Amol Agrawal
The Reserve Bank of India (RBI) on November 1, 2019, announced reorganisation of the supervision and regulation department into a “unified Department of Regulation”.
In an earlier article (October 21, 2019), I had argued why and how the RBI needs to reorganise its finance function under one deputy governor and allocate all related responsibilities (regulation, supervision and stability) to this one position. It is not very often that you see the central bank pays attention to your article and acts on the same. I am obviously kidding and it is just nice to note that my thinking was on similar lines as that of the RBI.
Until now, the central bank had six departments for supervision and regulation of three entities: banks, non-banks and cooperatives. The two broad roles of regulation and supervision were also divided across two deputy governors.
In its board meeting in May 2019, the RBI had announced setting up a new specialised supervisory cadre to strengthen “the supervision and regulation of commercial banks, urban cooperative banks and non-banking financial companies”.
Based on the board meeting, the RBI has unified the regulation and supervision departments around this new specialised cadre and named it as the Department of Regulation. The new department will look at three broad areas.
First, so far supervisory and regulatory activity is segmented purely based on the organisational structure of regulated entities. This led to the six separate departments as explained above. Under the new department, the regulation and supervision process should be activity based, looking at both comprehensively.
Second, the supervisory approach will be graded linked to the size and complexity. This would imply that bigger and more complex firms will be accorded a larger supervisory team. In the case of financial conglomerates, those entities which come under the RBI need to be regulated effectively.
Third, the reorganisation will help in more efficient allocation of human resources, which will in turn help develop a cadre of experienced and skillful personnel in regulation and supervision.
These are much-needed changes. The era of silo approach to regulation is long over and one needed a team which looked at regulation and supervision in a comprehensive and inter-bank manner.
This change in approach is best reflected in the surge of macroprudential regulation. Pre-2008 crisis, the focus was on microprudential norms, which looked at individual banks. Post-2008 crisis, it moved to macroprudential regulation, which looks at the system as a whole, looking at risks emerging from different kinds of banks and non-banks.
What does the RBI do next? As explained above, it should organise the function of regulation and supervision under one deputy governor. More importantly, make the position accountable which has been missing so far. All the banking (and over time finance) activities should be designated to this one DG.
The RBI releases a key report related to banking: Trend and Progress of Banking in India. This is a statutory report apart from the Annual report. The report could be renamed as Report on Banking Regulation and Supervision and released with Governor and deputy governor addressing the media.
Just like monetary policy briefing, this activity of bank regulation and supervision needs adequate attention and media coverage.
In due course, the RBI should categorise this regulation and supervision activity differently on its website. The press releases, notifications, speeches, reports, research etc. pertaining to regulation and supervision should be classified under this section.
The banking regulator could take a cue from European Central Bank’s (ECB) Banking Supervision function -- even Bank of Israel -- in this regard, which has done this really well. Some examples could be drawn from UK’s Financial Conduct Authority, which releases detailed reports in the case of penalising a bank on fraud/supervision matters. The RBI issues a very frugal press release which hardly reveals anything and people should know some -- if not all -- of these matters in detail.
The top bank should also look to build a cadre of research officers in this new department. For a long time, research on banking regulation and supervision has almost disappeared from research on central banking. Most of today’s research focuses on macroeconomics and monetary policy.
Moreover, this research has been criticised for ignoring role of banks and finance. The banks and finance are merely seen as intermediaries which always find their equilibrium excluding events such as bank runs, volatility in equity markets and so on. One approach is to change the existing research to include more finance matters and another is to do more research on finance/banking and think of its linkages with macroeconomics. Both are needed.
Overall, it’s a welcome step from the RBI, but a lot more has to be still done in the space of regulation and supervision. It will be interesting if the RBI makes some of the above-mentioned changes as well. Perhaps, then I can say with more conviction that someone in the RBI has been reading my columns!
Amol Agrawal is faculty at Ahmedabad University. Views are personal.
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