Naked truths about banking

B S :A Seshan  April 10, 2013 Last Updated at 21:25 IST

Anat Admati and Martin Hellwig contradict established myths that bankers spread about global banking

There are known unknowns; that is to say there are things that we now know that we don't know. 

But there are also unknown unknowns; 

are things we do not know we don't know."

- Donald Rumsfeld,
former US Defence Secretary

Whenever bankers objected to raising the capital of their institutions under the Basel norms on the ground that it was costly, I used to wonder why this should be the case. 

Does equity not form part of working capital deployed in their businesses? If so, how is equity, as such, costly vis-a-vis borrowing through deposits and other means? The book under review comprehensively deals with such myths in the world of banking, which the authors call "the bankers' new clothes". 

It consists of three parts: "Borrowing, Banking and Risk", "The Case for More Bank Equity" and "Moving Forward". There are 13 chapters, with 108 pages of copious notes at the end that are as informative as the main text.

The authors explode a number of myths spread by bankers. For reasons of space, only some of the more important myths and the responses are listed. (1) Banks are so different from all other businesses that the basic principles of economics and finance do not apply to them - on the other hand, the principles are the same. (2) Tighter restrictions on banks' borrowing might increase bank safety, but it would come at the expense of growth. This is not necessarily so. (3) Banks must "set aside" capital to satisfy new regulations - a variation of the "capital-is-costly theme" mentioned at the beginning. This is due to confusing capital with the cash reserve that does not earn a return. (4) The ability of banks to hold their own against global competition might suffer if regulation were stricter for them than for banks in other countries ("the level playing" argument). This ignores risk-taking. (5) Large banks are too big to fail, disrupting the economy - hence the need to be rescued by the government. The cost of saving banks may be even greater. (6) The financial crisis of 2007-09 was primarily caused by the problem of liquidity and not insolvency, since financial institutions did not have access to markets. It arose because the latter diagnosed it correctly as insolvency. (7) Media reports give the impression that the risk in lending comes mainly from speculation gone wrong.

 When banks suffer huge losses from systematic mistakes in lending decisions or the maturity mismatch between their assets and liabilities, it does not make news. (8) Derivatives and new techniques for risk management have benefited society by providing better means of sharing risks.

 They have, however, also expanded the scope for gambling and can be used in unrecognisable ways that increase, rather than decrease, risks in the system. Donald Rumsfeld's remark cited at the beginning makes the point clear.

 The authors point out that trading in financial claims is more important for many banks than loans in their balance sheets.

The theme of the book is that banks have assumed excessive risks on the grounds of the myths listed above with considerable cost to the economic system and taxpayers. 

The authors caution the reader that today's banking system, even with the proposed reforms, is as dangerous and fragile as the one that brought us to the recent crisis. They recommend a number of reforms. The emphasis is on increasing the equity requirements of banks. They are dissatisfied with Basel III norms.

One major criticism of an otherwise eminently readable book is that there is no reference to the interface between bank regulation and monetary policy, though there are sporadic references to the US Fed's role in the financial crisis.

 When I looked at the index, I was surprised that there was only one entry - and that too related to a note at the end of the book. Yet one of the cardinal lessons of the recent crisis is the close link between monetary policy, banking practices and financial stability that has led to special monitoring arrangements in many countries. 

At the time the US was discussing the framework of its financial architecture, Thomas Jefferson, third US president, famously said bankers were more dangerous than standing armies in the field because of the financial clout they commanded. His observation is still relevant. 

The easy money policy followed by the Fed in the earlier years was much praised at that time for the prosperity it brought to the US economy. It is now considered the villain of the piece because of the adverse selection of loan proposals and subprime mortgages that it spawned, sowing the seeds of the crisis. One past study of the European Central Bank showed how the capital-asset ratio had a restraining influence on the growth of money supply in the euro system.

The authors have written the book for the enlightenment of the average reader who has no background in economics, finance or quantitative fields. But it can be read by anyone interested in banking - bankers, policy makers and researchers.

