Context: The Financial Stability and Development Council (FSDC) cautioned that the pandemic poses a serious threat to the stability of the global financial system as the ultimate impact of the crisis and the timing of recovery is uncertain at this point of time.

Agenda of the meeting:

  • The meeting reviewed the current global and domestic macroeconomic situation, financial stability and vulnerabilities issues, major issues likely to be faced by banks and other financial institutions. 
  • It also reviewed regulatory and policy responses, Liquidity or Solvency of NBFCs/HFCs/MFIs and other related issues. 
  • Besides, market volatility, domestic resource mobilisation and capital flows issues were also discussed by the Council.

Initiatives taken: 

  • The Council took note of the initiatives taken by the Government and the regulators in the recent months to help revive the economy.  
  • Government and the RBI have announced various fiscal and monetary measures to pre-emptively limit the economic damage and would continue to address the liquidity and capital requirements of the financial institutions.
  • The Council also reviewed the action taken by members on the decision taken by FSDC earlier.

Way ahead:

  • The decisive monetary and fiscal policy actions aimed at containing the fallout from the pandemic, have stabilised investor sentiment in the short-run.
  • There is a need to keep a continuous vigil by the Government and all regulators on the financial conditions that could expose financial vulnerabilities in the medium and long-term. 

The efforts of the Government and regulators are focused on avoiding a prolonged period of dislocation in financial markets.

Report - “Impact of covid-19 on the global financial system" - World Economic Forum (WEF) 

  • Risk of a more protracted slowdown: Released last month, the report said while financial system resilience, fiscal support, regulatory flexibility and liquidity provision to date have helped ensure that the financial system is supportive of economic recovery, a more protracted slowdown may present new risks to the financial system. 
  • Vulnerability of the developing economies:Whereas most advanced economies are addressing emerging recessions with large fiscal packages, many emerging-market and developing economies lack the fiscal space to adequately respond. 
  • Worse than the Global Financial Crisis(GFC) of 2008: Moreover, since the beginning of the crisis, investors have fled from emerging markets, with portfolio outflows exceeding those during the GFC and other periods of major stress.
  • Short term and long term measures: The WEF report said while in the short term, the focus should be on liquidity support, ultimately, governments might need to take equity in some firms in order to keep them afloat, which would require developing the tools to fairly and efficiently do so.
  • Policy tools: As the crisis develops from a ‘liquidity phase’ into a ’solvency phase’, it will be necessary for governments to consider a range of policy tools, including efficient bankruptcy and restructuring systems, government guarantees and other support for private investments, programmes for sector-specific government equity injections, and establishing asset management companies.


Financial Stability and Development Council (FSDC)

  • The FSDC is a non-statutory apex body of financial sector regulators, headed by the Union Finance Minister. 
  • It was constituted in December 2010 in order to strengthen and institutionalize the mechanism for maintaining financial stability, enhancing inter-regulatory coordination and promoting financial sector development.
  • The Council deals with issues relating to financial stability, financial sector development, inter–regulatory coordination, financial literacy, financial inclusion and macro-prudential supervision of the economy.
  • Composition: 
    • The Council is chaired by the Union Finance Minister
    • Its members are Governor, Reserve Bank of India; Finance Secretary and/or Secretary, Department of Economic Affairs; Secretary, Department of Financial Services; Chief Economic Adviser, Ministry of Finance; Chairman, Securities and Exchange Board of India; Chairman, Insurance Regulatory and Development Authority and Chairman, Pension Fund Regulatory and Development Authority. It also includes the chairman of the Insolvency and Bankruptcy Board (IBBI).
    • Recently, the government through a gazette notification, had included the Ministry of electronics and information technology (MeitY) secretary in the FSDC in view of the increased focus of the government on the digital economy.

Source: https://www.livemint.com/politics/policy/virus-crisis-a-serious-threat-to-global-financial-system-11590693384959.html