BIOECONOMY, Climate-Nature-Finance, Financial Reforms, Economic Reforms, Tax Reforms

The world is at risk of another financial crisis as monetary stimulus in developed economies encourages investors to take risks and boost asset prices, Reserve Bank of India (RBI) Governor Raghuram Rajan said Thursday.

“We are taking a greater chance of having another crash at a time when the world is less capable of bearing the cost,” Rajan told the Central Banking Journal. Global monetary authorities must coordinate more closely and create a safety net to protect developing countries and avoid a “merry-go-round” of perpetual crisis, he said.

Mr. Rajan has been a vocal critic of developed nations’ monetary policies and their impact on the rest of the world. The former International Monetary Fund (IMF) chief economist said the world hasn’t learned its lesson from the credit crisis and criticised the use of quantitative easing and other “extreme monetary actions,” he said.

Investors are counting on “easy money” being available for the foreseeable future and thinking they can sell before everyone else does, he said.

“They put the trades on even though they know what will happen as everyone attempts to exit positions at the same time,” he said. “There will be major market volatility if that occurs.”

Mr. Rajan said the problems arising “are not so much from credit growth, which is relatively tepid in the industrial markets and has been much stronger in emerging markets, but from asset prices due to financial risk-taking.”

Stay tuned…

(July 31, 2014) Over widespread objections from civil society, the World Bank’s board of directors gave a green light yesterday to a weak new set of rules to replace its existing environmental and social “safeguard” policies. The proposed policies appear to reverse a generation of gains by weakening protections from harm for the poor and the environment in Bank-funded projects.

“By eliminating clear rules and gutting key requirements, the Bank is breaking President Kim’s repeated promises not to dilute the safeguards,” says Sasanka Thilakasiri, Policy Advisor at Oxfam International.

Final approval of the policies will not come until 2015. Though they made clear they do not “endorse” the draft, by clearing the draft as is, the board sent a clear signal of a major shift in which governments and the World Bank are given unprecedented latitude over decisions regarding when, how, and, in some cases, evenif these policies will be applied to particular Bank projects.

“The Bank’s promises that this new ‘flexible approach’ will be made up for by closer supervision fall flat because the Bank is notoriously bad at it and lacks the capacity to monitor impacts on the ground,” says Cesar Gamboa, a long-time Bank-watcher from Derecho Ambiente y Recursos Naturales in Peru.

Consistent with its mantra on flexibility, the Bank is proposing a new loophole that allows governments to “opt out” of previously guaranteed protections for indigenous peoples, citing discomfort among certain African governments with the term “indigenous peoples” and the rights it confers. This would be a major blow to indigenous peoples, particularly in Africa, who have counted on the Bank to recognize their rights when their own governments refuse.

Adrien Sinafasi, a prominent indigenous “pygmy” activist in the Democratic Republic of Congo, argues that “the World Bank’s intention to allow our governments, which have marginalized our communities for decades, to decide whether we are indigenous would severely undermine our fundamental human rights and weaken the limited protections we currently have.”

At the same time, despite repeated promises by the World Bank that the revised safeguard policies would include stronger protections for poor communities and those it terms “disadvantaged” or “vulnerable” groups, the leaked draft contains only general mentions of the need to consider impacts of projects on those who may be “disadvantaged” due to age, disability, gender, and sexual orientation or gender identity.

“It is imperative that the World Bank looks at the unique impacts on each ‘disadvantaged’ or ‘vulnerable’ group given their specific rights and needs. Only this will enable all persons to benefit from and not be harmed by Bank projects,” says Mohammed Loutfy, Disabled People’s International, Arab Region Advisory Body Chair.

Similar Bank assurances that pressing environmental challenges would be adequately addressed in the new policies are also contradicted by the draft policies. “Despite the Bank’s warning of the dangers that a warming world poses to development, there is only sporadic mention of climate change in the safeguard proposal. Nowhere does it lay out what governments have to do to assess if their projects will exacerbate climate change or how climate change will affect the viability of their projects,” says Soumya Dutta, Convener of Beyond Copenhagen collective and other climate justice groups in India.

Meanwhile, Makoma Lekalakala from Earthlife Africa in Johannesburg, South Africa says, “the introduction of ‘biodiversity offsets’ into previous ‘no-go’ areas substantially weakens existing protections for critical natural habitats and protected areas, based on the shaky premise that destruction to these areas can be compensated or ‘offset’ by agreements to preserve habitats elsewhere in perpetuity.”

Ultimately, the policies not only fail to protect communities impacted by Bank projects, they will also lower the bar for development finance institutions that look to the World Bank as a trend-setter. Vince McElhinny, the Bank Information Center’s Senior Policy Advisor, notes, “the World Bank has fallen far short of its goal of setting a new global standard when it comes to protecting the poor and the planet. Instead, it is setting off a race to the bottom.”

Bankers are nearly unanimous on the subject of Anat R. Admati, the Stanford finance professor and persistent industry gadfly: Her ideas are wildly impractical, bad for the American economy and not to be taken seriously.

But after years of quixotic advocacy, Ms. Admati is reaching some very prominent ears. Last month, President Obama invited her and five other economists to a private lunch to discuss their ideas. She left him with a copy of “The Bankers’ New Clothes: What’s Wrong With Banking and What to Do About It,” a 2013 book she co-authored. A few weeks later, she testified for the first time before the Senate Banking Committee. And, in a recent speech, Stanley Fischer, vice chairman of the Federal Reserve, praised her “vigorous campaign.”

Dennis Kelleher, chief executive of Better Markets, a nonprofit that advocates stronger financial regulation, said Ms. Admati has emerged as one of the most effective advocates of the view that regulatory changes since the 2008 crisis remain insufficient. “She has been, as one must be,” Mr. Kelleher said, “dogged from the West Coast to the East Coast to Europe and back again and over again.”

