Bitcoin as currency - closer than we think

This article was published in the DNA op-ed page on 24th Jan, 2018

Bitcoin has assumed cult proportions, and naysayers in both financial markets (through their dire warnings of a Dutch Tulip redux) and global governments (through pre-emptive executive actions) have not really been able to fully dampen the enthusiasm of cult-followers. The real question though is if Bitcoin would be ever able to transcend its cult-status into its promised nirvana, ie, an alternative global currency. Prospects of that happening, while enormous challenges remain, are perhaps not the in “not in my lifetime” domain. Why? Let us examine the key hot buttons — demand and supply considerations of an alternative global currency. 

Starting with demand — is there a demand for an alternative global currency? This is an easy answer — it is a loud, unambiguous YES. There are multiple intellectual convincing and politically powerful support for Bitcoins as an alternate currency. 

First, the current international financial system is predicated on the status of US Dollar (USD) as the de facto reserve currency. Bulk of trade settlements, capital flows and money transfers happen in USD — giving the US government supranational powers to regulate the international financial system. Along with USD as the reserve currency, the entire global financial architecture is run by financial institutions around US rules. This gives enormous political powers to the US government — it can (and has) try to influence behaviour of people, corporations, even countries, by sanctioning their access to the global financial system. States at the receiving end of such action — Russia, Iran, Venezuela come immediately in recent memory — have enormous interest in breaking out of the straightjacket of USD. Bitcoin, where custody, transfer and trust are ensured by a disaggregated, decentralized protocol (rather than US laws), reduces the leverage of sanctions today that US government has. 

Second, the crisis of confidence in the traditional monetary regime. Under the traditional monetary policy, new money is primarily created by “fiat”, or by central banks (representing their respective sovereign governments) printing money. Post the global financial crisis in 2008, central banks around the world used this power to print very large sums of money (popularly described as Quantitative Easing), with the objective to keeping interest rates low, finance government buy-outs of toxic financial assets, and give a general “monetary boost” to a crisis-hit global economy. In some parts, it worked. But it also left in its wake a crisis of confidence with a section of thought-leaders  — as currency as an asset was seen to have been devalued by printing such large amounts, opening up possibilities of run-away inflation in the future. 

Next, what about supply? Is Bitcoin (and the whole family of cryptocurrencies at large) geared up to become an alternative form of money? Any form of money has two features — as a medium of exchange and as a store of value. At an overarching level, money also has to support business cycles in the real economy. 

As a medium of exchange, Bitcoin (and cryptocurrencies in general) shows the maximum promise — as a decentralised, public architecture — since money transfers can be done faster, cheaper and without taking credit risk on various intermediaries along the chain. A typical international wire transfer today navigates its way through multiple banks, clearing houses, custodians and transfer protocols (like SWIFT) — takes several days, with the only beneficiary being the intermediary banks making money out of the idle float. Cryptocurrencies like Litecoin can do the transfer in minutes, and cost virtually nothing.  

The real issue with Bitcoin today though, is as a store of value. Rather, as a “stable” store of value. Volatility in Bitcoins today is very high, 20-25 times the volatility of stocks. Now, no one would generally like to be paid in a form of money that can be worth 15 per cent more (or less) the day after. Part of this is growing up pangs, Bitcoins do not have the normal full suite of financial products underlying the asset — most financial assets that do not have well-traded option contracts tend to be non-ergodic (in simple terms, subject to massive blow-ups). Recently, mainstream exchanges like Chicago Board of Trade and Chicago Mercantile Exchange started offering futures contracts on Bitcoins. Its not enough, futures contracts, sans a large, liquid options market, will not bring volatility down markedly. The point though is, this is just the beginning. Moore’s Law in financial market innovation will kick-in at some stage, especially with mainstream financial market participation increasing, and newer derivative instruments would start trading off Bitcoin underlyings. However, this is the toughest condition for Bitcoin to achieve for it to become a form of money. 

Which brings us to the last issue, does Bitcoin lend itself to viable monetary policy formulation, one that can support the real economy? The first objection would be in terms of its finite quantity – Bitcoin is limited to 21 million. In times of economic downturn, it limits the ability of governments to expand the money supply to tackle the same. This isn’t as such a difficult problem, as Bitcoin is but one of many cryptocurrencies, there are many more (like Litecoin, Dash etc).  

The bigger issue, though, is around the power of the State associated with money. Fiat money today is printed by governments, it’s a sovereign obligation. How would states react to a new architecture stripping that power away? 

