Banking News dated 27th September 2018

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Banking News: September 27, 2018


Banks look at voluntary way  to get Aadhaar data

Banks look at voluntary way
to get Aadhaar data

The Telegraph
Published on September 27, 2018

Non-mandatory provision may
allow banks to exploit lacuna

Mumbai, September 26: Banks appear to be unfazed by the Supreme Court verdict that bars them from insisting on the submission of the Aadhaar number while opening new accounts. They already seem to have worked out a way to get round the legal roadblock.

State Bank of India chairman Rajnish Kumar said that the apex court judgment makes it clear that the submission of the Aadhaar number will no longer be mandatory.

Some bankers feel there is no reason why banks cannot collect this data if the customer “volunteers” this information although lawyers said a legal challenge could not be ruled out by consumers if banks press ahead with the plan.

The Supreme Court ruled that “there cannot be a mandatory provision of linking of every bank account (with the Aadhaar number)”.

“Nobody would keep black money in the bank account. We accept the possibility of opening an account in an assumed name and keeping black money therein… the persons doing such an act, if at all, would be very few,” the majority judgment said.

The verdict did not say anything about the voluntary submission of the Aadhaar document — and that has given banks the hope that they will be able to exploit this lacuna to cull Aadhaar data.

The SBI chairman provided some justification for this course of action. “Everybody will have to honour the Supreme Court's judgment, but I believe from services point of view it (Aadhaar) is a great facility.… It is very convenient to open a bank account using an Aadhaar card. Today, on our digital platform, if a customer wants to open a bank account with Aadhaar card, it can be opened within five minutes and the account also becomes operational immediately,” Kumar said. He said the country’s largest bank has been opening close to 27,000 digital accounts per day using its Yono platform, and no paper work is required for these accounts since KYC is done through the electronic route.

Adhil Shetty, CEO, BankBazaar.com, an online marketplace for financial products, said regulators like the RBI would now have to come out with revised directives on KYC (know your customer) practices that banks or others will have to follow. According to Shetty, clarification is now needed to figure out the impact of the order on the existing e-KYC processes for opening a bank account.

While the Supreme Court judgment has prompted calls that banks and telecom should erase the Aadhaar data that they have already collected from their customers, some lawyers are of the view that this could bring its own set of challenges. “You will need a supplementary legal regime to deal with the aftermath of striking down Section 57 of the Act,” said Pavan Duggal, a cyber law expert.


It's back to Old KYC for Bank Account Opening

The Daily News & Analysis
Published on September 27, 2018

Mumbai, September 26: Banks will no longer be allowed to demand Aadhaar card from customers while opening new accounts. This will make the process of opening new accounts difficult as most banks were opening accounts just based on the Aadhaar number and biometric authentication, and a subsequent verification with the Unique Identification Authority of India (UIDAI) database.

Banks will now have to seek address proof, identity proof and other details and implement the old know-your-customer (KYC) norms for opening new accounts.

As per the Supreme Court verdict on Wednesday, all information collected from UIDAI may need to be deleted or delinked by intimating the customers. The data can't be kept with the bank without the consent of the customer and for more than six months. This would mean that banks will have to start a delink project.

However, the Aadhaar may be used as an official document to prove the customer's identity with his/her consent.

On an average, banks have already linked 60-70% of their existing accounts to the customers' Aadhaar cards after the government gave a deadline of March 2018 to link all accounts to the Aadhaar. This had been kept on hold subsequently, pending the apex court verdict.

While upholding the validity of the Aadhaar card, the court has added some caveats. The five-judge constitution bench, led by Chief Justice Dipak Misra, struck down Section 57 of the Aadhaar Act, which allowed any "body corporate or person" or private entity to demand Aadhaar. Telecom operators were earlier asked by Department of Telecommunications to conduct Aadhaar-based verification of mobile phone connections.

"Much of the work trying to link bank accounts were already undertaken by the banks," said a legal head of a public sector bank.

Aadhaar is 12-digit identification number issued to individuals by the UIDAI after storing their biometric data. The UIDAI, launched in 2009, uses Iris and fingerprint scans to obtain biometric data from applicants and stores it in a database.

State Bank of India said Aadhaar was a faster method. Rajnish Kumar, chairman of SBI, said in the sidelines of a press conference that Aadhaar has been "very convenient" for opening an account. "Today, on our digital channels, an account can be opened with an Aadhaar card within 5 minutes and the account becomes operational."

Digital loan platforms like Faircent said that decision of the apex court will not impact their business. "Aadhaar was only an optional line for us so no impact," said Rajat Gandhi, founder of Faircent.

Kotak Mahindra Bank said it did not foresee any adverse impact on Kotak's savings account opening growth because of the court ruling. "Aadhaar continues to be one of the six officially valid documents (OVD) available to customers for completing KYC requirements. Customers are welcome to use any one of the six OVDs of their choice for the purpose of account opening. We are also examining in detail the recent SC ruling in this regard and will be further guided by the same, and the RBI guidelines," Virat Diwanji, president - retail liabilities & branch banking, Kotak Mahindra Bank.


No concrete proposal yet from IL&FS
for funds, says SBI chief Rajnish Kumar

The Indian Express
Published on September 27, 2018

Life Insurance Corporation of India, which is the largest shareholder with over 25 per cent stake, had on Tuesday said it wouldn’t allow the group to go belly up.

Mumbai, September 26:  State Bank of India Chairman Rajnish Kumar on Wednesday said it has not received any concrete proposal for additional funds so far from beleaguered Infrastructure Leasing & Financial Services (IL&FS) group which is saddled with liabilities of around Rs 91,000 crore. He also said liquidity is not a big concern in the financial services sector.

