The Welfare Impact of Microcredit on Rural Households in China

So? does it? Read the abstract.

Microcredit has gained worldwide acceptance in recent years as a flexible mechanism to expand individuals’ (especially the poor's) access to financial services, which is considered as an efficient way to achieve poverty reduction and other social development. A large number of empirical studies have been done to examine the welfare effects of microcredit on the borrowers and such effects are well documented in many other countries such as Bangladesh. However, the impacts of microcredit on China rural households’ livelihood are not well documented. This paper attempts to empirically evaluate the impact of microcredit on household welfare outcomes such as income and consumption in rural China. The estimation is based on the difference-in-difference approach which is an increasingly popular method of tackling the selection bias issue in assessing the impacts of microcredit. The study uses a two-year panel dataset, including both primary and secondary data collected through a household survey in rural China. Our empirical results favour the wide belief in the literature that joining microcredit programme helps improve households’ welfare such as income and consumption. Despite the optimistic findings on how microcredit has changed the rural households’ living conditions, our results show that the vast majority of the programme participants are non-poor, which casts some doubts on the social potential (such as poverty reduction) of China's microcredit programmes.

So the results are, it helps in improving welfare, but its usually aimed at the non poor. So sort of half way house, that little bit of credit helps but not the absolute poor. Perhaps Bolsa Familia?

A million messages per second

I have been researching a wee bit on technology and impact on trading and I came across this rather interesting article about the rate of messages on market data. I quote:

Broader institutional participation, increased volatility, advancements in technology, remote market making, and regulatory changes are driving options quote volumes to higher and higher peaks. The six options exchanges in the U.S send their quote data to the Options Price Reporting Authority, which merges it into one feed and pushes it out to the market. During periods of heavy market activity, Opra sends out as many as 300,000 messages per second, far above what was seen just a few years ago.
To stay ahead of the curve, Opra has repeatedly advised the industry to boost its capacity to receive these market data messages. At the beginning of 2007, the required capacity level set by Opra was 359,000 messages per second. At the beginning of 2008, Opra had increased that level to 701,000 messages per second, and it is targeting 907,000 by the middle of 2008.

If you are interested in risk management (market, credit, operational and legal as well), do sign up to this site, very useful indeed.

All this to be taken with a grain of piquant salt!!!

Vulture Funds - Recovering Non-Performing Assets

Whenever a firm has to declare bankruptcy or has cash flow challenges, the assets then pass to the creditors' hands. In a specific case, when you are talking about a bank lending out money on the basis of assets as collateral, then the situation becomes tougher.
I mean, yes, if you stop paying, then the bank can take the asset/collateral, but think about it, what will a bank do with a repossessed car? Or a house? Or a patent? A bank is not a driver, house holder or a scientist to handle a patent. So even if it tried to take on the assets which backed the non-performing loan, it would still end up with the problem of what to do with them. Because of this, way too many non-performing loans and the collateral assets are simply stuck in litigation or on books without generating additional value.
This is where specialist asset disposal units come into the picture. But this article, despite being positive was a bit scary at the same time. First, the scary numbers:
Official figures indicate that there are more than $50bn in non-performing assets (NPAs) in India. This surprising statistic derives from two pronounced downturns in the 1980s and 1990s, before India started its current growth trajectory.
That is $50 Billion worth of assets which are wasting away in the country without generating any productive returns whatsoever. So what do these asset disposal people do? Well, putting it simply, they go to the banks, buy up the book at a 20-25% discount and then (I quote:

● The turnaround: taking an underperforming business, restructuring it, putting in new management and controls.
● Break-up and sale: Non-core assets, particularly real estate, are sold off.
● “Flips”: The company is taken out of the hands of the lender and simply sold on to trade or other buyers.
● Bridging: The company has been restructured but lacks the capital to repay the lender. The fund finances the payout to the lenders and takes a fixed return of, say, 25 per cent, on resolution.

So in a way, this is good, that these funds and special purpose disposal units pick up the lifeless and rotting carcasses, slice out the dead skin and turn them into productive assets which others can use and which generates some kind of benefit or profit. Now you might call them vulture funds, but these funds do work on what nobody else wants to touch. Good for them.
All this to be taken with a grain of piquant salt!!!

Islamic Finance and Credit Rating

For what it is worth, I agree with this. Credit Rating agencies have to take into account all material information while rating bonds. So why on earth can they say that they are rating everything except for whether they are sharia compliant or not? Well, if somebody withdraws the sharia fatwa, then the bondholders are sunk, so this evaluation by the credit rating agencies is crucial! If nothing else, it will force standardisation on the market and make the credit rating transparent.

Technorati Tags: Islamic Finance

Banking Crisis in Second Life!