Philosophically, this would be the biggest supply-side question that Bitcoin has to answer. Good news (for Bitcoin fans), is that there is a modern precedent. About 500 million citizens in dozens of States, gave up their sovereignty to print money to a common shared pool — the European Monetary Union, on January 1, 1999 — giving birth to Euro. Some of the objectives of the Euro are not very dissimilar to the demand-side arguments for Bitcoin. In a nutshell, it has happened before! While the obstacles are many, so it would seem are the arguments in favour of Bitcoin. How the cookie crumbles would be an interesting story of our lifetime!

Cutting Small Savings rates - penny wise pound foolish

This article was published by the Economic Times on 11th Jan 2018

Bailing in deposits - the only alternative is to nationalise banking

This article was published by DNA on its opinion page on 13th Dec 2017

There’s never a dull moment in banking these days. The Financial Resolution and Deposit Insurance (FRDI) Bill 2017, now sent to a Parliamentary Committee, has been the latest source of much-alarmed commentary recently. At the heart of the alarm is the concept of “bail in” introduced in the bill. Typically, when in stress, banks around the world have been bailed out, ie, external funds (mostly taxpayer) have been used to rescue depositors and bond-holders. A bail-in is just the opposite, where depositor/bond-holder funds could be used to rescue a distressed bank.

In simple terms, it would mean conversion of the bailed-in deposit into equity. In the case of FRDI, the relevant bail-in clause has a provision of “cancelling a liability owed by a specified service provider” and “modifying or changing the form of a liability owed by a specified service provider”. 

The principle of bail-in has been discussed in depth since the global financial crisis of 2008 when the US and Europe alone spent upwards of $1 trillion of taxpayer funds to bail-out stricken banks. The moral hazard question — using taxpayer money to bail-out private investors/depositors — is one that had to be answered. The Bank of International Settlements (BIS, the central bank of all central banks) and G20 formed the Financial Stability Board (FSB) in 2009 to draft rules to prevent an encore of such situations. Bail-in was part of the package of sweeping reforms suggested by BIS. Since then, a number of countries have implemented country-specific banking regulations around bail-ins. European Union’s Bank Recovery and Resolution Directive set out broad guidelines for rescuing distressed European banks. 

Since then, Europe has used bail-ins a number of times to rescue banks. Starting with a small Danish bank (Amagerbanken), which went bankrupt in 2011, prompting Denmark’s Finansiel Stabilitet to force bailing in of high-value deposits and bonds. This was small compared to Cypriot banks in 2013, which saw massive bail-ins of high value ( >Euro 100,000) deposits and bonds to rescue banks reeling from Greek sovereign defaults. Even more recently, in 2016, Banco Popular, Spain’s sixth-largest bank, had certain categories of bonds bailed in en masse, even though depositors were spared. 

In a nutshell, it is an idea whose time has not just come but has been tested live many times. What explains the “oh my God” reactions to FRDI then?

Prima facie, the rationale is deceptively intuitive — small depositors put their life’s savings into bank deposits. Corralling them as equity to rescue distressed banks is unfair and illogical. Politically, this has indeed been the case globally (and in India). Outside of cooperative banks, not a single depositor has lost any money in India, even when their banks went belly-up. In the recent past, instances of Global Trust Bank (GTB) and Bank of Rajasthan are illustrative — RBI organised bail-outs in each case to protect depositors. The issue is, all bailouts involve taxpayer funding, explicit or implicit. In the case of GTB, the same was implicit, via funding required in the Oriental Bank of Commerce that took GTB over. The recent Rs. 1.3 lakh crore recapitalisation programme of Public Sector Banks (PSB) is an instance of explicit taxpayer funding of bank bailouts. Back to moral hazards!

The bigger issue is simple — private sector banks, in good times, make profits for its shareholders. But in distress, they are expected to be bailed out by the state. 

A classic case of privatisation of profits and nationalisation of losses. It is an untenable equation, precisely why bail-ins become crucial. Banks are not ordinary enterprises. Sans a bailout or a bail-in, a bankrupt bank will have massive repercussions on not just the financial system but also the larger economy. Lehman Brothers is an illustrative case — a medium-sized investment bank, its bankruptcy nearly brought the financial system to a collapse.

Above all, while Lehman did not have depositors, its senior unsecured bondholders (same seniority in capital structure as depositors) received nothing more than 10-15 cents on every dollar they had invested. Turn back to the Cypriot example, where bailed-in depositors/bondholders have retained at least 40-50 cents to every dollar they had invested. No two cases are the same, but they do provide illustrative lessons.

