Leadeship in Clinical Practice Essay Example | Topics and Well Written Essays - 1500 words

Leadeship in Clinical Practice - Essay Example Nurse-doctor communication results in safe and effective care of patient. Similar to that nurse-supporting staff relation also affects the patients because they are the one who are responsible for taking care of patient in relation to medicines, food, clothing, cleanliness etc. So these two factors play a key role in managing a clinic performance. This relation can be made efficient only on the basis of effective leadership and communication skills (Armstrong, 2005, Chiarella, 2002). 1.2 Theories of communication Communication can be understood in various ways, as human nature also differs depending on one’s personality and nature. There is diversity in it because it is a broader concept of discipline. There are many theories of leadership and communication such as CBS model, situational theory, contingency theory etc. In accordance to the situation of the discussion paper two communication theories will support the present condition of staff members who assist nurses. They ar e situational and contingency theories (Woodward J, 1965). Situational leadership theory This theory believes that there is not a one single best style of leadership. In fact, leading will be effective only if it is related to specific tasks. It is the style of maturity. It will not only help in the accomplishment of tasks and jobs, but will also influence the group performing the job (Hersey P, 1969). This theory is related to various clinical areas, mostly towards the relationship of nurse-supporting staff because the followers are less skilled. They need full guidance and supervision. This can be done by assigning them task in groups on the basis of specific situations. Each group will be given task on the basis of his or maturity level. The result of which will be increased knowledge and experience through mutual coordination in a group. It will help to motivate the task as well as relationship behavior of the followers. Contingency theory This theory believes that leadership ef fectiveness is mainly based on two factors i.e. situational control and leadership style. It emphasize on the fact that there is not a single way of leading, similar to that of situational theory. It believes that an organization success depends on both internal as well as external factors. In a clinic perspective, business will be successful only if it’s both, the external factors such as clients, image etc., and internal factors such as doctors, nurses, supporting staff etc., are considered and dealt efficiently. Organization should focus more on organizational structures and management styles (Lawrence P, 1967). Managers should make the organizational structure friendly in order to educate its supporting staff. Management styles should be less formal because they are fresh graduate’s one need to be at their level to promote efficiency. Clinics should have open systems in order to satisfy their internal needs of supporting staff and make them prepare to deal with cha llenging situations (Turner C, 2002). There is not a single way of organizing things. All depends on the nature of task provided to the working staff. Nursing managers should clearly explain the task or jobs to the staff. They should find a good fit among staff and jobs. This means that jobs should be assigned on the basis of capability of a person. Different techniques should be used in various departments of a clinic (Fred Lutans, 2011). 1.3 Communication in clinical areas

Press release event Essay Example | Topics and Well Written Essays - 500 words

Press release event - Essay Example Buses will leave for Bradford Woods from the School of Public Health – Bloomington building, on Oct 15th @ 8am. Culture of Care emphasizes the Bystander Intervention Mechanism to help students demonstrate care for one another. The program encourages them to adopt an active approach for the delivery of care to other members of the society, as this is essential to overcome the obstacles that arise due to the more prevalent Bystander Effect. Many of us are well-aware of the reluctance that is demonstrated by our people regarding performance of social duties. Considering every social responsibility to be the duty of others is the primary reason behind the Bystander Effect; a phenomenon that is detrimental to our society as a whole. This encouragement program targets Hoosiers to rise to the occasion and have the courage to care, by learning about overcoming the Bystander Effect. Goal of the retreat is to answer questions pertaining to what, why and how this initiative is important. The topics pertaining to social and psychological well-being are of the highest priority and will be addressed accordingly. The aim is to bring about a positive change in the behaviors of the members of the society by educating them in a way that is informal yet contributory towards the learning of the society as a whole. Being the first-ever retreat hosted by this initiative, the event will inspire fresh ideas brought forward by students to make the campus a safer place for all. Revolving around the notion of Bystander Effect, the activity will seek to find answer to questions

Benefits of Postnatal Debriefing

Benefits of Postnatal Debriefing 215133 POSTNATAL DEBRIEFING STILL VALUED BY WOMEN Introduction Providing debriefing for women in the postnatal period is believed by many midwives to help women to adjust to their childbirth experiences, and to help reduce postnatal psychological morbidity. The evidence base is equivocal in relation to the efficacy of these kinds of interventions, which are typically delivered by midwives in clinical practice. This essay will review several pieces of research relating to postnatal debriefing associated with the psychological distress and potential post traumatic stress disorder associated with childbirth. It will look at the quality of evidence available and discuss some of the parameters of the arguments surrounding the provision of postnatal debriefing, listening and counselling services. It will also make recommendations for practice in relation to this kind of provision, and in relation to future research. Discussion Lavender and Walkinshaw (1998) carried out a randomised trial of a postnatal ‘debriefing’ service provided by midwives, to see what effect it had on psychological morbidity after childbirth. The authors comprise one midwife and one obstetrician, and the midwife has a postgraduate degree, suggestive that they have the skills to carry out and report on such a study. Using a randomised trial design is aimed at filling an apparent gap in the research at the time of the study, in relation to this area of practice (Lavender and Walkinshaw, 1998). This study was carried out â€Å"in a regional teaching hospital in northwest England, and used a sample of â€Å"one hundred and twenty postnatal primigravidas†, who were â€Å"allocated by sealed envelopes to receive the debriefing intervention (n 4 56) or not (n 4 58).† (Lavender and Walkinshaw, 1998 p 215). The study involved the collection of baseline intrapartum and demographic information in order to assess a wid e variety of variables in the study (Lavender and Walkinshaw, 1998). The intervention is described as follows: â€Å" Women randomised to the intervention participated in an interactive interview in which they spent as much time as necessary discussing their labour, asking questions, and exploring their feelings. One research midwife, who had received no formal training in counselling, conducted the interviews, which lasted between 30 and 120 minutes, the duration being guided by the needs of the respondent. Hospital notes were available throughout the interview so that direct questions could be answered. No interview schedule was defined, since the interviews were respondent led.† (Lavender and Walkinshaw, 1998) This approach raises several points. To being with, it is positive that there is such transparency in explaining the intervention, even if the intervention is brief, because it allows the reader to understand the nature, it aids replication, and it demonstrates the lack of specialist knowledge required to perform the intervention. Secondly, it shows that a research midwife, who was not a counsellor, was carrying out the intervention. And thirdly, it demonstrates a woman-focused, midwifery-oriented approach, in that the interviews were respondent led and the length was not limited. Such an approach reflects midwifery philosophies which makes the article useful for midwifery practice. Lavender and Walkinshaw (1998) used an established data collection instrument, the Hospital Anxiety and Depression (HAD) scale, which was administered by postal questionnaire 3 weeks after delivery. Using an established data collection instrument adds strength to the study, but there is a small amount of unreliability about postal questionnaires, because there is never any guarantee that they are filled out by the person they are sent to. Using the pre-tested scale allowed the authors to compare the proportion of women in each group with anxiety and depression scores of more than 10 points, using odds ratios and 95% confidence intervals, both of which are acceptable statistical applications for these data. The 95% response rate ensured a good sample size (Lavender and Walkinsahw, 1998), although the study would have had even more statistical significance if it could have been carried out across more than one site. The benefits of this intervention were established by the study, but the authors raise some concerns, including concern at the high levels of morbidity detected, and question whether using the chosen scale was appropriate for measu ring psychological morbidity after childbirth (normal or abnormal) (Lavender and Walkinshaw, 1998). This study is limited now by its age, and by being superceded by more recent studies. Kershaw et al (2005) carried out a prospective randomised controlled trail with two arms, which compared debriefing methods after birth which were aimed at reducing fear of future childbirth. As can be seen, this studied a more specific intervention, in relation to a very specific outcome, rather than measuring psychological morbidity per se. This would make it more applicable to specific aspects of practice. This study was also carried out in one site, and the authors provide details of the hospital site, which this author would question due to the issue of confidentiality. Kershaw et al (2005) focused on mothers whose first birth was an operative delivery, and gained ethical approval. More details about the ethics of this study would have enhanced its quality. Kershaw et al (2005) provide their inclusion and exclusion criteria, but do not discuss controlling for other variables. They also use a pre-established measurement tool to assess the fear of childbirth experienced by the stu dy participants (Kershaw et al, 2005). They do subsequently present demographic information, and they use a range of suitable statistical tests, explaining the significance of these, which makes it easier for the novice reader to begin to assess the quality of the data analysis. This again was a debriefing intervention carried out by midwives in the postnatal period (Kershaw et al, 2005). However, unlike the previous study, this one differed because the debriefing was held on two separate occasions, and sessions were held at home (Kershaw et al, 2005). Another significant element of this study was that the midwives involved received training in critical incident stress debriefing (Kershaw et al, 2005). The authors justify their study as follows: â€Å" In this study fear of childbirth and post-traumatic stress were measured rather than maternal depression and general health. It was decided not to measure maternal depression as research has suggested this is frequently associated with factors not related to childbirth. Women were allowed sufficient time to debrief, sessions lasted up to an hour and a half.† (Kershaw et al, 1508). This shows some strengths, including a focus on specific psychological features, rather than on general health and depression, which can be difficult to assess. Although the authors state women were allowed sufficient time for the session, this study does not reflect the kind of midwifery philosophy that the Lavender and Walkinshaw (1998) study did. The findings from this study do not support the use of this particular intervention in this particular population. â€Å"The findings of this study demonstrated in the short term no significant difference in the WDEQ fear of childbirth scores and IES emotional distress scores. These findings show community-led debriefing is not proven to be of any value in reducing women’s fear of childbirth following an operative delivery.† (Kershaw et al, 2005 p 1508). However, this study may not be the last word on this kind of intervention, and there are limitations, including the focus only on women who had operative deliveries, focusing on one site, and in the intervention itself. Maybe the nature of the intervention, and the training provided for midwives, was limited. The authors agree that a longer-term evaluation might show different results (Kershaw et al, 2005). It might be that the data collection tool was inappropriate, as with the previous study. However, this study, as with the previous one, does establish the usefulness and facility of midwives providing postnatal support of this kind. Kershaw et al (2005) show that midwives identified those women who would be needing debriefing, but this author would argue that midwives are not experts in mental health, and limiting debriefing to those identified by midwives as at higher risk might miss important cases. Reading between the lines of this study seems to imply that this intervention is valued by midwives and by patients, despite the findings of the statistical analysis. Small et al (2000) carried out a randomised controlled trial of midwife led debriefing to reduce maternal depression after operative childbirth, again, focusing on women who are viewed as potentially at higher risk of mental health morbidity postnatally. This study was carried out in a large maternity teaching hospital in Melbourne, Australia, unlike the previous two studies, which were carried out in the UK. Small et al (2000) had a sample of 1041 women who had given birth by either caesarean section (n = 624) , by assisted vaginal delivery using forceps (n = 353) or vacuum extraction (n = 64), and these women were randomised to the intervention group or the control group (Small et al, 2000). The sample size was statistically calculated for significance, which is a strength of the study. The methodology is clear and the randomisation process described. The intervention â€Å"provided women with an opportunity to discuss their labour, birth, and post ­delivery events and expe riences† (Small et al, 2000 p 1044). Although there is a woman-centred focus in this study, only 1 hour maximum was allowed for the discussion, which this author would suggest is a severe limitation of this intervention in relation to woman-centred debriefing. The midwives were not trained but described as experienced and skilled. The main outcome measures were â€Å"maternal depression (score >13 on the Edinburgh postnatal depression scale) and overall health status (comparison of mean scores on SF ­36 subscales) measured by postal questionnaire at six months postpartum† (Small et al, 2000 p 1044). Again, established scales are being used to lend strength to the study. Small et al (2000) found that â€Å"more women allocated to debriefing scored as depressed six months after birth than women allocated to usual postpartum care (81 (17%) v 65 (14%)), although this difference was not significant (odds ratio = 1.24, 95% confidence interval 0.87 to 1.77)† and â€Å"they were also more likely to report that depression had been a problem for them since the birth, but the difference was not significant (123 (28%) v 94 (22%); odds ratio = 1.37, 1.00 to 1.86).