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Financial Stability and Development Council

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In pursuance of the announcement made in the Union Budget 2010–11 and with a view to strengthen and institutionalize the mechanism for maintaining financial stability and enhancing inter-regulatory coordination, Indian Government has setup an apex-level Financial Stability and Development Council (FSDC), vide its notification dated 30th December, 2010. The first meeting of the Council was held on 31st December, 2010.

FSDC has replaced the High Level Coordination Committee on Financial Markets (HLCCFM), which was facilitating regulatory coordination, though informally, prior to the setting up of FSDC. The technical committee under HLCCFM for RBI regulated entities, though at a modest level, had set up a Financial Conglomerate Monitoring Mechanism since 2004. The secretariat of HLCCFM was in Ministry of Finance (Capital Market Division, Department of Economic Affairs).


The Chairman of the FSDC is the Finance Minister of India and its members include the heads of the financial sector regulatory authorities (i.e, SEBI, IRDA, RBI, PFRDA and FMC) , Finance Secretary and/or Secretary, Department of Economic Affairs (Ministry of Finance), Secretary, (Department of Financial Services, Ministry of Finance) and the Chief Economic Adviser. The commodities markets regulator, Forward Markets Commission (FMC) was added to the FSDC in December 2013 subsequent to shifting of administrative jurisdiction of commodities market regulation from Ministry of consumer Affairs to Ministry of Finance. The Joint Secretary (Capital Markets Division, Department of Economic Affairs, Ministry of Finance) was the Secretary of the Council till August 2013. Now this post is being held by the Additional Secretary in the Ministry of Finance.

A sub-committee of FSDC has also been set up under the chairmanship of Governor RBI. The Sub-Committee discusses and decides on a range of issues relating to financial sector development and stability including substantive issues relating to inter-regulatory coordination.

As a result of the deliberations of the Sub-Committee of the FSDC held on August 16, 2011, two Technical Groups were set up – a Technical Group on Financial Inclusion and Financial Literacy and an Inter Regulatory Technical Group.

The Inter Regulatory Technical Group is chaired by an Executive Director of RBI and comprises of ED level representatives from the SEBI, IRDA and PFRDA. The Group will meet once every two months. It will discuss issues related to risks to systemic financial stability and inter regulatory coordination and will provide essential inputs for the meetings of the Sub-Committee.

The Technical Group on Financial Inclusion and Financial Literacy is headed by the Deputy Governor of RBI and comprises of representatives of all Regulators and Ministry of Finance.

In addition, an Inter-Regulatory Forum for Monitoring of Financial Conglomerates has also been set up under the aegies of FSDC.

FSDC also functions through working group and a macro financial monitoring group. More may be seen here.


Without prejudice to the autonomy of regulators, this Council would monitor macro prudential supervision of the economy, including the functioning of large financial conglomerates. It will address inter-regulatory coordination issues and thus spur financial sector development. It will also focus on financial literacy and financial inclusion. What distinguishes FSDC from other such similarly situated organizations across the globe is the additional mandate given for development of financial sector.

Background and History

In the wake of the financial crisis of 2008, the issue of financial stability as also the means and institutions to secure the same has become an important question across countries globally.

Since April 2009, India is a member of the international agency looking into the issue, namely, Financial Stability Board, a recast of the erstwhile Financial Stability Forum . HLCCFM was constituted vide a demi official letter dated 24th May 1992 written by the then Secretary (Economic Affairs, Ministry of Finance), Dr. Montek Singh Ahuluwalia to the then RBI Governor, S Venkitaramanan. HLCCFM was the forum to deal with inter-regulatory issues arising in the financial and capital markets, as India follows a multi-regulatory regime for financial sector. It functioned under the Chairmanship of Governor (RBI), with Chairman (SEBI) Secretary (Economic Affairs, Ministry of Finance), Chairman (Insurance Regulatory and Development Authority) and Chairman (Pension Fund Regulatory Development Authority- PFRDA) as members.

However, it was an informal body and had its own limitations despite being a good mechanism. In the absence of formal instruments, clear specifications as to its functions/powers and an empowered secretariat to nominate and follow up on the decisions of the HLCCFM, its effectiveness has been limited. The markets that are regulated by members of the HLCCFM have dramatically changed since 1992. Over time, markets have become more complex and converged and are becoming increasingly integrated. In such a scenario, if the regulators do not take an integrated and holistic view, it was felt that outcomes will be sub-optimal.

