In a bid to prevent bank failures in the future, a high-powered panel has proposed the setting up of a Financial Resolution Authority (FRA) to deal with any exigency in a financial institution and even allow "temporary public ownership" of troubled banks.
The committee under Financial Stability and Development Council, chaired by RBI deputy governor Anand Sinha, said the experience and expertise of Deposit Insurance and Credit Guarantee Corporation (DICGC) could be transformed into the proposed FRA to deal with failures of banks.
"The FRA as a separate entity can be set up by either transforming the present DICGC into FRA or by setting up a new authority namely FRA that will subsume DICGC," said the report submitted to RBI governor Raghuram Rajan.
After the Lehman crisis, many financial institutions had to resort to government support and bailouts at the cost of taxpayers' money. Authorities in many countries amended laws to protect taxpayers from the exposure to losses and containing the negative effects of posed by "too-big-to- fail" institutions.
"The FRA would be responsible for the resolution of all financial institutions, regardless of size or of sector. This FRA should be institutionally independent and an equal player with other safety net agencies," the report said, advocating that the mandate of the FRA will be to resolve failed financial institutions and market intermediaries along with providing deposit insurance and protection to insurance policy holders and investors within certain limits.
Outlining the need for a prompt corrective action to avert a bank failure, the committee said the government may, on recommendation of FSDC, be empowered to place a financial institutions under "temporary public ownership" to ensure to protect public interest.The panel recommended setting up of a "resolution" fund, which would be different from a deposit insurance and investor protection funds. The FRA may raise the fund through bonds, which could be guaranteed by the government.
The panel also advocated setting up of crisis management groups and forging of cross-border cooperation agreements to handle cases of a global systemically important financial institution.