Deepak Mohanty: Lessons for monetary policy from the global financial
crisis - an emerging market perspective
Paper presented by Mr Deepak Mohanty, Executive Director of the Reserve Bank of India, at
the Central Banks Conference of the Bank of Israel, Jerusalem, 1 April 2011.
* * *
The assistance by Jaya Mohanty, Rajeev Jain and Binod B. Bhoi is acknowledged.
The global financial crisis has challenged the conventional views on the role of monetary
policy. Post-crisis, the weight of arguments tilts towards acceptance of financial stability as
an objective of central bank or monetary policy. However, the key challenge is to evolve a
consistent framework for implementation. While interest rate can continue as the dominant
instrument for implementing monetary policy, supplementing it with other quantity or
macroprudential instruments even in normal times will not only enhance the flexibility of monetary
policy to attain multiple objectives but could also obviate the risk of hitting the zero lower
bound.
I. Introduction
I thank the Bank of Israel for this opportunity to present my views before this distinguished
gathering. The past three years have been unprecedented in the history of the world
economy. The crisis though not unique in terms of its nature has certainly been more global
and intense in terms of its impact. The expanse of the crisis has tested all the limits of
conventional and unconventional policy options available to policymakers around the world.
In fact, the speed and intensity with which the US subprime crisis turned into a global
financial crisis and then into a global economic crisis has led to a whole new debate on the
dominant tenets in macroeconomics.
The crisis has certainly questioned the efficacy of the existing institutional framework and
available policy instruments at the national as well as international levels in ensuring global
financial stability. It has raised skepticism about the functioning of financial markets and
institutions, in particular their capacity to price, allocate and manage risk efficiently. It
exposed weaknesses in both private sector risk management and inadequacies in the public
sector's oversight of the financial system. The lessons, though are still being distilled, are
relevant not only to advanced economies but also to emerging market economies (EMEs).
Against this backdrop, I will reflect on the following set of questions. How was the recent
crisis different from the past crises in terms of its cause and impact? What were the
differences in the nature of policy response in the advanced economies and EMEs? How
was India impacted and what were its policy responses? I will conclude by highlighting six
key lessons from the crisis which have implications for the conduct of monetary policy.
II. Genesis of the crisis
It has now become clear that the crisis was not an outcome of any single cause rather the
result of the complex interaction between a host of macroeconomic and microeconomic
factors. From a macroeconomic perspective, the crisis has been viewed as being caused by
the persistence of global imbalances, excessively accommodative monetary policy pursued
in major advanced economies and lack of recognition of asset prices in policy formulation.
The microeconomic causes highlighted in the literature are the excessive credit growth and
associated leverages, the lowering of credit standards, rapid financial innovations without
adequate regulation, inadequate corporate governance, inappropriate incentive structure in
the financial sector and overall lax oversight of the financial system.
Global imbalances
It is argued that while the subprime problem was the trigger, the root cause of the crisis lies
in the persistence of the global imbalances (BIS, 2009). Large current account deficits in the
advanced countries, especially the US, mirrored by large current account surpluses in EMEs,
especially China, implied that excess saving flowed uphill from developing countries to
developed countries (Chart 1). This "saving glut" (Bernanke, 2005) was considered as one of
the factors leading to the crisis. The causation, however, is not very clear: whether it is
excess saving in China or excess consumption in the US that contributed to the crisis
(Mohanty, 2010).
At the same time, it is argued that large accumulation of reserves by the EMEs, led by China,
as self insurance against sudden reversal of capital flows, caused misalignment of exchange
rates. This prevented the global imbalances from adjusting in an orderly manner - with the
burden of adjustment falling disproportionately on countries with flexible exchange rates.
While there is merit in this argument, it is not clear whether movement in exchange rates by
itself could have prevented global imbalances without an adjustment in aggregate demand -
lower consumption in the US and higher consumption in China.
Monetary policy
In a number of advanced countries, policy rates remained very low (i.e., below what is
considered as neutral rates) for a sustained period which resulted in mispricing of risks and
hence contributed to the crisis (Chart 2).
