or indirectly financed via central bank credits. direct or automatic access of government to central bank credits would naturally imply that monetary policy is subordinated to fiscal policy. finally, policy independence is related to the flexibility given to the central bank in the formulation and execution of monetary policy, under a given mandate. while the central government may give such directions to the rbi, after consulting the governor, as it may consider necessary in the public interest, the overall management of the rbi ’ s affairs and business rests with the central board of directors. all directors of the central board, including the governor and the deputy governors, are appointed by the government and they could be superseded or removed. the staffing pattern is left to the rbi, but rules governing their service conditions and compensation are currently not out of alignment with the public sector, in general, and the banking sector, in particular. on financial aspects of the rbi vis - a - vis the government, the phasing out of automatic monetisation of fiscal deficits by 1997 and the enactment of the fiscal responsibility and currently the outside experts in the tac - mp are prof. d m nachane, dr. r h patil, dr. shankar acharya, shri suman bery, and shri s s tarapore. budget management ( frbm ) legislation in 2003 are two important milestones in the direction of providing safeguards to monetary policy from the consequences of expansionary fiscal policy and ensuring a degree of autonomy of the rbi. consequently, barring emergencies, there are limits to the ways and means advances by the rbi to the government and prohibition on rbi from participating in primary issuance of all government securities. the rbi has gradually withdrawn from the practice of providing concessional finance or refinance for specified sectors, though the statutory provisions continue to enable it. the rbi advocates direct fiscal support to the developmental activities so that the support is transparent, accountable, and quantifiable, rather than through monetary operations of rbi, which would tantamount to quasi - fiscal operations. rbi contributes to the exchequer by way of transfer of balance of its annual profits, after making provisions and transfers to its reserves. the general principles regarding such transfers have been rationalised as part of the reform process in 1997. the present arrangement is governed by the objective of strengthening the rbi balance sheet by achieving a stipulated level of reserves in the balance sheet over a period – though the time - frame to achieve the level is extended to accommodate immediate fiscal compulsions.

european supervisory regime needs a sounds institutional framework. in this context, thought must also be given to the ssm ’ s decision - making structures and processes. now that the ecb is responsible for banking supervision, the ecb governing council is the supreme decision - making body for supervisory decisions in addition to monetary policy ones. these two decision - making powers are relevant in that banks are, on the one hand, an essential part of the monetary policy transmission mechanism but, on the other hand, are also subject to the scrutiny of the banking supervisor. it would be wrong to claim that conflicts of interest could never arise here. of course, these potential conflicts of interest were discussed back when the ssm was established, and the institutional framework that restricts the role of the ecb governing council in supervisory decisions is meant to address this. this framework has worked thus far, but i am not sure whether it will work in all circumstances. it therefore can ’ t do any harm to think of ways to improve it. bis central bankers ’ speeches alongside the institutional structures, i also see further need for improvement with regard to the decision - making structures and processes. specifically, i mean that the ssm ’ s senior management levels must – due to requirements laid down in the ecb statute – also deal with many routine tasks which, purely in terms of their content, could also be carried out at other levels of the organisation. the “ fit and proper ” assessments of future members of the supervised banks ’ management bodies with executive and supervisory functions are an apt example here. this year alone, the supervisory board, followed by the governing council, has made more than 1, 000 such fit and proper decisions. the ecb recognises these problems and is currently working on a solution that will hopefully soon be found. 4. conclusion a european supervisor for the largest banks in the euro area has now been in place for one year. from my perspective, this first year has been satisfactory and shown great promise. nevertheless, we still have some way to go before a genuine european supervisory regime is established. we will only reach this destination if, when harmonising supervisory standards and supervisory options, we strike a balance that makes sense from a supervisory and economic perspective and fits the structures and circumstances of the european banking market. this challenge can certainly be overcome, and it is with this in mind that i look forward to the ssm ’ s second year. thank you for your attention. bis central bankers ’ speeches