Government of India Volume I: Analysis and Recommendations

SYSTEMIC RISK
field of systemic risk, it is essential that system-wide measures are implemented on the
scale of the financial system or a large part of the financial system. For example, raising
capital requirements for the banking sector alone may lead to an increase in systemic
risk relating to bank substitutes, or the non-banking sector, which may defeat the purpose
of imposing the system-wide measure. For a system-wide measure such as capital
requirements to matter on the scale of the entire financial system, the formulation and
operation of such measures would have to take place in a co-ordinated fashion.
The fourth element requires promotion of inter-regulatory co-ordination amongst
the member of the FSDC. Effective co-ordination across a wide range of policy areas
is a key element of designing an appropriate institutional framework to monitor systemic
risk. Since co-ordination is an inherent part of the FSDC’s work, the performance
of this function may not be visible as a stand alone process with separate tangible goals.
Nonetheless, the FSDC would focus on facilitating co-ordination which will aim to reduce
regulatory uncertainty, thus promoting the overall coherence of the financial system.
Finally, the fifth element involves assisting the Central Government with crisis management.
In the event that any systemic crises occur, the draft Code emphasises a more
formal and cohesive approach to crisis management. The Ministry of Finance, Central
Government will lead the crisis management function, with assistance from the FSDC. The
FSDC will also provide assistance to members and other agencies in their efforts to resolve
the crisis.
9.5. Constructing and analysing a system-wide database
The process of systemic risk oversight begins with the gathering of information from all
sectors of the financial system, collating the same and analysing it from the viewpoint
of identifying system-wide trends which may be areas of concern. This requires interregulatory
agency co-ordination, through which the data gathering, as well as discussion
leads to informed decision making. The Commission envisages the construction of a unified
database, located at the FSDC which will hold all data relating to the entire financial
system.
The FSDC will be a forum for the construction of a sophisticated database leading to
the assimilation and transmission of system-wide financial data (Table 9.5). This database
will serve to assist the FSDC in conducting research on systemic risk and system-wide
trends, and facilitate a discussion about policy alternatives between the members of the
FSDC. It will not have any power to give directions to financial regulatory agencies, which
would be governed only by their respective legislation. The reporting requirements will
be stipulated by the respective regulatory agency in relation to its respective financial
entities. The latter will be required to route the data only through the FSDC’s database.
All regulatory agencies will have instantaneous and continuous access to the data of financial
entities which they regulate.
Once this database is in place, and maintained regularly, the FSDC would conduct
research, in co-operation with all regulatory institutions and with several academic institutions
in order to analyse this data and identify potential systemic risks. These areas
of concern would be brought up for discussion at the FSDC. Based on the consensus
achieved at the FSDC, actions would be undertaken by all regulatory agencies in a coordinated
fashion.
Towards this end, the FSDC will operate a data centre called the Financial Data Management
Centre (FDMC) that will obtain data from regulated entities and other financial
firms. All supervisory information supplied by a regulated entity to any regulator will be
routed through and held by this database; there will be no other physical or electronic
FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION 93