Swaminathan J: Supervision amidst emerging risks
Opening remarks by Mr Swaminathan J, Deputy Governor of the Reserve Bank of
India, at the "High-Level Policy Conference of Central Banks in the Global South",
organised by the Reserve Bank of India as a part of commemoration of its 90th year,
Mumbai, 22 November 2024.
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Esteemed delegates from across the world, respected Governor, Deputy Governors
and all my colleagues from the Reserve Bank of India, ladies and gentlemen. A very
good afternoon to you all.
It is indeed my honour to deliver the opening remarks before such a distinguished panel
comprising Dr. John Mushayavanhu, Governor, Reserve Bank of Zimbabwe; Mr. S. S.
Mundra, former Deputy Governor, RBI; Mr. Jay Surti, Division Chief, Financial
Supervision and Regulation Division, Monetary and Capital Markets Department, IMF;
Mr. Krishna Sastry Pendyala, Partner, Cyber Security, E& Y and the moderator for the
panel, Mr. M. Nagaraju, Secretary, Department of Financial Services, Government of
India.
The supervision of banks and financial institutions, as we understand it today, is a
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relatively recent development-dating back around fifty years . However, the concept of
overseeing banks is embedded in the very foundations of central banking. From the
early days, central banks have fulfilled their role as the lender of last resort, ensuring
that financial institutions remained solvent and protected against systemic crises.
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Indeed, supervision has been the keystone that has supported the integrity and
stability of the financial system, by protecting depositors' interests, and thereby
fostering trust in the banking sector.
As the world rapidly evolves, so does the nature of risks confronting the financial sector.
Technological advancements have brought incredible efficiencies but also significant
vulnerabilities, such as cybersecurity threats and risks stemming from third-party
dependencies.
Climate change, once considered a distant concern, now poses immediate and material
risks to institutions and economies alike. Added to this are the complexities of
geopolitical uncertainties, volatile markets, and shifting macroeconomic trends. Thus,
the task of supervision has become more dynamic and critical than ever before.
Supervision, therefore, needs to evolve with the times and can no longer be just about
enforcing compliance. Instead, it needs to anticipate risks, respond swiftly to both
foreseeable and unforeseen risks and foster resilience in the financial system.
Let me take a moment to clarify what resilience means. While stability ensures that the
financial system can withstand shocks without losing its capacity to function, resilience
goes a step further. Resilience indicates that in addition to weathering the storm, the
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financial system is able to adapt to the newer realities and thrive in it so that it remains
a pillar of trust and stability.
To build financial resilience, supervision must be proactive, continuous, forward-looking,
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and risk focused. An effective banking supervision system requires the supervisor to
maintain a continuous, forward-looking assessment of the risk profiles of individual
banks, aligned with their systemic significance. Supervisors must be able to identify,
evaluate, and address risks both within individual institutions and across the entire
banking system. This also includes having a well-defined framework for early
intervention and clear contingency plans to ensure that non-viable banks can be
resolved in an orderly and efficient manner. For that, supervisors must possess the
resolve to act swiftly and decisively when necessary.
In recent years, we have worked to reposition the RBI's supervisory framework to better
align with this objective. Our supervisory initiatives aim to identify risks and
vulnerabilities early, establishing a structured framework for early intervention to
mitigate these risks. We have shifted our focus from merely addressing the symptoms
of vulnerabilities to identifying and addressing their root causes, while also harmonizing
supervisory rigour across various segments of the financial system.
We have designed and implemented a Calibrated Supervisory Approach, which
provides the flexibility and scalability needed to focus more effectively on high-risk
institutions and practices. At the heart of this approach is a proactive off-site
surveillance mechanism that enables us to detect emerging risks and assess
vulnerabilities across the supervised entities, ensuring timely action to mitigate or
manage these risks before they escalate.
To further strengthen our supervisory capacity, we are also investing in initiatives such
as the College of Supervisors, which seeks to enhance the skills and expertise of our
supervisory staff. In addition to building capacity, we are increasingly focusing our
efforts on improving the risk and compliance culture within supervised entities, ensuring
that these institutions not only meet regulatory requirements but also foster a proactive,
robust approach to managing risk and compliance at all levels.
While we, as supervisors, strive to perform our duties to the best of our abilities, it may
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be worthwhile to recall what Charles Goodhart aptly said , "-the conduct of supervision
is a thankless task, one that is all too likely to tarnish the reputation of the supervisor.
The best a supervisor can hope for is that nothing untoward happens. Supervisors are
only noticed when their actions anger the regulated entities, whether through restrictive
or intrusive measures, or when they are criticized after a failure, such as a financial
institution collapse or customer harm. Despite the discussion around the need for
allowing some degree of freedom for institutions to fail, supervisors inevitably face
negative press when such events occur, regardless of the circumstances."
Be that as it may, to conclude, while the task of supervision may be challenging but it is
also essential for ensuring the stability and resilience of the financial system. As
supervisors, it is through our vigilance, proactive measures, and continued evolution of
supervisory frameworks that we can create a financial environment where institutions
not only survive but continue to thrive in the face of emerging risks.
As part of our vision for the next decade, RBI@100, the Reserve Bank of India aims to
further engage with the central banks of the Global South. We are dedicated to
establishing a global model of risk-focused supervision, one that emphasizes strong risk
discovery and compliance culture, and builds a "through-the-cycle" risk assessment
framework. Additionally, we are working towards creating a robust data analytics
ecosystem to support our supervisory functions, ensuring that our approach remains
forward-looking and agile in a rapidly changing world.
With these thoughts, I look forward to an engaging and insightful panel discussion that
will explore the evolving role of supervision in the face of emerging risks. Thank you!
1
Masciandaro, D and M Quintyn (2013) "The evolution of financial supervision: The
continuing search for the Holy Grail", SUERF 50th Anniversary Volume Chapters:
263318.
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A keystone is the wedge-shaped piece at the crown of an arch that locks the other
pieces in place
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Mary Dowell-Jones & Ross Buckley, Reconceiving Resilience: A New Guiding
Principle for Financial Regulation?, 37 Nw. J. Int'l L. & Bus. 1 (2017).
http://scholarlycommons.law.northwestern.edu/njilb/vol37/iss1/1
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Principle 8: Supervisory Approach of the Basel Core Principles states An effective
system of banking supervision requires the supervisor to develop and maintain a
forward-looking assessment of the risk profile of individual banks, proportionate to their
systemic importance; identify, assess and address risks emanating from banks and the
banking system as a whole; have a framework in place for early intervention; and have
plans in place, in partnership with other relevant authorities, to take action to resolve
banks in an orderly manner if they become non-viable.
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Goodhart, C.A.E. (2000). The Organisational Structure of Banking Supervision. FSI
Occasional Papers, Financial Stability Institute, No. 1, November. pp. 20-21. Available
at: https://www.bis.org/fsi/fsipapers01.pdf.