Ms. Admati’s simple message is that the government is overlooking the best way to strengthen the financial system. Regulators, she says, need to worry less about what banks do with their money, and more about where the money comes from.

Companies other than banks get money mostly by selling shares to investors or by reinvesting profits. Banks, by contrast, can rely almost entirely on borrowed funds, including the money they get from depositors. Ms. Admati argues that banks are taking larger risks than other kinds of companies because they use other people’s money, and the results are that they keep crashing the economy.

Her solution is to make banks behave more like other companies by forcing them to reduce sharply their reliance on borrowed money. That would likely make the banking industry more stodgy and less profitable — reducing the economic risks, the executive bonuses and, for shareholders, both the risks and the profits.

“My comparison is to speed limits,” Ms. Admati said in an interview near the Stanford campus. “Basically what we have here is the market has decided nobody else should be driving faster than 70 miles an hour and these are the biggest trucks with the most explosive cargo and they are driving at almost 100 miles an hour.”

For all her success in stimulating debate, however, Ms. Admati and like-minded critics face long odds. Since the financial crisis, the government has already required banks to reduce their reliance on borrowed money by increasing capital standards, which dictate the share of funding that must come from equity. Mr. Obama recently described that increase as massive, and officials are considering further increases for the largest banks. But the net effect is tiny in comparison to the change sought by Ms. Admati. Officials worry that larger changes would hamstring American banks, driving business both to other kinds of domestic financial firms and to foreign rivals.

In his speech, Mr. Fischer said Ms. Admati’s arguments made sense in principle. “At one level, the story on capital and liquidity ratios is very simple: From the viewpoint of the stability of the financial system, more of each is better,” he said. But the United States, he said, was constrained by practicality. If other countries aren’t willing to impose stricter capital requirements on their own banks — and they don’t appear to be — then unilateral increases would hurt the American banking industry and the broader economy.

Andrew Metrick, a Yale finance professor, said that such rules could also push activity into the less regulated corners of the domestic financial system.

He compared the situation to a pair of parallel highways, echoing Ms. Admati’s metaphor. “If you lower the speed limit on one highway, you’ll have fewer accidents on that highway,” he said. “But the other road will just get more crowded.”

Ms. Admati compares this logic to letting American manufacturers pollute so that they can compete more effectively with companies in China. And she says she is looking for new ways to press her fight. In February, she debated bankers at the World Economic Forum in Davos, Switzerland. In May, she delivered a 15-minute TED talk to an audience at Stanford. Next year, she is planning a conference in Washington. She says it’s hard to imagine a return to the kind of theoretical work that absorbed her before the crisis.

“This is not fun,” she said of her campaign. “But I know that this is a bad system. There is no justification for this — zero. The only reason we are staying where we are is that the status quo has staying power. And if we are stuck with the status quo, then we are going to have to suffer the consequences.”

‘Something Is Very Wrong’

Before the financial crisis in 2008, Ms. Admati spent most of her time working with complicated financial models. She had never paid much attention to banking or to public policy. But as the crisis unfolded, she began reading and talking with colleagues — “like a doctor from another field of medicine visiting the emergency room,” she said — and grew increasingly disconcerted by what she learned.

Even after the crisis, banks continue to rely on debt financing far more than other kinds of corporations. Last year, the eight largest American banks together derived less than 5 percent of their funding from shareholders, according to Thomas M. Hoenig, vice chairman of the Federal Deposit Insurance Corporation. The average equity financing for nonfinancial corporations was about 60 percent.

Ms. Admati said she started asking one question repeatedly: Why were banks behaving so differently? Companies with more debt are more vulnerable to financial setbacks. Banks were in the danger zone, so why not raise more equity?

Four years later, she says she’s still waiting to hear a good answer. She recalled the explanation in one prominent banking textbook, which she read in 2010, as a particular spur to action. “It was shocking,” she remembered. She said she went to the office of a Stanford colleague, her frequent collaborator Paul Pfleiderer, and told him: “Something is very wrong. I’ve never heard so much nonsense in all of my life.” She still becomes visibly angry as she recalls the conversation. “They are denying what we know about financial markets. It’s like they are saying gravity is not a force in nature.”

Ms. Admati decided to enter the public square because she felt that academics and policy makers weren’t listening. “The Bankers’ New Clothes,” which she wrote with Martin Hellwig, an economics professor at the University of Bonn, proved a turning point in her campaign. But the first step was much smaller. She was not sure how to reach a popular audience, so in 2010 she enrolled in a program that teaches prominent women to write opinion articles. Her first, published in The Financial Times in the fall of 2010, was a letter co-signed by 19 other academics that criticized an international agreement on minimum bank capital standards as “far from sufficient to protect the system from recurring crises.”

Banking is the only industry subject to systematic capital regulation. Borrowing by most companies is effectively regulated by the caution of lenders. But the largest lenders to banks are depositors, who generally have no reason to be cautious because federal deposit insurance guarantees repayment of up to $250,000 even if the bank fails. This means the government, which takes the risk, must also impose the discipline.

In the decades before the financial crisis, banks gradually convinced regulators to reduce capital requirements to very low levels. In the aftermath, banks acknowledged that some increases were necessary — they had just needed enormous bailouts, after all — but they fought to minimize those increases. The day after Ms. Admati’s article ran, the same paper ran one by Vikram S. Pandit, then the chief executive of Citigroup, arguing that the proposed standards were excessive. “The last thing the global economy needs is another economic dampener,” Mr. Pandit wrote.

‘Add a Digit’

The industry has benefited from, and sometimes encouraged, public confusion. Banks are often described as “holding” capital, and capital is often described as a cushion or a rainy-day fund. “Every dollar of capital is one less dollar working in the economy,” the Financial Services Roundtable, a trade association representing big banks and financial firms, said in 2011. But capital, like debt, is just a kind of funding. It does the same work as borrowed money. The special value of capital is that companies are under no obligation to repay their shareholders, whereas a company that cannot repay its creditors is out of business.

