI?

8. Who is the Governor of RBI?

9. What are the current repo and reverse repo rates?

10. Who was appointed as the Deputy Governor of RBI in January 2011 after the
denial of extension to Usha Thorat's tenure?

1. Reserve Bank of India
2. Syndicate Bank
3. Anyonya Co-operative Bank
4. State Bank of India
5. Comptoire d' Escompte de Paris of France in 1860
Contributed by 6. INMB (Indo-Nigeria Merchant Bank) established 1981
7. O. P. Bhatt
Nripanshi 8. Duvvuri Subbarao
MIB 1st Year 9. Repo- 6.5% ; Reverse repo- 5.5%
10. Anand Sinha


U.S. Economy: Growth Accelerates as Consumers Boost Spending

The U.S. economy accelerated in the fourth quarter of 2010 as consumer spending
climbed by the most in more than four years.

Oil Jumps, Stocks Retreat, Dollar Rises Amid Protests in Egypt

Crude oil jumped, stocks fell around the world and the dollar gained against the euro amid
concern protests in Egypt are intensifying as President Hosni Mubarak imposes a curfew
in Cairo, Suez and Alexandria. The Middle East nation's dollar bonds fell, pushing yields
to a record high.

Govt public debt in Q3 up 4% at Rs 28,62,624cr

The outstanding internal debt of the Government stood at Rs 25,64,983crore in Q3,
thereby constituting 36.6 per cent of GDP (Gross Domestic Product) compared with 35
per cent in the previous quarter.

Accel Partners set for $400 mn fund for India

PE fund spotted Facebook, Groupon early on This may well be the best fund news for
Indian entrepreneurs looking at growth capital. Accel Partners, the marquee global
venture capital and growth equity provider with $6 billion assets under management, is
enroute to setting up a $400 million India-dedicated private equity fund.

India considering infrastructure debt fund options

India plans to spend $1.5 trillion in the 10 years to 2017 to revamp its creaky
infrastructure, which is seen as a brake on Asia's third-largest economy's growth.

'Japans Credit Rating Cut to AA- by S&P on Debt Load

Japan's credit rating was cut for the first time in nine years by Standard & Poor's as
persistent deflation and political gridlock undermine efforts to reduce a 943 trillion yen
($11 trillion) debt burden.

Egypt Stocks Slump Most 2 Years, Pound Falls as Protests Persist

Egypt stocks tumbled the most in more than two years and bonds fell as protests against
the country's government persisted and calls for another mass rally tomorrow mounted.
The pound slumped to a six-year-low.

Food inflation inches up to 15.57%

Food inflation inches up to 15.57%Onions went up by a huge 111.58 per cent year-on-
year, thus, showing that government initiatives like export ban were not proving
sufficiently effective

U.S. earnings help world stocks but gold off and euro wavers
World stocks edged higher and Wall Street rose on Friday as JP Morgan's strong
earnings offset weaker-than-expected U.S. retail sales, but China's move to raise
banks' reserves hit gold prices.
AIG Repays Fed, Swaps Treasury Investment for Stock
American International Group Inc. retired a Federal Reserve credit line and swapped
the Treasury Department's preferred stake for 92 percent of the insurer's common
stock as the U.S. unwinds its investment in the company.

Back from the brink

Two years after the scam broke, Satyam is almost back on track. BhupeshBhandari
tells the story of the turnaround. When RamalingaRaju confessed his monumental
fraud on January 7, 2009, he not only brought Satyam Computer Services, India's
fourth-largest information technology company, perilously close to implosion but also
turned topsy-turvy the lives of his 50,000 or so employees
India to sign free trade deals with Japan, Malaysia in Feb
India has finalised free trade agreements (FTA) with Japan and Malaysia and will sign
the deals in February, the country's minister for commerce and industry, Anand
Sharma, said on Friday.
Stocks, Commodities Drop on China Rate Concern; Treasuries Fall
Stocks fell, with the benchmark index for emerging markets sliding the most in almost
two months, and oil and copper retreated as China's accelerating economy fanned
concern interest rates will rise. Treasuries slipped and currencies of commodity
producing nations tumbled.

India concern over trade gap with Australia

While India is Australia's third largest export market and fifth largest trade partner,
Australia is India's sixth largest trading partner.

12th Plan to focus on reducing poor-rich gap: MoS

The focus of the 12th Five-Year Plan (2012-17) will be on bridging the rich-poor gap
by accelerating growth in the rural and backward parts of the country, newly appointed
Minister of State for Planning Ashwani Kumar said today.

'Nigerias First Eurobonds to Spur African Borrowing
Nigeria plans its first sale of international bonds today to spur corporate borrowing in
Africa's biggest oil producing nation.

RIL Q3 net profit at Rs 5136 cr, up 28% YOY

RIL Q3 net profit at Rs 5136 cr, up 28% YOYRIL maintained its profit-growth
momentum by reporting a 28% rise in net profit at Rs 5136 crvsRs 4008 cr for Q3 FY-

'Trade deficit in 2010-11 to be at $115-125 bn'

DGFT AnupPujari said the trade deficit would widen despite hope to surpass $200
billion export target for the year, but imports are increasing too.

'U.S. Home Prices Bouncing Around Bottom, Economist Case Says

U.S. home prices have reached a bottom and may be set to rise in the first half as
buyers take advantage of increased affordability, said Karl Case, the economist who
co-founded the S&P/Case-Shiller home price index.

Obama Said to Call for Five-Year Discretionary Spending Freeze

President Barack Obama will propose tonight a five-year freeze of non-security
discretionary spending as a way to reduce the federal government's budget deficit,
according to an administration official.