Various Governmental Committees, as given below, have also recommended such an approach to regulation:

a. RBI’s Advisory Group on Securities Market Regulation (RBI-AGSMR 2001);
b. High Level Expert Committee on Making Mumbai an International Financial Centre (MIFC 2007);
c. Committee on Financial Sector Reforms (CFSR 2008);
d. Committee on Financial Sector Assessment (CFSA 2009).

The Raghuram Rajan Report (CFSR) had touched upon the need to have a regulatory mechanism for financial stability. The report suggested the creation of a statutory body called Financial Sector Oversight Agency (FSOA) to do the macro prudential supervision of the economy, to monitor the functioning of large, systemically important, financial conglomerates and to address and defuse inter-regulatory conflicts. The committee envisioned a council approach with all the chiefs of regulatory bodies as members and Finance Secretary as a permanent invitee. The Committee had also recommended strengthening the capacity of the Deposit Insurance and Credit Guarantee Corporation (DICGC) to both monitor risk and resolve a failing bank, instilling a more explicit system of prompt corrective action and making deposit insurance premia more risk-based.

The other report on financial sector namely the Making Mumbai an International Financial Center (MIFC) report had underlined the need for macroeconomic stability for a credible international financial centre to function in the country. The report of the Committee on Financial Sector Assessment (CFSA) which was a joint effort of RBI and Ministry of Finance, Government of India, says stability assessment and stress testing of the financial institutions need to be conducted on a more systemic basis, to capture the second round and contagion risks. For this purpose, CFSA had recommended setting up of an inter-disciplinary Financial Stability Unit. Accordingly various regulators had set up their own Financial Stability Units. RBI set up the unit on July 17, 2009. The CFSA report emphasised that in the interest of financial stability, there is a need for strengthening inter-regulatory co-operation and information-sharing arrangements, both within and across borders among the regulators. The committee had identified that there is no legislation specifically permitting regulation of financial conglomerates and holding companies in India and perhaps through an amendment of the act, RBI could be empowered to do the same.

The Finance Minister held a meeting with the Regulators and officials of Ministry of Finance on the creation of Financial Stability & Development Council on 12th October 2010. The discussion paper had been circulated by the Ministry of Finance to all stake holders. It was agreed that with a view to strengthen and institutionalize the mechanism for maintaining financial Stability and Development, Government would set up the apex Council. The council was notified on 30th December 2010.

Global Efforts in managing Financial Stability

Financial stability is indeed a sunrise area and clarity is yet to emerge on target variables and policy instruments to be used in this regard and the institutions responsible for monitoring the same. Many countries have vested these powers with the central bank considering their expertise in supervising large banks and monetary stability. As of end-2005, almost fifty central banks were publishing Financial Stability Reports, and many others were considering publication. Despite the central banks’ growing interest in financial stability, direct references to financial stability as a central banks’ objective, are rare to find in the basic central bank legislation. Only about 3 percent of the central bank laws surveyed by the IMF official (2007) had an explicit legal responsibility for financial stability. If financial stability is included, it is more likely to be found among “tasks” than among “objectives.” Financial stability is often bundled together with other “standard” tasks, such as the support for smooth functioning of the payment system, regulation and supervision of the banking system, or lender-of-the-last resort functions. Financial stability and the central bank’s role in it is more commonly specified in other documents, such as mission statements or memoranda of understanding (if there is an integrated financial supervisory agency outside the central bank). Central banks typically explain their interest in the stability and general health of the financial system by their monetary policy objectives, payment system functions, bank supervision role, and lender of last resort role.

