The Bank for International Settlements (BIS), headquartered in Basel, Switzerland, on Thursday last week, released a document crucial for global banking supervision. This organisation aids central banks in their pursuit of monetary and financial stability through international cooperation and includes 63 member-countries, including the Reserve Bank of India (RBI).

The latest edition of the ‘Core Principles for Effective Banking Supervision’ (www.bis.org) will serve as a guiding framework for central banks supervising banks in over 90 jurisdictions. This set of principles, unanimously endorsed by participants at the 23rd International Conference on April 24 and 25 in Basel, garners broader acceptance beyond the BIS membership, reflecting its global influence.

Since the last update in 2012, the revised ‘Core Principles’ incorporate global banking experiences to enhance the original 29 principles, establishing them as the de facto minimum standards for prudent bank regulation and supervision.

Notable updates include the acknowledgement of “climate-related financial risks”, the importance of a bank’s business model being analysed by the regulator to evaluate forward-looking strategies, and the addition of “operational resilience” to address risks from digitalisation and non-bank financial intermediation. These changes are expected to influence how commercial banks are supervised by RBI.

However, there are broader critiques to be considered, particularly from an Indian perspective, which highlight potential drawbacks in the BIS model of banking supervision. A significant concern is the perceived Western bias in the BIS’s evaluation of banking supervision architecture, which traditionally focuses on Western banking models characterised by private ownership with minimal to no government intervention. This model starkly contrasts with systems like those in India, where government ownership plays a pivotal role in the banking sector.

Trust and stability

The Indian banking model, characterised by significant government involvement, has demonstrated resilience during financial crises, such as the 2008 global financial crisis and the Southeast Asian currency crisis. The trust and stability of India’s financial system, bolstered by government ownership, have been crucial in maintaining systemic stability and preventing financial upheavals like bank runs. This “trust” factor, a cornerstone of the Indian financial ethos, seems largely overlooked by BIS standards, which prioritise macroeconomic policies, crisis management frameworks, and market discipline without sufficient recognition of alternative, successful banking models like those of India and China.

Moreover, the governance and ownership structure of the BIS itself suggest a dominance of Western influence. Since its inception in 1930, the BIS has never had an Asian as its General Manager, and its Board of Directors includes central bank governors with ex-officio status for the US, UK, Germany, France, Italy and Belgium. One can very well imagine where the fulcrum of control lies. This is akin to the control structure of other international institutions like the IMF or the World Bank.

This Western-centric governance may contribute to policy formulations that neglect the realities of developing countries, promoting a one-size-fits-all approach to banking supervision that may not be applicable globally. The problem is compounded by suggestions that the expectation is for these principles to be adopted in its entirety by member institutions. Invariably, we have evidence to suggest that regulators in India follow these dictums down to the last dotted line.

Additionally, the relevance of global financial institutions like the BIS, IMF, and World Bank has been questioned during times of crisis. National entities, such as the RBI, have often had to design and implement policies tailored to their specific needs rather than following international advisories. For instance, during the 2008 financial crisis, Western governments intervened directly to support their banks, a strategy that contrasts sharply with the typical recommendations the IMF makes to developing countries. “Close down” unviable banks/entities, is a standard IMF prescription.

In light of these observations, there is a growing need for countries like India and China to assert more control over how international banking principles are adopted, ensuring that any global guidelines are adapted to fit their unique developmental and national priorities.

This approach would not only safeguard their financial stability but also ensure that their banking systems continue to reflect and support their economic and social objectives. This advocacy for a more inclusive and considerate international financial governance structure underscores the need for a re-evaluation of global banking supervision norms to better accommodate diverse economic models and practices around the world.

The writer is a commentator on banking and finance