RBI hikes repo, reverse repo rates by 25 bps

Repo rate, the one at which RBI lends to banks will now be 6.50%, reverse repo, the
rate banks receive for depositing funds with the central bank will be at 5.50%.

RBI ups inflation projection to 7%, positive on growth

With food prices continuing to rule high, RBI revised its current fiscal year-end
projections for inflation, raising it to 7% from the earlier 5.5%, but said it was hopeful
of the economy growing at a robust 8.5%.

'Current a/c deficit at 3.5% of GDP, unsustainable'

CAD, representing the difference in inflows and outflows of foreign exchange, barring
capital movements, stood at 2.9 per cent of the GDP last fiscal.

India is most over-regulated country in the world: Survey

India has topped a list of the most "over-regulated countries in the world" in a survey
on Asian business and politics by Hong Kong-based Political and Economic Risk
Consultancy Ltd (PERC).

“The worse a situation becomes the less it takes to turn it around, the bigger the upside.”
- George Soros

George Soros (Schwartz György): Billionaire Fund Manager & Philanthropist (Net Worth
14.2 Billion USD)

Famous for: Making billions and giving away millions every year. Soros has also been a very
successful currency trader and investor, being called "the Man Who Broke the Bank of
England" in the early nineties when he bet big against pounds sterling.

Soros details: Born - Hungary August 12, 1930 Lives – USA

George Soros has made his mark as an enormously successful speculator, wise enough to
largely withdraw when still way ahead of the game. The bulk of his enormous winnings is
now devoted to encouraging transitional and emerging nations to become 'open societies,'
open not only in the sense of freedom of commerce but—more important—tolerant of new
ideas and different modes of thinking and behavior.

Soros fled Hungary in 1947 for England, where he graduated from the London School of
Economics in 1952 and then obtained an entry-level position with an investment bank in
London. In 1956, he immigrated to the United States and held analyst and investment
management positions at the New York firms of F.M. Mayer (1956-59), Wertheim & Co.
(1959-63) and Arnhold & S. Bleichroeder (1963-73).

Soros went off on his own in 1973, founding the hedge fund company of Soros Fund
Management, which eventually evolved into the well-known and respected Quantum Fund.
For almost two decades, he ran this aggressive and successful hedge fund, reportedly racking
up returns in excess of 30% per year and, on two occasions, posting annual returns of more
than 100%.

George Soros gained international notoriety when, in September of 1992, he risked $10
billion on a single currency speculation when he shorted the British pound. He turned out to
be right, and in a single day the trade generated a profit of $1 billion – ultimately, it was
reported that his profit on the transaction almost reached $2 billion. As a result, he is
famously known as the "the man who broke the Bank of England."

Soros is also famous for running the Quantum Fund, which generated an average annual
return of more than 30% while he was at the helm. Along with the famous pound trade, Soros
was also cited by some as the "trigger" behind the Asian financial crisis in 1997, as he had a
large bet against the Thai baht.

He is also widely known for his political activism and philanthropic efforts.


FinShastra is a student effort towards integrating theories in finance and the

happenings in the world of finance around us. It is not a platform to brand or
promote a particular person or his beliefs as being sacrosanct. The last issue
(Financial Crisis and Beyond , Page 11 ..) inadvertently appeared to be promoting
one of the members :Kamal Girdhar in the footnote(Kamal Girdhar is an
alumnus........2011) . The error is regretted . 15
Investment Style
George Soros was a master at translating broad-brush economic trends into highly
leveraged, killer plays in bonds and currencies. As an investor, Soros was a short-term
speculator, making huge bets on the directions of financial markets. He believed that
financial markets can best be described as chaotic. The prices of securities and currencies
depend on human beings, or the traders - both professional and non-professional - who buy
and sell these assets. These persons often act out based on emotion, rather than logical
considerations. (For more insight, see Understanding Investor Behavior.)

He also believed that market participants influenced one another and moved in herds. He
said that most of the time he moved with the herd, but always watched for an opportunity to
get out in front and "make a killing." How could he tell when the time was right? Soros has
said that he would have an instinctive physical reaction about when to buy and sell, making is
strategy a difficult model to emulate.

An Interview with George Soros

What is your view on the hot money coming into India? Can this money be pulled out as
prices rise and inflation concerns weigh?

India has a very good dynamic among emerging markets and it also has domestically driven
growth. But inflation is now an issue and hot money into India is very much a part of that
issue. So that will weigh on India in a big way.

Is there a bubble to be concerned about?

Markets are prone to create bubbles. Bubbles are inherent to markets. Imbalances do not
liquidate themselves and so you do need supervision and you do need control. Regulators
are even more imperfect than markets and make markets occasionally do what they want
them to do and often what they don't.

What solutions in the post-crisis world are emblematic of the lessons learnt?

One of the lessons to be learnt is about margin and capital requirements in trading positions
and that needs to be varied. It is beginning to be recognised finally. I think that capital flows
can be disruptive, so some limitations on internal flows are necessary. It is being
implemented but the principles have not been recognised. History shows that systemically
important institutions will not be allowed to fail. This was visible in 2008 when systemically
important institutions were given an implicit guarantee. If you have it then regulators have
to exert themselves that this is not revoked. This will then mean stricter regulation and that
the industry won't like. That's a big bone of contention. I think until some large institutions
are allowed to fail there will be no credibility and that is a real problem.

What is the big lesson about money supply?

It is not enough to control money supply, you also have to control credit. The theory of
monetarism is false. Markets have moods. (They) can be exuberant and fearful, which can
change given the amount of money supply. Regulating money not enough. You need tools for
that—margin needs, variable capital requirement should be used.

Contibuted By Anuratn