all three elements of the social contract for banking need to be reformed. better regulation and supervision, including a macroprudential element. better arrangements for liquidity insurance, which the bank has tried to introduce alongside our international peers. and, my main topic today, a new regime for resolving bank distress. in particular, banks must structure and run themselves to permit orderly wind down. and they must invest to provide the authorities with the information they need to do so. this will not be easy. and it will not be cheap. together with higher capital and liquidity requirements – lower leverage and reduced maturity transformations – over time it may well mean a lower headline return on equity for some banks. but, of course, it would also entail lower risk for bank equity and bond investors, and surely it is risk - adjusted returns that matter. and it would also deliver lower risk to society more generally, which matters hugely. to be clear, we want banks and the financial sector more generally to thrive. the institution i come from believes in a market economy, in capitalism. the financial sector has played an enormous role in the development of modern economies. but a regime in which banks can thrive standing on your own feet would be a better market – for all of us.

options, benchmarking them against the comparable rupee borrowings. only if business and industry find the long - term foreign currency borrowing costs are lower, on a fully - hedged basis, than the comparable rupee borrowing costs, must they choose such borrowing options! i also regret to have to say that the current popular, but uninformed and totally untenable, refrain has been that forward cover for foreign exchange for longer term such as five years, or so, is not available ; what is available is out to one month, three months, six months and maximum one year and not beyond. but i would like to enlighten the discerning audience here that a long - term forward foreign exchange hedging solution can be easily customized by banks by recourse to what is known as rolling hedging strategy which simply involves simultaneously cancelling, and rebooking, a short - term forward exchange contract until the desired long - term maturity. incidentally, such simultaneous cancellation and rebooking of forward contracts for rollover is exempted from the rbi restrictions introduced on 15th december, 2011. of course, precisely the same strategy can be replicated in the exchange - traded foreign currency futures markets as well. contrary to the popular perception, this strategy is fairly simple and perfectly do - able and locks in the original starting spot exchange rate. what, in other words, this entirely unexceptionable, and highly desirable, strategy does is substitute volatility of the spot exchange rate with that of forward margins at each roll over date. it is empirically, and bis central bankers ’ speeches anecdotally, established that volatility of forward margins is far less onerous than that of the spot exchange rate. therefore, i would very strongly encourage business and industry to routinely avail of this hedging solution both to cover forex risk of long - term imports and longterm foreign currency borrowings. 7. i turn next to the other very popular foreign currency funding option, namely, foreign currency convertible bonds ( fccbs ). i must confess that i have been very intrigued by what i have read in business and finance newspapers. the sense that i got was that corporates use fccbs to raise long - term fixed rate foreign currency funds hoping that overseas investors will exercise the option embedded in fccbs and convert into equity! and precisely for this reason, it has been noticed that corporates do not make provision of domestic rupee and foreign currency resources