The Telegraph
Saturday , May 3 , 2014
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Panel pill for FI watchdog

Mumbai, May 2: An RBI panel has made some suggestions on reviving ailing financial institutions, including banks, as part of a broader national objective to ensure financial stability during times of crisis such as the 2008 sub-prime crash that plunged the world into recession.

The panel has recommended that the proposed financial resolution authority (FRA) — a body to deal with failed financial institutions — be given various tools, including bail-in and temporary public ownerships.

The sub-committee of the Financial Stability and Development Council (FSDC) had constituted a high-level working group with Anand Sinha, former RBI deputy governor, as the chairperson, and Arvind Mayaram, secretary in the department of economic affairs, as co-chairperson to suggest ways to strengthen Indian financial institutions.

The FSDC feels it is necessary to put in place a comprehensive framework for dealing with the failure of financial institutions. If a crisis arose in a regulated financial institution, the government, regulators, supervisors and the resolution authority should have the power to deal with the situation effectively.

The working group has recommended that there should be a policy framework supported by law to deal with the failure of financial institutions and FMI, or financial market infrastructure, such as payment systems, clearing houses, securities depositories.

The group also suggested that the scope of the financial resolution authority in India should cover all financial institutions, including commercial banks (public, private, and foreign banks having branch/subsidiaries in India), non-banking financial companies, companies in insurance and FMI.

The panel feels the FRA should be given a variety of tools such as liquidation, bridge institution, bail-in and temporary public ownership. A bridge institution is an entity that temporarily holds the assets and liabilities of a failed bank.

Bail-in is a statutory power that enables resolution authorities to convert existing creditors into shareholders, thus recapitalising the failed institution.