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Reserve Bank of India Governor D Subbarao has strongly criticised the Financial Sector Legislative Reforms Commission (FSLRC)’s recommendations for statutory status to the Financial Stability Development Council (FSDC) and entrusting it with the responsibility of financial stability.
The FSDC was created around 30 months earlier by the Union government, with the finance minister as chairman and the RBI governor as one of the members (he heads one of its committees). The central bank had always opposed the new body’s ambit.
“The concern is whether responsibility for financial stability can be given to a committee rather than to an institution,” said Subbarao today in a banking seminar here.
The FSLRC gave its report to the government in March. The central bank had argued that RBI’s historical responsibility for financial stability be clearly defined and formalised.
“The FSLRC recommendation that the executive responsibility for safeguarding systemic risk should vest with the FSDC Board runs counter to the post-crisis trend around the world of giving collegial bodies responsibility only for coordination and for making recommendations,” said the governor.
He said FSDC should work as a coordinator of regulators to ensure financial sector stability. "A coordination body should be just that — a body which will have more importance during a crisis time. In normal times, (this) will be at a low-level equilibrium," Subbarao said at a conference organised by the Indian Merchants’ Chamber.
The FSLRC report called for a total overhaul of the existing financial system, by merging the oversight functions of the market, commodity, insurance and pension regulators.
“RBI is also 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,” said Subbarao.
However, Rajiv Takru, secretary, financial services, in the finance ministry, defended the role of FSDC. Asked about the governor’s comments, Takru said, “I am not quite sure what he said... FSDC has a very broad-based membership... It has all the departments of the finance ministry... all the regulators... RBI governor also sits there.”
He added, on the sidelines of the same event: “Personally, I will say FSDC does have a major role; it is one forum where all of us sit together in a formal atmosphere. You must understand that no institution is an island. RBI is not an island. All the regulators are playing their part... Regulators by their very definition work in isolation. It is extremely important to have non-apex bodies to sit down and discuss.”
