Today’s resilience no guarantee for tomorrow: RBI Guv flags emerging financial risks
Reserve Bank governor Sanjay Malhotra on Saturday said that the central bank remains committed to monitoring emerging vulnerabilities and maintaining a strong and resilient financial system, even as the financial sector remains resilient with healthy balance sheets of banks and NBFCs.“Today’s resilience may not necessarily imply tomorrow’s immunity, and we are committed to remain vigilant of emerging vulnerabilities and continue to keep our financial system strong and resilient,” he said while speaking at the Kautilya Economic Conclave here.Malhotra outlined five priorities for policymakers and said the approach to financial stability should be centred on making the system capable of withstanding and containing the impact of shocks, rather than focusing on preventing them. He said shocks, whether endogenous or exogenous, are inevitable and the financial system should be able to continue providing services even under severe stress.
New generation of systemic risks
The RBI governor pointed to a new generation of systemic risks that are increasingly exogenous, cross-border and interconnected. He said a future financial crisis may not necessarily emerge from a bank or even from within the financial sector.Instead, a geopolitical event, cyber attack or technological failure could affect the financial system through multiple channels, he said. This, Malhotra said, makes it important to understand network dependencies and contagion channels better, with scenario analysis becoming a cornerstone of risk management.
Better data for risk assessment
He also called for stronger monitoring and assessment frameworks backed by better and more granular data. Information on non-banking financial institutions (NBFIs), interconnected exposures, technological developments and cross-border positions can remain fragmented, he said.As the financial system becomes more interconnected, Malhotra said, the quality of data would increasingly determine the quality of risk assessment.
Resilience needs to be system-wide
Malhotra said financial resilience cannot be limited to banks and needs to be “system-wide”. While a strong banking system is necessary, he said it is not sufficient by itself.He said resilience is required across NBFIs, financial markets, payment systems, technology infrastructure providers, critical third parties and cross-border financial networks.
Innovation must not undermine trust
The governor also highlighted the role of financial innovation, saying artificial intelligence, tokenisation and new forms of financial intermediation could significantly improve efficiency. At the same time, he stressed that innovation must not undermine the foundations of trust in the financial system.Sound institutions, settlement finality, singleness of money and financial integrity are fundamental properties that need to be preserved, he said.“The challenge before us is to build a financial system that can withstand shocks that we can anticipate, and even those we cannot yet foresee,” he said.Malhotra said this would require resilient institutions, better data, deeper markets, credible safety nets and effective resolution mechanisms. Regulation and supervision, he added, would also need to be proactive and forward-looking while remaining proportionate.“If we succeed, financial stability will remain largely invisible, and in central banking, invisibility is perhaps the most invaluable and meaningful measure of success,” he added.