The industry’s more serious argument is that equity is more expensive than debt. If governments require banks to raise more equity, the industry warns, the results would be higher interest rates, less lending and slower economic growth.

A 2010 analysis funded by the Clearing House Association, a trade group, concluded that an increase of 10 percentage points in capital requirements would raise interest rates by 0.25 to 0.45 percentage points.

This, in the view of Ms. Admati, is a small price to pay for fewer crises. She notes that debt is cheaper than equity largely because of government subsidies — not just deposit insurance but also tax deductions for interest payments on other kinds of debt — so more equity would basically transfer costs from taxpayers to banks. Even in the short term, she says, the economic impact may well be positive. A study last year by Benjamin H. Cohen, an economist at the Bank for International Settlements, found that banks with more capital tended to make more loans.

Ms. Admati says large banks should be required to raise at least 30 percent of their funding in the form of equity, about six times more than the current average for the largest American banks. This would not affect the ability of banks to accept deposits; it would not even affect their borrowing from other sources. Instead, she says, banks should be required to suspend dividend payments, thus increasing their equity by retaining their profits, until they are sufficiently capitalized.

“There is no more clear case of choosing the banks over the public than the payouts,” she said of regulators’ decisions to let banks resume dividend payments after the crisis. “They can tell you all day long they’re working on ‘too big to fail,’ but while they’re working on it they cannot allow banks to be getting closer to failure.”

She freely concedes that there is no particular science behind her 30 percent equity figure. The point, she says, is that 5 percent is the wrong ballpark. The proper baseline, in her view, is what the market imposes on other kinds of companies.

“We have too much belief that we can be precise,” she said. “I don’t mean 20 percent. I don’t mean 30 percent. I mean add a digit. I mean a lot more.”

She has been to Washington repeatedly in recent years, but when she returned last month to testify before a Senate committee, she approached the trip with the intensity of a last chance. She made dinner plans with a senior policy maker the night before her testimony and spent the morning before her appearance meeting with congressional staff members. When she learned she had missed a chance to meet with Senator Elizabeth Warren, the Massachusetts Democrat who is a leader in the push for stronger financial regulations, she doubled back after the hearing to plead for a second chance, standing antsy outside the office, checking messages.

As she waited, she said she was glad that policy makers finally seemed to be listening. But, she said, she was frustrated by the lack of progress and not sure about how to press ahead.

Then she excused herself and went to check once more to see if Senator Warren was available.

At the end of the Sixth BRICS Summit in Fortaleza, Brazil on July 16, 2014, the leaders of the BRICS countries announced the “Fortaleza Action Plan.” This plan is in the context of the Fortaleza Declaration, where the leaders reinforced their position that BRICS would be an international force in challenging the neo-liberal policies of the Washington Consensus. Touching on areas of major destabilization in the world – from Syria to Sudan and from Ukraine to Iraq – the leaders spelt out the need for new paths to peace and for strengthening the United Nations to resolve the outstanding questions of war and insecurity.

The most daring aspect of the Fortaleza Declaration was the announcement of a new financial architecture to intervene in relation to the international tensions that have arisen since the Federal Reserve Bank of the United States announced the monetary policy of Quantitative Easing This policy allows a central bank, like the Federal Reserve System, to purchase government or other securities from the market with the goal of lowering interest rates and increasing the available money supply. The BRICS summit announced two new pillars in a new financial architecture that is to be anchored with the headquarters of the New Development Bank in Shanghai, China.

The Fortaleza Action Plan and the outcomes of this summit represented a major step in breaking the Exorbitant Privilege of the US dollar as a the dominant international currency. Along with the formal establishment of the New Development Bank (NDB), the leaders announced the launch of a Contingency Reserve Arrangement (CRA), which in 2013 was approved to receive a $100 billion fund to combat currency crises. The first president of the Bank will be from India, the inaugural Chairman of the Board of directors will come from Brazil and the inaugural chairman of the Board of Governors will be Russian. It was stressed in the Fortaleza proclamations that the BRICS Bank would be organized on the basis of equality unlike the current IMF and World Bank where the leader of the IMF is always a European and the head of the World Bank is always a U.S citizen.

The proposal for the BRICS bank had been announced at the BRICS summit in New Delhi in 2012 and at the summit in Durban in 2013 the plan for the CRA was also outlined. The long term goal of the CRA will be to provide emergency cash to BRICS countries faced with short term credit crisis or balance of payments problems. Ultimately, in the context of the present currency wars, the CRA will replace the International Monetary Fund (IMF) as the provider of resources for BRICS members and other poor societies when there is balance of payment difficulties.

When the announcement was made of the bank to be capitalized with the US$ 50 billion and the CRA with US$100b, it was also announced that the leaders of BRICS were also considering the establishment of a BRICS Exchange Alliance to challenge the opaque derivatives market of the Wall Street oligarchs and an energy alliance to challenge the speculative activities of the Intercontinental Exchange (ICE). These four institutions (a) the New Development Bank (b) the Contingency Reserve Arrangement (c) The BRICS exchange alliance and (d) the BRICS Energy Alliance – when fully operational will engender a tremendous change in the direction of creating a New International Economic Order.

For as we will outline, the NDB and the CRA will not simply be like other regional development banks such as the European Investment Bank or the Corporación Andina de Fomento (CAF), also known as the “Development Bank of Latin America.” The bank is emerging at a moment when the entire international financial system continues to be in a state of instability because of the recklessness of the predatory speculators of Wall Street. In the midst of this recklessness, the ruling class of the United States is stoking warfare to deflect working peoples from the crisis of global capital.

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Why not also a Development Bank which can bring new resources and track those already allocated to regional and international Banks and Funds, and provide professional support to all subjects involved in cooperation within the field of new opportunities offered by development finance?