“The SBI board will take decisions in the larger interest of the industry and also to protect our shareholders interest,” SBI Chairman Rajnish Kumar said. IL&FS which needs an immediate capital infusion of Rs 3,500 crore by way of credit line, is also planning a Rs 4,500 crore rights issue, but some of the existing shareholders are not keen to participate in the issue. SBI holds 6.42 per cent in the IL&FS group which has defaulted on interest payment on various debt repayments since August 27.

Life Insurance Corporation of India, which is the largest shareholder with over 25 per cent stake, had on Tuesday said it wouldn’t allow the group to go belly up.


Centre to pump Rs 54 billion into
PNB to meet regulatory requirements

Somesh Jha
The Business Standard
Published on September 27, 2018

State-run banks may not get capital based
on their performance and reform measures

New Delhi, September 26: The government may ditch its plans to infuse capital into public sector banks (PSBs) based on their performance and reform measures this financial year, as it looks to pump in money to meet regulatory requirements and help grow loan books of the banks.

This comes following demands from PSBs, during the annual review meeting with Finance Minister Arun Jaitley on Tuesday, that they may require early funds from the government to help them in lending more to the industry.

In its latest move, the government has decided to infuse Rs 54.3 billion in the Punjab National Bank (PNB), which was hit by Rs 143-billion fraud, through recapitalisation bonds. The Delhi-headquartered bank had demanded an additional capital of around Rs80 billion for 2018-19 earlier this year following the fraud.

After rejecting its demand earlier, the government has infused Rs 82.5 billion in PNB so far. The Centre had earlier pumped in Rs 28.2 billion into PNB for meeting its minimal capital requirement at the time of paying interest towards Additional Tier 1 (AT-1) bonds.

With this, the total government infusion into PSBs has reached almost Rs 191 billion this financial year. Earlier, five more banks – Central Bank, Corporation Bank, Indian Overseas Bank, Andhra Bank and Allahabad Bank — were capitalised by the government.

Finance Minister Arun Jaitley had said during a press conference on Tuesday that bankers had demanded that the government be “more upfront in capital requirement.”  State Bank of India Chairman Rajnish Kumar said that the bankers demanded the government to advance its capital infusion schedule.

“The intention is right, but with a right intention and a sizeable capitalisation programme that has been announced, you wouldn’t want to see failure. Today, some of the banks are not meeting their capital needs. Imagine a situation where banks are unable to service their tier-1 bonds, what repercussions would that have?” said Karthik Srinivasan, senior vice-president at ICRA. “The near-term pain in the system is forcing the government to infuse money into weaker banks,” he said.

When the government had announced the contours of the Rs 2.11 trillion recapitalisation programme in January, department of financial services secretary Rajiv Kumar had promised that recapitalisation in 2018-19 would be dependent on the performance and reforms of PSBs.

“This is no easy money (that the banks will get)," Kumar had said, adding that the PSBs will have to adopt the differentiated business strategy and exit from non-core businesses and focus on their core competencies, as a part of the 30-point reforms agenda chalked out by the Centre.

The Indian Banks’ Association has roped in Boston Consulting Group (BCG) to bring out a report card on the compliance of the reform agenda, known as EASE — Enhanced Access and Service Excellence — to which the Centre’s recapitalisation exercise in 2018-19 was linked. The Centre was planning to bring out the report card, based on BCG’s findings, in March, and based on the performance of banks, money was supposed to be pumped in accordingly.

“That’s the catch. The banks suggested the government that money be available to them in advance this financial year. But the fact that PSBs expect a recovery of bad loans to the tune of Rs1.8 trillion this financial year is reassuring for us,” a senior government official said.

In the annual review meeting on Tuesday, PSBs promised the government that it will step up recovery this financial year with an equal focus on cases outside the bankruptcy courts.

In 2017-18, PSBs had recovered bad loans worth around Rs746 billion. The banks are supposed to transfer all cases of non-performing assets above Rs500 million in a specialised vertical for recovery.

Banks are also aiming to monetise non-core assets worth Rs187 billion this fiscal, compared to Rs114 billion in 2017-18. The PSBs will also shut down 57 foreign branches compared to two last fiscal year.

The government had announced Rs2.11-trillion capital infusion programme in October last year. According to the plan, PSBs were to get Rs 1.35 trillion through recapitalisation bonds, and the balance Rs 580 billion through fund raising from the market.

Of the Rs 1.35 trillion, the government had infused about Rs710 billion through recap bonds last financial year, and balance will be done during the current financial year.


New banknotes: Decoding the rich history & culture
of the country reflected through Indian currency

Shruti Chakraborty
The Firstpost Online
Published on September 26, 2018

After the demonetisation of the Rs 500 and Rs 1,000 currency notes on 8 November, 2016, we've seen five new currency notes from the Reserve Bank of India (RBI). Fresh off the mint is the Rs 100 note, which was unveiled on 19 July, 2018.

While not many of us might spend time staring at currency notes or even pondering over the design — other than those aspects that help verify its authenticity — there is, in fact, a great deal of thought put into its designing. As RBI says on its website, “Currency notes reflect the nation’s rich and diverse culture, her struggle for freedom and her proud achievements as a nation.”

In the latest series, labelled the 'Mahatma Gandhi new series' by RBI, five of the six banknotes interestingly feature prominent historical Indian monuments on the reverse side, which suggests a focus on India's heritage and culture. As graphic designer Itu Chaudhuri once told an English language daily, “All banknotes are an exercise in national image building.” While the Ashoka Pillar was the first sculptural emblem to be featured on a banknote issued in Independent India, some of the other prominent structures to grace the legal tender have been the Brihadeshwara Temple in Tanjore on the Rs 1,000 note and the Gateway of India in Mumbai on the Rs 5,000 note — both issued in 1954.

