Resolution corporation for financial firms in the works

The proposal in the Financial Resolution and Deposit Insurance Bill, 2017, to introduce a resolution corporation to tackle bankruptcy in financial services firms has piqued the interest of analysts.

The working of the resolution corporation will be much like what has been laid out in the Insolvency and Bankruptcy Code (IBC), which has been devised for corporate entities.

Financial firms do not fall in the ambit of the IBC and, therefore, bankruptcy needs of financial firms, such as banks, have to be coordinated outside the IBC process. 

The resolution corporation would be the equivalent of the IBC in that case.

In early September, the Bill was referred to a joint parliamentary committee of both Houses for deliberation and taking feedback from various stakeholders and the public.

According to some central bank officials, the Reserve Bank of India (RBI) is likely to repeat its 2013-14 assertion on the issue that while the resolution corporation is a welcome step, and is much-needed, its powers to examine financial firms should not duplicate or overlap with those of the regulator.

While the resolution corporation is in no way a super-regulator, as proposed by the Financial Sector Legislative Reforms Commission, it eventually can chip away at the powers of the central bank in resolving disputes among financial firms and bankruptcy.

Banks are now supervised entirely by the RBI. Allowing another institution to decide on the bankruptcy of a bank could be a significant dilution of the RBI’s powers. 

The resolution corporation will have representatives of the RBI and other regulators, as well as the government. But the ruling of the corporation would be final and the central bank cannot override it.

Such resolution corporations exist in other countries.

“The idea is that the central bank should be responsible for monetary policy and prudential regulation, and need not necessarily be bothered about other aspects. In countries such as the UK, the financial conduct authority and prudential policy authority are different and that’s the standard practice globally,” said a senior economist, adding, “The resolution corporation won’t be a direct encroachment on the RBI’s turf, but this could be the first step towards a series of steps to relegate it to certain core activities.”

There are precedents globally of resolution corporations handling the liquidation of banks. In recent times, two banks in Europe — Banco Popular in Spain and Veneto Banca of Italy — have been guided towards bankruptcy proceedings through such resolution corporations under the guidance of the European Central Bank. 

In India too, the resolution corporation will chip in only when the case is at the last stage of being ‘critical’.

KEY TAKEAWAYS

• A JPC is examining Financial Resolution and Deposit Insurance Bill
• The Bill proposes to introduce a resolution corporation for banks
• RBI welcomes step but may warn it should not violate central bank’s powers
• The corporation would step in only at the critical stage of a bank
• This may not be violating RBI turf, but could be a first step
• Globally, resolution is separate from regulation