This was the missing piece, and it is not a minor thing. Within the next few months the Italian Parliament will approve a new law on cooperation, marking the end of Law 49 adopted 27 years ago. On many previous occasions, parliamentarians, parties and ministers have unsuccessfully tried to adapt this law to the radical and evident changes brought by the mere passing of time.

Everything changes in 30 years, look at us: our body, our families, the cities we live in, the way we work. In the same way, the world around us has changed dimension, orientation and speed. The geography of rich and poor countries has mutated, a new global dialogue has emerged concerning the next development targets (a long way from the hunger strikes against world hunger in the 1980s). This will define a universal language for 2015: common objectives, instruments, responsibilities assigned to everyone and to each under the aegis of the United Nations and the international community.

It will certainly be a major challenge: defeat world poverty in 15 years – hitting the economic, social and environmental causes of underdevelopment and ensuring the universality of such objectives in the framework of good governance and respect of human rights. This will put those who subscribe to these challenges at risk of failure, of discrepancy between rhetoric and reality.

Thus we have the objective, the final goal. What about the instruments?

The OECD DAC and the EU have highlighted the continuous growth in public support for development despite the economic crisis. Yet they have also reaffirmed that public support, even if everyone was to reach the historical milestone of 0.7% of GDP, would not be sufficient to meet the objectives of such an ambitious agenda. Responding to emergencies, helping developing countries, promoting development amongst those emerging, helping many to bridge their internal inequalities and making these efforts sustainable requires an active involvement of all actors.

It is therefore not by chance – and even less an “ideological” step back – that institutions not only work with civil society and NGOs, but are also increasingly co-involved with the private sector.  In a framework of shared principles, the private sector can bring real and fresh resources, promote innovation and contribute to the inclusive development of emerging countries.

This is not merely about highlighting isolated cases of “enlightened business”, but about changing the perception of development and its relations.

In this new law, under discussion by the Italian Parliament, the government intends to complete the structure of “cooperation 2.0”, granting it with what Emilio Ciarlo defined a “Development Bank” (in a debate promoted by Pistelli’s political advisor on vita.it, Afronline’s publisher). As happens with KfW in Germany and AFD in France, this would involve creating an ad hoc department within a public group such as ‘Cassa Depositi e Prestiti’  (the Italian Deposits and Loans Fund) that could be then accredited as an International Financial Institution (IFI) to the European Commission.

Following a subsequent agreement with the Italian Foreign Affairs Ministry and the Agency, the “Development Bank” would manage existing financial instruments efficiently. In particular, it should also guide Italian actors through the great deal of opportunities offered by IFIs and ultimately bring its own funds to Italian cooperation.

The so-called “matching” between public and private resources, the “blending” of grants and loans or between different funds are practices already consolidated by partner countries and call on Italy to catch up. These countries, which we usually consider reference points, not only dedicate more resources towards development assistance and trace their contributions down to banks and international funds, but also multiply these resources through efficient cooperation with the private sector. This is where we intend to elevate our system.

If the Italian Parliament examines the law this summer, the government will then take six months to establish the Agency, its Statute and the convention that will regulate its relations with the Ministry of Foreign Affairs. A similar period could be needed to create a development bank.

Therefore, we are working to make 2015 not only the year of Expo (the Universal Exposition taking place in Milan) and a new Development Agenda but also the birth of the new Italian Cooperation.

A year after being elected president of the Inter-American Development Bank in 2005, Luis Alberto Moreno introduced reforms to recalibrate the bank’s programming and streamline its operations. Resulting in significant changes in IDB management and staffing, the reforms had four main objectives:

▪ Develop sectoral expertise.
▪ Enhance country focus.
▪ Bolster risk- and results-based management capacity.
▪ Improve institutional efficiency.

These reforms came at a time when IDB is battling the perception that it has lots its relevance in Latin America and the Caribbean, its main region of focus. The realignment was implemented to help the bank respond more efficiently to the region’s development challenges, stay competitive amid the rise of new development finance sources and sharpen its focus on results.

Eight years after the realignment, IDB’s Office of Oversight and Evaluations noted that will the reforms succeeded in deepening sectoral and country focus, it was not able to achieve all of its objectives. The realignment was unable to yield improvements in managing project cycles. Further, the reforms actually caused delays in procurement.

A leaked draft of the World Bank’s proposed new Safeguard Policies appears to reverse a generation of gains. Despite over two years of input from civil society, project-affected communities, and experts on a wider range of social and environmental issues, the leaked proposal reveals a significant weakening of those standards. The proposed policies, which are up for discussion by the Bank’s board on July 30 ahead of public consultations, are not only at odds with the Bank’s stated goals of ending extreme poverty and boosting shared prosperity, but they also lower the bar for the entire international community.

On multiple occasions, World Bank President Jim Kim has promised that this review of Bank policies would not lead to “dilution,” or weakening, of Bank policies. Yet, the leaked draft reveals major dilutions such as gutting requirements that potential negative environmental and social impacts of a project be assessed and made public before the World Bank’s board approves project loans. The elimination of clear, predictable rules also appears to be a clear attempt by the Bank to avoid accountability for the negative impacts of projects that it funds. In another example of clear dilution, the Bank is proposing a new loophole that allows governments to “opt out” of following requirements related to indigenous peoples, which would be a major blow to indigenous peoples who have counted on the Bank to recognize them when governments refuse.

World Bank Management has also made promises that the revised safeguard policies would include stronger protections for poor communities and those it terms “vulnerable” or “marginalized” groups. Yet despite this promise, the leaked draft contains only general mentions of the need to consider impacts of projects on those who may be disadvantaged due to age, disability, gender, and sexual orientation or gender identity. No clear procedures are provided to describe what specifically the borrower would need to do to ensure these groups benefit equally from Bank projects and are not disproportionately harmed when projects entail physical and economic displacement.

