Wednesday, August 21, 2013

Mortgage insurance: market structure, underwriting cycle and policy implications

Mortgage insurance: market structure, underwriting cycle and policy implications
Joint Forum, Aug 20, 2013
http://www.bis.org/press/p130820.htm

The Joint Forum released today its final report on Mortgage insurance: market structure, underwriting cycle and policy implications.   

The events of the last few years, particularly those in the global financial crisis that began in 2007, demonstrate that mortgage insurance is subject to significant stress in the worst tail events. This report examines the interaction of mortgage insurers with mortgage originators and underwriters. It makes the following set of recommendations directed at policymakers and supervisors which aim at reducing the likelihood of mortgage insurance stress and failure in such tail events:
  1. Policymakers should consider requiring that mortgage originators and mortgage insurers align their interests;
  2. Supervisors should ensure that mortgage insurers and mortgage originators maintain strong underwriting standards;
  3. Supervisors should be alert to - and correct for - deterioration in underwriting standards stemming from behavioural incentives influencing mortgage originators and mortgage insurers;
  4. Supervisors should require mortgage insurers to build long-term capital buffers and reserves during the troughs of the underwriting cycle to cover claims during its peaks;
  5. Supervisors should be aware of and take action to prevent cross-sectoral arbitrage which could arise from differences in the accounting between insurers' technical reserves and banks' loan loss provisions, and from differences in the capital requirements for credit risk between banks and insurers;
  6. Supervisors should be alert to potential cross-sectoral arbitrage resulting from the use of alternatives to traditional mortgage insurance; and
  7. Supervisors should apply the FSB Principles for Sound Residential Mortgage Underwriting Practices to mortgage insurers noting that proper supervisory implementation necessitates both insurance and banking expertise.
The Joint Forum based its recommendations on an analysis of existing mortgage underwriting standards and the underwriting cycle.

Thomas Schmitz-Lippert, Chairman of the Joint Forum and Executive Director International Policy at the German Federal Financial Supervisory Authority, BaFin, said: "Mortgage origination and mortgage insurance were at the very core of the financial crisis. The Joint Forum Recommendations on Mortgage Insurance provide guidance to national policymakers and supervisors in order to avoid mistakes of the past and strengthen resilience in the future."

An earlier version of this report was issued for consultation in February 2013.

Saturday, August 17, 2013

Do Relationships Matter? Evidence from Loan Officer Turnover

Do Relationships Matter? Evidence from Loan Officer Turnover. By Alejandro, Drexler, and Antoinette Schoar
World Bank Blogs, Mon Aug 12, 2013
http://blogs.worldbank.org/allaboutfinance/do-relationships-matter-evidence-loan-officer-turnover

One of the most frequent causes of credit constraints is the presence of asymmetric information between businesses and investors. Asymmetric information is particularly problematic for micro-entrepreneurs where the information about cash flows and investment decisions is not formally recorded. Furthermore, micro-entrepreneurs many times have few assets to pledge as collateral and do not have a guarantor with a solid financial condition, making it even more difficult for them to access the credit market.

Microfinance institutions specialize in lending to these types of borrowers and have lending technologies that do not rely on formal records. Instead, revenues and expenses are estimated based on non-verifiable information collected by loan officers during field visits to the borrowers’ houses and businesses.

During these field visits, loan officers observe the premises of the business, the inventory, and other relevant information the borrowers can demonstrate. They also discuss business matters with the entrepreneurs as well as personal matters that might affect their repayment capacity.

Loan officers’ expertise is crucial to estimate the financial health of a business during these short visits. For example, experienced loan officers are able to estimate businesses’ inventories and revenues by observing key variables, including the products on the shelves or the number of clients that show up at the business during the visit. Although these observations cannot be verified and are considered soft information, the types of skills that lead to such information can be acquired through training, are not loan officer-client specific, and can be applied even if the loan officer is not acquainted with the entrepreneur.

However, an important fraction of the information required to make a microfinance lending decision is private and is collected during the social interactions between the loan officers and the entrepreneurs. The flow of this type of information strongly depends on the interpersonal ties between the borrowers and the loan officers (Uzzi, 1996). For example,it is unlikely that borrowers would disclose their health expenses, alimony expenses, or other expenses they incur to support family members in need to a stranger. Therefore, this type of information is lost when a loan officer leaves the bank, unless the private information can be credibly transferred to a new loan officer, and/or if the departing loan officer can convince borrowers to share “personal information” with the new loan officer.

The social relationship between the loan officers and the borrowers not only helps the bank to make better lending decisions, but also might increase the willingness of the borrowers to get debt. This is particularly important for borrowers that associate a negative connotation with debt, are unfamiliar with financial services, or mistrust financial institutions. On the downside, making lending decisions based on these social interactions makes banks dependent on loan officers and subject to their misinterpretation or misreporting of information.

While it is recognized that the social relationship between the loan officers and the entrepreneurs can have important implications for the lenders and the borrowers, little is known about the costs associated with disruptions to these relationships.

In a recent study, we test the importance of interpersonal relationships in the lending process. In particular, we study whether the banks’ lending decision and the borrowers’ repayment rate, willingness to get debt at the bank, and willingness to get debt at other banks are affected when a loan officer is absent for long periods of time.

We find that the relationship between loan officers and borrowers has first-order implications on entrepreneurs’ credit availability, repayment behavior, and borrowing decisions. When loan officers are absent, we observe a 20% decrease in the probability that clients get a new loan. This reduction is the consequence of both a 5% decrease in the bank’s loan approval rate and a 15% reduction in the number of applications. We do not observe a change in credit terms such as interest rates or maturity; this indicates that the bank adjusts the risk by cutting credit and not by adjusting the price of the loans. We also observe a 22% increase in the probability of missing a payment and an 18% increase in the probability of default for the borrower.

To understand the conditions in which this information can be transferred or generated by the new loan officer, we look at variations in: (1) how well the absence of loan officers can be planned in advance, since it is more difficult to transfer soft information in the case of completely unplanned leaves, and (2) whether the departing loan officers have any incentives to collaborate in conveying information to replacement loan officers. We observe four different types of absences due to sickness, resignation, pregnancy, and dismissal. We use sickness leaves as a baseline, because they are both unexpected and exogenous.

During sickness leaves, we still observe a decrease in lending and an increase in delinquency, but we do not see an increase in outright default. This finding indicates that most payment delays are caused by reduced monitoring and not caused by financial distress. We also observe a decrease in the probability of applying for a new loan at the bank, but an increase in the probability of applying for credit at other banks, suggesting a reduction in the loyalty of clients toward the bank.

We observe similar results during maternity leaves, but we do not observe an increase in the probability of approaching other banks. This is natural since maternity leaves are exogenous but anticipated, and the loan officers can set up their clients with new loans before they leave.

The strongest reduction in credit and the strongest increase in default are observed after loan officers are dismissed. We believe this is the result of poor past performance of the dismissed loan officers as well as a lack of incentive to transfer any soft information.

However, clients of resigning loan officers are less affected by the leave; application probability does not present a significant decrease and the default rate does not increase. This might indicate that when given enough time, loan officers can brief the replacing loan officers about the soft information of the clients. It also suggests that when having the right incentives, the departing loan officers can familiarize the new loan officers with the clients and gain their confidence.

We also study whether the importance of social relationships depends on borrowers’ characteristics. As expected, the probability of the bank approving a loan to firms with larger and better credit risks less affected by loan officer leaves, probably because hard information about the clients is more readily available. However, we also observe that the probability of applying for a new loan at the bank and the probability of applying for a new loan at other banks do not change after the leave. This finding can indicate that the relationship between clients with large and good credit scores and the bank is less dependent on loyalty.

We also find that female clients are more affected by loan officers’ absences, which is probably because female clients have fewer assets and many times operate informal businesses from home. Therefore, cash flows are particularly difficult to verify and personal information is particularly relevant. This finding highlights the importance of micro-credit lending on promoting women’s financial inclusion.

Overall the results in the study support the view that personal relationships are crucial to reduce credit constraints and improve entrepreneurs’ incentives to repay. The results suggest that close social ties between the loan officers and the borrowers can increase the offer of credit to micro entrepreneurs, but also indicate that the demand for credit can depend on social ties. In light of these results, the high turnover observed in the loan officers’ labor market can be very costly for banks and borrowers and can be one of the factors that impede many micro-businesses to grow beyond subsistence level.



References

Drexler, Alejandro, and Antoinette Schoar. 2012. Do Relationships Matter? Evidence from Loan Officer Turnover. Working Paper. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2144337

Uzzi, Brian. 1996. The Sources and Consequences of Embeddedness for the Economic Performance of Organizations: The Network Effect. American Sociological Review pp. 674–698.

Friday, August 16, 2013

Longevity risk transfer markets: market structure, growth drivers and impediments, and potential risks - consultative report

Longevity risk transfer markets: market structure, growth drivers and impediments, and potential risks - consultative report
The Joint Forum
August 2013
http://www.bis.org/publ/joint31.htm

The ageing population phenomenon being observed in many countries poses serious social policy challenges. Longevity risk - the risk of paying out on pensions and annuities longer than anticipated - is significant when measured from a financial perspective. Longevity risk transfer markets: market structure, growth drivers and impediments, and potential risks (PDF) is a forward-looking report released by the Joint Forum on longevity risk transfer (LRT) markets.


Recommendations:

Whether or not policymakers should play a more active role in encouraging longevity risk transfer from private pension plans to (re)insurers and ultimately to broader capital markets depends on considerations regarding where this risk is best held. Answering this question is beyond the scope of this preliminary analysis, but some relevant factors are worth mentioning.

Advocates of more LRT (see, e.g., Towers Watson, 2011, and Swiss Re, 2012) point to already visible and unwieldy corporate pension benefit obligations and to the heavy underfunding of DB pension funds.31 In this context, they recognise that not only are pension obligations a sizeable distraction to corporate core business lines, but a significant longevity shock could undermine the firm’s own existence. In addition, they point out that some LRT instruments (namely buy-outs) may provide pensioners with a more stringently regulated (re)insurer counterparty.

In addition, policymakers may want to encourage (re)insurers to use LRT markets to free up capital in order to give (re)insurers (or any other entities allowed to provide annuity products) the possibility of writing more of these annuities, which are useful and unique retirement products. On the other hand, the transfer of risk from a mature sector with significant capital requirements to an LRT market that may not have these safeguards may not be in the employees’ best interests, and may even create new systemic risks.