In the 1980s, there was a shift in the design motifs to showcase "symbols of Science and Technology (Aryabhatta on the Rs 2 note), Progress (the Oil Rig on Re 1 and Farm Mechanisation on Rs 5) and a change in orientation to Indian art forms on the Rs 20 and the Rs 10 notes." Again in 1996, a new set of banknotes (Rs 10, Rs 50, Rs 100, Rs 500 and Rs 1,000) were issued — the Mahatma Gandhi series, mostly with very artistic designs. Only the Rs 50 note featured a building, which was the Indian Parliament House, on the reverse.

Then came the fateful 8 November, 2016, a date that changed the fates of both India and the US. Since then, the currency market has been fairly volatile. While we won’t go into the intricacies of foreign exchange and the fluctuations in the US, closer home, the changes have been quite tangible with the introduction of a new series of banknotes by the RBI.

The first new notes in this series were available starting 9 November, 2016, which were Rs 2,000 and Rs 500. The magenta Rs 2,000 note featured the much-acclaimed Mangalyaan on the reverse side, while the stone-grey Rs 500 shows the ramparts of the Red Fort in New Delhi. With the unveiling of the latest Rs 100 note, we now have five banknotes in circulation that showcase some of India’s stunning monuments on the reverse side.

Here's a look at the monuments that are currently featured on the contemporary Indian banknotes, and some interesting facts about them:

Rs 10 — Konark Sun Temple, Odisha

The Rs 10 banknote was announced by RBI on 5 January, 2018. While the front side has the profile portrait of Mahatma Gandhi, this paper note has the intricately carved Konark Sun Temple from Odisha on the reverse.

This 13th century sun temple forms part of the golden triangle of Odisha (along with Puri and Bhubaneswar) for travelers and pilgrims. Conceived and built by King Narasimhadeva I as Surya's chariot, this was one of the tallest and grandest temples in India at the time. A fair bit has been written about the building's erotic imagery, though its uniqueness lies in the depiction of time through architecture, wherein the chariot is pulled by Surya's seven horses (symbolic of the seven days of the week, or the seven metres of Sanskrit prosody).

The chariot's 12 pairs of wheels symbolise the 12 months of the Hindu calendar, the 24 wheels stand for the number of hours in a day, and the eight major spokes in each wheel signify the division of the day into prahars. No wonder then that this mathematical marvel was recognised as a World Heritage Site by UNESCO in 1984.

Rs 50 — Stone Chariot of Hampi, Karnataka

The fluorescent blue banknote worth Rs 50 was officially announced on 18 August, 2017, and features yet another chariot temple, but this time from Hampi in Karnataka. Images of the Garuda Stone Chariot have often been used as a symbol of Hampi's treasure trove of temples, which were collectively listed as a UNESCO World Heritage Site in 1986.

This intricately carved chariot is actually a Garuda shrine in the Vitthala (a form of Krishna) temple complex, and has two elephants towards the front, positioned in a manner as if they are pulling it. According to Hindu mythology, Garuda is said to be Vishnu's vahana (vehicle), and apparently a huge sculpture once sat on the chariot, which currently lies empty. With around 1,600 surviving structures inspired by the Dravidian style of architecture, the Hampi group of monuments were built between the 14th and 16th centuries during the Vijayanagara Empire.

It's said that this chariot was commissioned by King Krishnadevaraya in the 16th century, and modeled on Konark's sun temple after he had fought a battle in the region. Called an 'austere and grandiose site' by UNESCO, the 'exquisitely ornate' work on the Vitthala temple and the stone chariot have often been hailed as representative of 'the culmination of Vijayanagara temple architecture'.

Rs 100 — Rani ki Vav, Gujarat

On 19 July, 2018, the Reserve Bank of India unveiled the revised design of the Rs 100 banknote, which features the stunningly ornate 11th century stepwell — Rani ki Vav, located in Patan, Gujarat. Built by the Solanki Queen Udayamati as a memorial to her husband, King Bhimadeva I, the stepwell is extremely well-preserved.

It is about 65 metres long from the entrance to the well, about 20 metres broad and more than 30 metres deep. A Vaishnava site (which was common at the time since Lord Vishnu is intimately associated in mythology with cosmic waters), the stepwell also has a number of Parvati or Gauri sculptures, which are meant to represent the queen as a widow, who builds the stepwell as a means of penance; appeasing the gods so that she can be with her husband in another realm. There are 700–800 sculptures of deities and mythological figures.

Since the site had been flooded for around 800 years, these sculptures and ornate pillars have been exceptionally well-preserved. Rani ki Vav was declared a UNESCO World Heritage Site in 2014.

Rs 200 — Sanchi Stupa, Bihar

The very orange Rs 200 currency note debuted on 24 August 2017, and it prominently features the 2nd-1st century BC Buddhist monument Sanchi Stupa with one of its ornate gateways on the reverse side.

Built by Emperor Ashoka, it is said to be the oldest Buddhist sanctuary in existence and was a major Buddhist centre in India till about the 12 century. In fact, over the centuries, there have been additional structures built over the original hemispherical dome (which covered Buddha's relics). The site's signature elements are the four beautifully carved Torans (gateways), one of which is also featured prominently in the currency note. The carvings on these gateways show tales from Buddha's life as well as his early incarnations, which are commonly known as Jataka Tales.

The Sanchi monuments, along with the main stupa, were declared a World Heritage Site by UNESCO in 1989.

Rs 500 — Red Fort, Delhi

The new Rs 500 note was issued within hours of 8 November, 2016's fateful announcement by the prime minister, along with the new magenta Rs 2,000 banknote. It features the very familiar ramparts of the Red Fort in Delhi, along with the national flag flying high.

