Reading Hayek in Beijing. Bret Stephens on Yang Jisheng

Reading Hayek in Beijing. By Bret Stephens
A chronicler of Mao's depredations finds much to worry about in modern China.The Wall Street Journal, May 25, 2013, on page A11
http://online.wsj.com/article/SB10001424127887324659404578501492191072734.html

On Yang Jisheng

In the spring of 1959, Yang Jisheng, then an 18-year-old scholarship student at a boarding school in China's Hubei Province, got an unexpected visit from a childhood friend. "Your father is starving to death!" the friend told him. "Hurry back, and take some rice if you can."

Granted leave from his school, Mr. Yang rushed to his family farm. "The elm tree in front of our house had been reduced to a barkless trunk," he recalled, "and even its roots had been dug up." Entering his home, he found his father "half-reclined on his bed, his eyes sunken and lifeless, his face gaunt, the skin creased and flaccid . . . I was shocked with the realization that the term skin and bones referred to something so horrible and cruel."

Mr. Yang's father would die within three days. Yet it would take years before Mr. Yang learned that what happened to his father was not an isolated incident. He was one of the 36 million Chinese who succumbed to famine between 1958 and 1962.

It would take years more for him to realize that the source of all the suffering was not nature: There were no major droughts or floods in China in the famine years. Rather, the cause was man, and one man in particular: Mao Zedong, the Great Helmsman, whose visage still stares down on Beijing's Tiananmen Square from atop the gates of the Forbidden City.

Mr. Yang went on to make his career, first as a journalist and senior editor with the Xinhua News Agency, then as a historian whose unflinching scholarship has brought him into increasing conflict with the Communist Party—of which he nonetheless remains a member. Now 72 and a resident of Beijing, he's in New York this month to receive the Manhattan Institute's Hayek Prize for "Tombstone," his painstakingly researched, definitive history of the famine. On a visit to the Journal's headquarters, his affinity for the prize's namesake becomes clear.

"This book had a huge impact on me," he says, holding up his dog-eared Chinese translation of Friedrich Hayek's "The Road to Serfdom." Hayek's book, he explains, was originally translated into Chinese in 1962 as "an 'internal reference' for top leaders," meaning it was forbidden fruit to everyone else. Only in 1997 was a redacted translation made publicly available, complete with an editor's preface denouncing Hayek as "not in line with the facts," and "conceptually mixed up."

Mr. Yang quickly saw that in Hayek's warnings about the dangers of economic centralization lay both the ultimate explanation for the tragedies of his youth—and the predicaments of China's present. "In a country where the sole employer is the state," Hayek had observed, "opposition means death by slow starvation."

So it was in 1958 as Mao initiated his Great Leap Forward, demanding huge increases in grain and steel production. Peasants were forced to work intolerable hours to meet impossible grain quotas, often employing disastrous agricultural methods inspired by the quack Soviet agronomist Trofim Lysenko. The grain that was produced was shipped to the cities, and even exported abroad, with no allowances made to feed the peasants adequately. Starving peasants were prevented from fleeing their districts to find food. Cannibalism, including parents eating their own children, became commonplace.

"Mao's powers expanded from the people's minds to their stomachs," Mr. Yang says. "Whatever the Chinese people's brains were thinking and what their stomachs were receiving were all under the control of Mao. . . . His powers extended to every inch of the field, and every factory, every workroom of a factory, every family in China."

All the while, sympathetic Western journalists—America's Edgar Snow and Britain's Felix Greene in particular—were invited on carefully orchestrated tours so they could "refute" rumors of mass starvation. To this day, few people realize that Mao's forced famine was the single greatest atrocity of the 20th century, exceeding by orders of magnitude the Rwandan genocide, the Cambodian Killing Fields and the Holocaust.

The power of Mr. Yang's book lies in its hauntingly precise descriptions of the cruelty of party officials, the suffering of the peasants, the pervasive dread of being called "a right deviationist" for telling the truth that quotas weren't being met and that millions were being starved to death, and the toadyism of Mao lieutenants.

Yet the book is more than a history of a uniquely cruel regime at a receding moment in time. It is also a warning of what lies at the end of the road for nations that substitute individualism with any form of collectivism, no matter what the motives. Which brings Mr. Yang to the present day.

"China's economy is not what [Party leaders] claim as the 'socialist-market economy,' " he says. "It's a 'power-market' economy."

What does that mean?

"It means the market is controlled by the power. . . . For example, the land: Any permit to enter any sector, to do any business has to be approved by the government. Even local government, down to the county level. So every county operates like an enterprise, a company. The party secretary of the county is the CEO, the president."

Put another way, the conventional notion that the modern Chinese system combines political authoritarianism with economic liberalism is mistaken: A more accurate description of the recipe is dictatorship and cronyism, with the results showing up in rampant corruption, environmental degradation and wide inequalities between the politically well-connected and everyone else. "There are two major forms of hatred" in China today, Mr. Yang explains. "Hatred toward the rich; hatred toward the powerful, the officials." As often as not they are one and the same.

Yet isn't China a vastly freer place than it was in the days of Mr. Yang's youth? He allows that the party's top priority in the post-Mao era has been to improve the lot of the peasantry, "to deal with how to fill the stomach."

He also acknowledges that there's more intellectual freedom. "I would have been executed if I had this book published 40 years ago," he notes. "I would have been imprisoned if this book was out 30 years ago. Now the result is that I'm not allowed to get any articles published in the mainstream media." The Chinese-language version of "Tombstone" was published in Hong Kong but is banned on the mainland.

There is, of course, a rational reason why the regime tolerates Mr. Yang. To survive, the regime needs to censor vast amounts of information—what Mr. Yang calls "the ruling technique" of Chinese leaders across the centuries. Yet censorship isn't enough: It also needs a certain number of people who understand the full truth about the Maoist system so that the party will never repeat its mistakes, even as it keeps the cult of Mao alive in order to preserve its political legitimacy. That's especially true today as China is being swept by a wave of Maoist nostalgia among people who, Mr. Yang says, "abstract Mao as this symbol of social justice," and then use that abstraction to criticize the current regime.

"Ten million workers get laid off in the state-owned enterprise reforms," he explains. "So many people are dissatisfied with the reforms. Then they become nostalgic and think the Mao era was much better. Because they never experienced the Mao era!" One of the leaders of that revival, incidentally, was Bo Xilai, the powerful former Chongqing party chief, brought down in a murder scandal last year.

But there's a more sinister reason why Mr. Yang is tolerated. Put simply, the regime needs some people to have a degree of intellectual freedom, in order to more perfectly maintain its dictatorship over everyone else.

"Once I gave a lecture to leaders at a government bureau," Mr. Yang recalls. "I told them it's a dangerous job, you guys, being officials, because you have too much power. I said you guys have to be careful because those who want approval from you to get certain land and projects, who bribe you, these are like bullets, ammunition, coated in sugar, to fire at you. So today you may be a top official, tomorrow you may be a prisoner."

How did the officials react to that one?

"They said, 'Professor Yang, what you said, we should pay attention.' "

So they should. As Hayek wrote in his famous essay on "The Use of Knowledge in a Society," the fundamental problem of any planned system is that "knowledge of circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess."

The Great Leap Forward was an extreme example of what happens when a coercive state, operating on the conceit of perfect knowledge, attempts to achieve some end. Even today the regime seems to think it's possible to know everything—one reason they devote so many resources to monitoring domestic websites and hacking into the servers of Western companies. But the problem of incomplete knowledge can't be solved in an authoritarian system that refuses to cede power to the separate people who possess that knowledge.

"For the last 20 years, the Chinese government has been saying they have to change the growth mode of the economy," Mr. Yang notes. "So they've been saying, rather than just merely expanding the economy they should do internal changes, meaning more value-added services and high tech. They've been shouting such slogans for 20 years, and not many results. Why haven't we seen many changes? Because it's the problem that lies in the very system, because it's a power-market economy. . . . If the politics isn't changed, the growth mode cannot be changed."

That suggests China will never become a mature power until it becomes a democratic one. As to whether that will happen anytime soon, Mr. Yang seems doubtful: The one opinion widely shared by rulers and ruled alike in China is that without the Communist Party's leadership, "China will be thrown into chaos."

Still, Mr. Yang hardly seems to have given up hope that he can play a role in raising his country's prospects. In particular, he's keen to reclaim two ideas at risk of being lost in today's China.

The first is the meaning of rights. A saying attributed to the philosopher Lao Tzu, he says, has it that a ruler should fill the people's stomachs and empty their heads. The gambit of China's current rulers is that they can stay in power forever by applying that maxim. Mr. Yang hopes they're wrong.

"People have more needs than just eating!" he insists. "In China, human rights means the right to survive, and I argue with these people. This is not human rights, it's animal rights. People have all sorts of needs. Spiritual needs, the need to be free, the freedoms."

The second is the obligation of memory. China today is a country galloping into a century many people believe it will define, one way or the other. Yet the past, Mr. Yang insists, also has its claims.

"If a people cannot face their history, these people won't have a future. That was one of the purposes for me to write this book. I wrote a lot of hard facts, tragedies. I wanted people to learn a lesson, so we can be far away from the darkness, far away from tragedies, and won't repeat them."

Hayek would have understood both points well.

Mr. Stephens writes "Global View," the Journal's foreign-affairs column.

