Monday, June 28, 2010

Bank regulation

Bloomberg reports that the rules for tighter capital requirements and liquidity requirements by banks could get delayed. They are to be discussed by the G 20 in November and implemented from 2012 on. But as Mario Draghi the Governor of Bank of Italy and the Chairman of the Financial Stability Board - a global coordination body, which works closely with Basle Committee put it - it is better to delay the standards put in rather than weaken them. My only concern is that as public memory is short, time might prove a weakening factor in itself. So the fond hope is that delay is not too long.

The norms - detailed by a consultative paper released by BIS in 2009 December - apart from other areas - are on two major fronts
a) Capital - particularly, what can constitute Tier 1 capital and if there can be a minimum floor level of Tier 1 that can be stipulated.

b) Liquidity - reserves which are liquid and can handle short and medium term volatility.

The powerful banker's lobby ( The Institute of International Finance ) and other bodies had predictably painted a bleak picture for the economies if the Basle proposals are implemented - and have also indicated that the recovery would get jeopardized if they are put in place now. The lobby in the US has succeeded in diluting some of the recommendations in the reform package - largely on the liquidity front and in part on the capital front - that will be soon cleared by the Obama administration.

Thankfully in India RBI has had a significant amount of forethought - and the IBA - dominated by PSBs is not also unreasonably strong. I am not surprised to see several positions made by BIS - including counter cyclic capital stipulations - have already been implemented in India. The norms for classifying instruments is relatively tighter in India and we do have a floor at 6 %. There is no concept of Tier 3 in India. The SLR and CRR requirements have also helped maintain the required amount of liquidity comfort in the banking system. No wonder we have a resilient banking system !

1 comment:

  1. Definitely, the Indian Banking System is resilient. Take this example: to get a 10000 Rs loan on India you need to show at least ten documents. compare that to the western world where ppl swipe away to glory.

    subprime, in any format, will never happen in India. its that simple.