Global Agenda for Regulatory and Supervisory Reforms: The Stock Taking and Way Forward - ଆରବିଆଇ - Reserve Bank of India
Global Agenda for Regulatory and Supervisory Reforms: The Stock Taking and Way Forward
Smt. Usha Thorat, Deputy Governor, Reserve Bank of India
delivered-on ସେପ୍ଟେମ୍ବର 08, 2009
I thank the organisers of the FICCI - IBA Conference on Global Banking: Paradigm Shift for having invited me to chair the panel session this afternoon on Strengthening Financial Regulation and Supervision. Macro economic Scenario 2. The massive derailment of the financial sector in the advanced economies has had a knock on effect on the world economy. The world output is expected to contract by 1.4 per cent in 2009, GDP in the advanced economies is projected to decline by 3.8 per cent in 2009 before growing by a meagre 0.6 per cent in 2010. The GDP of US and the UK is forecast to witness a fall of 2.6 per cent and 4.2 per cent in 2009 before an anaemic recovery to 0.8 per cent and 0.2 in 2010, respectively. Euro area, on the other hand, is expected to shrink by 4.8 per cent and 0.3 per cent both in 2009 and 2010, respectively (WEO, 2009a). Unemployment in advanced countries is projected to scale higher from 5.8 per cent in 2008 to 8.1 per cent in 2009 and further to 9.2 per cent in 2010 (WEO, 2009). The unemployment in the US is expected to almost double from 5.8 per cent in 2008 to 10.1 per cent in 2010. Spain is forecast to suffer the highest unemployment within the euro area with 19.3 per cent unemployment in 2010. The fiscal stimuli that have been put together in these countries in response led to worsening fiscal positions. In the OECD countries, the fiscal position is set to deteriorate from -3.2 per cent in 2008 to -7.7 per cent in 2009 and further to -8.8 per cent in 2010. The fiscal deficit is poised to more than double in the US, Japan and the Euro area in 2009 and further deteriorate in 2010. By the end of 2010, the ratio of gross government debt to GDP is estimated to reach 98 per cent for the US, 87 per cent for Germany, 80 per cent for France and 73 per cent for UK. Financial stabilization in the world has come at a huge cost. Financial stabilization cost# is highest for the US at 12.7 per cent of GDP and lowest for Italy at 0.9 per cent of GDP. For the UK, it is 9.1 per cent, 4.4 per cent for Canada, 3.1 per cent for Germany, and 1.8 per cent for France (GFSR, 2009). 3. Collapsing growth in advanced economies led to a sharp contraction in economic activity in EMEs, due, inter alia, to an unprecedented drop in export demand that coincided, with a significant reversal in international bank lending and foreign portfolio investment. Emerging and developing economies are projected to post a much subdued growth of 1.5 per cent in 2009, notwithstanding an expected pick up in growth momentum during the second half of 2009. Emerging Asia is estimated to grow by 5.5 percent in 2009 and 7.0 percent in 2010, owing to improving prospects in China (7.5 per cent and 8.5 per cent) and India (5.4 per cent and 6.5 per cent). African countries are forecast to register much lower growth of 1.8 per cent in 2009 and recover to 4.1 per cent in 2010. On the contrary, Latin America is projected to contract by 2.6 per cent in 2009, before a recovery to 2.3 per cent in 2010. Badly affected by the reversal of capital flows and sharp contraction in commodity exports, countries in central and eastern Europe and in Commonwealth of Independent States are expected to suffer more severe shrinkage of 5.0 per cent and 5.8 per cent respectively in 2009 (WEO, 2009a). These countries are highly dependent on western European banks, which own the majority of banking systems in these countries. Cross-border bank funding has been disrupted as the banking crisis in western Europe intensified. This real sector weakness has been adversely affecting the banking sector in these countries through the negative feedback loop. Global Response by Sovereigns and regulators 4. It is not therefore surprising that there has been so much soul searching, especially in the advanced economies, of what went so seriously wrong with the international financial system leading to the worst crisis since the great depression. The various factors that led to and precipitated the crisis are now well known and documented and I do not want to go over these. What I would like to do, is to discuss the actions taken so far by Governments, central bankers and regulators over the last one year. Just last week, we have had two very important statements - one issued by the G20 Finance Ministers and Governors and the other by the Basel oversight body – the Group of Governors and Heads of supervision. These statements reflect the consensus arrived at, so far, for strengthening financial regulation and supervision and outline what remains to be done. It is therefore very timely that we are having this seminar today to debate and discuss the implications of the changing international framework for emerging countries like India.5. Let me start with the Basel Committee. In July this year, the Committee issued a series of standards for higher capital for the trading book as it was recognised that the Basel II framework seriously underestimated the capital needs for the trading book. Therefore, the Basel Committee has introduced new trading book capital rules that substantially raise trading book capital requirements. It prescribes higher capital requirements for resecuritisations and exposures to off-balance sheet vehicles. It has evolved principles for stress testing and valuation of complex products, as also for supervision and management of funding liquidity risk. It has incorporated the FSB compensation standards into the Pillar 2 supervisory review process and has enhanced Pillar 3 disclosures focusing on trading activities, securitisations and exposures to off-balance sheet vehicles. Yesterday, i.e. on 7th Sep 2009, following a meeting of the Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision representing 27 important jurisdictions, issued a press release on a comprehensive set of measures to strengthen regulation, supervision and risk management of the banking sector. These measures include:
In order to ensure transition to a higher level and quality of capital, supervisors will be encouraged to take actions to limit excessive dividend payments, share buybacks and compensation. 6. The G 20 Finance Ministers and Central Bank Governors issued a statement on 5th September reaffirming their commitment to strengthen the financial system to prevent the build-up of excessive risk and future crises and support sustainable growth. The Group took note of the actions taken so far by FSB including introduction of CCPs to clear most credit default swaps, stronger oversight regimes for credit rating agencies, internationally agreed principles for the oversight of hedge funds, good practices for due diligence by asset managers when investing in structured finance products, and issuance of internationally agreed principles for regulation of short selling. More action has been called for by the Group in the following areas:
The Indian Position 7. In India, strengthening and developing financial sector has been subservient to the needs of the real sector. Endeavour has always been to ensure harmonised development of all the sectors of the Indian economy. A number of measures based on the principles that are now accepted internationally were already brought into practice even before the crisis. These included restrictions on leverage for banking and non banking institutions, stringent liquidity requirements, counter cyclical prudential measures, not recognising in Tier I capital many items that are now sought to be deducted internationally, recognising profits from sale of securitised assets to SPVs over the life of the securities issued, not reckoning unrealised gains in earnings or in Tier I capital. The challenge for us is to facilitate the growth of the real sector through financial products and innovations subject to adequate safeguards and adoption of sound risk management policies. For further strengthening financial regulation and supervision, the following measures are under the consideration of RBI:
Way Forward 8. The agenda that is being developed for strengthening of financial sector regulation and supervision is ambitious. Contentious issues will arise both at national and at the international levels on regulatory cooperation. Whereas the principles underlying this regulatory overhaul are being increasingly accepted, many challenges will arise on their practicality and modes of implementation:
Thank you References @ Opening remarks at the Panel Session on “Strengthening financial regulation and supervision” of the FICCI- IBA Conference on “Global Banking: Paradigm Shift” on September 8, 2009 at Hotel Grand Hyatt, Mumbai. Assistance of Shri Tulasi Gopinath in preparing the speech is acknowledged. # Net cost, which is gross minus recovery over the next five years. |