"Near-Coincident" Indicators of Systemic Stress. By Ivailo Arsov, Elie Canetti, Laura Kodres, and Srobona Mitra

"Near-Coincident" Indicators of Systemic Stress. By Ivailo Arsov, Elie Canetti, Laura Kodres, and Srobona Mitra
IMF Working Paper No. 13/115
May 17, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40551.0

Summary: The G-20 Data Gaps Initiative has called for the IMF to develop standard measures of tail risk, which we identify in this paper with systemic risk. To understand the conditions under which tail risk is present, it is first necessary to develop a measure of what constitutes a systemic stress, or tail, event. We develop such a measure and uses it to assess the performance of eleven near-term systemic risk indicators as ‘early’ warning of distress among top financial institutions in the United States and the euro area. Two indicators perform particularly well in both regions, and a couple of other simple indicators do well across a number of criteria. We also find that the sizes of institutions do not necessarily correspond with their contribution to spillover risk. Some practical guidance for policies is provided.

Unconventional Monetary Policies - Recent Experiences and Prospects (+ Background Paper)

Unconventional Monetary Policies - Recent Experiences and Prospects
IMF Policy Paper
http://www.imf.org/external/pp/longres.aspx?id=4764

Summary:This paper addresses three questions about unconventional monetary policies. First, what policies were tried, and with what objectives? Second, were policies effective? And third, what role might these policies continue to play in the future?




Unconventional Monetary Policies - Recent Experiences and Prospects - Background Paper
IMF Policy Paper
http://www.imf.org/external/pp/longres.aspx?id=4765

Summary:This paper provides background information to the main Board paper, “The Role and Limits of Unconventional Monetary Policy.” This paper is divided in five distinct sections, each focused on a different topic covered in the main paper, though most relate to bond purchase programs. As a result, this paper centers on the experience of the United States Federal Reserve (Fed), the Bank of England (BOE) and the Bank of Japan (BOJ), mostly leaving the European Central Bank (ECB) aside given its focus on restoring the functioning of financial markets and intermediation. Section A explores whether bond purchase programs were effective at decreasing bond yields and, if so, through which channels. Section B goes one step further in evaluating whether bond purchase programs had—or can be expected to have—significant effects on real growth and inflation. Section C studies the spillover effects of bond purchases on both advanced and emerging market economies, using very similar methods as introduced in the first section. Section D breaks from the immediate focus on bond purchases to discuss how inflation might decrease the debt burden in advanced economies, in light of possible pressures that could fall (or be perceived to fall) on central banks. Finally, Section E discusses the possible risks of exiting given the very large central bank balance sheets.

Creating a Safer Financial System: Will the Volcker, Vickers, and Liikanen Structural Measures Help?

Creating a Safer Financial System: Will the Volcker, Vickers, and Liikanen Structural Measures Help? By Jose Vinals, Ceyla Pazarbasioglu, Jay Surti, Aditya Narain, Michaela Erbenova, and Julian Chow
IMF Staff Discussion Notes No. 13/4
May 14, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40526.0

Summary: The U.S., the U.K., and more recently, the E.U., have proposed policy measures directly targeting complexity and business structures of banks. Unlike other, price-based reforms (e.g., Basel 3 and G-SIFI surcharges), these proposals have been developed unilaterally with material differences in scope, design and implementation schedules. This may exacerbate cross-border regulatory arbitrage and put a further burden on consolidated supervision and cross-border resolution. This paper provides an analysis of the potential implications of implementing different structural policy measures. It proposes a pragmatic and coordinated approach to development of these policies to reduce risk of regulatory arbitrage and minimize unintended consequences. In doing so, it also aims to identify a set of common policy measures that countries could adopt to re-scope bank business models and corporate structures.

Executive Summary
Structural constraints on banks proposed by a number of countries aim to address the too-important-to- fail problem by reducing the risk that these institutions will fail and by simplifying their resolution if they do fail.

Structural measures can contribute to financial stability in combination with enhanced, post-crisis price-based regulations, supervision, and cross-border bank resolution frameworks. Activity restrictions, when appropriately designed and judiciously implemented, can work in tandem with strengthened capital requirements to limit bank management’s capacity for excessive risk taking. Corporate structures aligned to business activities and limits on intra-group exposures and on their pricing can shield systemically important financial services from idiosyncratic shocks impacting other activities.  The nations proposing structural banking reform are global financial centers and systemically important economies. By enhancing financial stability in these countries, such policies can have positive spillovers on the global economy and financial system.

Nevertheless, our analysis suggests that these policies will also have potentially significant global costs given that they will be imposed on internationally active and systemic financial institutions. Our assessment points to the need for a global cost-benefit exercise encompassing extra-territorial implications of structural measures. This is necessary to determine whether the benefits of structural measures match or exceed costs at the global level; it would be difficult to justify them otherwise.

Subjecting a global institution to different structural measures in different jurisdictions could exert further pressure on consolidated supervision and cross-border resolution. Our view is that, with firm political support, a “targeted” approach—with structural measures tailored to the specific risk profiles of individual banks at a global group level—would promote global financial stability more effectively than an across-the-board approach. However, absent sufficient confidence in the supervisory capacity to design and forcefully implement the targeted approach, across-the-board measures would be appropriate provided their global benefits exceed their costs.

Can a Growing Services Sector Renew Asia's Economic Growth?

Can a Growing Services Sector Renew Asia's Economic Growth? By Marcus Noland, Donghyun Park, and Gemma B. Estrada
AsiaPacific Issues, No. 109
Honolulu: East-West Center, April 2013
Pages: 8
http://www.eastwestcenter.org/publications/can-growing-services-sector-renew-asias-economic-growth

To continue Asia's economic growth the focus for expansion and improvement must move from export manufacturing to the services sector--primarily to cross-border trade in such modern services as finance, information and communication, and professional business services. As the Asian services-sector economies have historically been dominated by personal services rather than by more information-intensive services, serious concerns exist about their ability to rapidly and successfully grow these modern services. While Asia does have some well-known services-sector success stories--such as in India and the Philippines--most Asian services economies have a history of relatively slow developmental change. Removing internal and external policy and structural constraints will be key to productivity growth in modern cross-border services trade. Improving educational opportunities and strengthening infrastructure and capital and labor markets will all be needed complements to regulatory reform if Asia is to grow new and innovative service providers.

U.S. SEC Proposes Rules For Cross-Border Swap Trades

U.S. SEC Proposes Rules For Cross-Border Swap Trades. By Sarah N. Lynch
Daily News (White Plains, NY)
May 02, 2013
http://www.garp.org/risk-news-and-resources/risk-headlines/story.aspx?newsid=61783

Excerpts:

The top U.S. securities regulator unveiled a proposal on Wednesday [May 1] that spells out how its rules for swaps will apply to foreign banks, saying it hoped its proposal can resolve a brewing global conflict over how to regulate the $640 trillion market.

[...]

 "This is particularly important because the global nature of this market means that participants may be subject to requirements in multiple countries," SEC Chair Mary Jo White said.

The SEC and another regulator, the Commodity Futures Trading Commission, won broad new powers in the 2010 Dodd-Frank Wall Street reform law to police the $640 trillion derivatives market, which was then largely unregulated. But Europeans and the CFTC have butted heads over the issue of how the U.S. rules should apply abroad for the past year, with CFTC Chairman Gary Gensler blamed for his aggressive stance in how he wants to apply the rules abroad.

European regulators have countered that the CFTC's approach, which was first proposed last summer, could create duplicative regimes, and have urged the United States to let them regulate the banks on their own turf.

"This type of overlapping regulatory oversight could lead to conflicting or costly duplicative regulatory requirements. Market participants need to know which rules to follow - and I believe that this proposal will serve as the road map," said Ms. White, who was just sworn in as SEC chair last month.

[...]

The CFTC late last year granted broad exemptions that vastly scaled back the cross-border reach of its proposal, but these expire in the middle of July, and it has given no clues as to whether its final draft will be equally loose. The SEC's proposal on Wednesday reflects a less aggressive approach than what the CFTC had initially proposed, and are more aligned with the CFTC's less stringent, time- limited exemptions that are currently in place.

"The proposed rules approved today by the SEC provide yet another example of the significant difference in approach taken by each of the SEC and the CFTC," said Michael O'Brien, a partner at Winston & Strawn.

Others said that the two sets of rules ultimately might not come out all that differently, and that the SEC's more accommodating stance towards foreign regulators by no means meant it would be easier on the industry.

"The detail of the rules implies that it is by no means going to be a free pass," said Gareth Old, a lawyer at Clifford Chance in New York. "The (SEC) is going to scrutinize both non-U.S. regulations and also conduct by market participants in terms of how they use those regulations probably just as carefully as the CFTC."

[...]

Still, a few SEC commissioners on Wednesday flagged a variety of reservations with the plan. Commissioner Luis Aguilar, a Democrat, said he had concerns that the SEC's plan exempts foreign subsidiaries of U.S. firms from being dubbed "U.S. persons" - a category that subjects firms to certain SEC regulations.

"The proposed rules seem to assume that any failure by these foreign subsidiaries would not financially affect the U.S. parents," he said. "However, even without a legal obligation, a U.S parent company will likely step in to save its financially troubled subsidiaries ... The proposed rules do not appear to address fully these contagion and spillover risks."

Commissioner Troy Paredes, a Republican, raised completely opposite concerns, saying he has fears that trades cutting across international boundaries could still too often be captured by the SEC's rules.