Notwithstanding the arguments on both the sides, the crisis has shown that monetary
policies in advanced countries do have spillover effect on EMEs. For instance, persistence of
low interest rates in advanced economies, by increasing the interest rate differential could
push excessive capital flows to EMEs in search of higher returns, thus exposing these
economies to the risk of reversal unrelated to their fundamentals. Excessive inflows could
accentuate asset prices and put upward pressure on exchange rate. Given the fact that most
of EMEs are linked with advanced economies more than ever before, they could not remain
insulated from the impact of crisis originating elsewhere.
Excess leverage
Apart from perpetuating global imbalances, it is argued that the easy monetary policy
pursued in advanced economies encouraged excessive leveraging on the part of investors
as well as banks and financial institutions. The sharp rise in the leverage of financial
institutions in the first decade of this century has been particularly striking (Chart 3).
Search for yields
The low interest rates coupled with excess market liquidity led to the search for yields, which
in turn promoted rapid financial innovations in terms of complex derivatives and structured
finance products. Consequently, the financial system got enlarged with the growth in
offbalance sheet activities, and the shadow banking remained beyond the purview of regulation.
During the golden years, financial economists believed that free-market economies could
never go astray which is belied by the crisis (Krugman, 2009). The financial system,
however, remained vulnerable to the risks of reversal in easy monetary policy on the one
hand and disorderly unwinding of global imbalances on the other. It is argued that the "great
moderation" carried the seeds of its own destruction. This stability bred complacency,
excessive risk taking and, ultimately, instability (Minsky, 2008). Furthermore, multilateral
institutions like the IMF which were charged with the responsibility of surveillance, failed in
diagnosing the vulnerabilities both at the global level and at the level of systemically
important advanced economies (Reddy, 2009).
III. Impact and policy response
Advanced economies
The crisis manifested itself first in the form of tightening of liquidity in inter-bank markets in
advanced economies as banks became reluctant to lend to each other because of the fear of
counterparty risks. This led to abnormal level of spreads, shortening of maturities, and
contraction of some market segments. As a result, banks and other financial institutions
experienced erosion in their access to funding and capital. The tightening of credit conditions
coupled with extreme risk aversion and deleveraging by banks and financial institutions led to
a sharp slowdown in private sector credit growth.
Equity prices also plunged in the face of heightened uncertainties. The falling equity prices
coupled with the deteriorating macroeconomic conditions affected profitability of banks and
financial institutions. Consequently, the liquidity problem transformed into a solvency problem
leading to large scale bank failures in the US and other advanced economies in Europe. The
attendant wealth loss on account of collapsing asset prices further aggravated the problem in
the real sector. The real GDP growth in advanced economies decelerated from 2.7 per cent
in 2007 to 0.2 per cent in 2008 and subsequently turned negative (-3.4 per cent) in 2009.
Transmission to EMEs
Initially, it was widely hypothesized that EMEs would remain insulated from global financial
meltdown on the back of the buffer in terms of substantial foreign exchange reserves,
improved policy frameworks and generally robust banking sector and corporate balance
sheets. However, as the crisis intensified further with the failure of Lehman Brothers in
September 2008 and resulted in heightened risk aversion and global deleveraging, the EMEs
were affected.
Policy response
The international transmission of liquidity shocks was fast and unprecedented. While falling
asset prices and uncertainty about valuation of the traded instruments affected market
liquidity, failure of leading global financial institutions and the deleveraging process tightened
the market for funding liquidity. Given the growing risk of illiquidity cascading into solvency
problems, the crisis evoked unprecedented policy response, both nationally and
internationally. Monetary authorities in the advanced economies were the first to resort to
aggressive monetary easing first by reducing policy rates and then by using their balance
sheets in unconventional ways to augment liquidity. With the financial crisis spreading to the
real sector and raising concerns of economic recession, credit and quantitative easing
acquired policy priority in most central banks.
Central banks in advanced countries expanded the pool of securities as well as the number
of counter-parties eligible for their central banking operations as well as extended the
maturity of those liquidity providing operations. Implementation of such unconventional
measures led to sharp expansion in the size and composition of their balance sheets
(Chart 4).
The large scale economic downturn accompanying the financial crisis also led to activation of
counter-cyclical fiscal policy of unprecedented magnitude. The fiscal measures focused on
improving the balance sheet of the financial and corporate sectors as reflected in large scale
bailouts in the US and other advanced economies. Reflecting such fiscal stimulus measures,
advanced economies witnessed significant deterioration in their fiscal position as reflected in
high public debt to GDP ratios (Chart 5).
