| | The new governor of the Reserve Bank of India will have to navigate a path that brings international recognition of India’s banking supervision and standards, but avoids the worse pitfalls of the “Basle Consensus”, which places market prices at the heart of modern financial regulation. The RBI should follow an alternative model of banking regulation that will have three pillars. The first should be that the economic cycle must be put close to the centre of banking regulation, since this is the source of market and systemic failure. The second should be a focus on systemically important distinctions, such as maturity mismatches and leverage. And the third pillar would be to require banks to either self-insure or pay an insurance premium to taxpayers against the risk that the taxpayer will be required to bail them out.
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