In his Budget speech, the Finance Minister proposed the setting up an apex regulator for the financial sector, which would enable the government “to strengthen and institutionalise the mechanism for maintaining financial stability.” The proposed Financial Stability and Development Council would monitor the macro-prudential regulation of the economy and address inter-regulatory coordination issues. The move to entrust it with the task of coordinating the activities of the existing regulators — the RBI, SEBI, the IRDA, and the PFRDA — has set off an intense debate. The existing oversight arrangement, of course, has not delivered. The High Level Coordination Committee (HLCC) on capital markets, supplemented by operational coordination among the regulators, has not been equal to the task. For instance, it has not been able to prevent turf wars between the IRDA and SEBI over the unit-linked insurance plans. The debt markets have stumbled between two regulatory jurisdictions, those of SEBI and the RBI.

For the new Council to accomplish what the HLCC has not been able to do, it might have to encroach on the autonomy of individual regulators. Such a prospect appeals to no one. Besides, there is every possibility that over the medium term the Council would become a unified regulatory authority for the financial sector. Bringing all regulatory functions under one roof has not worked well in countries where it was tried. The authorities need to clarify whether it is at all necessary to create a new body to monitor macro-prudential regulation and maintain financial stability when the RBI has been fulfilling nearly all those functions. Its role in insulating the domestic economy from the recent global crisis has been widely acclaimed. By setting up the new body, the government seeks to fix problems that do not exist in India. It must learn from the U.K., which tinkered with a long-established tradition and shifted the responsibility of prudential regulation from the Bank of England to a new authority, which proved grossly ineffective as the financial crisis unfolded. While attempts are already on to restore the status quo ante, it is clear that prudential regulation goes hand in hand with the central bank's role as a lender of last resort.

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