Similar Bank assurances that pressing environmental challenges would be adequately addressed in the new policies are also contradicted by the text of the draft policies. For example, despite the Bank’s prominence in warning of the dangers that a warming world poses to development, there is only sporadic mention of climate change in the safeguard proposal and nowhere does it lay out what governments have to do to assess if their projects will exacerbate climate change or how climate change will affect the viability of their projects. Meanwhile, the introduction of “biodiversity offsets” into previous “no-go” areas substantially weakens existing protections for critical natural habitats and protected areas, based on the shaky premise that destruction to these areas can be compensated or “offset” by agreements to preserve habitats elsewhere in perpetuity.

Throughout the policies there are many cases in which the borrower and the World Bank are given unprecedented latitude over decisions regarding when, how, and, in some cases, even if these policies will be applied to particular Bank projects. Despite repeated claims that this “flexible approach” will be compensated by expanded supervision and monitoring, there are too few clear requirements in the draft or an accompanying implementation plan to offer any comfort that safeguard objectives on the ground are more likely to be met. As the World Bank asks us to trust them, the string of broken promises, the climate of secrecy in preparing the proposal, and an underfunded safeguard staffing structure in utter disarray, provide little reassurance that these policies will be implemented in an effective way to prevent negative impacts to project affected communities and the environment.

While the draft contains some positive advances, such as the adoption of a labor standard—albeit one that is much weaker than those already in place at other Multilateral Development Banks—these advances do not compensate for the numerous instances of procedural and substantive weakening found throughout the draft. Overall, the World Bank has fallen far short of its goal of setting a new global standard when it comes to protecting the poor and the planet.

Last week, Paul Krugman said too big to fail is over:

There was indeed a large-bank funding advantage during and for some time after the crisis, but it has now been diminished or gone away — maybe even slightly reversed. That is, financial markets are now acting as if they believe that future bailouts won’t be as favorable to fat cats as the bailouts of 2008.

This news is part of broader evidence that Dodd-Frank has actually done considerable good, on fronts from consumer protection to bank capitalization ….

But as David Dayen notes, Krugman’s stretching the facts:

The report [that Krugman relies on for his claim that too big to fail] doesn’t really say that future bailouts won’t be as favorable to the fat cats, or even that market participants believe that: it does say that large financial institutions would likely continue to enjoy lower funding costs than their counterparts in times of high credit risk (see page 40). Furthermore, the report so completely second-guesses itself that it shouldn’t be taken as evidence of anything, as the report itself states in numerous spots. Presumably a Nobel Prize winner has come across reports with muted conclusions before and would know not to get too far out in front of the facts by amplifying them.

***

The report did not say that the advantage has “essentially disappeared.” GAO ran 42 models to try and assess the subsidy. In 2013, 18 of those models effectively tested positive for the subsidy, 8 tested negative, and 16 showed nothing. That’s fairly inconclusive, and not at all as definitive as Krugman makes it.

***

Gretchen Morgenson reported on the same study in the news, and managed to get it right, contrawhat Krugman thought he could get away with on the op-ed page.

(GAO’s) methodology was convoluted and its conclusions hardly definitive. The report said that while the big banks had enjoyed a subsidy during the financial crisis, that benefit “may have declined or reversed in recent years.” [...]

The trouble with this mishmash is that big bankers and even policy makers will cite these figures as proof that the problem of too-big-to-fail institutions has been resolved. Mary J. Miller, the departing under secretary for domestic finance at the United States Treasury, wrote in a letter about the report: “We believe these results reflect increased market recognition of what should now be evident — Dodd-Frank ended ‘too big to fail’ as a matter of law.”

Not exactly. As the report noted, the value of the implied guarantee varies, skyrocketing with economic stress (such as in 2008) and settling back down in periods of calm.

In other words, were we to return to panic mode, the value of the implied taxpayer backing would rocket. The threat of high-cost taxpayer bailouts remains very much with us.

There’s more: Morgenson actually watched the hearing about the report, and found credible questioning of GAO’s methodology, in particular the narrow way in which they defined the subsidy as entirely about lower debt costs, instead of the lower cost of equity and benefits to stockholders. I’ve also heard that bond prices, with their focus on immediate-term risk, are simply an inaccurate indicator of short-term borrowing costs, particularly those in the securities lending markets.

And a few days after Krugman wrote his piece, the Washington Post reported:

Eleven of the biggest U.S. banks have no viable plan for unwinding their businesses without rattling the economy, federal regulators said Tuesday, ordering the firms to address their shortcomings by July 2015 or face tougher rules.

***

The Federal Reserve and the Federal Deposit Insurance Corp. called the banks’ resolution plans, or “living wills,” “unrealistic or inadequately supported.” They said the plans “fail to make, or even to identify, the kinds of changes in firm structure and practices that would be necessary to enhance the prospects for” an orderly resolution.

***

“Each plan being discussed today is deficient and fails to convincingly demonstrate how, in failure, any one of these firms could overcome obstacles to entering bankruptcy without precipitating a financial crisis,” Thomas M. Hoenig, vice chairman of the FDIC, said in a statement Tuesday.

***

Regulators, especially Hoenig at the FDIC, worry that banks are generally larger, more complicated and more interconnected than they were before the meltdown.

***

And the average notional value of derivatives for the three largest firms exceeded $60 trillion at the end of 2013, up 30 percent from the start of the crisis.

***

“There have been no fundamental changes in their reliance on wholesale funding markets, bank-like money-market funds, or repos [repurchase agreements], activities that have proven to be major sources of volatility.”

David Stockman – Ronald Reagan’s budget director – writes:

The giant regulatory diversion known as Dodd-Frank has actually permitted the TBTF banks to get even bigger and more dangerous. Indeed, JPM and BAC were taken to their present unmanageable size by regulators—ostensibly fighting the last outbreak of TBTF—who imposed or acquiesced to the shotgun mergers of late 2008.