Entrusting financial stability to central banks may be a good beginning in a crisis situation. However, as seen in the financial crisis of 2008, systemic risk arises not just from the banking sector, but from other financial firms like investment banks or insurance companies which are outside the jurisdiction of the Central Bank and potentially from non-financial firms too. For instance, central banks may be able to constrain banks from extending loans to the real estate sector to prevent an asset price build up. However, this does not preclude firms like large insurance companies from taking greater exposures in the real estate segment. Hence, financial stability requires comprehensive prudential supervision. Moreover, potentially the regulator of the banking sector may have an incentive to cover up regulatory failures by using public money to rescue a failing bank. Such incentive issues (and moral hazards) arise if the task of financial stability is assigned to any of the sectoral regulators. For example, in US, Fed is assigned the task of financial stability. However, a separate body called Federal Deposit Insurance Corporation (FDIC) is in charge closing down banks. On account of these conflict of interest issues, many jurisdictions have created a separate body consisting of representatives of various regulators to deal with financial stability. This is also essential to ensure coordinated counter cyclicality of respective policy initiatives of different regulators. For instance, even if the central bank decides to raise capital requirements for banks during a boom phase as a counter cyclical measure, it can only lead to diversion of funds from banks to non-banking sectors. Hence, all regulators need to move together while implementing counter cyclical policies. BIS , observed in this regard that "prudential tools that target financial stability need to be calibrated at the level of the financial system but implemented at the level of each regulated institution" which is essentially the task of individual regulator.

The attempt across the globe was to generate early warning signals and to formulate necessary plans for rescuing the situation. This is more like a disaster management system for the economy, just as there is one for tackling natural calamities. In US, an attempt was made to create on a war footing Emergency Economic Stabilization Acts, making available new resources and talent specialised in implementing emergency measures as well as generating early warning indicators, legal expertise related to foreclosures, mortgages etc.

In general, there are two models in operation for handling issues related to financial stability:

1. A single agency model, where central bank or a new national agency takes charge of systemic stability.
2. A council approach where central bank, other financial sector regulators and fiscal authorities supported by a strong secretariat looks into it.

In US, the central bank- Fed- is now given greater supervisory authority over any institution that poses a threat to the financial system and if necessary to ensure control of them if they fail, including foreign groups owning a large or risky US subsidiary. Fed’s new role will be supplemented by a new Council of regulators, which is nothing but a refined version of existing President’s Working Group, which consisted of the heads of Treasury, SEC, CFTC and Fed. The new Council will have representation from 8 regulators including the newly created Consumer Protection Agency and is headed by the Treasury Secretary. It will advise the Fed on its new role. A website has already been made functional to bring in more transparency with respect to the emergency actions taken to restore financial stability.

European Union (EU), based on the Larosiere working group report has set up European Systemic Risk Board as a “reputational body” to be in charge of macro prudential oversight and to enhance effectiveness of early warning mechanisms (i.e. ESRB will not be conceived as a body with legal personality and binding powers but rather as a body drawing its legitimacy from its reputation for independent judgments, high quality analysis and sharpness in its conclusions.) But it has powers to access all the necessary information. Banking on the expertise of central banks, European Central Bank (ECB) acts as the secretariat of the ESRB and thus will be headed by ECB president. ESRB is meant to cooperate closely with European System of Financial Supervisors (ESFS -a network of national financial supervisors) and where appropriate, provide the European Supervisory Authorities (created by the transformation of existing three committees CEBS, CEIOPS and CESR respectively for banking supervision, insurance and occupational pension, and securities regulation) with information on systemic risks required for the achievement of their tasks. ESFS would look into large cross border financial institutions.

In 2010 the UK Government outlined plans for reform of its regulatory framework, including the creation of an independent Financial Policy Committee at the Bank of England and a new prudential regulator as a subsidiary of the Bank. The Bank of England will thus be given new powers to protect and enhance financial stability. The Government will create a new Financial Policy Committee (FPC) within the Bank, which will look at the wider economic and financial risks to the stability of the system. In anticipation of the legislation to create the Financial Policy Committee (FPC), as outlined in the Government’s consultation document “A new approach to financial regulation: building a stronger system”, the UK Government and the Bank announced the establishment of an interim Financial Policy Committee on 17 February 2011. The interim FPC will undertake, as far as possible, the forthcoming statutory FPC’s macro-prudential role. The initial task is to carry out preparatory work and analysis into potential macro-prudential tools. This Committee will be equipped with specific macro-prudential tools it can use to address risks and vulnerabilities it identifies.

Memorandum of understanding which establishes a framework for co-operation between Treasury, the Bank of England and the Financial Services Authority (the FSA) in the field of financial stability can be seen here. It sets out the role of each authority, and explains how they work together towards the common objective of financial stability in the UK.

For the documents of FSDC may please see here

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