s s mundra : unintended consequences of new international supervisory framework – an emerging market perspective keynote address by mr s s mundra, deputy governor of the reserve bank of india, at the bank of france - reserve bank of india joint conference, paris, 20 july 2015. * * * assistance provided by dr. mridul saggar, shri ayyappan nair and shri sanjeev prakash is gratefully acknowledged. bonjour! 1. thank you ms. anne le lorier for your thoughts. it is my pleasure to deliver the key note address at this rbi - bdf joint conference being hosted by banque de france. let me begin by thanking you and the bdf for your warmth, friendliness and cordiality. banque de france is one of the oldest central banks in the world, set up in january 1800 by napoleon bonaparte with the objective of fostering renewed economic growth in the wake of the deep recession of the revolutionary period. as we sit down to deliberate upon the consequences of new international supervisory framework today, the milieu is strikingly similar to what existed more than two centuries ago. even today, the global economy continues its struggle out of retrenchment in output suffered during the financial crisis, proving right the adage “ more the things change, more they remain the same ”. even as the standard setting bodies ( ssbs ) have embarked upon various regulatory reforms to nurture the financial system out of quagmire that it had gone into before the outbreak of the crisis, we feel it is worthwhile to deliberate upon the unintended consequences of the new international regulatory / supervisory measures and chart out ways to counter the potential adverse fallouts. in my address today, i would like to present the views from the perspective of the emerging markets. i will begin by briefly tracing the genesis and context of the new supervisory framework and then, i will argue that there are limitations around how much can the regulatory regime be tightened, considering its cost on the economy. i would then close by offering my perspectives on the way ahead for limiting the unintended consequences of the new regulatory framework. but before i get to the subject proper, let me spend a couple of minutes in underlining the contrasting realties that the advanced and the emerging economies like india are faced with, in an otherwise “ interconnected ” world. 2. let us face it – it ’ s a multi - paced world. the ground realties in advanced economies (

management, governance, transparency and disclosure standards thereby enabling depositors, investors and counterparties to take a more informed decision. the intended consequences of the regulatory reform measures are all too well known to need repetition before this knowledgeable audience. bis central bankers ’ speeches unintended consequences of reforms 8. it is obvious that the new regulatory and supervisory framework that we are putting in place now have some unintended consequences that are likely to entail additional economic costs. an underlying tension around the trade - off between financial stability and economic growth persists despite impact assessment studies showing results to the contrary. i would like to touch upon some of these issues with a particular focus on the impact on emerging markets. i ) impact on gdp growth although, an ex - ante assessment of the economic impact of regulatory reforms is difficult ; studies conducted by various international agencies indicate different magnitudes of impact. the bcbs ( 2010 ) estimated that the basel iii capital and liquidity charges would reduce the steady state level of economic activity by 0. 6 per cent in total or 0. 08 per cent annually if spread over the eight year transition period. mag of bis in 2010 covered 17 industrialized countries to conclude that the lending spread would increase by 15 bps by 2015 in response to a 1 % increase in capital over 4 years. iif which took a view ( 2010 ) of europe, us & japan concluded that a 2 % increase by way of capital and liquidity would translate into increase in the lending spread by 132 basis points. another study ( 2012 – 19 ) by iif indicates a negative impact of 0. 40 %, 0. 30 % and 0. 10 % on the annual growth for europe, japan and the us respectively. while the differences in outcomes could be attributed to the differences in methodology, the direction of impact is nonetheless clear. the economies need to brace up to the fact that the new regulations would have an adverse impact on the economic growth. the combination of ( a ) increased capital requirements, particularly in the common equity element of tier 1 capital and capital buffers and ( b ) minimum liquidity requirements, are likely to reduce the return on equity for banks. it is unclear how different banks will address the situation but the options include : reduction of rates on retail deposits ; reduced staff compensation ; and increased margins on products. reduction in retail deposits rates can have two consequences. first, it can result in increased disintermediation. second, they can even affect the overall saving rate of