So now these same regulators, who have spent four years stumbling around in the Dodd-Frank puzzle palace confecting thousands of pages of indecipherable regulations, slam their wards for not having sufficiently robust “living wills”. C’mon! This is just another Washington double-shuffle.

The very idea that $2 trillion global banking behemoths like JPMorgan or Bank of America could be entrusted to write-up standby plans for their own orderly and antiseptic bankruptcy is not only just plain stupid; it also drips with political cynicism and cowardice. If they are too big to fail, they are too big to exist. Period.

And Michael Winship notes:

In The New York Times, columnist Gretchen Morgenson writes, “Six years after the financial crisis, it’s clear that some institutions remain too complex and interconnected to be unwound quickly and efficiently if they get into trouble.“It is also clear that this status confers financial benefits on those institutions. Stated simply, there is an enormous value in a bank’s ability to tap the taxpayer for a bailout rather than being forced to go through bankruptcy.”

Morgenson adds, “Were we to return to panic mode, the value of the implied taxpayer backing would rocket. The threat of high-taxpayer bailouts remains very much with us.”

Financial professionals echo her concern. Camden Fine, president and CEO of the Independent Community Bankers of America, notes in American Banker (not without self-interest) that while the size of big bank subsidies may have “diminished since the crisis … the larger point is that the biggest and riskiest financial firms still have a competitive advantage in the marketplace. They can still access subsidized funding more cheaply than smaller financial firms because creditors believe the government would bail them out in the event of a crisis. No matter how you cut it, a subsidy is a subsidy. And this subsidy is one that puts the American taxpayer on the hook. …

“Meanwhile, the largest financial institutions are only getting bigger. According to our analysis of call report data from the Federal Deposit Insurance Corp., since the end of 2009, the assets of the six largest financial institutions have grown each year. Their total assets rose from $6.41 trillion in 2009 to $7.22 trillion in 2014 — a total increase of $800 billion. The top six banks are also responsible for more than half of the $2 trillion increase in total U.S. banking assets in the years since 2009.”

***

As Senators Brown and Vitter stated, “Today’s report confirms that in times of crisis, the largest megabanks receive an advantage over Main Street financial institutions. Wall Street lobbyists may try to spin that the advantage has lessened. But if the Army Corps of Engineers came out with a study that said a levee system works pretty well when it’s sunny — but couldn’t be trusted in a hurricane — we would take that as evidence we need to act.”

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There is no question that banking is quickly becoming a digital business, supported by enhanced online and mobile offerings from traditional financial institutions as well as new market entrants. But how ready is the banking and credit union community for this transformation?

By Jim Marous, Editor, Retail Banking Strategies

According to a Bain & Company report entitled, “Building the Retail Bank of the Future,” more than half of the 78 global financial institutions benchmarked lag substantially in the ability to create the “bank of the future” experience that customers already expect – integrated, on demand, real-time banking services via a combination of digital and physical assets.

Bain found that while many banks have focused their digital investments on digitizing transactions that reduce brick and mortar cost, less has been done to make consumers’ banking experience more convenient, easy and engaging through a seamless integration of channels.  While consumers have definitely appreciated digital innovations such as remote deposit capture, remote bill pay and other simplified transactions delivered through a mobile app, winning the digital consumer in the future will require more.

In fact, many of the comments made by the dozens of participants in the discussion revolved around simplicity of design, the removal of friction and the ability to improve the customer experience. <a “The biggest threat the digital pure plays present to incumbents is that they don’t have hang ups about cannibalizing branch networks and how the requisite shift in revenue delivery will compromise the business case for branches,” stated author, speaker and Moven CEO/Founder Brett King in an interview with The Financial Brand. “In fact, while lower acquisition costs and lower distribution costs are key metrics for neo-banks and P2P lenders, their ability to generate business purely through digital is the biggest single threat to the existing model of retail financial services.”

The impact of not being able to provide the digital capabilities customers desire is difficulty in defending against more nimble, low-cost, digital-only entrants that are increasingly grabbing market share. The cost of losing these digital natives can be high.

In fact, in a survey of 77,000 banking consumers, Bain found that consumers who conduct the most digital transactions also have the greatest satisfaction with their banks (as measured by Net Promoter Score) and do more business with them as well. As shown below, customer loyalty scores were nearly three times higher for digitally-active customers than for less digital counterparts. There was also a correlation between digital channel use and affluence.

The Bretton Woods agreement – which is 70 years old this month – established three institutions to promote law and order in international economic relations:

• The IMF, to promote macroeconomic stability
• The GATT (and its successor, the WTO), to ensure an open trading environment
• The World Bank, to provide development finance for poverty reduction

The smooth operation of this rules-based, US-led global economic architecture contributed to the unprecedented economic growth and worldwide prosperity of the post-WWII period.

In more recent times, however, this architecture has lost much of its legitimacy because the world trade and GDP shares of emerging markets – especially those in Asia – have risen more rapidly than their shares in IMF quotas. For example, China accounts for 13.6% of the global economy (in terms of purchasing power parity), but its voting power is 3.8% less than that of the Benelux countries.

It is not that the IMF and the White House have not made the effort. In November 2010, the IMF management proposed what it labelled as the “most fundamental governance overhaul in the Fund’s 65-year history” (IMF 2010). If approved, the proposal would have reduced some of the quota misalignment at the IMF, fulfilled the G20 pledge to transfer 6% of the quota to dynamic emerging markets, and given China the third-largest voice in the IMF (Virmani and Patra 2011, Virmani 2012). The target was to make the reform effective in 2011, but – despite the strong support of Barack Obama – the proposal is still stuck in the US Congress. The cost of this delay is rising.

An important consequence of the slow progress in reforming the governance of the IMF has been the move from a centralized to a decentralized global economic architecture, in which regional institutions are being established to deliver international public goods in parallel with senior global institutions.

