Issue XXVI: The safest banking system of them all?

11 Apr

While watching the financial meltdown envelope the world economy and worry the heads of the CNBC crowd, some of you may wonder what a competently-run banking sector looks like.  Surely, it is not the United States or Japan given their massive past and present banking failures.  Europeans, accustomed to lecturing the world about Anglo-American capitalism, can no longer pretend they are doing too hot either with the banking meltdowns in Ireland, Britain, and Iceland.  In fact, their Basel II Accord loosened the amount of reserves and capital banks had to keep stored away in case of emergency more than America permitted.  Central and Eastern European banks have crashed under their Western owners while Latin America’s banks are also in the same situation.  Canada’s system is pretty safe, but who wants to talk about Canada?

The most interesting reversal in reputation is that of the Reserve Bank of India, the central bank of India, and the government-owned banking system of India.  Ever since Indira Gandhi nationalized the banks, 70% of banks in India are owned by the federal government but are independently run by a trust.  India’s chief central banker is Y.V. Reddy, and he (unlike the once-ludicrously overpraised Alan Greenspan) prevented Indian banks from speculating on real estate during the recent property boom in India.  I saw property values climb to ridiculous prices with my own eyes in Mumbai and Bangalore, but apparently the only ones who lost their shirts in the property crash were American and other foreign banks.  Off-balance sheet vehicles like securitization were banned, and interest rates were raised to cool the market (here interest rates were repeatedly left at historically low levels).

Also completely unnoticed by the Western financial press is the requirement that government banks open multiple branches in the countryside for every branch they open in the city, allowing even small towns and villages to have banks.  The biggest bank, State Bank of India, has 16,000 branches.  Banks cannot profit on the urban elite while not servicing the common man (70% of Indians live in villages).  Private banks, foreign or domestic, have no such requirement…. they skim the milk off the urban middle and upper classes.  As government workers, they don’t make the outrageous salaries that private bankers demand even though they run far bigger banks.

Yet this policy under very recently evoked scorn from the know-it-all investor class and their intellectual hacks in academia.  Even the very insightful Financial Times India correspondent, Edward Luce, complained in In Spite of the Gods that the government needs to open up the finance sector and that government banks were poorly run.  The Economist still doesn’t get it and whines on the Reserve Bank of India’s birthday that India’s banking system won’t be opening up anytime soon.  Of course, their interest in defending financial liberalization is more on behalf of their wealthy readers than average Indians.  Tellingly, they then advise how “outsiders [can] profit from India’s financial evolution.”

After years of lecturing from the Washington Consensus, it is India that has the last laugh.  From the Asia Times,

India’s feisty Commerce Minister Kamal Nath, the bane of US negotiators in the recent World Trade Organization Doha Round talks, even took a gloating potshot. “Those who preached us ‘best practices’ have not helped their own financial sector,” he told reporters asking him to comment on the US financial crisis, hinting perhaps that it’s time for know-it-all financial experts in the US to learn a few lessons from India.

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