RD News 22Feb12

• Reserve Bank of India: Issues Guidelines on Basel III Liquidity Standards
• RBI “fully committed” to Basel III. 
• Guidelines indicate how the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) will be made operational and monitored, with Indian banks needing to comply from mid-2012, before the Basel standards come into force in 2015 and 2018 respectively.
• The Basel standards will supersede India’s existing liquidity regime of a cash reserve ratio and statutory liquidity ratio.

• EU: Adopts Regulation on Short-Selling and Ban on Naked CDS
• Rule gives regulators option to ban so-called ‘naked’ short selling and credit default swaps (CDS) on sovereign debt.
• Text argues that buying CDS without having a long position in the underlying debt or asset is economically equivalent to taking a short position on that underlying instrument, warranting the coverage of CDS in the rule.
• Authorities will have powers of intervention “in the case of adverse developments which constitute a serious threat to financial stability or to market confidence in a Member State of the Union”.
• The European Securities and Markets Authority (ESMA) will be given additional powers to override competent authorities if it is deemed that they “have not taken sufficient measures to address the threat”.
• The regulation is set to come into force by 1 November 2012.

• K C Chakrabarty: Indian banking sector – towards the next orbit
• A combination of strong regulation and supervision and a will to evolve policies that lean against the wind helped insulate the Indian financial system from the crisis. It helped too that the Indian banks were not very sophisticated and excessively leveraged.
• However, in a world where financial systems recognize no boundaries and the fortunes of nations are intertwined, no nation can consider itself an island and remain immune to the changes in the tides of the world economy for a prolonged period.
• While none of the Indian banks feature in this list of 29 G-SIBs, the BCBS and FSB are already working towards laying down a criterion for identification of domestic SIBs which would need to be subjected to additional capital and liquidity requirements on the lines of that applicable to the G-SIBs.

• BIS: Inflation Dynamics in the Presence of Informal Labour Markets
• Consider the effects of informal labour markets on the dynamics of inflation and on the transmission of aggregate demand and supply shocks.
• Results show that the informal economy generates a "buffer" effect that diminishes the pressure of demand shocks on inflation.
• Result implies that, in economies with large informal labour markets, changes in interest rates are more effective in stimulating real output and there is less impact on inflation.
• Furthermore, the model produces cyclical flows from informal to formal employment, consistent with the data.

• Usha Thorat: Recommends Tier I capital of 12% for Non-Banking Financial Companies
• The NBFC sector has been increasing its assets compared to the banking sector. Quite a lot of funds from the banking sector were flowing into NBFCs, and quite a lot of funds from the mutual funds as well.
• Proposal for NBFCs to have higher risks weights on exposure to real estate and to capital markets is a part of the various measures that were recommended for strengthening their regulatory framework.

• FT: The bank needs more than a new governor
• Banker candidates for next governor:
• Lord Green
• Douglas Flint
• Peter Sands
• John Varley
• Favourite remains Paul Tucker.