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FMB Assignment 1

The document discusses issues with banking regulations and proposes reforms. It notes that banking crises can occur due to adverse macroeconomic conditions, excessive risk taking, fraud, and outdated regulations. Current regulations do not incentivize banks to reduce asset risk, promote monitoring, and have separated commercial and investment banking. Proposed reforms include linking capital requirements to asset riskiness, restricting high-risk activities, increasing transparency of off-balance sheet activities and contingent liabilities, and quantifying associated risks. Alternatives to deposit insurance like risk-sensitive insurance are also discussed.

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67 views3 pages

FMB Assignment 1

The document discusses issues with banking regulations and proposes reforms. It notes that banking crises can occur due to adverse macroeconomic conditions, excessive risk taking, fraud, and outdated regulations. Current regulations do not incentivize banks to reduce asset risk, promote monitoring, and have separated commercial and investment banking. Proposed reforms include linking capital requirements to asset riskiness, restricting high-risk activities, increasing transparency of off-balance sheet activities and contingent liabilities, and quantifying associated risks. Alternatives to deposit insurance like risk-sensitive insurance are also discussed.

Uploaded by

anil14bits87
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Team View on Article on each of the conversation

Market Experts

Team Members:
Akhilesh Prasad Shukla

(MP13005)

Anil Kumar
(MP13009)
Chandra Bhushan
Ratish Mayank

(MP13022)
(MP13043)

Sumantra Khan
(MP13060)
Sumit Kumar

(MP13061)

A friendly conversation
Banking industry occasionally goes through crises because of the
following reasons

Adverse macro environment


Excessive risk taking
Fraud
Out-dated regulations

Banking industry faces the fundamental problems of Adverse selection


and Moral hazard.
The regulatory mechanism provides no incentive for reducing risk of
assets . So there is less emphasis on monitoring and as a consequence
NPAs go up.
The existing regulations also separate commercial and investment
banking activities.
Many innovative financial instruments have become popular of late .
They serve the financing needs of many different types of customers .
Banks are restricted in the variety of instruments they can offer are at a
competitive disadvantage w.r.t non- banking financial institutions. The
risk levels of these instruments differ .
So there is need to modify Banking regulations and make it suitable to
the present environment.
The proposed reforms should address the following concerns:

Link Capital requirement of banks to riskiness of asset portfolio :


Restriction on activities by banks not meeting capital requirements
appropriate for their risk category.
Make contingent liabilities & other off balance sheet activities
visible upfront .
Quantify risk involved in off balance sheet activities

The insurance deposit system has brought stability to banking industry


by eliminating bank runs .
But deposit insurance scheme has encouraged banks to accumulate
risky assets .

There are various alternatives to the current form of deposit insurance :

Risk sensitive insurance


Have 100% reserve [ eliminate fractional reserve banking ]
Regulate risk level of investments made with insured deposits.
Securitise risky assets

A solution to the above problem must be based on the fundamental role


played by banks .

Banks transform assets by borrowing short term and lending long


term .
Banks reduce transaction costs for lenders and borrowers
Banks create money by giving loans and creating checkable
deposits.
Banks make it possible to finance large Projects .

Some of these roles are gradually shifting to other financial


organisations . So an analysis of the present and future role of banks as
financial intermediaries is required .
A More Detail Perspective on the Banking Regulations is required.

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