Some banking giants more powerful than central banks, says Y. V. Reddy

At a time when the financial sector is being blamed for much of the global economic crisis, former Governor of Reserve Bank of India Y. V. Reddy has said that some financial conglomerates are more powerful than even the central banks.

At the same time, Dr. Reddy also flagged the issue of leading rating agencies and accounting firms enjoying an oligopolistic power over the markets, and said that some large international banks enjoyed significant influence over political economy in several countries.

“They (international banks) have often been found to deal in financial flows of suspect legality in one country, though not always in both countries involved. International banks have the opportunity and incentive to conduct operations involving tax avoidance. Because of these operations, international banks enjoy significant influence over the political economy in several countries,” Dr. Reddy said, while delivering the Per Jacobsson Foundation Lecture 2012 on Sunday in Basel, Switzerland.

“In the prevailing environment of global financial markets, some large global financial conglomerates are larger, and, perhaps, more powerful than some of the central banks,” said the former chief of the RBI.

On the policy front, Dr. Reddy said “available evidence shows that financial contributions to political activity from the financial sector in many affected countries (from economic crisis) increased significantly in recent years. Moreover, large global financial conglomerates seem to be in a position to influence not only political governance but also corporate governance, to suit their own interests.” While Dr. Reddy did not name any country in his speech, his remarks mostly appeared to be targeted at Western countries.

However, the role of rating agencies and accounting firms had been criticised on various platforms in India as well.

Speaking on the issue of ‘society, economic policies and the financial sector’, Dr. Reddy said the “concentration of global financial power in a few entities with close mutual connections has considerable potential to undermine competitive forces.”

Without naming any entities, Dr. Reddy said: “Leading rating agencies and accounting firms, along with few leading business news agencies, have continuous dealings with each other, which tend to reinforce the exercise of their oligopolistic power over markets.

Further, operations of international banks/conglomerates specialising in cross-border flows, combining traditional banking and risky investment banking operations, have close business and operational links with rating agencies, accounting firms and the like,” he noted.

Known for his straight-forward commentary on the state of affairs of economy, Dr. Reddy said central bankers had “not merely a stake but also have a legitimate role to play,” amid the current global economic scenario.

“There appears to be an erosion of trust in the financial sector as a whole, and banking, in particular, in advanced economies,” he further said. Listing out the possible reasons for erosion of trust, Dr. Reddy said these included the perception about financial sector players having enjoyed disproportionate benefits, and some major global players in financial markets having discrediting themselves by resorting to questionable practices.

There were concerns over penalties being imposed by regulators without giving details about malfeasance and the losses suffered by the public, while questions had been asked about fat remuneration packages as well for senior management personnel, he said.

Dr. Reddy also listed out issues such as the finance industry offering “prospects of highly paid jobs for those employed in the regulatory agencies and Treasuries or Ministries of Finance,” in many countries.

Also, the regulators, as part of the public consultation process, often depended on the entities regulated by them for consultation, which was a feature common in most industries. “But the dominant market shares of the few giants in the finance industry, combined with the characteristic externalities of finance, make a difference to the process and outcomes.