This was so interesting and frankly a very interesting view of where life is heading in the banking world. If you remember the lines in front of the Northern Rock branches, now you have the start of a banking run online. Read this and wonder. I quote some bits:

To begin with, Second Life banks have something of an iffy reputation. Although most have acted responsibly, there have been some well-known disasters such as Ginko in which investors lost hundreds of thousands of Lindens. My own banking has been with JT Financial. After an event about discussing business in Second Life months ago, I was approached by one banker who invited me to do business with his institution. I put only a little cash it, wary that it might disappear. But it didn’t. Later on after winning some cash in a trivia contest, I put a little more in, investing a fraction of it in a little stock. The idea was for emergency funds in case something happened to the Lindens on me. I suppose another reason was some real-life habits are hard to break. Still, my funds were only a small fraction of the total amount of Lindens I’ve usually had.

See the picture of the online virtual banking run?


All this to be taken with a grain of piquant salt!!!

To the Swiftest Go the Spoils: Case Studies in Retail Loan Origination

An interesting case study on how automation has caused improvements in service, profitability and coverage for a simple instrument such as Loans. Because Loans are such simple instruments, it naturally tends towards a scale or volume business (similar to that of credit cards, FX or even cash equities). So the bottom line here is that if you build a BIGGER and BETTER mousetrap, they will come. I quote:

“Automation can bring numerous benefits to the consumer lending process. These benefits encompass both the bank and the consumer and can contribute directly to the bottom line and the customer experience,“ says Jacob Jegher, coauthor of the report and senior analyst. “Winning banks will embrace automation and loan origination systems in order to make faster and more consistent decisions, lower costs, increase productivity, automate processes, reduce errors, and enhance customer service.”
“Bank systems are a quagmire of complexities and inefficiencies. Lending systems and the associated processes are certainly no exception. Banks need to invest in identifying inefficient processes to improve reaction time, customer service, and employee productivity,” says Bart Narter, coauthor of the report and senior analyst. “Even with the present volatility in the US lending market, opportunity still exists. Banks need to focus on installing systems that will be with them for the long term—systems that will allow banks to respond to market demand, customer requirements, and operational requirements.”

People need to think more about latency, about having open links (to other systems such as online loan price comparison sites), about exception management systems, to have margin matricies on a dynamic basis (think on a non-linear basis!), to have multiple cross subsidy aspects built in, to look at loan returns on a multi event basis (marriage, divorce, job movements, etc.), etc. etc. But good and interesting report.

Read and consider!

All this to be taken with a grain of piquant salt!!!

Kamakura Troubled Company Index Makes Largest Jump Since September 2001

This index is one of the most interesting indices that you can come across, and it has some pretty smart math behind it. About 3-4 years or so ago, I checked it out and I can but imagine that it has gotten even better.

I quote:

Kamakura Corporation announced today that its monthly index of troubled public companies showed the greatest one month increase since September 2001. The percent of public companies classified as troubled jumped 2.4% in November to 10.4% of the public company universe. In September 2001, the index had leaped 3.0% to reach its all-time high of 28.0% of the public company universe. The index is now a full 5.0% higher than its all time low 5.4%, a level reached in April and May, 2006. Current credit conditions are still better than 63.3% of the monthly periods since the start of the index in January, 1990. This is down sharply, however, from a 95.2% rank in July. The average value of the index has been 13.4% over the last 18 years. Kamakura defines a troubled company as a company whose default probability is in excess of 1%. The index now covers more than 20,000 public companies in 29 countries using the fourth generation version of Kamakura's advanced credit models.

So read and worry!

All this to be taken with a grain of piquant salt!!!

Estimating systemic risk in the international financial system

Looks like according to this paper, the current regulatory system is pretty good in managing systemic risk. I would tend to agree, but one needs to be careful, I am not very happy with the incidence of international banks and the cleavages between regulators, central banks and governments (as seen with Northern Rock in the UK, Saschen LB in Germany and and and).

Sohnke M. Bartram, Gregory W. Brown and John E. Hund, Estimating systemic risk in the international financial system, Journal of Financial Economics Volume 86, Issue 3, , December 2007, Pages 835-869.()Abstract: This paper develops three distinct methods to quantify the risk of a systemic failure in the global banking system. We examine a sample of 334 banks (representing 80% of global bank equity) in 28 countries around five global financial crises. Our results suggest statistically significant, but economically small, increases in systemic risk. Although policy responses are endogenous, the low estimated probabilities suggest that the distress of central bankers, regulators and politicians about the events we study could be overstated and that current policy responses to financial crises could be adequate to handle major macroeconomic events.

Technorati Tags: Credit risk , Financial Institutions

Do big banks need more capital?

See this article from Risk Centre. I quote:

With all due respect to the Nout Wellink and the other members of the BCBS, we do not believe that the implementation of the Basel II proposal or anything that looks remotely like it would have alleviated the ongoing collapse of the market for complex structured assets. When an entire asset class literally dies in a matter of weeks, the risk is infinite. To us, measuring the liquidity or market risk of a Structured Investment Vehicle ("SIV"), with or without the Basel II framework, makes about as much sense as using statistics to predict corporate credit defaults.

Remember too that most of Basel II is based upon the very quantitative models and rating agency methods which caused the subprime crisis, thus offers of assistance from Basel II's creators within the BCBS should be viewed with caution. Basel II merely mimics the business processes of the Sell Side investment houses, systems which are intended first to enable new financial transactions and, as a secondary matter, manage the risk.

