FSG under formation for financial crisis resolution

Financial Stability Group (FSG), an apex body comprising all financial-sector regulators, comes up soon for dealing with possible financial shocks, officials said.
Headed by the finance minister, the FSG will analyse periodically such factors as may affect the financial stability of the country-as the world at large still reels from the setbacks caused by the past financial flu.
Different countries, including the United States, India, and Singapore, have already constituted similar bodies to get advice on how to deal with financial shocks.
The move to form such an apex body has been made in line with a recommendation made by the World Bank Group in their mission report on Bangladesh contingency-planning project in March 2011.
World Bank's twin-the International Monetary Fund (IMF)--also made such recommendation while Bangladesh was taking extended credit facility (ECF).
Recently the central bank prepared a concept paper on the proposed FSG and sent it to the ministry of finance (MoF) for necessary action to form the watchdog body.
The paper says against the backdrop of recent global financial crisis, many countries have been doling out large-scale government supports and bailout for failed banks and other financial conglomerates in order to maintain financial stability.
However, it adds, such bail-out programmes may not bring the expected outcome owing to inherent shortcomings of the existing resolution mechanism that involves many regulators in resolving problems of financial and non-financial institutions.
The paper broached a proposal that Bangladesh should set up FSG which is needed for bailout of failed banks and other financial institutions.
The FSG comprises financial-sector regulators like the ministry of finance, Bangladesh Bank, Bangladesh Securities and Exchange Commission, Microcredit Regulatory Authority (MRA), Insurance Development & Regulatory Authority and Registrar of Cooperatives, and relevant government agencies, including the National Board of Revenue.
As proposed in the concept paper, the existing Coordination Council of regulators, led by the finance minister, can as well be accommodated under the umbrella of FSG. And two additional working groups, namely, working groups on resolution regime for banks/financial institutions and on macro-financial monitoring can be created.
Constituting three additional technical groups-coordination council technical group, early warning technical group, and inter-regulatory forum for monitoring large non-financial corporations-is also suggested.
"The recent global financial crisis (GFC), having started in 2007-2008, has put forward the issue of financial stability as one of the most pertinent agenda for macroeconomic policymakers," the proposition says.
The FSG is conceived as the highest-level decision-making authority on safeguarding financial stability.
According to the concept paper, there are three types of Financial Stability Group globally: consolidated financial stability regulator, independent prudential regulator and financial stability regulator within the central bank, and coordinated systematic stability regulatory council.
In the event of a bank failure, the financial guardian body will advise extending monetary support to the failed bank. It will examine the expected loss that may be incurred from the spill-over effects of the failed bank into the financial sector at large.
In the broader term the FSG will take decision on use of the public resources in bank resolution, coordinate during systemic crisis, act as a manager of financial crisis and financial stability, improvement of resolution regime for financial institutions, and designation of macro-prudential instruments, and facilitate crisis-simulation exercise.
At a crisis moment the panel will diagnose the problems, determine government responses to the crisis and ensure all the government agencies work in a synergy to execute the policy responses.
It will prepare the broad outline of the policy remedies like emphasising the protection of depositors to assure that their deposits are safe. It will liaison with the parliamentary standing committee and the cabinet, determine the nature and extent of the support given to depositors and creditors, ensure polices are in place for providing adequate supply of cash to the market, and determine possible effects on commercial sector from interventions.
Contacted over phone, general manager of Financial Stability Department Debashish Chakrabortty did not want to comment about the formation of FSG.
Former governor of the central bank Dr Salehuddin Ahmed, while talking to the FE Monday, emphasised making effective the fiscal coordination council first instead of floating bodies one after another.
"The existing fiscal coordination council hardly sits. It needs to be made effective. The council should sit more frequently to give advice for prudent fiscal and monetary policy," he said.
Mr Ahmed thinks that apart from keeping heads of financial-sector regulators, some experts also could be put on the board of FSG.
syful-islam@outlook.com