Subsequent to our earlier posts detailing the three broad themes from the IFMR Financial Systems Design Conference 2011, Day 2 of the conference witnessed participants identify pathways to achieve the specific visions that were formulated across the sessions in Origination, Risk Transmission and Aggregation. These pathways have been segmented into the categories of Research, Regulation, Innovation and Public Infrastructure.
1. Conceptually, what are the trade-offs, if any, between financial inclusion and systemic risk? Are there particular models of financial inclusion that fare better than others as viewed from this perspective?
2. Are there market based instruments (ex: listed subordinate debt) that provide additional information regarding the health of systemically important financial institutions? Can these effectively supplement supervision-based information?
3. How critical is priority sector regulation to the flow of credit to sectors such as agriculture and SME? Does priority sector regulation cause allocative inefficiencies in the economy? Are there less distortionary measures to direct resources to some sectors that have a high perceived social return?
4. Does structuring Government ownership in financial institutions differently reduce distortionary effects? For ex: holding company structure to channel all Government investments into financial institutions versus direct Government investments into specific financial institutions.
5. How must the performance of Chief Risk Officers in financial institutions be measured? How should their compensation be structured?
6. Financial advice as a function of originators. How is this best structured? What liability must the originator have for advice provided to clients? How must financial advisors be compensated? What is the corresponding regulatory and legal framework for customer protection in India?
7. How different are customer outcomes in an environment characterised by: (a) Financial product access alone and (b) Financial product access combined with financial advice?
8. Why is the take-up for risk transmission products (principally insurance) low at a household level? Is the selling process and agent incentives creating barriers to take-up?
9. In markets like India, what is the inter-play of hard information and soft information for credit origination? Do regionally focussed originators have better soft information? Why are non-bank institutions much more successful in some segments (ex: used commercial vehicles finance, microfinance) than banks?
10. How should regulation of the financial system be structured given that the product level distinctions are blurring? Is there a need for distinct regulators for systemic risk and customer protection?
11. The conference highlighted that the roles of the regulator and the policy-maker are quite distinct? Is increasing financial access in an under-served market like India a policy objective or a regulatory objective? How should these be coordinated?
12. What are the inherent conflicts of interest in the way regulation is currently structured? How can they be addressed?
13. How should financial sector regulators be governed?
14. With increasing sophistication of markets and products, risk measurement capabilities of regulators will become important. What are the best ways to build regulator capacity?
15. What data and reporting standards aid transparency, particularly in the regulation of systemically important financial institutions?
16. Are there market based instruments (ex: listed subordinate debt) that provide additional information regarding the health of systemically important financial institutions? Can these effectively supplement supervision-based information?
17. Managing moral hazard is important while regulating credit risk transmission mechanisms. Conference emphasised the importance of adequate capital at risk for originators that participate in securitisation as an example of this.
III. Public Infrastructure
18. Payment system innovations crucial to better origination. There are several important developments in India in this regard, including the Interbank Mobile Payment Service (IMPS) and UID-linked electronic transfer of benefits. These need to be further strengthened. Cash dematerialisation infrastructure is also an important element of this.
19. Well-defined frameworks for bankruptcy/resolution are important to orderly development of markets.
20. Need to develop electronic records for collateral and collateral transfers. This includes land, house titles and vehicles.
21. Development of cyber security and privacy laws an important complement to financial sector development.
22. Expansion of broadband connectivity will have important implications for how originators are structured. Real-time data transfer has some off-set on originator-related risk.
23. Can transactional information/behaviour available with utilities and telcos provide originators information about credit risk and substitute for soft information/collateral? This might enable newer kinds of originators and under-writing processes in the near future.
24. Technological development is gradually eliminating economies of scale in origination. It may be possible to have smaller sized but efficient originators going forward. As a related point, the justification for mega-sized financial institutions that pose serious systemic risk may get diminished.
25. The Conference noted the need for much more product innovation, both for origination as well as risk transmission. Examples include commodity options, inflation indexed bonds and corporate bonds.
A summary of the overall Conference’s proceedings is available here for further reading.