“The Indian banking system saved us from 10 years of turmoil in the Global market, the Statutory Liquidity Ratio (SLR) was a buffer which went unnoticed and assured the robustness of the country’s banking system. Also the Capital Adequacy Ratio (CAR) which was much higher than the globally prescribed ratio helped in this regard” said Prof Charan Singh the Chief Economist of the Foundation for Economic growth and Welfare (EGROW Foundation). He was addressing a panel discussion on ‘World Economy and Global Financial Stability’ organised at New Delhi’s India International Center recently.
Prof Singh highlighted the magnitude of the 2008 financial crisis “As many as 24 countries experienced banking crisis following the collapse of Lehman brothers in 2008 even today in majority of these countries the output remains at 85% of the pre crisis levels that is how severe the crisis was.”
He felt that the financial system the world over is now safer compared to 2008 “Regulation and supervision of large and interconnected Institutions were brought in, central banks around the world including India have started stress testing, shadow banks were not really supervised earlier on but in the last 10 years these have come under supervision, though these are called shadow bank’s their volumes are sometimes very large especially in the US where they could be almost the size of regulated banks. The credit rating agencies earlier on were pretty much taken at face value this is not the case now. All these developments have made the system today is a little safer compared to 2008.”
Prof Singh was of the opinion that the supervisory role of the Central bank is an important determinant of economic stability “The banking system regulations can be decided by Basel norms and multilateral institutions but supervision is always done at the local level branches are inspected and banks are examined at the local level this supervisory role is crutial for stability.”
He identified potential sources of instability “Some countries have taken supervision roll out of the control of the central banks this is something new and has not yet been put to test it remains to be seen what would be the outcome of this. Balance sheets of the central banks of UK, US and Europe are all based on the unconventional monetary policy that was adopted during the last 10 years, it is to be seen how the balance sheets of central banks come back shrink and go back to their pre crisis levels. During the last decade monetary policy has played a more important role compared to fiscal policy, how is this going to unwind and where is it going to lead us is a matter of concern, economic theory has no precedence here. It is tough to say how the trade war between the US and China would affect the exports and imports of the emerging countries where exports and imports play a major role for the Balance of payments and current account.”
Prof Singh concluded by warning that the regulations and supervision which have been put in place during the last ten years must not be dismantled under any pretext if we are to avoid a 2008 like crisis.