At the same time, when longevity risk is shifted from the corporate sector to a limited number of (re)insurers, with global interconnections, there may be systemic consequences in the case of a failure of a key player (as was the case in the CRT market). Most countries in which this view is shared incentivise the private sector to provide adequate retirement benefits to employees, sometimes providing explicit protection to corporate pension funds with government-supported guarantee schemes. In other countries, this view is expressed implicitly by allowing pension funds to value their liabilities with a discount rate that is higher than the one used for (re)insurers’ reserves.

Motivated by the aforementioned preliminary findings, the Joint Forum proposes the following recommendations to supervisors and policymakers:
  1. Supervisors should communicate and cooperate on LRT internationally and cross-sectorally in order to reduce the potential for regulatory arbitrage.
  2. Supervisors should seek to ensure that holders of longevity risk under their supervision have the appropriate knowledge, skills, expertise and information to manage it.
  3. Policymakers should review their explicit and implicit policies with regards to where longevity risk should reside to inform their policy towards LRT markets. They should also be aware that social policies may have consequences on both longevity risk management practices and the functioning of LRT markets.
  4. Policymakers should review rules and regulations pertaining to the measurement, management and disclosure of longevity risk with the objective of establishing or maintaining appropriately high qualitative and quantitative standards, including provisions and capital requirements for expected and unexpected increases in life expectancy.
  5. Policymakers should consider ensuring that institutions taking on longevity risk, including pension fund sponsors, are able to withstand unexpected, as well as expected, increases in life expectancy.
  6. Policymakers should closely monitor the LRT taking place between corporates, banks, (re)insurers and the financial markets, including the amount and nature of the longevity risk transferred, and the interconnectedness this gives rise to.
  7. Supervisors should take into account that longevity swaps may expose the banking sector to longevity tail risk, possibly leading to risk transfer chain breakdowns.
  8. Policymakers should support and foster the compilation and dissemination of more granular and up-to-date longevity and mortality data that are relevant for the valuations of pension and life insurance liabilities.

References
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  • An, Heng, Zhaodan Huang, and Ting Zhang, 2013, "What Determines Corporate Pension Fund Risk-Taking Strategy?" Journal of Banking & Finance, Vol. 37, No. 2, pp. 597–613.
  • Aon Hewitt, 2011, Global Pension Risk Survey 2011. Available at www.aon.com/netherlands/persberichten/2011/Aon_Hewitt_GRS_EURO_2011.pdf)
  • Barrieu, Pauline, Harry Bensusan, Nicole El Karoui, Caroline Hillairet, Stephane Loisel, Claudia Ravanelli, Yahia Salhi, 2012, "Understanding, Modelling and Managing Longevity Risk: Key Issues and Main Challenges," Scandinavian Actuarial Journal, Volume 2012, Issue 3, pp. 203-231.
  • Biffis, Enrico and David Blake, 2009, “Mortality-Linked Securities and Derivatives,” October 7. Available at SSRN: http://ssrn.com/abstract=1340409
  • Biffis, Enrico and David Blake, 2012, “How to Start a Capital Market in Longevity Risk Transfers,” Unpublished manuscript, September.
  • Biffis, Enrico, David Blake, Lorenzo Pitotti, and Ariel Sun, 2011, “The Cost of Counterparty Risk and Collateralization in Longevity Swaps,” Cass Business School Pension Institute Working Paper (London: City University, April.
  • Black, Fischer, 1980. "The Tax Consequences of Long-Run Pension Policy," Financial Analysts Journal, Vol. 36, No. 4, pp. 21-28.
  • Blake, David, Tom Boardman, and Andrew Cairns, 2010, “Sharing Longevity Risk: Why Governments Should Issue Longevity Bonds,” Cass Business School Pension Institute Working Paper, (London: City University, March).
  • Bodie, Zvi, Jay O. Light, Randall Morck, and Robert A. Taggart Jr., 1987. "Funding and Asset Allocation in Corporate Pension Plans: An Empirical Investigation," In: Bodie, Zvi, John B. Shoven, and David A. Wise, (Eds.), Issues in Pension Economics, University of Chicago Press, Chicago, pp. 15-47.
  • Brown, Jeffrey R., Jeffrey R. Kling, Sendhil Mullainathan, and Marian V. Wrobel, 2008, “Why Don’t People Insure Late Life Consumption? A Framing Explanation of the Under-Annuitization Puzzle,” National Bureau of Economic Research Working Paper No. 13748, January.
  • Cairns, Andrew J.G., 2013, "Modelling and Management of Longevity Risk," Unpublished Working Paper, March.
  • Cardinale, Mirko, 2007. "Corporate Pension Funding and Credit Spreads," Financial Analysts Journal, Vol. 63, No. 5, pp. 82-101.
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  • Coughlan, Marwa Khalaf-Allah, Yijing Ye, Sumit Kumar, Andrew J.G. Cairns, David Blake, and Kevin Dowd, 2011, “Longevity Hedging 101: A Framework for Longevity Basis Risk Analysis and Hedge Effectiveness,” North American Actuarial Journal, Vol. 15, No. 2, pp. 150–76.
  • Cox, Samuel H. and Yijia Lin, 2007, “Natural Hedging of Life and Annuity Mortality Risks,” North American Actuarial Journal, Vol. 11, No. No. 3, pp. 1–15.
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  • Dowd, Kevin, David Blake, Andrew J.G. Cairns, and Paul Dawson, 2006, “Survivor Swaps,” Journal of Risk and Insurance, Vol. 73, No. 1, pp. 1–17.
  • Financial Stability Report (FSB), 2013, “OTC Derivatives Market Reforms: Fifth Progress Report on Implementation,” April 15.
  • Fitch Ratings, 2012, “Pension Plan Changes Incrementally Positive to GM's Credit Profile,” Fitch Ratings Endorsement Policy, June 1.
  • Fong, Joelle H. Y., Olivia S. Mitchell, and Benedict S.K. Koh, 2011, “Longevity Risk Management in Singapore’s National Pension System,” Journal of Risk and Insurance, Vol. 78, No. 4, pp. 961-981.
  • Francis, Jere R., and Sara Ann Reiter, 1987, "Determinants of Corporate Pension Funding Strategy," Journal of Accounting and Economics, Vol. 9, pp. 35-59.
  • Gallagher, Ronan C., and Donal G. McKillop, 2010, "Unfunded Pension Liabilities and the Corporate CDS Market," Journal of Fixed Income, Winter, pp. 30-46.
  • Groome, Todd, John Kiff, and Paul Mills, 2011, “Influencing Financial Innovation: The Management of Systemic Risks and the Role of the Public Sector,” in Beder, Tanya, and Cara M. Marshall, 2011, Financial Engineering: The Evolution of a Profession, John Wiley & Sons Inc.
  • International Monetary Fund (IMF), 2012, Global Financial Stability Report, World Economic and Financial Surveys (Washington, April).
  • Joint Forum, 2008, Credit Risk Transfer - Developments from 2005 to 2007, July.
  • Joint Forum, 2010, Review of the Differentiated Nature and Scope of Financial Regulation, January.
  • Lee, Yung-Tsung, Chou-Wen Wang, Hong-Chih Huang, 2012, "On the valuation of reverse mortgages with regular tenure payments," Insurance: Mathematics and Economics, Vol. 51, pp. 430–441.
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  • Sagoo, Pretty, and Roger Douglas, 2012, “Recent Innovations in Longevity Risk Management; A New Generation of Tools Emerges,” Eighth International Longevity Risk and Capital Markets Solutions Conference, September 8. Available at www.cass.city.ac.uk/__data/assets/pdf_file/0008/141587/Sagoo_Douglas_presentation.pdf
  • Sharpe, William, F., 1976. "Corporate Pension Funding Policy," Journal of Financial Economics, Vol. 3, No. 3, pp. 183-193.
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  • Standard & Poor’s (S&P), 2012, “General Motors Co.'s Proposed Actions On U.S. Salaried Pension Plans Do Not Affect Ratings,” Standard & Poor’s Bulletin, June 1.
  • Stone, Charles and Anne Zissu, 2006, "Securitization of Senior Life Settlements: Managing Extension Risk." Journal of Derivatives, Spring.
  • Swiss Re, 2010, A Short Guide to Longer Lives: Longevity Funding Issues and Potential Solutions. Available at http://media.swissre.com/documents/Longer_lives.pdf
  • Swiss Re, 2012, A Mature Market: Building a Capital Market for Longevity Risk. Available at http://media.swissre.com/documents/Mature_Market_EN.pdf
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Thursday, August 15, 2013

Evaluating early warning indicators of banking crises: Satisfying policy requirements

Evaluating early warning indicators of banking crises: Satisfying policy requirements
By Mathias Drehmann and Mikael Juselius
BIS Working Papers No 421
Aug 2013
Early warning indicators (EWIs) of banking crises should ideally be evaluated on the basis of their performance relative to the macroprudential policy maker's decision problem. We translate several practical aspects of this problem - such as difficulties in assessing the costs and benefits of various policy measures as well as requirements for the timing and stability of EWIs - into statistical evaluation criteria. Applying the criteria to a set of potential EWIs, we find that the credit-to-GDP gap and a new indicator, the debt service ratio (DSR), consistently outperform other measures. The credit-to-GDP gap is the best indicator at longer horizons, whereas the DSR dominates at shorter horizons.

JEL classification: C40, G01
Keywords: EWIs, ROC, area under the curve, macroprudential policy


Excerpts:

In the empirical part of the paper, we apply our approach to assess the performance of 10 different EWIs. We mainly look at the EWIs individually, but at the end of the paper we also consider how to combine them. Our sample consists of 26 economies, covering quarterly time series starting in 1980. The set of potential EWIs includes more established indicators such as real credit growth, the credit-to- GDP gap, growth rates and gaps of property prices and equity prices (eg Drehmann et al (2011)) as well as the non-core liability ratio proposed by Hahm et al (2012).  We also test two new measures: a country’s history of financial crises and the debt service ratio (DSR). The DSR was first suggested in this context by Drehmann and Juselius (2012) and is defined as the proportion of interest payments and mandatory repayments of principal to income. An important data-related innovation of our analysis is that we use total credit to the private non-financial sector obtained from a new BIS database (Dembiermont et al (2013)).

