Banks, Policy and Risks

This paper assesses the sources of risk for Indian banks in the context of their history, structure, level of development, and policy environment and draws out implications for global and domestic policy. It contrasts scale and cross-border exposures for banks in emerging and advanced economies. The paper finds that the path of market development and regulatory evolution has helped reduce structural risks. Some aspects of the broad-pattern regulation, that have good incentives, would fill gaps in global regulatory reforms. Cyclical risks are rising but they are neither systemic nor of a very large magnitude and can be contained as long as policy makers moderate large fluctuations in asset prices. This is required since markets remain thin. International institutions should design instruments to mitigate contagion risks.