Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

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Sat, 04 Jun 2011

RBI Report on Financial Holding Companies

I participated in a panel discussion on CNBC-TV18 about the recent report of an RBI Working Group on Financial Holding Companies (FHCs). The transcript and video are available at the CNBC-TV18 web site. I made four points:

  1. The global financial crisis has shown that we need a funeral plan for our largest financial conglomerates. The FHC model makes it easier to deal with the failure of a part of a conglomerate. The failing subsidiary can be wound up leaving the rest of the conglomerate intact. In the current model, the failing business unit may own other healthy business and they all go down if the parent unit is resolved.
  2. It is natural that a report by the Reserve Bank would recommend that the FHC should be regulated by the RBI in line with the central bank’s mandate regarding financial stability. I am sure there will be a lot of debate on that. It is perfectly possible that this could move up to the financial stability development council or something like that. The competencies required to regulate FHCs probably does not exist in the Indian regulatory space today, and if we are going to build those capabilities, then it it probably make sense to create them in a regulatory collegium like the FSDC.
  3. A big advantage of the FHC model does is that the FHC does not have any operations on its own – it does nothing other than own share in each of the operating subsidiaries. Each operating subsidiary can be independently regulated by its own sectoral regulator. The only thing that you need to do at the FHC is consolidated prudential supervision of the conglomerate. That is a lot easier to do than consolidated supervision of an entity, which is also an operating financial company.
  4. Businesses houses that set up banks should be subject to the FHC regime. If a manufacturing company chooses to own a bank or a systemically important insurance company or asset manager then the financial regulators have interest in the solvency and in the governance of the parent manufacturing company itself. The regulation of the corporate holding company will essentially be in terms of how much leverage it can have and in terms of what are the minimum governance standards. If a manufacturing company does not like that then it should not get into the financial sector.

Posted at 17:36 on Sat, 04 Jun 2011     View/Post Comments (0)     permanent link