† (p 1043). According to this study, the authors demonstrated that midwife led debriefing following operative births was not only not effective in reducing maternal morbidity (in particular, psychological morbidity), at the six month point after delivery, but that it may have been a contributing factor to emotional health issues for certain women (Small et al, 2000). This author would suggest that it might be the nature of the intervention that is the issue here, because it was provided in hospital, soon after birth, and may not have been particularly woman-centred. Cultural differences between Australian women and UK women cannot be ruled out; neither can cultural differences in models of care and practice. Priest et al (2003) carried out a randomised single-blind controlled trial, stratified for parity and delivery mode, to test whether critical incident stress debriefing after childbirth reduces the incidence of postnatal psychological disorders, also in Australia, in two maternity hospitals. They had a large enough sample size, consisting of 1745 women who delivered healthy term infants between a specificed time period, with 75 allocated to the intervention group and 870 to control group (Priest et al, 2003). Again, the study design is transparent, and the randomisation process clear. As with the previous study by Small et al (2000), the intervention was carried out soon after delivery, but this intervention consisted of an individual, standardised debriefing session based on the principles of critical incident stress debriefing. The intervention is described briefly, and it is stated that the midwives were trained in the intervention (Priest et al, 2003). However, the intervention i tself and the training is not really described in great detail, which affects replication of the study. The intervention is based on theories which are not specifically developed for childbirth trauma, but that have been adapted, and this may be a weakness. As with the other studies, recognised outcome measures are used. Priest et al (2003) found that â€Å"there were no significant differences between control and intervention groups in scores on Impact of Events or Edinburgh Postnatal Depression Scales at 2, 6 or 12 months postpartum, or in proportions of women who met diagnostic criteria for a stress disorder (intervention, 0.6% v control, 0.8%; P = 0.58) or major or minor depression (intervention, 17.8% v control, 18.2%; relative risk [95% CI], 0.99 [0.87–1.11]) during the postpartum year. Nor were there differences in median time to onset of depression (intervention, 6 [interquartile range, 4–9] weeks v control, 4 [3–8] weeks; P = 0.84), or duration of depression (intervention, 24 [12–46] weeks v control, 22 [10–52] weeks; P=0.98).† (p 544). This leads to the conclusion that this single session of midwife led, specific debriefing was ineffective as a means of prevention of postnatal psychological disorders (Priest et al, 2003). While the authors conclude that the intervention had no ill effects (Priest et al, 2003), this author finds these findings significant in their lack of support for the intervention, and would suggest, again, that it may be the nature of the intervention that is leading to these kinds of results. Gamble et al (2005) carried out a randomised controlled trial to assess the effectiveness of a counselling intervention after a traumatic childbirth, based on a midwife-led brief counselling intervention for women deemed at risk of developing symptoms of psychological symptoms postnatally. This was a smaller study group, with only 50 in the intervention group and 53 in the control group, and the intervention was also provided as face to face counselling within 72 hours of birth, as with the previous study, but also had a telephone counselling session at between four and six weeks postnatally (Gamble et al, 2005). The allocation/randomisation process is described, but the midwife was not blind to the randomisation, which may represent a potential source of bias. Established data collection scales were used as with all the previous studies: â€Å"Edinburgh Postnatal Depression Scale (EPDS) , Depression Anxiety and Stress Scale-21 (DASS-21) , and Maternity Social Support Scale (MSSS)â €  (Gamble et al, 2005 p 13). Gamble et al (2005) measured the following outcome measures: posttraumatic stress symptoms, depression, self-blame, and confidence about a future pregnancy. Gamble et al (2005) provide great detail about the underpinnings of the therapeutic intervention, and there is a midwifery/woman-centred focus to the intervention (and, by association, to the study). Gamble et al (2005) found their intervention to be effective in reducing symptoms of trauma, depression, stress, and feelings of self-blame. All of these studies fall within the scope of good standards of evidence for practice, but find marked differences between studies in relation to efficacy and non-efficacy of interventions. There may be a number of reasons for this. Only one study suggests potential negative effects of this kind of intervention, but this was not conclusive and warranted further investigation. However, the literature around this subject does seem to predominantly suggest that such interventions are useful for women following birth. Axe (2000) suggests that women can use such support to help them cope with the difference between their expectations and experiences of birth. Robinson (1999) argues for the increasing occurrence of post traumatic stress disorder following traumatic childbirth, and suggests that this is under-diagnosed and represents a significant maternal morbidity which needs addressing, a suggestion also found by Ayers and Pickering (2001). Creedy et al (2000) state that â€Å"posttraum atic stress disorder after childbirth is a poorly recognized phenomenon,† and that â€Å"women who experienced both a high level of obstetric intervention and dissatisfaction with their intrapartum care were more likely to develop trauma symptoms than women who received a high level of obstetric intervention or women who perceived their care to be inadequate† (p 104). Therefore, the focus on debriefing may not be the only way forward to improve psychological morbidity – there may be a need for research to explore ways of reducing the trauma that occurs in the first place. Czarnocka and Slade (2000) suggest that there may be opportunities for prevention of post traumatic stress and psychological morbidity after birth, through providing care in labour that enhances perceptions of control and support. One study demonstrates that negative experiences of interactions with maternity staff can contribute to psychological morbidity (Wijma et al, 1997). Kenardy (2000) suggests that it is the nature of the debriefing that may be ineffective in those studies that have found such results. Gamble et al (2002) also suggest that the kind and timing of the debriefing warrants further investigation. Hagan et al (1996) did not find any reduction in psychological morbidity following this kind of intervention. Alexander (1999) suggests that some of the problems may be linked to the lack of clarity and understanding that exists about these processes, which are neither necessarily formal psychological counselling nor a simple sharing session. Yet there does seem to be some indication that these kinds of supportive therapies are found to be useful by women and by midwives. Westley (1997) describes providing women with the opportunity to talk about their birth experiences, and have their questions answered, as useful, a finding supported by Smith et al (1996), Phillips (2003), Inglis (2002), Dennett (2003), Charles (1994), Charles and Curtis (1994), Baxter et al (2003), and Allott (1996). Certainly, a range of literature established post-traumatic stress disorder as a potential and/or real psychological morbidity for women having had a baby (Ayers and Pickering, 2001; Creedy et al, 2000; Laing, 2001; Menage, 1996; Robinson, 1999; Ballard et al, 1995; Crompton, 1996). Psychological debriefing interventions may be effective in preventing or managing post traumatic stress disorder in a range of situations (Rose et al, 2004), but there would seem to be some dangers inherent in some of the interventions found in the literature ( Kenardy, 2000; Madden, 2002). Conclusion It would appear from the randomised controlled trials analysed here that while some evidence supports postnatal debriefing as a means of reducing psychological morbidity, significant evidence shows no correlation between postnatal interventions of this kind and improved emotional health outcomes. However, anecdotal evidence and other literature suggests that midwives and women find some benefit from opportunities to talk about their childbirth experiences. Some of these simply allow women an opportunity to talk and to ask questions about what happened to them. This leads to the conclusion that such interventions require much more research, preferably research which includes detailed, qualitative evaluations of interventions, and interventions which are specifically designed for this client group. However, this author would also recommend that such interventions be provided, as they are not proven to do harm in the majority of studies, and represent a woman-centred approach to good mi dwifery care. References Alexander J (1998) Confusing debriefing and defusing postnatally: the need for clarity of terms, purpose and value. Midwifery 14: 122-124. Allott H (1996) Picking up the pieces: the post-delivery stress clinic. British Journal of Midwifery 4(10): 534-536. Axe S (2000) Labour debriefing is crucial for good psychological care. British Journal of Midwifery 8(10): 626-631. Ayers S, Pickering A D (2001) Do women get post-traumatic stress disorder as a result of childbirth? A prospective study of incidence. Birth 28(2): 111-118. Ballard C G, Stanley A K, Brockington I F (1995) Post-traumatic stress disorder (PTSD) after childbirth. The British Journal of Psychiatry 166: 525-528. Baxter J, McCrae A, Dorey-Irani A (2003) Talking with women after birth. British Journal of Midwifery 11(5): 304-309. Charles J L (1994) Birth afterthoughts: a listening and information service. British Journal of Midwifery 2(7): 331-334. Charles J, Curtis L (1994) Birth afterthoughts. Midwives Chronicle 107(1278): 266-268. Creedy D K, Shochet I M, Horsfall J (2000) Childbirth and the development of acute trauma symptoms: incidence and contributing factors. Birth 27(2): 104-111. Crompton J (1996) Post-traumatic stress disorder and childbirth. British Journal of Midwifery 4(6): 290-294. Czarnocka J, Slade P (2000) Prevalence and predictors of post-traumatic stress symptoms following childbirth. British Journal of Clinical Psychology 39: 35-51. Dennett S (2003) Talking about the birth with a midwife. British Journal of Midwifery 11(1): 24-27. Gamble J A, Creedy D K, Webster J, Moyle (2002) A review of the literature on debriefing or non-directive counselling to prevent postpartum emotional distress. Midwifery 18: 72-79. Inglis S (2002) Accessing a debriefing service following birth. British Journal of Midwifery 10(6): 368-371. Kenardy J (2000) The current status of psychological debriefing. It may do more harm than good. British Medical Journal 321:1032-1033. Laing K G (2001) Post-traumatic stress disorder: myth or reality? British Journal of Midwifery 9(7): 447-451. Lavender T, Walkinshaw S A (1998) Can midwives reduce postpartum psychological morbidity? A randomized trial. Birth 25(4): Dec 215-219. Madden I (2002) Midwifery debriefing – in whose best interest? British Journal of Midwifery 10(10): 631-634. Menage J (1993) Post-traumatic stress disorder in women who have undergone obstetric and/ or gynaecological procedures. A consecutive study of 30 cases of PTSD. Journal of Reproductive and Infant Psychology 11: 221-228. Menage J (1996) Post-traumatic stress disorder following obstetric/ gynaecological procedures. British Journal of Midwifery 4(10): 532-533. Page L (1996) Positive care in childbirth. British Journal of Midwifery 4(10): 530-531. Phillips S (2003) Debriefing following traumatic childbirth. British Journal of Midwifery 11(12): 725-730. Robinson J (1999) When delivery is torture – postnatal PTSD. British Journal of Midwifery 7(11): 684. Robinson J (1998) Dangers of debriefing. British Journal of Midwifery 6(4): 251. Rose S, Bisson J, Wessely S (2004) Psychological debriefing for preventing post-traumatic stress disorder (PTSD) (Cochrane Review). In: The Cochrane Library, Issue 1. Chichester: John Wiley Sons. Small R, Lumley J, Donohue L, Potter A, Waldenstrà ¶m U (2000) Randomised controlled trial of midwife led debriefing to reduce maternal depression after operative childbirth. British Medical Journal 321:1043-1047. Smith J A, Mitchell S (1996) Debriefing after childbirth: a tool for effective risk management. British Journal of Midwifery 4(11): 581-586. Wessely S, Rose S, Bisson J (1999) A systematic review of brief psychological interventions (â€Å"debriefing†) for the treatment of immediate trauma-related symptoms and the treatment of post traumatic stress disorder. In: Cochrane Collaboration. Cochrane library. Issue 4. Oxford: Update Software. Westley W (1997) ‘Time to talk’ listening service. Midwives 110(1309): 30-31. Wijma K, Soderquist M A, Wijma B (1997) Post traumatic stress disorder after childbirth: a cross-sectional study. Journal of Anxiety Disorders 11: 587-597.