We find that the credit-to-GDP gap and the DSR are the best performing EWIs in terms of our evaluation criteria. Their forecasting abilities dominate those of the other EWIs at all policy-relevant horizons. In addition, these two variables satisfy our criteria pertaining to the stability and interpretability of the signals. As the credit-to- GDP gap reflects the build-up of leverage of private sector borrowers and the DSR captures incipient liquidity constraints, their timing is somewhat different. While the credit-to-GDP gap performs consistently well, even over horizons of up to five years ahead of crises, the DSR becomes very precise two years ahead of crises. Using and combining the information of both indicators is therefore ideal from a policy perspective. Of the remaining indicators, only the non-core liability ratio fulfils our statistical criteria. But its AUC is always statistically smaller than the AUC of either the credit-to-GDP gap or the DSR. These results are robust with respect to different aspects of the estimation, such as the particular sample or the specific crisis classification used.

Wednesday, August 14, 2013

Recovery of financial market infrastructures - consultative report

Recovery of financial market infrastructures - consultative report
BIS, Aug 2013
www.bis.org/publ/cpss109.htm

The Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) have published for public comment a consultative report on the Recovery of financial market infrastructures.

The report provides guidance to financial market infrastructures such as CCPs on how to develop plans to enable them to recover from threats to their viability and financial strength that might prevent them from continuing to provide critical services to their participants and the markets they serve. It also provides guidance to relevant authorities in carrying out their responsibilities associated with the development and implementation of recovery plans and tools.

The report has been produced in response to comments received on the July 2012 CPSS-IOSCO report on Recovery and resolution of financial market infrastructures that requested more guidance on what recovery tools would be appropriate for FMIs.

The report supplements the CPSS-IOSCO Principles for financial market infrastructures (PFMI) , the international standards for financial market infrastructures (FMIs) published in April 2012. It provides guidance on how FMIs can observe the requirements in the PFMI that they have effective recovery plans. It does not itself create additional standards for FMIs. The report is also consistent with the Financial Stability Board's Key attributes of effective resolution regimes for financial institutions, published in October 2011 and which also covers the importance of recovery planning. Aspects of the consultation report concerning FMI resolution have been included in a new draft annex to the FSB Key attributes and will be included in a forthcoming assessment methodology for the Key attributes.

Financial market infrastructures (FMIs), which include payments systems, securities settlement systems, central securities depositories, central counterparties and trade repositories, play an essential role in the global financial system. The disorderly failure of an FMI could lead to severe systemic disruption if it caused markets to cease to operate effectively.

 Published with the report is a cover note that lists specific issues on which the committees seek comments during the public consultation period. Comments on the report are invited from all interested parties and should be sent by 11 October 2013 to both the CPSS secretariat (cpss@bis.org) and the IOSCO secretariat (fmirecovery@iosco.org). The comments will be published on the websites of the BIS and IOSCO unless commentators have requested otherwise.

Tuesday, August 13, 2013

Views from Japan: Nuclear Weapons

Views from Japan: Nuclear Weapons

Questions sent to a Japanese citizen:

konnichiwa, dear [xxx]-san

I was reading the book "Strategy in the Second Nuclear Age: Power, Ambition, and the Ultimate Weapon" by Toshi Yoshihara and James R. Holmes (Editors), and there is a chapter on Thinking About the Unthinkable - Tokyo's Nuclear Option

We'd like to publish a post and would like:

1  to have arguments in favor and against (specially in favor, since we never see them published) such nuclear option, made by Japanese politicians;
2  to have your opinion on this.

[...]

Thank you very much, sir.

[signature removed]


---
Answer (edited):
konnichiwa,

how are you going? it's been incredibly hot these days... I almost start melting.

sorry, I haven't read the book. so i'm not very sure my opinions match to your point. anyway, I give you what I see and think. is it about nuclear weapons? (or total nuclear power?) i refer nuke weapons for this moment. please let me know if you need more about nuclear in japan.

1.it seems 3 big opinions among politicians (and citizens too) :

#1. it's better to have nu-bombs. because we are facing dangers of Chinese and North Korean nukes. it's the only way to be against nukes.

#2. let's talk and think about nuclear weapons to possess seriously now. it's actually been the biggest taboo in japan even only to talk about the option because of our experiences of Hiroshima, Nagasaki and recently Fukushima which are big trauma for us. I can call it "nuclear allergy". but we are indeed surrounded and threatened by nu-weapons of China and Korea now. it's the time to think about it... and even just the debates will be able to restrain China and Korea (they know our technology is good enough to make nu-weapons immediately if we try).

#3. nobody should even talk or think about it. all nuclear in the world just should be thrown away and banned. because we've learnt from the past



#2 seems the most major opinion, #1 is a sort of extreme... #3 is mainly supported by liberal people. extreme on the other side.


2. my opinion: I used to think like #3, but slightly have changed to #2. I'm sure #3 is right, but too much ideal. no matter how japan says this to the world, no countries will abandon them (at least near future).

japanese people's been used to live in peace by American forces, however people's started to realize no peace for free. i think we are on the way to "normal" country.

please don't understand me, I believe almost all of people don't want to have nu-weapons in real, people's just getting more serious to think about what our country is and what is the best for us.


I wish I got points you need. mail me if you have something not sure.

best regards(^_^)/

[signature removed]

Friday, August 9, 2013

HEAT! A Bank Health Assessment Tool. By Li L. Ong, Phakawa Jeasakul and Sarah Kwoh

HEAT! A Bank Health Assessment Tool. By Li L. Ong, Phakawa Jeasakul and Sarah Kwoh
IMF Working Paper No. 13/177
August 09, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40872.0

Summary: Developments during the global financial crisis have highlighted the importance of differentiating across financial systems and institutions. Assessments of financial stability have increasingly considered the characteristics of individual banks within a financial system, as well as those with significant international reach, to identify vulnerabilities and inform policy decisions. This paper proposes a simple measure of bank soundness, the Bank Health Index (BHI), to facilitate preliminary analyses of individual financial institutions relative to their peers. The evidence suggests that the BHI is useful for a first-pass identification of bank soundness conditions. Automated spreadsheet templates of the bank Health Assessment Tool (HEAT!) are provided for users with access to the BankScope, Bloomberg and/or SNL database(s).

Introduction

The impact of the global financial crisis on individual banking systems and banks has highlighted the importance of differentiating across countries and among financial institutions. Traditionally, macroprudential surveillance of the financial sector has complemented the microprudential oversight of individual financial institutions by supervisors (The World Bank/IMF, 2005). However, the growing systemic importance of these institutions, notably banks, and their potential impact on policy and the public purse have underscored the need to extend any macroprudential analysis to include individual systemic institutions as well.

The depth and protracted nature of the current crisis have revealed vast divergences in the resilience of individual banks. This is, in large part, attributable to banks’ business models and management quality, sometimes mitigated by the various pre-emptive or supportive policy actions taken by country authorities. In many cases, specific knowledge of characteristics underpinning individual banks’ financial health has been crucial for identifying vulnerabilities and informing policy decisions for crisis prevention or management purposes. Looking ahead, lessons learned from this crisis suggest that more granular, bank-specific analysis will become increasingly more important in that it could:

  • enable early identification of vulnerabilities in global systemically important banks (G-SIBs) and domestic systemically important banks (D-SIBs), which could help prevent widespread spillovers from any realization of tail risks if appropriate mitigation actions are put in place;
  • inform system-wide reform strategies by differentiating the core, healthy banks from the very weak ones that require significant restructuring or even resolution, so that the strong banks are not burdened with a “one size fits all” solution for an entire system; and 
  • inform restructuring decisions, such as mergers and acquisitions, recapitalization and/or liquidity support, by highlighting banks’ weaknesses or identifying the weak banks.

To this end, this paper proposes a simple, broadly-based measure of bank soundness that would allow preliminary, first-pass analysis of the health of individual financial institutions and, consequently, financial systems. We develop a Bank Health Index (BHI) and provide automated spreadsheet templates, the bank Health Assessment Tool (HEAT!), to facilitate the exercise. We show that the BHI, albeit simple, can be useful for initial identification of relative bank soundness and is also able to identify more specific areas of vulnerability.  However, we also note its limitations and acknowledge that such analyses would need to be complemented by more rigorous and robust quantitative (e.g., stress tests) and qualitative (e.g., supervisory and regulatory frameworks) assessments.


Concluding Remarks

The global financial crisis has underscored the importance of individual banks to the stability of their own or even the global financial system. Thus, analyses of the health of individual banks, especially the systemic ones, are becoming a matter of course for surveillance purposes and for crisis management decisions. We have developed the BHI to enable simple, preliminary analyses of individual banks in financial systems around the world and introduced an Excel-based spreadsheet tool (HEAT!) to facilitate its calculation and presentation. Our back-test, based on actual developments in the Spanish banking system, suggests that the BHI is able to accurately differentiate banks according to their financial soundness.

That said, there are strong caveats attached to the use of the BHI and its components. Any representation about the health of individual banks using this method should be made with care. Specifically, the Index is an aggregation of ratios, so the performance of the individual components should also be considered in any analysis. Moreover, the associated z-scores do not provide an absolute assessment of the health of banks, but rather, their relative health within a sample, which means that the selection of the sample itself matters. The differences in banks’ business models at any point in time and their changing nature over time, as well as the definitions used in calculating the constituent components of the BHI should also be taken into account when interpreting the results. Last but not least, it is also important for the user to be familiar with the peculiarities of any banking system being analyzed and to ensure that any assessment is supplemented with other quantitative and qualitative information.

Saturday, August 3, 2013

Nearly 450 Innovative Medicines in Development for Neurological Disorders

Neurological Disorders
innovation.org
July 30, 2013
www.innovation.org/index.cfm/FutureofInnovation/NewMedicinesinDevelopment/Neurological_Disorders


Nearly 450 Innovative Medicines in Development for Neurological Disorders

Neurological disorders—such as epilepsy, multiple sclerosis, Alzheimer’s disease, and Parkinson’s disease—inflict great pain and suffering on patients and their families, and every year cost the U.S. economy billions of dollars. However, a growing understanding of how neurological disorders work at a genetic and molecular level has spurred improvements in treatment for many of these diseases.

America’s biopharmaceutical research companies are developing 444 medicines to prevent and treat neurological disorders, according to a new report released by the Pharmaceutical Research and Manufacturers of America (PhRMA). 

The report demonstrates the wide range of medicines in development for the more than 600 neurological disorders that affect millions of Americans each year. These medicines are all currently in clinical trials or awaiting Food & Drug Administration (FDA) review. They include 82 for Alzheimer’s disease, 82 for pain, 62 for brain tumors, 38 for multiple sclerosis, 28 for epilepsy and seizures, 27 for Parkinson’s disease, and 25 for headache.

