Reserve Bank of India Governor D. Subbarao expressed deep concern over the Financial Stability Development Council, the proposed super regulator, being given the sole mandate to safeguard financial stability.
Vesting executive responsibility with the FSDC board for safeguarding against systemic risk runs counter to the post-crisis trend around the world of giving collegial bodies responsibility only for coordination and for making recommendations.
The RBI is of the view that in a bank-dominated financial sector like that of India, the synergy between the central bank’s monetary policy and its role as a lender of last resort, on the one hand, and policies for financial stability, on the other, is much greater.
The Financial Sector Legislative Reforms Commission has envisaged an FSDC board chaired by the Finance Minister and comprising all the regulators and agencies of the financial sector “which allows it to combine the expertise of the multiple agencies involved in regulation, consumer protection and resolution.”
The FSDC has a sub-committee chaired by the RBI Governor.
Extend responsibility?
According to Subbarao, “We need to think through whether the responsibility of FSDC board should be extended from being a coordination body to one having authority for executive decisions? What will that imply for the speed of decision-making?
“Can we clearly define the boundaries between financial stability issues falling within the purview of the FSDC and regulatory issues falling exclusively within the domain of the regulators? Will this arrangement not mean compromising the synergy between monetary policy and policies for financial stability? And what will it mean for the autonomy of regulators?”
At a banking and finance conference organised by the Indian Merchants’ Chamber, Subbarao said that FSDC is a co-ordination body between the Government and different financial sector regulators. The FSDC, he added, should remain a co-ordination body.
He also recalled the assurance given by former Finance Minister Pranab Mukherjee that the autonomy of the regulators will not be compromised as a result of FSDC coming into operation.
“In particular, there are concerns whether the responsibility of financial stability can be given to a committee rather than to an institution,” he pointed out.
Subbarao said the mandate of financial stability does not solely rest with the RBI. The Reserve Bank has argued before the commission that the financial stability mandate that it has been carrying out historically by virtue of its broad mandate should be clearly defined and formalised.
He also said that FSDC needs to define what it means by financial stability.
“It is important to define that. Because if you do not define that, then there is a risk that the FSDC will transgress into the domain that is beyond its jurisdiction,” Subbarao said.