Emergence of complex group structures prompts RBI, SEBI, IRDA and PFRDA to work together

The four financial sector regulators in the country have signed a Memorandum of Understanding (MoU) for co-operation in the field of consolidated supervision and monitoring of financial groups identified as financial conglomerates.

The regulators which have signed the MoU are: Reserve Bank of India, Securities and Exchange Board of India, Insurance Regulatory and Development Authority, and Pension Fund Regulatory and Development Authority.

Financial biggies

Typically, financial conglomerates undertake a range of financial activities, including commercial banking, insurance, investment banking, equity broking, and pension business. Some examples of banking conglomerates are: State Bank of India, Punjab National Bank, Canara Bank, Bank of India, and Bank of Baroda (public sector banks); ICICI Bank, HDFC Bank, Axis Bank and Kotak Mahindra Bank (private sector banks); and Standard Chartered Bank, Citibank and HSBC (foreign banks).

Conglomerates are also major players in wholesale financial markets, for example, as market makers in the foreign exchange and over-the-counter derivatives markets.

As major players in wholesale financial markets, they provide liquidity to other market participants and are also major borrowers of funds.

They may also be an important part of the local payment and settlements infrastructure.

As such, in normal times they will be an important resource for other financial intermediaries and end-users as facilitators of financial transactions and as a channel or counterparty for mitigating risk.

However, through their linkages with domestic financial institutions and their prominent role in markets, they also have the potential to be a source of domestic financial instability.

Special significance

The consolidated supervision of financial conglomerates has acquired special significance due to the emergence of complex group structures.

In such structures, a supervised entity might belong to a Group headed by a holding/parent entity which in turn might also have several other subsidiaries and affiliates — some of which might not even be subject to a formal regulation/supervision.

The purpose of consolidated supervision is not to supervise each and every entity within a group but to supervise the regulated entity as a part of the Group, so as to take into account the likely risks that may arise from various parts of the Group for the supervised entity.

Failure of large and established international banks in the past on account of the operations of their subsidiaries illustrates the magnitude of such risks, which has heightened the supervisory concerns.

Meanwhile, the Sub-Committee of the Financial Stability and Development Council (FSDC), which met on Friday, has approved the National Strategy for Financial Education (NSFE). The NSFE has been revised incorporating the feedback received from public consultations and from a global peer review.

Ramkumar.k@thehindu.co.in

(This article was published on March 8, 2013)
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