Many of the potential medicines use cutting-edge technologies and new scientific approaches. For example:

  • A medicine that prompts the immune system to protect neurons affected by amyotrophic lateral sclerosis (ALS), also known as Lou Gehrig's disease
  • A gene therapy for the treatment of Alzheimer’s disease
  • A gene therapy to reverse the effects of Parkinson’s disease
These new medicines promise to continue the already remarkable progress against neurological disorders and to raise the quality of life for patients suffering from these diseases and their families. Read more about selected medicines in development for neurological disorders.

Alzheimer's Disease

Every 68 seconds someone in America develops Alzheimer’s disease, according to the Alzheimer’s Association, and by 2050 it could be every 33 seconds, or nearly a million new cases per year. Disease-modifying treatments currently in development could delay the onset of the disease by five years, and result in 50 percent fewer patients by 2050.

There are also potential cost savings offered by innovative disease-modifying treatments. As the 6th leading cause of death in the United States and one of the most common neurological disorders, Alzheimer’s disease currently costs society approximately $203 billion. This number could increase to $1.2 trillion by 2050; however, delaying the onset of the disease by five years could reduce the cost of care of Alzheimer’s patients in 2050 by nearly $450 billion.

Additional Resources

Sunday, July 28, 2013

Comments on "Why does intelligence analysis sometimes fail?" (Science Daily)

Comments on "Why does intelligence analysis sometimes fail?" (Science Daily)

1  There are several things that are objectionable about this Science Daily piece [1] and other jobs...

First of all, the author seems not to have read the article in full. It says that Wirtz "focuses in particular on the contribution of the scholar Robert Jervis," as if this happened by no special reason.

Not so, Wirtz's article [2] is, as said in the acknowledgements, a contribution to a book [3] __in honor__ of R Jervis:
This article was previously published in a collection of essays in honor of Robert Jervis.

And second, it loads too much the conclusions. Science Daily's writer says that "The way to reduce failures Jervis believed [...] was to improve agents' analytical skills rather than endlessly reorganising the bureaucracy."

Wirt'z essay says that "Jervis focuses on analytic tradecraft, not bureaucratic reorganization, as the best way to improve intelligence. In that sense, he agrees with intelligence analysts, who often identify the quest for better tradecraft as the best guarantee against intelligence failure," which is a bit different of that statement by SD's writer. Maybe Jervis believed what SD published, but Wirtz goes not so far, he only says that Jervis focuses on analysis improvements.

To me, it is not in Wirt'z paper that Jervis is in some way against all reorganizations after intel failures or that he was skeptical of reorganization, generally speaking, as SD suggests with "rather than endlessly." Maybe both things, reorganization and analytic improvements, are needed in many occasions: First, make heads roll and dissolve some directorates or units after intel failures, and second, improve the craft.


2  Going now to Wirtz's job, maybe Jervis did focus "on analytic tradecraft, not bureaucratic reorganization, as the best way to improve intelligence" [2] because, one, he wasn't a manager and didn't have to focus in reorganizations, and was not contracted to give opinions of that field of reorganization, but in the one of analytic craft; and two, because he "is best known for his scholarship on international relations; especially the way human cognition shapes foreign and defence policies". [1] As Jervis said, as described in the presentation of his book, [4] "Give someone a hammer, everything is a nail."

This is applicable to Prof Jervis, isn't it? Like to everyone of us.


3  More generally, many scholars and professionals think like Prof Jervis: "In light of these critical intelligence failures, Jervis says, “We can do better.”" [4]

I doubt we can. And not only me. Jeffrey Cooper suggests, in a work he did for the CIA, [5] several, many ways to improve the analyst's job, but after those, he reminds us of Kahneman's suggestion of using methodologists in the teams to watch over the analysts' work, to prevent our falling in some trap of our sad, human nature, which is a way of saying there is no training or changes in our way of thinking/working that can compensate for our analytical pathologies:
Finally, the introduction of a "process watcher," as suggested by Kahneman, is intended to bring a clear and unbiased, outside expert’s eye to analytic teams. The process watcher function, unlike that of a Red Team, is intended to focus exclusively on identifying errors in the analytic process, not on alternative interpretations of the evidence or different logic chains.

Also, I infer from this recommendation that our bosses and organizations are also let's say less than capable of guaranteeing quality for the taxpayer's bucks.

Aside of the need of experts not in the contents, but in the methods, since we are not capable of working/reasoning/computing well [6 and references therein], can anyone compute the costs of adding to the intelligence units more personnel to improve the quality of our analysis?



References

[1]  Why does intelligence analysis sometimes fail?. ScienceDaily. Retrieved July 28, 2013, from http://www.sciencedaily.com­ /releases/2013/07/130723073955.htm?goback=%2Egde_2216219_member_260803925

[2]  James J. Wirtz. The Art of the Intelligence Autopsy. Intelligence and National Security, Mar 2013; DOI: 10.1080/02684527.2012.748371

[3]  James W. Davis (ed.), Psychology, Strategy and Conflict: Perceptions of Insecurity in International Relations (Oxford: Routledge 2012).

[4] Saltzman Lecture Report. Why Intelligence Fails: Lessons from the Iranian Revolution and the Iraq War New York, New York – March 9, 2010. Retrieved July 28, 2013, from http://www.siwps.com/events/professor-robert-jervis-why-intelligence-fails.attachment/jervis/Jervis%203-9-10.pdf

[5]  Jeffrey R Cooper: Curing Analytic Pathologies - Pathways to Improved Intelligence Analysis. Langley, VA: CIA, December 2005

[6]  Biased Policy Professionals. Sheheryar Banuri, Stefan Dercon, and Varun Gauri. World Bank Policy Research Working Paper 8113. https://www.bipartisanalliance.com/2017/08/biased-policy-professionals-world-bank.html

Saturday, July 20, 2013

Liquidity coverage ratio disclosure standards - consultative document

Liquidity coverage ratio disclosure standards - consultative document
BCBS, July 19, 2013
http://www.bis.org/publ/bcbs259.htm

The Basel Committee on Banking Supervision has today issued for consultation Liquidity coverage ratio disclosure standards.

Following the publication of the LCR standard in January 2013, the Basel Committee indicated its intention to develop associated disclosure standards. Public disclosure improves transparency, reduces uncertainty in the markets and strengthens market discipline. To promote the benefits of disclosure the Committee believes that it is important that banks adopt a common disclosure framework to help market participants consistently assess the liquidity risk position of banks. Moreover, to promote consistency and ease of use of disclosures related to the LCR, the Basel Committee has agreed that internationally-active banks across Basel member jurisdictions will be required to publish their LCR according to a common template.

In designing the disclosure standards for the LCR, the Basel Committee has balanced the benefits of promoting market discipline against the challenges associated with disclosure of liquidity positions under certain circumstances, including the potential for undesirable dynamics during periods of stress.

Friday, July 19, 2013

Bank Resolution Costs, Depositor Preference, and Asset Encumbrance

Bank Resolution Costs, Depositor Preference, and Asset Encumbrance. By Daniel C. Hardy
IMF Working Paper No. 13/172
July 18, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40799.0

Summary: Depositor preference and collateralization of borrowing may reduce the cost of settling the conflicts among creditors that arises in case of resolution or bankruptcy. This net benefit, which may be capitalized into the value of the bank rather than affect creditors’ expected returns, should result in lower overall funding costs and thus a lower probability of distress despite increasing encumbrance of the bank’s balance sheet. The benefit is maximized when resolution is initiated early enough for preferred depositors to remain fully protected.


Conclusions and next steps (edited)


Bank resolution, like bankruptcy and debt restructuring generally, inherently involves a great deal of negotiation and uncertainty; these are situations in which contracts are far from complete. Experience from many sectors, most notably the financial sector, suggest that the attendant conflicts among claimants can add substantially to costs and delays in resolution.

The prospective costs attached to such conflicts, which should depend on the magnitude of residual assets, can influence the optimal composition and conditions of financing, and, in particular, motivate the introduction of provisions that make some claims “bankruptcy remote.” Bankruptcy remoteness can be achieved through statute and policy, as when depositors enjoy preferred status as a matter of law, or through private agreements, as when banks issue covered bonds backed by a pool of high-quality assets. The asset encumbrance that results from either mechanism can be desirable insofar as it reduces bankruptcy costs, and, through lower overall funding costs, lowers the probability of distress. This substantive effect from the composition of financing is not due to asymmetric information or related mechanisms, but to the gain from containing conflict resolution costs.

In the first instance, the gain should be capitalized into the value of the bank, which enjoys an overall reduction in funding costs. The extension of preferred status to some creditors (including a DGS) need not make them better off. Nor need non-secured borrowers be disadvantaged in expectational terms: they earn more when the bank survives but bear larger net losses in case of resolution (though they spend less contending for their claims). Granting preferred status to (some) depositors need not provoke increased collateralization of other credits: from the point of view of the borrowing bank, collateralization and statutory depositor preference are near substitutes, with the difference that collateralization can be increased at the bank’s initiative, albeit at an increasing marginal cost. However, the achievement of full benefits and their distribution will depend on pricing being risk-sensitive; the probability of distress might not be reduced if those that benefit from collateralization demand an interest rate that ignores the reduction in LGD that collateralization should achieve.

For these measures to be valuable, a high degree of legal certainty of their implementation must be achieved, and it is important that the resolution process starts when the borrowing bank still has enough residual assets that preferred or collateralized claims can be met. If, ex post, these conditions are not met, conflict may be intensified. Hence, bank stability might be enhanced by limiting total asset encumbrance (preferred deposits plus collateralized borrowing) to below the likely minimum level of residual assets. Authorities that are willing and able to take early corrective action, and therefore rarely have to deal with banks left with scant residual assets, can be more sanguine about asset encumbrance.

The analysis presented here lead on to other questions of practical relevance, which may be addressed in further research using an extension of the framework. Some of these questions include the following:

• What systematic evidence might be examined to determine whether and how bankruptcy costs depend on the intensity of conflict over residual assets? Some anecdotal evidence indicates that bankruptcy proceedings and bank resolutions are characterized by intensive lobbying in various forms, which considerably inflate the costs to all concerned. There is also some statistical evidence that bankruptcy costs and delays are related to the complexity of the affected corporation, and complexity is plausibly connected to the number of interest groups and thus expenditure on lobbying. But it would be worthwhile to investigate also who bears costs and receives benefits ex ante, as measured, for example, by the reaction of market prices to relevant regulatory innovations.