Without going into too much detail, I agree with the above sentiments. You see, I have a slightly different perspective on this. Based upon my previous research on extreme events, I am firmly of the belief that the relationships between various factors in these extreme events becomes dramatically non-linear in nature.

So a structure such as Basel II which relies on linear modeling to provide an indication of risk capital is ok for stable, linearly correlated markets but fails miserably when it moves into the fat tails. If you just look at the investment banks, they are taking billions of dollars in losses. My question, if you still are quibbling about it, why did the risk management models not pick up this problem?

Now the fact that the risk management models did not pick up the sub-prime mess leads me to wonder whether it makes sense to provide estimates of capital adequacy based upon these very same risk management models? No Sir.

The answer is that the banks need MORE capital, not less capital. More capital has the downside of implied opportunity cost, less capital has the downside of shaking the entire financial system through systemic risk. If I was a central banker, I would take a hard close look at Basel II.

Technorati Tags: corporate Governance , financial institutions , financial markets , market risk , credit risk , operational risk

Ignore Risk Management at your peril, your entire bank might be at risk

Here we go again, now Carnegie, the Swedish investment bank, is being pummelled by the markets and country, for having completely mucked up its risk management, allowed traders to run amok and ended up with huge losses. 200 years of pristine reputation, clean and transparent firm, all firmly driven into the toilet.

How many times have we seen this? Risk management underinvestment and then traders take wrong posititions or mis vale or mark to model or something like that and then it blows up, usually bringing down the very management who did not pay money or attention to their risk management systems.

After thinking about it for 2 seconds, I came up with some questions arise which I would ask to the CEO

1. Who does the chief risk officer report to? If the CEO with NO dotted lines, then fine. If there are any dotted lines or matrix management, then there is a disaster waiting to happen. This is applicable to market, credit, ops, liquidity risk

2. Are each division's capital allocated based upon risk?

3. Do you match the divisional RoE with their P &L? On a monthly basis?

4. How do you base your bonus pool allocations? On revenue or adjusted risk levels?

5. Who develops your risk scenario's? How often do you do war gaming? Do your head of trading attend? What is your definition of comfort values?

6. Why are you not making your divisional risk and RoE transparent?

7. What is your investment in IT? What is the ratio of risk investments to trading investments? If less than 20 percent, why?

8. When was the last time you had an independent risk and trading systems audit? And seen the results? And acted upon them? And reviewed them? And fired somebody for not following them?

9. Where does product control fit it? Do they report to trading or risk heads?

10. Who is looking after your model risk? Do you know the stress scenario results? Under what circumstances do they fail? Negative interest rates? Liquidity risk? Spreads very wide? Exchange stops trading? A dr death scenario?

But I am afraid this will happen again and again and again, people just do not listen and short term profits will again overwhelm the risk manager's warnings. And then the bank will again drop into the muck!

All this to be taken with a grain of piquant salt!!!

Northern Rock - shutting the door after the horse has bolted

In the old days, you and I will get together, plonk some money into the cooperative building society as our deposits. Then Mr. X will come to ask for a mortgage and the building society will give him our deposit money. X will repay the money back to the building society at the mortgage rate and the society will give us a savings interest rate which is lower than the mortgage rate obviously. Now, sometimes it would happen that there wouldn't be sufficient deposits coming in from individuals so the society can approach other banks to give some money to the society. The society does not want to turn away borrowers, after all. And in the fullness of time, the lending from the other banks will be covered by other deposits and repayments, and life was good, simple, easy, low risk and fun.

Ok, so the basic problem with Northern Rock was that it was funding its mortgage lending through the wholesale markets rather than mainly through its deposit base. And when the market understood that there was far too much exposure to the wholesale markets compared to the deposit base, the market said, your business is too risky and we cannot lend our depositors money to you as we are not sure you can repay it back. In other words, there was a liquidity problem!

Now this is something that the Financial Services Authority is supposed to track and warn financial institutions if they are going to go off. Well, we know what happened, it all went potty and nobody knows who was responsible for this gruesome mess.

Guess what the FT is reporting now? I quote:

The Financial Services Authority has sent a comprehensive one-off liquidity questionnaire to all banks and building societies asking for details of how they plan to fund future mortgage commitments.
The spreadsheet is designed to pinpoint future problems among mortgage lenders – particularly if the capital markets in effect remain closed for the foreseeable future.
The FSA has asked lenders to give details of their current pipeline of home loans commitments to the end of the year, as well as how much funding they have from the capital markets.It also asks how often the lenders have monitored their liquidity position.
It also wants to know what management actions have been considered as well as what contingency planning is in place. In addition, it also asks lenders what other sources of funding they have.

All very good and nice to know. But very curiously, why NOW? what was it doing before when the credit crisis was in full flow? Or even before when the signals were flashing high and spreads were widening even further than normal?

Technorati Tags: Financial Markets , Credit Risk , Market Risk , Liquidity Risk , Financial Institutions , UK