cases, the non - banking functions are carried out in the form of bank - subsidiaries. while from a market perspective, such a model may tend to constrain growth, this model offers an interesting perspective in the “ too - big - to - fail ” debate. i will be touching on this aspect later but internally within india there is support from certain quarters for a “ holding company ” structure. the other aspect of the “ too - big - to - fail ” debate, as succinctly dealt in the second fsa discussion paper on turner review relates to the core - banking versus trading activities of banks. we have a kind of hybrid model with banks being allowed to undertake proprietary trading as also sell insurance products. insurance, all forms of asset management, merchant banking and broking have to be undertaken through separate subsidiaries. issues with banks ’ involvement with private pools of capital are being sought to be addressed through appropriate capital requirements for such exposures and the reputation risk. as the financial system exists today, there are no major segments operating in an unregulated manner. the focus of regulation, though, is primarily on deposit taking institutions and systemically important non - deposit taking institutions. the model for regulation combines both direct entity regulation as well as overarching market regulation, where applicable. what such a framework enables is to provide a mechanism for containing market - based leverage, apart from a prudential oversight. in our case, it proved to be an effective combination since banks ’ exposure to such entities could be regulated through absolute exposure norms or even tweaking the risk weights applicable to such exposures. the problem, i realize, would be much more involved in predominantly market based financial systems where direct bank linkages are not very obvious but even in such regimes, as has been clearly demonstrated, the indirect linkages of banks with the unregulated entities can acquire systemic proportions. that is why it would be important to ensure that the markets too should not provide leverage capabilities to such entities beyond a limit. regulation of non - banking finance companies in india has gradually evolved from a focus on acceptance of deposits to acceptance of public funds in any form. with the growth of the financial system, it gradually came to be realized that even non - deposit taking entities, which were mostly in asset financing and loan business, could pose systemic risks on account of their interactions with the formal banking system and market based financing. moreover, many such entities in this lightly regulated segment were essentially indulging in

shyamala gopinath : philosophy and practice of financial sector regulation – space for unorthodoxy speech by ms shyamala gopinath, deputy governor of the reserve bank of india, at the fsa turner review conference, london, 2 november 2009. * * * it is a privilege to be invited to share my thoughts at this conference. the contribution of fsa in setting the terms of the debate in the aftermath of the crisis has been very significant and crucial. the clarity, conviction and clinical sharpness of arguments one encounters while reading the turner review ask of us a very fundamental question – how could the world not have expected this crisis? how could the policy regimes world over, barring a few exceptions, failed to even recognize what now seems to be obvious? perhaps it had to do with the force and might of the reigning doctrinaire regarding financial markets. post crisis, there was a natural effort to understand and assess the nature of various inexactitudes which had earlier been missed and incorporate these into the policy frameworks. phrases such as systemic risk oversight and macro - prudential regulation have become the new touchstones for a repaired regulatory framework. there is a renewed effort to redefine the regulatory philosophy and principles around a different mould. the danger is in this organic mould continuing to derive its legitimacy from the pre - crisis framework. hopefully, a crisis of such magnitude would not fail to provide the necessary impetus and support for departure of a more fundamental nature. i realize the huge challenge for this, given the sheer weight of the academic work of nearly four decades in the field of finance and the entrenched orthodoxy around it. to bring out any paradigm shift would require an equally weighty intellectual case for an alternative model. yes, this crisis could provide a trigger for that process but as history shows us, paradigm shifts of such magnitude do not follow a set path. it would however be imprudent to ignore the basic lesson of the crisis, which is that the existing framework has severe pitfalls. as with any stable ecosystem, what is needed is a space for heterogeneity – the space for unorthodoxy. as identified by the un president ’ s commission 1, “ strengthening the diversity of ideas ” would be a key principle in addressing the issues underlying the crisis. india has had the fortune of having a relatively stable financial system through the past few major crises affecting the world – the asian crisis, the dotcom