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The past few months have seemed like a bad sequel to a third-rate movie. The movie, which could be called the return of the power crisis, has the same plot, the same cast, and the same producers/directors. It starts with a pseudo- rosy picture. The reservoirs are growing empty in a rain-dependent land but the people are told to carry on as usual and promised that nothing bad will happen to them. Then all of a sudden, the crisis hits and the losses to people are tremendous because they have not been prepared to deal with it leaders react with harsh measures to stave off the threat of total darkness as long as possible. Then suddenly, the monsoon rains arrive and power is back. And they all live happily ever after. Until next years crisis, that is.
It seems as though we are covering stramgely familiar territory with the power siuation. After the monsoon rains of 1996 swept away the most severe power crisis Sri Lanka had ever experienced, the government acted as if the whole power problrm had gone away. People were told that the Ceylon Electricity Board (CEB) would expand generation capacity and that we would not have to face power cuts again. The government never made it cleat that the improvement in the power situation was only temporary or that energy conservation was an urgent need.
As the water levels in the reservoirs dropped early this year, suburban residents noticed that informal power cuts-what the CEB euphemistically calls " load-shedding " were being imposed almost daily. The government still maintained its stand power cuts would not be imposed.
In late February, the president "decreed" under emergency regulation, that the National Environment Act, Urban Development Act, and the Public Nuisance Ordinance ( part of the Civi Procedure Code) be suspended with respect to power generation projects. Two particular projects that this "dance" will cover are the noisy Kool Air power plant in EtulKotte and the proposed Upper Kotmale Hydro Power Project for which Environmenttal Impact Assessment (EIA) clearance was twice rejected. Such havsh steps, characterised as emergency megsures are being taken surprisingly in the face of the gevernments refusat to impose even intermittent power cuts. In early April, as water levels in the reservoirs remained ominously low, the government still maintains that there will be no power cuts.
While it is true that decisive measures need to be introduced to overcome the impending power crisis, the current approach of " management by denial" and "management by commandment" (ie decrees,bans) is counterproductive. Firstly, it dose not give peoples intelligence by blatantly painting a false pcture. Scondly, it dose not give people the opportunity to respond to the trun situation. People will respond to the information provided to them, since they have been told that there is no power problem, people will utilies power carelessly. If they are complete truth, people will use power sparingly in order to extend the existing supply as long as possible it is in ther interest to do so.
It seems that, in reacting to the power situation, our priorities have become muddled. Power cuts have become the primany indicator of a power crisis. And the government. in its "managements by denial" mode, is detemined not to impose power cuts. What has not been recognised is that the total ban on air condtioners and the suspension of important legislation could, in many ways, be more damaging for the economy and less effctive in terms of power usage than the introduction of short power cuts.
A vital aspect that has not received adequate attention over the past few years, despite prior knowledge of the power shortage, is energy conservetion. In other countries, even where there is no power shortage , creating awareness about and providing incentives for energy conservation has resulted in big savings. The need for conservation and the habit of conservation should be instilled into the Sri Lanka public-for residences as well as industries and for private as well as public sector institution-at all times, particularly when power is freely available. We should leam from the lessons of 1996 that, after the crisis has begun, it is too late to run the " Conserve Power " ad campaigns. At this point, the damage has already been done.
The government should employ a well-planned, proactive approach to resolve this problem. The problem is one that was forecast years ago so we should not wait until it reaches us and then employer harsh , reactive approach. We should also try to move away from the "management by commandment " approach and move toward an incentive-based approach to energy conservation. Above all, the government should not underdone the laws this country. There is already a fundamental right case pending at the Supreme Court, filed through Environmental Foundation Ltd.(EFL) on behalf of five young children, that seeks to rescind the suspension of the three pieces of legislation.
The amount of capital banks should hold to cover the risk of loan default has long been a matter of contention among regulatory authorities. But for a decade now almost all the world's regulators have adopted the Basle standards, the capital adequacy rules of the Bank for International Settlement.
This is stated in an article by George Graham published in the London Financial Times.. The article explains a new way of calculating capital requirements that would, according to the writer, better reflect the risks of lending.
The new model of measuring credit risks was launched recently by J.P. Morgan, The U.S. investment bank with the backing of several other big international banks, says the writer. As regards the Basle rules he says that to many bankers they have become increasingly perverse "unfairly penalising some low-risk lending while favouring other much more dangerous types of business."
He quotes Stephen Thieke who, as an official of the US Federal Reserve, was involved in the drafting of the Basle standards and is one of those responsible for J.P. Morgan's new model as saying;" As one of the authors of the product (the BIS rules) I have to say 'yes', they have outlived their usefulness".
The essence of the Basle formula, says Graham, now broadly adopted in the European Union's capital adequacy directive, was to require banks to hold a capital cushion amounting to at least 8 per cent of their total assets. The assets are weighted according to risk. Commercial loans are counted at their full value while mortages are weighted at 50 per cent of the risk of a commercial loan because they are backed by physical property.
