Government of India Volume I: Analysis and Recommendations

RESOLUTION
and the tax payer arising from the risk of failure of a financial institution. However, there
are important differences between the perspective of micro-prudential and resolution
authorities in terms of timing and intensity of intervention. As long as a firm is healthy,
the resolution authority does not intervene; and instead, relies on information from the
micro-prudential regulator. At best, it conducts periodic reviews.
As the probability of failure increases, the degree of supervision by the resolution
corporation will increase. At each stage of greater difficulty, there will be regular interaction
between the micro-prudential regulators and the resolution corporation. Microprudential
regulators and the resolution corporation have a well defined protocol, embedded
in the draft Code, for joint work covering:
1. Risk assessment of covered service providers;
2. Actions to be taken with respect to a covered service provider at different stages of risk to the
covered service provider; and
3. Identification of emerging regulatory risks, their assessment, quantification and impact on the
financial sector.
The task of resolving a failing covered service provider also involves interaction with
the competition regulator, CCI. One commonly used tool of resolution involves selling
the firm to a healthy firm. In the routine business of selling or merging a firm, the effects
on competition must be considered. The resolution corporation must consult the CCI on
the likely effects of its actions on the state of competition in the market. In addition, the
resolution corporation must prepare a report detailing the effect that its proposed action
is likely to have on competition in the relevant market. The interaction should involve
sharing of any relevant information and data at the disposal of the resolution corporation.
However, in times of crisis, concerns of financial stability may outweigh competition
concerns. An analysis of global experience shows that post-crisis, national competition
authorities recognise that failing firm investigations are too lengthy, as firms in distress
may deteriorate rapidly, and cause inefficient liquidations. Procedures need to be
amended to facilitate speedy mergers of failing firms. In such an event, the obligation to
consult the CCI and examine the implications on competition must be exempted.
The resolution corporation must approach the FSDC in two circumstances. Firstly,
if there is a difference of opinion between the resolution corporation and the microprudential
regulator, either entity may approach the FSDC, which must resolve their dispute.
Secondly, if the resolution corporation believes that it may be required to take action
against a SIFI, it must necessarily inform the FSDC of the measures that it proposes to
take thus, and seek permission for taking any such measures. The Commission is of the
view that actions by the resolution corporation against a SIFI are likely to have systemic
implications. The one entity in the new financial architecture designed by the Commission
with a view of the entire system is the FSDC. Therefore, any actions against a SIFI
must necessarily be with the knowledge and permission of the FSDC, to preempt any unforeseen
systemic consequences from occurring.
Table 7.3 establishes the framework of co-ordinated action with other agencies.
7.5. Powers of the resolution corporation
The Commission believes that the resolution corporation needs to be equipped with
wide powers to carry out its functions. To carry out its supervisory reviews, the resolution
corporation needs to have a specialised staff of examiners. These examiners will conduct
regular examination of covered service providers. When the covered service provider
shows unfavourable trends in its risk profile, the resolution corporation can call for special
examinations as a measure of enhanced supervision.
FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION 73