Diesel

NIVESHAK 11
subsidiaries in the same group. However, it
doesn’t constrain intra group funding.
The Liikanen Report was broader in scope,
but less strict. The proprietary trading and
the market making activities (no distinction
made between the two) were required to be in
different subsidiaries if within the same group.
Additional conditions were imposed such as
self-sufficiency in capital and liquidity for the
subsidiaries and intra group lending on market
prices.
The Vickers Commission proposed that the banks
should ‘ring fence’ their retail banking services
from the investment
banking divisions.
This was aimed at
narrowing the activities
encompassed within
the protected entity.
This protected entity
was very narrowly
defined as the retail,
corporate banking and
the strategies to hedge
risks arising from
such activities. This
was to the exclusion
of all underwriting,
secondary market
transactions. Like the Liikanen report, but
unlike the Volcker rule, it allowed room for the
coexistence of protected activities and others in
the same group, albeit in separate subsidiaries.
These recommendations are however stricter
than the Liikanen ones in the sense that the
intragroup lending norms are stringent and the
very interaction of such protected entities with
the wider financial sector is curtailed.
India Story
With this overview of the world regulations, let
us devote some time to the IB sector in India,
and what the events across the world entail for
the domestic industry.
The IB industry is at a nascent stage in India. It
is mostly limited to a few big banks which are
themselves curtailed in their ability to expand
IB activities.
The banking sector in the country is of the UB
type, with no significant presence of standalone
IBs. The UB structure is of the BHC hue, where
big banks lead the conglomerate. The banks
themselves are the holding companies, with
subsidiaries involved in the financial services,
IB activities. The risk emanates from the
balance sheets of these affiliates, as the losses
of such would
be go upstream
to reflect in the
c o n s o l i d a t e d
books of the
banks, posing a
danger to them.
The 2008 crisis was
a wakeup call for
the regulators in
the West. RBI had
foreseen these
risks, and taken
steps to prevent
wide scale failure
of banks. The
first of such measures was the limits on equity
investment by a bank in a subsidiary company;
or a financial services company which is not a
subsidiary. This limit for the subsidiaries was set
at 10% of the bank’s paid up share capital and
reserves, while that on the total investments
made in all subsidiaries and non-subsidiaries
(engaged in financial services) is 20%. However,
this effectively inhibited the expansion of this
industry. So, while the West came up with giant
banking structures, Indian banks were nowhere
in the picture. Standalone banks, which would
come under the purview of the SEBI, were
also largely absent from the Indian theatre.
Article Cover of the Story Month
The investment banking (IB) sector bore the brunt
of the crisis, it was after all one of the biggest
culprits. In the aftermath of the crisis, the IB sector
was in tatters. Some of the biggest conglomerate
banks in America had failed spectacularly.
© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG