countries making an explicit determination of the mode of presence of foreign banks in the form of branch or subsidiary. what has been the global response? the crisis has shifted the bias towards domestic incorporation of foreign banks i. e. subsidiarisation. indeed, even pre - crisis, a number of jurisdictions mandated local incorporation of foreign banks. the subsidiary form of presence provides several comforts to regulators. first, a subsidiary has its own board of directors, including independent directors, which provides sufficient separation between the bank and its owners to ensure that the interests of domestic depositors are not compromised ; second, the clear delineation between the assets and liabilities of the bank and those of its parent affords greater leverage to the host country to ring fence the operations of the bank ; third, it is local economic conditions, rather than global perspectives, that drive the managerial decisions of subsidiaries ; and finally, it is easier to define the jurisdiction whose laws would apply to the subsidiary, thereby affording more effective control to regulators in a crisis situation. how have we, in india, responded? what is the policy in this regard in india? the road map for the presence of foreign banks in india put out by the reserve bank in 2005 allows foreign banks a choice – of coming in either as a branch or as a subsidiary – but not in both modes at the same time. even so, all foreign banks operating in india, currently 43 in number, have chosen to come in only in the branch mode. reflecting the lessons of the crisis, we deliberated in the reserve bank on whether in india too we should require mandatory incorporation of foreign banks. accordingly, the reserve bank put out a discussion paper in 2011 marshalling the merits and demerits of this initiative. the proposed framework leans towards the subsidiarization model for fresh entrants while nudging existing foreign banks with a balance sheet size above a threshold to bis central bankers ’ speeches convert from a branch model to a subsidiary model. it is expected that this will level the playing field for foreign banks and make the overall indian banking system more competitive and inclusive. in order to reach a final decision on this issue, we needed to clarify some taxation and legal issues. over the last two years, we have worked with the government to resolve the major taxation issues such as exception from stamp duty and capital gains tax on conversion from a branch to a subsidiary. we have yet to resolve a few legal issues which we hope can be done in the next

originated in advanced economies, emerging economies too were affected, indeed by much more than they had thought possible. the contagion brought home a simple message. in a rapidly globalizing world, national and international financial stability are interlinked. they are really two sides of the same coin. another important lesson we learnt is that financial markets are not self correcting. indeed in the pre - crisis years, a consensus was building around the view that modern risk management has increased the resilience of the financial sector, and that any excess would self correct in good time. the crisis proved that to be wrong. as we unlearnt that, we also learnt some new insights – that it is difficult to detect signs of pressure building up in the system in real time, that the financial sector can contain pressure for a longer time than we think possible, and as a consequence, when the inevitable implosion takes place, it can be quite disastrous, or even catastrophic. we learnt that it is difficult to predict the precise nature of the implosion. for example, in the pre - crisis years, even the few who sensed stress bis central bankers ’ speeches building up in the system, thought there would be a currency crisis ; in the event the implosion took the form of a financial sector crisis. there were other lessons too. that a collection of rational financial institutions does not necessarily make a rational financial sector. in other words, rational behaviour at the individual institutional level does not aggregate to collective rationality because of the fallacy of composition. financial institutions are notoriously prone to herd behaviour. they have a strong collective tendency to over expose themselves to the same type of risk during an upturn, and become overly risk averse during a downturn which can lead the whole system on a downward spiral of risk aversion, market seizure and instability. converting lessons into policies i have so far spoken about the broader lessons of the crisis that have enhanced our understanding of the financial sector, especially of the financial sector in a highly integrated world. a logical question would be how are we converting those lessons into practical policies and systemic improvements. this is what i now want to turn to. as you all know, the last four years have witnessed a vigorous debate internationally on how to foster a strong, stable and sustainable financial sector. there has already been significant agreement on some reforms while some important issues are still under debate. emerging economies and global reforms there have been some questions about why emerging economies too should