Chapter 1. Regulators of Banks and Financial Institutions 1.1 History of Financial Regulation Organizations that conduct financial transactions in the form of loans, deposits or even simple exchange of money (in cash or electronic form) are called financial institutions. Financial regulation is basically putting constraints and restrictions on such institutions by Govt bodies (RBI, SEBI etc). Benefits of Regulation ¥ Market stability and confidence v Protection of consumers and investors (viz. depositors) v Reduction of financial frauds and crimes v Reduction of systematic risk (to be discussed later) Costs of Regulation would include legislative costs, administrative costs, company costs for compliance, cost of supervising, capital requirements (by firms to adhere to regulations). Banking Regulation Act, 1949 was first in the direction of regulation — it gives RBI the power to license banks, have regulation over shareholding, voting rights of shareholders, supervise boards and management, watch over the operations of the banks, issue directives for public interest and even impose fines on banks. BRA actually supplements the Companies Act 1956 (the new one being Companies Act, 2013). Companies Act regulates incorporation of a company, responsibilities of a company, directors, dissolution of a company. Indian Capital Markets are regulated and monitored by three entities viz. Finance Ministry, the Reserve Bank of India (RBI) and The Securities & Exchange Board of India (SEBI). By Capital Market we mean that part of the financial system which concerns with raising capital by means of issuance of shares, bonds, and some other type of long-term instruments. SEBI was established under SCRA act, 1956. Depositories Act, 1996 established depositories (holds funds on behalf of shareholders, bond holders etc., like a trustee of the fund) like NSDL and CDSL to curb irregularities in the capital market and to pave a way for a proper conduct of the financial markets via free transferability of securities in a speedy and accurate manner. H. Rajan and Shah proposal suggested creation of a separate regulator for top 10 conglomerates that would have one-stop approval for all innovators.Chapter 1. Regulators of Banks and Financial Institutions 1.1 History of Financial Regulation Organizations that conduct financial transactions in the form of loans, deposits or even simple exchange of money (in cash or electronic form) are called financial institutions. Financial regulation is basically putting constraints and restrictions on such institutions by Govt bodies (RBI, SEBI etc). Benefits of Regulation ¥ Market stability and confidence v Protection of consumers and investors (viz. depositors) v Reduction of financial frauds and crimes v Reduction of systematic risk (to be discussed later) Costs of Regulation would include legislative costs, administrative costs, company costs for compliance, cost of supervising, capital requirements (by firms to adhere to regulations). Banking Regulation Act, 1949 was first in the direction of regulation — it gives RBI the power to license banks, have regulation over shareholding, voting rights of shareholders, supervise boards and management, watch over the operations of the banks, issue directives for public interest and even impose fines on banks. BRA actually supplements the Companies Act 1956 (the new one being Companies Act, 2013). Companies Act regulates incorporation of a company, responsibilities of a company, directors, dissolution of a company. Indian Capital Markets are regulated and monitored by three entities viz. Finance Ministry, the Reserve Bank of India (RBI) and The Securities & Exchange Board of India (SEBI). By Capital Market we mean that part of the financial system which concerns with raising capital by means of issuance of shares, bonds, and some other type of long-term instruments. SEBI was established under SCRA act, 1956. DepositoriesAct, 1996 established depositories (holds funds on behalf of shareholders, bond holders etc., like a trustee of the fund) like NSDL and CDSL to curb irregularities in the capital market and to pave a way for a proper conduct of the financial markets via free transferability of securities in a speedy and accurate manner. H. Rajan and Shah proposal suggested creation of a separate regulator for top 10 conglomerates that would have one-stop approval for all Innovators. HLCC or High Level Coordination Committee on Financial and Capital Markets is representation of major regulators, chaired by the governor of RBI and has top officials of SEBI, IRDA and the pension regulatory bodies besides Union Finance ministry. The Financial Sector Legislative Reforms Commission (FSLRC) Is a body which was started by GOI, to reassess the legal-institutional architecture of the country’s financial sector. It has issued suggestions for regulators in terms of independence and accountability and suggested the concept of Super Regulator or the unified regulator. It also proposed regulators to carry out Micro-Prudential Regulation such that interests of the small customers are protected by issuance of same set of capital requirements by all regulators for certain type of financial institutions. 1.2 Reserve Bank of India History RBI is the chief monetary institution in India, also known as the Central bank for the Govt. Formed on April 1, 1935 according to the RBI Act, 1934, the first of the head Office of RBI was in Calcutta and was in Mumbai by 1937. Thus RBI is a statutory body. (Any body created by the act of the parliament is a statutory body). Initially privately owned, after 1949, the RBI has been fully owned by the Govt. Urijit Patel is the current governor (24th) of RBI serving since September 2016.