• Why is information on bank asset encumbrance not more readily available? Appropriate pricing of both collateralized and non-collateralized borrowing depends on making good estimates of probability of failure and of loss given default facing different creditors, and thus of the degree of outstanding asset encumbrance. Yet it is difficult to obtain current or detailed, bank-by-bank information: one may use published accounts to quantify a bank’s deposit base—if deposits enjoy preferential status—and the volume of covered bonds that it has issued, but typically one cannot know the volume of assets pledged in the interbank market, to the central bank, in liquidity swap and derivative deals, etc. Presumably a bank in a weak position is afraid to reveal that fact and face a “squeeze” on its position. However, there seem to be incentives for strong banks to disclose information, and thus to force others to reveal more. To some extent this occurs: many banks repaid as early as possible financing from the ECB’s Long-Term Refinancing Operation, presumably to demonstrate their strength. If banks do not volunteer much information on encumbrance, there could be grounds for imposing greater transparency through regulation, but national authorities have traditionally reserved the right to provide central bank refinancing on a confidential basis. [The European Systemic Risk Board recently issued recommendations to enhance prudential oversight of asset encumbrance and related market transparency, but explicitly prohibits the revelation of data on assets encumbered to central banks (see "Recommendations of European Systemic Risk Board of 20 December 2012 on funding of credit institutions" (ESRB/2012/2), available at http://www.esrb.europa.eu/pub/pdf/recommendations/2012/ESRB_2011_2.en.pdf?e622821b9c3171124f1d85f3a1b4d40e ).]

• What are the implications for funding behavior and stability of heterogeneity among creditors in their litigating/lobbying ability and incentives? Welch (1997) has initiated a discussion of the question, with a focus on a non-financial corporate facing a dominant bank creditor, but the situation of banks, with many retail and wholesale counterparties, may be rather different. The interests of those most effective in lobbying may not coincide with those of society or the prudential regulator. One advantage of depositor preference is that it protects the interests of a large number of creditors with a substantial portion of claims for whom, however, it is individually relatively expensive to defend those claims in case of resolution; the weak atomistic depositors are molded into one dominant creditor. In this connection, differences in lobbying ability could account for aspects of market segmentation: those with low costs might specialize in the holding of certain instruments, and those with high costs (or funding constraints) might want to concentrate on holding secured, bankruptcy-remote assets.

• In what ways would statutory bail-in of unsecured creditors be symmetric to the granting depositors preferred status, and in what ways would contingent capital (“CoCos”) be symmetric to collateralized credit?


The framework would need to be extended to analyze how different forms of asset encumbrance might affect bank liquidity risk, taking into account the availability of other liquidity buffers and interaction with solvency risk. Indeed, liquidity and solvency risk are deeply connected, especially for banks. Furthermore, illiquidity, like bankruptcy, is “a situation in which existing claims are inconsistent,” and so suited to an analysis based on costly resolution of conflict, rather than the application of predetermined rules and contracts. In all cases, one category of claimant is assigned a special status in case of bankruptcy or resolution—some are assigned an especially weak position, others an especially strong one. The incentives for, and ability of the different claimants to lobby for larger compensation is therefore affected. For example, those clearly subject to a statutory bail-in would not devote resources to contesting claims with those in a clearly superior position, and thus bankruptcy costs could be reduced. Holders of bail-in-able securities or CoCos would presumably demand higher yields to compensate for this risk, which in itself may increase risk of distress, but there could be some net benefit.

Thursday, July 18, 2013

Conspiracy Theories Permeate Pakistani Society

Pakistan Taliban Lambastes Schoolgirl for U.N. Speech. By Saeed Shah
Anti-Western View Shown in Verbal Attack Permeates Pakistani Society
The Wall Street Journal, July 18, 2013, on page A7
For full article: http://online.wsj.com/article/SB10001424127887323309404578612173917367976.html

ISLAMABAD—Malala Yousafzai, a teenage campaigner for girls' education who was nearly killed by Pakistani militants, was feted at the United Nations last week. Here at home, however, she has been widely portrayed as part of a Western conspiracy against Islam and the developing world.

A 1,800-word open letter in imperfect English by Adnan Rasheed, one of the most feared Taliban leaders in Pakistan, outlined these conspiracy theories Wednesday, describing the type of secular education that Ms. Yousafzai championed as "satanic" and arguing that the U.N. wanted to "enslave the world."

Even as the 16-year-old girl is celebrated abroad as a hero, such radical views are becoming mainstream in Pakistani society, where even commentators hostile to the Taliban widely portray Ms. Yousafzai as a pawn of the West or even a CIA agent.

While Pakistanis usually condemn the violence of the Taliban, the paranoid worldview of the group has soaked deep into society, making the fight against extremism much more difficult. Many in the country, for example, still refuse to believe that Osama bin Laden was found living here in 2011.

"Public opinion is confused about the Malala issue. Many people hate Malala," said Zubair Torwali, a newspaper columnist from her home valley of Swat. "Anything here in Pakistan related to the West or America becomes a thing of conspiracy. The Taliban's ideology is flourishing in Pakistan. It is victorious."

Pakistani society is also influenced by the support that the military has long given to jihadist groups. More recently, the backlash over nearly a decade of U.S. drone strikes, and over the unilateral American raid to kill bin Laden deep inside Pakistan, has created a virulently anti-Western culture that sees spies everywhere.

Ms. Yousafzai narrowly survived an assassination attempt by the Pakistani Taliban in October last year, when she was shot in the head from point-blank range.

When aged just 11, Ms. Yousafzai became a powerful voice against the Taliban through a diary she kept of the extremists' takeover of Swat Valley, in northwest Pakistan. The diary was broadcast by BBC radio in 2009. Following the shooting in Swat, she was airlifted for treatment in England, where she now lives with her family.

Ms. Yousafzai, brought to the U.N. headquarters in New York to mark her 16th birthday, said in a speech Friday that "extremists are afraid of books and pens."

Mr. Rasheed's open letter to Ms. Yousafzai was the first reaction to these remarks by the Taliban leadership.

Mr. Rasheed began the letter by saying that he wishes that the attack on her had "never happened." Then, however, he went on to justify it with detailed arguments, showing, if there were any doubt, the dangers that Ms. Yousafzai would face if she returned home.

"Taliban believe that you were intentionally writing against them and running a smearing campaign to malign their efforts to establish Islamic system in Swat and your writings were provocative," he wrote.

Mr. Rasheed denied that the Taliban were against education—though he went on to spell out the movement's opposition to the "satanic or secular curriculum," which is a "conspiracy of tiny elite who want to enslave the whole humanity for their evil agendas in the name of new world order."

He advised Ms. Yousafzai to return to Pakistan and enroll in a madrassah, or Islamic seminary.

"Your propaganda was the issue and what you are doing now, you are using your tongue on the behest of the others and you must know that if the pen is mightier than the sword then tongue is sharper…In the wars tongue is more destructive than any weapon," the letter said.

When the shooting happened, there was an unprecedented outpouring of public sympathy for Ms. Yousafzai, and anger against the Taliban, inside Pakistan.

However, since then, opinion has hardened against the girl. Last week, on the local Pakistani language versions of the BBC website, in the national language Urdu and the Pashto spoken in her native Swat, the majority of comments were venomously against the schoolgirl. Some even described her as a "prostitute."

Detractors seized on the assistance and attention Ms. Yousafzai received from Western governments and media after the attack. Her appearance at the United Nations seemed to confirm the view that she was somehow working on a Western agenda.

Even Shahbaz Sharif, chief minister of the largest Punjab province and brother of Prime Minister Nawaz Sharif, issued an oblique criticism of Ms. Yousafzai's speech, posting on his Twitter account that it "seemed to be written for global consumption."

Wednesday, July 17, 2013

IMF Papers on Macroprudential Policies and Systemic Risk Monitoring

1  The Macroprudential Framework: Policy Responsiveness and Institutional Arrangements

Author/Editor:     Cheng Hoon Lim ; Ivo Krznar ; Fabian Lipinsky ; Akira Otani ; Xiaoyong Wu

IMF Working Paper No. 13/166, July 17, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40789.0

Summary: This paper gauges if, and how, institutional arrangements are correlated with the use of macroprudential policy instruments. Using data from 39 countries, the paper evaluates policy response time in various types of institutional arrangements for macroprudential policy and finds that the macroprudential framework that gives the central bank an important role is associated with more timely use of macroprudential policy instruments. Policymakers may also tend to use macroprudential instruments more quickly if the ability to conduct monetary policy is somehow constrained. This finding points to the importance of coordination between macroprudential and monetary policy.




2  Evaluating the Net Benefits of Macroprudential Policy: A Cookbook

Author/Editor:     Nicolas Arregui ; Jaromir Benes ; Ivo Krznar ; Srobona Mitra ; Andre Santos

IMF Working Paper No. 13/167, July 17, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40790.0

Summary: The paper proposes a simple, new, analytical framework for assessing the cost and benefits of macroprudential policies. It proposes a measure of net benefits in terms of parameters that can be estimated: the probability of crisis, the loss in output given crisis, policy effectiveness in bringing down both the probability and damage during crisis, and the output-cost of a policy decision. It discusses three types of policy leakages and identifies instruments that could best minimize the leakages. Some rules of thumb for policymakers are provided.



3   Systemic Risk Monitoring ("SysMo") Toolkit—A User Guide

Author/Editor:     Nicolas R. Blancher ; Srobona Mitra ; Hanan Morsy ; Akira Otani ; Tiago Severo ; Laura Valderrama

IMF Working Paper No. 13/168, July 17, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40791.0

Summary: There has recently been a proliferation of new quantitative tools as part of various initiatives to improve the monitoring of systemic risk. The "SysMo" project takes stock of the current toolkit used at the IMF for this purpose. It offers detailed and practical guidance on the use of current systemic risk monitoring tools on the basis of six key questions policymakers are likely to ask. It provides "how-to" guidance to select and interpret monitoring tools; a continuously updated inventory of key categories of tools ("Tools Binder"); and suggestions on how to operationalize systemic risk monitoring, including through a systemic risk "Dashboard." In doing so, the project cuts across various country-specific circumstances and makes a preliminary assessment of the adequacy and limitations of the current toolkit.