Jewish Perceptions of Jesus Christ Essay -- Judaism Christianity Chris

Jewish Perceptions of Jesus Christ Christianity and Judaism are major world religions which, though they worship the same God, have marked differences which have caused two thousand years of strife and animosity between the two religions. In his book We Jews and Jesus, Samuel Sandmel likens the link between Judaism and Christianity to a type of parent-child relationship, saying, â€Å"Early Christianity was a Judaism; within a century after the death of Jesus it was a separate religion. It was critical of its parent, and hostile to it, and elicited from its parent reciprocal criticism and hostility.†1 Opposing views of Jesus Christ caused the initial rift between Judaism and Christianity and is the primary source of the tension between the two religions which has continued for the last two millennia. Therefore, in order to understand how Judaism and Christianity relate to one another, it is essential to understand the way Jesus is perceived in each religion. The way that Christians view Jesus is quite well known, but Judaism’s view of him is much lesser known, so it is important to explore Judaism’s perceptions of Jesus, beginning with New Testament times, and to examine the ways in which these feelings and opinions have changed over time. Although the New Testament is the main source of information regarding Jesus’ life, Jews often disregard it as a reliable source of information. It was not written until two to three generations after Jesus, hence it cannot be considered a primary source. Also, from a Jewish perspective, the aim of the Gospels is not to give an accurate account of Jesus’ life and teachings; the Gospels served as missionary documents containing accounts recorded by biased evangelists. They reflect the aims of the church rather than actual facts, and their writers were more concerned with the advancement of Christianity than the transmission of factual historical information. For these reasons, it is impossible to separate the historical Jesus from the divine Christ presented in the Gospels, and Judaism regards the Gospels as unreliable and irrational. It is not known exactly when Jesus was born, but according to the Christian calender, his birth year was circa 4 B.C. Christmas, the day of Christ’s birth, is celebrated by Christians on December 25, but the actual day and month of his birth are unknown. Rachel Zurer, a followe... ...-40. 42. Votaw, C.W., "The Modern Jewish View of Jesus." The Biblical World, 1905. 26(2): p. 102. 43. Votaw, C.W., "The Modern Jewish View of Jesus." The Biblical World, 1905. 26(2): p. 102. 44. Votaw, C.W., "The Modern Jewish View of Jesus." The Biblical World, 1905. 26(2): p. 115. 45. Votaw, C.W., "The Modern Jewish View of Jesus." The Biblical World, 1905. 26(2): p. 106. 46. Votaw, C.W., "The Modern Jewish View of Jesus." The Biblical World, 1905. 26(2): p. 106. 47. Votaw, C.W., "The Modern Jewish View of Jesus." The Biblical World, 1905. 26(2): p. 117. 48. Votaw, C.W., "The Modern Jewish View of Jesus." The Biblical World, 1905. 26(2): p. 109-110. 49. Votaw, C.W., "The Modern Jewish View of Jesus." The Biblical World, 1905. 26(2): p. 102. 50. Votaw, C.W., "The Modern Jewish View of Jesus." The Biblical World, 1905. 26(2): p. 110-111. 51. Votaw, C.W., "The Modern Jewish View of Jesus." The Biblical World, 1905. 26(2): p. 110, 112. 52. Votaw, C.W., "The Modern Jewish View of Jesus." The Biblical World, 1905. 26(2): p. 102, 114. 53. Sandmel, S., in We Jews and Jesus. 1965, Oxford University Press: New York. p. 47.

Bank6003 Notes

BANK6003 Final Exam Notes TOPIC 4A: Credit Risk – Estimating Default Probabilities Overview * Theory of credit risk less developed than VaR based models of market risk. * Much less amenable to precise measurement than market risk – default probabilities are much more difficult to measure than dispersion of market movements. * Measurement on individual loans is important to FI for pricing and setting limits on credit risk exposure. Default Risk Models 1. Qualitative Models * Assembling relevant information from private and external sources to make a judgement on the probability of default. Borrower specific factors (idiosyncratic or specific to individual borrower) include: reputation, leverage, volatility of earnings, covenants and collateral. * Market-specific factors (systematic factors that impact all borrowers include): business cycle and interest rate levels. * FI manager weighs these factors to come to an overall credit decision. * Subjective 2. Credit Scoring Mod els * Quantitative models that use data on observed borrower characteristics to calculate a score that represents borrower’s probability of default or sort borrowers into different default risk categories.Linear Probability Models (LPMs) * Econometric model to explain repayment experience on past/old loans. * Regression model with a â€Å"dummy† dependent variable Z; Z = 1 default and Z=0 no default. * Weakness: no guarantee that the estimated default probabilities will always lie between 0 and 1 (theoretical flaw) Logit and Probit Models * Developed to overcome weakness of LPM. * Explicitly restrict the estimated range of default probabilities to lie between 0 and 1. * Logit: assumes probability of default to be logistically distributed. Probit: assumes probability of default has a cumulative normal distribution function. Linear Discriminant Analysis * Derived from statistical technique called multivariate analysis. * Divides borrowers into high or low default risk cl asses. * Altman’s LDM = most famous model developed in the late 1960s. Z < 1. 8 (critical value), there is a high chance of default. * Weaknesses * Only considers two extreme cases (default/no default). * Weights need not be stationary over time. 3. New Credit Risk Evaluation Models Newer models have been developed – use financial theory and financial market data to make inferences about default probabilities. * Most relevant for evaluating loans to larger corporate borrowers. * Area of very active continuing research by FIs. Credit Ratings * Ratings change relatively infrequently – objective of ratings stability. * Only chance when there is reason to believe that a long-term change in the company’s creditworthiness has taken place. * S&P: AAA, AA, A, BBB, BB, B and CCC * Moody’s: Aaa, Aa, A, Baa, Ba, B and Caa Bonds with ratings of BBB and above are considered to be â€Å"investment grade† Estimating Default Probabilities 1. Historical Data * Provided by rating agencies e. g. cumulative average default rates * If a company starts with a: * Good credit rating, default probabilities tend to increase with time. * Poor credit rating, default probabilities tend to decrease with time. * Default Intensity vs Unconditional Default Probability * Default intensity or hazard rate is the probability of default conditional on no earlier default. * Unconditional default probability is the probability of default as seen at time zero. Default intensities and unconditional default probabilities for a Caa rated company in the third year * Unconditional default probability = Caa defaulting during the 3rd year = 39. 709 – 30. 204 = 9. 505% * Probability that Caa will survive until the end of year 2 = 100 – 30. 204 = 69. 796%. * Probability that Caa will default in 3rd year conditional on no earlier default = 0. 09505/0. 69796 = 13. 62% Recovery Rate * Usually defined as the price of the bond 30 days after default as a perce nt of its face value. * Recovery rate % = 1 – LGD% * Ranking of bonds * Senior Secured * Senior Unsecured Senior Subordinated * Subordinated * Junior Subordinated Credit Default Swaps * Instrument that is very useful for estimating default probabilities is a CDS. * Buyer of the insurance obtains the right to sell bonds issued by the company for their face value when a credit event occurs and the seller of the insurance agrees to buy the bonds for their face value when a credit event occurs. * The total value of the bonds that can be sold is known as the CDS’ notional principal. * Total amount paid per year, as a percent of the notional principal, to buy protection is known as the CDS spread. Buyer of the instrument acquires protection from the seller against a default by a particular company or country (the reference entity) * Example: buyer pays a premium of 90bps per year for $100m of 5-year protection against company X. * Premium is known as the credit default sprea d. It is paid for the life of contract or until default. * If there is a default, the buyer has the right to sell bonds with a face value of $100m issued by company X for $100m. * Payments are usually made quarterly in arrears * In the event of default, there is a final accrual payment by the buyer * Attractions of the CDS market Allows credit risks to be traded in the same way as market risks * Can be used to transfer credit risks to a third party * Can be used to diversify credit risk Credit Indices * Developed to track credit default swap spreads. * Two important standard portfolios are: * CDX NA IG, portfolio of 125 investment grade companies in North America * iTraxx Europe, portfolio of 125 investment grade companies in Europe * Updated on March 20 and September 20 each year. * Example * 5 year CDX NA IG index is bid 165bp, offer 166bp. Quotes mean that a trader can buy CDS protection on all 125 companies in the index for 166 basis points per company. * Suppose an investor wan ts $800,000 of protection on each company. * The total cost is 0. 0166 x 800,000 x 125 = $1,660,000. * When a company defaults, the investor receives the usual CDS payoff and the annual payment is reduced by 1,660,000/125 = $13,280. * Index is the average of the CDS spreads on the companies in the underlying portfolio. Use of Fixed Coupons * Increasingly CDS and CDS indices trade like bonds so that the periodic protection payments remain fixed. A coupon and a recovery rate is specified. * Quoted spread > coupon, buyer of protection makes an initial payment. * Quoted spread < coupon, seller of protection makes an initial payment. Credit Spreads * Extra rate of interest required by investors for bearing a particular credit risk. CDS Spreads and Bond Yields * CDS can be used to hedge a position in a corporate bond. * Example: investor buys a 5-year corporate bond yielding 7% per year for its face value and at the same time enters into a 5-year CDS to buy protection against the issuer o f the bond defaulting. CDS spread is 2% p. . Effect of the CDS is to convert the corporate bond to a risk-free bond. If the bond issuer does not default, the investor earns 5% per year. If the bond issuer defaults, the investor exchanges the bond for its face value and this can be invested at the risk-free rate for the remainder of the five years. The Risk-Free Rate * The risk-free rate used by bond traders when quoting credit spreads is the Treasury rate. * Traditionally used LIBOR/swap rate * Normal market conditions: risk free rate is 10bp less than the LIBOR/swap * Stressed conditions, the gap is much higher Asset Swaps Provide a direct estimate of the excess of a bond yield over the LIBOR/swap rate. * Example: asset swap spread for a particular bond is quoted as 150 basis points. 3 possible situations: 1. Bond sells for its par value of 100. Company A pays the coupon and Company B pays LIBOR plus 150bp. 2. Bond sells below par, say 95. Company A pays $5 per $100 of principal at the outset. After that, Company A pays the coupon and Company B pays LIBOR plus 150bp. 3. Bond sells above par, say 108. Company B pays $8 per $100 of principal at the outset. After that, Company A pays the coupon and Company B pays LIBOR plus 150bp. Therefore, the present value of the asset swap spread is the present value of the cost of default. CDS-Bond Basis * CDS-Bond Basis = CDS spread minus the bond yield spread * Bond yield spread is usually calculated as the asset swap spread * Should be close to zero, but there are a number of reasons why it deviates: 1. Bond may sell for a price significantly different from par (above par = positive basis, below par = negative basis) 2. There is counterparty risk in a CDS (negative direction) 3. There is a cheapest-to-deliver bond option in a CDS (positive direction) 4.Payoff in a CDS does not include accrued interest on the bond that is delivered (negative direction) 5. Restructuring clause in a CDS contract may lead to a payoff when th ere is no default (positive direction) 6. LIBOR is greater than the risk-free rate assumed (positive direction) Estimating Default Probabilities from Credit Spreads * Average hazard rate between time zero and time t * s(t) = credit spread, t = maturity, R = recovery rate * s = 240bps, R = 0. 40, hazard rate = 0. 