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THE BANKERS' NEW CLOTHES
What's Wrong with Banking and What to do About it
Anat Admati and Martin Hellwig
Princeton University Press
398 pages; $29.95

Kotak Mahindra Bank to sell 20 million shares to Heliconia

At 11am, Kotak shares were up 0.84% at Rs634 apiece, while the benchmark 30-share Sensex was down 1.45%. Photo: Ramesh Pathania/Mint

Live Mint : Joel Rebello:Fri, Apr 12 2013. 11 31 AM IST

Kotak’s share sale at Rs.648 apiece will infuse a total of Rs.1,296 crore into the bank

Mumbai: Private sector Kotak Mahindra Bank Ltd said on Friday it will issue 20 million shares on a preferential basis to Singapore-based Heliconia Pte Ltd at Rs.648 apiece.

Kotak’s board approved the share sale, which will infuse a total ofRs.1,296 crore into the bank, at a meeting on Thursday.

Heliconia is an affiliate of the Government of Singapore Investment Corp. Pte Ltd.

At 11am, Kotak shares were up 0.84% at Rs.634 apiece, while the benchmark 30- share Sensex was down 1.45%.

“Now Is Our Time” An Interview with Sheryl Sandberg by Adi Ignatius,COO of Face Book

Photography: Jonathan Sprague

HBR ;April :2013

Since becoming the COO of Facebook, in 2008, Sheryl Sandberg has managed the social media giant’s complex business operations. 

More recently she has taken on a second, no less public role outside the company as an outspoken advocate for women aspiring to leadership positions. 

Her new book, Lean In—which Sandberg describes as “sort of a feminist manifesto”—is a call for women to act in their own behalf to overcome institutional and personal barriers to success. 

In this edited interview with HBR’s editor in chief, Adi Ignatius, Sandberg explains why the workplace is ready for a revolution.

HBR: What do you mean when you refer to your book as “sort of a feminist manifesto”?

Sandberg: The book is a combination of things. It’s partly stories from my own life and experience, partly data and research about gender issues, and partly a call to action by and for women.

Would you describe yourself as a feminist? That word has taken a beating in recent years.

Had you asked me that when I was in college, I would have said I was not. But I think we need to reclaim the “F word” if it means supporting equal opportunities for men and women.

What’s the big idea in Lean In?

The book is for any woman who wants advice on how to sit at any table she wants to sit at, and for any man who wants to be part of creating a more equal world. If we could get to a place of true equality, where what we do in life is determined not by gender but by our passions and interests, our companies would be more productive and our home lives not just better balanced but happier.

You talk in the book about reigniting a revolution. How would you like to see that happen?

Women are making progress at every level except as leaders. We started accounting for 50% of college degrees 30 years ago, but progress at the top has stalled. For the past decade women in corporate America have held only about 14% of C-suite jobs and 17% of board seats. There aren’t enough women sitting at the tables where decisions are made. Reigniting the revolution means I want us to notice all of this and find ways to encourage more women to step up and more companies to recognize what women bring to the table.

What’s the cost to society when women don’t pursue their ambitions fully?

Warren Buffett has said, quite graciously and famously, that one of the reasons for his success is that he had to compete with only half the population. The more people who get in the race, the faster the running times will be.

Some have criticized you for essentially blaming women for not being “better,” even though many of the challenges they confront are institutional. How do you respond?

Women face huge institutional barriers. But we also face barriers that exist within ourselves, sometimes as the result of our socialization. For most of my professional life, no one ever talked to me about the ways I held myself back. I’m trying to add to that side of the debate. There’s a great quote from Alice Walker: “The most common way people give up their power is by thinking they don’t have any.” I am not blaming women; I’m helping them see the power they’ve got and encouraging them to use it.

Say more about how women hold themselves back.

One important way, as I write in the book, is that they “leave before they leave.” That is, they take themselves out of the running for career advancement because they want to have a family. But in some cases they’re making these decisions years in advance—before they even have a partner! That should be a time when they lean in, not pull back.

We’re talking a lot about what women do wrong. What do female leaders do well that men should emulate?

I don’t believe there are stereotypical forms of male and female leadership. But I think there are things we’re encouraged to do as women that can be good for all leaders. Women are often very good listeners. They are often good consensus builders. They can make teams cohesive.

Illustration: Walter Newton

Is the ultimate goal for men and women to become more like each other, or to identify and celebrate the differences?

I think we want to understand the differences and celebrate them. But we need to break down limitations imposed by stereotypes. We don’t really encourage women to be leaders. We call our daughters—but not our sons—bossy. We overestimate our sons’ crawling abilities and underestimate our daughters’. Women are given messages all through their lives that they shouldn’t lead. At the same time, the world still isn’t very welcoming or respectful toward full-time at-home dads.