Other factors accounting for the decentralization are the need for a multi-pronged approach to manage financial globalization and the evolution of a multi-polar world (Rana 2013). For example, in the area of macroeconomic stability – where the IMF is regarded as the global financial safety net – we have the European Stability Mechanism, the Arab Monetary Fund, and the Chiang Mai Initiative Multilateralization as the regional safety nets.

Similar developments can also be witnessed in the international trade, financial and development architectures (Henning 2011). These trends complicate the governance of the global economy, and lead to duplication of efforts and wastage of scarce resources.

The situation has been aggravated further by the evolution of the China-led architecture in Asia. The recent establishment of the New Development Bank by the BRICS (Brazil, Russia, India, China, and South Africa) (BRICS 2014) and the soon-to-be-established Asian Infrastructure Investment Fund – both financed mainly by China – are signs that the country wishes to play a greater role in the global economic arena befitting its position as the number two – and the soon to be number one – economy in the world.

Establishing institutions dedicated wholly to providing infrastructure loans and guarantees is innovative, as they were lacking in the global architecture. But China’s recent moves also reflect its frustration at being unable to obtain a greater voice at the IMF and the World Bank.

Other components of the emerging China-led regional architecture are the recently-established $100 billion Credit Reserve Arrangement or the mini IMF among the BRICS (BRICS 2014) to tide over members in financial difficulties, and the Chinese desire to steer infrastructure development in Asia (both maritime and land-based) through its New Silk Roads policies without Western influence (Rana 2014). Through the latter initiative, China is exporting a central feature of its development model to the rest of Asia and the world. China spent 8.5% of its GDP on infrastructure development during the period 1992–2011, with the developing country norm being just 2-4% of GDP (The Economist 2014). The Regional Comprehensive Economic Partnership in Asia locks out the US, while the US-led Trans-Pacific Partnership locks out China. Going forward, we can expect more such initiatives from China.

While the China-led regional architecture in Asia does not pose a real threat to the IMF, World Bank and Asian Development Bank, it locks out Western countries – just as Western countries have locked out China – and further complicates the governance of the global architecture.

The Asian Development Bank has projected that Asia requires $800 billion till 2020 for developing infrastructure, compared to the total lending by the Asian Development Bank of $15 billion a year – roughly half of which goes to infrastructure finance (Asian Development Bank 2014). With an authorised capital of $100 billion, when expanded from the present $50 billion, the New Development Bank could lend about $15 billion a year. There is, therefore, ample room for everyone. Also, the Credit Reserve Arrangement is not a fund that can be used to stem an impending financial crisis, but a network of bilateral swaps with an absence of clearly specified rules on when they could be triggered and utilised.

What should be done? The issue could be resolved if the IMF and World Bank could work together with China-led regional institutions in a complementary and seamless manner. The ‘troika’ model (IMF 2013) – in which bailout packages are designed, financed, and monitored jointly by the ECB, the European Commission, and the IMF – is a good example. But it is unlikely that such an approach will be possible in Asia, as it would require the IMF to work jointly with the Chiang Mai Initiative Multilateralization and the ASEAN+3 Research Office.

This is because Europe is special to the IMF and Asia is not. Europe, which occupies 10 out of the 24 chairs at the IMF Board, has the second-largest voice in the IMF. If so, 70 years on, we need a New Bretton Woods, led by a select group from the truly systemically important countries of the world.

Why not also a Development Bank which can bring new resources and track those already allocated to regional and international Banks and Funds, and provide professional support to all subjects involved in cooperation within the field of new opportunities offered by development finance?

This was the missing piece, and it is not a minor thing. Within the next few months the Italian Parliament will approve a new law on cooperation, marking the end of Law 49 adopted 27 years ago. On many previous occasions, parliamentarians, parties and ministers have unsuccessfully tried to adapt this law to the radical and evident changes brought by the mere passing of time.

Everything changes in 30 years, look at us: our body, our families, the cities we live in, the way we work. In the same way, the world around us has changed dimension, orientation and speed. The geography of rich and poor countries has mutated, a new global dialogue has emerged concerning the next development targets (a long way from the hunger strikes against world hunger in the 1980s). This will define a universal language for 2015: common objectives, instruments, responsibilities assigned to everyone and to each under the aegis of the United Nations and the international community.

It will certainly be a major challenge: defeat world poverty in 15 years – hitting the economic, social and environmental causes of underdevelopment and ensuring the universality of such objectives in the framework of good governance and respect of human rights. This will put those who subscribe to these challenges at risk of failure, of discrepancy between rhetoric and reality.

Thus we have the objective, the final goal. What about the instruments?

The OECD DAC and the EU have highlighted the continuous growth in public support for development despite the economic crisis. Yet they have also reaffirmed that public support, even if everyone was to reach the historical milestone of 0.7% of GDP, would not be sufficient to meet the objectives of such an ambitious agenda. Responding to emergencies, helping developing countries, promoting development amongst those emerging, helping many to bridge their internal inequalities and making these efforts sustainable requires an active involvement of all actors.

It is therefore not by chance – and even less an “ideological” step back – that institutions not only work with civil society and NGOs, but are also increasingly co-involved with the private sector.  In a framework of shared principles, the private sector can bring real and fresh resources, promote innovation and contribute to the inclusive development of emerging countries.

This is not merely about highlighting isolated cases of “enlightened business”, but about changing the perception of development and its relations.

In this new law, under discussion by the Italian Parliament, the government intends to complete the structure of “cooperation 2.0”, granting it with what Emilio Ciarlo defined a “Development Bank” (in a debate promoted by Pistelli’s political advisor on vita.it, Afronline’s publisher). As happens with KfW in Germany and AFD in France, this would involve creating an ad hoc department within a public group such as ‘Cassa Depositi e Prestiti’  (the Italian Deposits and Loans Fund) that could be then accredited as an International Financial Institution (IFI) to the European Commission.

