Challenge before us is to build a financial system that can withstand the shocks we anticipate and those we cannot yet foresee, says RBI Guv

Reserve Bank Governor Sanjay Malhotra lays down five key priorities that policymakers must factor in when safeguarding financial stability. Acknowledging that some shocks will be inevitable, he said that financial stability is not about preventing them. It is about strengthening systemic resilience to face those shocks and contain their amplification. Shocks may be endogenous or exogenous. Our aim must be to foster a financial system that can provide financial services in all states of the world, even under severe shocks. Secondly, a new generation of systemic risks is taking shape, RBI Guv stated and that assessing them and their complex interactions is vital. Risks are increasingly exogenous, cross-border and interconnected. The next financial crisis may not originate in a bank, or even in finance. It may begin with a geopolitical event, a cyberattack, or a technological failure and affect the financial system through multiple channels.

To strengthen systemic resilience, we must aim to better understand the network of dependencies and contagion channels and make scenario analysis a cornerstone of risk management, he said. Thirdly, we must improve monitoring and assessment frameworks. For that, we need better and more granular data. The financial system is becoming increasingly complex, but data on NBFIs, interconnected exposures, technology dependencies and cross-border positions remain fragmented. In an increasingly interconnected financial system, the quality of our data will increasingly determine the quality of our risk assessment, he noted. Fourthly, resilience must be system-wide. A strong banking system is necessary, but not sufficient. We need resilience across sectors and institutions: NBFIs, financial markets, payment systems, technology infrastructure, critical third parties and cross-border financial networks. Financial instability anywhere can become a threat to financial stability everywhere, he further noted.

Lastly, he said that innovation must strengthen, not fragment, the foundations of trust. Artificial intelligence, tokenisation, and new forms of financial intermediation can dramatically improve efficiency. But innovation will be sustainable only if the financial system preserves the fundamental properties on which trust rests: sound institutions, settlement finality, singleness of money, and financial integrity. The challenge before us is to build a financial system that can withstand the shocks we anticipate and those we cannot yet foresee. This requires resilient institutions, better data, deeper markets, credible safety nets, effective resolution mechanisms and regulation and supervision that are proactive and forward-looking, while being proportionate. If we succeed, financial stability will remain largely invisible. And, in central banking, invisibility is perhaps the most meaningful measure of success.

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