On the regulatory structure of finance.
Dissent and discussion on the finance ministry’s discussion paper on a new Financial Stability and Development Council have been coming out in dribs and drabs. We need more wholesome debate. The discussion paper has been made available, so far, to the financial sector regulators, but not to the public at large. This is rather strange.
The recent global financial crisis was helped along, if not created, by failure to regulate finance properly. This testifies to the stake every citizen has in sound financial regulation. So, it is absurd for the finance ministry to behave as if regulation of finance is something that primarily concerns the incumbent regulators.
In fact, entrenched regulators are likely to resist any change and giving undue weight to their views could prove inimical to the goal of designing an optimal regulatory structure.
The discussion paper should be released for public debate, the ministry should get some premier university departments and think tanks to organise seminars on the subject, closely follow the global discourse on the subject, evolving at a healthy clip, thanks to the keen desire to avoid or at least delay another crisis, and draw upon the ideas that come up to finally formulate its views for submission to Parliament for its approval. What the crisis has made clear is pretty simple.
The stability of the financial system as a whole is not a concern that can be addressed by those who regulate individual segments of the financial sector. How the linkage between macroprudential regulation and microprudential regulation is to be institutionalised in a coherent fashion is far from clear.
It is unlikely that there is a single model that will suit all countries. Depending on the degree of development of individual market segments, institutionalised information flows and completeness of transmission mechanisms, not to speak of behavioural codes of ethics and maturity, the appropriate regulatory structure would vary from country to country and evolve over time.
The finance ministry should waste no time and set the ball rolling on a wider consultation on the regulatory structure that would suit India.
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