Central bank finances, by David Archer and Paul Moser-Boehm

By David Archer and Paul Moser-Boehm

BIS Papers No 71
April 2013

http://www.bis.org/publ/bppdf/bispap71.htm

 

 

This paper looks at the relevance of a central bank's own finances for its policy work. Some central banks are exposed to significant financial risks, partly due to the environment in which they operate, and partly due to the nature of policy actions. While financial exposures and losses do not hamper central banks' operational capabilities, they may weaken the effectiveness of central bank policy transmission. Against this backdrop, the paper analyses the determinants of a central bank's financial position and the possible implications of insufficient financial resources for policymaking. It also provides a conceptual framework for considering the question of whether central banks have sufficient financial resources.

JEL classification: E58, E61, G01, M41

	Title	Languages
	Foreword	EN
	Overview and conclusions	EN
	Introduction	EN
	Part A: Preliminaries: understanding central bank finances	EN
	Part B: What financial resources do central banks have?	EN
	Part C: What level of financial resources do central banks need?	EN
	Part D: Assessing the appropriate amount of financial resources - a framework	EN
	Annex 1: Central bank accounting policies	EN
	Annex 2: Components of selected distribution schemes	EN

"What a civilised society, I thought to myself"

From the speech by Lee Kuan Yew at the Imperial College Commemoration Eve Dinner, Oct 22, 2002 (http://www3.imperial.ac.uk/newsandeventspggrp/imperialcollege/alumni/pastukevents/newssummary/news_26-2-2007-14-0-12):

Looking back at those early years, I am amazed at my youthful innocence. I watched Britain at the beginning of its experiment with the welfare state; the Atlee government started to build a society that attempted to look after its citizens from cradle to grave. I was so impressed after the introduction of the National Health Service when I went to collect my pair of new glasses from my opticians in Cambridge to be told that no payment was due. All I had to do was to sign a form. What a civilised society, I thought to myself. The same thing happened at the dentist and the doctor.

I did not understand what a cosseted life would do to the spirit of enterprise of a pe ople, diminishing their desire to achieve and succeed. I believed that wealth came naturally from wheat growing in the fields, orchards bearing fruit every summer, and factories turning out all that was needed to maintain a comfortable life.

Only two decades later when I had to make an outdated entrepot economy feed a people did I realise we needed to create the wealth before we can share it. And to create wealth, high motivation and incentives are crucial to drive a people to achieve, to take risks for profit or there will be nothing to share.

It is remarkable that powerful minds like Sir William Beveridge's, who thought out this egalitarian welfare system, did not foresee its unintended consequences. It took more than three decades of gradual decline in performance before Margaret Thatcher set out to reverse it, to restore individual incentives and the motivation to succeed, to encourage risk-taking, necessary for a successful entrepreneurial economy.

h/t: Haseltine, William A. Affordable Excellence: The Singapore Health System. Brookings Institution Press with the National University of Singapore Press, Apr 2013


The most interesting this, to me is that this once was the norm:

Perhaps the most impressive sight I came upon was when I emerged from the tube station at Piccadilly Circus. I found a little table with a pile of newspapers and a box of coins and notes with nobody in attendance. You take your newspaper, toss in your coin or put in your 10-shilling note and take your change. I took a deep breath - this was a truly civilised people.

But, as he added:

Five decades ago, London was a grimy, sooty, bomb-scarred city, with less food, fewer cars, and deprived of the conveniences of the consumer society. But the people, then homogeneous, white, and Christians, were admirable, self-confident and courteous.

From that well-mannered Britain to the yobs and football hooligans of the 1990s took only 40 years. I learned that civilised living does not come about naturally.

Two Muslim Brothers Who Took the Assimilation Path. By Kenan Trebincevic

Two Muslim Brothers Who Took the Assimilation Path. By Kenan Trebincevic
The Wall Street Journal, April 27, 2013, on page A11
http://online.wsj.com/article/SB10001424127887323789704578443473812237556.html

'I hope they're not Muslim," I told my brother, Eldin, when we first saw the pictures of the Boston bombers. We soon found out that Dzhokhar and Tamerlan Tsarnaev shared our religion, as we'd dreaded, when my Jewish college roommate jokingly texted: "Hey, would you please tell your people to stop blowing things up?"

I laughed, in sadness, but soon felt completely unnerved by how much the Tsarnaevs' story mirrored our own. My brother and I were born six years apart, and we're two foreign-born-and-named, athletic, Islamic brothers from difficult backgrounds in Eastern Europe, where we had experienced persecution and then been generously taken in by Americans. The 26-year-old Tamerlan Tsarnaev, killed in the police shootout, was the eldest, strong-minded child, like Eldin. Dzhokhar Tsarnaev, now in a federal medical detention center in Massachusetts, looked up to his sibling, as I always looked up to my strong-minded brother.

Boxing is big in Chechnya and nearby regions where the Tsarnaev family has its roots, and the brothers excelled in the sport, like their father. Martial arts are big in the Balkans, where we're from. Our dad owned a gym in our hometown of Brčko, Bosnia, where he trained athletes and where Eldin and I won brown belts and awards for karate.

The Tsarneavs were caught in the confusing war between Chechnya and Russia that erupted in 1999, and they wound up emigrating in 2003 to Cambridge, Mass. Caught in the bloody war between Bosnia and Serbia, factions of the former Yugoslavia, my family moved to Westport, Conn., in 1993.

Like the Tsarnaevs' father, our father suffered setbacks to his career in America, and to his health. While Anzor Tsarnaev reportedly toiled as a mechanic for $10 an hour, our dad, Senahid, slung poultry at a fast-food chicken place and took other low-paying jobs. While the Tsarnaevs' mother, Zubeidat, did facials at a Boston spa and later at their home to make ends meet, my mother, Adisa, baby-sat and found work at a data-processing firm. We too had little money, and it was hard to get jobs without connections or language skills.

Yet the Tsarnaev boys became angry, alienated young men who never quite assimilated into their new country (Tamerlan said on Twitter: "I don't have a single American friend, I don't understand them"), while my brother and I made many friends in the U.S. and wound up on the more successful side of the American dream.

There is a well-documented connection between unhappy, disenfranchised immigrants who can't connect and crime and terrorism. When I first moved here at age 13 I felt as lost, estranged and resentful as Tamerlan Tsarnaev appeared to be. In the days since the Boston bombing, I kept comparing Eldin's and my circumstances with the Tsarnaevs' to see where our paths diverged and what saved us from becoming embittered.

I was struck by news accounts that the Tsarnaev parents moved back to Russia, where they separated two years ago. One of their daughters lived in New Jersey, and she admitted that she hadn't spoken to her brothers in years. I was fortunate that my immediate family of four stayed together, first in Connecticut until my mother died of cancer in 2007, then in Queens, N.Y., where my father, brother and I now live blocks away from each other.

Even when I moved into my college dorm room at the University of Hartford and Eldin moved to the Stony Brook campus in Long Island, we spoke to our mother, father and each other daily—either by cellphone or email. I'm convinced that remaining a close-knit family kept my brother and me saner and safer. The Tsarnaev family, by contrast, seemed constantly roiled—by war, immigration, work and financial difficulties, serious illness and a marriage breakup. Throw in radical religion and, in retrospect, it seems a recipe for disaster.

Perhaps because my family survived the ethnic cleansing in the Balkans to wipe out Muslims, my family members—unlike Tamerlan Tsarnaev and his mother—did not seek solace with any specific religious figure or house of worship. While we remained proud of our heritage, we were sponsored by the Interfaith Council in Connecticut, a group of liberal churches and synagogues.

When we arrived in 1993 at JFK airport, we were met by the Rev. Don Hodges, a Methodist minister. He drove us to his Westport home, where we stayed for four months. It's not surprising or wrong for immigrants to deepen their focus on religion in a strange land. But I would speculate that in our case we felt such gratitude to the people of differing faiths who helped us that our chances of assimilating, and succeeding, in America were enhanced.

When my mother found a lump in her breast, the late surgeon Dr. Malcolm Beinfeld at Norwalk Hospital operated on her. Dr. Beinfeld, who was Jewish, told us that the Bosnian genocide against Muslims reminded him of the Holocaust. We never received a bill for the surgery or for my mother's subsequent radiation and chemotherapy.

A Protestant dentist, Richard Sands, asked my mother: "What does your son need?" At 13, I was taken to an orthodontist who gave me braces and took care of me for two years. I was embarrassed but deeply grateful that he never asked for a dime.

On my first day of school in Westport, Dr. Glenn Hightower, the principal, and a member of Mr. Hodges's church, introduced me to the seventh-grade English class with his arm draped around my shoulders. He explained that my family had been exiled in the Bosnian war, and he asked the other students to help me out. I had a foreign name, strange accent and could barely speak the language. I felt scared and pathetic, like a mutt waiting to be adopted. I was immediately befriended by Miguel Peman, a Catholic Spanish-American student, who offered me a seat.

When the school-bus driver who drove me home noticed that I had a long walk to Mr. Hodges's house, he introduced himself as Offir, from Israel, and dropped me off right at the driveway, making me promise not to tell anyone. Later, my Greek Orthodox soccer coach, Ted Popadoupolis, gave me rides to practices and games when my parents couldn't.

My brother and I didn't pursue sports with the dreams of Olympic glory that Tamerlan Tsarnaev apparently did. At schools in Westport, Norwalk and Hartford, a series of teachers and mentors helped us formulate a realistic career plan. They geared us toward a more feasible field than sports stardom: physical therapy.

