between home and host country supervisors. leverage ratio : excessive leverage particularly in off balance sheet transactions could go unnoticed because of the emphasis on risk weighted capital adequacy requirement. assets created through leverage may not appear risky during a boom phase, and bubbles could be fuelled by growing leverage without the need for higher capital. recognising the risks in over leverage and in view of the fact that risk models cannot capture risks with absolute precision, the risk based capital adequacy is proposed to be underpinned by an internationally harmonized leverage ratio. the design of a leverage ratio requires a definition of capital ( the capital measure ) and a definition of total exposure ( the total exposure or assets measure ). the specification of both the numerator and the denominator is a complex issue and it will be a challenge to arrive at an internationally homogeneous definition. the capital measure should ideally be the pure loss absorbing component. the exposure must include all onbalance sheet items, with some arguing for exclusion of cash and cash like instruments. for off balance sheet items, there could be several options based on conversion factors, notional principal values etc. currently all options are being examined. in normal times it may not be binding – the acid test is whether a bank otherwise complying with basel ii will be limited by this ratio in good times, so that it does not leverage excessively and result in shortage of capital in bad times. it would put a floor under the build up of excessive leverage. regulation of otc derivatives market : there is a move to transfer all standardized otc derivatives particularly credit default swaps onto trading platforms / exchanges or a clearing house. however the specific proposals being discussed in various countries do envisage continuance of non - standardised otc contracts albeit with a stricter bilateral collateralisation requirement and higher capital charge. also, the end - users that use derivatives to hedge commercial risks are proposed to be exempt from the clearing requirement. this was one of the major concerns expressed against the move to transfer all otc transactions onto exchanges that it will increase the cost of hedging for the real sector. the issues going forward would be : ( i ) balance the trade - off between bringing all major market participants onto exchanges and giving relief for hedging by end - users ; ( ii ) identifying the specific contracts that can be traded on the exchange ( iii ) strengthening prudential framework for residual non - standardised otc contracts. it would be imperative for

from recession or slowdown ), “ rescue ” ( of failing or vulnerable banks and financial institutions ), “ retreat ” ( or exit at some stage from the large policy stimulus delivered so far ), “ regulation ” ( to strengthen crisis prevention ) and “ restructuring ” ( particularly international architecture to preserve and promote financial stability in a globalised world ). today i will focus on one of the five “ rs ”, i. e., “ regulation ” as a catalyst to minimize the probability and intensity of systemic crises in future, and also share with you the indian experience and approach to regulation. regulation and crisis the high impact and unprecedented complexity of the crisis has opened several issues on the regulation of financial entities and markets to vigorous debate and diverse perspectives. in particular, “ soft touch ” regulation, widely perceived as a key factor that allowed excesses to grow in financial systems is now considered ineffective and one that needs to be approached with considerable caution. in the post - crisis scenario, a counter viewpoint is emerging, which though not in favour of excessive regulation does emphasise that regulation needs to be more encompassing and should include a macro perspective. going forward, regulation has to balance the focus on systemic aspects with promoting efficient and competitive financial systems and healthy institutions to support growth and economic development. in the pre - crisis framework for financial stability – the three pillars of basel - ii, namely capital adequacy, supervisory review and market discipline were generally seen as adequate and appropriate. however, the crisis revealed that many international banks needed higher and better quality capital, because there was pervasive underestimation of risk, which created the impression that banking systems around the world were adequately capitalized before the crisis. the supervisory review process for assessing capital adequacy, and the overall supervisory frameworks for early identification of vulnerabilities also failed because of complex interconnectedness between financial institutions and markets which was difficult to understand without robust macro - prudential supervision. the disclosures envisaged in pillar 3 also proved to be insufficient in the light of the complexity of financial instruments and the information asymmetries generated. it is not surprising therefore that in the post - crisis period, the emerging global consensus is increasingly supporting regulatory actions that will strengthen prudential regulation both at the macro and micro level that will need to be integrated appropriately into the national regulatory regimes over time. today, i will touch upon some important international initiatives underway that aim to develop a macro prudential orientation towards regulation