One of the main residences of the Mughal dynasty for almost 200 years, the city fort made of red sandstone was built in the 17th century, but not many know that it was originally called Qila-i-Mubarak, or the 'Blessed Fort'. Also, a UNESCO World Heritage Site, the Red Fort is unlike all the other monuments featured on this list as it continues to serve a modern-day purpose as the annual platform for the prime minister to deliver his address to the nation on Independence Day.


Financial Stocks in India are even More Volatile

Nupur Acharya
The Bloomberg News
Published on September 26, 2018

New Delhi, September 26 (Bloomberg):  For Asia equity investors in search of volatility, there’s no need to buy U.S. pot stocks. India has its own wild ride.

The turmoil in India’s non-bank finance firms has triggered swings in the nation’s stock market that make the recent moves in U.S. pot-related shares look like a walk on the grass. Volatility in the S&P BSE Finance Index has soared to the highest level in almost two years, with stocks such as Dewan Housing Finance Corp. fluctuating an average 26 percent in the past three sessions, more than the 19 percent move in Tilray Inc.

Investors have been on the edge since Friday, with a default by Infrastructure Leasing & Financial Services Ltd. sending jitters through the $2.1 trillion stock market and erasing more than $8.5 billion from the value of the financial gauge. The rout has added to investor concerns over the impact of higher oil prices and a tumbling rupee. Indian shares, which until last week were this year’s best-performers in the region, have lost their top spot to New Zealand.

The anxiety over a possible liquidity crunch for non-bank finance companies, which typically borrow in the market to on-lend, wiped off $1.3 billion in value for Dewan Housing, one of the most-hit stocks, in three days. In North America, fortunes were made and lost in hours on pot shares such as Tilray and Weed Inc.

For India, the sudden plunges show traders are getting nervous as adverse news flow hits an expensive market, UBS Group AG said in a note this week.

“If this is a temporary liquidity squeeze or a potential new credit shock remains difficult to gauge,” analysts led by Gautam Chhaochharia wrote, advising clients to not buy the declines. “While unlikely a systemic issue, we worry about a negative feedback loop developing, given rich valuations.”


How SBI redemption affected debt market

Saikat Das
The Economic Times
Published on September 27, 2018

Mumbai, September 26: The State Bank of India (SBI) last Friday redeemed at least Rs 15,000 crore of mutual fund investments, which also put pressure on asset managers to sell their holdings in the secondary market, multiple people familiar with the matter told ET.

While the purpose of the SBI redemptions is not clear, some market participants linked the timing of the sale to a planned accumulation of cash that could be subsequently used to fund either equity or debt at the struggling financier, IL&FS. The country’s biggest bank, a shareholder in the infrastructure conglomerate, is expected to extend a credit line, although nothing is finalised.

An email sent to SBI remained unanswered until the publication of this report.

Friday marked one of the most volatile sessions of trading in recent memory, with the benchmark Sensex swinging about 1500 points between gains and losses. Concerns over the cost of funds for non-banking finance companies (NBFC) caused stocks in virtually the entire financial services sector to slump, with DHFL losing about 50% through a dramatic afternoon of trading.

Fund managers are keen to understand where SBI would deploy the redeemed cash, and the role of such investments in stabilising the rattled debt market that is negotiating the first northward movement in the interest-rate cycle since the current administration took office.

“Redemptions toward the end of most quarters are normal. But what was not normal was the pace with which SBI redeemed those mutual fund investments, putting the focus on the IL&FS contagion,” said one of the persons cited above.

The redeemed funds were mostly parked in liquid schemes, which invest in short-term debt instruments. Banks normally invest in them. Many of those mutual fund schemes are said to have invested in debt papers of NBFCs, dealers said.

Separately, volumes in commercial papers (CP) and corporate bonds dipped, with cost of borrowing rising. CPs - short term debt papers – sold by NBFCs have since become costlier. They, however, started to recover since Tuesday.

CP costs have risen by about 60-70 basis points between Friday and Tuesday across one-two- and three-month maturities. Corporate bonds, too, issued by NBFCs have offered about 30-40 basis points higher than usual.

“There was a complete freeze in the debt market as fear gripped the trading floors. The bulk sale, indeed, dented the sentiment that day,” said an asset management executive, who manages thousands of crores of rupees in debt investments.

Later on Sunday, the SBI chairman reiterated the lender’s continued support toward NBFCs, while the central bank, too, stepped in to assure the roiled markets of liquidity injection in an emergency.

“SBI lends support to NBFCs in private and public sector within the regulatory policy framework and will continue to do so,” SBI Chairman Rajnish Kumar said last Sunday. “Some comments are being attributed to SBI about the bank being wary of lending to NBFCs. The rumours are baseless. There is no concern on the liquidity of NBFCs in view of their liquid cash position, and availability of committed lines.”


What Causes Financial Crises?

The Knowledge@Wharton
Published on September 25, 2018

One of the great ironies of the 2008 financial crisis is that it was sparked by a product created from a historically safe investment asset: residential mortgages. In the past quarter century, delinquency rates of single-family home mortgages hovered below 3% for the most part except for the time around the Great Recession, according to the Federal Reserve Bank of St. Louis. Then Wall Street bundled mortgages of various qualities into complex, opaque securities to be bought and sold, often using debt to turbo-charge the investment. When defaults began on Main Street, the tremors reached all the way around the world.

Today, the financial crisis seems like a footnote in history. But like other crises, it has sparked a period of soul-searching. What signs that a crisis was brewing did experts and regulators miss? Why didn’t regulatory reforms in the past prevent it? How could regulators stop another crisis from happening? What are the lessons from this and other meltdowns? These and other questions were the focus of a panel at the “Financial Markets, Volatility, and Crises: A Decade Later” conference held recently in New York by Wharton’s Jacobs Levy Equity Management Centre for Quantitative Financial Research.

