Need to strengthen financial regulation: YV Reddy

Former Reserve Bank of India governor YV Reddy said that a lot more work needed to be done to strengthen the financial sector regulation at the global level although the sector doesn't want it, and that its scope should extend to non-banking companies.

"In the US, the govern-ment issued bonds to bailout the financial sector. Now the financial sector is using the bailout money to buy the government paper. This is the kind of anomaly that is taking place," Reddy said.

He was speaking at the inaugural of a five-day workshop on financial econometrics at the Univer-sity of Hyderabad, in which research scholars as well as officials from the Securities and Exchange Board of India and finance ministry participated.

 

He characterised the cur-rent situation in the global economy as a divergence, pointing to the threat of inflation in some countries and deflation in others, recovery in the financial sector compared to rising unemployment, and the disconnect between develop-ed and emerging economies.

Reddy also blamed the incentive structure of '2 & 20', in which fund managers get 2 per cent of the funds being managed and 20 per cent of the profits earned as bonus. "The definition of systemic risk has to change because the technology has changed," he said.

He listed five factors as having caused the global financial crisis: macroeconomic imbalances with huge surpluses in China, Japan etc and big deficits in the US; lack of focus in monetary policies of advanced countries; excessive financialisation without linkages to real sector; lack of financial sector regulation, with market participants taking excessive risk; and premature globalisation of the financial markets, while regulation remained national.

Counter-cyclical policies, micro- and macro-prudential norms to contain leverage and liquidity, higher capital requirements -- all had a place in the financial regulation, Reddy said. He flagged the backward-looking nature of economic models and the missing variables on behavioural and institutional aspects as two weak links.

Reddy also recommended five books to the students to help them understand the global financial crisis better. These are Manias, Panics and Crashes by CP Kindleberger; Traders, Guns & Money by Satyajit Das; From Asian to Global Financial Crisis by Andrew Sheng; Fault Lines by Raghuram Rajan; and Reddy's own new book to be published next month.

School of Economics

The University of Hyderabad’s department of Economics would be upgraded to School of Economics. This would mean a lot more facilities, activities and academic freedom. The Economics department has 19 faculty members, apart from former RBI governor Y V Reddy as an Emeritus Professor.