I’ve asked female CEOs to talk about the experience of functioning in what is still essentially a boys’ club, but they inevitably decline, saying, “I view myself as a CEO, not as a ‘female CEO.’” Surely there’s a difference worth exploring.

Had you asked me that question five years ago, I would have said the same thing. No one talks about gender in the workplace, because if you say the words “I am a woman,” the other person is likely to hear “I want special treatment” or “I’m going to sue you.” A man who runs a large organization told me it’s easier to talk in public about your sex life than it is to talk about gender. But there are real gender-based issues: how we understand ourselves, how we experience each other. One of my goals is to make gender an open and honest topic in the workplace.

Why do so many highly educated women leave the workforce?

There are many reasons women leave—from lack of flexibility and discrimination to the desire to pursue other goals. The fact that so many women from top schools drop out of the workforce is one of the most important causes of the leadership gap. If we want to balance out leadership roles in the workplace, we have to balance out responsibilities in the home.

The work-life balance can be daunting. I’ve never met a working mother who feels happy about how she’s doing either as a professional or as a mother. What’s your advice to women who feel so conflicted?

We have to be realistic about our choices. When we measure ourselves against people at work who don’t have other responsibilities, we feel we fall short. And when we measure ourselves against women who are with their children all day, we feel the same way. We need to recognize that we can’t do it all, that we face trade-offs every single minute of the day. We have to stop beating ourselves up for not doing everything perfectly.

You talk a lot about the “likability” gap. Why do female leaders score so poorly in that area?

The data show that success and likability are positively correlated for men and negatively correlated for women. Which means that as women get more successful, they are liked less—both by men and by other women. That’s because we want people to conform to our stereotypes. And when they don’t, we don’t like them as much. We expect men to have leadership qualities, to be assertive and competent, to speak out. We expect women to have communal qualities, to be givers and sharers, to pursue the common good. The problem is, we want to promote and hire people who are both competent and liked. And that’s just much easier for men.

I think it’s fair to ask whether Sheryl Sandberg is a realistic role model. You were top of your class at Harvard, you had a great mentor from early on in Larry Summers, you have a supportive husband who has a great job with flexibility. Your critics contend that you don’t understand the struggles most women face in the workplace.

I don’t hold myself up as a role model. I’m incredibly fortunate, and I have had amazing opportunities and mentors and support. But the struggles I write about are the ones all women face: the struggle to believe in yourself, to not feel guilty, to get enough sleep, to believe that you can be both a good professional and a good parent.

Why aren’t more women finding strong mentors and sponsors?

We need to explicitly encourage men to sponsor women. We keep telling women how important these connections are, so women walk up to virtual strangers and say, “Will you be my mentor?” That’s not how it works. You have to find ways to build a relationship. At the same time, senior men in the workplace are afraid to be alone with women, because people might assume something inappropriate is happening. But mentorship is all about being alone with a person and talking one-on-one, and we need to encourage that.

With this book, as with speeches such as your 2010 TED talk on gender, you’ve become a major spokesperson on this topic. How does that fit with what you do at Facebook?

It’s all complementary. Facebook’s mission is to allow people to express themselves and connect to the individuals and causes they care about. I care tremendously about Facebook’s being the very best place it can be. And since I’ve become more public on women’s issues, we’ve had a great track record of getting amazing women to apply and to stay.

You got a lot of attention for saying you go home at 5:30 to spend time with your kids. Shouldn’t we all go home at 5:30 and detach from work?

We should all find ways to do the things we want to do in our lives. I’m not trying to be prescriptive. It’s hard to admit that you go home at 5:30, no matter where you are in your career. But I did it on purpose to say to people, “Look, I can be both a mother and a professional, and I do it by going home at 5:30.” I also said that after I have dinner with my kids, give them a bath, and put them to bed, I get back online.

You’ve talked openly about having cried in the workplace. Should women and men feel free to embrace the full range of emotions at work?

Crying at work is not a best practice. I’m not recommending that if you want to get to the top, you should break out the tissues. But we’re human, and it’s important to broaden the kinds of behaviors that are acceptable at work.

