Daily Current Affairs

Why did bank bailout research get the Nobel? (GS Paper 3, Economy)

Why in news?

• Recently, three economists Ben Bernanke, Douglas Diamond and Philip Dybvig were jointly bestowed the Nobel Prize in Economics for 2022 by the Royal Swedish Academy of Sciences.

 

Why were they chosen for the award?

• The Nobel in Economics has been awarded to Bernanke, Diamond and Dybvig for their “research on banks and financial crises” undertaken in the early 1980s which have formed the foundations of what constitutes most modern banking research.
• Their analyses nearly four decades ago, still inform efforts to emphasise the vitality of banks to keep the economy functioning smoothly, the possible mechanisms to make them more robust amid crises periods, and how bank collapses can fuel a larger financial crisis that can rattle economies.
• Moreover, their work went beyond the realm of just theory and has had significant practical import in regulating financial markets and pre-empting or coping with crises.

 

What are the key insights from these economists’ work?

Ben Bernanke:

• Bernanke, who was the U.S. Federal Reserve chief from 2006 to 2014, hadanalysed the worst modern economic crisis, the Great Depression of the 1930s that began in the U.S. but bludgeoned economies across the world for several years.
• He turned conventional thinking of the time on its head by arguing that bank failures in the 1930s were not just a result of the Depression but, in fact, a contributing factor to the lingering scars on economic activity.
• Apart from the obvious impact of collapsing banks on its depositors’ fortunes, he argued that critical borrower profiles were lost when banks imploded, thus hindering the ability to channelise savings to investments that could have revived the economy faster.
• Previous economic historians had only focused on those banks’ failures as a factor that affected the economy in as much as there was a contraction in money supply.
• He proved otherwise by using ‘historical documentary evidence and empirical data to uncover the importance of the credit channel for the propagation of the depression.

 

Douglas Diamond & Philip Dybvig:

• Diamond and Dybvig, who completed their doctorates at Yale a year apart in the late 1970s, came together in 1983 to postulate theoretical models on banks’ role in an economy and what makes them vulnerable to ‘runs’ on their deposits.
• While depositors want any-time access to their savings parked with banks, banks don’t keep the money idle, investing and lending it onwards to borrowers for longer tenures.
• This tenure mismatch in banks’ asset-liability profiles mean that even rumours about a bank’s imminent collapse could become a self-fulfilling prophecy as all savers make a beeline to hastily withdraw their money though a bank only keeps part of those savings handy to meet routine withdrawals from a part of their depositor base.
• To meet a simultaneous withdrawal rush, a bank would be compelled to sell its long-term investments, even if at a loss, in the hope that the deposit bleeding stops before it runs out of cash in hand.

 

What framework did they propose?

• They provided solutions such as deposit insurance or a ‘lender of last resort’ policy that governments can consider to avoid such failures. When depositors know that the state has guaranteed their money, they no longer need to rush to the bank as soon as rumours start about a bank run.
• Most countries have deposit insurance schemes in place now, even as they hope and strive to ensure the eventuality of these risk covers being tapped doesn’t arise. Their work stimulated a flurry of subsequent studies yielding new fundamental insights on issues such as financial contagion, inside money creation, financial propagation, and financial regulation.
• The theoretical and empirical findings of Bernanke, Diamond, and Dybvig thus reinforce each other. Together they offer important insights into the beneficial role that banks play in the economy, but also into how their vulnerabilities can lead to devastating financial crises.

 

Why have they been picked now?

• A fresh crisis is emerging from the COVID-19 pandemic-induced haemorrhagin.
• The International Monetary Fund (IMF) has warned that the ‘worst is yet to come’ and recessionary conditions loom for many countries, as the war in Europe stretches on amid a ‘cost of living’ crisis vitiated by food and energy worries.
• The Nobel jury’s picks may well be construed as a reminder to governments about lessons that would come in handy again as the current tumult unfolds with fears about impending shocks to the banking system.
• These economists’ findings have been proven ‘extremely valuable for policymakers, as is evident in the actions taken by central banks and financial regulators in confronting two recent major crises;  the Great Recession triggered by the global financial crisis between 2007-09 when shadow banks like Lehman Brothers collapsed and the economic downturn that was generated by the COVID-19 pandemic.

