US, Europe turmoil: RBI urges banks, non-bank intermediaries to stress-test

Indian banks and non-bank financial intermediaries need to test the endurance of new shocks in the face of the recent turmoil in the financial sector in the US and Europe, according to RBI’s annual report for FY23.

“While remaining safe and resilient, Indian banks and non-bank financial intermediaries need to be resilient to these new shocks,” the report said.

Therefore, capital and liquidity reserves must be constantly reviewed and strengthened.

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“The resilience of the global financial system will inevitably be tested again as super-easy liquidity exits resume and systemic central banks shrink their bloated balance sheets. Regulatory fiscal policies are also slated to tighten in many countries, with lessons learned from bouts of banking system stress in March,” he said. the report.

The report indicated that the recent turmoil in the financial sector in the United States and Europe has called for a reassessment of risks to financial stability and the resilience of financial institutions in the context of tightening monetary policy.

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Accordingly, policy measures, such as guidance for entering expected loss-based provisions, are likely to be announced during 2023-24, according to the report.

In addition, the completion of guidelines on the securitization of stressed assets, and a comprehensive review of the prudential framework (including guidelines on resolving stress in relation to projects in progress) are also likely during the year to further strengthen the resolution ecosystem.

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The report said that central banks continue to face a difficult trade-off between restoring price stability and addressing slowing growth in an environment of heightened uncertainty.

“The potential financial risks from elevated debt levels and recent developments in the banking sector in the US and Europe highlight the scope of the unexpected buildup of stress with strong negative spillovers across the global financial system,” the Reserve Bank of India said.