Financial stability: Underlining context

Abstract

The paper argues that context is important in discussions of financial stability. It explores weaknesses in domestic and international reforms and ways of overcoming them, based on mitigating the fundamental failures finance is subject to. Relevant market failures need to be taken into account even in the design of monetary policy regimes such as inflation targeting. Rather than blind following of international prescriptions better alignment to domestic structure and needs whether in monetary policy, restructuring financial regulators, capital adequacy criteria and bank balance sheets is required. It argues marginal changes in India's financial regulatory structure will suffice, brings out a possible trade-off between capital adequacy and leverage caps following from special features of Indian regulations some of which need to be preserved, gives the history behind the rise in non-performing assets, and points to technological changes that may make financial inclusion more compatible with financial stability. The possibility of coordinating on simple leverage reducing measures with good incentive possibilities should be taken up in global dialogue, and regional alternatives supported as a corrective for asymmetries in bargaining power