reduce the tax shield of debt. debt has an advantage over equity capital in the sense that payments to debt holders are deducted from profits. in contrast, payments to shareholders, i. e., dividends, are made out of profits and hence are subject to corporate taxes. forcing banks to hold more capital reduces their tax shield and thereby diminishes banks ’ market value. what are the orders of magnitude we are talking about here? let me offer you a very rough back - of - the - envelope calculation using publicly available data in switzerland. assume that a bank has to increase its leverage ratio from 1 % to 5 %. if this bank is subject to ” capital ratios helped mask looming crisis ”, the wall street journal europe, 11 november 2008. an effective tax rate of 20 %, the increase in capital will reduce the bank ’ s total market value by less than 1 %. however, these costs notwithstanding, banks and shareholders may also benefit from holding more capital. for instance, banks that were more conservatively capitalised before the outset of the current crisis have now benefited from their relative strength. in the area of wealth management, for instance, stronger banks have been successful in attracting clients from weaker banks. moreover, looking at the poor performance of thinly capitalised banks ’ stocks over the last decade or so, low leverage ratios do not seem very attractive. our empirical analysis suggests that risk - adjusted stock returns of banks do not increase with leverage. a cross - sectional comparison of risk - adjusted returns with other industries is also sobering. the performance of the relatively low - capitalised banking sector has been devastating during the last decade. 7. conclusion to conclude, leverage has been a major contributing factor in the current financial crisis. excessive leverage has amplified the shocks to the financial system. moreover, the now inevitable de - leveraging is imposing further stress on the system. to enhance the longerterm resilience of the financial system, effective regulation to curtail banks ’ leverage is required. in an attempt to put a lower bound on banks ’ leverage, i strongly support enhancing current risk - weighted capital requirements with a simple leverage ratio. a leverage ratio effectively serves as a safety valve against the weaknesses and shortcomings of risk - weighted requirements. it ensures a minimum capital buffer that protects banks against unexpected losses and underestimation of risk. as we have learned from the current crisis, the failure of risk models may quickly turn banks that seem comfortably capitalised into poorly capital

and the means to achieve the desired results. the fundamental objectives of economic development in our country remain the same : growth and social justice. instrumentalities to achieve these will have to change in tune with our experience and according to the demands of the time and the responses of the society. in bringing about faster growth we need to address many issues. perhaps one that is most relevant in the context of work that is going on at iima is the issue of productivity. in ensuring a higher growth rate, there is no doubt that we must bring about an increase in the saving rate and, consequently, the investment rate. but at the same time one cannot over - emphasise the need for improving the productivity and efficiency of input use. economists in fact talk about total factor productivity, which identifies the contribution to the increase in output of influences other than increase in factor inputs. the total factor productivity growth thus encompasses the effect not only of technological progress but also of better utilisation of capacities, improved skills of labour, etc. in fact during the period 1960 - 87 the total factor productivity growth of east asia was 1. 9 per cent per productivity and efficiency. contrary to the general impression, the natural resources of our country are not large. from the point of view of long - range sustainability, the need for greater efficiency in the management of natural resources of land, water, minerals, etc. has become urgent. in a capital - scarce economy like ours, there can be no excuse for under - utilisation of capacity. macro - policy framework and micro - management practices must be such as to bring about the desired increase in productivity. while the policy framework must be supportive, industrial structure must be such as to compel firms to continually innovate and to cut costs. the policy environment, the organisational structure and the attitude to work and technology : all these have to be right. needless to say, institutes of management have an important role to play in bringing about this improvement in productivity by sharpening the skills and the vision of managers. - 2the recent development experience has clearly shown that countries which have grown fast are those which have made very heavy investment in education. even as we aim at creating a broad - based educational system, including compulsory education at the primary and secondary levels, we also need institutions of excellence. living as we are in a complex and globally competitive world, institutions of excellence in all disciplines are required to meet the challenges of competition, which in effect is the competition in skills