Do you feel that the way women are portrayed on TV and in the movies contributes to an antifeminist backlash?

I think we need to widen perceptions, and I’m not just talking about body-image issues. The media rarely depict working women with children as happy and adjusted and comfortable with themselves. They always sound harried. Tina Fey remembers going on the road with Steve Carell. They were both doing sitcoms and raising kids. Every interviewer asked her, “How do you do it all?” They never asked that of him. There’s this assumption that women can’t and men can. My goal is to change that conversation.

The media also tend to talk an awful lot about how female executives dress.

I’m lucky I’m not in an industry where that matters. Silicon Valley is awesome; I wear jeans to work almost every day. It’s a great place for women, because it really is all about what you build and what you do.

Is there any part of you that wonders whether there are biological imperatives that justify traditional gender roles?

Well, as Gloria Steinem says, this is about consciousness, not biology. We evolve. For example, humans are biologically programmed to be obese. Our bodies were made to store fat and sugar so that we could survive when the hunting season was over. But we can curb this impulse, and we do. Similarly, I don’t think the desire for leadership is based in biology. Do we really believe men are natural leaders and women are not? I think the desire for leadership is largely culturally created and reinforced.

Ultimately, it seems that the most critical thing for an ambitious woman is a supportive partner.

It’s the single most important career decision a woman makes: Is she going to have a life partner, and is that partner going to support her career? And by “support,” I mean getting up in the middle of the night half the time to change diapers.

I assume men are getting better at that.

They’re getting way better. But they are still doing far less than half the child care and housework. Next time you go to a party, watch what happens when a baby starts crying. Watch the parents and see who gets up. Women still largely have two jobs, and men have one.

Do you feel you have succeeded despite being a woman or because you’re a woman?

That’s a hard question to answer. I’ve had a lot of luck, a lot of sponsors, a lot of mentors. I’ve worked hard. But the success versus likability thing has been difficult. When I had my first performance review with [Facebook CEO] Mark Zuckerberg, he said, “You care too much about being liked, and it’s going to hold you back.” I had something I needed to overcome. And in that case it had to do with gender.

The biggest challenge you face in all of this may be the sense that we’ve been fighting the same battles for decades.

Yes. But I think now is our time. My mother was told by everyone that she had two choices: She could be a nurse or a teacher. The external barriers now are just so much lower. If we start acknowledging what the real issues are, we can solve them. It’s not that hard.

ATMs that can detect fake notes are now here

Sachin Kumar, Hindustan Times
Mumbai, April 11, 2013


Automatic teller machines, or ATMs, that can tell fake from real are here. Manufacturers such as NCR Corporation and Diebold Systems are helping banks roll out new machines that not only deposit and dispense cash but can also detect counterfeit notes. State Bank of India, ICICI 


Bank and Axis Bank have already started installing these ATMs, also known as cash recycling machines. At present, these are being used as cash-deposit machines in which a customer can drop loose cash.

“Cash recycling machine is a full-function ATM which can detect counterfeit notes,” said Ashok Shankar, solutions deployment manager, NCR Corporation India. As of now, they were only accepting cash but later — when the banks and customers get accustomed to them — other features such as cash dispensing and utility bill payment would be switched on, he said.

NCR has already handed over 600 machines to SBI. ICICI Bank has the machines at its 26 electronic branches while Axis Bank has installed around 500 of these at various locations.

“Another feature of these machines is that the money is credited to depositors’ account instantly,” said Julius Samson, senior vice-president, Axis Bank.

Complaints of ATMs dispensing counterfeit notes are not uncommon. According to the Reserve Bank of India, close to 5.21 lakh fake notes were detected in India in 2011-12, much higher than 4.36 lakh in 2010-11.

“Cash recycling machines are already in use in developed countries... Their usage is bound to increase in India,” said Karthik Ganapathi, managing director (South Asia), Diebold Systems.

Syndicated loans offer lucrative business to investment banks

Apart from providing certainty of closure and immunity from market volatility, syndicated loans also provide an easy pitch for new banks in the country to start their business. Photo: Pradeep Gaur/Mint

Live Mint :Malvika Joshi :Wed, Apr 10 2013. 11 31 PM 

Disbursed by a group of lenders to spread their risk, 

syndicated loans have seen a steady rise over the past five years

Mumbai: Syndicated loans are steadily finding favour with many debt-laden Indian firms which want large sums of money to finance new projects but cannot raise funds through equities. Some cannot raise money through bonds for lack of a suitable credit rating.