While this year is generally acknowledged to be the 10th anniversary of the crisis, in actuality there is “no real consensus about when it all began,” said Wharton finance professor Richard Herring, who moderated the panel. Some point to 2006 as the start, when home prices peaked, while others think it began with the 2007 collapse of two Bear Stearns hedge funds that bet heavily on subprime mortgages. Perhaps it was when BNP Paribas froze withdrawals from $2.2 billion worth of funds in the same year. Still others have argued that “it was manageable until the Lehman … orderly liquidation,” Herring said. That was the start.

Whenever the crisis actually began, panellists said that it bore similarities to other Wall Street meltdowns of the past, such as the 1987 market crash and the 1998 collapse of the hedge fund Long-Term Capital Management. Time and again, the chase for a higher investment return, the creation of new, complex securities, the relative inexperience of young traders, the popularity of a new theory to make money and lagging regulations have brought the financial system to the brink.

Free Lunches and the Illusion of Safety

Bruce Jacobs, principal and co-founder of Jacobs Levy Equity Management, said that while the 1987 crash, Long-Term Capital Management and the 2008 credit crisis were different events, they had similarities. “The common theme is that the strategies promised to make investing safe,” he said. “There is an expectation of protection and safety and at the same time they were sold on the basis of higher returns. They become irresistible.” But these “free lunch strategies” later backfired.

In the 1980s, belief in a trading strategy called portfolio insurance was supposed to take out risk. The strategy called for hedging against market downturns by short-selling stock index futures. Jacobs quoted Nobel laureate Robert Merton — who co-created the famed Black-Scholes-Merton calculation to determine fair pricing for options — as saying that if one literally traded continuously, all the risk would disappear because it is being shifted to someone else all the time. But practically speaking, Jacobs said, one can’t trade continuously in practice.

Portfolio insurance also can fail. “We all know what happened in 1987 — there was a major [stock market] crash, the largest one-day decline in the history of the U.S. markets, greater than the decline in 1929,” Jacobs said. It’s fine to shift risk to someone else, providing there are “counterparties on the other side willing to buy,” he said. But as many investors tried to shift risk at the same time, they could not find enough folks to take it off their hands. “The buyers were not there,” he said. “The markets became fragile. And the decline was over 20%.”

“Here, you have a high reward … and the expectation of lower risk. That is very hard to resist. This promise of low risk I will refer to as the illusion of safety.” said Bruce Jacobs.

Long-Term Capital Management, a hedge fund led by Nobel laureates, began operations on the premise that it would make money taking “very low risk [arbitrage] positions,” Jacobs said. For example, it would take advantage of securities that are not correctly priced relative to each other. But since the hedge fund only made a small return on its arbitrage positions, it piled on debt so it could bet bigger. In 1997, its debt was 30 times greater than its capital, according to the Federal Reserve. When its bets went south in 1998, 14 banks and brokerage firms pumped $3.6 billion in an arrangement orchestrated by the Fed to prevent a fire sale and harm other markets. The fund was later liquidated.

In the 2008 crisis, the culprit was residential mortgage-backed securities and collateralized debt obligations (CDOs). They were “triple A rated securities, very low risk presumably,” Jacobs said. “There was the promise of safety and yet the promise of higher returns.” But that belief flies in the face of “finance 101,” which is that if investors want a higher return, they have to take more risk, he said. “Here, you have a high reward … and the expectation of lower risk. That is very hard to resist. This promise of low risk I will refer to as the illusion of safety.”

Financial Innovation as Panacea

Another cause of financial crises is financial innovation. “I think most of the financial crises actually start with some new product or new approach to investing, and it’s always sold as a panacea” with reduced risk and higher returns, said Richard Lindsey, co-head of liquid alternatives at Windham Capital Management. “They’re marketed very heavily. They grow rapidly.” That happened with portfolio insurance. “The idea had been around for a couple of years, but once it started, it went very quickly.” Likewise, in the 2008 crisis. “If you think about the mortgage-backed market, the growth of that was also spectacular in a relatively short period of time.”

“I think most of the financial crises actually start with some new product or new approach to investing, and it’s always sold as a panacea.” said Richard Lindse.

These new securities also tend to be very complex and sometimes opaque. “Most senior management [of the firm that sells the security] generally don’t understand the product,” Lindsey said. “Investors [also] don’t understand the product they’re investing in. When you exacerbate that with a lot of quant analysis or quant-speak, sometimes it just makes the situation worse. They don’t really know what they’re investing in. They don’t really know what can or could happen to it.”

Risk management vulnerabilities have also characterized crises. For example, in the 2008 crisis, the trading desk might not have seen a risk in mortgages and pointed out that “there’s never been a problem of defaults,” Lindsey said. Meanwhile, risk managers would perhaps have felt that the firm was taking on a lot of risk but “didn’t have a basis for argument other than their perception,” he said. In a match-up between the trader and risk manager, the trader wins because he or she is seen as a “money maker” while the risk manager is part of the firm’s cost center.

Moreover, many traders tend to be younger and haven’t been through financial crises. “They’re new and they say, ‘This is different. This can’t have the risk that anything else has had previously.… I understand [the risk] and I know how to control it.’” Lindsey noted. “Generally, that tends not be true.” For instance, markets tend not to be as liquid as perceived, he said. Everything is working well until there comes “some type of precipitating event” like a currency crisis in Asia. “All of a sudden, it reveals all of the weaknesses in the system.” In the 1980s with portfolio insurance, after the market sold off, one could not trade. “The whole system kind of froze up.”

