Indian Merchants Chamber 4th International Banking and Finance Conference 2009 Banking - Crisis and Beyond

1. Indian Merchants’ Chamber 4th International Banking and Finance Conference 2009Banking - Crisis and Beyond Should Banking Be Made Boring ? An Indian Perspective Inaugural Address by Dr. D. Subbarao Governor Reserve Bank of India

2. 2 Krugman’s Thesis Make banking boring to make it safe American financial history corroborates boring banking hypothesis. Echoed by Mervyn King of Bank of England in ‘utility and casino’ model

3. 3 Questions Raised by Krugman’s Thesis What were the ills of the banking system that caused the crisis? Is making banking ‘boring’ a necessary and sufficient cure to those ills? How do the several proposals at the inter-national level for reforming banking measure up to the test of making banking boring? And, how relevant is the ‘boring banking’ perspective in India?

4. 4 Ills of the Banking System that Caused the Crisis Repeal of Glass - Steagall Act Globalization of financial institutions and services Proliferation of quasi banks beyond regulatory purview The moral hazard of ‘too big, too important to fail’ institutions Compensation and perverse incentives

5. 5 Is Boring Banking a Necessary and Sufficient Solution? The answer is ‘no’. Narrow banking not practical in today’s situation The crisis saw failure of both complex and traditional banks suggesting normal banking is not a remedy. Separation of traditional and complex institutions no insurance against systemic risk Economic cost of ‘boring’ banking can be heavy.

6. 6 International Initiatives Will They Make Banking Boring? (1) Macro Perspective Micro Perspective

7. 7 International Initiatives Will They Make Banking Boring? (2) Macro Prudential Measures Contain procyclicality and leverage Require contingent capital Systemic risk capital surcharge Resolution mechanisms for large and cross-border institutions, including ‘living wills’ Differentiated capital for OTC derivatives Global framework for regulation and supervisory colleges Expand perimeter of regulation

8. International Initiatives Will They Make Banking Boring? (3) Micro Prudential Measures Enhancement to Basel II Framework Global framework for liquidity risk regulation Reform of compensation structures

9. Boring Banking – An Indian Perspective (1) Indian banks remained safe and healthy in the midst of earlier crises as well as the recent one. Yet there are lessons from the crisis for Indian banking. ‘Boring banking’ an oxymoron in the Indian context Banking in India will be exciting because of the challenges it will have to address.

10. Boring Banking – An Indian Perspective (2) First Challenge Financial Inclusion

11. Boring Banking – An Indian Perspective (3) Second Challenge Financing Infrastructure

12. Boring Banking – An Indian Perspective (4) Third Challenge Risk Management

13. Boring Banking – An Indian Perspective (5) Fourth Challenge Further improvements in efficiency

14. Conclusion Krugman’s thesis - ‘make banking boring once again’ Making banking boring is not a cure to the past ills nor a path for the way forward. Challenges that Indian banks have to address Perish the thought of Indian banking getting boring.