Tag Archives: capital

William Hague to urge reform on visit to Burma

William Hague is visiting Burma, the first British foreign secretary to do so for more than 50 years.

He is expected to use meetings with the country’s leaders to press for the release of more political prisoners.
His visit is the latest in a series by top diplomats from around the world, amid steps towards reform by the new government in Burma.
Burma held its first elections in 20 years in 2010, replacing military rule with a nominally civilian government.
Since then the new administration has freed pro-democracy leader Aung San Suu Kyi and begun a process of dialogue.
Last month she formally registered her National League for Democracy as a political party, after boycotting the 2010 polls because of electoral laws that prevented her taking part.

In December US Secretary of State Hillary Clinton visited Burma, in what was seen as an endorsement of the reform process – although Western observers say much more is needed.
‘Political freedom’

Speaking ahead of his arrival in the capital, Nay Pyi Taw, William Hague welcomed the “encouraging” steps taken by the government.

“I am visiting the country to encourage the Burmese government to continue on its path of reform, and to gauge what more Britain can do to support this process,” he said.

Mr Hague is the first British foreign secretary to visit Burma since 1955.

In Nay Pyi Taw he will hold talks with President Thein Sein, a former top general who stepped down to contest the polls as a civilian.

He will then travel to Rangoon, Burma’s commercial capital, to meet Aung San Suu Kyi, representatives of some of Burma’s ethnic minority groups and dissidents.

Ms Suu Kyi’s party plans to contest by-elections in April that could see her elected to parliament. Her party secured a landslide victory in polls in 1990 but was never allowed to take power.

The new government has released some political prisoners in recent months but between 600 and 1,000 journalists, dissidents and monks who led anti-government protests in 2007 are thought to remain behind bars.

Mr Hague said he wanted to see more progress on reform.

“Further steps are needed that will have a lasting impact on human rights and political freedom in Burma,” he said.

“In particular, we hope to see the release of all remaining political prisoners, free and fair by-elections, humanitarian access to people in conflict areas, and credible steps towards national reconciliation.”

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Macroprudential policy Risky business

 THE new big hope of central banks is called macroprudential policy. During the boom, central banks used the fairly blunt instrument of interest rates as their main weapon. But since inflationary pressures were low, thanks to the deflationary shock stemming from China and eastern Europe, rates were kept low. This led to a splurge of asset-backed lending. Meanwhile, banks found easy ways to exploit the rules of the Basle accords – designed to ensure the system was well-capitalised. As a result, when mortgage-backed securities started to plunge in value in 2007, the banks were much less robust than was previously thought.

The Bank of England has set up a financial policy committee, which is just starting the arduous task of sorting out which principles it should follow and which policy buttons it can push. In a paper out today, it sets out its options. It starts by discussing the potential flaws in financial markets such as

incentive distortions which can, for example, arise from contracts that reward short-term performance excessively

informational distortions such as those linked to buyers doubting the quality of assets (adverse selection) or less than fully rational processing of information

co-ordination problems, where collective action, for example to step away from lending in a boom, may be in the interests of individual banks but there is no way to co-ordinate on this outcome

As the paper points out (and as Hyman Minsky famously noticed) there is a tendency for banks to get overexposed to risk in the upswing of a credit cycle. After all, it is the banks that are driving the cycle. As they become more confident about lending against assets, more funds are available to investors/speculators and asset prices rise, increasing the confidence of all involved. As a proportion of GDP, commercial lending to real estate doubled between 2002 and 2008. In the UK banking system, leverage (as measured by total assets to shareholders’ claims) increased from 20:1 to 50:1 within a decade. Both measures ought to have caused alarm but nothing was done.

There is little new in this, as the paper recognizes. Credit cycles have nearly always been marked by lending against property. But property is an illiquid market and prices fall very sharply when the balance of supply and demand shifts, often wiping out of all of a bank’s collateral. Meanwhile, the duration of bank funding was steadily falling, from an average maturity of 10 years in the early 1980s to four years by 2008 (the US followed a similar trajectory). This left the banks very vulnerable to a run on liquidity.

The FPC says the authorities have, in principle, three types of measure to deal with these risks.

those that affect the balance sheets of financial institutions

those that affect the terms and conditions of loans and other financial transactions

those that influence market structures

For example, balance sheet measures include maximum leverage ratios and liquidity buffers; the second group includes caps on loan-to-value ratios and minimum margins; the third includes requirements for disclosure to reduce uncertainty about the market exposure of individual banks, but also the use of central counterparties to clear trades.

The paper then conducts an excellent and clear-eyed assessment of the pros and cons of these measures, without coming to any definite conclusion (the paper is part of a consultation process). What is clear is that the authorities cannot rely on just one or two measures, esepcially given the proved willingness of banks to game the system. Of course, the authorities cannot prevent all future financial crises, but they can still be a lot more alert than they were in the early 2000s. The paper shows the FPC is making a good start.

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