04 = 4% Real World vs Risk-Neutral Default Probabilities * Real world = backed out of historical data Risk-neutral = backed out of bond prices or credit default swap spreads * Produce very different results. Why? * Corporate bonds are relatively illiquid * Subjective default probabilities of bond traders may be much higher than the estimates from Moody’s historical data * Bonds do not default independently of each other. This leads to systematic risk that cannot be diversified away. * Bond returns are highly skewed with limited upside. The non-systematic risk is difficult to diversify away and may be priced by the market. * Use real world for calculating credit VaR an d scenario analysis. Use risk-neutral for valuing for credit derivatives and PV of cost of default Option Models * Based on the idea that equity prices can provide more up-to-date information for estimating default probabilities. * Employ option pricing methods e. g. KMV. * Used by many of the largest banks to monitor credit risk. Merton’s Model * 1974 – company’s equity is an option on the assets of the company. * Equity value at time T as max(VT – D, 0) * VT is value of the firm * D is the debt repayment required * Option pricing model enables value of a firm’s equity today to be related to the value of its assets today and the volatility of its assets. Read also Recording General Fund Operating Budget and Operating TransactionsVolatilities * Equation together with the option pricing relationship enables value and volatility of assets to be determined from value and volatility of equity. Example * Company equity = $3m * Volatility of equity = 80% * Risk-free rate is 5% * Debt = $10m * Time to debt maturity = 1 year * Value of assets = $12. 40m * Volatility of assets = 21. 23% * Probability of default is 12. 7% * Market value of debt = $9. 40m * PV of payment is 9. 51 * Expected loss 1. 2% * Recovery rate 91% Use of Merton’s Model to estimate real-world default probability (e. g. Moody’s KMV) * Choose time horizon Calculate cumulative obligations to time horizon (D) * Use Merton’s model to calculate a theoretical probability of default * Use historical data to develop a one-to-one mapping of theoretical probability into real-world probability of default. * Distance to default TOPIC 4B: Credit Value at Risk Backgr ound * Credit risk is the risk of loss over a certain time period that will not be exceeded with a certain confidence level. * Calculate credit risk to determine both regulatory capital and economic capital. * Time horizon for credit risk VaR is often longer than that for market risk. Market risk usually one-day time horizon and then scaled up to 10 days for the calculation of regulatory capital. * Credit risk VaR, for instruments that are not held for trading, is usually calculated with a one-year time horizon/ * Historical simulation is the main tool used to calculate market risk VaR, but a more elaborate model is usually necessary to calculate credit risk VaR. * Key aspect is credit correlation. Defaults (or downgrades or credit spread changes) for different companies do not happen independently of each other. * Credit correlation increases risks for a financial institution with a portfolio of credit exposures.Introduction * Internal economic capital allocations against credit ri sk are based on bank’s estimate of their portfolio’s probability density function of credit losses. * Probability of credit losses exceeding some level, say X, is equal to the shaded area under the PDF. * A risky portfolio is one whose PDF has a relatively long, fat tail i. e. where there is a significant likelihood that actual losses will be substantially larger than expected losses. * Target insolvency rate = shaded area under PDF to right of X * Allocated economic capital = X – expected credit losses Expected vs Unexpected Credit Loss Expected = amount of credit loss expected on credit portfolio over the chosen time horizon * Unexpected = amount by which actual credit losses exceed expected credit loss. Economic Capital Allocation * Economic capital = estimated capital required to support credit risk exposure. * Process is similar to VaR methods used for allocation of capital for market risk. * Probability of unexpected credit loss exhausting economic capital is less than the bank’s target insolvency rate. * Target insolvency rate usually consistent with desired credit rating. * â€Å"AA† rating implies a 0. 3% chance of default. Need enough economic capital to be 99. 97% certain that credit losses will not cause insolvency. * Based on two inputs: 1. Bank’s target insolvency rate 2. Bank’s estimated PDF for portfolio credit losses * Two banks with identical portfolios could have very different economic capital for credit risk, owing to: 1. Differences in attitudes to risk taking (reflected in target insolvency rates) 2. Differences in methods of estimating PDFs (reflected in credit risk models) Measuring Credit Losses * Credit loss = current value –future value at the end of some time horizon. Precise definition of current/future values contingent on specific credit loss paradigm. * Current generation of credit risk models employ either of two conceptual paradigms: 1. Default-Mode (DM) Paradigm * Most common. * Credit loss arises only if default occurs within the time horizon. * â€Å"Two-state† model – only two outcomes, default and non-default. * If borrower defaults, credit loss = bank’s credit exposure – present value of future net recoveries (cash payments less workout expenses). * Current values are known but future values are uncertain. Estimate joint probability distribution with respect to 3 types of random variables: 1. Associated credit exposure 2. Indicator denoting whether facility defaults during planning horizon 3. In the event of default, the loss given default (LGD). Unexpected losses approach: * Assumption that PDF is well-approximated by mean and standard deviation. * Set capital at some multiple of estimated standard deviation of losses. * Requires estimates of expected and unexpected credit loss from default. * Expected loss (? ) depends on 3 key components: 1. LGD = loss given default, expressed as a decimal . PD = probability of default 3. EAD = expect credit exposure at default. * Standard deviation of portfolio credit losses * i = stand-alone standard deviation of credit losses from ith facility; * i = correlation between credit losses from ith facility and those on the overall portfolio; 2. Mark-to-Market (MTM) Paradigm * Credit loss can arise in response to decline in credit risk quality. * â€Å"Multi-state† model: default is only one of several possible credit ratings a loan could ‘migrate’ to over the horizon. * Credit portfolio marked to market at the beginning and end of planning horizon. Likelihood of a customer migrating from its current risk rating to any other category within the planning horizon is typically expressed in terms of a rating transition matrix. Row = current rating Column = prob of migrating to another risk grade * Complex estimation – need to estimate credit risk migrations at end of horizon as well as future credit spreads (risk-premium associated with end-of-period credit rating). * Two approaches: 1. Discounted contractual cash flow (DCCF) approach 2. Risk-neutral valuation (RNV) approach: an option valuation framework. In each methodology, a loan’s value is constructed as a discounted PV of its future cash flows. * Approaches differ mainly in how discount factors and yield spreads are estimated or calculated. TOPIC 5: OPERATIONAL RISK Overview * Definition: the risk of loss resulting from inadequate of failed internal processes, people and systems or from external events. * Harder to quantify and manage operational risk than credit or market risk. * FIs make a conscious decision to take a certain amount of credit and market risk but operational risk is a necessary part of doing business. Operational risk has become a more significant issue as a result of: * Increased use of highly automated technology and sophisticated systems * Growth of e-commerce * New wave of M&A * Increased risk mitigation techniques that may produ ce other risks * Increased prevalence of outsourcing * Over 100 operational loss events exceeding USD 100m since the end of the 1980s: * Internal fraud * External fraud * Employment practices and workplace safety * Clients, products and business practices * Damage to physical assets * Business disruption and system failures Execution, delivery and process management Regulatory Capital for Operational Risk * Three methods which represent a continuum of approaches characterised by increasing sophistication and risk sensitivity: 1. Basic Indicator Approach (15% of gross income) 2. Standardised Approach (different % for each business line) 3. Advanced Measurement Approach 1. Basic Indicator Approach * KBIA=GI ? ? GI = average annual gross income (net interest income + non-interest income) ? = 15% 2. Standardised Approach Bank activities divided into 8 business lines.Capital charge for each line is calculated by multiplying its gross income by the denoted beta. Total capital charge: KTSA = (GI1-8 ? ?1-8) To qualify for use of this approach, a bank must satisfy, at a minimum: – Its board of directors and senior management, as appropriate, are actively involved in the oversight of the operational risk management framework – It has an operational risk management system that is conceptually sound and implemented with integrity. – It has sufficient resources in the use of the approach in the major business lines as well as the control and audit areas. 3.Advanced Measurement Approach (AMA) * Regulatory capital requirement is determined using the quantitative and qualitative criteria for the AMA. * Banks can only use this approach if their local regulators/supervisory authorities have provided approval. * Qualitative Standards 1. Bank must have independent operational risk management function that is responsible for the design and implementation of banks’ operational risk management framework. 2. Bank’s internal operational risk measureme nt system must be closely integrated into the day-to-day risk management processes of the bank. 3.There must be regular reporting of operational risk exposures and loss experience to business unit management, senior management, and to the board of directors. 4. Bank’s operational risk management system must be well documented. 5. Internal and/or external auditors must perform regular reviews of the operational risk management processes & measurement systems. * Quantitative Standards 1. Banks must demonstrate that its approach captures potentially severe tail loss events. 2. Required to calculate regulatory capital requirement as the sum of expected loss (EL) and unexpected loss (UL) 3.Must be sufficiently ‘granular’ to capture the major drivers of operational risk. 4. Operational risk measurement system must include the use of internal data, relevant external data, scenario analysis and factors reflecting the business environment and internal control systems. Dis tributions important in estimating potential operational risk losses: 1. Loss frequency distribution * Distribution of number of losses observed during the time horizon (usually 1 year). * Loss frequency should be estimated from the banks own data as far as possible. One possibility is to assume a Poisson distribution: only need to estimate an average loss frequency. 2. Loss severity distribution * Distribution of the size of a loss given that a loss has occurred. * Based on both internal and external historical data. * Lognormal probability distribution is often used: only need to estimate mean and SD. AMA * The two distributions above are combined for each loss type and business line to determine the total loss distribution. * Monte Carlo simulation can be used to combine the two distributions. Four elements specified by the Basel Committee 1. Internal Data Operational risk losses have not been recorded as well as credit risk losses * Important losses are low-frequency high-severi ty losses * Loss frequency should be estimated from internal data 2. External Data * Data sharing or data vendors * Data from vendors: * Based on publicly available information biased towards large losses * Only be used to estimate the relative size of the mean losses and SD of losses for different risk categories. 