In a nutshell, the choice between a taxpayer-funded bailout and a depositor-funded bail-in isn’t that much of Hobson’s territory. 

If bail-ins are considered sacrilege, the default option left is to nationalize banks altogether. That way, all profits would belong to taxpayers. And then, when there is a bank in distress, taxpayers pick up the rescue tab. The Indian banking system, with PSB having 70 per cent market share, have tackled the moral hazard quite elegantly. Unfortunately, some of those who cry loudest for privatisation of banks are also those that have expressed the greatest horror at the bail-in provisions of FRDI. Unfortunately, like in everything else in life, we cant have our cake and eat it too!

New Insolvency Law - the govt is right, market is wrong

This was published in the DNA Opinion page on 29th of Nov, 2017

The recent changes to the Insolvency and Bankruptcy Code (IBC) through an Ordinance has brought into stark relief an enduring cliché — “good politics is not good economics”. Or at least, that is the dominant narrative of the market and the financial nomenklatura (let’s call it the finklatura) that cheerleads the market. Prima facie, the rationale of the finklatura is unexceptionable. 

The amended IBC essentially bars controlling shareholders (or promoters) of companies from bidding for their bankrupt companies that are being auctioned off via the NCLT (National Company Law Tribunal)-overseen process. In its original avatar, only those promoters deemed as “willful defaulters” were proscribed from bidding. Before this amendment came through, bidders in many of these cases before the NCLT included promoters (eg, Ruias for Essar Steel).

The politics of this is ostensibly simple — harsh measures against big business make for good optics and good messaging.

Economically, the finklatura asserts, it’s the other way round. Currently, there are 12 identified bankrupt companies that are before the NCLT for auctions that try to minimise the haircuts creditors (primarily banks) will need to take on the loans outstanding. In the short run, with promoters out of the process, bids are likely to turn less aggressive. There are multiple reasons for that. Most of the 12 companies are in steel, power and infrastructure sectors. To start with, all of these are industries where an enormous amount of local operating domain knowledge is critical to successful operations. Second, all 12 are large, complex enterprises — typically insiders have a lot better handle on the complexities of effective management. Put both factors together, and it is clear why existing promoters would have greater confidence in running these companies, and therefore bid more aggressively, compared to any other third-party bidder. The cherry on the cake —– structurally, all three are what economists call oligopolistic markets, i.e, industries with few operating players. In other words, in the best of times, there are relatively few viable bidders, and removing the promoter from the fray takes away a large chunk of active interest in the auction. 

Less aggressive bids, naturally, would cause the banks to accept a price that demands a higher haircut on their loans (initial market estimates range from 10-20 per cent higher haircuts in bids). This, in turn, would mean banks requiring more capital to clean up their balance sheets. Given that the recently announced bank recapitalisation plan is fully taxpayer-funded, this would check all the wrong boxes — higher public debt, higher interest rates, potentially even an expansion of the recapitalisation required, and all their downstream adverse consequences. The economic impact, therefore, is clear, that we have (yet again) sacrificed economic gains at the altar of politics. Or is it?

Let us examine the economics of it. There has recently been a great deal of excitement around Richard Thaler’s Nudge Theory (primarily driven by, as is usual for arcane subjects, by the Economics Nobel Prize awarded to Professor Thaler). 

Simply put, a Nudge is an act (or influence) that alters behaviour, while not precluding any options for the user. Now, a law is somewhat more than simply a nudge, it is perhaps more akin to a shove. From a signalling standpoint though, this shove makes for interesting potential outcomes. Fundamentally, a strong, almost unforgiving insolvency law sends a strong message to promoters across the board. The message fundamentally seeks to alter promoter behaviour. It does not preclude the option of promoters taking loans in their enterprises but puts the fear of God on ensuring prudence, analytical rigour and above all, integrity, in the utilization of loans. 

India’s promoters don’t fall sick, only their companies do — has been an oft-quoted, and sadly, accurate description of Indian capitalism. The spectre of promoters of distressed companies remaining in a saddle, infusing no additional equity, even as banks take large haircuts on loans — militate against a very fundamental definitional tenet of the market economy. Under that tenet, creditors are senior to equity shareholders over assets of a company.

In other words, creditors need to be repaid in full before equity-holders can own any assets of a company that has defaulted on servicing its loans. Seldom has this been honoured in its letter and spirit in India. The new law and the ongoing resolution process should, hopefully, establish the seniority of the creditor in the capital structure, for perhaps the first time in India.

