Resolution regime proposed for financial institutions

The global financial crisis of 2007 caught various financial sector regulators across the world unaware. With no established mechanisms to deal with the failure of financial institutions on that scale, the UK and US governments resorted to providing financial support to troubled institutions (also called “bailouts”) to keep them afloat to preserve the stability of the larger financial system.

The financial crisis also led to greater recognition of the phenomenon of financial institutions that were “too big to fail” (TBTF), i.e. institutions with very high exposure to the financial system and which were so complexly organized that their failure could have led to the collapse of the financial system, and the risks posed by such TBTF institutions to the health of the financial system. To minimize the impact of the failure of TBTF institutions, many jurisdictions have been moving towards putting in place regulatory mechanisms that can protect taxpayers and “effectively resolve” failing TBTF institutions.

On the recommendation of India’s Financial Stability and Development Council (FSDC), a high level working group was constituted to suggest appropriate measures for strengthening resolution mechanisms for stressed financial institutions in India. On 2 May, the Reserve Bank of India placed the Report of the High Level Working Group on Resolution Regime for Financial Institutions on its website.

Sawant Singh is a partner and Aditya Bhargava is a principal associate at the Mumbai office of Phoenix Legal.