We didn't experience the sort of disappointment and resentment that Tamerlan seems to have endured when his boxing dream went sour. Instead, sports teams gave us a sense of belonging.

Since my athletic father was a health nut, under his strong influence, my brother and I steered clear of the alcohol and drugs that seem to have plagued the Tsarnaevs—and might have fueled depression and hopelessness that, I would guess, twisted their judgment.

It is impossible to know what went on in someone else's childhood or what is happening in another's mind or heart. The Tsarnaevs took one path. My brother and I, despite our family's war displacement, persecution and years of poverty, thrived—but only with stable parents by our side, good jobs and help from many and diverse guardian angels. During a dark week, it was easy to forget that countless immigrants to America have similar stories to tell.

Mr. Trebincevic, a physical therapist who lives in Queens, is the coauthor, with Susan Shapiro, of "The Bosnia List," to be published by Viking next year.

Structural bank regulation initiatives: approaches and implications

By Leonardo Gambacorta and Adrian Van Rixtel

BIS Working Papers No 412
April 2013

http://www.bis.org/publ/work412.htm

The paper examines the basic rationale and features of the proposals adopted to separate specific investment and commercial banking activities (Volcker rule, Vickers and Liikanen proposals). In particular, it focuses on the likely implications of such initiatives for: (i) financial stability and systemic risk; (ii) banks' business models; and (iii) the international activities of global banks.

Keywords: regulation, bank business models, systemic risk, economies of scale, economies of scope, too big to fail

JELclassification: G21, G28

Excerpts:

The Volcker rule is narrow in scope but otherwise quite strict. It is narrow in that it seeks to carve out only proprietary trading while allowing market-making activities on behalf of customers. Moreover, it has several exemptions, including for transactions in specific instruments, such as US Treasury and agency securities. It is strict in that it forbids the coexistence of such trading activities and other banking activities in different subsidiaries within the same group. It similarly prevents investments in, and sponsorship of, entities that could expose institutions to equivalent risks, such as hedge funds and private equity funds. That said, it imposes very few additional restrictions on the transactions of banking organisations with other financial firms more generally (eg such as through constraints on lending or funding among them). However, it is worth remembering that the current US legislation does constrain the activities of depository institutions.

The Liikanen Report proposals are somewhat broader in scope but less strict.  They are broader because they seek to carve out both proprietary trading and market-making, without drawing a distinction between the two. They are less strict because they allow these activities to coexist with other banking business within the same group as long as these are carried out in separate subsidiaries. The proposals limit contagion within the group by requiring, in particular, that the subsidiaries be self-sufficient in terms of capital and liquidity and that transactions between the legal entities take place on market terms. Just like the Volcker rule, the proposals do not envisage significant restrictions between the protected banking unit and other financial firms, except that they require the separation of exposures to entities such as hedge funds and special investment vehicles (SIVs) in the trading entity.

The Vickers Commission proposals are even broader in scope but have a more articulated approach to strictness. They are broader in that they exclude a larger set of banking business from the protected entity, including also securities underwriting and secondary market purchases of loans and other financial instruments. A very narrow set of retail banking business must be within the protected entity (retail deposit-taking, overdrafts to individuals and loans to small and medium-sized enterprises (SMEs)); and another set may be conducted within it (eg some other forms of retail and corporate banking, including ancillary operations to hedge risks to support them). The approach to strictness is more articulated because it involves both intragroup and inter-firm restrictions (the “ring fence”). As in the Liikanen Report, protected activities can coexist with others in separate subsidiaries within the same group but subject to intragroup constraints that are somewhat tighter, including on the size of the linkages.3 Moreover, a series of restrictions limit the extent to which the banking unit within the ring fence can interact with other financial sector firms. An in-depth exploration of the economic underpinnings of the reforms is provided in Vickers (2012).


Conclusions

A number of jurisdictions are considering whether to implement regulations that impose restrictions on the scope of banking activity, or have already taken concrete steps towards doing so. These initiatives include the so-called Volcker rule in the United States, the proposals of the Vickers Commission in the United Kingdom and the European Commission’s Liikanen Report. Draft legislation on structural bank regulation is underway in Germany and France.

The proposals for structural bank regulation break with the conventional wisdom that the banking sector’s efficiency and stability stands only to gain from the increased diversification of banks’ activities. Rather, structural bank regulation sees the combination of commercial banking and certain types of capital market-related activities as a source of systemic risk. The common element of all the proposals is to restrict universal banking by drawing a line somewhere between “commercial” and “investment” banking businesses. Hence, the various initiatives on structural bank regulation aim at changing how banks organise themselves.

Structural bank regulation initiatives are designed to reduce systemic risk in several ways. First, they can shield the institutions carrying out the protected activities from losses incurred elsewhere. Second, they can prevent any subsidies supporting the protected activities (eg central bank lending facilities and deposit guarantee schemes) from cutting the cost of risk-taking and inducing moral hazard in other business lines. Third, they can reduce the complexity and possibly the size of banking organisations, making them easier to manage, more transparent to outside stakeholders and easier to resolve.

However, the initiatives also raise some challenges. One risk is that banks may respond to the reforms by shifting activities beyond the perimeter of consolidated regulation. In fact, one reason why the Liikanen Report opts for subsidiarisation rather than full separation is to reduce this risk. Migration would be a concern if these activities proved to be systemic in nature.

Second, structural regulation may, through various channels, affect the international activities of universal banks in particular. For example, disincentives for global banking may be created by initiatives seeking to protect depositors and cut the costs of the official safety net within the home country jurisdiction. Moreover, ring-fencing and subsidiarisation may constrain the allocation of capital and liquidity within a globally operating banking group. Through these channels, structural regulation may contribute to a fragmentation of banking markets along national lines.

A third risk is that structural regulation may create business models that are, in fact, more difficult to supervise and resolve. For example, resolution strategies may be rather complex to design and implement for globally operating banks that have to face increasing heterogeneity in permitted business models at the national level.

Financial sector ups and downs and the real sector in the open economy: Up by the stairs, down by the parachute

By Joshua Aizenman, Brian Pinto and Vladyslav Sushko

BIS Working Papers No 411
April 2013

http://www.bis.org/publ/work411.htm

We examine how financial expansion and contraction cycles affect the broader economy through their impact on real economic sectors in a panel of countries over 1960-2005. Periods of accelerated growth of the financial sector are more likely to be followed by abrupt financial contractions than are periods of slower financial sector growth. Sharp fluctuations in the financial sector have strongly asymmetric effects, with the majority of real sectors adversely affected by contractions, but not helped by expansions. The adverse effects of financial contractions are transmitted almost exclusively through the financial openness channel, with precautionary foreign exchange reserve holdings serving as a key buffer.

Keywords: financial cycles, financial and trade openness, real transmission of financial shocks, foreign exchange reserves

JELclassification: F15, F31, F36, F4

South Korea: Give Nukes a Chance. By Denny Roy

South Korea: Give Nukes a Chance. By Denny Roy
Asia Pacific Bulletin, no. 204
Washington, D.C.: East-West Center
March 27, 2013
http://www.eastwestcenter.org/publications/south-korea-give-nukes-chance

Excerpts:

It is only a matter of time before North Korea fields an actual nuclear-tipped missile that works. With the persistent security threat from North Korea seemingly worsening, recent public opinion surveys show that a majority of South Koreans favor getting their own nuclear weapons. There is no doubt that South Korea is capable of making its own nuclear weapons, probably within a year. Indeed, the Republic of Korea (ROK) has explored this possibility occasionally since the 1970s, each time backing off under outside pressure.

There are some good reasons why, in principle, the world is better off with a smaller, rather than larger, number of nuclear weapon states. Nevertheless, there are two additional principles that apply here. First, nuclear weapons are a powerful deterrent; they are the main reason why the Cold War remained cold. Second, there may be a specific circumstance in which the introduction of a new nuclear weapons capability has a constructive influence on international security—call it the exception to the general nonproliferation rule.

Given the ROK’s present circumstances, Washington and Seoul should seriously consider the following policy change. Seoul gives the required 90 days notice required for it to withdraw from the Nuclear Nonproliferation Treaty, which allows for deratification in the case of “extraordinary events” that threaten national security. The ROK announces its intention to begin working toward a nuclear weapons capability, with the following conditions: (1) the South Korean program will match North Korea’s progress step-by-step towards deploying a reliable nuclear-armed missile; and (2) Seoul will commit to halting and shelving its program if North Korea does the same. For its part, Washington announces that US nonproliferation policy is compelled to tolerate an exception when a law-abiding state is threatened by a rogue state—in this case North Korea—that has both acquired nuclear weapons and threatened to use them aggressively. Pyongyang has repeatedly spoken of using its nuclear weapons to devastate both the ROK and the United States.

This policy change is necessary because US, ROK and (half-hearted) Chinese efforts to get North Korea to denuclearize are not working. [...]

An ROK nuclear weapons capability would impose a meaningful penalty on the DPRK for its nuclear weapons program. Aside from the sanctions ordered by the United Nations Security Council, which have proved no more than a nuisance and are amply compensated for by the growing economic relationship with China, Pyongyang has suffered no significant negative consequences for acquiring nuclear weapons. A South Korean nuclear capability would change that. The North Koreans would understand that their act brought about an outcome they very much do not want [...].