All policymaking is political. In this case, the good politics of the law makes for good economic principles too. Ben Graham, the legendary investor, described markets as being a voting machine in the short term (tallying up stocks that are popular and unpopular) and weighing machine in the long term (assessing the substance). In the case of the new Insolvency law, the nomenklatura representing the markets is seemingly in its voting phase. Ironically, the vote-driven government seems to have “weighed” it in a lot better!     

Interest Rates: Stars Are Aligning, Not In The Direction Markets Hope!

This article was published by the Business World Magazine on the 26th of Nov, 2017

Interest rates are always in the news, but decibel levels on India's rates have gone up manifold since the last quarterly GDP growth print (of 5.7%) came out. The general refrain has been that India's rates, especially real interest rates (ie, net of inflation) are too high, and are adversely affecting growth and other macro outcomes like jobs. At the receiving end of most criticism has been the Reserve Bank of India (RBI), for not cutting policy rates aggressively. 

Unfortunately, like it is most of the times, the noise is likely to remain just that. Macro variables have not only vindicated RBI's stance on keeping rates steady, but also point towards marginal hardening of market yields.

To start with, the global monetary cycle, after years of easy money, is turning. Of the three major Central Banks (in US, Europe, Japan), two have embarked on a major unwinding of the Quantitative Easing (QE) that started after the global financial crisis in 2008, and injected trillions of dollars of liquidity in the global markets. At the same time, the global economy has started showing a coordinated upturn - IMF has recently upgraded its global growth forecasts to their best levels in five years. Global growth is expected to be 3.6% in 2017 (compared to 3.2% in 2016), driven by both developed markets (22% in 2017, compared to 1.7% in 2016) and developing markets (4.6% versus 4.3%). For well over a year, we have seen the goldilocks period in global growth since 2008 - with jobs, industrial production and global trade all moving up in tandem in a secular trend across the world. Both these factors, ie, unwinding of QE and strong global growth, together have meant that global interest rates are on their way up, limiting the headroom for Indian interest rates to decline from current levels.

India's macro variables on the other hand have started worsening at the margin. The key ballast for the economy in the last couple of years has been stable twin balance sheets (fiscal and trade) and low inflation, even as the economy settled to a low(er) growth equilibrium. The twin deficits have worsened. One, trade deficit is trending higher (averaging $12.6 billion in FY2018 compared to USD8 billion in the previous year). Two, fiscal situation of both state and central government have worsened, with farm loan waivers, state pay commission payouts, and now, the big bank recapitalisaiton plan (more of that later). To make things a little more interesting, inflation too seemed to have bottomed out, with more upside risks as global oil prices approach the USD60 level. In a nutshell, there is more at risk today for RBI to cut interest rates than many would have us believe.

The last piece in the interest rate jigsaw is the mega bank recapitalisation plan, funded substantially via a 1.3 lac crore Recap bond issuance. Ostensibly, this shouldn't expand the fiscal deficit - as many in the government, led by the Chief Economic Advisor have been at pains to explain. While "below the line" is the fashionable imprimatur of the Recap bonds, the impact of such definitions are optical rather than real. Effectively, the government (or some government institution) will issue bonds. While there might be adequate liquidity in the system to subscribe to these bonds, it expands the supply of bonds in the economy. In other words, it takes up the debt-GDP ratio, and skews the demand/supply dynamics for the bond market, adversely at the margin. At the end of the day, all bond (and equity) supply has to be financed by the same pool of financial (largely household) savings in the economy. Ergo, a large addition to the existing stock of bonds makes additional demands on the same pool, irrespective of the accounting treatment.

At the end, the real question is, does it matter? Will a reduction in interest rates by (say) 100 basis points kickstart the private investment cycle? When capacity utilisation in industry is running at mid-70% levels, the answer is almost obvious. In the last three year, the Indian economy has been marked by remarkable macro-stability in an increasingly uncertain world. By lowering rates today, is the marginal gain, in terms of higher potential growth, worth the risks of deteriorating macro? Historically, there has been very little correlation between interest rates and growth in India. Our growth challenges are elsewhere, in inadequate demand. Lower interest rates don't make for a good enough solution in the toolkit - the rates doves are barking up the wrong tree!