The income generated from arranging syndicated loans now account for almost half of the country’s investment banking revenue, unlike in major economies where debt capital market and mergers and acquisitions (M&A) account for bulk of the fees.

Disbursed by a group of lenders to spread their risk, syndicated loans have seen a steady rise over the past five years, accounting for almost 50% of India’s investment banking revenue in 2012 despite a weak economy that is eating into the share of other businesses, according to Dealogic, a consultancy and data management firm.

In 2012, loan syndication contributed $343 million (Rs.1,886 crore) towards investment banking revenues, accounting for a 49.5% share against 30% in 2007. Income from syndicated deals have risen almost 60% in five years and 33% over the year-ago period.

In India, underwriting, typically carried out by investment banks, has been one of the highest paying activities in absolute terms but syndication business as a percentage of the overall fee income has also been rising sharply over the years owing to a poor equity market.

In the US, share of syndicated loans in the overall fee income is the least compared with other businesses, less than 25% most years. In Japan and Australia, the share of such lending in the total fee income is as low as 11% and 10%, respectively, according to Dealogic.

While fluctuations in income from other businesses, apart from loan syndications, are mainly due to volatility in the equity market, bankers attribute lower credit ratings of Indian firms to be one of the main reasons for higher demand for syndicated loans.

To be sure, firms that avail of syndicate loans also have to pay a higher fee to the bankers.

“Debt capital market products (primarily bonds) are limited to AAA and AA rated clients in India with very high credit quality, whereas syndicated loans are available to all clients with investment grade rating (BBB and above). Due to the above, the yields in syndicated loans are higher,” said Kingshuk Chakraborty, president and managing director, loan syndications at Yes Bank Ltd.

Credit rating agency Crisil Ltd, in its report released in April, said its portfolio saw 404 defaults in 2012-13 against 188 in 2011-12. The default rate reached 4.7%, surpassing the 10-year high of 3.4% in 2011-12.

Ashwini Kapila, managing director, head of financial institutional group at Barclays India, agreed that offshore debt capital market issues in India have historically been limited to investment grade (largely public sector undertakings), where fees have been low due to intense competition.

“Pricing plays a crucial role in the bond market overseas. In India, the all-in cost ceiling for borrowing through overseas bonds stands capped at Libor plus 500 basis points, which is within the reach of only those firms who have high ratings,” said Manmohan Singh, managing director and head of debt capital markets at RBS India.

One basis point is a hundredth of a percentage point. Libor, or London inter-bank offered rate, is a benchmark for pricing loans.

The method of charging a fee is another reason which makes loan syndication more lucrative for arrangers. There is a higher upfront payment charged by the investment banks on the portion of the loan syndicated.

In a scenario where acquisition and risk appetite among Indian firms is low and equity markets are volatile, the fee earned from these businesses has also seen a sharp drop, said bankers.

Sensex, the benchmark equity index of BSE Ltd, rose 25.7% in 2012. It has dropped 6.18% this year.

“Fees on equity capital markets are definitely under pressure, not so much on headline (total) number but on distribution among a larger number of banks per transaction. M&A transactions are taking longer to complete. M&A fees have also been low as all large international banks and some strong domestic banks compete in this space, while the opportunities are very limited.” said Kapila of Barclays.

The share of equity capital market in the total investment banking revenue dropped from 46% to 12% since 2007 and from $503 million to $85 million in 2012.

Companies also find syndicated loans an easier way of raising funds.

“Syndicated facilities bring businesses the lowest transaction costs in aggregate and spare companies the time and effort of negotiating individually with each bank,” Chakraborty of Yes Bank said, adding it helps companies get visibility in the market.

Kapila of Barclays pointed out that certainty of funds is assured from the anchor banks. “Loan syndication also helps borrowers diversify their funding sources as new banks join the general syndication. An added advantage is that a successful syndicated loan makes the loan market a viable and reliable source of future fundraising for borrowers,” he said.

Apart from providing certainty of closure and immunity from market volatility, syndicated loans also provide an easy pitch for new banks in the country to start their business.