ROK nukes, furthermore, will help deter North Korean provocations. A capacity to attack a neighbor with nuclear weapons provides North Korea with cover for limited conventional attacks. Pyongyang has established a pattern of using quick, sharp jabs against South Korea. The goal is to rattle Seoul into accommodating North Korean economic and political demands. Seoul insists that future North Korean attacks will result in military retaliation by South Korean forces. Since South Korea has not hit back after previous incidents, it is uncertain whether this pledge will deter Pyongyang from trying this tactic again. A DPRK nuclear weapons capability worsens this already dangerous situation. North Korean planners might conclude that Seoul would not dare retaliate against a DPRK strike out of fear that the next step would be a nuclear attack on the ROK. A South Korean nuclear capability, however, would redress this imbalance. If ROK conventional military capabilities are superior to the DPRK and equal or superior at the nuclear level, deterrence against a North Korean attack is stronger.

South Korean nukes would close the credibility gap in the US-ROK alliance. The “umbrella” of America’s nuclear arsenal covers South Korea and theoretically negates the DPRK nuclear threat. However, South Koreans have always questioned the reliability of this commitment which potentially puts a US city at risk in order to protect a South Korean city. The doubts are growing more acute now that a North Korean capability is apparently close to realization. An ROK nuclear arsenal would remove this strain on the alliance and give the South Koreans a sense of greater control over their own destiny.

Pyongyang would not be the only target audience for Seoul’s announcement of intent to deploy nuclear weapons. Like the North Koreans, the People’s Republic of China (PRC) is deeply opposed to an ROK nuclear capability. The announcement would also signal to Beijing that the cost of failing to discipline their client state is rising dramatically. The Chinese are already debating whether the status quo of a rogue DPRK has become so adverse to Chinese interests that China must pressure Pyongyang more heavily even at the risk of causing regime collapse. South Korea’s imminent—and reversible—acquisition of nuclear weapons would strengthen the argument that the PRC must get tougher with the DPRK.

To be sure, this policy change would create its own problems. An ROK nuclear capability would pressure Japan to follow suit. A US-friendly, stable, law-abiding, liberal democratic country getting nukes is not necessarily a bad thing. But if so, the solution is for Washington and Seoul to emphasize that South Korea’s nuclear capability would be temporary and contingent, so Tokyo can remain non-nuclear.  Thankfully, there are precedents for middle-sized states giving up their nuclear weapons.

South Korea’s security situation is deteriorating and for the ROK’s leadership, national security is job number one. It is now time to get past the visceral opposition to proliferation and recognize that in this case, a conditional change of South Korea’s status to nuclear-weapon state can help manage the dangers created by a heightened North Korean threat.

Generalized linear modeling with highly dimensional data

Question from a student, University of Missouri-Kansas City:

Hi guys,
I have project in Regression class, and we have to use R to do it,but till now I didn't find appropriate code for this project, and I dont now which method I have to use.

I have to analysis of a high dimensional dataset. The data has a total of 500 features.

we have no knowledge as to which of the features are useful and which not. Thus we want to apply model selection techniques to obtain a subset of useful features. What we have to do is the following:

a) There are totally 2000 observations in the data. Use the first 1000 to train or fit your model, and the other 1000 for prediction.

b) You will report the number of features you select and the percentage of response you correctly predict. Your project is considered valid only if the obtained percentage exceeds 54%.

Please help me as much as you can.
Your help would be appreciated..
Thank you!

-------------------
Answer

well, doing batches of 30 variables I came across 88 of the 500 that minimize AIC for each batch:

t1=read.csv("qw.csv", header=FALSE)
nrow(t1)
# not a good solution -- better to get 1000 records randomly, but this is enough for now:
train_data=t1[1:1000,]
test_data=t1[1001:2000,]
library(bestglm)
x=train_data[,2:31]
y=train_data[,1]
xy=as.data.frame(cbind(x,y))
(bestAIC = bestglm(xy, IC="AIC"))

, and so on, going from  x=train_data[,2:31] to x=train_data[32:61], etc. Each run gives you a list of best variables to minimize AIC (I chose AIC but it can be any other criterion).

If I try to process more than 30 (or 31) columns with bestglm it takes too much time because it uses other programs and optimization is different... and clearly inefficient.

now, the problem seems reduced to using less than 90 variables instead of the original 500. Not the real solution, since I am doing this in a piecemeal basis, but maybe close to what we are looking for, which is to get 54pct of the observed values.

using other methods I got even less candidates to be used as variables, but let's keep the ones we found before

then I tried this: after finding the best candidates I created this object, a data frame:

dat = data.frame(train_data$V1, train_data$V50, train_data$V66, train_data$V325, train_data$V426, train_data$V28, train_data$V44, train_data$V75, train_data$V111, train_data$V128, train_data$V149, train_data$V152, train_data$V154, train_data$V179, train_data$V181, train_data$V189, train_data$V203, train_data$V210, train_data$V213, train_data$V216, train_data$V218, train_data$V234, train_data$V243, train_data$V309, train_data$V311, train_data$V323, train_data$V338, train_data$V382, train_data$V384, train_data$V405, train_data$V412, train_data$V415, train_data$V417, train_data$V424, train_data$V425, train_data$V434, train_data$V483)


then, I invoked this:

model = train(train_data$V1 ~ train_data$V50 + train_data$V66 + train_data$V325 + train_data$V426 + train_data$V28 + train_data$V44 + train_data$V75 + train_data$V111 + train_data$V128 + train_data$V149 + train_data$V152 + train_data$V154 + train_data$V179 + train_data$V181 + train_data$V189 + train_data$V203 + train_data$V210 + train_data$V213 + train_data$V216 + train_data$V218 + train_data$V234 + train_data$V243 + train_data$V309 + train_data$V311 + train_data$V323 + train_data$V338 + train_data$V382 + train_data$V384 + train_data$V405 + train_data$V412 + train_data$V415 + train_data$V417 + train_data$V424 + train_data$V425 + train_data$V434 + train_data$V483,
               dat,
               method='nnet',
               linout=TRUE,
               trace = FALSE)
ps = predict(model, dat)


if you check the result, ps, you find that most values are the same:

606 are -0.2158001115381
346 are 0.364988437287819

the rest of the 1000 values are very close to these two, the whole thing is this:

just 1 is -0.10
   1  is -0.14
   1  is -0.17
   1  is -0.18
   3  is -0.20
 617 are -0.21
   1  is 0.195
   1  is 0.359
   1  is 0.360
   1  is 0.362
   2  is 0.363
 370  are 0.364

, so I just converged all negative values to -1 and all positive values to 1 (let's assume is propensity not to buy or to buy), and then I found that 380 rows were negative when the original value to be predicted was -1 (499 rows), that is, a success percentage of 76 pct

only 257 values were positive when the original values were positive (success rate of 257/501 = 51.3pct)

the combined success rate in predicting the response variable values is a bit above 63%, which is above the value we aimed at, 54pct

---
now, I tried with the second data set, test_data (the second 1000 rows)

negative values when original response value was negative too:
          success rate is 453/501 = .90419

impressive?  See how disappointing is this:

positive values when original response value was positive too:
          success rate is 123/499 = .24649

the combined success rate is about 57pct, which is barely above the mark

---
do I trust my own method?

of course not, I would get all previous consumer surveys (buy/not buy) my company had in the files and then I will check if I can get a success rate at or above 57pct (which to me is too low, to say nothing of 54pct)

for the time and effort I spent maybe I should have tossed an electronic coin, with a bit of luck you can get a bit above 50pct success     : - )

maybe to prevent this they chose 54pct, since in 1000 runs you could be very well near 50pct

---
refinement, or "If we had all the time of the world..."

since I got enough free time, I tried this (same dat data frame):

model = train(train_data$V1 ~ log(train_data$V50) + log(train_data$V66) + log(train_data$V325) + log(train_data$V426) + log(train_data$V28) + log(train_data$V44) + log(train_data$V75) + log(train_data$V111) + log(train_data$V128) + log(train_data$V149) + log(train_data$V152) + log(train_data$V154) + log(train_data$V179) + log(train_data$V181) + log(train_data$V189) + log(train_data$V203) + log(train_data$V210) + log(train_data$V213) + log(train_data$V216) + log(train_data$V218) + log(train_data$V234) + log(train_data$V243) + log(train_data$V309) + log(train_data$V311) + log(train_data$V323) + log(train_data$V338) + log(train_data$V382) + log(train_data$V384) + log(train_data$V405) + log(train_data$V412) + log(train_data$V415) + log(train_data$V417) + log(train_data$V424) + log(train_data$V425) + log(train_data$V434) + log(train_data$V483),
               dat,
               method='nnet',
               linout=TRUE,
               trace = FALSE)
ps = predict(model, dat)

negative values when original response value was negative too: .7

positive values when original response value was positive too: .69

combined success rate: 69.4pct

# now we try with the other 1000 values:
[same dat data frame, but using test_data instead of train_data]

model = train(test_data$V1 ~ log(test_data$V50) + log(test_data$V66) + log(test_data$V325) + log(test_data$V426) + log(test_data$V28) + log(test_data$V44) + log(test_data$V75) + log(test_data$V111) + log(test_data$V128) + log(test_data$V149) + log(test_data$V152) + log(test_data$V154) + log(test_data$V179) + log(test_data$V181) + log(test_data$V189) + log(test_data$V203) + log(test_data$V210) + log(test_data$V213) + log(test_data$V216) + log(test_data$V218) + log(test_data$V234) + log(test_data$V243) + log(test_data$V309) + log(test_data$V311) + log(test_data$V323) + log(test_data$V338) + log(test_data$V382) + log(test_data$V384) + log(test_data$V405) + log(test_data$V412) + log(test_data$V415) + log(test_data$V417) + log(test_data$V424) + log(test_data$V425) + log(test_data$V434) + log(test_data$V483),
               dat,
               method='nnet',
               linout=TRUE,
               trace = FALSE)
ps = predict(model, dat)


negative values when original response value was negative too:
          success rate is 322/499 = .645

positive values when original response value was positive too:
          success rate is 307/501 = .612

combined success rate: 62.9pct

other things I tried failed -- if we had all the time of the world we could try other possibilities and get better results... or not

you'll tell me if you can reproduce the results, which are clearly above the 54pct mark