 

Does this have any resonance for India?

• Indian households as well as policy makers are all too familiar with bank failures in the recent past, starting from the trouble at the privately run Global Trust Bank to freezes in withdrawals at several co-operative banks.
• Government and regulatory interventions to sustain faith in the banking system have included higher deposit insurance cover, facilitating takeovers of weaker lenders and steps to rein in bad loans.
• The key learnings from the Nobel Laureates’ work seem to have been embraced by Indian authorities. But as the government pursues privatisation of banks while aiming to consolidate lenders to create larger entities to finance bigger investments and higher growth, utmost regulatory and legislative vigil is warranted to pre-empt any mishaps in the financial sector.
• As the IMF’s chief economist has warned, the risk of monetary, fiscal or financial policy miscalibration has risen sharply amid high uncertainty and growing fragilities.

 

The issues in the Collegium’s functioning

(GS Paper 2, Judiciary)

 

Context:

• A meeting of the Supreme Court Collegium, comprising the Chief Justice of India (CJI), and four senior-most judges, which was called recently but did not take place, was subsequently “closed without there being any further deliberation”.
• What prevented further deliberations was the fact that the Union Law Minister, by a letter requested Chief Justice U.U. Lalit to nominate his successor, as the latter’s tenure ends on November 8, 2022.
• The postponement of the meeting and its subsequent closure has invited attention to the manner in which the Collegium functions.

What is the work of the Collegium?

• The Collegium system, one in which a group of the senior-most judges make appointments to the higher judiciary, has been in practice for nearly three decades.
• Its importance lies in the fact that its opinion has primacy in the matter of appointments to the high courts and the Supreme Court, as well as transfers.
• Its legal basis is found in a series of three judgments or the ‘Judges Cases’ concerning the higher judiciary. Its manner of functioning has been laid down in the form of a ‘Memorandum of Procedure’.
• The Constitution says a Supreme Court judge is appointed by the President in consultation with the Chief Justice of India.

 

‘Judges Cases’:

• In the ‘First Judges Case’, the court held that the consultation with the CJI should be “full and effective”.
• The Second Judges case introduced the collegium system in 1993. It ruled that the CJI would have to consult a collegium of his two senior-most judges in the apex court on judicial appointments.
• The ‘Third Judges Case’ case in 1998, which was a Presidential reference, expanded the collegium to its present composition of the CJI and four of his senior-most judges.

 

How does it discharge its functions?

• The Collegium’s functioning has been criticised for being opaque. Its resolutions and recommendations are hosted on the Supreme Court’s website, giving relevant information about its decisions. However, the nature of the deliberations and whether there are any internal differences of opinion on the suitability of a particular candidate are unknown.
• It functions mainly through the system of adopting resolutions and sending them to the Union Law Ministry for further action.
• If a proposal for appointment of a judge is returned for reconsideration, the Collegium may either drop it or reiterate it. When the Collegium reiterates its decision after reconsideration, it is binding on the government.

 

Why was the September 30 meeting closed without result?

• The meeting had to be postponed because on that day, a member of the Collegium, Justice D.Y. Chandrachud, who will be the next Chief Justice of India, was preoccupied with his list of cases well beyond court hours.
• Subsequently, a difference of opinion has been acknowledged over the manner in which the deliberations were to go on.
• While Chief Justice Lalit wanted to circulate the files pertaining to some recommendations for appointment to the Supreme Court, two judges in the Collegium, Justice Chandrachud and Justice Abdul Nazeer, did not favour any decision through circulation. They preferred deliberations in person.
• Meanwhile, the Union Law Minister asked the Chief Justice to name his successor. By convention, once a recommendation for the successor to the CJI’s office is made, the Collegium ceases to make decisions.
• There is no law or rule that says the Collegium should become dysfunctional during the last month of a Chief Justice’s tenure, but it is observed as a matter of convention. It may also be a matter of propriety, as judges likely feel that the incoming CJI should have his say in initiating proposals for appointments to the Supreme Court.