Bhidé and Phelps: Central Banking Needs Rethinking: The Fed's monetary policy is hazardous, its bank supervision ineffectual

Bhidé and Phelps: Central Banking Needs Rethinking. By Amar Bhidé and Edmund Phelps
The Fed's monetary policy is hazardous, its bank supervision ineffectual.
The Wall Street Journal, July 16, 2013, on page A15
http://online.wsj.com/article/SB10001424127887324879504578597721920923596.html

The Federal Reserve did well to supply liquidity after Lehman Brothers failed in September 2008 and the world was plunged into financial crisis. But since then the Fed's monetary policy has been increasingly hazardous and bank supervision by the Fed and other regulators dangerously ineffectual.

Monetary policy might focus on the manageable task of keeping expectations of inflation on an even keel—an idea of Mr. Phelps's in 1967 that was long influential. That would leave businesses and other players to determine the pace of recovery from a recession or of pullback from a boom.

Nevertheless, in late 2008 the Fed began its policy of "quantitative easing"—repeated purchases of billions in Treasury debt—aimed at speeding recovery. "QE2" followed in late 2010 and "QE3" in autumn 2012. Fed Chairman Ben Bernanke said in November 2010 that this unprecedented program of sustained monetary easing would lead to "higher stock prices" that "will boost consumer wealth and help increase confidence, which can also spur spending."

It is doubtful, though, that quantitative easing boosted either wealth or confidence. The late University of Chicago economist Lloyd Metzler argued persuasively years ago that a central-bank purchase, in putting the price level onto a higher path, soon lowers the real value of household wealth—by roughly the amount of the purchase, in his analysis. (People swap bonds for money, then inflation occurs, until the real value of money holdings is back to where it was.)

True, stock prices did rise in real terms in 2009-10. But surely that rebound in share prices from the panic of 2008 was mainly due to a stunning rise in after-tax corporate profits, much of it overseas. Stock markets did not begin their recent breakout until late 2012, by which time other factors were at work, such as Washington's heightened concern over continuing fiscal deficits on top of already high public debt and entitlements. Had Fed purchases raised stock prices to levels that caught the eye of business owners, the purchases might have prompted accelerated business investment, a powerful creator of jobs. But the rise was evidently too little and too late to hasten markedly the recovery.

Moreover, the Fed's quantitative easing appears not to have increased confidence and may have reduced it. No one—the Fed included—knows how much more it will buy or how much of its mountain of Treasurys will be sold back to the market. The Fed said it would end easing at serious signs of faster inflation. But as the housing bubble that preceded the financial crisis showed, imprudent speculation can be destructive without high inflation. Today we have banks, insurance companies and pension funds leveraging their assets and loading up on credit risks because prudence cannot provide acceptable returns.

The cost of this uncertainty can be considerable. An attendant foreboding may lie behind some of the depression in business investment—even if myopic traders in bonds and currencies are impervious to it and too-big-to-fail banks go on making one-way bets. Also, the time and money that businesses give to innovation and efficiency gains are squeezed if the businesses are distracted by the uncertainties surrounding monetary policy.

This ambiguity notwithstanding, President Obama commends Mr. Bernanke for "helping us recover much stronger than, for example, our European partners." Sure, the European Central Bank did not adopt quantitative easing. But the delay in Europe's recovery plausibly derives from the severity of its fiscal and banking problems and its structural disadvantages, such as inflexible labor markets and lack of institutions for early renegotiation of debts.

The Fed attributes persistent joblessness in the U.S. to a deficiency of aggregate demand, which the Fed blames on foreigners' thrift. But if the West's problem were simply that, it long ago would have increased its money supply to meet the increases demanded and would have invested in businesses at an increased pace to take advantage of the cheap credit.

Households have maintained their strong propensity to consume, persuaded that their retirement incomes will be topped up with entitlements. But consumer-goods production—giant machines needing only a guard and a dog, as some wag put it—is generally not labor-intensive enough to provide high employment at normal wages. A central bank's monetary policy, no matter how ambitious, cannot solve this structural problem.

What we do need from the Fed is reform of the ways banks are regulated and supervised. Tough, on-the-ground examination of individual banks not only helps keep them solvent, such scrutiny can also prevent out-of-control money growth without suppressing productive lending. Similarly, rules that discourage banks from relying on yield-chasing hot money will limit the runs and panics the Fed has to fight.

Unfortunately, over the past couple of decades, bank regulation, like the Fed's macro-interventions, has become more top-down and formulaic.

Until the 1980s, for instance, bank examiners would assess how large a capital buffer each bank should have, taking into account its specific risks instead of relying on internationally standardized ratios.

Dysfunctional rules have also sustained the growth of monolithic megabanks that have little interest in traditional productive lending.

Unsurprisingly, the Fed's aggressive monetary easing has helped large companies already flush with cash issue bonds at low rates, while small businesses have struggled to secure working-capital loans.

In a modern economy some areas of top-down control are likely to be unavoidable. But that does not mean we should settle for institutions that are less participatory or accountable. It is not desirable that seven people on the Federal Open Market Committee have the power to intervene on a massive scale based on theories that may or may not be right and do not reflect a popular consensus.

America has a constitutional takings clause, as well as checks and balances on the state's power of eminent domain. Such matters as tax laws and budgets are subject to votes rather than being left to "experts." These arrangements are as much about legitimacy and consent of the governed as they are about economic efficiency.

Congress passed the Federal Reserve Act in 1913 mainly to forestall and contain panics, discourage speculation and improve the supervision of banks, not to steer the economy. Indeed, the Federal Reserve System was set up as 12 more-or-less independent reserve banks to assuage concerns about centralized control and capture by financial interests.

Restoring the modest foundational aims and diffused governance of the Fed would be good for our economy and good for our democracy.

Mr. Bhidé, a professor at Tufts University's Fletcher School, is the author of "A Call for Judgment: Sensible Finance for a Dynamic Economy" (Oxford, 2010). Mr. Phelps, the 2006 Nobel laureate in economics and director of Columbia University's Center on Capitalism and Society, is the author of "Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge and Change," forthcoming from Princeton University Press.

Tuesday, July 16, 2013

Trevor Butterworth's Fad Food Nation

Fad Food Nation. By Trevor Butterworth
A skeptical survey of the claims being made about food, health and the environment.
The Wall Street Journal, July 16, 2013, on page A13
online.wsj.com/article/SB10001424127887323823004578593943760620664.html  

Excerpts:

Not so long ago, I spoke to a chef who ministers to children attending some of the most elite and expensive schools in America. Why, I asked him, was his company's website larded with almost comical warnings about the lethality of eating genetically modified (GM) food? Did he actually believe this as scientific fact or was he catering to his clientele's spiritual fears? It was simply for the mothers, he said, candidly. They ate it up—or, rather, they had swallowed so many apocalyptic warnings about genetically modified food that he had no choice but to echo their terror. How could they entrust their children to him otherwise? The downside of such dogma, he explained, was cost. Many of the mothers wouldn't agree to their children eating anything less than 100% organic, even if organic food required flying in, as he put it, "apples from Cuba."

Mr. Butterworth is a contributor at Newsweek and editor at large for STATS.org.

The Financial Instability Council - Regulators want to make insurers too big to fail. Uh-oh.

The Financial Instability Council
Regulators want to make insurers too big to fail. Uh-oh.
The Wall Street Journal, July 16, 2013, on page A14
http://online.wsj.com/article/SB10001424127887324634304578537490141477314.html

There's finally a healthy discussion in Washington about how to end too-big-to-fail banks. But before the government can start getting rid of taxpayer-backed behemoths, it first has to stop creating them.

The 2010 Dodd-Frank law classified all banks with more than $50 billion in assets as systemically important, and the federal Financial Stability Oversight Council (FSOC) is considering which non-banks should also be deemed too big to fail. Last year the board of regulators slapped the systemic tag on eight "financial market utilities," including clearinghouses, which means taxpayers now stand behind derivatives trading. Congratulations.

And last week the council, chaired by Treasury Secretary Jack Lew, declared that GE Capital, the finance arm of General Electric, GE and AIG are also officially important. Now the council is trying to designate insurer Prudential as systemic, and perhaps MetLife too.

GE Capital was rescued in the 2008 panic and thus deserves the systemic label. AIG seems to welcome the designation, perhaps because its current mix of businesses means that it will face a lighter regulatory burden than some competitors. But taxpayers should be cheered to learn that Prudential and MetLife are resisting membership in the too-big-to-fail club, and for good reason. It's a giant and counterproductive leap to conclude that the insurance business presents a systemic risk to the financial system.

AIG was a giant insurer when it failed, but its disastrous housing bets largely occurred outside its traditional insurance businesses, which have always been regulated by the states. The company's catastrophic wagers on the mortgage market were overseen by the U.S. Treasury's Office of Thrift Supervision. So of course Treasury's solution is to expand federal regulation to the businesses that weren't overseen by the department and didn't fail. Makes perfect Beltway sense.

But this logic should give taxpayers pause. Along with the "systemic" designation comes regulation that was created for banks, not for insurance companies, and that will create problems for taxpayers and policyholders. Any firm dubbed "systemically important" will be regulated by the Federal Reserve. This will likely mean heavy new capital requirements designed to prevent problems that generally don't exist at an insurer.

Banks accept short-term liabilities in the form of deposits and use them to fund long-term loans. This "maturity transformation" has wonderful economic benefits but carries the risk of failure if lots of depositors suddenly want to withdraw their funds. To address this risk, banks are required to maintain capital cushions and liquidity to meet deposit withdrawals that can occur at any time.

Insurers, by contrast, match long-term liabilities with long-term assets. Premiums to cover some event likely to occur decades in the future are invested in assets of a similar duration. There is little risk of a "run on the bank" because policyholders, unlike depositors, typically cannot demand the face value of their policies in cash. Tornadoes, car accidents and terminal cancer do occur, but they don't occur everywhere at once, and they are not triggered by a panic in financial markets.

Insurers can fail, but since customers cannot immediately demand their money the way bank depositors can, the failures tend to play out slowly over many years. States also typically require insurers to contribute to a fund to make up for the shortfall if one of them fails and its assets and liabilities don't match. Without the same immediate demands for cash as at a bank that's heading south, there is less risk of an asset fire sale that could roil markets.

Treating insurers like banks would also raise costs substantially at insurers as they scramble to comply with the new burdens. This means higher premiums for customers. MetLife hired consultant Oliver Wyman to calculate the consumer costs of bank regulation if applied to several insurers that could potentially fall under federal bank rules. The industrywide estimate: $5 billion to $8 billion a year.