The contagion from the global financial crisis also warranted swift monetary and fiscal policy
responses in EMEs with a view to ensuring orderly functioning of markets, preserving
financial stability, and moderating its adverse effects on growth. They relied first on liquidity
augmenting measures - forex liquidity followed by domestic liquidity - and used instruments
such as currency swaps and cash reserve ratio before activating policy rates cuts, albeit,
from a much higher level. In the process, their policy responses became more synchronised
with global efforts.
Most emerging market central banks conducted outright sales of foreign exchange reserves
to help meet the local market's demand for foreign currency funding and to relieve the
pressure on the exchange rate. Central banks in countries like Brazil, Korea, Mexico and
Singapore had dollar swap arrangements with the Federal Reserve. However, it may be
noted that although EMEs undertook several liquidity-easing and foreign exchange
measures, their use of credit easing and quantitative easing was more limited (Table 1).
While both developed economies and EMEs resorted to conventional and unconventional
monetary measures, there were certain differences in terms of their timing, types and
magnitudes. First, while in the advanced economies the switchover was from conventional
monetary tools to unconventional measures due to policy rates approaching zero, in many
EMEs, unconventional foreign exchange easing and domestic liquidity augmenting measures
preceded the conventional measures of policy rate cuts. Second, while central banks in
EMEs relied mostly on direct instruments such as reserve requirements to ease domestic
liquidity, central banks in advanced countries resorted to various liquidity providing
operations through relaxation of counterparties, collaterals and maturity. Third, central banks
in advanced countries extensively used credit and quantitative easing measures which led to
large expansion of their balance sheets. Fourth, while in advanced economies fiscal support
aimed at rescuing the financial sector from the crisis situation, in EMEs they were generally
meant to address the deficiency in aggregate demand.
Indian experience
Until the emergence of the global crisis, the Indian economy was passing through a phase of
high growth driven by domestic demand - growing domestic investment financed mostly by
domestic savings and sustained consumption demand. Inflation was also low and stable.
Sequential financial sector reforms, rule-based fiscal policy and forward looking monetary
policy together contributed to the improved macroeconomic performance.
India, initially remained somewhat insulated to the global developments, but eventually was
impacted significantly through all the channels - financial, real and more importantly, the
confidence channel (Subbarao, 2009). This could be attributed to the global nature of the
current crisis on the one hand and accelerated trade and financial integration of the Indian
economy with the world since the 1990s on the other. Consequently, there has been a shift
in the degree of synchronisation of the Indian trade and business cycles with the global
cycles, which along with increased financial integration in the recent period indicate that India
cannot remain immune to global trends. Global economic developments now have a greater
influence on the domestic economy (Mohanty, 2009).
The impact was first visible on India's financial markets. Equity, money, forex and credit
markets came under pressure from a number of directions. Subsequently, under the impact
of external demand shocks, the Indian economy witnessed a moderation in growth,
especially during the second half of 2008-09 and registered 6.8 per cent for the full year, in
comparison with the robust growth performance in the preceding five years: 8.9 per cent per
annum (Table 2).
In order to limit the adverse impact of the contagion on the Indian financial markets and the
broader economy, the Reserve Bank, like most other central banks, took a number of
conventional and unconventional measures. These included augmenting domestic and
foreign exchange liquidity and a sharp reduction in the policy rates. The Reserve Bank used
multiple instruments such as the liquidity adjustment facility (LAF), open market operations
(OMO), cash reserve ratio (CRR) and securities under the market stabilization scheme
(MSS)1 to augment the liquidity in the system. In a span of seven months between October
2008 and April 2009, there was unprecedented policy activism. For example: (i) the repo rate
was reduced by 425 basis points to 4.75 per cent, (ii) the reverse repo rate was reduced by
275 basis points to 3.25 per cent, (iii) the CRR was reduced by a cumulative 400 basis points
to 5.0 per cent, and (iv) reduction in statutory liquidity ratio (SLR) by 1 percentage point of
banks' net demand and time liabilities (NDTL) to 24 per cent; (v) other liquidity provisions
included special refinance facility for all scheduled commercial banks to the extent 1 per cent
of their NDTL, term repo facility under LAF to enable banks to ease the liquidity stress faced
by mutual funds, NBFCs and housing finance companies and buyback of MSS securities.
