Given the rise in the number of cases that fall between various regulators, Sebi’s not knowing about Sahara’s fund-raising being the latest example, it’s not surprising that all countries are trying to evolve an architecture that allows a holistic look at organisations that are both too-big-to-fail as well as too-big-to-bail. Credit risks in banks, for instance, also include insurance/pension risks and, as we saw in the case of US banks and insurance firms, no one had any idea about the size of counter-party and off balance sheet risks that had piled up—that is the reason why, for a very long time, estimates of the size of the sub-prime crisis kept rising each month. Different countries are handling this differently. While the US has a financial sector council for oversight, somewhat akin to what India has—in India, the Financial Stability and Development Council (FSDC) is headed by the finance minister, though the operating sub-group is headed by the central bank. In the UK, while the powers of the Bank of England have been returned by the erstwhile Financial Services Authority, all non-banking financial regulation is taken care of by a new Financial Conduct Authority.
The Justice Srikrishna report, submitted last week, has a similar structure—an RBI with its debt management office (DMO) powers taken away and other regulators under a Unified Financial Agency (UFA). To the extent the idea is to prevent cases from falling between the cracks, it is a good one—the HLCC mechanism that preceded the FSDC didn’t really work and FSDC hasn’t had to deal with any crisis. While there are issues over an RBI sans a DMO—who will ensure banks buy government paper and if the DMO is part of the finance ministry, this creates moral hazard—the real challenge will be in staffing the UFA. If the idea is just to staff it with Sebi/Irda/Pfrda/FMC personnel, it’s not clear how it will work—indeed, over-centralisation could be a new problem. Different regulators need forensic accountants, chartered accountants, lawyers, economists; they need greater powers and insulation from the political process. Creation of regulatory capacity is a greater challenge than mandating a new regulator. If staffing a Sebi or an Irda is a challenge, it’s difficult to see how this gets sorted out in a unified Sebi/Irda.