 

What are the issues from this development?

Three questions may have arisen from the development:

• One is whether there ought to be a prescribed mode of decision-making, that is, through personal deliberations or by circulation or by adopting both means as per convenience.
• The second is whether all members of the Collegium give their opinions in writing, or whether they convey reservations, if any, orally. A related question that arises is whether all decisions ought to be unanimous and consensual.
• There is a view that a recommendation by majority, with one or two expressing reservations, may give a good reason for the executive to reject the recommendation or seek reconsideration.
• Also, the need for the Collegium not to hold any deliberations in the last month of a Chief Justice’s tenure is something to be debated.
• Given that the CJI is appointed by seniority, many of them have only a short tenure running into a few months. This convention may slow down decision-making.

 

Sri Lanka’s proposal for translocating gaurs

(GS Paper 3, Environment)

Why in news?

• The Indian government is considering a proposal from Sri Lanka to export a number of gaurs, or Indian bisons to revive the population of gavaras that have been extinct in the island since the end of the 17th century.
• If the project is cleared, it would be the first such agreement between India and Sri Lanka, and part of a global trend of “wildlife or zoological diplomacy”.

 

Details:

• The Ministry of External Affairs (MEA), which received the request in August, has now forwarded it to the Ministry of Environment and Forests (MoEF).
• The proposal came from world-renowned Sri Lankan conservationist Rohan Pethiyagoda, who was awarded the Linnean medal 2022 (U.K. -based equivalent of the Nobel prize for zoology) for his work on restoring fresh water and forest biodiversity.
• The proposal is to transport at least six specimens, including a bull and three to five cows.
• The Sri Lankan Department of Zoological Gardens would then carry out captive breeding a herd of about a dozen specimens over a five-year period before trial reintroduction to the wild could take place in accordance with internationally mandated guidelines for reintroductions.

 

Zoological diplomacy across globe:

• Experts say that while “zoological diplomacy” had been practised worldwide, they draw a distinction between “gifts or loans” of animals in captivity to translocation and reintroduction of a species, particularly between neighbouring countries with similar eco-systems.
• For example, American bison herds were supplemented with animals from Canada after the U.S. herds were almost all wiped out.
• The U.K. has recently introduced the European bison (Wisent) after an estimated 10,000 years in June 2022(its extinct relative the Steppe Bison was believed to have lived there many centuries ago).
• Israel has for decades pursued reintroductions, including of Persian fallow deer.
• Arabian oryx and other species have been released into the Negev desert, and South Africa has recently used the export of cheetahs to other African countries as a diplomatic tool during the post-apartheid era.
• More recently, Cambodia has requested translocating tigers from India, which is under consideration.

 

Gaur in Sri Lanka:

• The gaur, called the gavara in Sinhala, was once widespread and archaeological remains in ancient caves in the island included the remains of the animal.
• By the end of the 17th century, however, the species appears to have been extirpated in Sri Lanka, although they remain prominent in iconography and mythological stories.

 

About Indian gaur:

• The Indian gaur, a reclusive beast that lives in the wild, is the largest wild bovine that is a protected species and included in Schedule I of the Wild Life Protection Act, 1972 and listed as vulnerable in the International Union for Conservation of Nature (IUCN) Red List.
• There are about 13,000 to 30,000 gaurs in the world with approximately 85% of the population present in India.
• It is also found in Burma and Thailand.
• The first-ever population estimation exercise of the Indian gaur carried out in the Nilgiris Forest Division in February 2020 estimated around 2,000 Indian gaurs to be inhabiting the division.