The idea of a “super regulator” didn’t live too long. Born in 1997, when the UK set up the Financial Services Authority (FSA), it died on 16 June 2010. It was killed by the global financial crisis.
The UK’s new chancellor of the exchequer, George Osborne, announced on Wednesday night that FSA would “cease to exist in its current form”. He had said as much when he was the shadow chancellor last year.
But let’s rewind, back to the days when this idea reigned powerful. Fostered by the Great Moderation, an era of low and stable consumer price inflation during the last two decades, this idea—that one regulator should supervise all banks, insurance companies, stock exchanges and financial markets—went hand in hand with another conceit: that central banks should focus solely on prices. The apparent clarity and simplicity of this framework, where no two regulators fought over turf and where one body could keep watch over all financial activity, enamoured economists and policymakers, including those in India.
Though they didn’t moot exact replicas of FSA, the Raghuram Rajan and Percy Mistry reports commissioned by the government made similar assumptions about financial regulation. They thought that monetary and regulatory powers— controlling interest rates and regulating financial markets, respectively—could be neatly separated. But something had to fall in between the cracks: Osborne notes that “no one was controlling levels of debt”. He’s now planning to hand back banking supervision to the UK central bank.
India avoided these cracks precisely because the Reserve Bank of India (RBI) has been able to keep an eye on financial stability, by effectively supervising banks and not having to target just price stability. That’s an approach Mint has strongly supported—long before it became fashionable to do so. But if the Rajan or Mistry committees had had their way on reform, the status quo would have changed, for the worse.
India’s financial sector surely needs change, but this is one area that needn’t. Now that this idea is being buried in the same country it was born in, it’s time India’s policymakers took a hard look at these old assumptions of financial reform. And though we still don’t know what India’s new Financial Stability and Development Council will look like, perhaps it’s time policymakers re-examine its very basis.
Should India mourn or rejoice the death of this idea? Tell us at firstname.lastname@example.org