with systemically important banks and financial institutions in the international context. this involves a host of tasks : development of indicators of systemic risk, identification of systemically important financial institutions ( sifis ), differential systems for sifis by way of capital and liquidity surcharge and enhanced supervision, improving the capacity to resolve sifis without recourse to taxpayer money, reducing the probability and impact of a sifi failure, strengthening the core financial market infrastructure to reduce contagion risks if failure occurs and improving the oversight of sifis. 26. even if we accept that sifis should be subject to some additional regulation on top of the base level regulations, there are several issues that need to be addressed in fleshing out the necessary framework. the first issue is of evolving objective criteria for identifying systemically important institutions. second, how do we apply the criteria since the systemic importance of an institution is likely to be time - varying and state - dependent as per the economic environment? finally, drawing a sharp distinction between a sifi and a non - sifi requires considerable judgement and has a moral hazard downside. containment of systemic risk : indian perspective 27. the framework for identification of sifis that will evolve is expected to be applicable uniformly to all countries. india will also need to adopt that. the identification under the bcbs framework will happen from an international perspective, and we need to do a supplementary exercise to identify sifis in the domestic context even if they are not in the international list. in either case, if the proposal for levying systemic risk capital and liquidity charge is eventually agreed upon, a few indian banks may be called upon to maintain additional capital and liquidity charges. 28. then there is the issue of resolution of sifis in the event of failure. we also need to promote structures which make such resolutions smooth and orderly. the recent reserve bank initiative to constitute a working group to examine the suitability of financial holding companies in india is a step in this direction. rbi has also been constantly upgrading the regulatory and supervisory framework for financial conglomerates. efforts are also under way to bring a larger number of financial transactions within the ambit of multilateral settlement through central counterparties. vi. regulation of compensation practices of banks : bcbs proposals 29. it is now widely acknowledged that the flawed incentive framework underlying the compensation structures in the advanced country banking sectors fuelled the crisis. the performance - based compensation of bank executives is typically justified on the

, the rbi becomes a market participant for this purpose. in these situations, sometimes, the rbi may have a view that may differ from those of other participants. while market participants may have a purely pecuniary motive, the rbi upholds policy priorities centred around securing and preserving macroeconomic and financial stability. in this context, it is worthwhile to pay heed to governor's recent assurance on liquidity : " the reserve bank remains agile and watchful, continuously monitoring the liquidity situation and is ready to undertake liquidity operations on either side so that overall liquidity remains adequate to meet the requirements of the productive sectors of the economy. " furthermore, on the forex market, governor provided prescient forward guidance : " the terminal interest rate that the us fed is targeting is anybody's guess, but it cannot be the case that it will tighten monetary policy endlessly. when the tightening is over, the tide will surely turn. capital flows to india will resume and external financing conditions will ease. in this complex world in which both push and pull factors are at play, the inr, which is market - determined, should be allowed to find its level and that is what we have been striving to ensure ". in normal times, financial markets and the central bank can each pursue their own risk management and goal optimisation strategies. in extraordinary times such as now, when the world is hostage to super tornadoes and no country is immune, it pays for both to share a common set of expectations. after all, macroeconomic and financial stability involves shared benefits and for both, high stakes. thank you. 1 john forbes nash jr. ( june 13, 1928 – may 23, 2015 ) was an american mathematician who made fundamental contributions to game theory, geometry, and partial differential equations. he was awarded the 1994 nobel prize in economics. in 1959, nash began showing clear signs of mental illness, and spent several years being treated for schizophrenia. his struggles with his illness became the basis for sylvia nasar's biographical book a beautiful mind in 1998, as well as a film of the same name directed by ron howard, in which nash was portrayed by actor russell crowe. 2 milton friedman, capitalism and freedom, 3rd edition ( chicago : university of chicago press, 2002 ), 15 ; milton friedman, free to choose : a personal statement, 3rd edition ( new york : harcourt, 1990 ), 20, 145. 3 " governor's statement ", october 9