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Business News/ Politics / Policy/  Increased regulation of central banks can lead to rise in shadow-banking
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Increased regulation of central banks can lead to rise in shadow-banking

Policymakers need to constantly review financial regulation, as seemingly stringent norms can encourage new types of unregulated activities aided by new technology

Shadow banks face lesser regulation than traditional banks because they are not funded by deposits from public. Photo: BloombergPremium
Shadow banks face lesser regulation than traditional banks because they are not funded by deposits from public. Photo: Bloomberg

One of the important fallouts of the 2008 global financial crisis has been increased regulation of the banking sector in much of the developed world, especially in the US. However, it might have been counter-productive in some ways, by allowing the shadow banking sector to fill where the traditional banks withdrew, according to a new research paper by Greg Buchak, a researcher at the University of Chicago, and others. Shadow banks face lesser regulation than traditional banks because they are not funded by deposits from public and have gained a strong foothold in residential mortgage lending in the US, the original problem area behind the 2008 financial crisis. Thus, policymakers need to constantly review regulation, as seemingly stringent regulation could often encourage different kinds of unregulated activities. Besides, the rise of “fintech" firms, which combine technology with finance to provide services like payments and peer-to-peer lending pose additional challenges for regulators. In a recently published piece in the Economic and Political Weekly, Ajit Ranade, president and chief economist, Aditya Birla Group, has underlined the importance of keeping an eye on India’s fintech sector.

Also Read| Fintech, Regulatory Arbitrage, and the Rise of Shadow Banks

Financial inclusion is expected to improve welfare programmes, but can welfare programmes also improve financial inclusion? Surveys conducted between 2013 and 2015 show that districts where MGNREGS was implemented early saw better or improved access to bank accounts, according to research by Saibal Ghosh of the Centre for Advanced Financial Research and Learning (CAFRAL), Reserve Bank of India. However, improved access did not automatically translate to more usage of the bank accounts, although women in areas where MGNREGS was implemented early indeed increased their usage of such financial services.

Also Read | Did MGNREGS Improve Financial Inclusion?

Automation and robots leading to job losses is an intensely discussed topic today. Research by Daron Acemoglu and Pascual Restrepo, economists at the Massachusetts Institute of Technology (MIT) and Boston University, respectively, shows that the net effect of robots in the US, between 1990 and 2007 was to decrease the ratio of employed persons to total population in the country by 0.18-0.34 percentage points. Obviously this is a minor decline, but the reason could be that the number of robots is still very low. The paper also finds that impact of automation on jobs is different from that caused by imports from countries such as China and Mexico, raising questions on efficacy of protectionism as automation increases.

Also Read | Robots and Jobs: Evidence from US Labor Markets

‘Development’ remains a popular buzzword, especially around the time of elections in India. One of the most visible signs of development over the years has been roads, with political parties often promising to build more roads or improve existing ones. But once in power, do political parties put their best foot forward to deliver roads or do they simply try and extract ‘rents’ through questionable practices like favouring a particular set of contractors or receiving kickbacks. The reality might actually be far more nuanced, according to research by Anjali Thomas Bohlken of the Sam Nunn School of International Affairs at the Georgia Institute of Technology. Her analysis of roads built under the Pradhan Mantri Gram Sadak Yojana (PMGSY) in northern Indian states reveals that the party in power in a state often ensures efficient implementation of road projects in the constituencies where it won elections. However, the efficiency drops in constituencies belonging to a ruling-party lawmaker who is also a minister. This Bholken suggests is reflective of hierarchies within the co-partisan politicians in terms of being able to corner rent-seeking proceeds. The ministers gain financially by rent-seeking and politically by good work done across the state.

Also Read | How Political Influence Shapes Infrastructure Provision in India

Intervention in the foreign exchange market to accumulate foreign currency and prevent the home currency from appreciating might be the best policy for many emerging market economies, especially when they witness some commodity-driven boom in exports, according to a recent working paper published by the IMF. The paper endorsed the prudent steps taken by Latin American economies in 2000s to build their FX reserves, in the face of increased export earnings amid rise in commodity prices, especially industrial metals. Otherwise, these countries risked facing a prolonged “Dutch disease", wherein currency appreciation makes domestic industry less competitive.

Also Read | Foreign exchange intervention and the Dutch disease

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Published: 31 Mar 2017, 08:38 AM IST
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