CPSS: Implementation monitoring of standards

Implementation monitoring of standards
CPSS, Apr 17, 2013
http://www.bis.org/cpss/cpssinfo2_5.htm

The Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) have started the process of monitoring implementation of the Principles for financial market infrastructures (the PFMIs). The PFMIs are international standards for payment, clearing and settlement systems, including central counterparties, and trade repositories. They are designed to ensure that the infrastructure supporting global financial markets is robust and well placed to withstand financial shocks. The PFMIs were issued by CPSS-IOSCO in April 2012 and jurisdictions around the world are currently in the process of implementing them into their regulatory frameworks to foster the safety, efficiency and resilience of their financial market infrastructures (FMIs).

Full, timely and consistent implementation of the PFMIs is fundamental to ensuring the safety, soundness and efficiency of key FMIs and for supporting the resilience of the global financial system. In addition, the PFMIs play an important part in the G20's mandate that all standardised over-the-counter (OTC) derivatives should be centrally cleared. Global central clearing requirements reinforce the importance of strong safeguards and consistent oversight of derivatives central counterparties (CCPs) in particular. CPSS and IOSCO members are committed to adopt the principles and responsibilities contained in the PFMIs in line with the G20 and Financial Stability Board (FSB) expectations.

Scope of the assessments

The implementation monitoring will cover the implementation of the principles contained in the PFMIs as well as responsibilities A to E. Reviews will be carried out in stages, assessing first whether a jurisdiction has completed the process of adopting the legislation and other policies that will enable it to implement the principles and responsibilities and subsequently whether these changes are complete and consistent with the principles and responsibilities. Assessments will also examine consistency in the outcomes of implementation of the principles by FMIs and implementation of the responsibilities by authorities. The results of the assessments will be published on both CPSS and IOSCO websites.

Jurisdictional coverage - The assessments will cover the following jurisdictions: Argentina, Australia, Belgium, Brazil Canada, Chile, China, European Union, France, Germany, Hong Kong SAR, Indonesia, India, Italy, Japan, Korea, Mexico, Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, United Kingdom and United States.  The jurisdictional coverage reflects, among other factors, the importance of the PFMIs to the G20 mandate for central clearing of OTC derivatives and the need to ensure robust risk management by CCPs.

Types of FMI - In many jurisdictions, the framework for regulation, supervision and oversight is different for each type of financial market infrastructure (FMI). Whilst initial overall assessments will cover the regulation changes necessary for all types of FMIs, further thematic assessments (assessing the consistency of implementation) are likely to focus on OTC derivatives CCPs and TRs, given their importance for the successful completion of the G20 commitments regarding central clearing and transparency for derivatives products. Prioritising OTC derivatives CCPs and TRs will help ensure timely initial reporting given that most jurisdictions have made most progress in implementing reforms for these sectors.


Timing

A first assessment is currently underway examining whether jurisdictions have made regulatory changes that reflect the principles and responsibilities in the PFMI. Results of this assessment are due to be published in the third quarter of 2013. 

For a Sick Friend: First, Do No Harm. By Letty Cottin Pogrebin

For a Sick Friend: First, Do No Harm. By Letty Cottin Pogrebin
Conversing with the ill can be awkward, but keeping a few simple commandments makes a huge difference
The Wall Street Journal, April 13, 2013, on page C3
http://online.wsj.com/article/SB10001424127887324240804578416574019136696.html


'A closed mouth gathers no feet." It's a charming axiom, but silence isn't always an option when we're dealing with a friend who's sick or in despair. The natural human reaction is to feel awkward and upset in the face of illness, but unless we control those feelings and come up with an appropriate response, there's a good chance that we'll blurt out some cringe-worthy cliché, craven remark or blunt question that, in retrospect, we'll regret.

Take this real-life exchange. If ever the tone deaf needed a poster child, Fred is their man.

"How'd it go?" he asked his friend, Pete, who'd just had cancer surgery.

"Great!" said Pete. "They got it all."

"Really?" said Fred. "How do they know?"

A few simple commandments makes a huge difference when conversing with the ill.

Later, when Pete told him how demoralizing his remark had been, Fred's excuse was, "I was nervous. I just said what popped into my head."

We're all nervous around illness and mortality, but whatever pops into our heads should not necessarily plop out of our mouths. Yet, in my own experience as a breast-cancer patient, and for many of the people I have interviewed, friends do make hurtful remarks. Marion Fontana, who was diagnosed with breast cancer eight years after her husband, a New York City firefighter, died in the collapse of the World Trade Center, was told that she must have really bad karma to attract so much bad luck. In another case, upon hearing a man's leukemia diagnosis, his friend shrieked, "Wow! A girl in my office just died of that!"

You can't make this stuff up.

If we're not unwittingly insulting our sick friends, we're spouting clichés like "Everything happens for a reason." Though our intent is to comfort the patient, we also say such things to comfort ourselves and tamp down our own feelings of vulnerability. From now on, rather than sound like a Hallmark card, you might want to heed the following 10 Commandments for Conversing With a Sick Friend.

1. Rejoice at their good news. Don't minimize their bad news. A guy tells you that the doctors got it all, say "Hallelujah!" A man with advanced bladder cancer says that he's taking his kids to Disneyland next summer, don't bite your lip and mutter, "We'll see." Tell him it's a great idea. (What harm can it do?) Which doesn't mean that you should slap a happy face on a friend's grim diagnosis by saying something like, "Don't worry! Nowadays breast cancer is like having a cold!"

The best response in any encounter with a sick friend is to say, "Tell me what I can do to make things easier for you—I really want to help."

2. Treat your sick friends as you always did—but never forget their changed circumstance. However contradictory that may sound, I promise you can learn to live within the paradox if you keep your friend's illness and its constraints in mind but don't treat them as if their illness is who they are. Speak to them as you always did (tease them, kid around with them, get mad at them) but indulge their occasional blue moods or hissy-fits. Most important, start conversations about other things (sports, politics, food, movies) as soon as possible and you'll help speed their journey from the morass of illness to the miracle of the ordinary.

3. Avoid self-referential comments. A friend with a hacking cough doesn't need to hear, "You think that's bad? I had double pneumonia." Don't tell someone with brain cancer that you know how painful it must be because you get migraines. Don't complain about your colicky baby to the mother of a child with spina bifida. I'm not saying sick people have lost their capacity to empathize with others, just that solipsism is unhelpful and rude. The truest thing you can say to a sick or suffering friend is, "I can only try to imagine what you're going through."

4. Don't assume, verify. Several friends of Michele, a Canadian writer, reacted to her cancer diagnosis with, "Well, at least you caught it early, so you'll be all right!" In fact, she did not catch it early, and never said or hinted otherwise. So when someone said, "You caught it early," she thought, "No, I didn't, therefore I'm going to die." Repeat after me: "Assume nothing."

5. Get the facts straight before you open your mouth.Did your friend have a heart or liver transplant? Chemo or radiation? Don't just ask, "How are you?" Ask questions specific to your friend's health. "How's your rotator cuff these days?" "Did the blood test show Lyme disease?" "Are your new meds working?" If you need help remembering who has shingles and who has lupus, or the date of a friend's operation, enter a health note under the person's name in your contacts list or stick a Post-it by the phone and update the information as needed.

6. Help your sick friend feel useful. Zero in on one of their skills and lead to it. Assuming they're up to the task, ask a cybersmart patient to set up a Web page for you; ask a bridge or chess maven to give you pointers on the game; ask a retired teacher to guide your teenager through the college application process. In most cases, your request won't be seen as an imposition but a vote of confidence in your friend's talent and worth.

7. Don't infantilize the patient. Never speak to a grown-up the way you'd talk to a child. Objectionable sentences include, "How are we today, dearie?" "That's a good boy." "I bet you could swallow this teeny-tiny pill if you really tried." And the most wince-worthy, "Are we ready to go wee-wee?" Protect your friend's dignity at all costs.

8. Think twice before giving advice.Don't forward medical alerts, newspaper clippings or your Aunt Sadie's cure for gout. Your idea of a health bulletin that's useful or revelatory may mislead, upset, confuse or agitate your friend. Sick people have doctors to tell them what to do. Your job is simply to be their friend.

9. Let patients who are terminally ill set the conversational agenda.If they're unaware that they're dying, don't be the one to tell them. If they know they're at the end of life and want to talk about it, don't contradict or interrupt them; let them vent or weep or curse the Fates. Hand them a tissue and cry with them. If they want to confide their last wish, or trust you with a long-kept secret, thank them for the honor and listen hard. Someday you'll want to remember every word they say.

