Reddy says regulators need more power for crisis control

Reserve Bank of India (RBI) governor YV Reddy has sought greater authority for bank regulators to enable them to intervene at the first sign of weakness, well before an institution’s net worth turns negative. He has also called for a quick-response deposit insurance system that would help prevent a run in troubled banks. Speaking at the meeting of the task force on financial markets regulation in Manchester, the UK, Mr Reddy said that the subprime crisis was a fallout of under-pricing of risks. To deal with inflation combined with the threat to financial stability, Mr Reddy sought an enhanced degree of co-ordination among monetary authorities and regulators. Listing out the market failures that has led to the financial turbulence, Mr Reddy said that one of the market failures was the increased dependence of banks on wholesale funds. “This makes banks increasingly dependent on the market for raising liquidity while markets may have a tendency to shy away from providing liquidity when they are most needed,” Mr Reddy said. The central bank governor also blamed institutions for not undertaking their own credit analysis and not undertaking sufficient in-house examination in the assets underlying structured investments. Banks, he said, have not been disclosing the magnitude of risks associated with their on- and off-balance sheet exposure According to Mr Reddy, the top priority for central bankers is to calm the nerves about inflation or to anchor inflation expectations, with an implicit recognition that a somewhat elevated headline inflation in the short-term may be difficult to avoid. In his menu of solutions for the financial crisis, Mr Reddy said that consolidated supervision and prudential reporting should be applied to off-balance sheet entities associated with financial institutions and to loans sold with implicit or explicit recourse. He also called for a review of the prudential norms linked to external ratings assigned by credit rating agencies. – www.economictimes.indiatimes.com