Vineer Bhansali, founder and CIO of investment advisory services firm LongTail Alpha, said he has survived five financial crises, and “you see the same cyclical, endogenous behaviour, and the signs are almost always the same.” The catalyst tends to be “a great theorem that goes bad because it’s abused and it’s levered up,” he said. “It’s also accompanied by a very flat yield curve” that could indicate a coming economic downturn. Once the crisis is over, confidence returns, investors chase returns again and the cycle renews. “People get emboldened because it recovers very rapidly and then you have [another] big crisis.”


Big project!
WhatsApp, Reliance Jio join hands

The Financial Express
Published on September 27, 2018

Facebook's WhatsApp is working closely with Reliance Jio.

Mumbai, September 26 (Reuters): Facebook’s WhatsApp is working closely with Reliance Jio to spread awareness of false messages, weeks after the Indian telecoms operator opened up the messaging service to tens of millions of customers using its cheap internet-enabled phone.

Jio this month gave its more than 25 million JioPhone customers, many of them first-time internet users, access to WhatsApp at a time when the messaging service is battling false and incendiary texts and videos circulating on its platform.

Reliance Chairman Mukesh Ambani, India’s richest man, launched the JioPhone last year at a refundable deposit of 1,500 rupees ($20.60). The device is internet enabled but didn’t initially allow the use of WhatsApp or have several popular smartphone features.

All new users of the JioPhone get educational material that tells them about spotting a forwarded WhatsApp message and encourages them to share messages thoughtfully, WhatsApp spokesman Carl Woog told Reuters.

“We are working closely with Jio to continue our education campaign for WhatsApp users,” Woog said. In India’s smaller towns and villages, deep-seated prejudices, often based on caste and religion, and cut-price mobile data can aggravate the so-called fake news problem. Such regions are a key market for cheap devices such as the JioPhone.

More than 30 people have died this year in mob violence triggered by vitriolic messages on social media and WhatsApp, according to unofficial estimates, and police have previously told Reuters that minorities have been targeted in some remote and rural regions. That has prompted New Delhi to call on WhatsApp to take immediate action to “end this menace”.

WhatsApp has already taken some steps to quell the rise of fake news. It has launched print and radio ad campaigns to educate users and introduced new features on the app including limiting message forwards as well as the labelling of forwarded messages. It has also partnered with Digital Empowerment Foundation (DEF), a New Delhi-based non-profit organisation, to spread digital literacy in India’s towns and cities.

DEF will host a workshop in the eastern Indian city of Ranchi this week, WhatsApp’s Woog said. WhatsApp also plans to expand its outreach programme to existing JioPhone users. Reliance Jio did not immediately respond to an email seeking comment. With more than 200 million users, India is a key market for WhatsApp but one where it has had to delay the official launch of its payments services due to the country’s push on data localisation.

WhatsApp is currently looking for an India chief and a policy head for the country. It last month appointed a grievance officer for Indian users at its Menlo Park, California headquarters, like other global tech firms whose grievance officers sit outside of India.

India has, however, said it will toughen up its laws including pushing U.S. tech giants to have their grievance officers in India.


How Can Social Media Firms Tackle Hate Speech?

The Knowledge@Wharton
Published on September 22, 2018

For years, social media companies have done relatively little to keep hate speech off of their platforms, often accepting racist, homophobic and anti-Semitic screeds and comments as the cost of doing business. More recently, though, social media has exploded onto the front lines in the battle over hate speech, free speech and the socio-political war gripping the U.S.

One big recent spark was provided by Alex Jones. The conspiracy theorist has long floated patently false claims that child-sex rings run by prominent public figures (Robert Mueller, Hillary Clinton) are operating right under our noses, and that the Sandy Hook shooting was a hoax staged by gun-control activists. In early August, social media companies decided they had had enough: YouTube took down Jones’s channel — with 2.4 million subscribers — saying it violated the firm’s policy on hate speech, and Apple dropped some of Jones’s InfoWars podcasts from its app for the same reason. Facebook removed some of his pages, saying they were “glorifying violence” and using “dehumanizing language to describe people who are transgender, Muslims and immigrants.”

Twitter hesitated, but eventually “permanently suspended” Jones and InfoWars for what it called repeated violations of its policy against abusive behaviour.

Jones cried censorship. Now, social media companies are caught among multiple rocks and hard places. They want to create a pleasant environment for users (“safe,” in industry parlance), and yet they would like to be seen as upholding the American value of free speech. They enjoy the primacy once held by traditional media in this country, but they don’t want regulation and the responsibilities of mediating the truth that that industry exercised for decades.

Above all, perhaps, they want to keep growing users so they can keep growing profits.

“This issue is definitely a threat, because currently [social media firms] are on a roll, they make a lot of money and they are only growing in power,” says Gad Allon, director of Wharton’s Jerome Fisher Program in Management and Technology and professor of operations, information and decisions. “And so, if the public is going to go against them, if the political class is going to go against them, they will find themselves in a very different kind of situation.”

Calls for blocking certain kinds of speech on social media have grown in recent months, in the U.S. and elsewhere. Former United Nations high commissioner for human rights, Zeid Ra’ad al-Hussein, accused Myanmar military officials of using social media to incite genocide, and he called on Facebook to remove content, which it did. The Sri Lankan government shut down Facebook, WhatsApp and other platforms in the country earlier this year after violence against Muslims. It was only after Facebook officials visited the country with a pledge to curtail hate speech and misuse that the ban was lifted.

Social media has been called to account for itself in numerous Congressional hearings. Facebook chief Mark Zuckerberg, asked during testimony this past April to define hate speech, said: “Senator, I think this is a really hard question, and I think it’s one of the reasons why we struggle with it.” Zuckerberg has resisted calls to have Facebook take down pages of Holocaust deniers.