Moody's upgrade is a milestone in India's development journey

This was published in the Economic Times dated 20th Nov, 2017

In India’s argumentative ideas space, no news is good news. Therefore, the kerfuffle over the upgrade of India’s sovereign ratings by Moody’s (to Baa2, from Baa3) is entirely expected. For the partisan, it is a definitive validation of the government’s economic management. To naysayers, it is at best empty optics at a time when the economy is slowing down, at worst highly suspect on timing and credibility. Curiously, both miss essential woods for trivial plants.

First, the basic point – credit ratings, like most ratings, are predominantly an evaluation of the past, even though the objective is to provide guidance for the future. An upgrade is typically rare, especially so after the global financial crisis in 2008. It takes years of evaluation of policies (primarily related to macro-stability – debt-levels, sustainability of public finances, stability etc) before rating upgrades are done. In this case, the upgrade is especially creditable as it comes barely four years since India was classified as one of the “fragile five” economies, struggling with high twin deficits in fiscal and current accounts. To that extent, the current government deserves a lot of credit – it has privileged macro-stability over growth from its first day. It started with its first Budget, when the Finance Minister stuck with the deficit target set by his predecessor, a number that was received with much scepticism when it was presented by P Chidambaram. Since then, government has been a dogged “fiscal fundamentalist”, refusing any slippages even as growth plunged in the recent quarters. On the external account, a combination of luck (declining oil prices) and pluck (RBI ignoring shrill calls for massive reduction in interest rates), has kept the situation on an even keel.

Second, in many ways, this upgrade is merely a partial correction of a historical anomaly. Baa3, the toe-end of investment grade, clubs India with a bunch of countries with far worse macro-indicators. It’s a point that has been made repeatedly by Indian policymakers, most notably by Chief Economic Advisor Arvind Subramaniam in a section in the last Economic Survey. India’s structural strengths, eg, public debt entirely funded via rupee loans, all but a small part via local savings – were seemingly ignored while benchmarking on headline numbers.

Third, and most important point, is one of future signaling. What does it mean for India’s economic prospects going forward?

To start with, the sovereign rating is an estimation of the sovereign’s ability to repay its loans. An upgrade, technically, lowers the cost of borrowing for the sovereign. This is of limited practical utility to India, as the Indian government does not fund its deficits via offshore commercial bond markets. The entire public debt of India is funded via the domestic Rupee (INR) bond market, and foreign investor participation there is very small, and tightly regulated through quotas.   

Sovereign rating also serves as a benchmark for corporate entities domiciled in that country, as corporate ratings are (barring very exceptional cases) capped at the sovereign rating of the home-country of the corporate. Soon after the sovereign upgrade, Moody’s upgraded a bunch of Indian corporate entities (largely public sector companies). Over time, this has an impact on corporate ratings down the chain as well. While not automatic with a sovereign upgrade, a higher sovereign rating opens up fresh space for corporate upgrades too. This would result in reduction in cost of borrowing for Indian companies looking to raise financing from offshore bond markets.

Most important though is the optical macroeconomic signal. A ratings upgrade gives out a positive narrative on policy and builds incremental confidence in foreign investors. There are material benefits of the same, eg, in terms of incremental foreign investment pools from global Pension and Life Insurance firms that have minimum ratings criteria for investing. Typically, such incremental flows would tend to bid up Indian bond prices (both onshore and offshore) – we have already seen the first signs of the same in the form of dropping yields on government bonds. Higher bond prices, or lower yields, would tend to lower cost of funds – marginal for the government, but significant for corporate sector. Incrementally higher foreign flows tend to bid up INR too, making investments in a host of other Indian financial assets – equities, Real Estate – incrementally more attractive to foreign investors. It is especially propitious time for Public Sector Banks (PSB), that would find it easier to raise capital as part of the recapitalization plan announced earlier this month (PSB are expected to tap public markets to raise nearly 60,000 crores as a part of this plan). Lastly, as a net importer, a higher INR flows through as lower inflation into the economy, as imported goods become cheaper.

This isn’t an unmixed blessing. High levels of foreign flows resulting in rapid currency appreciation can result in loss of export competitiveness, with adverse consequences. South Korea’s meltdown in 1997-98 was at least partially due to a similar situation, barely a couple of years after it received a sovereign ratings upgrade.

In a nutshell, a ratings upgrade isn’t a major climax, nor is it much ado about nothing. It is a positive milestone, and quibbling about the size of the same is essentially narcissism of minor differences. But it is merely one milestone in India’s development journey, where there are miles to go before we can even think of dozing off!

Bank Reforms - preparing for the next crisis?

