This two-day conference has been quite productive and there have been very rich discussions of the challenges and options in strengthening and enhancing financial regulation. I am delighted that the discussions have drawn on the experience of a wide range of countries in emerging markets like China, Hong Kong, India, Jamaica, Korea, South Africa as well as in mature markets like Australia and the U.K.
The discussion focused on three main areas:
i. The range of structural options available;
ii. How to select the most appropriate regulatory structure; and
iii. How to manage the transition to a new regulatory structure.
Another set of issues that was discussed in detail was how to make the regulatory structure work better and that involved a detailed and lively debate on a number of issues:
a) How to deal with regulatory arbitrage;
b) Improving supervision of conglomerates;
c) A range of challenges in improving integrated risk management; and
d) How to enhance market conduct regulation.
But a more fundamental set of questions was also addressed. What is the purpose of regulation? In the Indian context, financial regulatory agencies have been given a regulatory role as well as a developmental role. Is that appropriate? What type of conflicts could this pose and what is the best way to deal with it? What needs to be done to better clarify the objectives, roles and responsibilities of regulatory agencies to make regulation more effective and efficient?
As Mr. Sisodia mentioned at the beginning of this Conference and Mr. Vinod Rai just now, they very much hope to hear from this Conference some suggestions, on all of these key issues. During the day, a draft suggesting some of the broad areas on which some consensus seems to have emerged has been circulated and I am really delighted that we are, therefore, able to respond to Mr. Sisodia. I would suggest that the Bank take on the responsibility, if we may, on behalf of this Conference, of finalizing this document into a brief summary of some of the key points that have emerged, which we will send to GOI in the next few days.
I would like to just summarize for you some of the conclusions and recommendations that have emerged:
1. The need to clarify the objectives of regulation, and to define more clearly the role and responsibility of regulatory agencies. One consensus which emerged was the importance of requiring regulators to concentrate on their regulation role while taking market development functions out of the ambit of regulatory agencies.
2. Secondly, there was broad agreement that over the longer term, and this is certainly something that needs to be seen as a gradual process, that there is a need for regulatory consolidation. In the near term, this process of consolidation can, perhaps, be started by ensuring that institutions are regulated based on their funding source. In other words, on the basis of their liability profile, rather than on the basis of their functions. One implication is that the regulatory functions which in some cases have been delegated or partially delegated to financial institutions would need to be removed from those institutions.
3. Thirdly, emphasis on the importance of improving information disclosure.
4. Fourthly, improving the supervision of conglomerates. That is partly a matter of streamlining information requirements so as to further reduce the regulatory cost of doing business, that is faced by conglomerates. It is perhaps also the idea of adopting a “lead regulator” approach for group-wise supervision and risk assessment of conglomerates. Perhaps the concept of a holding company kind of structure to deal with financial conglomerates can be considered.
5. Reducing opportunities for tax arbitrage by financial institutions through unifying tax treatment across financing intermediaries for similar credit products, such as housing loans.
6. Improving information sharing between financial regulators including necessary amendments to the law, subject to genuine confidentiality constraints; and
7. Finally, the need to work towards the convergence of lender’s rights, so that, for example, all lenders should get similar treatment on asset protection rather than a segmented and varied treatment.
I would just like to close by saying thank you to everybody who has participated in what I think, has been an extremely useful and stimulating conference - what I hope very much is not just a conference that took place, but is going to be a point in an ongoing process, leading to further work, discussion and action. I really would like to say thank you to everybody, in particular, for giving up their weekend to be here. Thank you to the number of speakers who have come from a very long way away to join us - I think the sharing of international experience has been enormously interesting and helpful. I would like to say thank you, in particular, to the Government of India for joining us in this important conference and helping us make a success of it.
Finally, let me say thank you, to four people in particular. First, to Priya for her leadership in making this conference happen and making it focus on a set of really important and interesting issues. To Varsha Marathe, for her contribution to the substantive formulation of the conference and for making it work. But let me also say thank you to the two people outside, who have done an enormous amount of practical leg-work and who as usual remain fairly invisible - but without whom this conference could not have happened and been a success. They are Anita D’Souza and Margaret Vasu. Thank you very much indeed!