“I feel empathy for the leaders of these organizations, because I believe they are conscientious and want to do the right thing, but it is hard to know what the right thing to do is.” said Christopher Yoo.

Some see social media companies as exercising too much editorial control, as well as feeding back to people what they already believe. “The worry is that social media is creating an echo chamber effect that reinforces polarization in our society, and the solution to that is to radically limit social media’s control over what information gets passed on or what doesn’t,” says Christopher S. Yoo, director of the University of Pennsylvania Law School’s Centre for Technology, Innovation & Competition and professor of law, communication and computer and information science.

“On the other hand, in the aftermath of the 2017 elections, there is enormous concern that false or misleading information is being conveyed by social media, and the solution there is for them to exercise more editorial control. Add this to Cambridge Analytica and Trump’s calls to regulate search results over what comes up when he Googles his name, and social media doesn’t know where to jump,” says Yoo. “I feel empathy for the leaders of these organizations, because I believe they are conscientious and want to do the right thing, but it is hard to know what the right thing to do is.”

But what if, through hate speech and becoming a frightening and depressing atmosphere, the Facebook news feed becomes a place that the public begins to avoid?

“That’s the biggest fear for Facebook,” says Allon. “That people will view it as a fearful place — if I want to feel bad that’s where I will go. That’s why they never want to show you opposing views, because it may anger you. The moment you think about Facebook the same way as smoking, that’s the death of Facebook.”

The Right to Say Anything

Social media companies may or may not decide to do something about hate speech. But right now, legally speaking, they are not compelled to do anything.

“Strictly as a matter of First Amendment law, they can do whatever they want. They could say, ‘We’re only going to publish people who are members of the Republican party,’ and there is nothing to prevent Facebook from doing what Trump is accusing them of doing,” says Nadine Strossen, law professor at New York Law School, immediate past president of the American Civil Liberties Union and author of HATE: Why We Should Resist It with Free Speech, Not Censorship. Discrimination laws might prevent them from discriminating on the basis of race and other factors, “but certainly not political ideology.”

The First Amendment concerns only government control of free speech, noted John Carroll, professor of mass communication at Boston University, in a recent conversation on the Knowledge@Wharton show on SiriusXM. (Listen to the full podcast at the top of this page.) Social media companies “have been really reluctant to remove content from Alex Jones in terms of … [it being] fraudulent content,” he said. “What they have done is said, ‘This is hate speech, and we have the right to remove it under our terms of service’ — and as a private business, they absolutely have that right.”

In fact, many Americans perceive social media as playing an active role in censorship. When asked whether they think it likely that social media platforms actively censor political views that those companies find objectionable, 72% of respondents to a June Pew Research Centre survey said yes. Republicans were especially inclined to think so: 85% of Republicans and Republican-leaning independents said it was likely that social media sites intentionally censor political viewpoints, with 54% saying it was very likely, found the Pew survey of 4,594 U.S. adults.

Social media companies routinely deny that they are actively censoring political views, and the tendency away from censorship was built into the structure of social media long before the term social media came into use. Section 230 of the Telecommunications Act of 1996 established protection from liability for a provider or user of an “interactive computer service” — as opposed to publishers — for carrying third-party content. In other words, it firmly established what would become social media as a largely unmediated bulletin board.

“The moment you think about Facebook the same way as smoking, that’s the death of Facebook.” said Gad Allon.

“This is why social media companies, when they first came on the public scene, said, ‘We are not media companies; we are tech companies,’” said Strossen. “They knew they had the right and power to act as traditional media companies and serve an editorial function in choosing what to publish and what not to publish, but deliberately said, ‘We are choosing to not engage in that kind of content discrimination, and will let all voices have equal access to our platforms.’”

In avoiding the gatekeeper role, social media established itself as being no more liable for messages conveyed than telephone companies were liable for conversations traveling over their phone lines.

Section 230 created “a safe harbour for Good Samaritan blocking of obscene, filthy, harassing or objectionable material,” says Yoo, “to give companies as conveyors of information latitude to exercise some editorial discretion without liability, to balance these concerns.”

The courts, however, haven’t provided great clarity on the question of how much control they should exercise. “If we take the statute seriously, social media companies’ control is limited to things that are obscene or harassing,” Yoo notes. “There have been court decisions interpreting this liability as extending to categories very broadly, which would give social media companies the latitude to control their newsfeeds. And then there are courts that have interpreted it narrowly, in which case companies would face a great deal of liability, so there is fair amount of legal uncertainty.”

The problem with the phone-line analogy is that no one picks up their phone to find him or herself eavesdropping on thousands of white supremacists and Holocaust deniers. Facebook’s community standards statement says the platform does not allow hate speech “because it creates an environment of intimidation and exclusion and in some cases may promote real-world violence. We define hate speech as a direct attack on people based on what we call protected characteristics — race, ethnicity, national origin, religious affiliation, sexual orientation, caste, sex, gender, gender identity, and serious disease or disability. We also provide some protections for immigration status. We define attack as violent or dehumanizing speech, statements of inferiority, or calls for exclusion or segregation.”

Questions of Interpretation

What ensues are some thorny questions around who gets to interpret; the biases and life experiences the individual interpreter brings to the task; and larger questions of context that algorithms are unable to consider.

Facebook, for instance, recently flagged the Declaration of Independence, removing paragraphs 27-31 when a community newspaper in Texas published it in the days leading up to the Fourth of July. It wasn’t clear whether snipping out part of our national guiding principle was purely algorithmic or involved a layer of human review, but the trigger appears to have been a reference to “merciless Indian Savages,” according to Slate.