The cumulative amount of primary liquidity potentially made available through all these
measures to the financial system was over Rs. 5.6 trillion (or over 10 per cent of GDP).
These measures were effective in ensuring speedy restoration of orderly conditions in the
financial markets over a short time span. Despite these measures, however, the balance
sheet of the Reserve Bank did not expand much, unlike in other advanced economies
(Chart 4), as these operations were conducted mainly with banks as the counterparties and
government securities as collaterals.
By synchronising the liquidity management operations with those of exchange rate
management and non-disruptive internal debt management operations, the Reserve Bank
ensured that appropriate liquidity was maintained in the system, consistent with the objective
of price and financial stability. These measures were supported by fiscal stimulus packages
during 2008-09 in the form of tax cuts, investment in infrastructure and increased
expenditure on government consumption. This raised the fiscal deficit of the Central
Government by about 3.5 per cent of GDP to 6.0 per cent in 2008-09 (Table 2). It is,
however, important to note that the entire fiscal stimulus in India was aimed at addressing
the deficiency in aggregate demand rather than extending support to the financial sector as
in the advanced countries. The expansionary fiscal stance continued during 2009-10 to
support aggregate demand.
Subsequently, with further consolidation of growth and inflation emerging as a major
concern, India began its exit from accommodative monetary policy pursued during the crisis
beginning October 2009. To begin with all special liquidity measures were withdrawn which
was followed by hikes in policy rates - LAF repo and reverse repo rates have been raised by
200 basis points and 250 basis points, respectively. The CRR has also been raised by
100 basis points to 6.0 per cent now. The process of fiscal consolidation resumed in
2010-11 is expected to be further strengthened in 2011-12. Thus, while the magnitude of
the crisis was global in nature, the policy responses in India were adapted to domestic
growth outlook, inflation conditions and financial stability considerations.
Key differences in policy response: India vis-à-vis the advanced countries
There were, however, some key differences between the actions taken by the Reserve Bank
of India and the central banks in many advanced countries:

In the process of liquidity injection, the counter-parties were banks unlike non-banks
in case of advanced economies. Even liquidity measures for mutual funds,
nonbanking financial companies (NBFCs) and housing finance companies were largely
channeled through the banks.
 There was no compromise on collateral standards for injecting liquidity. Unlike the
mortgage securities and commercial papers in the advanced economies, the range
of collaterals was not expanded beyond government securities.

Despite large liquidity injection, the Reserve Bank's balance sheet did not show
unusual increase because of release of earlier sterilised liquidity.

Availability and flexible use of multiple instruments facilitated better sequencing of
monetary and liquidity measures.

The use of pro-cyclical provisioning norms and counter-cyclical regulations ahead of
the global crisis helped safeguard financial stability.

Fiscal stimulus was geared to address deficiency in aggregate demand rather than
supporting the financial sector as was the case in advanced economies.
IV. Lessons from the crisis
The crisis showed that irrespective of the degree of globalisation of a country and the
soundness of its domestic policies, it cannot remain isolated due to the inter-linkages in the
global economy. The crisis has tested the mettle of central banks. In the process, they
reinvented themselves towards the unconventional and unprecedented role - shifting from
the role as lender of last resort to lender of first resort. While it might yet be early to draw
precise lessons, I will highlight six broad lessons reflecting on the ongoing debate, especially
from an EME perspective.
Lesson 1. Monetary policy has limits: constrained by zero bound
The dominant view during the pre-crisis period that one objective and one instrument as the
best monetary policy framework has come under question during the crisis. Despite the
success of this framework in achieving price stability, the crisis falsified the dominant view
that price stability could simultaneously ensure financial stability. It can be observed from the
sequencing of monetary policy responses in advanced countries that as policy rates
gradually approached record lows or even near zero, central banks had to resort to
unconventional measures such as credit and quantitative easing, which posed significant
challenges to policy communication.
New Keynesian models generally agree that monetary policy can be effective even at zero
lower bound, if policy can take the form of credible commitments to future interest rate paths.
However, the risk is that such commitments could undermine central banks' credibility if not
communicated effectively. As solutions to zero bound constraint, other prescriptions
(i) raising inflation targets by central banks (Blanchard et al., 2010) and (ii) making negative
nominal interest rates a possibility (Mankiw, 2010) have been questioned on various
grounds. While such measures may have a stimulating impact on the economy, they may
come at the risk of undermining public confidence in the central bank's willingness to resist
further upward shifts in inflation.