Although the risk weightings were an improvement, observes the writer, from earlier formula used by bank regulators, the Basle formula makes no distinction between loans to a company rated by international credit rating agencies as triple 'A' and those to an owner-operated corner shop. Nor does the formula give a bank any credit for spreading its risks over a diversified portfolio of loans.
What the Basle regulators failed to anticipate, says Graham, was the extent to which their ratios designed for large international banks and meant to be calculated across their whole spread of business as would come to influence management decisions in individual business units.
Graham observes that most banks are aware of "the distortions a blunt application of the Basle formula could bring to their business decisions" and many of them use more sophisticated internal measures. Some of them are returns on economic capital (Roec) risk - adjusted return on capital (Raroc) and even risk-adjusted return on risk-adjusted capital (Rarorac).
The writer cites Barclays, the UK bank, as a user of this kind of risk-adjusted measurement. It caculates its investment banking business subsidiary BZW, really needs a capital base less than half the regulatory level set by the Basle authorities. Barclay's business banking division, on the other hand, requires more than 22 per cent more capital than the Basle standards require.
Because Barclays, although it can allocate more capital than formally required to business banking, cannot allocate less than the rules require to BZW which has its own banking licence, it makes it harder for BZW to make an adequate return on the capital it has perforce to employ. Similarly mortgage lenders also have their credit risks overstated by the Basle formula.
The writer then describes the new model launched by J.P. Morgan. Called Credit Metrics it sets a market standard for measuring credit risk. The model aims to "Produce a single number for how much a bank stands to lose on a portfolio of credits which may have very different characteristics and therefore how much capital it ought to hold in reserve".
The model starts by measuring the probability that a particular credit or pool of credits will default. This is basically derived from credit ratings. It then plots the probability that they will all turn sour at the same time. Graham points out that the default probability for two loans to UK property companies would be high since both face the same market conditions.
But, says Graham, a bank with a well-diversified portfolio would need less capital because its risks are spread.
The model is backed by banks such as Deutsche Morgan Grenfell, Bank of America, Swiss Bank Corporation, Union Bank of Switzerland and BZW. These banks would like the BIS to accept the use of this kind of model in assessing their capital requirements. The writer says that while this approach would have appeared outlandish when the Basle rules were being drawn up a decade ago, it is no longer out of the question.
In fact, the BIS has already agreed that from the beginning of next year banks may use their own models for measuring how much capital they need to hold to guard against market risk. Yet, says Graham, the regulators lack confidence in the "robustness" of these market-risk models so much so that they have stipulated that any bank wishing to use such a model must multiply by three the amount of capital its model says it needs. Even so, says the writer, most banks believe using models would help to reduce their capital requirements.
The article goes on to state that regulators and many bank analysts fear that over-reliance on advanced statistical techniques, which these models seek to adopt, could breed what is called a "Zen banker", one who lies back and trusts the model rather than using his own judgement.
The article quotes Samuel Theodore, managing director in charge of European banks at Moodys, the credit rating agency, as saying," Resting on the laurels of advanced models can drive some organisations into trouble, as long as time-honoured sound lending practices are given a low priority."
Senior regulators, says Graham in conclusion, have not slammed the door on the possibility of allowing banks to use such models for their credit risk calculations. He reports Michael Foot, the head of banking supervision at the Bank of England, as saying "in five, ten years time we could be allowing banks to do that in the same way as we are going to for market risks." That may be longer than the three to five years J.P. Morgan would like, says the writer, but it leaves the way open for banks and regulators to talk.
(*) In Sri Lanka the Banking Act requires banks to maintain a capital adequacy ratio as may be determined by the Monetary Board "which shall, in determining such ratio to be maintained, as far as practicable adopt the guidelines for capital adequacy set out by the Bank for International Settlements in Basle".
Trouble is brewing at the Kangaroo Bank and the talk in the cocktail circuit is that the Chief Kangaroo wants to import more white Kangaroos to run the show. A white Kangaroo called baby Itchie has arrived whilst a senior local lieutenant has moved off and more are to go.
Sensing this, more and more competent local staff are leaving from A to Z to join the competitors in the market except for a few chicken. Soon, they say, the Kangaroo Bank will have more white Kangaroos at the top and only the old Johnnies and Clerks will be left.
The bosses at the Treasury are said to be disappointed that most commercial banks have not reduced lending rates following a second reduction in the statutory reserve ratio by the big bank.
Thus, the whole objective of giving the economy a kickstart has been brought to nought, they say.
So, the powers that be will review its decision to reduce the statutory reserve ratio, we hear....
In every state sector, workers are dissatisfied with their salaries - or salary increases - and are asking for more and going on strike.
Now, the trend has caught on in the private sector.
Unions at one well established, diversified blue chip group of companies are planning to ask for higher wages.
And, if the response is no, then a strike that could ripple the group is in the offing....
Continue to Business page 3 - Retuns to help Lanka
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