Research Team: Westchester Group
Commencement: September 2008
Completion: November 2009
The Asian crisis of 1997 emphasised the need for greater information exchange and international co-operation in financial supervision and surveillance. The recent financial crisis further exposed the weaknesses in the regulatory and supervisory mechanisms of financial systems across the globe. In 1999, finance ministers and central bank governors of G-7 nations convened a Financial Stability Forum (FSF) that came up with 12 key standards for sound financial systems. Following the 2009 G20 London summit, the FSF was succeeded by the Financial Stability Board, which included members of the G20 who were earlier not members of FSF. The standards proposed by FSF serve as an international benchmark for good practices that underlie a sound financial system. The major elements in this effort are strengthening the prudential oversight of capital, liquidity and risk management, enhancing transparency and valuation systems, changing the role and uses of credit ratings, strengthening the authorities’ responsiveness to risks, and robust arrangements for dealing with stress in the financial system. Against this backdrop, this study involved a comprehensive assessment of the Indian financial sector covering banking, securities and insurance sectors. Such an assessment serves as an indicator of the financial system’s stability and its resilience to macroeconomic crises and cross-border contagion. It also helps identify early signs of economic or social crisis (if any) hidden behind impressive macroeconomic numbers. The objective is to provide investors, policy makers, and other stakeholders with a perspective on the material factors affecting country risk, such as the degree of a country’s conformity with best practice standards. The study was completed in November 2009. It is hoped that this assessment will give a clear picture of the health of the Indian financial system and help in attracting significant levels of domestic and foreign private investment.