Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation. This blog is currently suspended.

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Wed, 28 Nov 2007

Can governments be trusted with financial data?

When the UK government loses CDs containing name, addresses, date of birth, child benefit and national insurance numbers and bank details relating to 25 million people (40% of the population), we must ask the question whether governments can be trusted with financial information on a large scale.

A comment by a reader of the Times Online underscored the gravity of the problem:

Given the large number of government employees that clearly have access to these databases, if the administration and security systems in place allow for this kind of data to be burned onto an external removable disc, then it is inevitable that such data already has been (or will be) deliberately taken and sold to identity theft fraudsters by a modestly paid, unscrupulous civil servant (it is unfortunately naive to assume everyone is honest).

This is an issue that has largely been addressed in banks and other financial institutions who have historically held our private data, and who have measures in place to prevent such extraction of confidential data.

The idea of a “momentary blunder” or accidental loss seems to miss the real risk.

It is true that the private sector is a little better at handling data, but then the US telecom operators have shown that they are more than happy to part with data to the government even when the government requests the data illegally.

In the Indian context, I am worried about the huge amount of data that is being collected under the tax information network. Moreover, as India makes hesitant moves towards electronic payment systems, there seems to be a great deal of eagerness on the part of everybody including the tax authorities to collect and preserve all the transaction data. If somebody wants to do data mining on a few petabytes of data, that is fine, but who will ensure the safety of all the data? Whom can we sue if the data is lost or stolen?

Posted at 17:43 on Wed, 28 Nov 2007     View/Post Comments (1)     permanent link

Sat, 24 Nov 2007

New Derivative Products in India

Yesterday, the Financial Express published an interview with me on the proposal by SEBI earlier this month to launch new derivative products. I made two main points:

Posted at 11:36 on Sat, 24 Nov 2007     View/Post Comments (1)     permanent link

Sun, 18 Nov 2007

Deposit Insurance and Northern Rock

The flurry of comments and discussion that followed Mervyn King’s interview to the BBC on November 6, 2007 have led me to the conclusion that the true lessons from Northern Rock are largely about deposit insurance and not about bank supervision.

Mervyn King’s interview about the handling of Northern Rock prompted a series of comments last week in the Financial Times by Philip Stevens, Willem Buiter and Martin Wolf. This has prompted me to revisit Northern Rock which I blogged about last month here and here. I am even more convinced than before that the Northern Rock episode does not reveal fundamental flaws with the model of unified regulation and separation of monetary policy from bank supervision. I also think that King’s decision to provide liquidity only at penal rates and against top class collateral was quite correct. Mervyn King said in his interview:

If you look at what the European Central Bank lent to banks through their auctions that they conducted, relative to the size of the banking system they lent an average of 230 million pounds per bank participating in their auctions. Northern Rock needed something closer to 25 billion, 100 times larger than the average amount which the European Central Bank was lending to banks through their auctions. The scale of the funding that was needed was staggeringly large.


So could we have had an auction that was sufficiently large that all the banks would have got 20 to 30 billion and Northern Rock wouldn’t have been noticed in that process? Well, that would have been an auction on a scale 50 odd times that which any other Central Bank had engaged in. And I’m absolutely convinced that the first question you would have asked on that day is: “What on earth must have happened to the entire British banking system to have merited an auction of that size?” We were doing this not to bail out the British banking system, which didn’t need bailing out, but actually to get money into one institution that needed it.

In my view, the lessons from Northern Rock are:

Posted at 12:14 on Sun, 18 Nov 2007     View/Post Comments (0)     permanent link

Wed, 14 Nov 2007

OTC Equity Derivatives in India

I wrote an article in the Business Standard today arguing for the creation of an OTC equity derivative market in India.

I made the following points

Posted at 15:55 on Wed, 14 Nov 2007     View/Post Comments (1)     permanent link

Tue, 13 Nov 2007

Quiet Period in US Public Offerings

Earlier this year, I blogged about the problems created by the quiet period during public offerings of shares in the United States. The Lex column on “Quiet Periods” in the Financial Times yesterday raises the same issues and refers to the Blackstone example that I mentioned in my blog posting. Lex concludes by saying that the US Securities and Exchange Commission (SEC) should put the “onus on companies to talk rather than hide”. This is a very elegant way of putting it. Regulations must always impose a duty to disclose rather than a duty to keep quiet.

Posted at 16:41 on Tue, 13 Nov 2007     View/Post Comments (0)     permanent link