Various alternative measures were undertaken in view of the constraint of zero lower bound.
For instance, the US Fed expanded its balance sheet on the liability side through
remuneration of reserves to pursue an expansionary monetary policy. However, this in itself
did not constitute an expansionary policy stance due to lack of associated incentive to spend.
The balance sheet expansion on the asset side through direct purchases of private
securities, although considered to be more effective, had repercussions in terms of
profits/loss with attendant fiscal implications. IMF (2010) points out that in case of severe
crisis, increases in risk aversion may well override the stimulus to consumption and
investment from low real interest rates.
The monetary policy frameworks in EMEs, mostly based on multiple indicators (e.g., in
China, India and Russia) and multiple instruments were found to be more effective in
responding to the crisis situation without being confronted with the zero lower bound.
Liquidity management operations being an integral part of execution of monetary policy in
EMEs, sequencing of policy measures in a combination of rate and quantity instruments
proved to be more effective.
While interest rate continues to be the dominant instrument for implementing monetary
policy, supplementing it by other quantity or macro-prudential instruments even in normal
times will not only enhance the flexibility of monetary policy to attain multiple objectives but
also could obviate the risk of hitting the zero lower bound. Concurrent deployment of multiple
instruments also enhances the transmission of monetary policy which is impaired as policy
rate moves close to the zero lower bound.
Lesson 2. Asset prices and monetary policy: leaning against the wind
During the pre-crisis period, central banks' monetary policy gained more credibility for
achieving great moderation characterized by high growth and low inflation. With the adoption
of inflation targeting increasing number of central banks had focused primarily on maintaining
price stability. However, it needs to be recognized that globalization was another major factor
contributing to the great moderation. Countries such as China and India with their abundant
labour provided low cost substitutes and thereby helped contain both inflation and wage
pressures in the advanced economies. Consequently, with explicit focus on price stability,
central banks were able to anchor inflationary expectations and gain credibility.
On the back of robust growth, there was "benign neglect" of credit market excesses and
asset price booms. The pre-crisis view largely favoured that asset markets were efficient at
distributing and pricing risk. Even though there could be some temporary bouts in asset
prices due to "exuberance" on the part of investors, there was little that monetary policy could
do about them (Bean et al., 2010). Moreover, many central banks had limited or no
supervisory role and therefore ignored or failed to assess the systemic risk arising from credit
and building up of asset price bubbles, partly fuelled by a low interest rate environment.
Post-crisis, it is increasingly recognised that the policy of benign neglect of asset price
buildup did not succeed: price stability by itself cannot deliver financial stability. Accordingly, it is
felt that the mandate of monetary policy should encompass macro-financial stability and not
just price stability. The view that monetary policy frameworks should allow policymakers to
lean against the buildup of financial imbalances, even if near-term inflation expectations
remain anchored, appears to be gaining ground. The balance of views within the central
banking community has been shifting in this direction (Carney, 2009; Shirakawa, 2009;
Trichet, 2009; Cagliarini et al, 2010; Woodford, 2010 and Fischer, 2011).
It is argued that central banks must improve the underlying analytical framework of their
monetary policy taking due cognisance of asset price movements, monetary and credit
developments and the build-up of financial imbalances in order to identify potential risks and
ensure more informed decision making. Given the likely synergy between macroprudential
supervision and conduct of monetary policy, the perception has gained importance that
central banks, entrusted with regulatory and supervisory functions, in addition to monetary
policy functions, are better equipped to foster financial stability goals. In fact, many central
banks have recently been assigned with new responsibilities for microprudential and
macroprudential supervision - such as the Bank of England and the Federal Reserve.
Lesson 3. Financial stability objective: instrumentality not clear?
Post-crisis there is emerging consensus that financial stability should be an objective of
central banks but opinion remains divided as to what extent it can be considered as an
additional objective of monetary policy. It is argued that the monetary policy horizon for
achieving the inflation target could be lengthened to facilitate taking financial stability
concerns into account. IMF (2010) noted that in adopting such an approach, central banks
need to guard against the persistent deviations of inflation which may otherwise dilute policy
accountability and create uncertainty about the long-term commitment to price stability. The
question is: should financial stability objectives be considered explicitly in the central bank's
reaction function? Svensson (2009) argues that it should be treated as a constraint to
monetary policy rather than as a separate target. The rationale being that under normal
circumstances financial stability does not impose any constraints on monetary policy, except
in crisis when it undermines the effectiveness of transmission mechanism. Broader
mandates for central banks will need to be made explicit and conditional on the priority of the
core mandates (Gokarn, 2010).
