Monday, October 19, 2009

I Never thought I'd hear ...

... (or read in this case) myself suggesting this but at the time the US Federal Reserve threw Goldman and Morgan Stanley the lifeline of converting themselves into bank holding companies, it could have taken a leaf from the handbook India's Central Bank, the Reserve Bank of India (RBI), uses to control banks' activity.

The RBI basically requires banks to have a significant percentage of their assets in the form of loans and advances to priority sectors which generally are agriculture, small business, housing and education loans. This, coupled with fairly strict limits on investments in bonds (apart from Government securities) and equities, ensures that credit flows to areas in which it is most needed and that trading gains and losses don't dominate banks' income statements.

No one is suggesting the same sectors or limits for the US, but this kind of broad approach could ensure banks do what the economy needs them to do - at least as a near term measure. Please click on the title to see an article from a weekend issue of the NYT about bailout funds fueling (some) fat profits on Wall Street.

I have nothing against profits but the issue I have is that these trading patterns are contributing quite significantly to equity market bubbles in markets such as India. As we've seen, when they implode it isn't pleasant and it is often the least sophisticated investors (and we have many of them in India) that get impacted the worst.

1 comment:

Anonymous said...

I agree. What seems old fashioned and prudent is just pure logic and common sense. Risks remain the same. The later generations think that they can manage risk better, use complex tools and in that ritual, forget that risk still exists.