Following a subsequent agreement with the Italian Foreign Affairs Ministry and the Agency, the “Development Bank” would manage existing financial instruments efficiently. In particular, it should also guide Italian actors through the great deal of opportunities offered by IFIs and ultimately bring its own funds to Italian cooperation.

The so-called “matching” between public and private resources, the “blending” of grants and loans or between different funds are practices already consolidated by partner countries and call on Italy to catch up. These countries, which we usually consider reference points, not only dedicate more resources towards development assistance and trace their contributions down to banks and international funds, but also multiply these resources through efficient cooperation with the private sector. This is where we intend to elevate our system.

If the Italian Parliament examines the law this summer, the government will then take six months to establish the Agency, its Statute and the convention that will regulate its relations with the Ministry of Foreign Affairs. A similar period could be needed to create a development bank.

Therefore, we are working to make 2015 not only the year of Expo (the Universal Exposition taking place in Milan) and a new Development Agenda but also the birth of the new Italian Cooperation.

What happens when almost 50 African heads-of-state, many of their ministers, hundreds of U.S. and African business leaders, donor officials, development professionals, civil society activists, artists, and entrepreneurs all gather together in one place to discuss the future of U.S.-African relations?

The short answer: we don’t really know yet.

As promised, the U.S.-Africa Leaders Summit in Washington, D.C. played host to plenty of big announcements. Among them: $1 billion from the Swedish government as it joins U.S. President Obama’s signature Power Africa initiative; an additional $7 billion from the New Alliance for Food Security and Nutrition’s private sector partners; a new $100 million “global resilience partnership” between the U.S. Agency for International Development and the Rockefeller Foundation; and $38 million from USAID and others to open leadership centers for young Africans.

If nothing else, Obama succeeded in placing the word “billion” next to the word “Africa” in the U.S. media as never before. That is no small feat since, as he pointed out in his remarks at the U.S.-Africa Business Forum, “Our entire trade with all of Africa is still only about equal to our trade with Brazil — one country.”

Indeed, when it comes to investing in Africa’s future, the U.S. has significant ground yet to gain on China. And for those who view strong economic ties as the cornerstone of development cooperation, this week’s summit was long overdue.

Changing the narrative or redirecting attention?

But headline-grabbing investment announcements, while useful in transforming the African narrative from “aid to trade,” also risk redirecting attention from some of the extremely troubled conditions under which those investments are poised to take place.

For example, the six countries where Obama’s Power Africa initiative operates rank only as high as 63rd and as low as 144th out of 177 countries on Transparency International’s global corruption index. Only one of the six — Ghana — ranks in the top half worldwide in its corruption control efforts. While energy sector reform is part of the Power Africa package, so far reform efforts seem to have stressed standardizing documents and economic liberalization to facilitate international investment over difficult commitments to combat corruption.

The U.S. government development agency leaders who have been tasked with helping break down the barriers to U.S. private investment in Africa — using tools such as credit guarantees, public-private partnerships and insurance schemes — will have to be careful that the risks they are mitigating include those of corruption, exploitation, and conflict, not just of poor profits and bad deals.

American companies are bound by the U.S. Foreign Corrupt Practices Act, which compels their investments to meet transparent accounting criteria and forbids bribery of foreign officials. But will U.S. investments go beyond a “do no harm” approach on hard-fought issues such as governance, corruption, and social inclusion? Do they need to?.

What is the American alternative, exactly?

Closer economic ties and investments in infrastructure, power, agribusiness, and transport can help lift people out of poverty and create incentives for leaders to prioritize the strength of public institutions over personal gain. But unless they are conditioned on measurable improvements to development and governance challenges, those investments can also legitimize irresponsible, unaccountable leadership.

The chief criticisms of this week’s summit were its lack of attention to good governance, Obama’s invitation to Washington of notorious human rights abusers, and the perception of a marginalized role for civil society in proceedings. There is an argument to be made that investment, trade and growth are the tip of the spear of progress across development challenges. At the same time, China’s approach to investment on the African continent has been widely derided as being unconcerned with concepts such as inclusive growth and undeterred by social and environmental risks.

So what exactly is the U.S. alternative we heard articulated in Washington this week, and who are the actors at its leading edge?

Obama’s strategic shift from African aid to African trade has somewhat altered the role of U.S. development agencies, who now convene mutual interests and facilitate commercial ties. What remains to be seen, however, is what role development professionals will play as those investments they have helped facilitate begin to mature over time.

How closely will USAID monitor Coca-Cola’s newly-announced $5 billion investment within the framework of the New Alliance for Food Security and Nutrition, for example? Is that investment subject to anywhere near the same degree of transparent and independent evaluation as publicly-funded agricultural development programs aspire to be?

And as U.S. development agencies increasingly play a “convening role” in bridging public and private aims and leveraging commercial resources — now increasingly in Africa — will they remain as committed to the monitoring and oversight role that pins those resources against indicators other than profit and production?

What comes next?

These are all questions that require considerable attention and scrutiny in the coming months, but aside from a few traffic closures, the occasional protest, and the constant wail of motorcade sirens, the first-ever U.S.-Africa Leaders Summit produced a generally favorable response. That may be, in part, because attendance at a summit in Washington, D.C. is generally limited to those who can afford the trip.

At Devex we seized the opportunity to hear from health ministers about innovation and solar energy entrepreneurs about Power Africa’s progress, to explore the link between regional African trade and human rights enforcement, to hear what young African leaders want from President Obama, and to learn about university partnerships for science and technology.

The Obama administration’s summit organizers described the gathering as a “starting point” in a new kind of relationship and we will continue to track progress along the way. This includes following U.S. legislative efforts to embed Africa programs in law through the African Growth and Opportunity Act reauthorization, as well as bills to codify Power Africa. And we will monitor how discussions among civil society activists and business leaders at this summit might feed into September’s U.N. General Assembly and the special discussions around finalizing the post-2015 sustainable development goals.

Stay tuned.