10. Don't pressure them to practice 'positive thinking.' The implication is that they caused their illness in the first place by negative thinking—by feeling discouraged, depressed or not having the "right attitude." Positive thinking can't cure Huntington's disease, ALS or inoperable brain cancer. Telling a terminal patient to keep up the fight isn't just futile, it's cruel. Insisting that they see the glass as half full may deny them the truth of what they know and the chance to tie up life's loose ends while there's still time. As one hospice patient put it, "All I want from my friends right now is the freedom to sulk and say goodbye."

Though most of us feel dis-eased around disease, colloquial English proffers a sparse vocabulary for the expression of embarrassment, fear, anxiety, grief or sorrow. These 10 commandments should help you relate to your sick friends with greater empathy, warmth and grace.

—Ms. Pogrebin is the author of 10 books and a founding editor of Ms. magazine. Her latest book is "How to Be a Friend to a Friend Who's Sick," from which this essay is adapted.

BCBS: Monitoring tools for intraday liquidity management - final document

BCBS: Monitoring tools for intraday liquidity management - final document
April 2013

http://www.bis.org/publ/bcbs248.htm

This document is the final version of the Committee's Monitoring tools for intraday liquidity management. It was developed in consultation with the Committee on Payment and Settlement Systems to enable banking supervisors to better monitor a bank's management of intraday liquidity risk and its ability to meet payment and settlement obligations on a timely basis. Over time, the tools will also provide supervisors with a better understanding of banks' payment and settlement behaviour.

The framework includes:

• the detailed design of the monitoring tools for a bank's intraday liquidity risk;
• stress scenarios;
• key application issues; and
• the reporting regime.

Management of intraday liquidity risk forms a key element of a bank's overall liquidity risk management framework. As such, the set of seven quantitative monitoring tools will complement the qualitative guidance on intraday liquidity management set out in the Basel Committee's 2008 Principles for Sound Liquidity Risk Management and Supervision. It is important to note that the tools are being introduced for monitoring purposes only and that internationally active banks will be required to apply them. National supervisors will determine the extent to which the tools apply to non-internationally active banks within their jurisdictions.

Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools (January 2013), which sets out one of the Committee's key reforms to strengthen global liquidity regulations does not include intraday liquidity within its calibration. The reporting of the monitoring tools will commence on a monthly basis from 1 January 2015 to coincide with the implementation of the LCR reporting requirements.

 An earlier version of the framework of monitoring tools was issued for consultation in July 2012. The Committee wishes to thank those who provided feedback and comments as these were instrumental in revising and finalising the monitoring tools.

Authorities' access to trade repository data - consultative report

CPSS: Authorities' access to trade repository data - consultative report
April 2013
www.bis.org/publ/cpss108.htm

The consultative report Authorities' access to trade repository data was published for public comment on 11 April 2013. 

Trade repositories (TRs) are entities that maintain a centralised electronic record of over-the-counter (OTC) derivatives transaction data. TRs will play a key role in increasing transparency in the OTC derivatives markets by improving the availability of data to authorities and the public in a manner that supports the proper handling and use of the data. For a broad range of authorities and official international financial institutions, it is essential to be able to access the data needed to fulfil their respective mandates while maintaining the confidentiality of the data pursuant to the laws of relevant jurisdictions.

The purpose of the report is to provide guidance to TRs and authorities on the principles that should guide authorities' access to data held in TRs for typical and non-typical data requests. The report also sets out possible approaches to addressing confidentiality concerns and access constraints. Accompanying the report is a cover note that lists the specific related issues for comment.
Comments should be sent by 10 May 2013 to both the CPSS secretariat (cpss@bis.org) and the IOSCO secretariat (accessdata@iosco.org). The comments will be published on the websites of the BIS and IOSCO unless commentators have requested otherwise.

• Full report (49 pages, 308 kb)
• Cover note (3 pages, 45 kb)

Market-Based Structural Top-Down Stress Tests of the Banking System. By Jorge Chan-Lau

Market-Based Structural Top-Down Stress Tests of the Banking System. By Jorge Chan-Lau
IMF Working Paper No. 13/88
April 10, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40468.0

Summary: Despite increased need for top-down stress tests of financial institutions, performing them is challenging owing to the absence of granular information on banks’ trading and loan portfolios. To deal with these data shortcomings, this paper presents a market-based structural top-down stress testing methodology that relies in market-based measures of a bank's probability of default and structural models of default risk to infer the capital losses they could experience in stress scenarios. As an illustration, the methodology is applied to a set of banks in an advanced emerging market economy.

Regulators Let Big Banks Look Safer Than They Are. By Sheila Bair

Regulators Let Big Banks Look Safer Than They Are. By Sheila Bair
The Wall Street Journal, April 2, 2013, on page A13
http://online.wsj.com/article/SB10001424127887323415304578370703145206368.html

The recent Senate report on the J.P. Morgan Chase "London Whale" trading debacle revealed emails, telephone conversations and other evidence of how Chase managers manipulated their internal risk models to boost the bank's regulatory capital ratios. Risk models are common and certainly not illegal. Nevertheless, their use in bolstering a bank's capital ratios can give the public a false sense of security about the stability of the nation's largest financial institutions.

Capital ratios (also called capital adequacy ratios) reflect the percentage of a bank's assets that are funded with equity and are a key barometer of the institution's financial strength—they measure the bank's ability to absorb losses and still remain solvent. This should be a simple measure, but it isn't. That's because regulators allow banks to use a process called "risk weighting," which allows them to raise their capital ratios by characterizing the assets they hold as "low risk."

For instance, as part of the Federal Reserve's recent stress test, the Bank of America reported to the Federal Reserve that its capital ratio is 11.4%. But that was a measure of the bank's common equity as a percentage of the assets it holds as weighted by their risk—which is much less than the value of these assets according to accounting rules. Take out the risk-weighting adjustment, and its capital ratio falls to 7.8%.

On average, the three big universal banking companies (J.P. Morgan Chase, Bank of America and Citigroup) risk-weight their assets at only 55% of their total assets. For every trillion dollars in accounting assets, these megabanks calculate their capital ratio as if the assets represented only $550 billion of risk.

As we learned during the 2008 financial crisis, financial models can be unreliable. Their assumptions about the risk of steep declines in housing prices were fatally flawed, causing catastrophic drops in the value of mortgage-backed securities. And now the London Whale episode has shown how capital regulations create incentives for even legitimate models to be manipulated.

According to the evidence compiled by the Senate Permanent Subcommittee on Investigations, the Chase staff was able to magically cut the risks of the Whale's trades in half. Of course, they also camouflaged the true dangers in those trades.

The ease with which models can be manipulated results in wildly divergent risk-weightings among banks with similar portfolios. Ironically, the government permits a bank to use its own internal models to help determine the riskiness of assets, such as securities and derivatives, which are held for trading—but not to determine the riskiness of good old-fashioned loans. The risk weights of loans are determined by regulation and generally subject to tougher capital treatment. As a result, financial institutions with large trading books can have less capital and still report higher capital ratios than traditional banks whose portfolios consist primarily of loans.

Compare, for instance, the risk-based ratios of Morgan Stanley, an investment bank that has struggled since the crisis, and U.S. Bancorp, a traditional commercial lender that has been one of the industry's best performers. According to the Fed's latest stress test, Morgan Stanley reported a risk-based capital ratio of nearly 14%; take out the risk weighting and its ratio drops to 7%. USB has a risk-based ratio of about 9%, virtually the same as its ratio on a non-risk weighted basis.

In the U.S. and most other countries, banks can also load up on their own country's government-backed debt and treat it as having zero risk. Many banks in distressed European nations have aggressively purchased their country's government debt to enhance their risk-based capital ratios.

In addition, if a bank buys the debt of another bank, it only needs to include 20% of the accounting value of those holdings for determining its capital requirements—but it must include 100% of the value of bonds of a commercial issuer. The rules governing capital ratios treat Citibank's debt as having one-fifth the risk of IBM's. In a financial system that is already far too interconnected, it defies reason that regulators give banks such strong capital incentives to invest in each other.

Regulators need to use a simple, effective ratio as the main determinant of a bank's capital strength and go back to the drawing board on risk-weighting assets. It does make sense to look at the riskiness of banks' assets in determining the adequacy of its capital. But the current rules are upside down, providing more generous treatment of derivatives trading than fully collateralized small-business lending.

The main argument megabanks advance against a tough capital ratio is that it would force them to raise more capital and hurt the economic recovery. But the megabanks aren't doing much new lending. Since the crisis, they have piled up excess reserves and expanded their securities and derivatives positions—where they get a capital break—while loans, which are subject to tougher capital rules, have remained nearly flat.

Though all banks have struggled to lend in the current environment, midsize banks, with their higher capital levels, have the strongest loan growth, and community banks do the lion's share of small-business lending. A strong capital ratio will reduce megabanks' incentives to trade instead of making loans. Over the long term, it will make these banks a more stable source of credit for the real economy and give them greater capacity to absorb unexpected losses. Bet on it, there will be future London Whale surprises, and the next one might not be so easy to harpoon.

Ms. Bair, the chairman of the Federal Deposit Insurance Corporation from 2006 to 2011, is the author of "Bull by the Horns: Fighting to Save Main Street From Wall Street and Wall Street From Itself" (Free Press, 2012).