3. Scenario Analysis * Aim is to generate scenarios covering all low frequency high severity losses * Can be based on both internal and external experience Aggregate scenarios to generate loss distributions 4. Business Environment and Internal Control Factors * Takes account of: * Complexity of business line * Technology used * Pace of change * Level of supervision * Staff turnover rates Power Law * Prob (v > x) = Kx-a * Power law holds well for the large losses experienced by banks. * When loss distributions are aggregated, the distribution with the heaviest tails tends to dominate. This means that the loss with the lowest alpha defines the extreme tails of the total los s distribution. Insurance * Important decision re operational risk is the extent to which it should be insured against.Moral Hazard * Risk that the existence of the insurance contract will cause the bank to behave differently than it otherwise would. * Example: a bank insures itself against robberies. As a result of the insurance policy, it may be tempted to be lax in its implementation of security measures – making a robbery more likely than it would otherwise have been. * Solution * Deductible – bank is responsible for bearing the first part of any loss * Coinsurance provision – insurance company pays a predetermined percentage of losses in excess of the deductible. * Policy limit – on total liability of the insurer.Adverse Selection * This is where an insurance company cannot distinguish between good and bad risks. * To overcome this, an insurance company must try to understand the controls that exist within banks and the losses that have been experien ced. Sarbanes-Oxley * Sarbanes-Oxley Act passed in the US in 2002. * Requires board of directors to become much more involved with day-to-day operations. They must monitor internal controls to ensure risks are being assessed and handled well. * Gives the SEC the power to censure the board or give it additional responsibilities. A company’s auditors are not allowed to carry out any significant non-auditing services. * Audit committee of the board must be made aware of alternative accounting treatments. * CEO and CFO must return bonuses in the event that financial statements are restated. TOPIC 6: LIQUIDITY RISK Overview * Liquidity refers to the ability to make cash payments as they become due. * Solvency refers to having more assets than liabilities, so that equity value is positive. Types of Liquidity Risk * Liquidity trading risk – markets can become illiquid very quickly.Cannot unwind asset position at a fair price fire sale prices. * Liquidity funding risk – risk of being unable to service cash flow obligations. Liquidity needs are uncertain. Liquidity Trading Risk * Price received for an asset depends on: * The mid market price * How much is to be sold * How quickly it is to be sold * The economic environment Bid-Offer Spread as a Function of Quantity * Dollar bid – offer spread, p = Offer price – Bid price * There is a spread which is constant up to some quantity. After a critical level (size limit of market makers), the spread widens.Proportional bid-offer spread= Offer price-bid priceMid-market price * Cost of liquidation in normal markets i=1n12si? i * N is the number of positions, alpha is the position of the instrument, s is the proportional bid-offer spread for the instrument. * Spread widens if market is in stressed conditions. * Cost of liquidation in stressed markets i=1n12(? i+ i)? i * Mean and SD, lambda is required confidence level Liquidity Adjusted VaRLiquidity-Adjusted Stressed VaR VaR+i=1n12si? i VaR+i= 1n12(? i+ i)? i Unwinding a Position Optimally (Two Options) Unwind quickly: trader will face large bid-offer spreads, but the potential loss from the mid-market price moving against the trader is small. * Unwind over several days: bid-offer spread each day will be lower, but the potential loss from the mid-market price moving against the trader is larger. Liquidity Funding Risk * Sources of liquidity * Liquid assets * Ability of liquidate trading positions (funding risk and trading risk are interrelated) * Wholesale and retail deposits * Lines of credit and the ability to borrow at short notice * Securitisation * Central bank borrowing (lender of last resort) Basel III Regulation * Liquidity Coverage Ratio: designed to make sure that the bank can survive a 30 day period of acute stress * Net Stable Funding Ratio: a longer term measure designed to ensure that stability of funding sources is consistent with the permanence of the assets that have to be funded. Liquidity Black Holes * Occurs when most market participants want to take one side of the market and liquidity dries up. Positive and Negative Feedback Trading * Exacerbates the direction of price movements * Positive feedback trader buys after a price increase and sells after a price decrease. Negative feedback trader buys after a price decrease and sells after a price increase. * Positive feedback trading can create or accentuate a black hole. Reasons for Positive Feedback Trading * Computer models incorporating stop-loss trading. Stop-loss trading = discarding position to prevent further losses. * Dynamic hedging a short option position. Example: if you have â€Å"sold an option† – cover yourself by going long i. e. buy underlying asset when price rises and sell when price decreases. * Creating a long option position synthetically * Margin calls The Leveraging CycleThe Deleveraging CycleIs Liquidity Improving? * Spreads are narrowing but arguably the risks of liquidity black holes are now greater than they used to be. * We need more diversity in financial markets where different groups of investors are acting independently of each other. Principles for Sound Liquidity Risk Management and Supervision (June 2008) * GFC regulators responded by undertaking a fundamental review of existing guidance of liquidity management and issued a revised set of principles on how banks should manage liquidity. Fundamental Principle for the Management and Supervision of Liquidity Risk 1.Sound management of liquidity risk – robust risk management framework. Governance of Liquidity Risk Management 2. Clearly articulate a liquidity risk tolerance 3. Strategy, policies and practices to manage liquidity risk 4. Incorporate liquidity costs, benefits and risks for all significant business activities. Measurement and Management of Liquidity Risk 5. Framework for comprehensively projecting cash flows arising from assets, liabilities and OBS items. 6. Actively monitor and control liquidi ty risk exposures and funding needs within and across legal entities. 7.Establish a funding strategy that provides effective diversification. 8. Effectively manage intraday liquidity positions and risks to meet payment and settlement obligations. 9. Actively manage collateral positions. 10. Conduct stress tests on a regular basis. 11. Formal contingency funding plan (CFP) in case of emergency. 12. Maintain a cushion of unencumbered, high quality liquid assets in case of stress scenarios. Public Disclosure 13. Publicly disclose information on a regular basis The Role of Supervisors 14. Regularly perform a comprehensive assessment of a bank’s overall liquidity risk management framework. 15.Supplement point 14 by monitoring a combination of internal reports, prudential reports and market information. 16. Should intervene to require effective and timely remedial action to address liquidity deficiencies. 17. Should communicate with other regulators e. g. central banks – coo peration TOPIC 7: CORE PRINCIPLES OF EFFECTIVE BANKING SUPERVISION Overview * Most important global standard for prudential regulation and supervision. * Endorsed by vast majority of countries. * Provides benchmark against which supervisory regimes can be assessed. * 1995: Mexican and Barings Crises Lyon Summit in 1996 for G7 Leaders. 1997: Document drafted and endorsed at G7 meeting. Final version presented at annual meetings of World Bank and IMF in Hong Kong. * 1998: G-22 endorsed * 2006: Revision of the Core Principles * 2011: Basel Committee mandates a major review, issues revised consultative paper. The Core Principles (2006) * 25 minimum requirements that need to be met for an effective regulatory system. * May need to be supplemented by other measures. * Seven major groups * Framework for supervisory authority – Principle 1 * Licensing and structure – Principles 2-5 * Prudential regulations and requirements – Principles 6-18 *Methods of ongoing banking s upervision – Principles 19-21 * Accounting and disclosure – Principle 22 * Corrective and remedial powers of supervisors – Principle 23 * Consolidated and cross-border banking – Principles 24-25. * Explicitly recognise: * Effective banking supervision is essential for a strong economic environment. * Supervision seeks to ensure banks operate in a safe and sound manner and hold sufficient capital and reserves. * Strong and effective supervision is a public good and critical to financial stability. * While cost of supervision is high, the cost of poor supervision is even higher. Key objective of banking supervision: * Maintain stability and confidence in the financial system * Encourage good corporate governance and enhance market transparency Revised Core Principles (2011) * Core Principles and assessment methodology merged into a single document. * Number of core principles increased to 29. * Takes account of several key trends and developments: * Need to deal with systemically important banks * Macroprudential focus (system-wide) and systemic risk * Effective crisis management, recovery and resolution measures. Sound corporate governance * Greater public disclosure and transparency enhance market discipline. * Two broad groups: 1. Supervisory powers, responsibilities and functions. Focus on effective risk-based supervision, and the need for early intervention and timely supervisory actions. Principles 1-13. 2. Prudential regulations and requirements. Cover supervisory expectations of banks, emphasising the importance of good corporate governance and risk management, as well as compliance with supervisory standards. Supervisory powers, responsibilities and functions 1.Clear responsibilities and objectives for each authority involved. Suitable legal framework. 2. Supervisor has operational independence, transparent processes, sound governance and adequate resources, and is accountable. 3. Cooperation and collaboration with domestic a uthorities and foreign supervisors. 4. Permissible activities of banks is controlled. 5. Assessment of bank ownership structure and governance. 6. Power to review, reject and impose prudential conditions on any changes in ownership or controlling interests. 7. Power to approve or reject major acquisitions. 8.Forward-looking assessment of the risk profile of banks and banking groups. 9. Uses appropriate range of techniques and tools to implement supervisory approach. 10. Collects, reviews and analyses prudential reports and statistical returns. 11. Early address of unsafe and unsound practices. 12. Supervises banking group on consolidated basis (including globally) 13. Cross-border sharing of information and cooperation. Prudential regulations and requirements 14. Robust corporate governance policies and processes. 15. Banks have a comprehensive risk management process, including recovery plans. 6. Set prudent and appropriate capital adequacy requirements. 17. Banks have an adequate credit risk management process. 18. Banks have adequate policies and processes for the early identification and management of problems assets, and maintain adequate provisions and reserves. 19. Banks have adequate policies re concentration risk. 20. Banks required to enter into any transactions with related parties on an arm’s length basis. 21. Banks have adequate policies re country and transfer risk. 22. Banks have an adequate market risk management process. 23.Banks have adequate systems re interest rate risk in the banking book. 24. Set prudent and appropriate liquidity requirements. 25. Banks have an adequate operational risk management framework. 26. Banks have adequate internal controls to establish and maintain a properly controlled operating environment for the conduct of their business. E. g. delegating authority and responsibility, separation of the functions that involve committing the bank. 27. Banks maintain adequate and reliable records, prepare financial state ments in accordance with accounting policies etc. 8. Banks regularly publish information on a consolidated and solo basis. 29. Banks have adequate policies and processes e. g. strict customer due diligence. Preconditions for Effective Banking Supervision 1. Provision of sound and sustainable macroeconomic policies. 2. A well established framework for financial stability policy formulation. 