Even as governments across the globe are busy bailing out banks, RBI on Monday yet again harped on the country?s good regulatory system, which has been keeping the Indian banking system in shape. When asked what makes the banking system sweem across the troubled waters, Reserve Bank of India (RBI) deputy governor Shyamala Gopinath noted that in the Indian context, what has provided a huge systemic advantage is the fact that the regulation of key financial markets?money market, government securities market, forex market and credit market ? vests with the banking regulator RBI.
?Thus the channels of interconnectedness between banks and other financial sector entities are not beyond the regulatory purview. From a financial stability perspective, the above framework has proved to be a sound model,? she said.
However, according to her key considerations for a revised regulatory framework can involve many other issues. ?Specification of the nature of connectedness between entities that may be considered inducing vulnerabilities in the system,? she said.
The next step is the identification, from the haze of the unregulated cluster, the class of entities considered to be either having significant direct connectedness with the regulated clusters or having a significant presence in any market segment where regulated entities are also present. Gopinath was speaking at the ninth annual international seminar on policy challenges for the financial sector, co-hosted by the board of governors of the federal reserve system, the IMF, and the World Bank on ?Emerging from the Crisis-Building a Stronger International Financial System?, June 3-5, 2009, Washington, DC.
?Putting in place a reporting system to capture the interconnected flows within the identified sub-system ? the regulated clusters and the unregulated entities on a regular basis, prescription of a prudential framework?and this is the key? for the regulated clusters to contain the risks arising from this connectedness,? she said. For the unregulated entities, the most significant aspect would be to contain their leveraging capability in general across major market segments, particularly the funding markets, Gopinath added.
?A simple quantitative limit would be the best suited,? she said. Some systemically significant entities, though, may still need a formal prudential regulatory structure, including capital adequacy requirement, she said.
The issue of extending the regulatory perimeter has to be a balancing act and it needs to be carefully nuanced in terms of intended objectives, said Gopinath.