THE ROLE OF ECONOMISTS IN BANKS
The Crucial Role Of Bank Economists In Transforming The Banking System In India. Economists Have To Be More Main Streamed Within The Operational Structure Of Commercial Banks. Apart From The Traditional Functioning Of Macro-Scanning, The Interlinkages Between Treasuries, Dealing Rooms And Trading Rooms Of Banks Need To Be Viewed Not Only With The Day-To-Day Needs Of Operational Necessity, But Also With Analytical Content And Policy Foresight. Today, Operational Aspects Of The Functioning Of Banks Are Attracting Intensive Research By Professional Economists. In Particular, Measuring And Modeling Different Kinds Of Risks Faced By Banks, The Behavior Of Risk-Return Relationships Associated With Different Portfolio Mixes And The Impact Of Fluctuations In Financial Markets On The Financial Performance Of Banks Are Areas Which Lend Themselves To Analytical And Empirical Appraisal By Economists And Econometricians. They, In Turn, Are Discovering The Degrees Of Freedom And Room For Analytical Maneuver In High Frequency Information Generated By The Day-To-Day Functioning Of Banks. It Is Vital That We Develop An Environment Where These Synergies Are Nurtured So As To Serve The Longer-Term Strategic Interests Of Banks. Even In Real Time Trading And Portfolio Decisions, The Fundamental Analysis Of Economists Provides An Independent Assessment Of Market Behavior, Reinforcing Technical Analysis. A Serious Limitation Of The Applicability Of Standard Economic Analysis To Banking Relates To The Inadequacies Of The Data-Base. Absence Of Long Time Series Data Storage In The Banking Industry Often Poses Serious Problems To The Quest For The Formal Analytical Relationships Between Variables. Even If Such Data Exist, The Presence Of Structural Breaks May Blur Meaningful Analysis Based On Traditional Formulation. Economists Need To Think Innovatively To Overcome This Problem. Use Of Panel Regression, Non-Parametric Methods And Multivariate Analyses Could Go A Long Way In Understanding And Validating Behavioral Relationships In Banking. Another Important Challenge For The Economics Profession Is To Develop Proper Models For Measurement Of Various Risks In Indian Conditions. This Is A Necessity In View Of The Move Towards Risk-Based Supervision. Quantification Of Operational Risks And Calibration Of Value At Risk (Var) Models Pose Major Computational Challenge To bankers and policy makers alike, particularly in India. A major difficulty lies in identifying the right statistical model that determines the underlying distribution suited to the particular category of operational loss, and building the necessary database for deriving operationally meaningful conclusions. In my inaugural address last year, I had also emphasized the need for bank economists to come out of their narrow specialization and address operational issues relating to banking and finance. In order to make a meaningful contribution to banking, economists must have the experience of working in operational areas of banks. For this purpose, economists need to soil their hands in dealing rooms, treasuries and investment units, credit authorization and loan recovery, strategic management groups and management information systems of the banks to understand the ground realities. There are also economies to be gained from field-level credit appraisal, asset recovery, debt restructuring, market and consumer behaviors in which banks are involved. Thus, the profession needs to amalgamate the objectivity and theoretical soundness of economics with the functional dimensions of banking and finance. It is this combination of specialist training with operational experience, which is going to make the economics profession relevant to the changing face of banking in India.
History of Banking in India
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