Wednesday November 4, 02:13 AM

Source: Indian Express Finance

Take right lessons from the crisis, Gopinath tells banks

By fe Bureaus
Banks should do away with doctrinaire approach and resort to a more practical method, coupled with clear prioritisation of objectives and studied cautions, while replicating models successful elsewhere, prescribed RBI deputy governor Shyamala Gopinath for managing financial risk by emerging economies. She was speaking at the FSA Turner Review Conference in London on Monday. We can certainly have the advantage of learning the right lessons from the crisis before progressing further, she said in her lecture on Philosophy and practice of financial sector regulation Space for unorthodoxy. More than the immediate measures, what is required is a debate on some of the fundamental issues. Now that the centrality of banks in the economic system has been established, a much stricter view needs to be taken regarding the activities that banks can undertake with depositors money, she said. Should large systemically critical banks be allowed to heavily leverage themselves with depositors money? Should the banks facilitate the high-risk high-return leverage game to benefit private investors at the cost of depositor funds? In that sense, I appreciate the arguments for separation of traditional lending business of banks from investment business. However, the extreme view is not very practical. The hybrid approach indicated in the FSA paper seems to be the way out but she suggested that some form of quantitative limit banks must have a substantial part of their assets in the form of traditional banking assets in order that they perform the role of supporting the real economy, she said. For instance, with regard to identification and mitigations of sources of systemic risk, the emerging market concerns are heightened because of the fact that many sources of systemic risk lie outside their jurisdictions. There could also be the issue of negative externality of larger than warranted capital requirements without careful calibration which could adversely impact the flow of credit to productive sectors, particularly in bank funding based financial systems. Emerging economies are faced with the challenge of managing volatile capital flows which is not a source of systemic vulnerability for developed economies, she added. The problem, I realise, would be much more involved in predominantly market-based financial systems where direct bank linkages are not very obvious but even in such regimes, as has been clearly demonstrated, the indirect linkages of banks with the unregulated entities can acquire systemic proportions, she explained.