Just ask to be happy!

(Guest Post by Mr Gopalan Parthasarathy)

We have times of propensity of high growth till adulthood – the growth indicators are very close to nature in these times: our physical growth, our learnability, our performance in sports, arts and science. None of them is so much defined in material and monetary terms. We get gravitated fully by the fun of activities in these times. Here our happiness is spurred by simple and doable expectations and preparing to meet them, meeting them and surpassing them.

Then comes the phase in which expectations start getting set in material and monetary terms. Here we face low hanging fruits first and by exerting ourselves, may be at the cost of work life balance for a while, we meet and surpass our expectations, as we have more or less set the definitions of outcomes in material terms. This is the phase in which we start getting into a binary mindset of success and failure – more or less, we start losing fun and pleasure, the non materially defined expectations simply fade away from us.

Then comes the phase in which the expectations we are used to set in material terms start showing resistance in terms of outcomes. We start looking at bending the rules of the game a bit so that we maintain an edge. We start looking at the world somewhat differently now, while we cannot cease to set higher expectations, we start seeing the zero sum games in achieving the results. In this phase, many start believing that ends justify means and start caring two hoots about what it takes to achieve results. Success feeds on itself – some players who know how to bend the rules of the game start succeeding more and the others start biting the bullet of expectations not being met and a growing measure of unhappiness starting to haunt them. A good number of them try to be more and more of themselves and in return get more and more of disappointment.

Can one return to the phase in which the expectations are set in non material terms? Perhaps one can borrow that phase this way: meeting like minded people and spending quality time with them, gradually focusing away from the work and work place, career et al as the subject matter; pursuing a hobby like in yesteryears and following the sports one used to be passionate about long ago; getting melted in music one loves and getting lost into a movie like good old days, a few things to do to get back into one’s elements, if you like.

Here there are two ways of returning – one can return with just no complaint about life and thus make the best out of these like in good old days. Or one can return, conscious in the back of mind they have to return to hell by the next day. Often a combination of both can happen – the mind playing between the two realities.

All said if we recollect when we were happier, we know how to get happiness back in our lives. Expectations and reality are the two sides of the coin. Either of them cannot be wished away. But then both of them should belong to us. We should not belong to them.

Let us wake up to a day and tell ourselves that we choose certain expectations for the day and work towards them. Let us go to bed conscious of our reality fully owning it up as ours. We should not become either our expectation or our reality but be a conscious and self aware outsider to both, who is able to play into them without losing oneself.

I think that is possible. Being aware of ourselves as the chooser of our expectations and owner of our reality, in both cases, not entirely synonymous with either and a playful outsider to both, could be possible. It is a proven fact that one can lower expectations and attain more happiness. I tend to think in today’s reality expectations are tigers on which we mount and find it hard to dismount from. Perhaps one may think of regaining expectations that used to get us happiness. May be when we were growing up those expectations were happening to us without our conscious choices. May be now we need to choose them consciously and hold on to happiness for a while, even as we cannot help expectations set in our reality taking us over. Being aware of the choices and owning up what we choose our expectations and at least make a variation in our choices now and then, if not for ever, can make all the difference to our perspective, if not to our harsh realities. Yes, to borrow the famous phrase from Robin and taking liberty to apply it metaphorically to this thought process, the monk has more choices than just selling his Ferrari, which could still be in the wish list replacing buying or keeping one for ever! At some point in time in our lives buying one was rightly in the wish list earlier. That is a process, as much as keeping it at a cost we should be aware of and selling when we have no use for it. Being aware of the process does make a difference and empowers us to regain the paradise lost.

Tired of the race and yet not able to quit it? Never mind, walk to your kitchen and open the candy jar with the same curiosity as you did with, the last time, no matter how many decades before. Slip into your backyard and smell it for a new plant or watch the new flower there in the same wonderment as you did in, the last time, no matter how many decades before. Go to the place you grew up and take a stroll giving a shout to anyone resembling your boyhood friends, like you did last time, no matter how many decades before. Skip your breakfast and roam around with an old friend and get scolded by your family all over again for being so undisciplined.

Dust up your favourite drums and try your hands into them shaking out your neighbours – you can always apologize.

In short, abandon yourself. Your happiness did not go anywhere. Only you have gone far away from it. It is always for the asking. Just ask to be happy!