This was published in the DNA newspaper dated 1st Nov 2017

The Public Sector Bank (PSB) recapitalisation plan announced by the government has sparked off renewed debates on the shape and future of Indian banking. The big policy and philosophical question is — what should the Indian banking system look like in the future? Unfortunately, we are saddled with seriously flawed assumptions on what constitutes “reform” in India — some of them borrowed wisdom from the West, yet some more are ideological postures. Let us look at some of the key postulates.

One, the idea of having fewer, (much) larger banks. It’s an old idea, but embedded firmly across the political divide, and was first mooted by P Chidambaram as Finance Minister. Chief Economic Advisor (CEA) Arvind Subramanian reiterated its salience a few days ago. Ironically enough, this is one idea where India is bucking the global trend. Since the global financial crisis in 2008, regulators globally have become extremely wary of banks that are too large. The reason for that is intuitive.

First, larger the bank, larger is its footprint, and hence greater the damage to the wider economy should it fail. Second, Risk Management 101 dictates diversification is a key mitigant of risk, while concentration is a contributor to it. Ergo, smaller, more numerous banks are preferred to larger, fewer ones, from a systemic risk management perspective. Globally Systematically Important Banks, or GSIB — a list of essentially Too-Big-To-Fail (TBTF) institutions — have been identified, and they are required to have more stringent control around capital and risk. In this context, the idea of having larger Indian banks is bizarre, because its stated aim would be to merge small banks into fewer TBTF ones, thereby increasing risks to the system!

Two, assumption of public ownership of PSB to taxpayer-funded “bailout” through recapitalisation. It has been established many times over the years — banking obligations, when banks are under stress, automatically devolve to the taxpayer, irrespective of ownership. Whether Korean banks post the 1997-98 Asian Crisis, US/European banks post the 2008 global financial crisis, or Indian banks many times over (remember Global Trust Bank, Bank of Rajasthan?) — in a crisis, banks need to be bailed out by the government, irrespective of whether they are owned privately or publicly. Banks aren’t ordinary corporate enterprises — failure of a bank has large social impact. Further, increasing complexity of the financial system means there are snowballing effects of a bank failure that are difficult to assess. Therefore, the taxpayer liability isn’t an issue of ownership, but the quality of regulation to ensure risks are appropriately managed.

Three, privatisation as a panacea for all ills. This is an ideological position — based primarily on faith rather than reason. The assumption is the issues afflicting PSB are on account of its state-ownership, which somehow make them structurally vulnerable to taking poor-quality decisions, sometimes compromised with integrity issues. From Leendert Neufville in Holland in the 18th century to a range of Asian banks in the 20th century to American and European banks in 2008 — history is replete with privately-owned banks collapsing on the weight of poor decision-making. Regulatory investigations in the last few years in private sector banks have shown up numerous cases of moral turpitude too. Even in India, large private-sector banks have been found out making poor-quality decisions on transparency, risk-management and governance. In other words, there is too much data disproving the hypothesis of superior governance of a privately-owned banking system.

The question then is, what should policy-makers focus on? The focus should be at the core of the issue, i.e., risk. Banks are fundamentally risky enterprises, allowed a level of leverage in their capital structures and a level of interconnectedness with large parts of the economy that no other commercial enterprise (barring perhaps insurance) is allowed. The example of Lehman Brothers is illustrative. It was a mid-sized bank with no retail deposits — and its collapse engendered a crisis to the global financial architecture. No wonder, banks have a social compact of “backstop” from the taxpayer.

That is where the real issue lies — not in ownership, not in size. Regulators should be concentrating on mitigating that risk on society. Fundamentally, it means converting banks into utilities — essential institutions, but ones that don’t take risks that can put society at risk (similar to, though not the same as, a telephone company). Solutions lie in the domain of smaller (not larger) banks, higher capital requirements, lesser risk-taking, greater state oversight (and not lesser via privatisation) and higher governance. In other words, make banks (and banking) a boring affair. Unfortunately, most of the oft-discussed, clichéd solutions today are taking the other direction — taken to their conclusions, they will increase the risks to the system, and make it even more vulnerable to future taxpayer bailouts.

Through history and literature, bankers have rarely been boring. From the usurious Shylock in Merchant of Venice to the murderous Patrick Bateman in American Psycho to the philandering Humphry Wellwood in The Children’s Book — bankers are usually flamboyant, somewhat unscrupulous characters. The real objective for regulators would be around converting bankers (and banks) into Mr Banks, the benign, boring Bank of England official in the Mary Poppins books. That, and not ideological positions around size and ownership, is what will shape for a safer, better banking architecture for India in the future.