For the first time since a financial stability and development council (FSDC) was proposed by the government, the Reserve Bank of India (RBI) went public about its reservation on the government’s plan, which is believed to strip the regulator’s role in ensuring financial stability.
Taking a dig at the very structure of FSDC, RBI today said ‘committees’ could not assume executive responsibility for financial stability, especially in a crisis situation.
“There has to be a clear recognition that committees cannot assume executive responsibility for financial stability, especially in a crisis situation where speed and surprise could be the key elements of response,” RBI said in its annual report for 2009-10, released today.
The central bank said explicit demarcation of responsibilities could help in strengthening crisis prevention process, through speedy and effective response in the demarcated areas.
“Clarity in responsibilities is critical for effective accountability,” it added.
In the budget for 2010-11, the government had announced that the council would be set up for strengthening institutional mechanism for stability. In a discussion paper regarding the role and scope for FSDC, the government suggested setting up two committees — one headed by the RBI governor and the other by the finance secretary. The finance ministry has prepared a discussion paper on the role of the council that was circulated among financial market regulators for their response.
Earlier this month, RBI Governor D Subbarao had said in Hyderabad that financial stability should be the explicit mandate of the central bank, though he not mentioned about FSDC in that context.
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Citing examples of how the central banks came up with unconventional measures for liquidity support during the global financial crisis, RBI said, central banks have to be the systemic regulator because of the mandate on lender of last resort.
The annual report also emphasised ensuring autonomy of regulators in the light of the enactment of the Securities and Insurance Laws (Amendment and Validation) Bill, 2010, which seeks to set up a joint panel, headed by the finance minister, to resolve regulatory disputes.
“During the Parliamentary debate on the Bill, the government gave an assurance that the scope of the proposed Bill will be restricted to jurisdictional disputes on regulation. In operationalising the arrangement envisaged under the Bill, it is important to ensure that the autonomy of the regulator is not compromised, either in fact or in perception,” RBI said.
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On the general preference on the size of bank, it said it should not be too small to lack scale efficiency. Nor, it could be too large to give rise to “too-big-to-fail” and market dominance concerns.
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