, pre - crisis, constituted almost 75 per cent of the total capital held by banks in developed countries. these were essentially capital market instruments with some optionalities attached to them. income composition 14. the overall balance sheet transformation was clearly evident in the increased reliance on nontraditional business activities that generated fee income, trading revenue, and other types of noninterest income. a significant proportion of bank revenues came from such activities and there was a view that this diversification of income streams was healthier for bank profits. consequently, there was conscious shift towards larger proprietary books and greater investment in “ owning, investing in and sponsoring ” hedge funds and private equity ventures. banks were effectively working as leverage - providing conduits for hedge funds and like entities which ran huge positions across all markets. 15. there was an entire set of market microstructure which facilitated the above transition – the rating agencies, accounting standards, legal documentation practices. the role of rating agencies was particularly critical as they, blessed by the regulators, provided the requisite comfort and legitimacy to riskier instruments and enabled deployment of a substantial chunk of institutional funds into such securities. the accounting standards, while aiming at reflecting the “ true and fair ” picture of the balance sheets, made the balance sheets much more procyclical and market skewed. the legal documentation, particularly related to bilateral contracts on the otc markets, by reinforcing the collateralization discipline, also exposed the entities to contagion effect from extraneous developments. additional margin calls and liquidation of securities kept as collaterals added to the negative feedback loop. 16. the end result of the banks ’ increasing reliance on capital markets and capital market intermediaries was an explosion in the total size of financial markets. based on the leverage provided by bank balance sheets, the market volumes and liquidity increased tremendously. this trend also put the banks at the centre of the entire financial market. a slightest problem with these banks and the entire financial system could come unstuck – this is what precisely happened during the crisis. 17. the next section deals with the numerous implicit support systems provided by banks for a well - functioning capital market. capital markets ’ linkage with banks 18. market based financial systems were supposed to have reduced the dependence of the financial system on banks. however, with increased market - orientation of bank balance sheets, banks emerged as the proverbial guerilla in the room. their presence was everywhere, implicit or explicit – as

a wide spectrum of stakeholders. this corroborates the importance and complexities of the issues around ownership, control, and corporate structure of private banks. it is precisely for these reasons, we have decided that some of the recommendations of the iw g need wider stakeholder consultation, deeper examination from various angles, including legalities, and may also require engagement with various other agencies and regulators. let me now discuss on the important issue in current milieu – corporate governance. importance of governance in financial institutions 12. a sound, efficient and robust financial intermediation structure facilitates optimal allocation of financial resources in the economy. for this, the trust of all stakeholders, especially of depositors in case of banks, is a pre - requisite. while legal and regulatory architectures provide a broad framework to maintain this trust, the trust needs to be grounded in good governance and ethical conduct of the institutions and their functionaries. the banks tend to be well regulated and are intensively supervised but any erosion of public trust in financial institutions cannot be countered with regulatory prescriptions or supervisory rigours alone. therefore, to mitigate the ‘ risk of failure ’ emanating from governance issues, the standards expected of banks are always higher than those from other entities. the same principle would apply to other regulated entities engaged in financial intermediation, albeit in varying degrees. 13. for ensuring sound corporate governance, we need to be mindful of two key challenges. first, dominant shareholders exercising relatively more control may not optimise the interest of all stakeholders. second, a self - serving management may have perverse incentives to take advantage of the diversified, diffused, or passive nature of other stakeholders. while separation of ownership from control must be a dominant response to address the first challenge, in order 3 / 6 bis central bankers'speeches to address the second challenge, it is important to ensure that the incentives of the management are aligned with the interest of depositors and other stakeholders. 14. in the domestic context, growing size and complexity of india ’ s financial system highlights the need to strengthen the governance standards in banks by increasing scrutiny of the role of promoter ( s ), major shareholder ( s ) and senior management vis - a - vis the role of the board. to this end, reserve bank issued a discussion paper on ‘ governance in commercial banks in india ’ in june 2020, the intention of this discussion paper was to enhance governance standards in banks and to align the current regulatory framework with global best practices albeit