On the slippery slope of regulating speech, what is considered free and legitimate speech by one group might be considered inciteful by another, and user agreements are of limited help, says Ron Berman, a Wharton marketing professor. “Many of these agreements use the grey line between an illegitimate behaviour on the platform, and illegitimate consequence, which is very problematic. For example, a call for Catalonian independence from Spain on Facebook may be considered free legitimate speech by a large group [of Catalonians], but if it later causes a violent protest, it may become [seen as] illegitimate.”

“From a public-relations perspective, I think the issue is less about investors and regulators, and more about advertisers who may decide to stop using Facebook as an advertising platform because it will be seen as allowing hate speech.” said Ron Berman.

Pressure is building on social media firms to do something about hate speech, and “no doubt, that threat of regulation will have an impact on the culture of these companies,” says Strossen. But regulating speech would be a grave mistake, she says. Even if Alex Jones did violate social media community standards by engaging in disparaging, dehumanizing, degrading and demeaning ideas, “one person’s view of what that concept is is antithetical to another’s,” she says. “Some say Black Lives Matter is demeaning to others. Some say All Lives Matter is racist because it is insensitive to those whose lives are in jeopardy. These are all subjective matters, so the only solution is not suppressing free speech. There is more harm in empowering government officials or private-sector actors with making these discretionary decisions.”

But social-media sites do have a legitimate business argument for stamping out hate speech as much as possible. One risk with two-sided platforms like Facebook is that they can quickly have a “phase” shift from a positive state to a negative state, says Berman. “For example, if it turns out that the Facebook ad-targeting algorithm allows advertisers to discriminate based on race, gender or any other factor, or that the targeting algorithm would make it possible to promote hate speech, other advertisers … would not want to appear as condoning this advertising platform,” he says. “From a public-relations perspective, I think the issue is less about investors and regulators, and more about advertisers who may decide to stop using Facebook as an advertising platform because it will be seen as allowing hate speech.”

Facebook, YouTube and Twitter are hiring thousands of new moderators, or “News Feed integrity data specialists,” as Facebook calls them, to filter out content it considers to be in violation of its standards. But moderators are inconsistent, and that inconsistency puts minority users of social media at a disadvantage, according to a report last year by the Centre for Investigative Reporting. The report cited Facebook users whose posts on racial matters were deleted by Facebook, but whose white friends, when asked to post the same content, found their posts were not deleted.

Don’t hold your breath for justice consistently applied. “The standards are irreducibly subjective, so the standard will be enforced with the subjective values of the enforcer,” says Strossen.

In the Silicon Valley mindset, however, there is a belief that everything can be solved algorithmically — “that there is a technical solution to every societal problem,” says Allon. “They believe they have the solution but just have not found it yet.”

The Wisdom of the Free Market

The other way of looking at the situation is that social media, as an industry, is still green. “To some extent, I think social media companies are going through a high-tech rite of passage,” says Yoo. “Many technologies are born and enjoy an initial period of benign neglect, and don’t spend much time thinking about the broader social impact of their products and the possibility they might be regulated.”

Strossen says what is needed to help combat hate speech is better media skills. “If I had to choose, I’d rather have more [guidance for people in sorting] the truth from that which is false, helping them to navigate to find messages that are supportive of how to facilitate their own effective counter-speech against hate speech, and to reach out to hate mongers to help them change their views.”

“Just as you get more hate speech through these new technologies, you also have much more effective response to hate speech.” said Nadine Strossen.

What’s important to remember, she says, is that while a lot of negativity has been let loose in the world as a result of social media, a lot good causes have also travelled far and wide. “Just as you get more hate speech through these new technologies, you also have much more effective response to hate speech. The other speech going on is incredibly inspiring. You could not have had the social-justice movement, from Black Lives Matter to #MeToo and the anti-gun movement. They really flourished thanks to social media.”

Allon says social media companies need to be more transparent about how they decide what is hate speech, and what they choose to do about it: “How do these algorithms work? How do they decide what I see and what I don’t see?”

One obvious solution for encountering less hate speech and providing safe zones would be to have a variety of social media platforms available to suit different tastes — one place that truly is about sharing vacation photos and getting in touch with high school friends, and others more political and controversial. Why isn’t this kind of sorting — through free-market dynamics — happening?

“I do think, actually, it is,” says Yoo. “If you want to see the future trends, look at what people just entering the market are doing, and that is what young people are doing. They are on multiple social media platforms simultaneously, and for them different platforms serve different purposes. So, I think you are starting to see diversification among social media, and I think that is a good healthy development.”

But it’s also important to note that Facebook, Twitter and Google combined “basically monopolize” the digital information environment, said David Karpf, associate director of George Washington University’s School of Media & Public Affairs, who joined B.U.’s Carroll on the Knowledge@Wharton show. “If those three shut you down, then it becomes tremendously hard to reach a massive audience.”

Facebook had 2.23 billion monthly active users as of June 30. Considered alongside the current total number of social media users globally, 3.3 billion, that raises the question: Is Facebook simply too big today to be considered a social media platform and business in the usual sense? Is it really more like a public utility because of its scale and ubiquity?

“I don’t think so,” says Yoo. “People forget, when they are concerned about the dominance of Facebook, that 10 years ago it didn’t really exist. What we see in the broad scale is that new players have come up or older players have reinvented themselves in dramatic ways, which indicates the market is incredibly dynamic. We forget that if we were having this discussion a decade ago we might be talking about MySpace — or two decades ago, AOL. The AOL-Time Warner merger was treated like the end of history, and as it turns out, [it was only] the end of $200 billion worth of shareholder value…. Google is a company [that is] only 20 years old. Apple, until it reinvented itself, was in the doldrums. These are incredibly dramatic changes that are the sign of an industry that is constantly buffeted by the gales of creative destruction in a very positive way.”

Source: Internet Newspapers and anupsen articles


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