3. A well developed public infrastructure 4. A clear framework for crisis management, recovery and resolution 5. An appropriate level of systemic protection (or public safety net) 6. Effective market discipline 001: IMF and World Bank Study on Countries’ Compliance with Core Principles * 32 countries are compliant with 10 or few BCPs * Only 5 countries were assessed as fully compliant with 25 or more of the BCPs. * Developing countries less compliant than advanced economies. * Advanced economies generally possess more robust internal frameworks as defined by the ‘preconditions’ 2008: IMF Study on BCP Compliance * Based on 136 compliance assessments. * Continued work needed on strengthening banking supervision in many jurisdictions, particularly in the area of risk management. More than 40% of countries did not comply with the essential criteria of principles dealing with risk management, consolidated supervision and the abuse of financial services. * More than 30% did not possess the necessary operational independence to perform effective supervision nor have adequate ability to use their formal powers to take corrective action. * On average, countries in Western Europe demonstrated a much higher degree of compliance (above 90%) with BCP than their counterparts in other regions. * Africa and Western Hemisphere weak. Generally, high-income countries reflected a higher degree of compliance. TOPIC 8: CAPITAL ADEQUACY Overview * Adequate capital better able to withstand losses, provide credit through the business cycle and help promote public confidence in ba nking system. Importance of Capital Adequacy * Absorb unanticipated losses and preserve confidence in the FI * Protect uninsured depositors and other stakeholders * Protect FI insurance funds and taxpayers * Protect deposit insurance owners against increases in insurance premiums * To acquire real investments in order to provide financial services e. . equity financing is very important. Capital Adequacy * Capital too low banks may be unable to absorb high level of losses. * Capital too high banks may not be able to make the most efficient use of their resources. Constraint on credit availability. Pre-1988 * Banks regulated using balance sheet measures e. g. ratio of capital to assets. * Variations between countries re definitions, required ratios and enforcement of regulations. * 1980s: bank leverage increased, OBS derivatives trading increased. * LDC debt = major problem 1988 Basel Capital Accord (Basel I) * G10 agreed to Basel I Only covered credit risk * Capital / risk-adjusted assets > 8% * Tier 1 capital = shareholders equity and retained earnings * Tier 2 capital = additional internal and external resources e. g. loan loss reserves * Tier 1 capital / risk-adjusted assets > 4% * On-balance-sheet assets assigned to one of four categories * 0% – cash and government bonds * 20% – claims on OECD banks * 50% – residential mortgages * 100% – corporate loans, corporate bonds * Off-balance-sheet assets divided into contingent or guarantee contracts and FX/IR forward, futures, option and swap contracts. Two step process (i) derive credit equivalent amounts as product of FV and conversion factor then (ii) multiply amount by risk weight. * OBS market contracts or derivative instruments = potential exposure + current exposure. * Potential exposure: credit risk if counterparty defaults in the future. * Current exposure: cost of replacing a derivative securities contract at today’s prices. 1996 Amendment * Implemented in 1998 * Requi res banks to measure and hold capital for market risk. * k is a multiplicative factor chosen by regulators (at least 3) VaR is the 99% 10-day value at risk SRC is the specific risk charge Total Capital = 0. 08 x [Credit risk RWA + Market risk RWA] where market risk RWA = 12. 5 x [k x VaR + SRC] Basel II (2004) * Implemented in 2007 * Three pillars 1. New minimum capital requirements for credit and operational risk 2. Supervisory review: more thorough and uniform 3. Market discipline: more disclosure * Only applied to large international banks in US * Implemented by securities companies as well as banks in EU Pillar 1: Minimum Capital Requirements * Credit risk measurement: * Standardised approach (external credit rating based risk weights) * Internal rating based (IRB) Market risk = unchanged * Operational risk: * Basic indicator: 15% of gross income * Standardised: multiplicative factor for income arising from each business line. * Advanced measurement approaches: assess 99. 9% wor st case loss over one year. * Total capital = 0. 08 x [Credit risk RWA + market risk RWA + Operational risk RWA] Pillar 2: Supervisory Review * Importance of effective supervisory review of banks’ internal assessments of their overall risks. Pillar 3: Market discipline * Increasing transparency – public disclosure Basel 2. 5 (Implemented 2011) * Stressed VaR for market risk * Incremental risk charge Ensures products such as bonds and derivatives in the trading book have the same capital requirement that they would if they were in the banking book. * Comprehensive risk measure (re credit default correlations) Basel III (2010) * Considerably increase quality and quantity of banks capital * Macroprudential overlay – systemic risk * Allows time for smooth transition to new regime * Core capital only retained earnings and common shares * Reserves increased from 2% to 4. 5% * Capital conservation buffer – 2. 5% of RWA * Countercyclical capital buffer * Tracing/ monitoring of liquidity funding Introduction of a maximum leverage ratio Capital Definitions and Requirements * Common equity > 4. 5% of RWA * Tier 1 > 6% of RWA * Phased implementation of capital levels stretching to Jan 1, 2015 * Phased implementation of capital definition stretching to Jan 1, 2018 Microprudential Features * Greater focus on common equity * Loss-absorbing during stress/crisis period capital conservation buffer * Promoting integrated management of market and counterparty credit risk. * Liquidity standard introduced introduced Jan 1, 2015 Introduced Jan 1, 2018 Available Stable Funding FactorsRequired Stable Funding Factors Macroprudential Factors * Countercyclical buffer * Acts as a brake in good times of high credit growth and a decompressor to restrict credit during downturns. * Within a range of 0-2. 5% * Left to the discretion of national regulators * Dividends restricted when capital is below required level * Phased in between Jan 1, 2016 – Jan 1, 2019 * Leverage Ratio * Target 3% * Ratio of Tier 1 capital to total exposure > 3% * Introduced on Jan 1, 2018 after a transition period * SIFIs * Required to hold additional loss absorbency capital, ranging from 1-2. 5% in common equity

Disinvestment: Capitalism and Public Sector

DISINVESTMENT – BOON OR BANE INTRODUCTION 1. Public enterprises are neither new nor unique to India. In good old days, Kautilya in his ‘Arthasastra’ talked of a public sector. A person was made incharge of salt manufacture and fixing its price. Similarily there were people made responsible for mining, coinage and gold, all in public sector. Nowadays there is hardly any country that is not engaged actively and directly in the management of economic and industrial enterprises. Various names given to these enterprises are ‘Public Sector Undertakings’ or PSUs, ‘Public Sector Enterprise’ or PSEs, ‘Trading Corporations’, State Owned Enterprise or SOEs, Government Owned Enterprise or GOE etc. 2. The role of government in businesses and otherwise has been questioned in the past. Thoreau said , â€Å"That government is best which governs least†. The only purpose of government would be to protect its citizens from force or fraud. The protection from force, that is, the protection of individual rights, would be achieved through the use of a police force to protect the rights of citizens at home; a military, to protect the rights of citizens from foreign aggression; and a court system to enforce contracts and settle disputes between citizens. It is not government business to do business. The poor performance of government owned enterprises around the world led to a world wide withdrawal of government from businesses and coining of a new term called ‘Privatisation’. Privatisation process in India is euphemistically called ‘Disinvestment’ to make it palatable to those who consider privatisation a dirty word. Disinvestment or privatisation in India was initiated in 1991-92 by the Chandrashekhar government and carried forward by subsequent governments. AIM 3. The aim of this paper is to study various aspects of Disinvestment so as to conclude whether it is a boon or bane for India. SCOPE 4. The paper would be covered under the following heads:- (a)What is Disinvestment? (b)Capitalism, Socialism, Communism and Market economy. c)Genesis of Government Participation In business. (d)Performance of Government Controlled Enterprises. (e)Objectives of Disinvestment. (f)Genesis of Disinvestment process. (g)The Disinvestment process in India. (h)Advantages of Disinvestment. (j)Disadvantages of Disinvestment. (k)Disinvestment-Boon or Bane. WHAT IS DISINVESTMENT 5. Disinvestment can be defined as withdrawal of state from production of goods and se rvices or transfer of ownership from the public sector to the private sector. CAPITALISM, SOCIALISM, COMMUNISM AND MARKET ECONOMY 6. Before we proceed further it would be worth our time to understand the concepts of Capitalism, Socialism, Communism and Market Economy. CAPITALISM 7. Capitalism is a political system in which factories, companies, land, etc. are owned privately in order to create profit for the owners. Prices of goods and services fluctuate depending on the desire of the consumer and the availability of the goods (the law of supply and demand). In a capitalist society their will be significant differences in wealth and power between those who have capital (machines, factories, ships, land, etc. and those who do not. 8. No one can say when capitalism first began. Clearly the development of capitalism was not revolutionary like that of communism. Instead it emerged gradually without anyone making a plan of what it should become. However, aspects of modern capitalism such as the stock exchange, banks and great disparity in wealth came about during the industrial revolution. 9. In 1776 Adam Smith, a Scot tish university professor, produced a book which described the workings of a capitalist society. He believed that a country's wealth depends on all people pursuing their own interests. If a person promotes his own interest he or she is unintentionally promoting his country's interest. Smith thought that governments should promote free trade and not interfere by protecting certain industries from competition. The only duty of governments, Smith wrote, was to provide services that couldn't be profitable like the building of roads, schools etc. 10. Capitalism means the complete separation of economy and state, just like the separation of church and state. Capitalism is the social system based upon private ownership of the means of production which entails a completely uncontrolled and unregulated economy where all land is privately owned. But the separation of the state and the economy is not primary, it is only an aspect of the premise that capitalism is based upon: individual rights. Capitalism is the only politico-economic system based on the doctrine of individual rights. This means that capitalism recognizes that each and every person is the owner of his own life, and has the right to live his life in any manner he chooses as long as he does not violate the rights of others. The essential nature of capitalism is social harmony through the pursuit of self-interest. Under capitalism, the individual's pursuit of his own economic self-interest simultaneously benefits the economic self-interests of all others. In allowing each individual to act unhampered by government regulations, capitalism causes wealth to be created in the most efficient manner possible which ultimately raises the standard of living, increases economic opportunities, and makes available an ever growing supply of products for everyone. The free-market operates in such a way so that as one man creates more wealth for himself, he simultaneously creates more wealth and opportunities for everyone else, which means that as the rich become richer, the poor become richer. It must be understood that capitalism serves the economic self-interests of all, including the non-capitalists. SOCIALISM 11. Socialism believes that the inequalities that exist in our society are unjust and that the minority of the population should not own the vast majority of the wealth. Socialists do, nevertheless, differ on ways by which this change should be achieved. Some believe that the change should be gradual, achieved through parliament, and others believe that the change should be rapid, brought about through revolution. 12. Karl Marx became the prophet and teacher of socialism whose writings transformed socialist thinking all over the world. Marx was a philosopher and an idealist Marx believed that man should labor not only for himself as an individual but for society as well. Implied in Marxist philosophy is the notion that man, being a social animal, has his destiny and his reality inextricably linked with his society. His analysis describes capitalism as the first stage followed by socialism and finally communism. Marx believed that socialism is an unrealised potential in capitalism and once most workers recognized their interests and became â€Å"class conscious,† the overthrow of capitalism would proceed as quickly as capitalist opposition allowed. The socialist society that would emerge out of the revolution would have all the productive potential of capitalism. People would be aided on the basis of social needs. COMMUNISM 13. The final goal, communism, toward which socialist society would constantly strive, is the abolition of alienation. A class-less society would be advantageous for the vast majority of the population. Communism, a form of government, inspires some people with the zeal of a religion. Communism in theory stands for total public ownership and rejects private property and personal profit. In practice, however, the state determines how strictly the doctrine is applied in any particular country. MARKET ECONOMY 14. The market economy idea is based on, or at least explained by, Darwin's theory of evolution. Companies are viewed as organisms in an ecosystem. A company with a successful formula will prosper and grow, spread its formula and ideas, while a company with a bad formula will wither and disappear. A profitable company can grow, or at least survive, while an unprofitable company will wither and die out. 15. Post Karl Marx, The fight against inequality was viewed as a fight by the collective worker class vs the individual entrepreneur. The individual who complements the group was seen as a contradiction. Some states evolved on this contradiction, wherein an individual was supposed to surrender his individuality and entrepreneurship for the state and the social security provided by it. On the other side of the world this fad for collectivism was viewed as a threat to its existing capitalist system which not only proved successful in the past, but also held promise for the future. It is this clash in ideologies which gave as a bi polar world of communism and capitalism. 