Growing economy to boost India’s banking system: RBI

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Mumbai, Sep 4: across markets are specific challenges to be dealt with in a globalised scenario. Inability to meet these challenges might translate into instability in the financial system. In a freer capital transactions regime, the magnitude of money laundering might also scale up along with the overall increase in financial flows, requiring appropriate policy responses of the financial system.

On regulation for ‘Financial Conglomerate’' RBI has said traditionally, the regulation of financial intermediaries all over the world has been on institutional lines, whereby regulation is directed at financial institutions, irrespective of the mix of business undertaken. In recent years, distinctions between banks and nonbanks financial intermediaries have become blurred. A number of financial conglomerates have also emerged that undertake various financial activities under the same corporate structure. These have challenged institution-based regulation as it fails to take into account the gaps and overlaps in regulation. Moreover, the risk assumed by the financial conglomerates as a group may be higher than the sum total of risks assumed by its affiliates/subsidiaries undertaking a number of activities.

Therefore, the regulatory structure based on institutions has become a major issue of policy and public debate in several countries. In order to overcome the issues raised by operations of financial conglomerates, some countries have followed a system of super/single regulator, which oversees all segments.

Some other countries have followed objectives-based regulation under which regulation is directed based on the objective (prudential regulation or market conduct).

However, each of the structures has its own advantages and disadvantages and the regulators are grappling with the issue as to which is the most appropriate structure. The recent financial market developments and the failure of Northern Rock in the UK, which had a supervisory structure outside the central bank, have added more uncertainty to this issue.