The Srikrishna commission’s proposal to form a Unified Financial Agency for all financial firms has not gone down well with the Reserve Bank of India.
The central bank has vehemently opposed the proposal, citing different reasons, including lack of focus and unconvincing results abroad.
It has also opposed proposals by the commission to strip its powers in debt management and to tinker with the mechanism to oversee forex movements.
The Financial Sector Legislative Reforms Commission, headed by Justice B N Srikrishna, in its final report last week, said the UFA would yield benefits in terms of ‘economies of scope and scale in the financial system.’
The proposed agency would take over the work on ‘organised financial trading from RBI in areas connected with the bond-currency-derivatives nexus, and from Forward Markets Commission for commodity futures, thus giving a unification of all organised financial trading including equities, government bonds, currencies, commodity futures and corporate bonds’, it added.
However, RBI is not convinced. In a letter to the commission weeks before the release of the final report, RBI Governor D Subbarao said while the central bank welcomed some proposals such as consumer protection and regulatory accountability, it had ‘serious concerns’ on a couple of proposals.
“At present, the jurisdiction of Reserve Bank extends over critical economic pricing variables like money market interest rates, medium to long-term interest rates and exchange rates.
These rates have a bearing on monetary policy function.
Since the Commission proposes to continue monetary policy with Reserve Bank, it is necessary that the regulatory jurisdiction over these (G-Sec, Bond and forex) markets continues with Reserve Bank.”
Subbarao added the bond and currency markets should not be equated with the securities market, as the focus of regulation and nature of investors differ significantly.
“Equity markets are retail-oriented, calling for stringent mechanisms for investor protection and transparency in issuance.
“However, in the government securities market, as the issuer is the sovereign, the quality of issuance or issuer has no implication on investor protection.
Further, the predominant institutional nature of the participants in the government security, forex and money markets shifts the regulatory focus to issues of systemic stability and macro economic framework,” RBI said in the letter.
The FSLRC had put up an approach paper late last year, in which it had put forth its intentions. Subbarao’s feedback came in response to this draft.
The market regulation function of RBI, the letter said, needs to be seen in the light of undue volatility in rates having wider macro-economic implications. Control over market participants is essential for effective discharge of monetary policy formulation and implementation function, it argued.
“It is, therefore, necessary that the regulatory jurisdiction over such markets remain with the Reserve Bank.”
RBI also felt the regulation of securitisation and reconstruction companies, credit information companies, and factoring companies should not go to the regulatory jurisdiction of UFA.
“Since the activities of these kinds of entities are very closely related to banking, it would be more appropriate to continue the regulation of these entities with the Reserve Bank of India, as is being done hitherto.”
Further bolstering its argument against the super-regulator, RBI said during the current crisis, both models -- regulation and supervision of financial institutions with the central bank and outside the central bank -- had failed in different countries.
Referring to the disbanding of the Financial Services Authority in the UK and entrusting the responsibility of the regulation and supervision of all financial institutions to the Bank of England, Subbarao said, “The developments in regulatory architecture, post crisis, have tended to entrust the central bank with the responsibility of regulation and supervision of financial entities where they were earlier not entrusted with the responsibility, rather than moving these responsibilities away from the central bank.”
Even in US, under the provisions of the Dodd Frank Act, all SIFIs (systemically important financial institutions), banks, and non-banks are subject to regulatory and supervisory oversight of the Federal Reserve.
“Since none of the models has proved to be superior to the other in the current crisis, disbanding the current architecture in favour of another unproven framework may not be desirable,” Subbarao told the commission weeks ahead of the release of the final report.
However, the commission stuck to its proposals.
Unity versus diversity
RBI says regulatory focus and consumers are quite different from equities
- The central bank not in favour of a separation of debt management office
- Wants to keep securitisation & reconstruction companies under its watch
- Unified regulator experiment had mixed results abroad
- After crisis trend abroad is to entrust central bank with more powers.