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Team Members:Akhilesh Prasad Shukla (MP13005)Anil Kumar (MP13009)Chandra Bhushan (MP13022)Ratish Mayank (MP13043)Sumantra Khan (MP13060)Sumit Kumar (MP13061)

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Banking industry occasionally goes through crises because of the following reasons

Adverse macro environment Excessive risk taking Fraud Out-dated regulations

Banking industry faces the fundamental problems of Adverse selection and Moral hazard.

The regulatory mechanism provides no incentive for reducing risk of assets . So there is less emphasis on monitoring and as a consequence NPAs go up.

The existing regulations also separate commercial and investment banking activities.

Many innovative financial instruments have become popular of late . They serve the financing needs of many different types of customers . Banks are restricted in the variety of instruments they can offer are at a competitive disadvantage w.r.t non- banking financial institutions. The risk levels of these instruments differ .

So there is need to modify Banking regulations and make it suitable to the present environment.

The proposed reforms should address the following concerns:

Link Capital requirement of banks to riskiness of asset portfolio : Restriction on activities by banks not meeting capital requirements appropriate for

their risk category. Make contingent liabilities & other off balance sheet activities visible upfront . Quantify risk involved in off balance sheet activities

The insurance deposit system has brought stability to banking industry by eliminating bank runs .

But deposit insurance scheme has encouraged banks to accumulate risky assets .

There are various alternatives to the current form of deposit insurance :

Risk sensitive insurance Have 100% reserve [ eliminate fractional reserve banking ] Regulate risk level of investments made with insured deposits.

Securitise risky assets

A solution to the above problem must be based on the fundamental role played by banks .

Banks transform assets by borrowing short term and lending long term . Banks reduce transaction costs for lenders and borrowers Banks create money by giving loans and creating checkable deposits. Banks make it possible to finance large Projects .

Some of these roles are gradually shifting to other financial organisations . So an analysis of the present and future role of banks as financial intermediaries is required .

A More Detail Perspective on the Banking Regulations is required.