If companies can't pass along these higher costs to customers and stay competitive, they are likely to exit the business, especially the capital-intensive life insurance market. That would mean less competition.

The other big risk is that the systemic risk designation could turn out to be self-fulfilling. If an insurer has to accept bank regulation, it might as well consider expanding into bank businesses. If it has to pay the regulatory costs of holding short-term liabilities, then the natural next step is to consider relying more on short-term funding, which almost everyone agrees was a key vulnerability leading into the 2008 crisis. Insurers may become riskier institutions than they now are, which means more risks for taxpayers.

This is no idle fear because the only certainty about financial regulation is that it never prevents the next crisis. Yet in order to reinforce the illusion of effective regulation, and vindicate the folly of Dodd-Frank, regulators are about to force insurance companies and customers who didn't cause the last crisis to pay more while encouraging firms to pursue riskier business thanks to an implied federal backstop. They should have called it the Financial Instability Council.

Wednesday, July 10, 2013

Riot after Chinese teachers try to stop pupils cheating. By Malcolm Moore

Riot after Chinese teachers try to stop pupils cheating. By Malcolm Moore
What should have been a hushed scene of 800 Chinese students diligently sitting their university entrance exams erupted into siege warfare after invigilators tried to stop them from cheating. The Telegraph, Jun 20, 2013
www.telegraph.co.uk/news/worldnews/asia/china/10132391/Riot-after-Chinese-teachers-try-to-stop-pupils-cheating.html

The relatively small city of Zhongxiang in Hubei province has always performed suspiciously well in China's notoriously tough "gaokao" exams, each year winning a disproportionate number of places at the country's elite universities.

Last year, the city received a slap on the wrist from the province's Education department after it discovered 99 identical papers in one subject. Forty five examiners were "harshly criticised" for allowing cheats to prosper.

So this year, a new pilot scheme was introduced to strictly enforce the rules.

When students at the No. 3 high school in Zhongxiang arrived to sit their exams earlier this month, they were dismayed to find they would be supervised not by their own teachers, but by 54 external invigilators randomly drafted in from different schools across the county.

The invigilators wasted no time in using metal detectors to relieve students of their mobile phones and secret transmitters, some of them designed to look like pencil erasers.

A special team of female invigilators was on hand to intimately search female examinees, according to the Southern Weekend newspaper.

Outside the school, meanwhile, a squad of officials patrolled the area to catch people transmitting answers to the examinees. At least two groups were caught trying to communicate with students from a hotel opposite the school gates.

For the students, and for their assembled parents waiting outside the school gates to pick them up afterwards, the new rules were an infringement too far.

As soon as the exams finished, a mob swarmed into the school in protest.

"I picked up my son at midday [from his exam]. He started crying. I asked him what was up and he said a teacher had frisked his body and taken his mobile phone from his underwear. I was furious and I asked him if he could identify the teacher. I said we should go back and find him," one of the protesting fathers, named as Mr Yin, said to the police later.

By late afternoon, the invigilators were trapped in a set of school offices, as groups of students pelted the windows with rocks. Outside, an angry mob of more than 2,000 people had gathered to vent its rage, smashing cars and chanting: "We want fairness. There is no fairness if you do not let us cheat."

According to the protesters, cheating is endemic in China, so being forced to sit the exams without help put their children at a disadvantage.

Teachers trapped in the school took to the internet to call for help. "We are trapped in the exam hall," wrote Kang Yanhong, one of the invigilators, on a Chinese messaging service. "Students are smashing things and trying to break in," she said.

Another of the external invigilators, named Li Yong, was punched in the nose by an angry father. Mr Li had confiscated a mobile phone from his son and then refused a bribe to return the handset.

"I hoped my son would do well in the exams. This supervisor affected his performance, so I was angry," the man, named Zhao, explained to the police later.

Hundreds of police eventually cordoned off the school and the local government conceded that "exam supervision had been too strict and some students did not take it well".

Additional reporting by Adam Wu

Monday, July 8, 2013

Discussion on balancing risk sensitivity, simplicity and comparability within the Basel capital standards initiated by the Basel Committee

Discussion on balancing risk sensitivity, simplicity and comparability within the Basel capital standards initiated by the Basel Committee
July 8, 2013
http://www.bis.org/press/p130708.htm

The Basel Committee on Banking Supervision today released a Discussion Paper on the balance between risk sensitivity, simplicity and comparability within the Basel capital standards.

In response to the financial crisis, the Basel Committee introduced a range of reforms designed to substantially raise the resilience of the banking system against shocks. In addition to these reforms, during 2012 the Committee commissioned a small group of its members (the Task Force on Simplicity and Comparability) to undertake a review of the Basel capital framework. The goal of the Task Force was to identify opportunities to remove undue complexity within the framework, and improve the comparability of its outcomes. The creation of the Task Force acknowledged that the framework has steadily grown over time as risk coverage has been expanded and more sophisticated risk measurement methodologies have been introduced.

The paper being released today discusses the reasons behind the evolution of the current framework, and outlines the potential benefits and costs that arise from a more risk sensitive methodology. The paper also discusses ideas that could possibly be explored to further reform the framework with the objective that it continues to strike an appropriate balance between the complementary goals of risk sensitivity, simplicity and comparability.

The purpose of the discussion paper is to seek views on this critical issue so as to help shape the Committee's thinking. At this stage, the Committee has not made a decision to pursue any of the ideas presented; the paper is being published to elicit comments and feedback from interested stakeholders, which will help the Committee refine its thinking in this area. Furthermore, the Committee remains firmly of the view that full, timely and consistent implementation of Basel III remains fundamental to building a resilient financial system, maintaining public confidence in regulatory ratios and providing a level playing field for internationally active banks. Adopting the Basel III reforms (higher and better quality capital, improved risk coverage, capital buffers, and liquidity and funding requirements) in accordance with the internationally-agreed transition period deadlines is itself an important step in improving the consistency of bank regulation globally.

Mr Stefan Ingves, Chairman of the Basel Committee and Governor, Sveriges Riksbank said: "The Committee is keenly aware of the current debate concerning the complexity of the current regulatory framework. For that reason, the Committee set up a Task Force last year to look at this issue in some depth. The Committee believes that it would benefit from further input on this critical issue before deciding on the merits of any specific changes to the current framework. The paper being released today is designed to encourage discussion amongst, and solicit views from, a broad set of stakeholders."

The Committee welcomes views on the issues outlined in this paper. Comments should be submitted by Friday 11 October 2013 by e-mail to baselcommittee@bis.org. Alternatively, comments may be sent by post to: Secretariat of the Basel Committee on Banking Supervision, Bank for International Settlements, CH-4002 Basel, Switzerland. All comments may be published on the website of the Bank for International Settlements unless a respondent explicitly requests confidential treatment.

Sunday, July 7, 2013

Lord Morris of Borth-y-Gest Memorial Lecture. By Michael Howard, MP. July 6, 2006

Lord Morris of Borth-y-Gest Memorial Lecture. By Michael Howard, MP
http://web.archive.org/web/20070505062753/http://www.michaelhowardmp.com/speeches/lampeter060706.htm
July 6, 2006


It is a great privilege to have been invited to give this lecture.

Lord Morris of Borth-y-Gest – or John Willie as I recall him being almost universally referred to – was one of the giants of the law when I studied it at Cambridge and during the years when I was making my way as a Junior Member of the Bar.

Superficially we had quite a few things in common. We were, of course, both Welsh. We were both members of the Inner Temple. We had both been Presidents of the Cambridge Union. And we both, and this may be particularly encouraging to some, took second-class degrees in law.

But there, I fear, the similarities come to an end. I could not hope, even to begin to match the distinction of John Willie’s attainments at the Bar, on the Bench and as one of our great appeal judges. Nor, let’s be frank about this, could I aspire to his hallmarks of gentleness, patience and universal popularity.

He was a legend in the land. And not just, of course, for what he achieved in his legal career. At the outbreak of war in 1914, at the age of 17 he joined the Royal Welsh Fusiliers, saw service in France, reached the rank of Captain and was awarded the Military Cross. And it is said that, after being appointed a Law Lord in 1960 he walked down Whitehall to the House of Lords every day, lifting his hat as he passed the cenotaph.

Sadly I never had the honour of appearing before him. But I did meet him. When I was an undergraduate at Cambridge he came to see us to encourage us to go to the Bar.

I cannot pretend that this was a decisive influence on my own career because I had already made up my mind that that was what I wanted to do. So none of the blame for my subsequent career can be laid at John Willie’s door.

The Dictionary of National Biography, in describing his judicial characteristics, says that he was 'vigilant in protecting the freedom of the individual when threatened by the executive' and adds that 'he exhibited judicial valour consistently and in full measure.'

These statements are justified. But they must be interpreted in the spirit and context of their time. Thirty years ago judges were also conscious of the constraints which were imposed on their role.

Since then, that role has been greatly expanded, first as a consequence of the enlargement of judicial review, more recently as a result of the Human Rights Act. It is to that trend, its implications and its consequences that I intend to devote the rest of my remarks this evening.

Over thirty years ago, on a visit to Philadelphia, I fell into conversation with a woman who had recently been given a parking ticket. She had been incensed, so incensed that she decided to go to Court to challenge it.

When she appeared in Court she was rather surprised when the magistrate called all the defendants who were due to appear that day to the bar of the Court. He told them his name and asked them to remember it. Then he said, “All cases dismissed.”

The astonishment of my acquaintance at this development was tempered somewhat when she discovered that a few days later the regular election of magistrates in the city was due to take place. The magistrate before whom she had appeared, albeit rather briefly, was re-elected with the biggest majority in the history of the Philadelphia magistracy.

When I was told that story I reacted, I am sorry to say, with a rather superior disdain. “What can you expect” I asked, “if you elect magistrates and judges? We in Britain would never contemplate any such step.”

Thirty years on I am much less sure. The truth is that during that time the power of judges in this country was increased, is increasing and will increase further, if nothing is done to change things.

For the most part this increase in power has been at the expense of elected Governments and elected Parliaments. Our judges, of course, are unelected. They are unaccountable. They cannot be dismissed, save in the most extreme circumstances, and in practice never are.

Moreover they are appointed without regard to their political background and views are without any public scrutiny, parliamentary or otherwise. I believe that this has, in the past, been one of the great strengths of our judiciary. But as they move, increasingly, to the centre of the political stage how long can this state of affairs continue?