Demystifying Basel III – Part 2

Part 2 – Basel III enhancements over Basel II

Basel III represents an effort to fix the gaps and lacunae in Basel II (See previous part for a detailed discussion). However, it is very important to note that Basel III does not jettison Basel II but builds on the essence of Basel II i.e., the link between risk profiles of banks and their capital requirements. Therefore, Basel III is an enhancement of Basel II.

The enhancements in Basel III over Basel II come primarily in five areas:

  1. Raising the Level and Quality of Capital
  2. Introducing a Global Liquidity Standard
  3. Supplementing Risk-based Capital with Leverage Ratio
  4. Measures for addressing Systemic Risk
  5. Measures for reducing Pro-cyclicality


Let us now have a brief look at each of the five areas mentioned above.

1. Raising the Level and Quality of Capital

Once bitten twice shy – this principle has definitely worked and Basel III requires both better quality capital and higher amount of capital. Let us have a look at the capital requirements under Basel III and compare the same with Basel II:

As seen from the above table, the minimum capital the minimum capital requirement remains at 8% of Risk Weighted Assets (RWA) in Basel III. But, Basel III has introduced a Capital Conservation Buffer of 2.5% of RWA over and above the minimum capital requirement, raising the total capital requirement to 10.5% of RWA as against 8.0% of Basel II.

Capital Conservation Buffer: The Capital Conservation Buffer is stipulated to ensure that banks are able to absorb the losses without breaching the minimum capital requirement, and are able to carry on business even in a downturn without deleveraging. It is important to note that this buffer is not part of regulatory minimum. However, the level of this buffer would determine the discretionary payments such as dividends distributed to shareholders and bonuses paid to staff.

Countercyclical Capital Buffer: In addition to Capital Conservation Buffer, Basel III introduces another capital buffer known as the Countercyclical Capital Buffer. This is in the range of 0% to 2.5% of RWA. This buffer can be mandated by the regulator on banks during periods of excess credit growth.

In addition to these two buffers, Basel III also provides for higher capital surcharge on systemically important banks. There are also other prescriptions regarding quality of capital within the minimum total so that capital is able to absorb losses, and calling upon tax payers to bear the burden of bail-out becomes absolutely the last resort!


2. Introducing a Global Liquidity Standard

In order to mitigate liquidity risk, Basel III addresses both potential short term liquidity stress and longer term structural liquidity mismatches in banks balance sheets by introducing liquidity requirements as follows:

Liquidity Coverage Ratio (LCR) promotes short term resilience by requiring sufficient high quality liquid assets to survive significant liquidity stress scenario lasting for 1 month.

NSFR promotes resilience over longer term (1 year) through incentives for banks to fund activities with more stable sources of funding. The NSFR mandates a minimum amount of stable sources of funding relative to the liquidity profile of assets, as well as potential for contingent liquidity needs arising from off-balance sheet commitments over a one year horizon. In essence, NSFR is aimed at encouraging banks to exploit stable sources of funding.

3. Supplementing Risk Based Capital with Leverage Ratio

To mitigate the risk of banks building up excess leverage as happened under Basel II, Basel III institutes a leverage ratio as a back stop to the risk based capital requirement. The Basel Committee is contemplating a Tier 1 leverage ratio of  3% or 33.3 times Tier 1 Capital which will eventually become Pillar 1 requirement as of January 1, 2018.

4. Measures for addressing Systemic Risk

Basel III has prescribed measures for addressing systemic risk which includes the following:

  • Measures to reduce the probability and impact of failure of Systemically Important Financial Institutions (SIFIs) which includes capital and / or liquidity surcharges, risk based levies on non-core funding.
  • Measures to improve capacities to resolve  SIFIs such as Living Wills, Cross border resolution framework etc.
  • Introduction of Central Counterparties for derivative settlements

5. Measures for reducing Pro-cyclicality:

Apart from introduction of the concept of Countercyclical Capital Buffer, the measures for reducing pro-cyclicality includes requiring banks to align compensation schemes to long term  viability and promoting expected loss model in accounting framework.

The above measures are sought to be introduced in a phased manner and BIS has suggested a time frame starting from January 2013. Most of the central banks and regulators have already announced their plans for the introduction of the measures. The ultimate goal is a stable financial system facilitating steady economic growth.