the boundary itself varies for different regulatory clusters – the focus of a banking regulator would be entirely different from that of a securities regulator, from that of an insurance regulator etc. and all of which may be different from the focus required for regulation of markets. if the entire financial system is looked as a single ecosystem, then inspite of the inherent differences between the various market players, it should be possible to identify the macro drivers of the whole system, the network flows. using this perspective, it becomes evident that just focusing only on the perimeter would be missing an integral component that may need regulatory attention. current crisis – perimeter issues as mentioned earlier, the origins of the current crisis lay within the heavily regulated institutions. the impact of the crisis, however, was exacerbated by dynamic interconnectedness between entities across regulated, unregulated and lightly regulated sectors. as some of the recent reports have pointed out, the two concerns relating to “ outside perimeter ” entities that contributed to the current crisis were : ( i ) maturity transformation being undertaken by these entities, which traditionally used to be a function of banks ; and ( ii ) the systemic leverage resulting out of the hugely leveraged positions of these entities, either through direct borrowing from banks or through the funding markets. the central issue in both the above is the interaction between the unregulated entities and the formal regulated funding channels, essentially banks and money markets. the maturity transformation primarily entailed heavy reliance by these entities on short term funds for funding long term assets. the prudential framework for banks placed a significant reliance on management of these alm mismatches but the unregulated entities, such as sivs didn ’ t have any oversight and as a business model, ran huge alm mismatches. the model just broke down when the funding markets started seizing. many of the entities, like hedge funds, were consciously left unregulated because of the fact that they managed only private capital pools where the issue of investor protection was not relevant. however, what was not appreciated was the systemic risks these entities were posing on account of the huge leverage positions these were carrying through either the formal banking channel or the funding markets, particularly repo markets. the seamless efficiency thought to be provided by close integration of the underlying asset markets and repo markets proved to be just a chimera. the disaggregated exposures of the regulated clusters at any point of time to the unregulated entities

k c chakrabarty : banking technology beyond cbs – issues and way forward address by dr k c chakrabarty, deputy governor of the reserve bank of india, at the executive roundtable organised by the institute for development & research in banking technology ( idrbt ), kolkata, 2 july 2010. assistance provided by dr himanshu joshi, smt pallavi chavan, shri m k mall and smt nikhila koduri in preparation of this address is gratefully acknowledged. * * * 1. mr sambamurthy, director idrbt, shri j p dua, cmd, allahabad bank, mr bhaskar sen, cmd, united bank of india, and other distinguished guests, ladies and gentlemen. i am indeed very happy to be in your midst today for the it conclave being organised by idrbt and share my thoughts with you on banking technology beyond core banking solution ( cbs ). 2. let me begin by asking, what is the purpose of technology? all of us would agree that technology has no longer remained just a means for automating processes. it has revolutionised every industry in the world by rendering faster and cost effective delivery of products and services to customers, who in the normal course could not have afforded the same, and at the same time producers of goods and services would remain viable and profitable. technology is the surest and most appropriate way of bringing inclusion in respect of any product and / or service. 3. as regards the banking sector, technology has completely changed the nature and pace of delivery of banking services world over. not only has it improved the speed but also the quality of the services delivered, and has at the same time ensured tremendous reduction in transaction costs for the banks as well as customers and made it possible to provide customer service through various delivery channels. 4. in a developing country like ours, technological advancement enables a broader and inclusive banking sector and in the process, is a key driver for the sustained and inclusive growth of the economy. having realised the close association between technology, inclusion and economic growth, the reserve bank of india with the help of institutions, such as idrbt on the one hand, and the banking sector on the other, have been actively involved in utilising technology for the development of the indian banking sector. idbrt, let me note here, has been an important facilitator in the adoption and development of technology in the indian banking sector. 5