High-level panel submitted a report on Resolution Regime for Financial Institutions to RBI. It was notified by RBI on 2 May 2014. The panel has made recommendations in order to bridge the gaps and develop an effective resolution regime for all financial institutions, when they run into viability problems.
High-level panel recommendations
The panel recommended a separate Comprehensive legal frame work for resolving Financial Institutions (FIs) as well as financial market infrastructure (FMIs).
The resolutions framework is to ensure continuity of financial services, protection of depositor and policy holder funds and to establish financial stability. It is guided by the
• Initiate resolution action in timely and speedy manner
• Protect and maintain stability of the financial system as well as public confidence in financial system
• Ensure continuity of essential financial services and critical functions like payment systems, clearing and settlement functions
• Protect depositors, insurance policy holders, and client funds/assets, through protection schemes and other arrangements within limits
• Avoid taxpayer’s money and not create a expectation that public support will be made available
• Ensure imposition of looses to the shareholders and unsecured creditors in a manner that respects hierarchy of claims
• Ensure predictability through clear legal framework and procedural clarity
The financial institutions include all kinds of banks of public, private, foreign, rural, and cooperatives. It will also include insurance companies, securities firms, commodities markets and pension schemes.
Financial market infrastructure includes payment systems and central counterparties, which will include clearing houses, securities settlement systems, depositories and trade repositories.
The panel has recommended setting up of a single independent Financial Resolution Authority (FRA).
About Financial Regulatory Authority
FRA should be sole responsible for operation and implementation of the framework including decision to choose appropriate resolution tool except the power to an institution into as temporary public ownership (invoked by government on the recommendation of FRA).
The FRA will work in coordination with regulators and will take over the task of providing depositor insurance protection to insurance policyholders within limits.
To set up FRA either transforming the present Deposit Insurance and Credit Guarantee Corporation (DICGC) into FRA or FRA to be set up that will subsume DICGA.
The regulators (RBI, SEBI or Insurance Regulatory and Development Authority) will coordinate with the FRA to resolve the distressed institution in earlier stage. FRA may use a variety of measures like
• Purchase and assumption
• Bridge institution
• Good-bank and bad-bank
• Bail-in and temporary public ownership
New mechanism bail-in is recommended, where investors in capital instruments lose money but small depositors are protected. The bail-in mechanism is used when there is a failure of domestic and global systemically important banks.
Previously, failure of financial institutions has been addressed through government bailouts or through forced mergers with government banks.
The Panel also recommended for the integrated financial database management system which will function as central data base wherein all the FIs and FMIs will submit regular financial information electronically. The data base is collected in order to ensure the availability of high quality and timely data, the supervision agencies and FRA should access to those information.
About High level panel
The High level panel was constituted by the Sub-Committee of the Financial Stability and Development Council in 2013, in light of the global financial crisis of 2008 and to develop a separate resolution framework for financial institutions, different from the corporate insolvency regime.
The panel was headed by RBI deputy governor Anand Sinha as Chairman and Arvind Mayaram as Co-Chairperson.
Other members of the panel are M J Joseph, Ramesh Abhishek, P Vijay Bhaskar, B Mahapatra, Jasbir Singh, Dr Mohapatra, Alok Nigam, P K Nagpal, Usha Suresh, G S Hegde, P Vijay Kumar, Vijay Chugh, Dr Mamta Suri, Deepa Kotnis and Chandan Sinha.
Who: high-level panel
When: 2 May 2014