shaktikanta das : financial sector in the new decade address by mr shaktikanta das, governor of the reserve bank of india, at the times network india economic conclave 2021, new delhi, 25 march 2021. * * * a very warm good morning to you all. it is indeed an honour for me to be here at the india economic conclave 2021 organised by the times network. i have been looking forward to participating in this year ’ s conclave, especially after an enriching experience during my participation in this event in 2019. the theme of this year's conclave, one which resonates very strongly is " india's decade : reform. perform. transform. ” the covid - 19 pandemic has set forth the wheels of transformation for everything around us, from our work life to our policy priorities. as we toil towards addressing the challenges raised by covid - 19 with the aim to emerge as a modern and transformed india, i applaud the foresight of the times network in selecting such a pertinent theme. 2. today in my address, i have chosen to speak on a subject in which the reserve bank has a major stake – “ financial sector in a new decade ”. contextually, it is important to bear in mind that unlike the global financial crisis ( gfc ) of 2008 when financial sector vulnerabilities impacted the real sector, this time the risk of contagion is from the real sector to the financial sector. global perspective 3. globally, the measures initiated in the last decade after the global financial crisis were aimed at reducing leverage and improving the quality and quantity of capital, among others. as a result, before entering the covid pandemic, banks were well capitalised and maintained high liquidity buffers, which - coupled with loan moratorium and asset classification freezes - helped them to stay resilient during these tough times. measures taken by central banks and national governments such as reducing policy rates ; capital, liquidity and regulatory relaxations ; asset purchases ; forex swaps ; and government guarantees, among others, played a crucial role in preventing heavy sell - offs and protecting bank balance sheets. this collective endeavour resulted in stabilisation of the financial sector and provided necessary liquidity support to maintain the flow of credit in the economy. the rapid progress in vaccine has upgraded the global outlook although we are not out of the woods yet as fresh waves of newer variants of the virus

default swaps. the adverse incentives such an approach induced in banks ’ behavior and its impact on the stability of the financial system are still to be fully appreciated in the regulatory frameworks. liabilities 10. on the liability side, a similar transformation was evident from reliance on low - cost, durable retail deposits to short term, wholesale, market linked funding. financial institutions worldwide increasingly started relying on wholesale funding to supplement demand deposits as a source of funds, becoming, therefore, vulnerable to a sudden dry up of these sources of funds. the deep and liquid global inter - bank markets were supposed to have mitigated the requirement and need for costly stored - liquidity. more than that, there was the benefit of leveraged liquidity – the repo markets provided a mechanism for banks to use / re - use liquid, high quality securities to raise requisite funding. 11. unregulated repo markets, resembling a fractional reserve banking model with similar multiplier effect, emerged as one of the weakest points escalating the crisis. banks ’ were relying heavily on the wholesale market funding through repo markets. during the crisis, however, there were sharp contractions in available market liquidity, which have been explained based on the interaction between margin calls and market liquidity, the cyclicality of leverage. in fact, although the ongoing crisis was initially dubbed the “ subprime crisis ” some authors have started to refer to it as the “ liquidity crunch of 2007 – 2008 ” ( brunnermeier, 2009 ). 12. another problem with the repo markets was that a substantial part of “ good assets ” of the banks got utilized as collateral for short term borrowings. this raises serious issues as far as the interest of depositors and other unsecured creditors are concerned – in times of crisis the available assets backing them would be greatly reduced. what incentivized this framework was a supposedly market - friendly provision in the us laws which gave the repo contracts an exemption from the bankruptcy proceedings. bis central bankers ’ speeches capital 13. the above transformations on the asset and liability sides were extremely capitalefficient. these made possible for banks to have a greater balance sheet size on a smaller capital base. more so, the very capital held by the banks became linked to market demands. increasingly the basle norms have permitted quasi - equity, subordinated debt instruments to be held and counted as capital for capital adequacy purposes. such instruments