Post-Crisis Reforms to
Banking Regulation and Supervision
Think Global, Act Local
Global Banking : Paradigm Shift
FICCI-IBA Conference
Mumbai
September 7, 2010
Dr. D. Subbarao
Governor, Reserve Bank of India
Basel III Reform Agenda
Thrust
• Fortify banking system
• Correct incentive framework
• Ensure long term stability
• Focus on both microprudential and
macroprudential dimensions
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Basel III Reforms
Main Elements
• Banks to hold more and better quality
capital
• Banks to carry more liquid assets
• Limit leverage of banks
• Banks to build capital buffers
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Basel III
Actual calibration and phasing in
after further assessment
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Banking 2020
Making the Decade’s Promise Come True
How best can banks contribute to the
double digit growth and rapid poverty
reduction that we are aspiring to?
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Capital Adequacy Framework
BCBS Proposals
• Improving quality, consistency and
transparency of capital
• Improving risk coverage of the
Basel II Framework
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Capital Adequacy Framework
Impact on Indian Banks
•
Existing capital ratios of Indian banks are above the
prescribed norms
•
Unlikely to be significantly impacted by proposed
norms
•
Possibly some negative impact from
– the shifting of deductions from regulatory capital
to common equity
– large OTC bilateral derivatives positions
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Containment of Financial
Leverage of Banks
BCBS Proposal
Introduction of a leverage ratio
which will be a simple, transparent,
non-risk based measure
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Containment of Financial
Leverage of Banks
Impact on Indian banks
• Leverage in the Indian banking
system is quite moderate
• Should SLR portfolio be excluded
from estimation of leverage ratio?
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Reducing the Pro-cyclicality of
Financial Sector Regulation
A major flaw in Basel II
is its inherent procyclicality
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Reducing Procyclicality
BCBS Proposals
• Calculation of capital on more
conservative default probabilities
• Promote forward looking provisions
• Introduce capital buffers that can be used
under stress
• Contain excess credit growth
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Reducing the Pro-cyclicality of
Financial Sector Regulation
Challenges
•
•
•
•
•
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How do we identify the inflection point?
Is there a single macroeconomic indicator that can
signal both good and bad times?
Are economic cycles not synchronised in global
setting?
How do we deal with abrupt release of capital buffer
which may become necessary?
How to determine the appropriate size of capital
buffer?
How to design a simple, transparent, low-cost capital
buffer?
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Reducing the Pro-cyclicality of
Financial Sector Regulation
Indian Perspective
• Is Credit-GDP ratio an appropriate
macroeconomic variable to calibrate
countercyclical capital buffer?
• Need to improve our capabilities to
predict business and sectoral cycles
and identify them in real time
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Liquidity Risk Management
Financial crisis highlighted feedback
loops through which institutional
liquidity constraints cascade into
systemic solvency crises.
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Liquidity Risk Management
BCBS Proposals
• Liquidity Coverage Ratio
• Net Stable Funding Ratio
• Liquidity-risk monitoring tools
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Liquidity Risk Management
Indian Perspective
• Capability to collect relevant data
accurately and granularly
• Predict the liquidity stress scenarios
with reasonable accuracy
• Dilemma in reckoning SLR holdings
as liquid assets
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Dealing with Systemically Important
Financial Institutions (SIFIs)
Tasks
• Development of indicators of systemic risk
• Identification of SIFIs
• Developing differential regulatory and supervisory
systems for SIFIs
• Resolution of SIFIs
• Reducing the probability and impact of a SIFI
failure
• Reduce contagion risks
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Dealing with Systemically Important
Financial Institutions (SIFIs)
Issues that Need to be Addressed
• Evolving objective criteria for
identifying SIFI
• Application of the criteria
• Distinction between SIFI and non-SIFI
– ‘moral hazard’ downside
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Containment of Systemic Risk
India Perspective
• Supplementary exercise to identify SIFIs in
the domestic context
• Upgradation of regulatory and supervisory
framework for financial conglomerates
• Enlarge number of financial transactions
under multilateral settlements through CCPs
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Regulation of Compensation
Practices of Banks
• Compensation structures
engendered perverse incentives
• Reform proposals to aim at
correcting perverse incentives
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Regulation of Compensation
Practices of Banks
Indian Perspective
• Reform of bank compensation structures
is relevant in India only to 30 per cent of
the non-public sector industry segment
• RBI draft guidelines on Compensation of
Whole Time Directors/Chief Executive
Officers /Risk Takers and Control Staff
• Need to revisit public sector
compensation structures?
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International Financial
Reporting Standards (IFRS)
Accounting standards setters and
prudential supervisors should work
together to identify solutions for
promoting stability and improving
transparency.
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International Financial Reporting
Standards (IFRS)
Indian Perspective
• Banks covered by Indian GAAP
(Generally Accepted Accounting
Principles)
• April 1, 2013 deadline for IFRS
convergence by banks
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International Financial Reporting
Standards (IFRS)
Indian Perspective
Challenges
• Accounting Standard IFRS 9 – still evolving
• Modification of IT systems
• Upgradation of staff skills – capacity
building
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Macroeconomic Impact of the
Proposed BCBS Reforms
BIS
•
The cost-benefit calculus will possibly be negative in the
short-term, albeit modestly, but will be distinctly positive
in the medium to long term
IIF
•
Estimates significantly higher sacrifice ratios
•
Agreement that the financial system will be stronger in
the longer term
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Implementation of Basel III in India
• Implementation of Basel III will be a
challenge
• Impact of Basel III will be different on
different banks
• Public sector banks – should anticipate no
problem in building capital buffers
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Conclusion - Concerns
• Calibration of the standards and their phasing
in so as not to impede recovery
• Banks apprehend they cannot use capital
buffers in the event of a downturn
• ‘Comply or explain’ framework may be
interpreted as wilful non-compliance or
unwarranted regulatory forbearance
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Conclusion
Challenge on delivering on the promise
for the next decade – ‘think global and
act local’
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