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Regulators play the oneupmanship game

Tamal Bandyopadhyay

On Saturday, March 31, the UK Listing Authority moved from the London Stock Exchange Tower to the Financial Services Authority's (FSA) main offices at Canary Wharf. The UK Listing Authority, which regulates the admission of companies to the Official List, was transferred to the FSA from the London Stock Exchange in May last year.

If this is one face of financial sector regulations, look at the other one: the scene shifts to Bombay, India's financial capital. On Tuesday, April 3, capital market watchdog Securities & Exchange Board of India (Sebi) chief D R Mehta washed his hands of the crisis that has engulfed the market as well as a few banks. "Sebi can't be held responsible for what happened in the banking system," he said in no uncertain terms. What he did not say is: this is Reserve Bank of India's problem. Why should I bother about it?

On its part, the Indian central bank has been maintaining a deafening silence. Officially, it has not blamed Sebi, but there are indications that the central bank feels the buck should stop at Sebi.

After all, as early as in October 2000, RBI did inform Sebi about the "unusual movements" of two banks' scrips. One of them is Global Trust Bank (the other being United Western Bank).

Weeks after the run on Madhavpura Mercantile Cooperative Bank, the Rs 1.37 billion fraud in Bank of India, the payment crisis in Calcutta Stock Exchange and suicides of a few bankrupt brokers, we are still a group of blind men feeling the elephant. Nobody has got a feel of the magnitude of the scam as yet.

There are similarities between the 1992 scam and this one, between Harshad Mehta and Ketan Parekh. But the major difference is: in 1992, it was a banking scam which spilled over to the capital markets while this time around - whether Sebi chairman D R Mehta likes it or not - it has been the case of a capital market scam spilling over to the banking system.

Another interesting point to note: despite the political, capital markets and banking crisis, the system has not come to a halt. There is no reflection of the problems on money or forex markets while capital markets have virtually discounted the impending arrests of few more brokers. That shows the resilience of the system acquired over the decade.

It's true that when Nasdaq falls from 5500 to 1600, nobody bays for the Securities and Exchange Commission chief's blood.

Or, for that matter, US Federal Reserve chief Alan Greenspan is not under fire for being unable to prop up the economy despite doses of interest rate cuts in quick succession.

But, the Indian context is radically different from the US. Here the regulators do not see eye to eye. There is not even an iota of co-ordination between the RBI and Sebi. This is despite the presence of such arrangements like the high-level committee of capital markets and the standing committee banks' capital market exposure, et al.

Even within the RBI, the left hand does not know what the right hand is up to. One fails to understand why public sector, old private and new private banks, as well as foreign banks, will be controlled by the department of banking operations & development (DBOD) and co-operative banks - even the scheduled ones - will come under the rural planning and credit department (RPCD).

Once a bank gets the scheduled status, it should be treated at par with any other commercial bank. If taking such a huge exposure to a little known Ahmedabad-based cooperative banks betrays collapse of the risk management system in Bank of India, the central bank should be squarely blamed for giving Madhavpura the scheduled status and yet saying it has no control over its supervision by passing the buck to the registrar of co-operative societies.

The very purpose of setting up the board for financial supervision (BFS) - currently headed by RBI deputy governor S P Talwar - has not served the purpose because of its faulty structure.

It lacks teeth, and nothing but a sub-committee of the board of directors of RBI. The task of supervision should ideally be separated from the RBI making the BFS an independent body with sufficient powers and the RBI should concentrate only on monetary policies. There is a moral hazard when one single entity oversees supervision as well as plays the role of the lender of the last resort.

We have before us the model of the Financial Services Authority - a single regulator for the whole of the UK's financial services industry. The new 'Super-SIB', as the super-regulator was called initially, is backed by law, ending self-regulation and removing from the Bank of England the power to oversee banks operating in the UK.

It would merge the responsibilities of nine separate regulatory bodies: the supervision and surveillance division of the Bank of England, the Securities and Investments Board (SIB), the three Self-Regulating Organisations (SROs) - the Securities and Futures Authority (SFA), the Investment Management Regulatory Organisation (IMRO) and the Personal Investment Authority (PIA) - as well as the Building Societies Commission, the Friendly Societies Commission, the Registry of Friendly Societies, and the Insurance Directorate of the DTI (subsequently transferred to HM Treasury).

It has brought a string of financial services under one roof - high street banks, stockbrokers, unit trusts, the Lloyd's insurance market and the selling of pensions.

With the distinctions between various financial intermediaries becoming blurred and barriers being pulled own, it is high time a unified approach was adopted. Look at State Bank of India. Its banking service come under the supervision of RBI, the merchant banking activities and mutual fund under Sebi and insurance venture under Insurance Regulatory & Development Authority (IRDA).

With regulators playing the game of passing the buck, financial intermediaries as well as the capital market are in for trouble unless a firm co-ordinating mechanism is put in place.

Whether it is banking, insurance or capital market activities, one leg of every transaction is cash - payment and settlement - where the banking system comes in. If a transaction needs to be settled, and not squared off, then somebody has to fund the loss. At this juncture, if "somebody" is abusing a particular bank, ultimately it becomes the problem of the banking system.

Since the liquidity support has to come from the Reserve Bank - the lender of the last resort - to ward off any crisis, ideally RBI should be made the super regulator. However, before assuming this role, the central bank must put its house in order.

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