16. Contrary to widely held beliefs, capitalism is not a system which exploits a large portion of society for the sake of a small minority of wealthy capitalists. Ironically, it is actually socialism that causes the systematic exploitation of labor. Since the socialist state holds a universal monopoly on labor and production, no economic incentive exists for the socialist state to provide anything more than minimum physical subsistence for the workers except to perhaps prevent riots or revolutions. Exploitation is inherent in the nature of socialism because individuals cannot live for their own sake, rather, they exist merely as means to whatever ends the socialist rulers — the self-proclaimed spokesman of â€Å"society† — may have in mind. Inequality is and progress are directly linked and progress always causes inequality. To reach for something high, we would have to stand on one another and not together on the same platform. GENESIS OF GOVERNMENT PARTICIPATION IN BUSINESS GOVERNMENT PARTICIPATION IN BUSINESS WORLDOVER 17. Before considering the need for disinvestment and why disinvestment, it is relevant to consider the main reasons for rise of state power world over. The following are few reasons for state power:- (a)Great depression of 1930s, unemployment and hardship. b)Rebuilding war-torn economies. (c)Redistribution of income, protection to the needy for ethical reasons. (d)Developing countries do not have markets in which individuals can operate and ill-developed private enterprise. (e)Rise of non-economic objectives (sanctions against apartheid policies, or restraining ethnic minorities dominating an economy). (f)Protect employment or ensure good working conditions. (g)Total lack of faith in markets and priva te ownership. (h)Cold war, wars among developing countries and border disputes. j)State investment in and the control of the strategic sectors of the economy was necessary for the economic development of those sectors and the security of the country. (k)Government stepping in to rescue certain enterprises, whose closure could result in significant loss of jobs. (l)An economic consensus around the world accepting public enterprises as an integral part of the economy, particularly to manage natural monopolies as also the core industries, like infrastructure, which in turn would promote rapid economic growth and the pace of industrialisation. GOVERNMENT PARTICIPATION IN INDIA 18. Before independence, there was almost no â€Å"Public sector† in Indian economy. The only industries worthy of mention were Railways, The Post & Telegraph. The Port Trust, The Ordnance and the Aircraft factories and few Government controlled undertakings. 19. In the 1948 Industrial Policy Resolution, the manufacture of arms and ammunition, production and control of atomic energy, ownership and management of railways became the State monopoly. Six basic industries viz. iron & steel, coal, aircraft manufacture, ship building, mineral oils, manufacture of telephone, telegraph and wireless apparatus were to be developed by the State. All other areas were left open to private initiatives. 20. Within a decade of laying down the policy parameters in 1948, another policy statement was issued in April 1956 by the Government to give a new orientation to the â€Å"mixed economy† concept. The passage of Industrial Policy Resolution of 1956 and adoption of socialist pattern of society as the national economic goal of the country built the foundation of the dominant public sector as we see it today. It was believed that a dominant public sector would reduce the inequality of income and wealth and advance the general prosperity of the nation. 21. The main objectives of setting up the Public Sector enterprises as stated in Industrial policy Resolution of 1956 were:- (a)To help in the rapid economic growth and Industrialisation of the country and create necessary infrastructure for economic development. (b) To earn return on investment and utilise generate resources for development. (c)To promote redistribution of income and wealth. (d)To create employment opportunities. e)To promote balanced regional development. (f)To promote import substitutions, save and earn foreign exchanges for the economy. 22. The 2nd Five year Plan document clearly stated that â€Å"all industries of basic and strategic importance, or in the nature of public utility services should be in the public sector. Other industries, which are essential and require investment on a scale, which only the state, in th e present circumstances, could provide have also to be in the public sector†. If further emphasized that, â€Å"the public sector has to expand rapidly. It has not only to initiate developments which the private sector is either unwilling or unable to undertake, it has to play the dominant role in shaping the entire pattern of investment in the economy†. The investment in public sector enterprises has grown from Rs. 29 Crore in 5 PSU on 01Apr 51 to Rs. 2,52,554 Crore in 240 PSU on 31Mar 2000. PERFORMANCE OF GOVERNMENT CONTROLLED ENTERPRISES 23. What was the outcome of government investment in business. Over a period of time, the States failed in achieving the goals and results for which State Owned Enterprises had been created. The following are some of the reasons for the same:- (a)Politicians govern the state and they serve group interest and not public interests. (b)Bureaucracy operates to maximise budget of individual departments, their own prospects and perks. (c)Expansions of state control resulting in the loss of economic and freedom and thereof-political freedom as well. (d)Regulation by state tends to serve the interest of regulated. (who capture regulators) rather than public. (e)Costs of regulation tend to exceed benefits of regulation. f)Supply by public authorities is inherently costly, inefficient usually in over supply, with less choice for consumers. (g)Developing countries have weak institutional structures for governments to operate services efficiently. (h)Public enterprises or state owned enterprises tend to be monopolistic, have no risk of closure and are liable to political and bureaucratic manipulation. (j)Property rights and transferability with gains or losses are important if owner s were to demand information and make the enterprise really accountable and efficient. 4. During the last ten years, the Tax-payer has had to give about Rs. 80,000 crore directly or indirectly to the public sector, so that it could survive. During 1999-2000 alone, the CAGs report on PSUs for 1999-2000 indicates that the tax-payer has taken a huge burden in one year alone which amounted to Rs. 23,140 crore for supporting PSUs. OBJECTIVES OF DISINVESTMENT 25. ‘Is the business of government business? ’- Easily the million-dollar question that plauged the minds of policy makers, intelligentsia and the public alike. The performance of PSUs world over led to introspection and a need for privatisation/disinvestments was felt. Technology and W. T. O. commitments have made the world a global village and unless industries, including public industries do not quickly restructure, they would not be able to survive. Public enterprises, because of the nature of their ownership, can restructure slowly and hence the logic of privatisation got stronger. Besides, techniques are now available to control public monopolies like Power and Telecom, where consumer interests can be better protected by egulation / competition. Therefore, investment of public money to ensure protection of consumer interests is no longer a convincing argument. Disinvestment aimed to achieve the following: – (a)Promote economic efficiency by fostering well functioning markets and competition. (b)Redefine role of the State in order to allow it to concentrate on the essential task of governing and to withdraw from activities, which are better suited to private enterprise. (c )Reduce fiscal burden of loss-making public enterprises, in order to help regain fiscal control and macroeconomic stability. d)Reduce the public debt. (e)Release limited State resources for financing or other demands, for example in the field of education and social health. (f)Generate new investment including foreign investment. (g)Mobilise domestic investments and deepen domestic financial development (h)Spread and democratise share ownership by encouraging it among individuals, making employees share-owners and by rising productivity through incentives for holding stock. GENESIS OF DISINVESTMENT PROCESS GENESIS OF DISINVESTMENT PROCESS – WORLDWIDE U. K (Post 1979) 26. Although the idea of privatisation has been around for a long time (Adam Smith wrote about it as long as 1762), privatisation has been tried widely since the mid 1970s. Privatisation first attracted world-wide attention in 1979 when the Conservative Government of Prime Minister Margaret Thacher began transforming the ailing U. K. economy by selling public holdings in industry, communications and other service sector areas. Since 1979, over 105 countries all over the world have initiated their own privatisation programmes. Following are the salient features of the privatisation programme in the UK:- a)Privatisation carried out in three phases (i)Phase I: Commercial enterprises (e. g. , British Aerospace) (ii)Phase II: Utilities (involved more complicated structural & regulatory issues) (iii)Phase III: Less commercial industries, mainly those performing socially desirable services and dependant on subsidies (e. g. , the railways). (b)Around 60 major businesses, representing 10% of GDP, transferred to private sector. (c)Fundamental issues addressed were:- (i) Ensuring commitment to the policy from the top of the Government. (ii) Setting clear objectives. iii) Careful planning. (iv) Engaging intermediaries-financial, technical and legal advisers. (d)Regulation & competition effectively used while privatising services and infrastructure. (e)Initially resisted both by consumers and employees. (f)However, consumers benefited from lower prices, greater choice & better service and productivity improved. (g)Employees too benefited in the medium term due to increase in economic activity, though some loss of jobs in the short run as productivity increased rapidly. Offered liberal opportunities to invest in divested shares. France 27. 8 large groups and 3 medium size banks were privatised. Shares divested to domestic public (about 50%), large shareholders (about 25%), employees (about 10%) & foreign investors (about 15%). 21 companies privatised, including 2 of the largest banks and 3 largest insurance companies. Shares divested to domestic public, large shareholders, employees & foreign investors in. China 28. Market reforms first started in 1978. Corporatisation and then listing on both domestic and foreign stock exchanges favoured for efficient large and medium size SOEs. Foreign investors permitted to invest in various infrastructure and utility businesses, including railways, toll roads, ports and power plants. In 1978, over three-quarters of industrial output was produced by the state sector. This fell to 34% by 1995. The collective sector increased from 32% to 37%, individual sector (small capitalist businesses) jumped from 1. 8% to 13% and others (including all other capitalist enterprises – local and foreign) leaped from 1. 2% to 16. 6%. Thus, the private sector grew at the expense of the state sector. Gradual stage-by-stage approach followed for reforming State Owned Enterprises (SOEs). According to the World Investment Report 1997, foreign direct inflows to China amounted to US $42. 