China's Demography and its Implications

China's Demography and its Implications. By Il Houng Lee, Qingjun Xu, and Murtaza Syed
IMF Working Paper No. 13/82
Mar 28, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40446.0

Summary: In coming decades, China will undergo a notable demographic transformation, with its old-age dependency ratio doubling to 24 percent by 2030 and rising even more precipitously thereafter. This paper uses the permanent income hypothesis to reassess national savings behavior, with greater prominence and more careful consideration given to the role played by changing demography. We use a forward-looking and dynamic approach that considers the entire population distribution. We find that this not only holds up well empirically but may also be superior to the static dependency ratios typically employed in the literature. Going further, we simulate global savings behavior based on our framework and find that China’s demographics should have induced a negative current account in the 2000s and a positive one in the 2010s given the rising share of prime savers, only turning negative around 2045. The opposite is true for the United States and Western Europe. The observed divergence in current account outcomes from the simulated path appears to have been partly policy induced. Over the next couple of decades, individual countries’ convergence toward the simulated savings pattern will be influenced by their past divergences and future policy choices. Other implications arising from China’s demography, including the growth model, the pension system, the labor market, and the public finances are also briefly reviewed.

China’s Path to Consumer-Based Growth: Reorienting Investment and Enhancing Efficiency

China’s Path to Consumer-Based Growth: Reorienting Investment and Enhancing Efficiency. By Il Houng Lee, Murtaza Syed, and Liu Xueyan (Xueyan Liu???)
IMF Working Paper No. 13/83
March 29, 2013

http://www.imf.org/external/pubs/cat/longres.aspx?sk=40446.0

Summary: This paper proposes a possible framework for identifying excessive investment. Based on this method, it finds evidence that some types of investment are becoming excessive in China, particularly in inland provinces. In these regions, private consumption has on average become more dependent on investment (rather than vice versa) and the impact is relatively short-lived, necessitating ever higher levels of investment to maintain economic activity. By contrast, private consumption has become more self-sustaining in coastal provinces, in large part because investment here tends to benefit household incomes more than corporates. If existing trends continue, valuable resources could be wasted at a time when China’s ability to finance investment is facing increasing constraints due to dwindling land, labor, and government resources and becoming more reliant on liquidity expansion, with attendant risks of financial instability and asset bubbles. Thus, investment should not be indiscriminately directed toward urbanization or industrialization of Western regions but shifted toward sectors with greater and more lasting spillovers to household income and consumption. In this context, investment in agriculture and services is found to be superior to that in manufacturing and real estate. Financial reform would facilitate such a reorientation, helping China to enhance capital efficiency and keep growth buoyant even as aggregate investment is lowered to sustainable levels.

America's Voluntary Standards System: A 'Best Practice' Model for Asian Innovation Policies? By Dieter Ernst

America's Voluntary Standards System: A 'Best Practice' Model for Asian Innovation Policies? By Dieter Ernst
East-West Center, Policy Studies, No. 66, March 2013
ISBN: 978-0-309-26204-5 (print); 978-0-86638-205-2 (electronic)
Pages: xvi, 66
http://www.eastwestcenter.org/publications/americas-voluntary-standards-system-best-practice-model-asian-innovation-policies


Summary

Across Asia there is a keen interest in the potential advantages of America's market-led system of voluntary standards and its contribution to US innovation leadership in complex technologies.

For its proponents, the US tradition of bottom-up, decentralized, informal, market-led standardization is a "best practice" model for innovation policy. Observers in Asia are, however, concerned about possible drawbacks of a standards system largely driven by the private sector.

This study reviews the historical roots of the American system, examines its defining characteristics, and highlights its strengths and weaknesses. A tradition of decentralized local self-government has given voice to diverse stakeholders in innovation. However, a lack of effective coordination of multiple stakeholder strategies constrains effective and open standardization processes.

Asian countries seeking to improve their standards systems should study the strengths and weaknesses of the American system. Attempts to replicate the US standards system will face clear limitations--persistent differences in Asia's economic institutions, levels of development, and growth models are bound to limit convergence to a US-style market-led voluntary standards system.

Too Cold, Too Hot, Or Just Right? Assessing Financial Sector Development Across the Globe

Too Cold, Too Hot, Or Just Right? Assessing Financial Sector Development Across the Globe. By A Barajas et alii.
IMF Working Paper No. 13/81
March 28, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40441.0

Summary: This paper introduces the concept of the financial possibility frontier as a constrained optimum level of financial development to gauge the relative performance of financial systems across the globe. This frontier takes into account structural country characteristics, institutional, and macroeconomic factors that impact financial system deepening. We operationalize this framework using a benchmarking exercise, which relates the difference between the actual level of financial development and the level predicted by structural characteristics, to an array of policy variables. We also show that an overshooting of the financial system significantly beyond levels predicted by its structural fundamentals is associated with credit booms and busts.


Excerpts:

Ample empirical evidence has shown a positive, albeit non-linear, relationship between financial system depth, economic growth, and macroeconomic volatility. At the same time, rapid expansion in credit has been associated with higher bank fragility and the likelihood of a systemic banking crisis.1 This seemingly conflicting evidence is actually consistent with theory. The same mechanisms through which finance helps growth also makes it susceptible to shocks and, ultimately, fragility. Specifically, the maturity and liquidity transformation from short-term savings and deposit facilities into long-term investments is at the core of the positive impact finance on the real economy, but it can also render the system susceptible to shocks. The information asymmetries and ensuing agency problems between savers and entrepreneurs that banks help to alleviate can also turn into a source of fragility given agency conflicts between depositors/creditors and banks.

The importance of the financial sector for the overall economy raises the question of the “optimal” or “Goldilocks” level of financial depth and the requisite policies to reach this optimum. Given the dual-faced nature of financial deepening, contributing to growth while often resulting in boom-bust cycles, and the identification of non-linear relationships between growth, volatility, and financial depth, it is apparent that additional deepening is not always desirable. Further, there is increasing evidence for a critical role of the financial system in defining policy space and the transmission of fiscal, monetary and exchange rate policies (IMF, 2012). Both shallow as well as over-extended financial systems can severely reduce the available policy space and hamper transmission channels.

The conceptual and empirical frameworks offered in this paper are relevant for the academic and policy debate on financial sector deepening, particularly in developing countries. We introduce the concept of a financial possibility frontier as a constrained optimum level of financial development to gauge the relative performance of financial systems around the globe. Specifically, this concept allows us to assess the performance of countries’ financial systems over time relative to structural country characteristics and other state variables (e.g., macroeconomic and institutional variables). Depending on the position of country’s financial system relative to the frontier, policy options can be prioritized to address deficiencies.

Three different sets of policies can be delineated depending on a country’s standing relative to the frontier. Market-developing policies, related to macroeconomic stability, long-term institution building, and other measures to overcome constraints imposed by a small size or volatile economic structure, can help push out the frontier. Market-enabling policies, which address deficiencies such as regulatory barriers and lack of competition, can help a financial system move toward the frontier. Finally, market-harnessing policies help prevent a financial system from moving beyond the frontier (the long-term sustainable equilibrium), and include regulatory oversight and short-term macroeconomic management.

We also operationalize this conceptual framework by presenting a benchmark model that predicts countries’ level of financial development based on structural characteristics (e.g., income, size, and demographic characteristics) and other fundamental factors. The most straightforward approach for assessing a country’s progress in financial deepening is to benchmark its financial system against peers or regional averages. Such comparisons, while useful, do not allow for a systematic unbundling of structural and policy factors that have a bearing on financial deepening. Using regression analysis, we relate gaps between predicted and actual levels of financial development to an array of macroeconomic, regulatory, and institutional variables. We also provide preliminary evidence that overshooting the predicted level of financial development is associated with credit boom-bust episodes, underlining the importance of optimizing rather than maximizing financial development.

This paper is related to several literatures. First, it is directly related to an earlier exercise to derive an access possibilities frontier as a conceptual tool to assess the optimal level of sustainable outreach of the financial system (Beck, and de la Torre, 2007). While Beck, and de la Torre (2007) focus on the microeconomics of access to and use of financial services, this paper provides a macroeconomic perspective on financial sector development. Second, our paper is related to the empirical literature on benchmarking. Based on Beck et al. (2008) and Al Hussainy et al. (2011), we derive a benchmarking model that relates a country’s level of financial development over time to a statistical benchmark, obtained from a large panel regression.

In a broader sense, the paper is also related to the literature on the finance-growth nexus, financial crises, and studies identifying policies needed for sound and effective financial systems. The finance and growth literature, as surveyed by Levine (2005), among others, has found a positive relationship between financial deepening and growth. More recent work, however, has uncovered non-linearities in this relationship. There is evidence that the effect of financial development is strongest among middle-income countries (Barajas et al., 2012), whereas other work finds a declining effect of finance on growth as countries grow richer.2 More recently, Arcand et al. (2012) find that the finance-growth relationship becomes negative as private credit reaches 110 percent of GDP, while Dabla-Norris and Srivisal (2013) document a positive relationship between financial depth and macroeconomic volatility at very high levels.

Our paper is also related to a growing literature exploring the anatomy of financial crises. This literature has pointed to the role of macroeconomic, bank-level and regulatory factors in driving and exacerbating financial fragility. Finally, our paper is related to a diverse literature exploring macroeconomic and institutional determinants of sound and efficient financial deepening.