##os ) tripled between 2001 and 2007 with particularly rapid growth of overnight repos. the financial firms were also excessively leveraged, with the leverage for many commercial and investment banks significantly going up from 2003 onwards. high leverage could be built up by financial institutions while being compliant with bis central bankers ’ speeches the capital adequacy requirement, pointing to serious deficiencies in risk measurement methodologies and models. for example, two large swiss banks, which were among the best capitalised, also came under stress during the crisis. lack of transparency in the otc markets was another major factor which led to build up of risks in the system. information about the position building was not available even with the regulators, leave alone the counterparties. the insurance giant, aig wrote huge credit protection ( to the tune of usd 400 billion ) collecting huge premium in return, believing that it would not be required to settle claims of protection buyers. the quantum of protection sold by aig was not known to the market participants due to which they went on buying credit protection from aig. when the system came under severe stress and aig was required to post higher margins, it found itself in deep trouble and had to be eventually bailed out by the federal reserve. burgeoning under / unregulated shadow banking system added to the forces which exacerbated the crisis. in the run up to the crisis, there was rapid growth in the shadow banking system. in the us, at the peak of credit boom, financing from this sector was much larger than that from the regulated banks. in many advanced economies including the us, the shadow banking system is still larger than the regular banking system. the hands - off approach to the shadow banking system from a regulatory perspective was based on a few assumptions and beliefs. one, the touching faith in market discipline and self regulation, – it was believed that shadow banks would be constrained by market discipline i. e. discipline imposed by banks and other market participants, and also by their own self regulation. two, it was believed that only banks were important from the financial stability perspective as they held deposits and were at the core of the payment and settlement systems. three, it was assumed that if banks ’ exposure to shadow banking system was regulated, it was easy to contain risks in the shadow banking system. four, it was also believed that regulation of shadow banking system would be very costly, reduce innovation and impede risk transfer. the compensation structure in financial institutions was

. the notification issued for compulsory amalgamation under section 45 of the act is also required to be placed before the two houses of parliament. 10. most of the amalgamations of the private sector banks in the post - nationalisation era were induced by the reserve bank in the larger public interest, under section 45 of the act. in all these cases, the weak or financially distressed banks were amalgamated with the healthy public sector banks. the over - riding principles governing the consideration of the amalgamation proposals were : ( a ) protection of the depositors ’ interest ; ( b ) expeditious resolution ; and ( c ) avoidance of regulatory forbearance. the amalgamations of the erstwhile global trust bank and the erstwhile united western bank with public sector banks are recent examples. even in such cases, commercial interests of the transferee bank and the impact of the amalgamation on its profitability were duly considered. the mergers of many weak private sector banks with the healthy ones, have brought us to a creditable stage today when not a single private sector bank in the country has the capital adequacy ratio of less than the minimum regulatory requirement of nine per cent. this now paves the way for effective implementation of the prompt corrective action ( pca ) framework by the rbi, which could not be invoked earlier when the banking system was populated by many weak banks, without creating confidentiality issues. ( c ) merger of public sector banks 11. the statutory framework for the amalgamation of the public sector banks, viz., the nationalised banks, state bank of india and its subsidiary banks, is, however, quite different since the foregoing provisions of the b r act do not apply to them. as regards the nationalised banks, the banking companies ( acquisition and transfer of undertakings ) act, 1970 and 1980, or the bank nationalisation acts authorise the central government, under section 9 ( 1 ) ( c ), to prepare or make, after consultation with the reserve bank, a scheme, inter alia, for transfer of undertaking of a “ corresponding new bank ” ( i. e., a nationalised bank ) to another “ corresponding new bank ” or for transfer of whole or part of any banking institution to a corresponding new bank. unlike the sanction of the schemes by the reserve bank under section 44 - a of the b r act, the scheme framed by the central government is required, under section 9 ( 6 ) of the bank nationalisation acts, to