Many EMEs had financial stability as an additional objective of their monetary policy
framework and therefore used multiple instruments, including quantitative tools such as the
cash reserve ratio to moderate the pace of domestic credit growth as well as monetary
impact of large capital flows (e.g., China, India and Russia). Macro-prudential measures in
the form of loan loss provisioning requirements were used to target certain sectors in a
number of EMEs (Moreno, 2011). Apart from raising provisioning requirements (on banks'
exposure to systemically important nonbank financial institutions), risk weights (for housing
loans, consumer credit and commercial real estate) were also used to check unbridled credit
growth in specific sectors. Several countries used credit ceilings (such as Indonesia) and
window guidance (involving consultations between the authorities and the banks in China) to
curtail lending, while Korea used aggregate credit ceiling to target credit to small and medium
enterprises.
Even while the weight of arguments tilts towards acceptance of financial stability as an
objective of central bank or monetary policy, there is little agreement about what should be
the framework and how it should be implemented: First, even if central banks closely monitor
developments in asset markets, how to calibrate the policy response remains an open-ended
issue? Second, do central banks have a sufficient number of instruments to conduct both
monetary and prudential policy to fulfill a dual mandate of price and financial stability? If both
monetary policy and prudential policies are conducted by the central bank, dedicated
governance arrangements are needed to ensure monetary policy independence (IMF,
2010).Third, how to coordinate macro-prudential tools with other supervisory and regulatory
agencies? This issue becomes all the more important when regulatory and supervisory
functions of financial system do not fall under central banks' purview. Fourth, there are also
risks that macro-prudential tools may under certain conditions act as substitutes to policy
interest rates and thereby could undermine the effectiveness of monetary transmission
mechanism.
Lesson 4. Financial stability: a shared responsibility?
There is no denying that financial stability, by its nature, lacks precise specification and
measurement unlike price stability. Even though greater role for central banks has been
widely recognized for ensuring financial stability, unlike price stability, a formal institutional
framework for better coordination with other regulatory agencies is yet to evolve. Caruana
(2011) highlighted that determining the manner of interaction and ensuring central bank
autonomy needed to achieve price stability, will not be easy.
Nonetheless, a number of countries, viz., the UK, the US and Euro area are gearing towards
a new set of arrangements for better coordination between financial regulatory agencies. In
particular, central banks are being assigned with an enhanced role for financial stability in
view of their informational advantage with respect to the dynamics of the financial system.
For instance, in the UK a Financial Policy Committee (FPC) has been set up under the
Chairmanship of Governor of the Bank of England to promote financial stability objective.
Within the Bank of England, a Prudential Regulation Authority (PRA) has been constituted to
deal with issues related to macro-prudential regulation for reducing risks across the financial
system. In this context, it may be noted that in many EMEs, including India, the responsibility
for executing monetary policy and supervising the financial system rested with the central
banks. This sort of arrangement proved to be more effective during the crisis, especially by
enabling central banks to undertake macro-prudential measures.
In the recent years, the Reserve Bank conducted macro-prudential regulation being both the
monetary authority and the regulator of banks and non-bank financial institutions. However,
there are different regulators for the capital market, insurance and pension fund. In order to
facilitate coordination amongst the various regulators of the financial system, recently a
Financial Stability and Development Council (FSDC) has been set up with the Finance
Minister as Chairman. While coordination mechanisms within the financial sector have been
strengthened, it is yet early to assess their efficacy which will be tested by future
developments.
Lesson 5. Need for development of local bond market
In the context of stability of the external sector, a key initiative could be to develop the local
currency bond market. Experience shows that capital flows to emerging and developing
countries take a sudden hit even if they are not the source of crisis. This can pose a number
of challenges for policy makers in EMEs. First, financing of growth can be an issue with
significant dependence on external resources. Second, domestic currencies tend to fall with
reversal of capital flows. Third, bank-intermediation is also adversely