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RBI to set up financial stability unit

By BS Reporter in Mumbai
April 22, 2009 13:07 IST
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The Reserve Bank of India (RBI) will set up a "financial stability unit" for drawing upon inter-disciplinary expertise from across various departments for carrying out periodic stress testing and preparing financial stability reports.

This decision comes in after India was invited to join the Financial Stability Board (FSB) in the G-20 summit held in London last month.

During the summit, it was decided that the Financial Stability Forum (FSF) would be expanded by including more emerging market economies and consequently it was rechristened as FSB with a broader mandate.

 "Alongside the current mandate of FSF - to assess vulnerabilities affecting the financial system and identify and oversee action needed to address them - the FSB will advise on market developments and monitor best practices in meeting regulatory standards, among others," RBI said in its annual policy document.

Similarly, the central bank has also proposed setting up of a "working group" to implement the recommendations of the Committee on Financial Sector Assessment (CFSA).

"The single factor stress tests carried out as part of the CFSA report have revealed that the country's banking system can withstand significant shocks arising from large potential changes in credit quality, interest rate and liquidity conditions. These stress tests for credit, market and liquidity risk show that Indian banks are generally resilient," the report said.

The CFSA report, which was released on March 30, recommended that the banking sector should be gradually opened to foreign players, the government should lower its shareholding in public sector banks below 51 per cent and allow state-owned players to merge if the Centre's stake cannot go below the prescribed lower limit.

In addition, the committee also reiterated the position of RBI and government that the move towards fuller capital account convertibility should also be gradual, concomitant with the objective of the achieving a balance in the external and fiscal sectors along with low inflation.

RBI has also recommended constituting a task force that would look into all the issues relating to the G-20 working groups and the CFSA report. This apart the task force would also responsible for suggesting requisite actions for the regulator in the domestic context on an on-going basis, for every quarter.

The central bank has decided to nominate Deputy Governor Usha Thorat as a member to the Basel Committee on Banking Supervision (BCBS) after it was invited to the committee.

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BS Reporter in Mumbai
Source: source

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