Government of India Volume I: Analysis and Recommendations

SYSTEMIC RISK
Table of Recommendations 9.8 Counter-cyclical capital measures
◮ The FSDC must conduct research and formulate a mechanism for the implementation of a counter-cyclical
capital buffer such that it is applicable to the entire financial system, or large parts of the financial system;
◮ The counter-cyclical capital buffer will be applied at the level of the entire financial system, or to large parts
of the financial system, as appropriate;
◮ The FSDC will make the decision to increase capital requirements when systemic risk is building up, and decrease
such requirements, and free capital when the system is under stress;
◮ Decisions of the FSDC will translate into action through co-ordinated regulations issued by the respective
regulatory agencies with identical effective dates; and
◮ The FSDC will continue to conduct research on other measures. Once the FSDC is satisfied regarding the applicability
of a measure, drawing on both international experience and original research in Indian settings,
the Ministry of Finance will propose amendments to the appropriate sections of the draft Code pertaining to
systemic risk, in Parliament.
Table of Recommendations 9.9 Aspects of inter-regulatory agency co-ordination
◮ Promoting formal co-ordination mechanisms amongst regulatory agencies;
◮ Coordinating the conduct of systemic-risk monitoring functions;
◮ Facilitating the adoption of common standards and practices in rule-making and enforcement;
◮ Coordinating with international organisations and multilateral bodies in conjunction with the Ministry of Finance;
and
◮ Helping to resolve inter-regulatory agency disputes.
system and devise new measures (based on international best practices where appropriate).
To this end, the Commission recommends that the Central Government should
undertake a formal review of this issue in five years.
9.8. Inter-regulatory agency co-ordination
The institutional arrangement of the FSDC brings together multiple regulatory perspectives
which are essential to identifying market trends that can result in systemic risk. The
Commission believes that the FSDC can further promote co-ordination and consultation
by initiating measures like the establishment of joint working groups, cross-staffing initiatives,
designated points of contact for inter-regulatory communication, resolution of
disputes and other such mechanisms between member-regulators.
The board of the FSDC will engage in resolving regulatory disputes amongst members
of the FSDC and between members and other regulatory agencies, if required. The
board of the FSDC will be empowered to determine its own procedure for resolution of
the dispute, in line with the principles of natural justice.
The FSDC will also work with member-regulators to help in identifying and reducing
regulatory uncertainty. In order to reduce regulatory uncertainty, the FSDC will promote
consistency in the principles and practices adopted by its member-regulators in the areas
of rule-making and enforcement. Such efforts will enable better resolution of conflicts
between the policies of the members and promote cohesive oversight of the financial
system.
The Commission wishes to emphasise that any action of the FSDC in this regard will
not interfere with the functioning or the primary regulatory mandate of the regulators.
Table 9.9 summarises the envisioned approach to inter-regulatory co-ordination.
9.9. Crisis management
Despite the best efforts at avoiding systemic crises, there is a possibility that some crises
may occur. Crisis management requires extraordinary co-operation between the various
FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION 97