According to Mahendren Moodley, chief executive and country head of FirstRand Bank in India, a global bank with strong distribution capabilities across key geographies may actually start with syndicated loans as one of the products.

In September, Tata Steel Ltd received approval for a Rs.35,000 crore loan from a consortium of banks led by State Bank of India, making it one of the largest exposures taken by Indian banks in recent times. The loan is for the company’s upcoming six-million tonne per annum (mtpa) steel plant in Kalinganagar in Orissa. State Bank’s investment banking arm SBI Capital Markets Ltd or SBI Caps is the arranger for the loan.

ONGC Petro Additions Ltd, a venture of ONGC and GAIL (India) Ltd, achieved financial closure in January. In this case too, SBI Caps was the sole financial advisor and arranger for the transaction.

Reliance Industries Ltd signed a syndicated loan facility worth $1.5 billion with a group of 28 international and Indian banks in October. The mandated lead arrangers and bookrunners for the deal include ANZ India, Bank of America Merrill Lynch, Bank of Nova Scotia and Bank of Tokyo-Mitsubishi UFJ, among others.

Banking sector's woes to continue in FY14: Jefferies

BT Online Bureau    New Delhi   Last Updated: April 8, 2013  | 22:22 IST

International investment bank Jefferies in a report said that the fundamentals of Indian banks are not likely to change much in FY14 in the segment.

"The fundamentals for the banking sector are unlikely to change much in FY14 given the "tepid" loan and deposit growth, "range-bound" net interest margins, and "weak" asset quality," Jefferies said in its report 'Initiating on India Banks: Going Nowhere', dated April 5.

Jefferies believes banks with strong branch networks like HDFC Bank, ICICI, and Axis could face smaller problems.

"Over the next 12 months, we believe the fundamentals of the domestic banking sector are unlikely to change much, with tepid loan and deposit growth, range-bound NIMs and weak asset quality," it says.

"Tight liquidity and weak deposit growth will be the banking sector's key challenges over FY14, much more than weaker loan growth, with the latter perhaps baked in the numbers. The strained balance sheet funding is reflected in higher loan-deposit ratios and could even create an ALM problems if growth are to be pushed," it warned.

Banks with strong branch expansion in recent times and ones that marry growth with matched funding such as HDFC Bank, ICICI and, to an extent Axis, could face smaller problems.

The report sees weaker loan growth given the falling capex sanctions and lower corporate sales growth, and the resultant stress on project financing and working capital.

"We believe retail growth will be unable to plug this gap, as aggressive growth may mar the asset quality in the long-run except for those banks that have expanded their franchise in recent times which would be able to report better growth numbers," it says. 

Though in a base rate regime banks are better protected from aggressive competitive under-pricing, SBI could play spoilsport, given its aggressive yield cuts in recent times, the report said.

On the NIMs front, it is wary of the numbers given the lower loan to deposit ratios and sharper repo rate cuts, resulting in asymmetric cuts in lending/deposit rates.

"We believe SBI is the most at risk here, but we are talking of a mere 20 bps (0.2 per cent) decline in the margins."

The report warns that "impaired asset formation has come off the Q4 of FY12 highs of 10 per cent to about 5.6 per cent in Q3 of FY13, but this is still beyond our comfort zone".

"With the window closing on regulatory forbearance for restructured assets (non-infrastructure), we foresee an increased rush for restructurings in the near-term.

"The massive pipeline of infrastructure projects that are facing huge delays makes the bottoming out argument equally shaky, adding zero sanctity to the true nature of the loan book and hence considerable difference exists as to the amount of prudential haircut required to adjust the book value," warns the report. (With Agency Inputs)

Manangement Tip of the Day - Use Personal Rituals to Make Changes Stick

HBR :APRIL 10, 2013

How many times have you promised to exercise more, or start meditating, or spend less time at the office?  To make changes that last, create rituals — highly specific behaviors that you do at the same time every day (or on specific days you select). Willpower is a limited resource, so use less of it by making challenging activities automatic.  By setting a time for your routine, you don't have to spend energy thinking about when to get it done.  If you find yourself faltering, reduce the challenge but stay the course. Run three days a week instead of four. Repetition, even in very small doses, builds capacity.  Any positive change you can make will be hugely satisfying — and a source of inspiration to make the next one.

Today's Management Tip was adapted from "How to Make a Change that Lasts" by Tony Schwartz.