It would be wrong to suggest that this shift in power is entirely new or that it is entirely due to the coming into force of the Human Rights Act.

The Courts have traditionally had the power to curb the illegal, arbitrary or irrational exercise of power by the Executive. But, traditionally this power was exercised with restraint.

The Courts would be careful not to quash decisions because they disagreed on the merits with the decisions under challenge.

There is common consent that during the last 50 years this restraint has been eroded. As the previous Lord Chancellor, Lord Irvine put it, in his 1995 Address to the Administrative Law Bar Association:
“The range of circumstances in which decisions may be struck down has been extended beyond recognition.”

That address was essentially a plea for judicial restraint. Indeed in it the future Lord Chancellor referred to what he described as the “constitutional imperative of judicial self-restraint.”

He gave three reasons for it. First he referred to the constitutional imperative – the fact that Parliament gives powers to various authorities, including Ministers, for good reasons and in reliance on the level of knowledge and experience which such authorities possess. Secondly, he referred to the lack of judicial expertise which, he said, made the Courts ill-equipped to take decisions in place of the designated authority. Thirdly, and most pertinently, he referred to what he called the democratic imperative – the fact that elected public authorities derive their authority in part from their electoral mandate.

It is worth quoting his words in full: “The electoral system,” he said, “also operates as an important safeguard against the unreasonable exercise of public powers, since elected authorities have to submit themselves, and their decision-making records, to the verdict of the electorate at regular intervals.”

With respect to Lord Irvine, I couldn’t have put it better myself.

Remarkably enough he even prayed in aid, as one of his arguments against judicial intervention, the fact that it would strengthen objections to the incorporation of the European Convention on Human Rights into our law – the very Human Rights Act which he did so much to introduce.

Rightly describing it as a step which would hugely enhance the role and significance of the judiciary in our society he said this:- “The traditional objection to incorporation has been that it would confer on unelected judges powers which naturally belong to Parliament. That objection, entertained by many across the political spectrum, can only be strengthened by fears of judicial supremacism.”

Lord Irvine was right. My essential objection to the Human Rights Act is that it does involve a very significant shift in power from elected representatives of the people to unelected judges. Members of Parliament, and Ministers are, except for Ministers in the House of Lords like the Lord Chancellor, answerable to their electorates. As I know only too well they can be summarily dismissed by the electorate. They are directly accountable. Judges, as I have already pointed out, are unelected, unaccountable and cannot be dismissed.

The reason why this difficulty arisesin such acute form as a result of the Human Rights Act is because so many of the decisions which our judges now have to make under it are, essentially, political in nature.

Just this week, Charles Clarke, the former Home Secretary, complained that, and I quote:- “One of the consequences of the Human Rights Act is that our most senior judiciary are taking decisions of deep concern to the security of our society without any responsibility for that security.”

What on earth did he expect?

Of course that is one of the consequences of the Human Rights Act. It is an inevitable consequence. It is what the Human Rights Act obliges the senior judiciary to do. It is not the fault of the judges if they perform, as conscientiously as they can, duties which the Government has placed on them.

And it is not as though the Government were not warned.

To select a quote almost at random Appeal Court Judge Sir Henry Brooke predicted that judges would be drawn into making “much more obviously political decisions.” He pointed out that under the Act “for the first time judges would have to decide whether government interference with a human right was 'necessary in a democratic society.’ – and that, of course, is clearly a political value judgement.

How does this arise? In a nutshell the Act requires our courts to apply the European Convention on Human Rights in every decision they make. The rights which the Convention seeks to protect are framed in very wide terms. The Convention was drawn up in the aftermath of the Second World War. Its authors saw it as a safeguard against any revival of Nazism or any other form of totalitarian tyranny. I suspect that many of them would turn in their graves if they were able to see the kind of cases which are being brought in reliance on it today.

None of these rights can be exercised in isolation. Any decision to uphold one right may well infringe someone else’s right. Or it may conflict with the rights of the community at large.

The example that has most recently hit the headlines well illustrates the difficulties that arise.

As David Cameron pointed out in his recent speech on this subject life in the globalised twenty first century world presents two great challenges to governments. The first is to protect our security. The second is protecting our liberty.

We would, I suspect, all agree with his view that 'it is vital that free societies do all they can to maintain people’s human rights and civil liberties, not least because a free society is, in the long term, one of the best protections against terrorism and crime.”

As he said, “The fundamental challenge is to strike the right balance between security and liberty.”

The fundamental question is who is ultimately responsible for striking that balance: elected members of Parliament or unelected judges?

In the cases on terrorism, Parliament twice, after much anxious consideration by both Houses, reached its view. It was not always a view with which I agreed. But it was the view of Parliament.

Yet twice the Judges have held that Parliament got the balance wrong. They thought the balance should be struck differently.

And in doing so they were not deliberately seeking to challenge the supremacy of Parliament. They were simply doing what Parliament has asked them to do.

There are countless other examples. In his recent speech on the subject David Cameron discussed the way in which the Human Rights Act has made the fight against crime harder.

He cited the example of the Assets Recovery Agency, which was set up to seize the assets of major criminals.

The agency has been forced to spend millions of pounds fighting legal challenges brought by criminals under the Human Rights Act.

This has had bogged down cases for years, and the backlog in the courts has grown to 146 uncompleted claims.

The Director of the Agency has directly blamed the human rights “bandwagon” for thwarting its efforts.

He referred to the case of the convicted rapist, Anthony Rice, who was wrongly released on licence and then murdered Naomi Bryant.

The bridges Report set up to investigate the case makes clear that one of the factors that influenced the thinking of officials in dealing with Rice was a concern that he might sue them under the Human Rights Act.

As David Cameron acknowledged there were other elements in the case that had no connection to human rights.

And it is true that any legal challenge by Rice might well have failed.

But it remains the case that officials sought to protect themselves rather than risk defeat in the courts.

The Rice case illustrates a wider trend.

Even without actual litigation, some public bodies are now so frightened of being sued under the Human Rights Act that they try to protect themselves by making decisions that are often absurd and occasionally dangerous.

We saw this recently when the police tried to recapture foreign ex-prisoners who should have been deported and had instead gone on the run.

The obvious thing to do would have been to issue “Wanted” posters but police forces across the country refused to do so on the grounds that it would breach the HRA.

The Association of Chief Police officers says in its guidance to forces: “Article 8 of the Human Rights Act gives everyone the right to respect for their private and family life.....and publication of photographs could be a breach of that.”

According to ACPO, photographs should be released only in “exceptional circumstances”, where public safety needs to override the case for privacy.

These were criminals who had been convicted of very serious offences and who shouldn’t even have been in the UK.

Yet the Metropolitan Police said, “We will use all the tools in our tool box to try and find them without printing their identity – that’s the last recourse.”

Perhaps the most ludicrous recent example occurred a few weeks ago when a suspected car thief clambered onto the roof tops after a high speed chase and began pelting the police who had tried to follow him with roof tiles.

It ended with a siege that would waste the time of 50 police officers, close the street until 9.40pm and culminate in the spectacle of the suspect being handed a bucket of KFC chicken, a two litre bottle of Pepsi and a packet of cigarettes at tax payers expense – all apparently to preserve his “human rights.”

Of course there are examples of cases where the Act has led to results most of us would applaud. But we have to ask whether those results could not have been achieved by effective lobbying of our elected Parliament or a change of Government following an Election.

The Human Rights Act requires the Courts to interpret legislation so that it complies with the Convention if that is at all possible. If in the Court’s view any secondary legislation – passed after due consideration by both Houses of Parliament – is incompatible with the Convention that legislation can be struck down by the Court.

If any primary legislation is held to be incompatible there is a fast-track procedure which would enable the Government to short-circuit the normal processes of parliamentary scrutiny in order to amend or repeal any such legislation.

This surely a direct threat to the very democratic imperative on which the then Lord Chancellor waxed so eloquent 5 years ago.

One of the consequences of this is likely to be the increasing politicisation of judges.

How long, if the Act remains in force, will our present system of selection of judges survive? How long before the political backgrounds of candidates for judicial office become subject to Parliamentary scrutiny? How long before we see demands that these judges submit themselves for election?

The most common argument in favour of the Act is that it 'brings rights home.’ By that its supporters mean that since the Act could in any event be relied upon in an appeal from the English Courts to the European Court of Human Rights it is much better to allow English judges to apply it themselves. Indeed in presenting this argument the impression is sometimes given that the new jurisdiction of the English Courts will in some way replace the jurisdiction of the European Court of Human Rights. This is of course quite untrue. The right to appeal to the ECHR will remain.

I would concede that the previous situation was not ideal.

The ECHR does sometimes reach decisions which are very difficult to understand and sometimes cause considerable frustration.

But there is a remedy for this which the last Government was pursuing. The ECHR recognises the existence of what it calls a 'margin of appreciation.’ By that it means that will make some allowance, in applying the Convention, for the local circumstances and traditions of the country from which the appeal is brought. The last Government had embarked on a campaign to increase this margin of appreciation so that the Court would give greater leeway to countries to decide things for themselves.

Now the very future of the margin of appreciation is uncertain. Academic controversy rages on to whether our courts will apply it. And the ECHR is much less likely to apply it to decisions of our Courts than to decisions of administrative bodies.

It is in this context that David Cameron’s proposal for a British Bill of Rights should be considered.

As Mr Cameron expressly said the existence of a clear and codified British Bill of Rights will tend to lead the European Court of Human Rights to apply, and I would add to enhance, the “margin of appreciation.”

This seems to me to be the key to the continuing application and acceptance of the European Convention. It was intended to be a backstop to ensure that there was no repetition in Western European of Nazi atrocities and to minimise, as far as possible, the danger of future totalitarian outrages. It was not intended to strike down carefully considered judgements by democratically elected authorities of where the balance should be struck between legitimate but competing interests.

The route to this more limited role for the Convention and the Court which adjudicates on it lies through an enhanced margin of appreciation. A British Bill of Rights may well help us to reach this very desirable destination.

It is of course true, as Mr Cameron himself acknowledged, that the drafting of such a Bill would represent a formidable challenge. But this is true of all charters of this kind. If it helps us to achieve a workable solution to our relationship with the European Convention the effort will be well worth while.

And if it also enables us to scrap the discredited Human Rights Act it would be doubly welcome.

As the distinguished Scottish judge, Lord McCluskey predicted, the Act has become:- “A field day for crackpots, a pain in the neck for judges and a goldmine for lawyers.”

It is an experiment that has failed. It should go.