3 billion in 1996. Some Other Countries 29. Some other countries which have undergone privatisation are :- (a)Eastern EuropeBulgaria, Czech. , Hungary, Latvia, Poland, Romania (b)Latin AmericaArgentina, Brazil (c)Far EastKorea, China, Philippines (d)S. E. Asia Malaysia, Thailand (e)South Asia Pakistan, Sri Lanka (f)Middle East & AfricaEgypt, Ghana, Kenya, Nigeria THE DISINVESTMENT PROCESS IN INDIA Genesis 30. A decade ago, the concept of privatisation as a catalyst was hardly acknowledged in India. Not long ago, it was nationalisation that was in vogue. Even international aid-donors such as the IMF and the World Bank had recommended a larger role for the public sector during the 1950s and 1960s and they refused to grant loans to those countries which did not have government-sponsored development programmes. Now, it is just the other way round. The prescription of privatisation is being sold, rather over-sold, as a panacea to cure our economic ills. India, for almost four decades was pursuing a path of development in which public sector was expected to be the engine of growth. But by mid-eighties their short comings and weaknesses started manifesting in the form of low capacity utilisation, low efficiency, lack of motivation, over-manning, huge time and cost overrun, inability to innovate and take quick decision, large scale political and bureaucratic interference in decision making, etc. But instead of trying to remove these defects and to increase the rate of growth of national economy, gradually the concept of self-reliant growth was given a quiet burial. The Government started to deregulate the imports by reducing or withdrawing import duty in phases. This resulted in dwindling of precious foreign exchange reserve to abysmally low level. The foreign debt repayment crisis compelled Government of India to raise loan from IMF against physical deposit of RBI gold reserve, on conditions harmful to the interest of the country. 31. Thus started the reversal of policies towards PSU. The Industrial policy of 1991 started the process of delicensing and except 18 industries, Industrial licensing was withdrawn. The market was opened up to domestic private capital and foreign capital was provided free entry upto 51% equity in high technology areas. The aim of economic liberalisation was to enlarge competition and allowing new firms to enter the market. Thus the emphasis shifted from PSEs to liberalisation, of economy and gradual disinvestment of PSEs. A paradigm shift of Government's economic policy orientation originated in 1991 from a foreign debt servicing crisis. Disinvestment Process 32. The Industrial Policy of 1991 limited the priority areas for the public sector to : (a)Essential infrastructure goods and services. (b)Exploration and exploitation of oil and mineral resources. c)Technology development and building of manufacturing capabilities in areas which are crucial in the long term development of the economy and where private sector investment is inadequate. (d)Manufacture of products where strategic considerations predominate such as defence equipment. 33. Congress Government in 1991-92 offered up to 20% of Govt. equity in selected PSUs to mutual funds and investment institutions in the public sector, as also to wor kers in these firms. The objective was to raise resources, encourage wider public participation and promote greater accountability. 4. As per Rangarajan Committee recommendations in Apr 93, there were only six Schedule ‘A’ industries where the Government might consider holding 51% or more equity, namely (a) Coal and lignite. (b) Mineral oils. (c) Arms, ammunition and defence equipment. (d) Atomic energy. (e) Radioactive minerals. (f) Railway transport. 35. The Common Minimum Programme of the United Front Govt in 1996 aimed for the following:- (a)To carefully examine withdrawal from non-core strategic areas. (b)To set up a Disinvestment Commission for advising on disinvestments issues. c)To take and implement decisions to disinvest in a transparent manner. (d)Job security, opportunities for retraining and redeployment to be assured. 36. Disinvestment Commission Recommendationsin Feb 97- Oct 99 aimed for the following:- (a)72 PSEs were referred to the Disinvestment Commis sion during 1996-99. The Disinvestment Commission gave its recommendations on 58 PSEs. (b)The Disinvestment Commission recommendations gave priority to strategic / trade sales, with transfer of management, instead of public offerings, as was recommended by the Rangarajan Committee in 1993. 37. In 1998-99, the govt aimed to bring down Government shareholding in the PSUs to 26% in the most of cases, (thus facilitating ownership changes, as was recommended by the Disinvestment Commission). 38. In 1999-2000, the Govt. aimed To strengthen the strategic PSUs, privatise non-strategic PSUs through gradual disinvestment or strategic sale and devise viable rehabilitation strategies for weak units. 39. On 16th March 1999, the cabinet approved classification of PSUs into Strategic and Non strategic. (a)Strategic PSUs: (i)Defence related (ii)Atomic energy related (iii)Railway transport b)Non-strategic PSUs: All other 40. Strategy for Non-strategic Public Sector Enterprises wasReduction of Government stake to 26%to be worked out on a case to case basis,on the following considerations: (a)Whether the Industrial sector requires the presence of the public sector as a countering force to prevent concentration of power in private hands. (b)Whether the Industrial sector requires a proper regu latory mechanism to protect the consumer interests before Public Sector Enterprises are Privatised. 41. In 2000 – 2001, the main elements Policy were:- (a)To restructure and revive potentially viable PSUs. b) To close down PSUs which cannot be revived. (c) To bring down Government equity in all non-strategic PSUs to 26% or lower, if necessary. (d)To fully protect the interests of workers. (e)To put in place mechanisms to raise resources from the market against the security of PSUs’ assets for providing an adequate safety-net to workers and employees. (f)To establish a systematic policy approach to disinvestment and privatisation and to give a fresh impetus to this programme, by setting up a new Department of Disinvestment. (g)To emphasize increasingly on strategic sales of identified PSUs. h)To use the entire receipt from disinvestment and privatisation for meeting expenditure in social sectors, restructuring of PSUs and retiring public debt. Utilisation of Proceeds 42 . In the Budget of 2000-2001 the Govt. outlined its aim for utilisation of the disinvestments proceeds as enumerated below. (a) Restructuring assistance to PSUs. (b) Safety net to workers. (c) Reduction of debt burden. (d) Additional budgetary support for the Plan, primarily in the social and infrastructure sectors (contingent upon realisation of the anticipated receipt). ADVANTAGES OF DISINVESTMENT 43. After disinvestments the following would be achieved: – (a)Releasing of huge amounts of scarce public resources locked up in non-strategic PSUs, for deployment in areas much higher on social priority, such as, public health, family welfare, education and social and essential infrastructure; (b)Stemming further outflow of public resources for sustaining the unviable non-strategic PSUs. (c)Reducing the public debt that is threatening to assume unmanageable proportions. d)Transferring the commercial risk, to which the tax-payers’ money locked up in the public sector is exposed, to the private sector wherever the private sector is willing and able to step in. The money that is deployed in the PSUs is really the public money; and, is exposed to an entirely avoidable and needless risk, in most cases. (e)Release of other tangible and intangible resources, such as, large manpower currently locked up in managing the PSUs, and their time and energy , for redeployment in areas that are much higher on the social priority but are short of such resources. f)Disinvestment would expose the privatised companies to market discipline, thereby forcing them to become more efficient and survive or cease on their own financial and economic strength. They would be able to respond to the market forces much faster and cater to their business needs in a more professional manner. It would also facilitate in freeing the PSUs from the Government control and introduction of corporate governance in the privatised companies. (e)Disinvestment would result in wider distribution of wealth through offering of shares of privatised companies to small investors and employees. f)Disinvestment would have a beneficial effect on the capital market; the increase in floating stock would give the market more depth and liquidity, give investors easier exit options, help in establishing more accurate benchmarks for valuation and pricing, and facilitate raising of f unds by the privatised companies for their projects or expansion, in future. (g)Opening up the erstwhile public sectors to appropriate private investors would increase economic activity and have an overall beneficial effect on the economy, employment and tax revenues in the medium to long term. h)In many areas, e. g. , the telecom sector, the end of public sector monopoly would bring relief to consumers by way of more choices, and cheaper and better quality of products and services. DISADVANTAGES OF DISINVESTMENT 44. Having seen so many advantages, what do we have on the flip side? Is disinvestments without any disadvantages? Some of the likely disadvantages could be:- (a)Non realisation of actual value of the PSU as the realisation would on unit potential and not assets held. The logic is similar to an old Fiat car in Delhi selling for less than what it would fetch as scrap. (b)Short term retrenchment occurs in order to increase efficiency. However, It is offset in the longterm by a profitable organisation creating more employment. (c)It is the wealthy who would buy the PSUs making them wealthier. Therefore, they inequality in society increases. (d)Creation of monopolies may take place. DISINVESTMENT-BOON OR BANE 45. After having seen the advantages and disadvantages of disinvestments, the ast performance of our PSUs, the non accountability of the Public sector to the Tax payer and the consumer we are sure that there is no doubt about the Disinvestment process being a boon for the nation. As the world changed in this era of globalisation, a country living in the past is doomed and economic slavery is not far behind. Proponents of anti-disinvestment campaign have a past record of pushing conglomerate like Coca-Cola out of the country, little realising that it all about creation of wealth by production and not about transfer of wealth to another country. For the poor to get rich, the rich must get richer and conversely for the rich to get richer the poor must get rich. It this is understood by one and all then the inequalities in the society become acceptable and progress becomes the norm of the day. Going slow on the disinvestments process would be to delay the progress of the country and turning around from it would only prove catastrophic for the economy and the industry. Effecieny is the keyword in the present day world and any thing produced inefficiently is at a cost that the nation has to pay one way or the other. It is better to give dole than to hire extra people and breed inefficiency. Let the government improve governance before it even thinks of Business. Let not the Pseudo profits earned by monopolistic mineral oil selling agencies like Indian Oil, HPCL etc cloud our vision. We have the example of BSNL, which when faced with private competition is coming out with innovative ideas to lure the customer, while in the past it was sleeping. CONCLUSION 46. Every time utopia is discovered in a system, utopia redefines itself. The process of corruption and correction is continuous. Same may happen with the concept of privatisation in the future. In retrospect, it is easy to fault the vision our leaders of yesteryears. If we need to fault them, it should not be for creating public owned enterprises but for killing the private enterprise by means of license raj, red tapism, lack of infrastructure, rules and rules for rules, corruption and capacity control. It remind me of a statement made by JRD Tata in one of his last interview and I quote â€Å" It is in this country that I was penalised for producing more†. I had not heard a sadder statement that day and stayed the saddest statement for a long time to come. Entrepreneur and the worker complement each other and need to co-exist. Today, government as an entrepreneur is passe. Yet, the indiscriminate pursuit of the policy, unmindful of the social setting is not without its failings. For in the interregnum, when the benefits of privatisation have not yet completely trickled down, we need sufficient social security mechanisms to ensure the poor do not turn poorer. We further need strong regulatory regimes and stronger competition laws concomitant with privatization in order to install the ‘consumer as king’, and prevent distortions in the functioning of the market by the big monopolistic players. A fine balance of these competing interests, with the ultimate goal of ‘public good’, which is essentially what the business of government is all about, should be the primary focus of any privatisation agenda.